Wednesday, January 29, 2014

Adapting to Icy Roads in the South

Atlanta has ground to a halt on the ice.  The comments posted here blame bad public transit and a lack of co-ordination such that everyone took to the roads at the same time.  Dynamic road pricing would have helped with that!  Now that Atlanta has experienced this "teachable moment" how will its citizens and government adapt so that the next ice storm causes much less damage and wasted time?   The wise man learns from experience!

Preparing for the Next Disaster's Short Run Aftermath

There is chaos the day after a Hurricane Sandy takes place.  Basic services and markets we take for granted are disrupted.  Building owners in NYC are aware of this and are purchasing basic "survival kits" for their building managers so that the disruption costs of such events decline.     This is free market adaptation at work and folks who can deliver solutions to anticipated challenges will become rich.

"As the mayhem receded, Mr. Ambrosini began to rethink his preparedness for future disasters. In particular, he wanted to make sure that those whose job it was to run the buildings during a disaster were outfitted with sufficient food and protection to do their tasks effectively. The result is a 21-piece survival kit that ABS has begun installing in many of its buildings, including 44 Wall Street in the financial district and 210 11th Avenue in Chelsea, which were particularly hard-hit by flood damage."

Note the sequence here;  1.  anticipated disaster risk stimulates new products to cope with anticipated challenges,  2.  forward looking businesses purchase these products.   This is how capitalism steps up.  An empirical behavioral economist might go do a survey of building owners in the flood plain to see what % of them haven't made these investments and to try to explain why.  

Sunday, January 26, 2014

The Benefits of Ambiguity

While leading economists such as Hansen and Weitzman have written about the costs of ambiguous risk for a macro economy, there can be benefits of ambiguity for individual decision makers.  This Stanford doctor has cancer and in this compelling piece  he discusses the awkward game played between doctors and patients (he has been on both sides of the fence) with respect to conveying accurate longevity probabilities.   Is ambiguity (not ignorance) bliss?   This guy is waking up each morning and going to work even though at age 36 he knows that his time is quite finite.

Saturday, January 25, 2014

Drunk Driving and the 99%

With the rise of Uber, it crossed my mind that wealthy people in LA have no excuse to drive drunk after a night out in West Hollywood.  Using their cell phone, they can summon their own private "black car" limo at relatively low cost to pick them up at whatever place they are hanging out.  Their cell phone will receive a text message when their ride has arrived so there is no reason to hang out outside waiting like a loser staring out at the street looking for their car.   Given the serious penalties for drunk driving, this should lead many of the party scene to substitute from using their own car and to use Uber.  I see from the Internet that NFL players are well aware of this and are increasing using Uber to cruise around.  So, I want to make two points;

1.  Uber offers some social benefits from reducing drunk driving from hip places to expensive residential neighborhoods.

2.  DUI offenses in Uber cities will be increasingly concentrated among poorer households.   This hypothesis would be testable if a data set existed for cities over time on the count and attributes of DUI offenders.

How mobile phone technology affects urban quality of life will become a hot topic in urban economics!

Thursday, January 23, 2014

Outdoor Ice Hockey on 60 Degree Los Angeles Nights: Adaptation Revisited

I don't play ice hockey but there are many LA people who do.  You might think that if it is 80 degrees during the day in January 2014 here and it is 60 degrees at night that you can't play ice hockey outside.  You would be wrong.  As this article discusses, new technology has made this possible.

"The technology has existed for several years to make this happen but the NHL, preferring the snow-globe atmosphere of cold-weather sites, resisted playing in a warm climate. Finally, in a season that includes six outdoor games, the NHL decided to stage its take on hockey, Southern California style.
The heart of the operation lies in the 53-foot truck that houses the pumps and refrigeration equipment. Its twin is in New York for outdoor games at Yankee Stadium on Sunday and next Wednesday.
Pipes from the truck will circulate the coolant glycol at the rate of 1,000 gallons a minute through ice pans set up beneath the ice. The glycol is recirculated through the system in the truck. The goal is to keep the ice temperature at 22 degrees.
Sensors constantly monitor the temperatures of the supply and return pipes. Craig has an "app" on his mobile phone that monitors the system — as well as the air temperature and dew point — and will sound an alarm at the slightest fluctuation. He falls asleep with the phone on his chest, set to vibrate, so it won't wake his wife. The principles of the refrigeration system, he said, "are the same as your fridge at home, but on a bigger magnitude." Much bigger.",0,2914304.column#ixzz2rEXq66ge

This is another example of how human ingenuity allows us to adapt to live our lives under the climate conditions we face.

