For those professors starting to write economics final exams, I suggest that you post the following two comments that were posted on the NY Times webpage.  Ask your students for an evaluation of the logic behind each of them.  Each quote highlights that economists have  failed in our educational mission to foster a society of workers/consumers/voters who understand and appreciate how free markets operate.  Economists of the world, we have more work to do!

RebeccaJonesMD

Brattleboro Vermont 25 minutes ago

There has been a commodification of many necessities: phones, internet, healthcare, housing, healthy food, education; as well as a weakening of regulations that would keep our air and water clean; our food safe; and of course with climate change there is no meaningful regulation that can help us feel secure about our future. These facts are creating stress at so many levels: financial; philosophical; existential. Jobs are just part of it.

Einstein

30 minutes ago

Detroit.

The symbol of 'free-trade' neoliberalism based on foolish Milton Friedman's cruel & selfish economic policies.

Universities have churned out MBAs brainwashed in so-called 'free trade' ideology.

It follows that USA politicians, Republican & Democrats bailed out the banks, and left millions of homes foreclosed.

We expected better from President Obama but we didn't get it.

In the year 2015, our cities are increasingly safe, clean and green.  Yet, the NY Times points out  new challenges that cities around the world now face.    Example #1 is Jeju, South Korea.  This article sketches the recent trend that large numbers of wealthy Chinese tourists are visiting this island.   This is a tale of "too much growth".


"The Japanese imperial era is long over, but Mr. Shin and many residents of this subtropical resort island say they are now worried about what some call a new foreign “invasion” — waves of Chinese tourists and investors sweeping into Jeju, famous for its honeymooners, palm trees and golf courses overlooking a turquoise sea.

“Planeload after planeload of them arrive, some buying up land around here,” Mr. Shin said, as he and his wife packaged strawberries in their greenhouse. “I sometimes wonder whether this island this time is not turning into a Chinese colony.”"

...

Of the 6.1 million Chinese tourists who visited South Korea last year, nearly half visited Jeju, a fivefold increase from 2011. The Chinese have also become Jeju’s biggest foreign investors. They recently broke ground for what was billed as Asia’s largest family theme-park and casino complex. And Chinese business people are building or have announced plans for several high-rise hotels and condominium developments, which local people fear will be snapped up mainly by Chinese.

Although Chinese-owned land in Jeju is still less than 1 percent, it has grown to 2,050 acres last year from just five acres in 2009. More than 70 percent of $6.1 billion in foreign investments in Jeju announced between 2010 and last year came from China."


So, would South Korea prefer that fewer tourists visit?   How would the Jeju economy be doing without their new Chinese friends?  Suppliers need customers!  Paul Krugman always writes about the need for greater aggregate demand and China represents "aggregate demand".


Example #2 comes from NYC and the infected Doctor who set off great concern about bring Ebola to a very dense city.  Craig Spencer has written a piece for the New England Journal of Medicine presenting his recent autobiography about his ordeal handling being infected with Ebola.  He was stigmatized and labeled as a "Typhoid Mary" as fear of epidemic spread.

 But, his case does raise an interesting Coasian issue related to public health in cities.   Who has the property rights here?  After he treated people in Africa, he was at risk of catching the disease. Is he presumed to be "innocent or guilty" here?   In an ideal world, he should have been sent to some "clean quarantine site" until doctors cleared him for release into the general population.  Yes, this isolation would be annoying and it does represent a tax on those who commit themselves to fight rare diseases in exotic places. BUT, at the same time it reduces the probability of a major public health disaster (i.e Typhoid Mary).  Given how risk averse we are, is this tradeoff so terrible?  The population could reward doctors such as Dr. Spencer by investing in pleasant "clean quarantine sites" so that it does not feel like a prison.

The 2022 World Cup will be played in Qatar.  The NY Times reports that Qatar is hot during the summer.  Anticipating that soccer players are less productive running around in 115 degree heat for 90 minutes, there is now a proposal to move the World Cup to the cooler months of November and December. Talk about adaptation!   There are lots of folks complaining that this change in plans interferes with existing league schedules.    I don't really care but this is a nice case study of how we adapt. There are many margins of adjustment including this one.  This "solution" did not require a lot of ingenuity.   It is no accident that Singapore springs into life at around 9pm as it gets cooler and everyone heads outside.

