I'm not sure why the NY Times requested a review of Jeff Madrick's new book but Dr. Krugman wrote an interesting review.   Mr. Madrick charges mainstream economists with damaging America.   That's a tough thing to say about  a group of Ph.D. doctors.  Didn't we take the Hippocratic Oath?  Dr. Krugman names Chicago names in his piece calling out Cochrane, Fama and Mulligan.  What is going on here?

Here is a direct quote from Amazon with the publisher praising Mr. Madrick's work:

"A bold indictment of some of our most accepted mainstream economic theories—why they’re wrong, and how they’ve been harming America and the world. Budget deficits are bad. A strong dollar is good. Controlling inflation is paramount. Pay reflects greater worker skills. A deregulated free market is fair and effective. Theories like these have become mantras among American economists both liberal and conservative over recent decades. Validated originally by patron saints like Milton Friedman, they’ve assumed the status of self-evident truths across much of the mainstream. Jeff Madrick, former columnist for The New York Times and Harper’s, argues compellingly that a reconsideration is long overdue."

Wow!

As I understand University of Chicago economics in the year 2014, there are four main key ingredients;

1.  People respond to incentives
2.  People are forward looking
3.  People differ with respect to their skills and ambitions and life goals
4.  People use markets to sell and buy goods to help them achieve their life goals
5.  Government is not an omniscient benevolent planner.  Instead, different actors in government have their own private agendas, resource constraints and private information about whether they are "doing their job".

From these 5 building blocks, the job of economists is to devise a set of rules to achieve a pareto optimal allocation of resources.  Without having read  Madrick's book, I have a feeling that he has a very strong taste for equality and would be willing to sacrifice much U.S economic growth in return for a more equal income distribution.

If he favors a much higher minimum wage and barriers to free trade to keep Chinese exports out of the U.S, does he have a favorite economic model for predicting the long run effects on this nation?  At the end of the day, there are many micro economic parameters that need to be known to answer the question of what is the shape of the equity/efficiency "frontier".   The new group of Chicago economists are quite honest about the need to highlight these parameters and to estimate them.

Put simply, if Hilary Clinton in 2016 pursues a "middle class" agenda that features sharp taxes on the rich, limiting free trade to protect U.S manufacturing jobs, a higher minimum wage and an expansion of public works;  will the U.S be a stronger nation in 20 years time?   I think it would be a productive discussion for macro economists to be honest about what structural parameters do they know and not know because this would highlight why this is a very hard question to answer.

The New York Times is angry that its reporters have been banished from China and that people in China cannot access the NY Times website.  Fortunately, the NY Post can fill this void (I am kidding).  In today's NY Times there is a long piece about the Hong Kong democracy protesters. The following quote is interesting:

"Many in the crowd — fearing that the police would use pepper spray, as they had on Friday night and Saturday morning — unfurled umbrellas, donned plastic raincoats and gauze masks, and put plastic wrap over their eyes. "

This is rational adaptation in the face of an anticipated threat.  This simple example generalizes and explains how urbanites will adapt to climate change.  We are not behavioral idiots.

Back in 1986, I was a student at the LSE.  Each day I read the Guardian and the Telegraph newspapers and learned an early lesson in media slant.  The correlation between the news and headlines on these respective left and right wing newspapers was about .1.   Today, I've achieved something that few University of Chicago Econ Ph.Ds can claim.  I have published in the London Guardian and here is the piece.   The editor wanted more on "climate refugees" and I supplied this but used my 500 words to discuss dynamic compensating differentials models and the role that the system of cities will play in protecting urbanites against climate change.

I guess I am part of the New Left now?   While my Guardian piece should buy me some street cred in Berkeley, I still suffered some indigestion from reading this Dr. Krugman piece about the rational expectations revolution in macro.

Here is a photo of my family garden.  How many plants can you name in the below photo?  If I still lived in Boston in my old suburb of Belmont, what would the garden look like at this time of year?

The University of Chicago's Harris School has a strong set of researchers who are actively involved in local and national policy making.  This announcement offers one example.  Ben Keys and others will discuss what the City of Chicago should do to redevelop the land being occupied by 55,000 vacant homes.

You do not have to be a "Big Data Scientist" to realize that you should start by making a map.  These homes will not be randomly distributed across the city.   These homes will tend to be concentrated in less desirable areas and their vacancy contributes to the local "lack of desirability" of the block.

