2. I am a 1987 graduate of the LSE.  In less than two months, I return to the LSE to see my friends there and to give several lectures. One will be a public lecture  where I discuss the big themes of my China research.  Most of this research is joint with Siqi Zheng of Tsinghua.   One of my China pollution papers, which will soon be published in AEJ, is joint with Pei Li and Daxuan Zhou.

    My year at the LSE (1986 to 1987) played a pivotal role in my early training.   From 1984 to 1986, I attended a liberal arts college.  There were no graduate students at my college.  Relatively few of the faculty were active researchers. Instead, these smart faculty taught and held office hours and served on campus administrative committees.   Few of my classmates were intellectual nerds who aspired to become professors.   In this setting, I became a cocky guy and a bit of "know it all".   At the LSE, I met students who had a better training than me and who were smarter than me.  The LSE attracts students from all over Europe and the Middle East and these individuals viewed life much differently than a dude from the suburbs of New York City.   Together, this was an eye opener.   By the end of my year at LSE, I had a much better sense of what pro economists really do and where at that moment I stood in the "ability" distribution.  I returned to my college for my senior year better trained and aware of the objective reality.  My very good exam grades at LSE must have played a key role in helping me to get admitted to Ph.D. programs.  This was my start and I've tried to make the most of the opportunity.

    When I return to LSE as a 49 year old guy (and folks know that I'm a strange public speaker with a very distinctive style that most professors would never dare to use), I hope that there will be some 20 year old in the audience who is interested in the substance of my remarks and is slightly inspired to learn that economics continues to be a fascinating subject offering great questions, now better data, and very good job prospects for those who demonstrate the potential to push the frontier forward.  
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  3. On Thursday night, I gave an after dinner talk for a group of NBER economists.  My talk focused on the impact of climate change on urban economic growth and urban quality of life.  I argued that urbanization and the system of cities will together greatly help us to adapt to the emerging threat of climate change.   Below, I provide my notes for my talk.

    In today's Economist, there is a long piece about Minister Lee of Singapore.  He died this week.  Here is a direct quote from the piece:

    "Among a number of 20th-century luminaries asked by the Wall Street Journal in 1999 to pick the most influential invention of the millennium, he alone shunned the printing press, electricity, the internal combustion engine and the internet and chose the air-conditioner. He explained that, before air-con, people living in the tropics were at a disadvantage because the heat and humidity damaged the quality of their work."

    Note the optimism. Note the ability of a physical place to protect itself from a threat.  Economic development offers this possibility.  As air conditioners become cheaper, this same effect will be observed in every city around the world and the impact of climate change caused heat on death and lowered productivity will be sharply attenuated.

    NBER dinner


    ·         Thank Don , remarks will be brief! 

    ·         Two major issues related to cities and climate change

    ·         1.  How does urban growth and a specific city’s urban form affect GHG emissions?    

    o   Billions moving to cities.   Cities raise our income due to learning and specialization and trade
    o   Engel curves and the resulting GHG emissions;   Davis and Gertler’s work,  cars everywhere,  fridge, air conditioner,  Catherine Wolfram’s work.  Growing urban middle class all over the world is buying energy consuming durables that improve their private quality of life but exacerbate the climate change challenge given that fossil fuels are used to produce the electricity for these products.    
    o   Glaeser and I on carbon footprints for cities around the world that differ in climate and in compactness.  

    ·         2. How will climate change impact urban economic growth and urban quality of life? 

    ·         My thesis is simple;  urbanization greatly helps us to adapt to climate change especially within nations with a large system of cities that provide choice and competition. 

    o   How far do cities go to protecting us?  That’s the empirical question. 
    o   My remarks build on ideas I first presented in my 2010 Climatopolis book!   Also build on many NBER scholars’ recent work. 

    ·         The right micro approach is to adopt an expenditure function approach within a Gary Becker Household production function framework;

    o   we seek to be safe, healthy and happy; 
    o   how does climate change’s shocks and trends affect each of these?
    o   For every shock that urban households can experience due to climate change, loss in consumer surplus? 
    o   Role of capitalism and new products to protect us from  that shock

    ·         Income insulates us;  

    o   Death Toll from natural disasters  -  my 2005 RESTAT paper

    o   Heat waves -- The Greenstone and co-authors work on air conditioning reducing the “sting” of heat waves, USA 20th Century and true in India, my time in Singapore;  Cities and air conditioning go hand in hand

    o   The urban poor and adaptation;  If income protects us, will those with less income be able to protect themselves?  As quality adjusted prices for sturdy housing, cell phone, air conditioning, fridge decline then even poorer urban people will have the capacity to protect themselves.

