I am in Istanbul, Turkey.  Tonight the World Congress for Environmental Economics starts.  Today I went for a two hour boat ride with Jing Cao and Shan Li and took this photo.  We had a great time on the water.




Soon, I will arrive in Tel Aviv.  This has been an action packed trip as I have visited two cities in Italy, three 4 cities in Croatia and now am in Turkey.  Israel and China are my next stops.

A slight piece of boasting.  Google Scholar informs me that I have reached 7,000 career cites.    For a 1993 Ph.D, that averages out to roughly 1 cite a day for 21 years.   My medium term goal is to reach 20,000 GS cites in 5 years.   That would be a respectable number of cites.

What would you say if I told you that your students can read a $1 textbook that teaches, through a number of "real world" examples, the leading ideas in environmental economics?  What if I told you that the book contains a number of free market environmentalism ideas that will simultaneously interest your students and get them to focus and challenge their neo-classical econ teacher?  Enough of the hard sell, here are the facts;

Dear Professor Smith,

Note that at this Amazon website students can download an App so they can read it on any device. They wouldn't have a physical copy of the book unless they print it.

Joe Nocera has written a loving tribute to ASU's President Michael Crow in this NY Times piece.   To his credit, Dr. Crow is thinking hard about how to make his school stand out from other public universities and to achieve the double bottom line goal of increasing access to higher education for all people.  Such "out of the box" thinking is exactly what competition fosters.    More ambitious universities should be thinking about strategies to differentiate themselves from the rest of the pack.

Dr. Crow and I were once colleagues at Columbia University.  What I remember about him are the ants taking over his Biosphere 2.  Here is what the NY Times reported in 2003 about Biosphere 2.


"It is difficult to say what kind of scientific promise the giant structure, an eight-story steel and glass terrarium, might hold. From the day in 1991 that eight men and women and 4,000 plant and animal species were sealed with great fanfare into it as part of an experiment to simulate the earth's ecology, Biosphere 2 generated fascination and skepticism. Biosphere 1 is the earth.

Critics called Biosphere 2 a ''scientific crapshoot.'' When the human guinea pigs left the structure after two years, crops had failed, noxious gases had built up, the water had turned acidic and the site was overrun by ''crazy ants'' and morning glories.

But Columbia officials decided that with some modifications it might hold some promise, and its decision in 1995 to take on Biosphere 2's management seemed to confer academic legitimacy to the project.

As recently as 1999, the collaboration seemed to be going well, as Columbia announced that it would invest $20 million over five years and manage it until 2010. And in 2001, the university said it would start a science and public policy graduate program at the center.

But Biosphere 2's chief champion, Columbia's executive vice provost, Michael Crow, left for Arizona State University, and a new president, Lee C. Bollinger, took the helm of the university. After two panels reviewing the site offered negative evaluations, Columbia expressed questions about further investment.

In March, Decisions Investments sued Columbia, saying its decision to end education programs there and its failure to hire faculty and build a new laboratory had diminished the property's value and were a breach of contract."
 

In April 2014, Tim Groseclose published his book "Cheating An Insider's Report on the Use of Race in Admissions at UCLA".   Admissions to elite universities is highly valued.  Who should be admitted and what criteria should be used for judging files?  To his credit,  Tim provides all of the admissions data he was able to access through a California Public Records Act request.  You can download the data here.  For those applied econometrics teachers consider having your students extract a random subset of these records and estimating some "production functions" in which the key outcome variable is whether a UCLA applicant is admitted.

Your students can test for the role of the student's;

1.  race
2. household income
3. standardized tests
4. grades in high school

as inputs in determining the probability of being admitted.

Using a linear probability model, the students can estimate multivariate regressions and the regression coefficients will have the interpretation of index weights and students will learn a good lesson in "isoquants".   Such an analysis represents a revealed preference test of the UCLA bureaucracy's formula for being admitted to this prestigious institution.

