He is a smart man.  Read his remarks here.    A quote:

"In the 2012 presidential race, 96 percent of all campaign contributions from Ivy League faculty and employees went to Barack Obama. That statistic, drawn from Federal Election Commission data, should give us pause -- and I say that as someone who endorsed President Obama. When 96 percent of faculty donors prefer one candidate to another, you have to wonder whether students are being exposed to the diversity of views that a university should offer. Diversity of gender, ethnicity and orientation is important. But a university cannot be great if its faculty is politically homogenous."

This danger lurks at UCLA.  I see this on almost a daily basis with many of our students' and the faculty's mistrust of free markets and competitive capitalism.   I sense incredible cynicism about how the world works.  In this narrative,  rich robber barons have captured the political process and use their $ resources to buy monopolies and minimize their exposure to regulation.  The poor and vulnerable suffer as they are exploited by the privileged.  Under this vision, life is a zero sum game.

In my UCLA classes, click here or read this--- I present a very different vision for how free market capitalism operates.  The select set of students who take my classes are exposed to the role that competition plays in protecting us and improving all of our standard of living.   Some faculty might gain from taking this class.

As UCLA enters a crucial fund raising campaign,  it will interest me to see what are the backgrounds of the people who make major gifts to the school. How did they make their money? What did they study at UCLA?

When I was a kid we used to spend August on Fire Island along the Atlantic Ocean.  We were told that the current beach front had been the middle of the island just a century before.   In the aftermath of Hurricane Sandy, investments are being made to fortify the sand dunes to protect against future flooding.  Who should pay for such place based investments?  In my Climatopolis work, I argue that local property owners should pay.  The New York Times reports today that I (and all other national tax payers) are contributing to their protection.   This is wrong on at least two levels.  It creates spatial moral hazard as it subsidizes living in risky areas and encourages greater private investment (i.e new homes) in such increasingly risky areas.  As these new investors plant new roots in such areas, they represent "human shields" and give place based politicians greater bargaining power to lobby for even more pork to flow to such risky areas.

The Chicago approach to risk taking is simple. If you value living in a beautiful and risky place, you are a grownup and you should bear the full costs of investing in such a place. If you expect other people's money to help build protection for you and to ex-post (i.e after the disaster) to bail you out, then we are treating you like a child.   Such benevolent paternalism will eventually cost all of us.  Instead, we should incentivize moving to higher ground and allow the "adult" risk lovers to use their own funds to live in risky areas.

Switching subjects, there is an Opinion piece in the NY Times making the "old cliche" point that in the past that there has been a correlation between violence and climate change. You read Eric Cline's piece and tell me if you learn anything.    This is warmed over Jared Diamond Collapse stuff.  This time "is different".  Dr. Cline misses the point that unlike in the past that we now live in a globalized world economy featuring instant information sharing and free markets.  These institutions, that did not exist 3000 years ago, mean that the distant past experience is meaningless for making predictions about climate change impacts for today.   The NY Times needs to talk to some economists about how self interested and forward looking households, firms and local governments anticipate and make investments to prepare for the new normal.   As I will argue in Turkey in a few weeks,  urbanization and the system of cities will play a key role in allowing us to adapt to many of the challenges that climate change will pose.

Brad Plumer  has written a good piece about drought's consequences for California farming but he needs to think about general equilibrium effects.   As a California resident who moved here 8 years ago in large part to shop at organic farming markets, I understand that California produces some tasty stuff.  That said,  California does not have a monopoly on producing produce. If the marginal cost of growing stuff here soars then marginal crops such as alfalfa will no longer be grown and other international exporters will fill the void and will export to the U.S.  Such general equilibrium effects protect U.S consumers from the "hyper inflation" for food that Plumer fears.

In his piece he ignores the magnitude of the size of effects that he discusses. He warns that prices have risen .7% percent in a month for fruits and veggies.  That works out to a 8.4% increase in prices if this persists for a whole year.   Such a price rise of this magnitude would be unlikely because international exports would soon flow in when the "law of one price" for berries is violated (if Mexican farmers can export and sell in the U.S for $2.5 or sell to their own market for $1.2 they will figure out how to ship the goods North).

Suppose domestic fruit prices increase by 8.4%.  Where does this $ go?  This extra income would greatly enhance farmer profits and many farms hire less fortunate workers to work in the fields. They would receive  a raise.

Returning back to the demand side,  if prices go up by 8.4% for fruits and veggies, how much less fruits and veggies would parents buy for their children? What is the price elasticity of demand for these products?    According to this survey article, the best guess of the price elasticity is -.5.   So, the 8.4% price rise would reduce household consumption by 4.2%.  That's not a big number.   If adults are fully grown and worry about their kids' consumption, the adults in the household may cut back their consumption to provide these key nutrients to their kids.  So, this 4.2% reduction in household consumption may have no impact on the kids' consumption.

My point in this blog post is to highlight how behavioral effects work in the real world and how their existence affects the interpretation of the news that journalists write about.  General equilibrium shouldn't be ignored!