I realize that the discussion will focus on foreclosed homes.  So, this means that there are 55,000 homes for which the current market price is less than the mortgage and home owners walked away and the banks now own those homes. These banks (such as Bank of America) are often not in the affected community and have weak incentives to take action.   The City of Chicago could offer to purchase all of these homes at some agreed upon price.  To keep this simple, suppose they each could be bought for $75,000 on average. So, 55,000 * 75,000 =  $4.2 billion.  The city could issue bonds to buy these properties.

The City of Chicago would face a portfolio problem.  Does it want to invest $4.2 billion in land within its own Borders? Does the Mayor believe in the future of Chicago?  If this land becomes more valuable in the future then a future mayor would be able to pay for the generous pensions that Chicago and other big liberal cities have voted for their public employees.
What is the optimal land use on a block in decline? If it is close to an area that is gentrifying then there could be an option value to buying the land and seeing if this block gets "hot".  Does the City of Chicago want immediate development on lots that are vacant? In this case it should sign a contract that has "inflation embedded in it".  A developer who buys the lot and develops immediately pays $X while a developer who buys and builds in the future pays 2*X.

Should the vacant land be rezoned for other uses than residential?

A question for the University of Chicago here is why is public policy needed here?    The city could knock down the existing structure and clean up any garbage and then make a map of the new "green fields" that it will auction off.  In this case, why won't the invisible hand allocate the land to its highest and best use?

The urban policy experts will argue that developers will ignore the local externalities associated with their choices.  But, is that true?  If the developers purchase several lots in the area then they become residual claimants on the neighborhood and have strong incentives to think about the local public goods.

The key issue here is one of expectations.  A vacant lot has great value in a neighborhood that is expected to gentrify while the opposite is also true.  Where do expectations come from and do developers have optimistic expectations about the dynamics of Chicago's Southside (where I'm assuming most of the vacant properties are located).  In Los Angeles and Chicago, Magic Johnson has been a major investor in real estate property.  Will he want to purchase some of these vacant lots?

Here is a new report  highlighting some climate change induced water challenges that California is likely to face over the next 80 years.  A pessimist would say; "we are doomed."  An optimist would say;  "Thanks for the "heads up"", now what are the new money making opportunities created by this anticipated challenge?"    For example, the report features some discussion of snow melt and water runoff (see page 23).  If some local government or land owner can figure out a way to capture this runoff so that it sinks into the ground and replenishes aquifers won't that city or property owner become rich as they now have large reserves of a valuable scarce resource?  Do you see my "big" point?    This simple example is the tip of the iceberg.  Do you bet against human ingenuity when there are 7 billion people on the planet and decades to make research progress and trillions of dollars of investment capital seeking new profitable ideas?  

Read the report, there is some exaggerated stuff about forecasting the population growth and spatial distribution of the population 40 years from now (see page 16).    Chapter 7 makes no sense in that it studies water demand 50 years from now.  How do the authors know what technologies will be in place then?   For example, will homes recycle their own gray water and convert this into water for drinking and washing?     I view this type of stuff as nuts but the non-social science pieces of the report make some interesting points.

Time is our scarcest asset. If you seek to waste 4 minutes contemplating the future of the Midwest then I encourage you to listen to my short radio interview.     For decades, millions of people have been moving away from the Midwest to the South and West.  In future decades, in part due to climate change, such regional trends may reverse.  Again, the key idea here is the "system of cities".  The U.S features hundreds of cities that compete for the skilled. Yes, LA, San Fran, Seattle, Chicago, NYC, Boston, Washington DC and Portland and San Diego are the hip expensive cities now but if any of these cities suffers due to climate change then asset owners in these locations will lose and people will move away to "higher ground" in cooler summer places that have access to water and face less flood risk.  Of course within even coastal cities, there always will be "higher ground".  If Southern Manhattan floods, Wall Street will move to Connecticut and Goldman Sachs will continue to make $.  The interesting issue here relates to how cities compete and will climate change actually help Midwest cities to better compete for the skilled?  Quality of life (which takes on many dimensions) varies across cities.  Which cities will have a comparative advantage in protecting their residents in the year 2080? Will this edge be due to natural advantages of geography and topography? Or due to wise policies? Regardless of what is the true cause, the competition between cities to be "safe pleasant" cities will make urbanites safer and allow us to continue to thrive in our hotter future.  Right now you can buy Detroit real estate cheap (here is a $60,000 home). If you believe that Detroit's relative quality of life (as compared to Phoenix and other Southwest cities) will improve, then you should buy land there now and thank me later!