This is clearly a highly controversial subject but Tim has performed an important service by bringing this subject into "the light".   Admissions officers have great power and discretion.  Big data methods allow us to take a close look at what they actually do rather than on relying on what they say they do.   Such cross-checks on power create good incentives and guarantee the continued strength of our key institutions.  We all need to face competition and cross-validation (by arms-length evaluators) that we are doing our jobs.  I believe this statement holds for professors, administrators, deans and admissions officers.

Nobody has a strong preference to be a "low ranked monkey".  Whether in the NBA or at the University of California,  workers are unhappy when they know they are below the median earners.   But does being "unhappy" translate into being unproductive?

In this blog post, I will provide a sketch of a good undergraduate economics honors thesis.  There are many economics students with strong quant skills who aspire to be the next Nate Silver.

Suppose that a student can access the universe of all player statistics for every team for the last 30 years.  For each team in each year, the researcher would calculate the income inequality measure for the team in that year and knowing each player's salary and the median salary could calculate whether the player's salary is above or below the median.

Key outcome statistics for the team would be its wins and how far it went in the playoffs

Key personal stats for the player would be some "sabermetrics" indicator of points, rebounds, assists, turnovers,  shooting efficiency, defensive prowess, etc.   Time varying controls would include the player's age and cumulative minutes played and recent injury history.  Suppose this can be boiled down to a single variable called X for each player in each year.  So if a team has 12 players this is a 12 dimensional vector each year. A similar metric could be constructed for the coach's quality based on past playoff and winning percentages.


The following multivariate regression would then be run;

Using the team/year aggregate data: a conditional logit model could be estimated of the form:

probability team j wins the title in year t =  f(X ,  coach quality,  team income inequality)

If the team income inequality variable has a negative coefficient then this indicates that team income inequality is "bad" for performance.

The player/year level micro data could then be used to test whether player performance suffers when they are on a team that has more income inequality and they are a low ranked monkey (LRM).

Define X1 as  a player's single quality index for that year (as defined above) and define X2 as his teammates scores for that year (this variable could be lagged).

The researcher would estimate:

X1 =  player fixed effect + player age + player injury + coach fixed effect + B2*X2 +  B3*team income inequality +  B4*LRM  +  B5*LRM*team income inequality +  final year of contract  + U

The income inequality is "bad" hypothesis would posit that    B4 is less than 0 and B5 is less than zero.

Why is NBA data important?  It isn't but it represents a collectable measure of productivity across hundreds of millionaires.  These guys have no real wants or needs.

The ambitious researcher could then re-estimate the micro regression above and study whether the player was traded in the subsequent year.  Traded players may indicate that the player was unhappy in the situation and disgruntled .

For those interested in other work investigating how individual performance is affected by the composition of the group one participates in, take a look at my paper with Dora Costa from 2003.








  

On Twitter, I see some chuckling that 51% of people polled in a Bloomberg Survey view climate change to be a "minor" or "no" threat.    While we don't know how people interpret the question;  what does the word "threat" mean and to whom and when,  what information would an empirical analyst need to answer the threat question?

To sketch a brief answer to this question; let's assume that every person is a risk neutral expected utility maximizer.

In each year, the following sequence plays out;

1.  The person either lives or dies.  Suppose the person dies with probability 1-h and this probability never changes and is independent over time.

2. If the person lives, there is a probability 1-g she is unemployed and receives pay of $0.   There is a probability of g that she is employed and earns a payment of $W.

3.    She only gains utility from eating Apples and the market price of an Apple is $m.  There are period by period budget constraints so she can't  borrow or lend.  Her annual discount factor is B

With this setup:  a consumer's lifetime discounted expected utility equals

sum from t = 0 to infinity     (h)^t*g^t*B^t*(W/m)

In this bad notation the math symbol "^" represents that I'm raising the variable to the exponent "t".  Note that this economy features no actual choice by the consumer.  Events such as survival or having a job just occur and this person only continues on consuming if they do occur.

To some provide intuition here, with a payment of W dollars which she only receives if she is alive and has a job, she can purchase W/m apples because each apple costs m dollars.  Future apple consumption is discounted because she is impatient and prefers consumption now.

