Monday, March 31, 2014

Feeding the World in Our Hotter Future: The Behavioral Economists vs. The Rational Expectations Crew

As I have written many times,  adapting to climate change poses the ultimate test for distinguishing the predictions of neo-classical economics from behavioral economics.   The caricature I like to sketch is Spock vs. Homer Simpson.  Spock has rational expectations while Homer (like the Titanic) walks right into the iceberg and then says "D'Oh".    The New York Times as usual embraces the behavioral economics view (that we are doomed) in its discussion of the new IPCC report.  In contrast, the Wall Street Journal buried this story with just a quick article.

In contrast the NY Times gives Prof. David Lobell of Stanford a chance to discuss his pessimism.   Here is a direct quote:

"The warning about the food supply in the new report is much sharper in tone than any previously issued by the panel. That reflects a growing body of research about how sensitive many crops are to heat waves and water stress. The report said that climate change was already dragging down the output of wheat and corn at a global scale, compared with what it would otherwise be.

David B. Lobell, a Stanford University scientist who has published much of the recent research and helped write the new report, said in an interview that as yet, too little work was being done to understand the risk, much less counter it with improved crop varieties and farming techniques. “It is a surprisingly small amount of effort for the stakes,” he said."

So, this suggests that there are $20 bills lying on the ground for those agricultural innovators who think about devising more robust seeds and crops that can grow and thrive under even tough conditions such as greater variability of rainfall and heat thresholds.     Stanford University is surrounded by venture capitalists looking for the next big thing.  Is Dr. Lobell working with these investors to identify promising new technologies to feed the world?  Now that he has performed the Paul Revere task of alerting us to this problem why won't some entrepreneurial types step up and seize this opportunity?  Think of the money that can be made from selling a robust food source to a hungry world.  Could this arbitrage opportunity really remain for long?   The Chicago economists would say no but it seems that Dr. Lobell thinks like a Berkeley economist.   Who is right? The stakes are high both for the world and for economic science.   

The adaptation optimists will point out that the invisible hand will guide corn and wheat production to spatially diversify such that it is grown in places that avoid his key 86 degrees threshold.  Inventories of this output will held over time and this will allow farmers to smooth prices so that they sell inventories during times of bad weather and accumulate inventories during bumper years.  

This survivalist blog claims that wheat can be preserved for 30 years. That's a long shelf life. 

Coastal Real Estate Prices and Climate Change

Last summer, Rolling Stone magazine published a thought provoking piece about the future of Miami in the face of climate change.  Devin Bunten and I both read this piece and started talking about rational expectations. If it is "common knowledge" that Miami is doomed, why have coastal Miami real estate prices been rising recently and rising faster than the state's average?  After all, a coastal home's value is the expected present discounted value of its future rents and if Miami is flooded in 2050 and we all agree, won't this expectation be capitalized now?

Over the last few months, we kept talking about this issue. It fits into part of my research agenda on how urbanized nations will adapt to climate change.   Within a nation, there are dozens and sometimes hundreds of cities to choose to live and work. Climate change will move these cities in "attribute space".  Some Canadian cities will be warmer in winter while other coastal cities will face new serious risks. As these anticipated risks play out, how will migration and local real estate prices  be affected?  Who will lose and who will win (Canadian land owners?) due to climate change.

We have written a new paper that is available here;  

The Impact of Emerging Climate Risks on Urban Real Estate Price Dynamics

Devin BuntenMatthew E. Kahn

NBER Working Paper No. 20018
Issued in March 2014
NBER Program(s):   AP   EEE   PE 
In the typical asset market, an asset featuring uninsurable idiosyncratic risk must offer a higher rate of return to compensate risk-averse investors. A home offers a standard asset's risk and return opportunities, but it also bundles access to its city's amenities|and to its climate risks. As climate change research reveals the true nature of these risks, how does the equilibrium real estate pricing gradient change when households can sort into different cities? When the population is homogeneous, the real estate pricing gradient instantly reflects the "new news". With population heterogeneity, an event study research design will underestimate the valuation of climate risk for households in low-risk cities while overestimating the valuation of households in high-risk areas.

Sunday, March 30, 2014

Neighborhood Dynamics in New York City

The New York Post reports that Little Italy in Manhattan is shrinking as Chinatown expands.  The New York Times reports that Spike Lee is upset that African-American communities in Brooklyn are shrinking as "Girls" (white yuppies) move in.   What do urban economists think?  Scarce land is allocated to the highest bidder. Unless there is an externality, why doesn't this private valuation reflect the highest and best use of this land?   If you say that there is an externality that the historical character of the area should be preserved, this may be a fair point but a critic might ask "why?'".    Why can't neighborhoods change?  If you say that the renters who live there planted roots there and now can't afford to live there then you are making a valid point but you are saying that they have the property rights to an asset they didn't own.   That's  a dangerous precedent that borders on socialism.