Wednesday, January 22, 2014

NCCA Tournament Winner Prediction and Dart Throwing Monkeys

Can a dart throwing monkey outperform professional stock pickers in terms of who can earn a higher risk adjusted rate of return on a portfolio?  Is the same monkey more likely to win the $1 billion dollar prize for correctly naming all of the winners in the March 2014 NCAA Basketball Tournament?

Suppose the monkey has a 50% chance of predicting each game's winner.   There are 64 teams at risk to win the title in this elimination competition.  In the first round of 64, there are 32 games.  The monkey's probability of getting each of these right = (1/2) raised to the 32 power.   In the next round there are 16 games and the probability of the monkey getting all of these right; is (1/2) raised to the 16th power.  There are then 8 games;  so the probability of getting these right is (1/2) raised to the 8th power and then (1/2) raised to the 4th power, then 1/4 and 1/2 chance for the title game.

so if I can add up my exponents; the probability the monkey wins the jackpot = .5^63.    The expected value of any one person entering into this contest =  .5^63*1 billion which I believe = 0.

If 1 billion people enter this competition, then the expected cost to the sponsor = .5^63*1,000,000 trillion which I still believe equals zero but I'm too lazy to check.

Monday, January 20, 2014

Does China's Production of Export Goods Cause Serious Pigouvian Damage to the Western United States?

The NY Times reports that a new PNAS paper finds that an unintended consequence of Chinese production of goods is to raise urban air pollution in the United States.   Given that a large share of China's production go to the United States, an economist might ask the following question;  "How much higher would U.S pollution levels be if the manufacturing activity that generates the goods that U.S consumers consume all took place in the United States?"    We know that air pollution and water pollution drifts across boundaries.   I do agree that that it is interesting to quantify these effects.  The authors appear to use a complicated spatial model for teasing out the origin and destination of various emissions.   The estimated effects appear to be quantitatively small (i.e 2% higher).    As China's coastal eastern cities deindustrialize, this U.S externality effect will further shrink.

So, from a day to day quality of life green cities point of view;  the United States should thank China.   U.S cities are greener because of our deindustrialization.    

Sunday, January 19, 2014

The Urban Economics of Sports Talent Scouts

This is a post about asymmetric information and costly monitoring.   Back in the year 1977, suppose that I had a 17 year old son who was a great football player for a middling high school team.  How would college scouts discover him and lobby the head coach to recruit him?   In this age before cell phones and YouTube, the scouts would drive to the game and sit there.  These transportation and time costs acted as a barrier to entry giving this scout some monopoly power.  If he discovered that my son is great, he would have an edge because this information would not be public information.  

Fast forward to 2014 and repeat this experiment.  Similar to other "middlemen" (i.e. travel agents), the Internet should almost eliminate the need for such talent scouts as I would sent a bunch of videos of entire games of my son playing and send them to the coach.  Now, the coach of a college football team is a busy guy.  He can't watch all of these tapes. How would he filter these?   Using "big data" techniques, he could use a predictive model to form a prediction of the likelihood that my kid would accept a scholarship if offered (based on my zip code's distance from his school, my kid's SATs and other things my kid stated in his application).  For the subset of those high school football players with a high propensity score (i.e the probability of attending university j if offered a scholarship), an assistant coach could go through the videos to search for the best fit for the team.

Similar to "Money Ball", this sketch highlights how emerging technology affects the assignment process of how high school football players join a specific football program.  

To an urban economist, the interesting point about this example is that in the past there was localized information (that my son was a star) that could only be known by bearing a time cost to come watch him play.   Zero cost video has eliminated this cost and made the information "public information" for anyone who watches the video of him playing.   We achieve better matching because of this transition.  

Saturday, January 18, 2014

Forest Fires Near Cities: A Challenge for Climate Change Adaptation Optimists?

Over the last couple of days, Los Angeles has been a hazy unpleasant place as smoke from the Colby fire has drifted around the region.  A couple of homeless guys have caused a lot of Pigouvian damage by playing with matches.  How would Milton Friedman handle this issue?  Would he call for privatization of this land?

