On Thursday, hundreds of economists will return to the University of Chicago to celebrate Gary Becker's contributions.   I have not been back to UC for a year now but I'm looking forward to seeing my old friends, and the Department's new building.  

I was a student at the University of Chicago from 1988 to 1993.  21 years is a long time and I barely remember my time there.  I remember meeting my future wife and trying to write a thesis.  With the exception of Jim Heckman's class and Gary's Econ 301 lectures, I really have no memory of the coursework.   I do remember the intensity of the place and the talented students were attracted to study there.  In no particular order, my entering class in the fall of 1988 produced;

Alberto Bisin of NYU
Ed Glaeser of Harvard
Phil Strahan of Boston College
Bernadette Minton of Ohio State
Ethan Ligon of UC Berkeley
Kahn  of UCLA
Erzo Luttmer of the University of Minnesota
Hedi Kallal  (who started at NYU)
Rick Flyer (who started at NYU)

An ambitious department who hired this subset of the U Chicago class of 1988 would be in very good shape in the REPEC rankings!

The impressive feature of the new University of Chicago Economics is the close proximity between the business school and the Econ Department.  This should lead to great new research.  An issue that every business school faces is that with their small Ph.D. class size, the senior faculty tend to begin to do less research and focus on "real world" issues (i.e consulting).   Whether the "center of gravity" of Chicago Economics will be at the Econ Department or at the Booth School is an interesting question and this competition should make the overall research community stronger.

Many graduates of the University of Chicago will return at the end of this week to celebrate Gary Becker's contributions to Economics and to building up the University of Chicago.  Their next generation of economists have big shoes to fill.   Given Gary's focus on human capital, it is fitting that the NY Times today ran a piece about Harold Horowytz, who ran Zabar's deli counter from 1972 to 1992.  For those who don't know Zabar's , it is Manhattan's best deli.   The point of the article is that this man loved his job and knew how to do his job.  Harold H represents a single example of human capital in motion as he had highly specialized knowledge that allowed him to produce a highly valued product in New York City (the perfect pastrami sandwich).  While this good is not tradeable across states, it helped to make Manhattan the wonderful consumer city that it is today.

Here is a photo of what Zabar's shelves look like. Plenty of great stuff and jostling New Yorkers trying to grab it.

From a public health perspective, it makes sense to quarantine potentially Ebola infected people but who has the property rights here?  Imagine a world where people have the right to not be quarantined. In this case, society would need to pay them for each of the 21 days we seek to quarantine these individuals. Suppose we offer them $1,000 a day, would that be sufficient for them to accept the quarantine?  Right now it appears that the government is saying that it has the property rights and can quarantine anyone suspected of suffering from this disease. Isn't that a "takings"?   This would appear to be another case similar to Eminent Domain.   In both cases, the government seizes an individual's property in the name of the "public good".

I have recently read biographies of the Late Night Comic Johnny Carson and the guitarist Joe Perry.    Carson's book is written by his ex-lawyer.

Carson hired Henry Bushkin when Bushkin was a young man and Carson was already famous.   Carson expected 100% completely loyalty and service.  This book suggests that Carson was a very complex hedonist who only felt alive when he was on stage and was a lonely man (thinking too much about his cold mother) when he was not on stage.   While Carson had at least three children, he didn't seem to interact with them and instead spent his life drinking, smoking,  cracking jokes and playing tennis.   While he accumulated great power in Hollywood as a Producer, he had little interest in actually doing that work.   Bushkin gained greatly from his lifetime work for Carson but eventually he grew up and appears to have been more ambitious than Carson.  They eventually outgrew each other.   As a resident of Little Holmby in LA, I often wonder what really goes on in Hollywood. My world and it do not intersect.  This book suggests a world that I would find distasteful.   The book raises an issue of how one's "public self" and "private self" differ.    My family has suggested that I allow too much of my private personality to seep into how I present myself in public (when giving one of my many talks).  Bushkin's book suggests that Carson was a different man on stage than in private.   Is internal consistency a "good thing"?

Joe Perry is well known as Steven Tyler's sidekick in Aerosmith.  I had always assumed that he was a minor league Keith Richards.  While I'm only 1/2 way done with is autobiography, he tells a great tale of the rise of Aerosmith.  He sketches his comfortable early life and his slow rebellion against the expectations that his parents had for him. Born in 1950, he came of age during the late 1960s which must have been a wild time to be a kid.   The book highlights both his ambition and the hedonism. It is hard to make it as a rock star and there is a lot of randomness to who emerges as a star.  He is honest about what went right and wrong along his strange path to fame.

The New York Times sketches that local officials in Florida are stepping up and enacting policies to reduce their area's exposure to emerging climate change risk.   Back in 2010, I published my Climatopolis book that offered a broad sketch of how city growth and city competition will facilitate climate change adaptation.  I will immodestly point out that I was ahead of my time.