So, to be fair and to be clear, I do see that there is a co-ordination problem that people who lived as renters for years in a community have revealed that they want to live there and they have developed roots there. If gentrification takes place and these individuals are displaced, they face a co-ordination issue of where they can regroup in a newly affordable community.  This transition takes time and resources and this is the cost that this group bears due to gentrification. Such transition dynamics have not been studied enough by urban economists because we haven't spent enough time thinking about endogenous social networks. Instead, we assume perfect competition, zero migration costs and a complete attribute space such that if Brooklyn becomes unaffordable that a household can costlessly move to a close Brooklyn substitute and continue to live his life.

An even more interesting issue here relates to urban politics. The political leaders in the gentrifying area were elected by the original group. Such self interested leaders will be aware that the new entrants may not support the leader and may eventually elect their own leader. This means that the incumbent political leader in a gentrifying area has strong incentives to rally around Spike Lee and "fight the power".  If the incumbent residents who are being priced out anticipate that political leaders will back their protests then this helps to solve their free rider problems and this group will gather and march and hope that the New York Times shows up to cover the rally, this in turn leads to Progressive Bill De Blasio to show up.  So, note the social dynamic here that is triggered and is self re-enforcing.   Randy Walsh and I discuss some of these issues in our new Handbook of Urban Economics chapter that I will blog about soon.

Saturday, March 29, 2014

Roger Pielke Jr's Piece and Superman's Lex Luthor

Nate Silver's new blog is generating some readers and some excitement. University of Chicago graduates are supposed to engage in active debate about important ideas and Silver represents the UC well.  Recently, there has been quite a lot of talk about Roger Pielke Jr's post for the 538 blog.  I would like to make a few points.

I was very happy to see in the piece that he cited my work on the death toll from natural disasters.  This downward trend is caused by economic growth as shown by evidence both across countries and within countries.   It is true that in very poor nations starting to urbanize that such migration causes a diversification problem that such nations have put millions of their eggs (the migrants) in one basket (a city) and can suffer a large loss of life because of this concentration of people in a poor city.

I am not qualified to judge whether climate change is increasing the count or the severity of natural disasters. I have assumed that this is the case.  As an economist what interests me is if we anticipate this trend, what actions will we take to reduce the anticipated trend's economic impact on us?

The simplest approach is to migrate to higher ground.  With good elevators, we can build high rise buildings in relatively small spaces (look at Hong Kong).  For each nation around the world, where is the higher ground?  Why aren't developers building there? What role is the nation's government playing in encouraging coastal living through implicit subsidies?

A mistake that climate change adaptation pessimists make is their view that the real estate capital stock (homes, apartments and buildings) to be infinitely lived capital.  Such buildings live a long but not permanent life.  If a coastal building has a lifespan of 75 years then when the new news that this building is at flood risk occurs, the owner of the building faces an expected present discounted value of lower lifetime rents over the life of this building.  This is his loss.  The rational owner will choose to invest less in maintenance of the building because of the expectation of a premature "death" of this building.  While this investor loses, there are other investors who will build on higher ground who will gain new demand for residential and commercial space from those who vacate the coast.  

Do you remember in the first Superman movie when Lex Luthor invested in Colorado real estate because he planned to nuke California and anticipated that Colorado would be the new coast?  So, this is almost a zero sum game.  A flooded Miami will reform on higher ground called "inland Miami".  Yes, there will be losers bu there will also be winners and the new capital stock will be built to higher quality.

As we grow richer, natural disasters will cause greater capital damage but I bet that the ratio of (capital damaged/total value of the capital stock)  will decline over time.

As I argue in Climatopolis, the insurance industry must be allowed to price gouge to provide strong incentives for owners of coastal real estate to take proper precautions to minimize the damage that such anticipated storms will cause.

Monday Climate Change Mitigation Conference at UCLA

Here are my slides for my talk at UCLA this Monday. You will see my usual blend of humor and wisdom.  My topic is the economics of the nascent California partnership with Quebec on carbon permit trading.   Here are the details about our conference.

The California-Quebec Adventure: Linking Cap and Trade as a Path to Global Climate Action

As usual, economists will be in the minority at this interdisciplinary event.  As I get older, I actually want to return to my roots and only interact with other academic economists.   

Friday, March 28, 2014

Why is Tom Brady Moving from Brentwood to Boston?

I read in People Magazine today that NFL great Tom Brady is selling this home in Brentwood, California (located 4 miles from me) to move to Boston.  For details about this $50 million dollar home, click here. I am aware that he works in Boston but he only works there for a few months a year and the team plays many away games and he is also approaching his retirement.   A move from Los Angeles to Boston that does not appear to be work related poses a challenge to the "consumer city" theory.   This theory posits that in this footloose age that the skilled and the rich seek out the most desirable areas and thus further enhance those areas both through the property taxes that they pay and through their aggregate purchasing power attracting upscale commercial and retail activity that further enhances the glamour of a specific community and its city (go visit Brentwood to see what I mean).   While I lived in Boston for eight years, I'm not sure that I would rate that livable city in LA's league.