The NY Times asks a good question related to basic energy research.  Given that the world needs cheap, green energy,  why aren't more US top research nerds working on this topic?  Part of the answer is related to our global endowments of fossil fuels, increased ability to access them (i.e fracking) combined with the absence of a carbon tax. Together, these two factors lead to low energy prices and hence a lower rate of return on investments in alternative energy.  But, the new point I would like to make is that we don't have the equivalent of the NSF or the NIH in the case of energy.   Instead, the Department of Energy makes the mistake of giving "The National Labs" a monopoly on $.   According to this budget document, the DOE spends around $9 billion a year on energy related research.  For example, $1.2 billion of this goes to the Oak Ridge National Lab each year.  

Folks, recall what the word opportunity cost means.  Suppose we shut down some of these National Labs (I recognize that their Congressional Reps might not vote in favor of this) and instead created a new branch of the NSF dedicated to energy research.   Nerds at research universities would compete for this funding and research would sharply accelerate.  Monopoly is dangerous.  We need more competition in our market economy!

UPDATE:  I should add that this concentration of research funds at the National Labs has frustrated some of my research and limited my ability to run some field experiments related to increasing household energy efficiency.  In an open competition for such research funds, would the National Labs researchers win?  If these individuals worked at research universities, rather than being concentrated at Labs --- would they do better research?  I realize that there are some national security issues here related to some technologies but this appears to be a relic of the Cold War and an excuse for erecting barriers to entry that protect the incumbents from competition.

 The Times reports the sad  and scary case of the spread of a superbug at UCLA as an invasive piece of medical equipment was used on multiple patients without being properly sterilized after each use.    Economic risk analysis can be used here to analyze the tradeoffs between costs incurred in purchasing durable equipment and the expected loss in life from reusing the equipment.

Suppose that it costs $F to purchase one of these devices and that it has a marginal cost of $c to clean it each time. Suppose that this device will be used n times before being thrown away.  Assume the interest rate = 0%.  Under these assumptions, the total cost of using this device n times = F + c*n.
Note the economies of scale here that the more it is used the average fixed cost declines.

Now define p(n) as the probability of a superbug infection that kills an individual and assume that p(0) = 0 and that p(n) is an increasing function of n such that the more the equipment is used that this raises the probability of a superbug infection disaster for the next patient.  Suppose that each person for who the equipment is used on values her life by $V.

What is the optimal number of times to use the equipment if the patients at the hospital are risk neutral?

Suppose you set n = 1,   in this case --- nobody dies from the superbug infection but the hospital bears a cost of $F each time and for N total procedures; the total cost is N*F

suppose you set n = 2,    then the total cost to society of treating the two patients =   F + 2*c + p(1)*V

the first person the new piece of equipment is used on has no chance of dying but the 2nd person does have a chance to die;

suppose you set n = 3 , then the total cost to society of treating the three patients  =  F + 3*c + p(1)*V  +  p(2)*V


UPDATE:  A reader named "Glenn" correctly pointed out that I need to be clear about the aggregate demand.   For example, if the hospital must conduct 100 procedures, what is the optimal configuration here to minimize the cost of achieving that goal.

A researcher who knows the parameters;  F, c, p() and V could solve this economy and figure out the optimal reuse.

Note the comparative statics, as the value of a statistical life goes up (V), the hospital should not reuse equipment.  As demand for 1 time use equipment rises, some firm would create this and this would lower F.  Of course, the ideal would be to set p(n) = 0 for all n but that is asking for a free lunch.

This is a classic Gary Becker risk tradeoff model similar to his crime deterrence work.

Now, you might ask; does the hospital know the p(n) function?  If they knew that they did not know the function, what issues does that raise?

I learned a piece of algebra recently.  Did you know that rent per month = ($/sqft)*sqft?     Where "sqft" = square feet of the apartment and $/sqft = price per square foot.  In major coastal cities,  price per square foot continues to rise.   This is caused by both supply and demand forces.  One way to continue to have affordable housing units in desirable cities is to allow developers the ability to supply micro-apartments.  This article talks about the demand for 400 square foot apartments.   I recognize that this would be a tight fit for families with kids but increasing the menu of housing options will be very attracting to the 20-29 year olds just starting out in the big city.  Relax building height restrictions in Manhattan and allow micro-apartments and much of the "housing crisis" that the NY Times drones on about will vanish. These free market solutions are much better policies than rent control or requiring developers to set aside a % of their new units but having them build "poor doors" as these units are set aside for lower income populations.

UPDATE:  As urban crime falls in big cities, young people (both men and women) are more willing to go out at night and don't need a big apartment.  In fact, they do not need their own kitchen.  Cities are about gains to trade and why not engage in comparative advantage and purchase your food in the city.  If apartments no longer need their own kitchen, then think about our future ability to arrange economic activity.  In a free market, you would be faced with a menu where some apartments do and do not have kitchens. A kitchen takes up space and that could be your home office!