The point of this blog post is to highlight that the field of environmental and urban economics is an essential research field (that didn't exist 20 years ago) but now has dozens of young researchers entering the field.  As the world urbanizes, we need to better understand the causes and the effects of such urbanization for local and global environmental issues. This is the core set of questions that I've worked on.  

Permit me to sketch the key ideas in that book (which while it didn't sell has shown that I'm not a bad Nostradamus).

1.  Within any nations, there is a system of cities.  Such cities (think of Miami or Boston) compete against each other for productive workers and firms.  Those cities with great quality of life will have an easier time attracting and retaining such economic actors. If climate change injures a specific city, it will suffer a brain drain and home prices will fall.  Anticipating this effect incentivizes property owners and local leaders (who value property tax revenue) to step up to protect the city.   Read my paper with Bunten.  

2.  Within any metropolitan area, there is "higher ground".  There are places due to geography and topography that are relatively safer from emerging risks. Economic activity will migrate to such areas. Wall Street can move to Connecticut. Yes, it can't happen over night but big fish such as Goldman Sachs can start the chain reaction. Manhattan would suffer but the productive agglomeration called Wall Street would remain. Wall Street doesn't need Wall Street in order to be productive!  Think about that. The greatness of the United States is the mind and the mind is portable.

3.  Cities facilitate innovation and idea diffusion. The key here is to have more experimentation related to water and electricity pricing so that we can learn the demand responses of heterogeneous households and firms.  Once we know these effects, policy makers in water drought areas will know how they will need to price water to equate supply and demand.

4.   Billions of people will face the challenge of climate change.  This creates a huge market for new products that help us to adapt.  Read Acemoglu and Linn's paper from 2004. The ideas apply immediately to climate change.  I am a technological optimist because there are trillions of dollars to earn in profits from making more energy efficient air conditioners, drought resistant plant, housing that can withstand floods, etc.    

Climate change offers the ultimate test of capitalism's viability as an adaptive system.    Local governments will compete against each other to maintain quality of life and this will go a great deal of the way to help us to adapt.

For a longer version of my thinking read this.   So many intellectuals fear free markets and prefer a top down system where a benevolent central figure such as FDR protects us and makes decisions for us.   Each of us had a daddy when we were a new child but we are not children.  We are a diverse set of individuals with different desires and resources.   Environmentalists need to think harder about how the invisible hand will protect them from climate change.

BUT, I 100% acknowledge that capitalism (in the absence of a carbon tax) has caused this challenge.  I would endorse an increase of the gas tax of $3 a gallon.   This would price the carbon externality, and accelerate technological innovation.  In the short run, it would raise the cost of food, electricity and produced goods and lower the price of suburban real estate.  In the medium term such costs would fall as induced innovation and lifestyle choices would be unleashed.







  

The Growth Accounting crew wants to talk about the coming slowdown in China's economic growth.   As I walk UCLA's campus, I see thousands of Chinese students enrolled seeking to learn and planning to return home.  What is the net effect of this investment in human capital on China's future growth.    Doesn't China offer the ultimate test of the human capital theory of economic growth? China is urbanizing and its educational attainment is rising sharply, will this translate into thousands of Jack Mas?

I think that the answer is that China's urban east coast economy is going to rapidly evolve to move away from its smokestack factories and to start to resemble San Francisco.  China will introduce intellectual property law to protect their forthcoming innovations.  

For those looking for some challenging reading related to economic growth, take a look at  Erzo Luttmer's approach .  His October 2014 lecture at the University of Chicago, doesn't feel like mechanical growth accounting approach of tracking input accumulation and asking whether some aggregate production (F(K,L) is stable over time.

I have vanished for a while but now I'm back to offer a few thoughts.

1.  The Ebola case in NYC offers an interesting test of self protection theory.  When the sick doctor checked into Bellevue there was a sudden surge in Bellevue Staff taking sick days.   Coincidence?

2.  While my Hebrew is a bit rusty, I must admit that I like this interview which I served up in early July 2014 in Tel Aviv.

3.  The Riviera Golf Club is very nice.  I wonder if they would accept my family as new members?




4.  I return to the University of Chicago this Thursday.  I've been away for 10 months now and I'm looking forward to seeing how the Econ Department is rebuilding its faculty.  I've been told that there are many empty offices in their new building.

5.  I return to USC this Monday afternoon to see some old friends.

Simon Dietz and Nicholas Stern have a new paper celebrating the Nordhaus Model for measuring the cost of climate change.  I would like to discuss their equation (4) on page 10 of the paper.

Environmental economists who do CGE modeling continue to introduce a damage parameter such that the damage to the capital stock is a deterministic function of a polynomial of global average temperature.

