Back in October 2012, the Lincoln Institute hosted a great conference celebrating the work of UC Berkeley's John Quigley.    After a long and thorough review process,  RSUE (one of the leading urban and regional economics journals) has published a special issue based on revisions of the conference papers.  All of the papers are available here.   Ed Glaeser wrote a powerful history of John Quigley's Economic thought.   For any student interested in urban, I highly recommend that they read Ed's paper.

I published two papers in this special issue.

1. Nils Kok and I investigate the "green building" price premium using a large California data set.   Controlling for zip code/street/time fixed effects, we find that Energy Star certified homes sell for about 5% more than observationally identical homes that do not have this certification.

2.  Siqi Zheng, Weizeng Sun, Danglun Luo and I have created a panel data set by city/year in China to investigate the correlates of what raises the probability that a mayor is promoted.  We document that local economic growth raises promotion chances. Controlling for several factors, we document that mayors are more likely to be promoted if their city is experiencing reductions in air pollution.  This result suggests that Chinese mayors now have a greater incentive to address local environmental challenges. We expect that this paper will be well cited in an emerging literature on the political economy of local mayor's incentives to invest in "green cities".

When is supply elastic?  What technologies feature roughly constant returns to scale?  At a top restaurant in NYC, the lead  Chef faces a scope and control issue. If the restaurant tried to sharply scale up its number of seats, the Chef wouldn't be able to maintain the quality of the meals.  Contrast this case with housing near a beautiful coast.  In most such areas, the area is zoned for single family homes.  If the area was upzoned and thus allowed multi-family housing, single family homes (even those worth $20 million) would be bought and knocked down and a 50 unit building would be built with each condo selling for $1.5 million.  This change in the rules would increase access and the total value of the land.    The supply of housing near the coast would become more elastic. Yes, I understand that I'm equating a single family home with a condo as a "house" but if a $20 million dollar home can be "turned" into $75 million dollars worth of new condos then value has been created in allowing such transactions to occur.   The real estate law in this case is causing the paucity of elite slots.

Scholars such as Robert Frank routinely talk about the zero sum game for status goods but this pessimism hinges on non-tested assumptions about an inelastic supply curve.   Elite "product" producers such as Yale are  trying to increase their number of students through building new colleges. China is trying to create its own great universities.  I recognize that in a market where reputation matters it can take a long time to convince the public that the new "Kahn University" is a great school and merits comparison with old type great Ivy league schools.  

As I have blogged before the rise of the MOOCS can be thought of as creating a more elastic supply of elite slots.  If society has a shortage of a valued resource then somebody will figure out how to increase its supply.

This is a long winded intro for talking about my teacher Lester Telser's 2013 short paper available here.   He investigates why the cost of running elite non-profit universities is rising over time and links this back to Ricardian rents and rising demand.

For our existing great private universities, they would have trouble scaling up in size.  Most are in urban areas.  NYU has faced stiff internal resistance in its attempts to build up vertical to increase its physical space.   Columbia has had to pay a lot of money for marginal land in its attempt to build a new campus.  Land is expensive near these universities because these universities are there!

For rural campuses (and I can't think of that many major private research universities not in big cities --- in part because of their hospital service and biomedical research), land is cheaper but in this age of power couples could they attract the same quality faculty?

So, from basic supply and demand --- if the 1% want something will its price be high?  This hinges on the shape of the supply curve.    Even the NY Times appreciates this point.  Read today's main editorial.  

The University of Chicago's Professor Casey Mulligan has published a new $3 e-book titled "Side Effects".  He provides an in depth examination of the future of health care in the United States.    Building on some of the ideas discussed in his WSJ profile,  the book provides a nitty gritty analysis of the unintended consequences of the new health care law.  It offers a number of predictions about the medium term future that can be compared to data to see if his theory is correct.   At its core, this book focuses on incentives both of workers in terms of hours worked and on the demand side focusing on the incentives of firms to bundle how many hours into how many jobs. Intuitively, under the new law,  will firms seek to hire many part time workers or fewer full time workers?

I am not a health care expert but as I read Mulligan's book, I was reminded that there are many behavioral elasticities that health economists designing the law are assuming equal zero.  Mulligan questions this optimistic (and lazy) assumption.  Put simply, if the NFL adopted Canadian Football rules, more teams would punt on 3rd down!    As I understand Casey's argument, many Obama health economists are implicitly ignoring the Lucas Critique.