In this silly simple urban economy, we can now talk about whether climate change is a threat to this representative agent.  This is an urban economy because the consumer doesn't grow her own food. Instead she buys it at a market.   For us to see that climate change is a threat to her lifetime expected utility, the climate scientist must either argue that:

1.  Climate change will lower the probability of survival (i.e h will decline).
2. Climate change will increase the unemployment rate (i.e g will decline)
3.  Climate change will lower her income if she has a job (W will decline)
4.   Climate change will raise the price of apples (i.e m will rise).

In my urban climate change adaptation work,  I reject #1.  (Read this paper).   Air conditioning and quality housing shield the urban population from death from heat waves, floods and other natural disaster spikes.  Hurricane Katrina's impact on New Orleans was quite a fluke.  NYC will suffer many fewer deaths when the next Sandy strikes.

In my Climatopolis work, I argue that in urbanized economies that #2 and #3 are not serious concerns.  Especially for those who can migrate within a system of cities and thus have a menu of alternatives.

#4 could certainly occur if nations have closed boundaries with respect to trade in agricultural goods.  Certain nations can certainly have bad harvests and this reduction in supply will drive up the price.  In a world of open trade in agriculture and spatially uncorrelated climate shocks and with inventories and substitution possibilities (note that this economy only produced apples), #4 will be a minor effect.

So, in this stylized economy we find a small impact of climate change.    For those who state that climate change is a major threat, what is your economic model of how we lose serious consumer surplus? Why don't households have substitution possibilities?

Note that in this economy, I didn't even introduce technological innovation.  For example , apples that can be produced in hotter climates and are more immune to bug infestations.

The broader lesson here is that the NY Times and other "doom and gloomers" need to be more explicit about who suffers because of climate change and why they suffer and how much they suffer.  Why would these "victims" allow themselves to be victims?  Why didn't they see the punch coming?   Does bad old capitalism offer any escape options for these suffering individuals?

In two weeks many of the world's environmental and resource economists will gather in Istanbul Turkey.  I will give one of the three keynote talks and I will focus on climate change adaptation and cities.   Adaptation is the awkward topic that many intellectuals (including many Ph.D. environmental economists) feel uncomfortable talking about.  Why is that?  In this blog post, I offer some conjectures;

1.  Intellectuals genuinely worry that the world is going to hell.   Long run trends in improvements in well being as measured by rising life expectancy, heights, and the number of people on the planet are waived off as mere short run phenomena that will evaporate in the coming days of reckoning.  

2. Intellectuals love behavioral economics and the view of the average Joe as a short sighted myopic moron.  Consider this old quote I wrote about Jared Diamond and the vision he advanced in his book Collapse and in his NY Times piece. 

"Expectations of future scarcity create incentives to innovate now. Implicit in Diamond's work is a type of mass behavioral economics myopia where he and few other "wisemen" are the only one's aware of the coming day of scarcity. I am more democratic and optimistic that if there is a future arbitrage opportunity that a few ambitious young capitalists will seek out the profit opportunities and be ready with the next "Toyota Prius" that will help to mitigate future scarcity challenges." source 

3.  Intellectuals genuinely believe that any discussion of progress and the adaptive ability of capitalism to reinvent itself in the face of an ambiguous but anticipated threat (i.e climate change) lulls middle class voters to refuse to take their medicine and adopt higher taxes now.  This view implicitly assumes that we (the intellectuals) have to scare the heck out of people to get them to take action now.

4.  Trust in the ability of free markets to improve all of our quality of life is at a record low.  While the elites tweet away on free market supplied phones and take Uber to where they want to go and fly airlines to attend their conferences, the government is viewed as the key mechanism for supplying public goods.

In the case of climate change adaptation, an alternative vision is that the free market offers many adaptation strategies for coping with evolving new risks.  Risks for one group equals opportunities for those entrepreneurs who can devise solutions.  As I discuss in Climatopolis, there are many cases in which government will be the main hindrance of adapting to climate change.  One example is water pricing in drought prone areas.   To download an early draft of my slides for my Istanbul talk click here.