With regards to California's farmers and water,  farmers should be charged a higher price for water so that it reflects what urbanites are willing to pay for it.

In the efficient equilibrium, water should be allocated so that we achieve the same "bang per gallon consumed" across all users in California;

price of water is such that supply =   demand

and

$ benefits from using a gallon in sector 1 = $ benefits from using a gallon in sector j for j = 2....... N

Right now farmers treat water as if it is a free resource and this causes most of the "demand shortage" problems.

For those with a low value of time and for those who appreciate good economics jokes,  here are my videos focused on the economics of climate change  and here are my videos focused on other topics related to environmental and urban economics.

Here is the video of my April 2014 talk at the University of Ottawa.  I argue that the combination of Big Data and field experiments can sharply improve urban quality of life.  

Robert Shiller has written an excellent piece sketching recent work on long run insurance.   For a popular audience such as the NY Times readers, he isn't able to delve into the details.   So, permit me to discuss just one.  I want to talk about incomplete futures markets caused by an inability of insurers to commit to honor future insurance contracts.  To appreciate this abstract point, consider the following example.

Matt owns island real estate and worries that due to sea level rise that my island will vanish in 50 years.   I want to buy insurance against this state of the world.  I am willing to pay a premium today and every year in return for a promise that if the disaster occurs that I will get a check from the insurance company.   Now every trade has a buyer and a seller.  On the sell side, there are a group of climate change deniers who don't believe that there will be significant sea level rise.  They should be happy to take this bet if they believe what they say.  They would agree to take Matt's money now and if the sea level rise takes place that they will pay out.  But, since the deniers think this scenario is a 0 probability event this should be an easy arbitrage opportunity for them.  Note that the disagreement about future event probabilities causes the gains to trade.  The problem here is that Matt knows that the insurance company will always have the option to go bankrupt if the event takes place and the insurance company is faced with a large number of future claims.

After the attacks of 9/11, a major issue was whether insurance companies would go broke honoring their insurance contracts.   For some economic analysis, see Dwight Jaffee's work.

As  I argue in my Climatopolis book, the real key role of the insurance market is to provide clear signals of what risk neutral informed sellers of insurance believe are the actuarial risks that different pieces of coastal real estate face.  Even a Homer Simpson will update his subjective priors if he sees that the insurance companies believe that a disaster is much more likely than he assumed.  Naive individuals who choose to live in coastal areas and take no precautions can't claim to be "victims" if such insurance pricing yells out about the actual expected dangers.  This is how adaptation takes place.  Doom and gloomers implicitly embrace a strong behavioral economics vision that people are morons who do not learn from available information.  The insurance industry's own self interested actions reduce the likelihood of this ugly hypothesis actually playing out.

Returning to the example above, if climate deniers sell Matt the contract but expect to declare bankruptcy if the event actually does take place (even though they think it has a 0% chance of taking place), then they will sell the insurance policy to Matt at a relatively low price and this will signal that the probability of risk to Matt's island is low.  Note that the key point here is that if the insurer knew that he had to honor contracts that he signs then he would have much stronger incentives to research the true likelihood of the event because he will lose a fortune if he sells premiums at too low  a price relative to the emerging truth. To appreciate this point, consider the following example;

Suppose that the insurer sells a $1 million dollar policy for $10,000.   A risk neutral person would only sell this policy (if they knew they could not declare bankruptcy and ignoring discounting considerations) if the event had a 10000/1 million = 1% or less chance of taking place.  Why?  Suppose the event has a 5% chance of taking place?  The insurer collects $10,000 but expects to pay out .05*1000000=50,000. That's a firm that is losing money.  The profit motive disciplines insurers to do their job!  Unless, they have  the future option to go bankrupt!

A turtle carries its shell on its back.  When it moves, it brings its "house" with it.    Imagine if coastal residents could at low cost move their homes to "higher ground" when sea level rise takes place.  In this case, the owners of such homes would lose the value of the land but not their structure.  This unbundling of a home (which is usually the structure and the land) would reduce the cost of climate change adaptation.   In the real world it is costly to physically move real estate structures.  An alternative to moving capital to higher ground is to allocate it to those who are willing to bear the risk.

Alvaro Huerta  is a Visiting Scholar at UCLA.  Today, the UCLA Bruin published his piece on the challenges that many Hispanics face in our economy.  Several of the policy proposals that he advocates (such as sharply raising the minimum wage) reject the core logic of Econ 101.  

What are the general lessons here for economists?

1.  We have not done a great job teaching the basic insights that we have learned about market economies over the last 150 years.

2.  We do not have a monopoly on leading the public discourse concerning how society evaluates what public policies are "good" and "bad".

3.  There are many University of California social science scholars who seek to blur the lines between positive and normative analysis.

This politicization of the social sciences appears to be a resurgent trend.  UCLA seems to celebrate activism among its faculty and researchers.  I see this at my own Institute and wonder whether this is wise?   The core job of the social scientist is to explain and predict human interactions.  For how many University of California social scientists, do they have the more ambitious goal of "changing the world"?