How Will Bangladesh Adapt to Climate Change?

The NY Times is starting to write about climate adaptation and today it has a nice set of images and words about the fate of Bangladesh.   As a climate change adaptation optimist, how much of a challenge does Bangladesh pose as a salient case?  Let's look at some data I downloaded from the World Bank's WDI data base on this nation's real per-capita GDP over the last 50 years.

Point #1 is that since 1980 there has been sharp economic growth.  While this is still a very poor nation, if this growth were to continue for another decade then more and more people in this nation will have the resources to protect themselves against the serious threat of flooding.  This of Japan, South Korea or China.  These nations were very poor in the not so recent past and yet few worry about their ability to adapt to climatic shocks.

Point #2:  Adaptation is more likely to be achieved when people anticipate the challenge.  So, how is Bangladesh adapting?  For those who want to read some serious stuff; take a look at this  and this  and this.

Point #3;  Don't forget about fertility trends and the quality vs. quantity tradeoff.

Take a look at this graph of this nation's births per woman.

Do you see the demographic transition taking place?  This nation is following a classic pattern such that the new generation of kids will have more human capital and financial capital and this will allow many of them to move to nations such as China that will need an influx of young immigrants in the near future. There are gains to trade in international labor markets.  The system of cities provides a diversified strategy for collectively protecting us from known unknowns.

Note the distinction here between damage to physical places versus people.  We will be better able to adapt to climate change if we allow for more mobility and options to locate and live your life in our hotter future.

I made all of these points in my Climatopolis.  For those who want even more optimism in your life, take a look at Matt Ridley's piece in the WSJ today. 

Wednesday, March 26, 2014

Predicting China's Real Estate Market Dynamics Using Internet Search Activity

Google has been good for me.  It has allowed me to efficiently search for stuff that interests me and it has allowed me to write several economics research papers.  People have been interested in my past work on Google Searches as a tool to learn about interest in climate change.   Now you can read a draft of my new Internet paper focused on China's housing markets and what is revealed by Chinese households' Internet searches related to their markets.  Here is our paper's title and abstract.

Internet Search Activity as Social Learning: Evidence from China's Housing Market Dynamics
Siqi Zheng
Tsinghua University
Weizeng Sun
Tsinghua University
Matthew E. Kahn*

March 25th 2014


Over the last decade, China’s home prices have soared.  Young people, especially young men, continue to want to buy homes and must choose whether and when and where to buy.  Due to fundamental uncertainty about one’s labor income path, future real estate price growth and government policy, potential real estate buyers have an incentive to seek out Internet information about evolving market sentiment.  Following a recent U.S literature, we build a 35 Chinese city real estate sentiment index that measures the degree of optimism in a local market at a point in time.  All else equal, this index predicts several important real estate phenomena and its effects differ depending on local demand side and supply side conditions.  Our findings suggest that this sentiment index proxies for a time varying housing demand shifter.  We use a household expectations survey covering seven cities to further explore the underpinnings of the empirical relationships we document.   

Tuesday, March 25, 2014

Swimming in the Pacific Ocean

I haven't swam in an Ocean for 35 years. Today, I made my comeback in the surprisingly warm Pacific.  If you had been at this beach at 5pm, you would have seen quite a sight.

Social Status and the Vertical Quality Model

This Stanford Anthropologist argues that Facebook makes us miserable.  She advances an interesting hypothesis that until people are connected to the Web that they are blissfully unaware of how little fun and status they are achieving relative to everyone else.  It is easy to "Keep up with The Joneses" when you don't know they exist.  Facebook confronts you with those smooth, attractive Joneses and the low ranked monkeys get depressed.  One study focused on this topic is discussed here.

A few thoughts;

1.  Facebook is an "opt in" technology. You can choose not to spend time on Facebook so establishing the causal effects of spending time on Facebook is tricky because the researcher must disentangle selection effects from treatment effects.

2.  Implicit in Dr. Luhrmann's analysis is a view of the world that people believe in a vertical model of quality.  For hundreds of years, economists have talked about comparative advantage rather than focusing on absolute advantage.  In an absolute advantage model, Mike Tyson is a better boxer than me, he is a better economist than me, he is funnier than me, he is more handsome than me, he cooks better than me, he is a better father than me.  Are you getting the picture here?  In the absolute advantage model, there is a single index of a person's quality (such as IQ) and we can sort people from the highest monkey to the lowest ranked monkey.

Economists reject this vision.  The comparative advantage model views people and nations as multidimensional. We make choices over what we study in college and what we focus our scarce time on.  Such investments increase your skill at one task (such as blogging) and you sell these services to the market while buying stuff that others have a relative advantage in producing.  