For those who want to see how a micro economists (trained at UChicago) thinks about the urban economics of climate change adaptation then read this quick version of my Climatopolis.

If you want to learn even more; then read my $1 book on Amazon.

The NY Times reminds us that the California Dream is expensive.  Early in the article, an interesting fact is presented and Richard Green of USC makes a key point:

"In much of the state, a two-bedroom apartment or home is virtually impossible to acquire with anything less than a six-figure salary.

“It’s hard to imagine how all of California doesn’t become like New York City and San Francisco, where you have very rich people and poor people but nothing in between,” said Richard K. Green, an economist and director of the Lusk Center for Real Estate at the University of Southern California. “That’s socially unhealthy and unsustainable, but it’s where we are going right now — affordability is its worst ever, and we’re seeing a hollowing-out of the middle class here.”"

Micro economists might approach this issue using supply and demand.  We know why the demand to live in California high.  You have read my climate demand papers?  (see #1, #2, and #3).  No other state in the nation offers California's unique weather, beauty (oceans and mountains) and blue skies.  Richer people are willing to pay more for these climate amenities and billions of dollars of foreign $ is flowing into the US to buy our prime real estate.  China's rich investors want a safe asset for their family and recognize that California offers unique quality of life attributes that cannot be found in Beijing.

At the same time that demand is rising, it is very hard to build in California. Yes, the topography of building on mountains is tough but I've argued that another cost shifter is liberals!  Those cities (think of Santa Monica, Berkeley) with more liberal registered voters allow less new housing to be built within their boundaries.  Read my 2011 paper.  

For young economists seeking to work on a hard problem, consider the following.  By limiting housing supply in cities such as Santa Monica, does this raise home prices because this shifts in the supply curve or does such regulation both shift in supply and increase demand?  If you argue the "latter", how would you disentangle how much of the zoning effect's impact on price is due to supply versus demand?   What could be the story?   Suppose that zoning preserves a neighborhood's character and charm.  This could increase demand to live there.  So, the challenge here for structural researchers is to figure out whether zoning leads or lags shifts in housing demand.  When a place zones, does this increase demand? Or, does zoning increase when demand has exogenously increased and people are trying to move in?

Consider the impact of the California Coastal Commission, here is a 2010 co-authored paper of mine that few people know about but I think it is quite good.  Regulation binds.

I am listening to Aerosmith's song "Rag Doll" and Duran Duran's "Girls on Film" while I write this B- blog post.   A number of news articles are picking up my "quote" about the rise of environmental refugees.   I'd like to set the record slightly straight.  First, for economists who only know Arrow and Debreu, the term "environmental refugees" may not be part of their standard lexicon.   There are a number of "doom and gloomers" who claim that 80 years from now we will live in a Mad Max world of savagery as we will have destroyed our planet and will be fighting to the death over scarce resources.  Environmental refugees will cross borders in their hunt for food and clean water.

I do not believe that this will be the world in 2094.  Instead, I would say that "environmental refugees" are people considering migrating and we always have the choice whether to migrate or not.  Migration is an investment such that the migrant incurs upfront costs (packing, leaving your family and the familiar and paying to ship your stuff and yourself to a new place) in return for a stream of future benefits.  The benefit is that you have the opportunity to live your life in a new place.

The United States have over 300 major cities. We do not know which of these cities will adapt well in the face of climate change but many of them will. Those cities that have a comparative advantage in adapting will experience an influx of migrants and this will lead these economies to boom. I believe that such migration will be orderly and there will be rule of law.  Such "environmental refugees" are likely to leave cities that do a bad job coping with; heat, drought and fires.  Those cities that figure out how to adapt will boom. This competition makes all urbanites better off as they will have choice and extra adaptation strategies.  People are not passive victims in my view. Instead, while Mother Nature is throwing new punches, self interested people are researching where is the "higher ground" and will move there. Free market price signals will make this an orderly migration.  

While I am pleased to be quoted in this NY Times article,  I'm a pinch surprised by the quote.  I am a home owner in LA. I would not have made this big bet of all my life's savings if I thought that LA is doomed in the face of climate change.   I do not have a crystal ball and I can't claim to have perfect foresight concerning the exact names of those cities that will thrive in our hotter future.