I do support Alvaro Huerta's broad goal of improving the living standard for all.  99% of economists would say that the most efficient way to achieve this goal is early investment in kids (see the Heckman Equation) combined with increased competition in the supply of urban schooling.   Center city teacher's unions have effectively blocked many reforms that would greatly benefit many Hispanic kids.    Every other sector of the economy faces competition, why not this one?  Many affluent children who go to private schools, would attend public schools if such public schools raised their game.

Many of Dr. Huerta's policy proposals focus on "redistribution" rather than on skill formation.   The problem with his redistribution proposal is the act of redistributing income reduces economic growth because of the distortionary incentives built into taxation of labor and capital.   Those who are passionate about helping the 99% must think hard about how to accelerate the growth of the U.S economy.  This is not a zero sum game division of a pizza.  The U.S economy is not growing in large part because of the lack growth of our individual skills.  We need to invest more in our young people and for them to invest more in themselves by studying more hours and studying college subjects that focus on skill formation and career development.

Tom Steyer is investing his own money to counter the Koch Brothers and to try to elevate climate change mitigation as a national policy issue.  Will the candidates for election in 2016 and the future Congress take this issue seriously?  His only real opening is to lobby for a broad suite of "tax reform" where carbon charges bundled with income tax reductions would be jointly voted on.

My pessimism about the likelihood of his valuable effort succeeding is based on my reading of my own three papers.

1.   This paper looks at Congressional voting on Waxman-Markey and documents that poorer, more Conservative, high carbon congressional districts feature leaders who vote against low carbon regulation.

2.  This paper uses Google Insights and documents that when people are worried about recession that they are less interested in searching for "global warming" and this reveals that they are less focused on long run issues when short run concerns have grabbed their focus.

3.  This recent paper uses data from California and documents that even in liberal sophisticated California that Republicans and those who live in the suburbs vote against low carbon policy.   I bet that Tom Steyer owns at least one suburban home. His fellow neighbors know that their current lifestyles are fossil fuel dependent and that they will pay a personal cost for embracing the zero carbon lifestyle.

The challenge that Mr. Steyer faces is one of stranded assets and the embrace of the suburban lifestyle. The U.S economy's durable capital stock features trillions of dollars of long lived durable capital such as fossil fuel fired cars, coal mines, and energy inefficient buildings that would all become much more costly to operate under a carbon tax.  These owners of this capital recognize that they will lose from a change in the status quo policy of a zero carbon tax.  Mr. Steyer should consider buying all of this capital and then we could start from scratch with his valuable zero carbon vision.

He would also have to wrestle with the point that most of the U.S lives and works in the suburbs and until we have electric vehicles and ample cheap power from renewables that this lifestyle would impose high costs on residents (millions of whom are not as rich as Mr. Steyer) and thus reduce their disposable income.

I would like to see Tom Steyer go to any suburban middle class neighborhood (perhaps Van Nuys, California) and explain to folks his proposal and see what they say and whether they support his agenda.

I respect that Mr. Steyer is investing hundreds of millions of his own $.  He must believe that somebody is at the margin such that persuasion would lead some suburbanites to change their mind on this topic.  Is he right about this?  How many voters are "at the margin"?  A structural political science approach would be needed to measure population heterogeneity and to dismiss "cheap talk" concerns about public opinion polls.  For example, suppose there is a suburbanite who opposes carbon pricing if it would raise his annual expenditures on electricity and transportation by $1,000 but would support it if this price fell to $750.  This is an example of a voter "at the margin" who might change his mind based on Mr. Steyer's PAC's actions.

If Mr. Steyer sought the help of academics, we would argue that mitigating our carbon emissions now is a type of insurance policy against low probability future horrible events.    Yes, the public would pay more in the short run but would reduce the likelihood of future disasters.   The challenge Mr. Steyer faces is that the typical tax payer is focused on today and there is also an element of moral hazard.  Such tax payers are likely to expect their government to come to their rescue in the future if something "terrible happens".

The WSJ reports that the NFL Eagles mainly draft college graduates.  Why?  Isn't the NFL a "muscle" rather than a "brains" league?  Graduating from college requires certain non-cognitive skills that Jim Heckman has written about in many recent papers.  In a simple signalling model,  obtaining a college degree may signal to coaches a willingness of the player to persevere and go to Econ lecturers (rather than party) and at least moderate intelligence.   An imaginative coach can have a more sophisticated playbook if he knows that his players will be able to understand and execute the plays.

Whether the "Big 5" personality traits embodied in individuals aggregate up into a winning football team is an open question.   For example, there are 22 starters in football.  Is the starting team's overall perseverance a function of the team average for this personal characteristic? Or is it a function of the player with the most perseverance or the least perseverance (an O Ring theory of the team that you are only as strong as your weakest link).  See page 141 of this Todd Sandler paper.  

Teams also worry about discipline and players staying out of trouble.  What are the facts? Are the NFL's college graduates less likely to be arrested than the average player?   If the answer is "yes", then this is sharp evidence that the college graduate subset have higher average non-cognitive skills of self control.