In a world that recognizes that there are many different skills (dancing, kissing, debating, writing, cooking, thinking, boxing); we can all be the star at something!  When I taught at Harvard I saw this first hand, Harvard had the best student in each of these subtasks and they were all delighted with themselves because they knew they were great at what they cared about.  The key here to keep your self respect and your sanity is to promote comparative advantage.   An economist is who is a good researcher and a great teacher can take pride that she is mentoring the next generation rather than thinking depressed thoughts that she won't win a Nobel Prize.  While REPEC ranks us on a vertical quality index, economics researchers ranked #2000 and higher can think of a variety of ways that makes them "better" than the #1 Dude on the list.


Monday, March 24, 2014

What Happens When Liberal Cities Raise Their Minimum Wage?

The NY Times has published an interesting piece making the case that more cities should raise their minimum wage.  The authors argue that firms can benefit from complying with such wage hikes as their workers will be more loyal and will quit less.  The more interesting question to me here concerns the economic incidence of such local wage growth.

As liberal cities such as Seattle raise their minimum wage, how do local businesses respond?  How many shut down? How many remain in business and raise the price to final consumers?  In liberal cities, the typical consumer is also likely to be liberal.  Are such consumers willing to pay their "fair share" for higher coffee prices and locally produced services?  In this case, the "buy local" movement shifts the redistribution from the firms who employ the minimum wage workers to their consumers.

A future urban economics project should construct a CPI index in liberal versus conservative areas to see whether residents of cities such as Seattle and San Francisco pay significantly more for a basket of common goods than the people of Houston.  Some of this is due to differential rents for land, and some is due to differential housing regulation (further driving up the price of real estate) but if this localized minimum wage movement is phased in across liberal cities then "over paying" low skill labor in liberal places will be another reason why a $ of nominal earnings for a middle class household doesn't go far in liberal places.

Another project for an urban/local public finance scholar would be to build on David Albouy's work on ranking city quality of life.  He ranks metropolitan areas with respect to their quality of life and their productivity.  Are liberal areas more highly ranked in terms of quality of life? If the answer is "yes", then in a simple differentiated products model, liberal cities can engage in more redistributionary policies (i.e raise the tax on the middle class) without driving them away because they have market power.   How much market power do they really have?   A second question that interests me very much here relates to selection versus treatment.  Do liberals make a city great through the public goods policies they enact and their cool lifestyle?  This would be a treatment effect.  Or, have liberals moved to the areas with exogenous great life and simply settled there and then introduced their funky redistributionary policies?

This intersection between politics and urban economics is a ripe subject.   I have published a few papers on this including;  this one on housing supply and this local redistribution paper with Ed Glaeser.

Sunday, March 23, 2014

The Rise of University of Chicago Economics

As a 1993 graduate who is married to a 1993 graduate and who hopes that his son may be a 2022 graduate in its college, the future of the University of Chicago is of mild interest to me.  In recent days, there have been interesting blog posts about the debt the university has taken on to finance new construction and anonymous posters have shared their constructive thoughts about the future of the school's renowned Economics Department.

I was back at the University of Chicago in late October 2013 and early December 2013 and I saw a thriving economics research community.    In early December, the University was celebrating the Fama/Hansen Nobel Prize in Financial Economics.

The Economics Department is small in size but the Becker Friedman Institute allows the Department to import ample visiting talent both for short term visits and for conferences and as Post-Docs.   My friend Rob Metcalfe is an example of the type of talent that UChicago attracts.    Dora and I both believe that UCLA would be a much more interesting research community if it could finance luring more Post-Docs to Westwood.   The BFI didn't exist when I was a student at Chicago.  I never attended a single economics conference until I graduated from Chicago.  Now, there appears to be an interesting conference at Chicago almost twice a month. At the Department, an ambitious new faculty hiring plan is already yielding strong results.

The construction of the new Economics Department Building will place leading economists only 200 feet from the Booth Business School.   Location matters and this close physical proximity will facilitate learning and more interaction.   Harvard's various sets of economists at Littauer, HBS and the KSG sit far apart and I never saw much interaction between the MIT Econ faculty and the Sloan School faculty.    The Booth School faculty is loaded with young talent from the top Ph.D. training programs such as Harvard and MIT.  By co-locating the Booth School very close to the new Economics Department, the gains to trade will flourish.  

Across the Midway, the Law School and the Harris School both have many excellent economists.  While the Law School will not be able to replace scholars such as Cass Sunstein and Richard Epstein (guys who were there when I was a student), the faculty remains quite strong and the Harris School faculty has significantly improved since I was a student.

The University of Chicago has never had much "social capital".  The place celebrates competition, raw competition.  At both Harvard and MIT,  I have seen more camaraderie among the faculty and students.  I believe that my UChicago needs to invest in some social capital and find some new faculty members who are loyal to the institution and willing to provide public goods.   Back in the day,  Sherwin Rosen played this key role.  Such "Jedi" still do exist.