In the absence of private property, the Coase theorem doesn't apply.  The forest is public property and these guys engaged in illegal activity when they set the fire.  Given that they are homeless, they do not have the deep pockets to be held responsible for their actions.  If there are 8 million people in LA who each suffered $20 worth of damage from this episode, then we can't recoup $160 million in aggregate damage from these three.  What can be done?

An optimist might say that the answer is drones.  Drones could be deployed on these public lands and identify the "hot spots". Once fires break out a targeted "water bombing" would take place.  Would such water bombs take care of the problem?  I don't know.  If it doesn't, then LA must think about ways to limit access to the forests and perhaps even have check points to search people for matches and other destructive tools.   Is this extreme?  Yes, but the air pollution damage is real.

A Chicago economist would suggest that more severe penalties for arsonists are needed but would the ACLU permit this?    

This issue is relevant for climate change adaptation.  The Southwest of the U.S suffers from intense drought that may be caused by climate change.  If it doesn't rain and it is hotter outside (due to climate change), then the forests are at greater risk to catch fire with a mere spark.  Are there more robust trees that could be planted that could better cope with these "new normal" conditions?  I don't know.

Here are some drought resilient trees from Australia.  Could they be "easily" transplanted to LA?

A UCLA Historian Endorses the Field Experiment Methodology

I was delighted to read the following letter to the editor in today's NY Times.

To the Editor:
Re “The Inequality Problem,” by David Brooks (column, Jan. 17):
Discussions about raising the minimum wage often focus on single motherhood, school dropouts and damaging youthful behavior to explain the lack of social mobility, but not inequality per se. The jobs at the bottom will remain even when individuals rise to better ones.
Mr. Brooks relies upon one negative study of the effect of raising the minimum wage, ignoring dozens that report the benefits of higher wages at the bottom. Instead of bouncing between warring studies, why not collect a decisive amount of data by raising the minimum wage and observing its consequences?
Taos, N.M., Jan. 17, 2014
The writer is professor emerita of history at U.C.L.A.

Note that in the final sentence of the letter that Prof. Appleby endorses the field experiment approach of introducing a change in policy to establish the causal effects of minimum wages on the working poor's labor income.   A skeptic might ask what is the control group in this case but let's put that to the side.    
Over the last decade, the UCLA's Social Sciences Division has reduced its number of faculty and the remaining faculty are aging.  Some hiring priority decisions must be made.   This is an awkward discussion that the university's leaders have not been eager to have.  It strikes me that the high returns investment in this "Big Data" age is in hiring quantitative rational choice empiricists.  As this letter makes clear, these researchers have the cutting edge skills to answer important questions. Our students would benefit from learning these skills and this would increase their employment prospects in the modern economy.   Such researchers work on key policy issues ranging from the causes of poverty, to the family, to business strategy, to opportunities for historically disadvantaged groups.   
UPDATE:  A prominent economist has written me asking why the Prof. Appleby's proposed experiment focuses on raising the minimum wage and seeing what happens.  He suggested that a more socially beneficial exercise would be to cut the minimum wage and see what happens.   He reminded me of  Neumark and Wascher's review of the non-experimental evidence (circa 2006).

Two Days of Free Environmental and Urban Economics Books on Amazon

For those who have always wanted to know more about environmental and urban economics, you can download my Fundamentals book for free on January 18th and 19th 2014.   Over the last 20 years, several research economists have been working at the intersection of environmental economics and urban economics and this book conveys the point that we have some progress but there are still many open questions.

Thursday, January 16, 2014

Roger Farmer's New Blog Causes a 100% Growth in the Count of UCLA Econ Bloggers

Here is a link to Roger's new blog.    Given this list of talented economists here at UCLA, who else should be blogging?  My vote would be for Lee Ohanian to join us.   Paul Krugman needs to face some competition in the market place for ideas.

How Will Olympic Marathoners Adapt to the Increased Heat?