Citylab reports some great stuff in this blog post.  Such information plays the same role as Paul Revere did a long time ago.  Now that we know that coastal Manhattan has a problem, the efficient markets hypothesis makes some testable predictions about how asset prices will adjust. Investors will see these price signals and adjust their investment patterns. You do not need to be Einstein to predict that Manhattan's future Don Trumps will have strong incentives to identify "higher ground" on the island and to seek zoning law changes to allow them to build high rises there.  This is capitalist adaptation.  Look at this picture below, you will see that "higher ground" exists.  Self interested individuals who do not want to drown and capitalist real estate investors will figure out new types of building materials that are built on "higher ground" and even Manhattan can continue to thrive.   If it can't, then Wall Street would simply join the hedge funds on higher ground in Connecticut.  Environmentalists have to distinguish between short run transition costs and long run productivity effects of sea level rise.  In the short run, such sea level rise represents a type of Keynesian stimulus as we would have to rebuild infrastructure on the higher ground and this would create construction jobs for low skill workers.



For those who are willing to think about the economics of climate change adaptation, read my 2014 paper.

Optimists of the world unite.   While this piece does not discuss the cost of constructing and operating floating schools,  it demonstrates the power of the Climatopolis Two Step;  Anticipate a challenge and invest accordingly.

"Bangladesh — a country of waterways — is one of the most threatened by rising sea levels. About a third of the country is covered by water during monsoon time, but with climate change, water can soak two-thirds of the country.

An amazing nonprofit, Shidhulai Swanirvar Sangstha, has developed solutions that can be used in many parts of the world.

When there's too much rain, students take classes aboard solar-powered boats, often for four months a year. There are now 22 floating schools, five floating health clinics and 10 libraries. A new two-tiered school has classrooms on the lower level and a playground on top.

And in the watery world that's taking over, they are even helping people create floating farms. The nonprofit provides training, seeds, feed and the entire structure for farms that include ducks, fish and even a vegetable garden."

Note the emphasis on human ingenuity.   Who is Shidhulai Swanirvar Sangstha?  Here is its webpage.  Who is providing their $? Is the Gates Foundation Investing?  This is one way through which capitalism accelerates the adaptation process.

Here is a direct quote from this organization;

"One third of Bangladesh floods annually during the monsoon season, but extreme floods cover up to two thirds. Every year, during the rainy season, monsoon winds brings plenty of rainfall that causes its’ hundreds of rivers to swell and overflow onto the land. Due to floods, thousands of schools are forced to close and many children miss school days.

Shidhulai Swanirvar Sangstha came up with a creative solution ‘floating school’ to address this issue and brought the school to the students during the flooding. Also the organization runs a fleet of boats acting as libraries, adult education centers and solar workshops. Boats themselves are outfitted with solar panels that power computers, lights and other equipment. But the boats bring more than services to these cut-off areas - they bring electricity. Shidhulai also runs floating clinics that have doctors and paramedics."

Millions of "Mark Zuckerbergs" will focus on innovation geared towards climate adaptation. Ideas are public goods and the winning ideas will diffuse.   Julian Simon would understand and appreciate this logic.  Do you?

Michael Greenstone has a nice quote on Marketplace making the green case for raising gas taxes now.  At the same time, the NY Times recently reported that Ragu Rajan is celebrating that importer India is now paying low gas prices.  "With crude prices now halved, fuel costs for trucks and cars have plunged, pulling down transport expenses and inflation. The cost of government fuel subsidies has nose-dived, helping curb the country’s chronic budget deficits. “We’ve got essentially a $50 billion gift for the economy,” said Raghuram G. Rajan, the governor of the Reserve Bank of India."

It would interest me to see the cross-national relationship between economic growth and the growth of GHG emissions for nations with different gasoline prices.  Ideally such gasoline prices would be randomly assigned but I recognize that this would be a hard field experiment to implement.

The NY Times engages in the guilty pleasure of checking out how my Bel-Air neighbors live in their 40,000 square foot homes.   This is "50 Shades of Green".  One quote from the piece caught my eye;

"Mr. Landry learned how to design for the special needs of the rich and famous. Two kitchens, one for family and one for staff. Large, open foyers with direct flow to give fund-raiser crowds easy access to the backyard. Wings that could be closed off, so that a large house becomes a series of smaller ones, inhabited by the owners, extended family and houseguests. And amenities like home theaters and spas that account for all that square footage — and, more important, make interaction with the public avoidable."

Read that last sentence again.  The point of the mega-homes is to create an urban oasis so that you can access the city when you want to but to recreate the city's retail strip within your home so that you don't have to interact with guys like me.