Friday, March 21, 2014

Inelastic Supply and the 1%'s Demand

This NY Post article  tells a story about the transportation of rich Manhattan people to a weekend beach community.  There are a finite number of slots on the fast train. The rich reserve slots and pay an extra fee but then 30% of the time don't bother to show up and later receive a refund because they didn't show up.  Thus, they have a a low cost option that has the net effect of displacing the 99% from getting to where they want to go.   What happened?

There are two pieces of interesting economics here.   First, if there was a spot market in tickets then the rich guy who bought the property right to ride the train but now realizes he can't make that specific trip would be able to sell his ticket to some other guy at zero transaction cost.  Since there is no re-sale market, they can't find each other and the seat goes empty.

Second, the train has finite capacity with a fixed number of seats.  This is the vertical supply curve case and it appears that the train company hasn't raised its price enough on peak summer days.  The 99% clearly want the train supplier to engage in price discrimination such that the rich are charged more than the 99%.  Another alternative would be to run more trains during the summer time.  The article goes on to say that the train company plans to shorten the refund window so that the 1% will face higher costs to reclaiming their $ for rides that they reserved but then didn't use.

Thursday, March 20, 2014

A Tour of Kid Rock's Malibu Home

Real estate is a field that greatly interests me.  Much of my current work is about commercial real estate energy efficiency and another piece of my work is focused on real estate in China but Los Angeles real estate continues to interest me.  As a fan of Kid Rock's music, I'm happy to see that he has spent some of the money I have given him on elegant Malibu living.

The Urban Land Institute Events in Los Angeles

On Wednesday morning, I had the pleasure of participating in an Urban Land Institute event in Century City. Here is a photo of my panel.  As you can see, I'm sitting on the far right and dressed more casually than my peers.   I'd like to participate more in these "public intellectual" events in LA but I need them to be close to Westwood because I don't drive and I don't like to be stuck in traffic.   It is my impression that UCLA faculty do not spend enough time talking to "real people" and firms located in LA.

Embedded image permalink

Here is the set up for our panel;
California’s water supply is seriously dwindling.  The first three months of 2013 were the driest on record and reservoirs in Northern California, which supply the majority of water for Southern California, are at frighteningly low levels.  And it isn’t expected to get any better soon.  Studies also show that Southern California’s other major source of water, the Colorado River, will not be able to keep up with the additional demand as a result of drought, population growth and climate change.  And while commercial real estate accounts for approximately 12 percent of water use, it does not diminish the fact that there is a need for smarter, more efficient use of water in the built environment.
The March ULI StimULI breakfast will delve deeply into the availability of water in California. Among the issues to be addressed by our panel of experts include:
  • What, if anything, has been done to prepare for the drought and insure Southern California has sufficient water in the future?;
  • What regulatory/legislative requirements and/or mandates lie ahead? and;
  • How does California adapt to a hotter/dryer future?


  • Matthew Kahn, Professor of the Environment/UCLA
  • Brandon Goshi, Manager of Water Policy and Strategy, Metropolitan Water District
  • Tracy Rafter, CEO/Los Angeles County Business Federation
  • Richard Restuccia, Director of Water Management Solutions/ValleyCrest Companies
  • Eric Garner, Managing Partner and Water Rights Attorney; Best, Best & Krieger

As you can imagine, I returned to my Climatopolis themes of raising water prices, allowing farmers to sell their water to urbanites and encouraging conservation and innovation through the price mechanism.  I am consistently amazed by the unwillingness among many environmentalists to allow market forces to work.  The good news is that even media outlets such as the New York Times are sobering up and regularly having OP-ED writers discuss the importance of raising water prices to reflect scarcity.  For example read Mark Bittman's reasonable piece. 

Tuesday, March 18, 2014

Diminishing Returns to Climate Change Reporting at the NY Times

Read this NY Times piece by Justin Gillis and you will quickly see that he is tired of reporting the same old story again and again that climate change is real and potentially scary. He is also well aware that his readers suffer from fatigue on this issue even though the NY Times is written for the educated elite.    Here is the new report . You can judge whether it is "new".

Here is my advice for the New York Times. The Times should engage in some specificity. It should select 50 areas around the world ranging from Newark New Jersey to Singapore to Cairo and for each of these areas it should write in detail about how these areas will be affected by climate change.  It can survey households, governments and firms about what people are doing in those areas to adapt.  The NY Times keeps embracing behavioral economics that nobody is aware of the emerging challenges. Is that true?  What are the market adaptation strategies for protecting the public such as allowing insurance prices to rise, international trade in food, and migration across areas.  Gillis writes for the Science Section of the newspaper but he keeps approaching the issue from a social science perspective. Why isn't the NY Times actually talking to social scientists rather than to climate scientists about the climate change adaptation challenge. As 26,700 people have read, my views on free market climate adaptation are well known.   We will adapt.  For those who prefer videos, you can watch these. 