The NY Times has published a slightly optimistic piece about how summer athletes will cope with hotter conditions in the Olympics.   Showing some good economic logic, the piece recognizes that there are several stages at which adaptation can take place.  First, there is the site selection.  The article has a short piece about what where in Australia the Olympics would take place.  Conditional that a site has been selected, there is a question of the hour the day when the events take place. Conditional on the site and the hour, athletes will anticipate that the conditions could be extreme and they have the right incentives to prepare for them and to take precautions. The piece provides a case study of a guy who trained in a steam bath room so that he would be ready for humid conditions.  That's "rational expectations" adaptation.   The author of the article is more concerned about the fans than the athletes.  But, here I don't worry.   Fans know that they can watch the event from their air conditioned home.  Only the subset who can take the heat will actually go and attend in person.  Free markets will provide "pocket fans" to provide cooling. Gatorade and other companies will provide drinks to restore your body's equilibrium.   Your smart phone will provide you with real time information on whether you are at risk of having heat stroke.  The suppliers of the outdoor event will be smart to have a refreshment tent ready for people who are at risk because if people think they may collapse then they won't attend the event and the event's organizers will lose money. This fear of losing profit motivates the organizers to "be prepared".  That's free market adaptation!!!

The point of this case study is educate skeptics about how free markets evolve to meet our changing needs. Self interest alone drives the adaptation here.  No government is needed just an invisible hand.

Wednesday, January 15, 2014

Does Private Property Reduce Deaths from Natural Disasters?

Today's NY Times has a great piece exploring the unintended consequences of insecure property rights in the developing world. argue that in many developing countries that squatters do not trust their governments and thus do not comply with disaster warnings when a Tsunami or storm is anticipated.   This group of poor people anticipates that if they leave their land that the government will step in and seize it.  Rather than risking this "takings", they do not move to higher ground when the storm arrives and thousands die.  The Counter-factual the authors have in mind is that if these individuals had secure property rights to their land, then they could walk away as the storm approach and reclaim their property later.  The authors claim that thousands could withstand the storms with this legal change.   Note the optimism here. Note that "bad governance" is the bad guy here.  What can LDC governments do to regain the trust of their people?  There can be more competition in political markets with elections and accountability.

On an unrelated note, Amazon will giving away for free my Fundamentals of Environmental Economics book on January 16th and January 17.

UC Berkeley Hires its Key Leaders from Columbia University

UC Berkeley has recently hired a new chancellor (the equivalent of the University's President) and a Provost.  Both were faculty members at Columbia University.    This recruiting of external talent from the Ivy League strikes me to be a wise investment.  

Tuesday, January 14, 2014

What Do NY Times Readers Have to Say About Sea Level Rise's Impact on the East Coast?

Here are many comments associated with Justin Gilles' piece in today's NY Times.  Let's think like economists.  Suppose you are a renter of a coastal house.  If sea level rise poses serious flood risk, you have an easy option to not renew your lease and to move to higher ground.    Migration isn't costless. You must pay the fixed cost of moving your stuff and you leave your local friends and knowledge about the area.  You might have been well matched with the area such that you love your morning walk near the beach.  An economist would ask the following question;  "if you have to move from your coastal rental, what is your next best affordable place to live and how close a substitute is it to your current place that due to climate change is at increased flood risk?"  A basic idea of economics is that prices adjust so that your next best housing option is a close substitute for your current rental.   Doom and gloomers implicitly assume that we have no options.  Read Sherwin Rosen's 2002 AEA Presidential Address.

What about home owners in coastal areas now at increased flood risk?  An economist would say;  "You made a bet by investing your savings in a risky asset.  If the value of your house had tripled would you have paid extra taxes because you don't "deserve" this good news?"  Why if bad news occurs, do you deserve a payoff from other taxpayers who didn't make the risk bet?   You had the option to buy insurance where you located, why didn't you buy more?   Why do you have the property right to live in a risky place that is growing more risky over time?  If the person says;  "I was born here and I want to die here.  All of my roots are here".  An economist might reply; "you have the right to live your life as you see fit but do your kids know the gamble you have taken?  Are you aware of the risk you are taking by remaining here?   Social workers could educate local community members about the risk. If they continue to want to live there, then what do benevolent paternalists do at that stage?  Local government can step in and use eminent domain to buy their houses to force them to move to "higher ground"?  At what price should government pay?  The market price that reflects the lower demand for living in a newly risky area?  Or will politicians seek to pay too high of price using federally subsidized tax dollars to over-compensate land owners in at risk areas.

If coastal home owners want to remain in their increasingly at risk areas and if they want federal subsidies for building sea walls, should the rest of the U.S oppose this?   As I argue in Climatopolis back in 2010, the answer is "yes".  Such subsidies represent a new example of moral hazard and risk taking related to sea level rise should not be subsidized.  If home owners want to live a risky life, they can use their own funds to do so.  The funny thing here is that people would be more likely to move away from the new hazard and thus adapt to climate change if the federal government was less generous in rebuilding coastal areas.   Everyone is about to get another lesson in "crowding out".  Similar to Peltzman's famous safety example, investment by government in protecting the public actually reduces the coastal home owners' incentives to invest in private self protection. 