Twenty years ago when I was a young Asst. Professor at Columbia University, I was given the task of teaching Econ 101 to 350+ undergraduates.  I haven't taught this course in recent years but I have a few thoughts about how to do it right.   The appropriate topics and pace of such a course are discussed here.  Let's assume that the Professor teaches for 150 minutes a week for 12 weeks.  What can he/she hope to accomplish?

To simplify the task, I would ignore Keynesian economics and spent no time on accounting identities (C+I+G = Y).

At the start of each class, I would spent 20 minutes on some topic in the New York Times and highlight how the issue at hand is an economic question of tradeoffs, and incentives.  I would discuss my surprise that the Times tends to ignore economic analysis in its journalism and explain how the "economic approach to human behavior" adds insights and anticipates likely unintended consequences.

I start my class talking about Robinson Crusoe and his time allocation when he can't trade with anyone. I then teach comparative advantage by introducing another person who he can trade with.

We then populate the economy with lots of buyers and sellers and markets emerge. I talk about the necessary conditions for markets to emerge (i.e.  a currency of exchange, trust, co-ordinating on what location to meet to exchange the goods, property rights being well defined and enforced).    In each class, I would stress how to use the simple machinery of supply and demand to analyze markets and market behavior.

We would start on the demand side with a brief overview of what is each person's "conception of the good life" and how access to capitalist markets allows different individuals to purchase market goods that help them to achieve their goals.  We would spend a fair bit of time on budget constraints and contrast rich people and poor people and how price changes affect the feasible consumption set.  We would talk about how government policy changes the feasible budget set.

I would tease students who know calculus to think about how the simple graphs we make (of tangencies between indifference curves and budget lines) can be quickly solved for using the calculus.  This gives them a taste of intermediate micro.

I would talk about hard extensions such as introducing time and uncertainty.

We would sketch the perfect competition model and why it is a useful benchmark for studying many markets.

We would then flip over to study the supply side.  At what price will a pizza firm sell you pizza? What costs does a pizza firm incur?  Which of these costs are fixed and which are variable?   If factor input prices change or if there is technological advance, how does this affect the supply side?

Integrating supply and demand into one integrated framework allows me to then study economic incidence issues.  Who gains if immigration leads to lower wages for pizza makers?   How much consumer surplus is gained in this case? What is consumer surplus?

At the backend of the intro course, government is introduced.  Externalities and public goods are defined and explained.  What are the costs and benefits of government intervention in the free market? Who are the winners and losers? Is this a zero sum game or is there deadweight loss?  What is deadweight loss?  We have a philosophical Hayek like talk on whether the competitive equilibrium is a pareto optimum and these esoteric terms are defined.

At the end of the course, I discuss why I don't teach Keynesian Macro.  I say that an economy is not an airplane. With an airplane, when it flies too low we know how to get its altitude back on track.  To view the economy as an airplane and to actively engage in counter-cyclical policy is to entrust the Fed's economists with too much power.  How do we know that they know what they are doing?   I discuss the hard concept of uncertainty and investment under uncertainty with my students.

I end the course talking about how to use the micro tools we have focused on in applied fields such as health economics, urban economics, environmental economics.   In this field experiment age, I would also teach my students how to use randomization to test for causal role that incentives play in determining demand and supply side behavior.  For example, if I pay a person X cents per kwh of electricity below last month's consumption, by how much does a person reduce his electricity consumption?  Choose X at random for different people and keep track of the changes across people in their electricity consumption when they are given an exogenous incentive to conserve.   This experimental design sketches out a supply curve for conserving electricity.

I hope this vision is clear.   This isn't cute stuff.  The good student will take away from this class that economics is a hard but valuable subject that offers a series of tools that can be applied to many real world problems.

Why are poor people poor?
Will China's air pollution improve?
Why do so many kids in public schools receive bad education?
Why do people in the United States drive more than the people in Europe?
Why is obesity rising in the United States?

These are interesting questions and students who take econ 101 are able to provide coherent answers to these questions.  Can you?

I would spend 1.5 weeks of the class on macro but in this case I would focus on growth economics and in particular on long run trends in human capital accumulation at the individual, city and national level.  I would highlight the mistakes in the Malthus logic about unending population growth and instead highlight Becker's work on the economics of fertility and women's opportunities outside of the home.  