Monday, March 17, 2014

Control Groups and Efficient Public Policy

I attended an interesting meeting today where I had the opportunity to speak to a policy analyst who works for an elected official.   I mentioned how important it is to have a control group in order to evaluate the effectiveness of a given policy and to infer the counter-factual outcome (i.e what would have happened if the policy in question had not been adopted).

She argued that it is often politically difficult to have a control group.  How does the elected official explain why 1/2 the population received a treatment while the other 1/2 didn't?

I tried to argue that without a good control group that it is very hard to know whether a specific policy is cost-effective.  She countered that with many "Big Data" public policies that the cost of treatment is relatively low.  One example is building energy efficiency labels.  Such labels (similar to a new car's MPG sticker) indicate whether a given building is energy efficient or not.  In such cases, she argued that any observed improvement in outcomes (for example investments in energy efficiency)  can be embraced by government officials as a sign that their policies are effective.

This discussion reminded me of the old paper that CEOs are paid for luck. If good things happen to a company during a boom, people call the CEO a genius and he gets even richer.  To an economist, we seek to understand whether he caused his firm's good outcome but it may be the case that other decision makers such as voters are not so sophisticated and elected officials are willing and eager to claim credit for any observed progress.  

So, the point of this blog post is that voters claim they want cost effective public policies but then rebel against standard research method to pinpoint whether such policies actually exist.

Sunday, March 16, 2014

Dalton Conley's Parentology Receives a Bad Review in the NY Times

Somebody named Rebecca Traister doesn't like Dalton Conley's new book about parenting.  Shouldn't a  University Professor at NYU and a former Dean of Social Sciences be treated with more respect?   In the review, Ms. Traister implies that Conley is out of touch with "real average parents" and also implies that Conley doesn't understand the Heckman Equation.    In producing a quality child, there is a deep question of what is the production function? How much of later life success is due to genes, parenting and their interaction?  This is what Jim Heckman's research team is trying to study.   Ms. Traister also believes that Dr. Conley talks too much about himself.   In any book, how much should the author reveal about himself versus the subject at hand?  Or is the subject at hand Dalton Conley?

As an author of one popular book, I find it quite interesting how the non-academic public thinks about popular books written by academics.  Does "the public" have fond memories of their University teachers? Do they believe that academics have special wisdom or simply believe that we are strange nerds who use our tenure to take leisure and sip tea?

Does the Consumer City Cause Productivity Growth?

Read this article about why startups locate in Santa Monica on the beach.  The great quality of life in this Los Angeles city attracts these young people and also acts as a co-ordinating device.   Young hipsters with ideas know that others like them are gathering in this location.  Add in the glamour of Hollywood and Los Angeles has a nascent new economic brewing.  Note that government is only needed here to provide street safety and good infrastructure. No tax breaks are needed.  Will the middle class gain from this movement?  Yes, in terms of a local multiplier effect for rising demand for service jobs. As the economy evolves, people have to be ready to adapt. If they can't, who has the problem?

Thursday, March 13, 2014

Big Data and Testing for Defective Vehicle Makes and Models

Reading this article about vehicle fatalities and GM air bags got me thinking about "Big Data".  Why don't safety nerds regularly run regressions at the individual level using a linear probability model to examine how the probability that a vehicle fatality took place varies as a function of the vehicle's make and model?

In a regression framework, the dependent variable be a dummy variable that equals one if the vehicle was involved in an accident that caused a fatality to someone in the vehicle and equals zero otherwise.  I realize that people who drive more miles will be more likely to be in vehicle accident but the researcher could collect information on what zip code the vehicle is registered in and merge in data on the average adult who lives in the zip code's average income and age.  By knowing the zip code's centroid location, the researcher could calculate the residential area's distance to public transit and to the city center and to employment centers.  Knowing the calendar date, the researcher could merge in climate conditions (i.e icy, snowing, rainy).  Controlling for these demographic variables, urban form variables and the climate conditions, the researcher could estimate a series of dummy variables for what make/model/vintage are most likely to be in fatalities.  While large positive estimates could be spurious, they would provide a clue for what types of vehicles the regulators should focus on.  A researcher would have to recognize that if year 2005 Toyota Avalon's are 33% of the vehicle fleet and drive 33% of the total U.S miles driven, then it shouldn't be surprising that a large number of fatalities occur in those cars.  Such a research design would need to study which vehicles/makes/models and vintages are over-represented among fatalities relative to their respective share of total miles driven.  