Sunday, January 12, 2014

Some Photos of Berkeley

I spend some time in the Berkeley/San Francisco vicinity.  Below, I show you some of the photos I've taken on my recent walks.  I apologize for the fact that no hipsters, nerds, Woodstock Alums, or other Berkeley "celebrities" appear in the photos below.

Goats                                                                        The Berkeley View of San Fran


The View from Berkeley's Indian Rock                     Treasure Island and the new Bay Bridge


The NY Times Book Review on Climate Change

Today's NY Times Book Review offers four short reviews about recent climate change books. I would like to make a few comments about the subject matter of Linda Marsa's book.

From Booklist

"As the world gets warmer, “we’ll live sicker and die quicker.” Marsa nimbly navigates the topic of global warming and confirms the connection between climate change and disease. A hotter Earth triggers or worsens a variety of illnesses, including asthma, heat stroke, heart disease, and a multitude of infections. “The World Health Organization (WHO) estimates that, worldwide over the past three decades, 150,000 people a year have died as a result of a warming planet—mainly from increased mortality due to higher rates of malaria, diarrheal diseases, and floods—and that five million cases of illnesses can be attributed to it annually, too.” A sweltering planet means a drier future, with grave implications for our food, water supply, and air quality. The year 2012 was the hottest in recorded history. Phenomena like derechos (severe widespread windstorms) and haboobs (wind-driven walls of dust) are no longer rare. Marsa forecasts a “medical meltdown,” for as Earth heats up, public health systems around the world will be overwhelmed. A megadose of preventive medicine for our planet is needed. Sobering, informative, and essential reading. --Tony Miksanek

Note the linear extrapolation implicit in this quote. Why don't we learn from past experience? As nations and people grow richer, why don't they adopt precautions that we take for granted in the United States?  As nations grow richer, they suffer less death from natural disaster.  Why isn't Tony M. embracing economic growth as the tonic for this anticipated challenge?
Let's take a look at a specific case; the city/nation of Singapore.  Singapore's average annual high temperature is 88 degrees F.    Here are its data on infectious disease dynamics.   For a nation of 6 million people to have a count of heat cases in the 100s means that the infectious disease rate is quite low (under 1 in 10,000 people).   How has Singapore defended itself against the threats that Marsa highlights?  Part of the answer is that Singapore is highly educated, rich and well governed.  
Why can't the rest of the world (as locations warm) follow Singapore's leadership and past experience?  If your answer is "bad governance", then this raises the importance of improving urban governance in the face of climate change. We need more competitive urban political markets to allow "better" candidates to run for office and to incentivize them to act to address these potential challenges once they are in office.  
I agree that a nation that is not used to warming weather who is poor and has bad governance has a big problem in the face of climate change but I would ask why these nations are poor and badly governed?  Could climate change create an imperative to change these conditions to be more like Singapore?  
Could necessity be the mother of "improved governance"?

Wednesday, January 08, 2014

New Research on Cities

In October 2012, I had the opportunity to participate in a World Bank Conference on urbanization in Barcelona Spain.  Here is a copy of my paper "Sustainable and Smart Cities".  Here is a link for all of the conference papers.  

Monday, January 06, 2014

Time Inconsistent Energy Policy: The Case of Spain

The NY Times reports that Spain has reneged on its contract with solar power installers.  Could this time inconsistency lead risk averse investors to delay solar investment as political uncertainty increases?  Don't forget your Dixit and Pindyck!   There are residential and commercial real estate owners who spent their own money to install solar with the expectation that they could sell the power back to the grid at a fixed price.  The present discounted value of the expected revenue is crucially affected by this price that was written into the deal. Now, Spain has sharply reduced this fixed price and it has introduced a new tax on the solar installers to cover the fixed cost of the grid.    What are the implications of this time inconsistency for the rise of green power?  The interesting issue is who bears the risk of government changing the "rules of the game"?  Middle class households will be less willing to bear up front costs and then rely on government keeping its word for 25 years.  Can this risk be hedged?   Could expectations of future time inconsistency, freeze the nascent green economy?