As shown in the author's equation (2), the capital stock of an economy next period can be written as:

K_t+1 =   (1-Damage)*(1-Depreciation)*K_t  +  Investment_t

Intuitively, if you own a valuable asset at time t, this asset will depreciate a little over the course of the year and due to climate change it will suffer some damage and so your asset position at the start of the next year reflects this negative adjustment of your original asset position (that it suffers depreciation and climate damage) and then you can offset this by investing more in the asset.

Norhaus and Dietz and Stern write out the Damage function = f(Temperature).

This deterministic f() and time invariant function is written at a point in time as:

Damage_t = 1 - 1/(1+ b1*Temperature + b2*temperature*temperature)

What I don't like about this approach is the lack of serious discussion that b1 and b2 converge to zero over time.   The whole adaptation micro-foundational approach as discussed in my Climatopolis book and in the work of economists such as Richard Tol and by Desmet and Rossi-Hansberg is that the economy reorganizes itself in anticipation of climate change so that that b1 and b2 converge to zero.  This reorganization is not costless but it is taking place and it isn't modeled in this mechanical and deterministic set of equations.

The point of Greenstone et. al. is that over the 20th century in the U.S that b1 and b2 have converged to zero for urban activity.  Given that the vast bulk of U.S GNP is based on urban activity this highlights how the temperature impact on our economy has shrunk over time.

This research approach violates the Lucas Critique as reduced form parameters are treated as structural parameters.  A more rigorous and scientific research program would be to explicitly link b1 and b2 to real investments in the economy and to the spatial organization of economic activity.  Such investments occur under uncertainty but under the expectation that we have incentives to reorganize economic activity.

The existing Nordhaus model  appears to ignore the rational expectations hypothesis. The agents in the model should be able to solve out for the expected future damage costs because they know the posited damage function of how temperature maps into damage to capital and they know how GDP growth maps into temperature growth.  Anticipating future damage to the capital stock under the status quo policy should nudge forward looking investors to seek out investments that are less risk and in my spatial setting are on "higher ground".

Intuitively, if you expect to face a 30% tax in 10 years on capital (because of Mother Nature not the IRS),  if you continue to invest in the same old assets (i.e. coastal housing) that you have always invested in --- then you have strong incentives to seek out less risky assets to invest in.  In my model, investors can substitute away from capital along the coast and now seek out projects on "higher ground".    The introduction of cities into these models would completely change the damage equation presented above and highlights that it is not a structural relationship and thus any predictions based on such a equation are likely to be of low value.  Instead, today's damage function is highly likely to be an upper-bound on future damage because of the constant re-organization of the economy to reduce the impact of temperature on our quality of life.

In the NY Times Style Section, there is an interesting article about the shifting balance of power within California.   The Hollywood Moguls traveled to Silicon Valley because they know that the real $ is there.  What are the gains to trade between Hollywood and Silicon Valley?

The Cliche is that Silicon Valley needs content for its platforms while Hollywood wants $.   One can imagine a future where there is no work/leisure divide.  People walk around with a headset on and can access the entire Internet and stream any movie or any show at any time.  Given that many people have ADD, it will interest me who has the self control to actually do any work? Global productivity may plummet as people just watch House of Cards all day long as sit at a Starbucks drinking a coffee.

How will people pay for this 24 hour a day/7 day a week constant Internet access? Will there be Internet congestion pricing? Will Smart Phones, Search Engines, TVs, video games, and Movies and personal computers and tablets all merge into one product? I think the answer is "yes".   There will be content suppliers and there will be content delivery.   We will reallocate our time such that we work less and we simply sit around and have fun.

An issue that has arisen in the "old economy" is that whomever controls the distribution network gets rich.  Think of coal mining firms needing the railroads to deliver the coal to the big city.   For some evidence from environmental economics, take a look at this paper.

The beach community of Santa Monica has a small airport where rich guys land their private planes.  All airports take up a lot of room and this one may be 230 acres of land within 3 miles of the beach.  More facts about the airport are here.   Is this an efficient allocation of scarce resources?

I would guess that if this land were sold to real estate developers on 1/4 acre plots that these 1000 new homes would sell for $1.5 million each.   So, at 1% property tax the city of Santa Monica could collect an annual flow of $15 million dollars a year from these new home owners.  In addition, the city would collect a one time payment of maybe $750 million dollars by privatizing the land.   That would give some Bobby Shriver a lot of $ to play with and it would increase demand for local schools, cops and fire protection creating new jobs for the city and more vitality in a rundown part of Santa Monica (because of the noise from the airport).

Now I must admit that I have a personal stake in this debate.  Planes fly over my Little Holmby home as they prepare to land at that airport. I want these annoying private planes to go away.