A critic might say that this is a "fancy" way to defend denying health care to poor people.  That would be a "low blow".   Instead,  Professor Mulligan is demonstrating how a "public intellectual" who is a Ph.D. economist goes about using his skills to hone the public dialogue.  We economists believe that incentives matter.  Mulligan is investigating what are the incentive effects embedded in President Obama's new health care law.  From an intermediate micro economics perspective, he is studying how the new law leads to kinked budget constraints and induces optimizing households and firms to move to corners and kinks.  Such individually rational choices have social consequences.  At a time when our economy features "secular stagnation", we need to be smarter about what tradeoffs we are making in the name of achieving a worthy goal such as an expansion of health care for the poor.

Today, economists are really interested in salient effects.  Raj Chetty has written several papers on tax salience.   To understand what is "salient", let me define the converse.  If you pay for your electricity bill using automatic credit card billing then this isn't salient. You never see the bill and "out of sight is out of mind".  Without being confronted with such price information , you are less likely to invest in energy efficiency.  Mulligan is arguing that there are several new taxes embedded in the new Obama Health care law that are not salient. This may be intentional by the White House to reduce political opposition but to economists it is crucial that we foresee the full price tag and potentially distorting effects of a major piece of new legislation.  At a time when our economy isn't creating many "good jobs", could this law further slow this process?  Shouldn't economists be studying this?

One feature that I really like in Mulligan's book is taking the theory of compensating differentials seriously.  Adam Smith would respect this and my mentor Sherwin Rosen would also salute this.   If jobs offer greater benefits then workers will accept a lower wage.  If firms must pay out greater benefits then they will only hire workers at a lower wage.

Anthony Flint appreciates the beauty of the Rhode Island coast but worries about its future.  With sea level rise, there certainly will be specific parcels of land and structures there that will vanish.  The owners of such parcels will lose.  Anticipating this, the structures will be allowed to depreciate and they won't have any valuable possessions (or people) in them when they submerge. This is an example of how expectations reduce the cost of climate change.  

As land is lost, other land becomes more valuable.  Other "higher ground" pieces of coastal real estate will go up in value.  Changes in zoning laws would allow more people to live there.  So, instead of having a single family house on a bluff with a view of the ocean there could be a 20 story building (see Ocean Avenue in Santa Monica).   Look at this building. Do you see its stilts. It overlooks the Pacific Ocean.  



This simple example highlights how adaptation takes place. Note that the free market guides this process.  No President or Governor guides this set of events.  

Here is a direct quote that refers to Steve Slovic who is an English Professor at the University of Idaho (I don't know him):

"Mr. Slovic sees, if not action, then at least rising concern. “Climate cycles are not absolutely fixed and predictable,” he said, “and that may be the great lesson of the era that we’re living through right now. Whether we believe in human-caused planet-wide changes or whether we believe that these are natural cycles, I think all of us in the early 21st century have this sense of a kind of basic uncertainty about how conditions are changing.” 

He’s noticed a growing desire to find ways to adapt to these changes: “The more nimble we can be, the more lightly we can live on the planet, I think the more able we will be to adjust to various shifts that we see occurring every day right now and that are likely to continue to occur in the future, and I see this reflected in the literature.” 

We don’t yet know how to make it rain. But increasingly, we may be talking about what to do when the rain doesn’t come."

In the face of drought, water price will rise and the basic laws of economics will be tested and confirmed as significant supply and demand side responses take place. In the medium term, induced innovation will take place as R&D is directed to augment our water supply. Engineers will quickly make breakthroughs in a range of technologies from desalinization to others that I can't even imagine. Don't bet against human ingenuity.  But to trigger this directed search for solutions requires a price incentives --- so politicians need to allow water prices to rise to reflect the fundamental scarcity.

 

While Eric Snowden and friends worry about the costs of spying, new monitoring technologies also offer benefits.   This piece  discusses how drones are being introduced to patrol over nature parks to see if poachers are actively invading parts of a park.   Such information should help environmentalists to focus their enforcement efforts.  The big point here is that cheaper monitoring technology reduces the private information that agents have.  Such agents become aware that their actions are being monitored and this should reduce shirking and other forms of bad behavior.  This new information access should also affect contract design.

Years ago, Tom Hubbard wrote a QJE paper focused on how the trucking industry's contract design was affected by onboard truck GPS systems that relay to headquarters where the truck is at each point in time. Before such technology, these truckers had private information about their activity (had they gone to Vegas to gamble and go dancing) or were they actually driving their assigned route?  In such a case, the headquarters had to provide some incentive compatible bonus for actually delivering the goods on time.  With the new GPS system on board, the headquarters could just pay an hourly wage because the asymmetric information problem had vanished.

Other examples?  On midterms, teachers worry about cheating and must keep our eyes on the crowded classroom. If we could fly a drone, there would be even less cheating taking place.