As in the United States, there has been a new discussion of the solar death spiral.  The basic economics here is rising average fixed cost.  If it costs $F to have an electricity grid and there are N electricity consumers then the average fixed cost = F/N.   Each consumer would be charged this and enough revenue would be collected to keep the grid operating.  Solar installers, "opt out" and go off the grid.  Suppose that N2 < N make the choice to go solar. This means that N-N2 = N3 remain on the grid and their average fixed cost now rises = F/N3.  Do you see the "death spiral"?  As more people opt out, the average fixed cost for everyone else goes up.  This is just like the health insurance death spiral.   In the future, if good batteries can be created to store solar energy generated during the day, then solar households literally can be off the grid. In the short term, they are connected to the grid as they sell back power they don't consume.   I don't have an easy answer for what is the "optimal contract" to confront solar consumers with given the fixed lumpy costs of providing a grid when we don't have reliable battery technology.

Sunday, January 05, 2014

The Tiger Mom Ranks Different Cultures on Parental Value Added

In this age of the field experiment, how will economists test the Tiger Mom's provocative hypothesis of the central role of culture in rearing productive kids?   A quote from Amazon's book description; 

"Why do some groups rise? Drawing on groundbreaking original research and startling statistics, The Triple Package uncovers the secret to their success. A superiority complex, insecurity, impulse control—these are the elements of the Triple Package, the rare and potent cultural constellation that drives disproportionate group success. The Triple Package is open to anyone. America itself was once a Triple Package culture. It’s been losing that edge for a long time now. Even as headlines proclaim the death of upward mobility in America, the truth is that the oldfashioned American Dream is very much alive—butsome groups have a cultural edge, which enables them to take advantage of opportunity far more than others."
One strategy for testing these claims is to return to Bruce Sacerdote's adoption research and to supplement this research design with in depth interviews of the different parents in order to quantify their "non-cognitive" skills.   From a research standpoint, we would need many different types of adopted infants (not just Korean origin kids) to disentangle parenting from endowments and traits.   The researcher would also need to model a parent's choice over investments in children (both time and market inputs) once she becomes aware of her specific child's talents, interests and personality.  

Ross Douthat versus Jim Heckman

This is a mismatch.  While I might slightly enjoy watching a 70 year old De Niero box a 600 year old Stallone,  Ross Douthat overreaches when he writes;

"De Blasio’s signature proposal, universal pre-K, is a more ambiguous case. Most research indicates that early childhood education doesn’t have the benefits to children’s prospects that its advocates suggest. But it’s possible the program could increase the mobility of parents, by lowering costs and stress for two-earner and single-parent households."

For an overview of Heckman's thinking on this issue, go here.  

For some more discussion, read Greg Duncan's work here and here. 

Saturday, January 04, 2014

A Busy 2014?

I'm back in Los Angeles where it will be 78 degrees on Monday and Tuesday (no Polar Vortex for me!).  This will be an exciting Winter 2014.  I'm co-teaching a new Anderson School/Law School class on socially responsible real estate investing.  I'm co-teaching a large freshman cluster class and I'm leading a senior research project where I will advise seven IOE students as they work on the feasibility of increased reliance on solar power as a means to move water in California.   In addition, I will be mentoring some students doing independent studies with me and several of my co-authors from China will soon appear.   I also plan to spend some time here learning a new sport!

In terms of travel,  between now and mid-July, I will be in Palo Alto, Houston, College Station, Cambridge, New York City, Atlanta, Ithaca, Ottawa, Washington DC,  Philadelphia,  Italy,  France, Switzerland,  Turkey, Israel, China and maybe Japan.  

Thursday, January 02, 2014

The AEA Convention and Tree Cutting

Before the advent of the smart phone, all economists attending the AEA convention would receive two free books. One book was the conference program and the other was the hotel directory listing where all of the economists were staying.  Each of these printed items was handed to each of the 10,000 economists attending the annual economics convention. If together, these two books contained 200 sheets of paper, then this 3 day convention needed 2 million sheets of paper!    But, click on this and you will see the future.  Now that all economists have a smart phone, the Conference App will soon mean that these physical copies of these books will no longer be distributed.  Ingenuity can substitute for scarce resources.