Do U.S environmentalists support the recent policy of the U.S Commerce Department to impose tariffs on Chinese solar panels?  Whether international trade is "good" for the environment is an old question that Larry Summers wrestled with in this memo and Copeland and Taylor have done great research on.    In this 2012 paper, Aparna Sawhney and I argue that free trade in "renewable power equipment" raises a new set of trade and the environment issues.

Here is the abstract:

"We track US imports of advanced technology wind and solar power-generation equipment from a panel of countries during 1989–2010, and examine the determining factors including country size, sector-specific US FDI outflow, and domestic wind and solar power generation. Differentiating between the core high-tech and the balance of system equipment, we find US imports of both categories have grown at significantly higher rate from the relatively poorer countries, and particularly China and India. Larger countries are found to be exporting significantly more, and US FDI is found to play a significant positive role in the exports of high-tech equipment for the poor countries. For the core wind and solar high-tech equipment, we find domestic renewable power generation of the exporting countries also played a significant positive role."

The big point of this paper is that renewable power equipment is an example of a piece of capital that offers global externality benefits as its adoption reduces global GHG emissions.  This means that importing nations and the rest of the world gain if exporting nations such as China choose to strategically subsidize green industries such as solar panel makers and wind turbine makers.  Note that these  products are different than toys or cars that the mass production of these goods lowers the price of adopting green technology by mainstream U.S firms such as Walmart.  The U.S in its pursuit of protecting "U.S jobs" is sacrificing environmental progress.  Will mainstream environmentalists acknowledge this point?

Demand curves slope down. If tariffs rise sharply, then how much will U.S adoption of wind turbines and solar panels fall by in the short term and medium term?

Paul Krugman has written an interesting piece   He states; "So the real obstacle, as we try to confront global warming, is economic ideology reinforced by hostility to science."   I don't think this is right.  The real obstacle we face for why the U.S isn't taking the lead on this issue is sunk capital and suburbanization.  We are a nation of suburban voters.  Unlike his Manhattan fellow residents, most of us live and work in the suburbs where we use fossil fueled vehicles and live in large homes that use plenty of electricity which we expect that will be cheaply provided to allow us to use our home appliances and to run air conditioning to protect us from humid summer heat.  We want natural gas in the winter to heat and year round clean cooking.  Self interest guides why so many U.S suburban voters are not excited about carbon taxes.  Of course, Dr. Krugman is right that such carbon taxes would offer significant long term insurance benefits against the unknown costs of climate change. He is wrong to play down the costs that suburbanites will bear in the short run as we decarbonize the economy.     If all U.S citizens could trade in their fossil fuel vehicles at the purchase price and could be promised that their electricity prices would not rise, they would vote in favor of carbon taxes.  Self interest is an important determinant of public opinion.

In paper #1 below, we document that both ideology and self interest are determinants of support for low carbon policies.

Readers should read the following papers;

1. Matthew J. Holian & Matthew E. Kahn, 2014. "Household Demand for Low Carbon Public Policies: Evidence from California," NBER Working Papers 19965, National Bureau of Economic Research, Inc.
2. Matthew J. Holian & Matthew E. Kahn, 2013. "The Rise of the Low Carbon Consumer City," NBER Working Papers 18735, National Bureau of Economic Research, Inc.
3. Michael I. Cragg & Yuyu Zhou & Kevin Gurney & Matthew E. Kahn, 2013. "Carbon Geography: The Political Economy Of Congressional Support For Legislation Intended To Mitigate Greenhouse Gas Production," Economic Inquiry, Western Economic Association International, vol. 51(2), pages 1640-1650, 04.
4. Glaeser, Edward L. & Kahn, Matthew E., 2010. "The greenness of cities: Carbon dioxide emissions and urban development," Journal of Urban Economics, Elsevier, vol. 67(3), pages 404-418, May.
5. Siqi Zheng & Rui Wang & Edward L. Glaeser & Matthew E. Kahn, 2011. "The greenness of China: household carbon dioxide emissions and urban development," Journal of Economic Geography, Oxford University Press, vol. 11(5), pages 761-792, September.