The fixed effects recovered from these regressions could be graphed relative to data from RL Polk on the vehicle make/model/vintage's share of all vehicle registrations and those observations that lie above the 45 degree line should be targeted for a safety inspection.  For example, if a vehicle type is involved in 3% of all accidents but this type of vehicle is only 1% of the total vehicle fleet, then this vehicle should be investigated for safety problems.  It is possible though that the vehicle is safe but that crazy drivers tend to buy it.  How can this selection issue be handled?  If crazy drivers tend to buy risky cars, how does  a Big Data nerd tease out whether the extra accident risk is due to bad driving or bad initial vehicle construction?  

Years ago, Steve Levitt and Jack Porter wrote an important paper on teasing out causal effects about drunk driving from driving data.    Can their framework be used to recover vehicle/model/model year fixed effects to identify the risky cars?  A selection model would be needed to judge what types of drivers self select to drive what types of cars.   Note that the risk here that safety experts seek to estimate is not from the driver's type but due to the manufacturer's choices.   Can these two sources of risk be disentangled in order to identify deadly products before more people die?

A Test of Induced Innovation

Can government mandates cause innovation?  The CAFE fuel economy standards are a prime example of Federal attempts to nudge vehicle makers to invest more in R&D for creating more fuel efficient vehicles. In California, there is now a new push for consumer product makers to design safer products. The DTSC is in charge. Here is its recent  announcement. I have an interest in this subject both as a consumer of such products and two years ago I performed a prospective economic analysis of the likely effects of this regulation.

Wednesday, March 12, 2014

My Three New NBER Papers

In this blog post, I would like to preview my three new NBER papers. One is on Walmart's energy consumption. One is about public bus purchases and scrappage and the third is about learning about California voter's preferences for carbon mitigation based on voting on AB32 and High Speed Rail.

1. Walmart was kind enough to share its store level monthly electricity consumption for each of its over 200 stores in California for a 6 year period.  Nils Kok and I used these data to test a variety of hypotheses.  Relative to a large sample of control stores, Walmart's stores exhibit a remarkable degree of consistent performance as measured by kwh per square foot of interior space.  We also document that Walmart achieves this same level of performance irregardless if the company bought the real estate space from someone else or built the initial store itself.  We argue that our results are in line with Nick Bloom's work on the role that financial capital and management human capital play in helping larger firms to be more energy efficient.  While residential electricity consumers and small commercial electricity consumers may face Herbert Simon style cost of actions such that they satisfice rather than optimize their electricity consumption, Walmart is large enough such that there is a lot of $ on the table it it doesn't optimize. This for profit firm is aware of this and hires the experts and the materials to balance its goals of selling goods while minimizing costs at its stores.   We hope that this paper helps to trigger a new literature on the environmental benefits of large scale capitalism.   Relative to smaller stores, Walmart achieves energy efficiency economies of scale and does not face financing constraints for paying for upfront expensive but efficient appliances at their stores. Walmart will also hire the best experts for advising them (a fixed cost) that can spread across their huge amount of total square footage across their stores. The net effect is an energy efficient business!  Is small beautiful?

2.   My bus paper with Shan Li and Jerry Nickelsburg tackles a new issue that nobody has thought about.  While a zillion IO and energy economists have studied the private vehicle market. Nobody has studied the public metro bus market.  While 1/2 of vehicles on the U.S roads are foreign made, NONE of our buses are imported.  WHY?  and So What?    Our paper highlights that unlike the private vehicle fleet that the U.S metro bus fleet does not respond to gas prices. When gas prices go up, the fuel economy of the stock buses does not improve and the fuel economy of the flow of new buses purchased does not improve.  Why?  We argue that the U.S Buy America Mandate and the relatively small scale of this industry shields domestic suppliers from foreign competition and retards their incentive to innovate and design more fuel efficient buses.  Our study investigates a market in which a non-profit (transit agencies) use other people's money (U.S tax payer transfers) to purchase expensive ($300,00) buses from small for profit domestic firms who face strong protection from international competition. This is a multi-billion dollar industry with very funky institutional details. We believe that we have made a contribution to IO and energy economics here.

3.  My new voting paper with Matt Holian builds on some early work that John Matsusaka and I did when we were graduate students at the University of Chicago.   That paper has been well cited;

Kahn, Matthew E & Matsusaka, John G, 1997. "Demand for Environmental Goods: Evidence from Voting Patterns on California Initiatives,"Journal of Law and Economics, University of Chicago Press, vol. 40(1), pages 137-73, April.

Matt and I write down a model of how heterogeneous households sort within a metropolitan area that builds on my past work with Ed Glaeser and Jordan Rappaport.   All else equal, environmentalists are  more likely to live downtown because the center cities allow them to have a low carbon footprint and environmentalists gain utility from engaging in voluntary restraint.  Once people have chosen their optimal location, they then vote on low carbon regulation.  Center City residents face a lower Becker price in voting in favor of low carbon regulation because they have already configured their lifestyle to be easily able to adapt to carbon pricing and they also support the overall goal of lower carbon emissions.  We use both PPIC micro data and actual California voting data on Prop 23 and the High Speed Rail vote to document the fact that educated people, liberals and center city residents support low carbon policies. These results highlight the challenge that the Joe Romms of the world face because so many Americans live in the suburbs and recognize the short run extra costs they will face from supporting strong carbon mitigation. In this sense our paper contributes to the political economy literature on carbon politics.