For activities that take place out in the open with a spatial component, drones appear to have an edge in monitoring. I agree that if a bunch of guys are colluding by email that a drone won't spot this but if a group of workers in a field are goofing off then the drone will record this and when output is found to be low for that sector; the workers can't claim that there was "bad luck" as the cause for the low output because their lack of effort has been documented.

Will economists start to write papers about the benefits of "Big Brother"?   What are workers' rights to privacy?

From time to time, I live in Carpinteria, California.  Located close to Santa Barbara and UCSB, this beach town is a special place offering a combination of ocean access, hiking, scenic views, temperate weather and a small town sensibility (and two Starbucks).   An 80 minute drive from Westwood, this town is great for relaxing and exercising.   When in LA,  I rarely travel to the Venice Beach or the Santa Monica Beach.  While in Carpinteria, I go to the beach every day.  I have even gone jogging for three straight days.  In LA that's unlike to be the case.   When I was a kid, we would vacation on Fire Island along the Atlantic Ocean.  With the bright sunshine and blue skies, the Pacific Ocean just looks better than the Atlantic.

UCLA is heavily investing in building a hotel/conference center, dorms, a music building, an engineering building, and many new medical campus buildings.   At the same time, the faculty's size is shrinking and the faculty are aging (see pages 15 and 16).   Over at USC,  I read that this school has just finished building an interdisciplinary social science building that will be home to many of its rising research centers.    How do universities prioritize capital projects?  Which projects improve research on campus versus which improve student quality of life? What is the right balance between the two?  Can economists be useful in helping to decide this?

At a time when UCLA is ranked higher than USC in football, is USC closing the nerd gap?  Which matters more in the formula for being a great university?

My fellow University of Chicago economists, stop reading Krugman's latest and explain this puzzle to me.  A United Flight to Denver was diverted to Chicago because of a fight between two 48 year olds over whether the person sitting in front in Economy Plus has the right to recline her chair.   For details read this.

As we get ready to start the new academic year, here is an excellent example of the Coase Theorem not working! Who has property rights on an airplane when the person in front of you wants to recline while you care about your knees? Why was this United flight diverted to Chicago? Wasn't that a destruction of resources for everyone involved? My fellow Becker students, what is the answer? You have 10 minutes to answer this 6 point question. The Coase Theorem predicts that the recliner should have paid the person behind her? True, false, uncertain. Explain.

An environmental economist might ask a valuation question here.  In aggregate, on a plane carrying perhaps 150 passengers, what was the total loss to everyone on board (including all of the passenger time lost landing in Chicago and taking off again) and the value of the anxiety caused by this fight between these two people?   Did the two duelers internalize these social costs when their fight began?  Why didn't the victims on the plane pay the duelers to stop dueling?  Or would this create bad incentives encouraging even more fights over common space? The tragedy of the commons is an interesting problem!

The IPCC appears to have served up its same points again in a new set of reports related to the challenge of climate change.  Here is the report from Justin Gillis from the NY Times.  Here is the IPCC webpage so you can read up on what's new here.

A direct quote from the Gillis article;

"Warming that substantial would almost certainly have catastrophic effects, including a mass extinction of plants and animals, huge shortfalls in food production, extreme coastal flooding and many other problems, the report found.

The report noted that severe weather events, some of them linked to human emissions, had disrupted the food supply in recent years, leading to several spikes in the prices of staple grains and destabilizing some governments in poorer countries.

Continued warming, the report found, is likely to “slow down economic growth, make poverty reduction more difficult, further erode food security, and prolong existing poverty traps and create new ones, the latter particularly in urban areas and emerging hot spots of hunger.”

Note the pessimism about our ability to adapt.  But, why?  What is the causal chain of events such that climate change slows down economic growth?  What is the micro economics here?   How does climate change make urban areas poorer?  In a system of cities, do all of the cities become poorer or does economic activity simply migrate from the most affected cities to less affected cities?

I love how the NY Times and non-economists make declarative sentences about the future without being honest about the uncertainty associated with their statements. I wish I was this confident about my ability to predict the future.

We do know that self interested individuals, firms and governments have strong incentives to come up with new strategies for coping with these real challenges. Ideas are public goods. If somebody on the planet (and they have strong survival and economic incentives to do so) figures out a good adaptation strategy then we all benefit from it.  The ideas of Julian Simon are ignored by the behavioral economics community and climate scientists who assume that everyone is unable to plan for the future.  I find this to be fascinating and to be a bit scary that the Rational Expectations revolution of the 1970s in modern macro has had no impact on how "intellectuals" think about major social problems.