Are Recessions Good for the Environment? Evidence from Greece

The conventional wisdom is that air quality improves during recessions as dirty factories produce less stuff.  Recent research from USC has documented that PM2.5 levels are rising in Greece as households whose real incomes are falling move down the energy ladder and consume lower quality, cheaper, dirtier fuels such as wood.  Alex Pfaff et. al. studied a household level environmental kuznets curve for energy in Pakistan but they were looking at a cross-section of poor, middle income and richer households at a point in time.  This Greece research examines a dynamic process as Greek households become poorer over time due to macroeconomic decline.   So, this is clear evidence of non-homethetic income effects.  As people become poorer (all else equal), they consume lower quality fuel and this creates more local pollution.

This Greece study highlights that the household sector is an important contributor to local pollution.  To do a good job studying the supply of urban pollution economists need to look at the;  transportation, household, industrial and power generation sectors and how their emissions evolve over time.   Given that households in Europe live in close proximity to other households (no sprawl), higher household levels of wood burning affect more local neighbors --- this means that the likely social costs of this privately beneficial action (burning wood for heating and cooking) is larger.

Finally, I should note that this blog post's claim ---- that recessions can have negative environmental impacts -- dovetails with my politics piece with Matt Kotchen.    As you recall, we use a state/year level panel data set of Google Insights to document that when state unemployment rates rise that searches for the term "global warming" decline. Our favorite explanation for this fact is that recessions lead households to focus on short term bread and butter concerns and to ignore medium risks such as climate change.  The U.S Congress understands this point and has been devoting no effort to passing carbon legislation. In this sense recessions mean that the median voter isn't in the mood to tackle "big" environmental challenges.  Given that many environmental challenges require government intervention, this finding immediately indicates that "recessions are bad" for mitigating key externalities.

Wednesday, January 01, 2014

Urban Mayors as Treatment Effects

While mayors are not randomly assigned to lead their respective cities, it is still interesting to think about how we know that mayors "cause" a city's quality of life and economic outcomes to change.  The mayorial transition in NYC offers one salient data point about the role that urban leadership plays in determining a city's medium term dynamics.   Some open questions;

1.  In an open system of cities where firms and households can move to the suburbs of the same metropolitan area or move across cities (i.e Manhattan to Chicago),  can a liberal mayor redistribute income without the city suffering a capital drain as the 1% and footloose jobs run to alternative locations?

The answer hinges on several deep parameters.  First, in product space --- is the city in question a unique city that has few close substitutes? If the answer is "yes", then the mayor will be more likely to achieve his redistribution goals with less of an economic loss for the city.  Second, do the people who will be taxed more to achieve liberal goals such as universal pre-K and ending "stop and frisk" --- feel that they gain from such new policies?  Do Manhattan's 1% have an altruistic side?  Do they value other people's civil rights?   If the answer is "yes", then the new mayor will be able to achieve his goals without macro growth consequences for his city.

2.  Will NYC's overall quality of life suffer because of new liberal policies?  If the new mayor plays nice with the municipal unions, how much will the city's deficit increase by? Who will pay the taxes to finance these pay increases?  If other services are cut because the unions play hardball with Del Blasio, how much does the city suffer? For example, will garbage be picked up less often?   Was "stop and frisk" an important reason that NYC's crime fell over the last 20 years? Will crime in the city increase if the cops change their tactics?

3.  If a mayor pursues a new progressive policy such as universal pre-K, is this redistribution or in the medium term will such a policy boost the city's quality of life and the quality of its workforce?   If the latter is true, then why don't more conservative mayors pursue this strategy?  Are they too impatient?

4.  Firms are forward looking. If firms expect that the new mayor isn't business friendly, will firms who were thinking of moving to NYC move elsewhere?   

5.  Other mayors are strategic.  For small cities (think of Yonkers) close to Manhattan, will their mayors now aggressively court businesses to attract them so that they offer access to New York City while avoiding the political constraints that businesses that are physically located there face?

6.  Relative to other cities, will NYC real estate prices start to fall?   Urban economists argue that land owners are the residual claimants on good news and bad news for city quality of life and productivity. NYC real estate was cheap in the 1970s and early 1980s when the city was in big trouble.   How will this interest group use its clout to nudge the mayor to pursue policies that are in its interest?

7.  What performance criteria do you use to judge whether a mayor has done a "good job"?  Economists would say that you need a control group.  What would Manhattan be like in the year 2018 if Quinn had been mayor?  Since she is not mayor, this is a hard question to answer but without such a counter-factual, how will judge whether the new mayor should be re-elected?