Tuesday, March 11, 2014

Carbon Politics and Economic Research

The NY Times reports that some Senators will be leading an all day  "teach-in" on reducing U.S greenhouse gas emissions.  While I support this effort,  the Senators' aids might want to consider some basic economic research.  In this 2013 paper published in Economic Inquiry, we document that three variables do a very good job predicting which Congressional Representatives vote against carbon mitigation legislation.   These 3 variables are;  1. the district's per-capita income (richer districts vote pro-carbon mitigation),  2. The district's per-capita carbon emissions  (low carbon districts vote pro-carbon mitigation), 3. The Representative's liberal voting index (liberal Representatives vote pro-carbon mitigation).  So, the challenge for those of us who seek carbon regulation is that there are many representatives who are not liberal, whose constituents who are not rich and whose district is high carbon (both because of climate, local electric utility energy source being coal, and due to being a suburbanized district).

In this new NBER paper,  Matt Holian and I solely focus on California.

Household Demand for Low Carbon Public Policies: Evidence from California

Matthew J. HolianMatthew E. Kahn

NBER Working Paper No. 19965
Issued in March 2014
NBER Program(s):   EEE   PE   POL 

In recent years, Californians have voted on two key pieces of low carbon regulation. The resulting voting patterns provide an opportunity to examine the demand for carbon mitigation efforts. Household voting patterns are found to mirror the voting patterns by the U.S Congress on national carbon legislation. Political liberals and more educated voters favor such regulations while suburbanites tend to oppose such initiatives. Survey responses at the individual level are shown to predict the spatial variation in actual voting patterns and hence convergent validity for results obtained with stated preference data on voting markets.

Even in Blue State California,  the low-carbon coalition faces a challenge of how to garner support.  Take a look at this table from our new paper;

                    Fraction of U.S. population living at various distances from CBD, 1970-2010

     5-       10       

Each row sums to 1.  

We are a suburbanizing nation and the suburbs are high carbon. Voters know this.

Friday, March 07, 2014

Why are Water Prices So Low in Drought Areas?

Read this article about the water intensity of different foods (i.e how many gallons of water it takes to create a pound of meat) and note that water prices are never mentioned.   While millions of people have studied Econ 101, the basic ideas of supply and demand do not sink in.  Why is that?  Why have economists failed to convey our most important ideas?  When are efficient public policies adopted?

Monday, March 03, 2014

Ranking Economists

Here is the overall ranking of the World's Economics Departments .  Here is REPEC's Rankings of individual economists over the last 10 years.   While I like my ranking of #290,  I see that UCLA is under-represented among economists who rank < 290.   I see Andy Atkeson at #277 and nobody else.   I'm proud of being #2 at UCLA but I can't help but notice that UC Berkeley has twelve scholars with a rank < 290.  Can yardstick competition yield greater research effort?    

Understanding the Causes of Stagnant Wages for College Graduates

The New York Times Editorial Board has written an unsigned piece about flat wages for college graduates.   While I do not believe that a single Ph.D. economist serves on their board, they offer various hypotheses and cures.   They report the fact that between the years 2001 and 2013 that the average male college graduate's wage has been $33 while for the average female college graduate her wage has stayed flat at $25 over the last 12 years.   

The NY Times offers some "subtle" analysis and offers a series of policy solutions.  Here is a direct quote;

"While economic recovery and more college education are generally believed to lift wages, that didn’t happen in the 2000s and hasn’t since the end of the last recession. What’s needed to raise pay are policies like a higher minimum wage; trade pacts that foster high labor and regulatory standards; and more support for union organizing. Increasing the number of high-paying jobs also depends on strategies like enhancing public spending to fix roads and bridges and to hire more teachers, as well as developing new energy and technology industries through government-financed research. "

My thoughts?

A labor economist might ask the following questions;

1.  Over the years 2001 to 2013, has there been a composition shift in who is entering college?  As more and more people enter college, is the marginal person the same as the incumbents in terms of pre-college preparation, cognitive skills and non-cognitive skills?    The WSJ today reports that some people are going to college to defer paying their existing debts.  Is this a positive selection effect?

2. Have there been shifts in what people are majoring in?  The NY Times fact would be more of a puzzle if a larger % of college students are majoring in quantitative analytic majors such as engineering, math, stats, economics, the sciences.  In this age of "big data", there is huge demand for the ability to use the newly available data.

3.  What about the "treatment" itself?  Are colleges doing a worse job teaching now than in the past due to being squeezed with respect to resources and strange allocative decisions?