    New Threats

    • Sea Level Rise in coastal cities such as Miami and New York;   Durable capital and endogenous maintenance;  Lego pieces and option value of disassembling;   Known unknowns and how plan for them
    • System of cities;  if coastal cities do a bad job adapting, skilled people will leave and urban growth in these cities will slow. This creates an incentive for local leaders to step up and be pro-active.
    • Zoning in cities.  Climate scientists will improve their modeling predictions and will identify where is "higher ground".   We need to change local zoning laws to allow for upzoning in safe areas.   Glaeser has noted that the whole world can live in Texas at medium population density.  There is enough land.   Yes, sea level rise will lead to the loss of coast line but there will be a pecuniary externality as higher ground land will rise in value.    A type of zero sum game.   


    High Frequency Reoptimization and the Smart Phone

    ·         Matt Neidell's work on self protection and real time information;  Internet 

    ·         Frank Wolak work on dynamic pricing and keeping the grid from blacking out, same for water pricing;


    Migration and Urban places versus people

    ·         Urban people versus urban places ;   

    o   Those cities that do a bad job adapting will suffer home price loss (Rosen) , mayor will have less property tax revenue. 
    o   Migration costs and voting with your feet;  Timmins and Kennan and Walker;   place based people how help them?    The elderly and the less educated face higher migration costs
    o    FEMA creates spatial moral hazard  .  Why are we subsidizing living in risky areas?


    Urban Production and climate shocks disruption to the economy

    ·         Extreme weather events and team production, who must meet face to face to create output?  My conjecture is that the productivity impact of extreme climate events will shrink over time as more economic takes place in indoor cities which are insulated from such shocks.  Professors get more work done on a nasty day.  No team production , and thus can work at home.

    ·         Air conditioning in LDC firms;  as human capital rises;  firms will endogenously supply air conditioning.  My work with Josh Zivin on urban TFP in the face of shocks,  Chicago’s productivity on a very snowy day; who can work from home? Who really needs to go to work in this internet age? Extremely hot day   

    ·   

    The LDC Research

    NBER Researchers are creating a new field of study that will become increasingly important;  cities in the developing world;  development economists have focused too much on farmers.

    ·         Farming    --- important to study which farmers in which nations are able to adapt to changing climate conditions. To make sure that urbanites have access to affordable food we need; futures markets and free trade across nations in agricultural goods. This allows for risk diversification. We also need crops that we can hold in inventory to smooth risk.  ; 

    ·         Orderly rural to urban migration in the face of climate shocks? Adaptability of farmers;  system of cities; many cities to choose from;  Borjas, Freeman and Katz and the ripple effects of immigration to cities as natives move from the immigrant port.

    ·         Ted Miguel's work on country side violence in Southern Africa exacerbated by climate change;  urbanization will help to diffuse this threat.


    conclude

    ·         The Future of Bangladesh --- Acemoglu and Linn  --- induced innovation;   anticipated challenge creates profit opportunity

    ·         Not chanting that the free market will “solve all”,  Instead --- the role that urban economic growth plays in protecting us from an emerging threat.  Self interested “victims”?  investment under uncertainty --- reconsidered. 


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  4. The UCLA Daily Bruin sometimes reports polls of its readers' views.    While surveys may attract a non-random sample of respondents, note that 66% of UCLA students support water rationing. Note that "water pricing" isn't even included as an option for adapting to drought conditions.   A charitable chap might suggest that the third option "the state will find a solution" includes water pricing but I'm not that chap.    This evidence suggests that UCLA Economics needs to increase its "treatment effect" in educating our students about the allocation of scarce resources and the productive role that the price system plays in allocating such resources.  Starting in August, I will see first hand whether USC students exhibit a greater appreciation for market solutions to public policy challenges.

    OPINION POLL

    In a March 12 Los Angeles Times Op-Ed, Nasa scientist and UC Irvine Professor Jay Famiglietti explained how California only has one year of water left and no concrete plan to deal with the low water supply. How do you feel about this matter?
    • The low water supply is alarming, and the state should immediately start rationing water as Famiglietti suggests (66%, 194 Votes)
    • Though the information is alarming, before implementing water rationing, California residents should first try to decrease their individual water usage (20%, 60 Votes)
    • The state will find a solution to the low water supply before the situation becomes dire so no immediate action should be taken (9%, 28 Votes)
    • I don't know how I feel about this matter (5%, 14 Votes)
    Total Voters: 296
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  6. Have you ever written a book manuscript and submitted it to a leading academic press and received four favorable reviews all recommending publication? But then based on a negative report from a scholar who doesn't have an econ degree, your manuscript is rejected.  A bad day. An embarrassing day.   When this book is finally published, you will see that it is quite good.

    UPDATE:  If you don't believe me, watch the podcast of my May 26th 2015 Public Lecture at LSE.  I am eager to use this opportunity to show that our work is both very high quality, policy relevant and fascinating.

    Five days have now passed.  The market for good books is competitive. We now believe that we have found a new publisher for our book.  If all goes right, it will be published in Spring 2016.  We will see if my USC colleagues read this book.

    The Scholar who did not like our book had a monopoly position as he sits on the University Press' board.   While he does not have a Ph.D. in economics, he felt quite confident that he could provide a definitive verdict on a book not in his field.  He treated us in a condescending way and showed a real scorn for economists, popular books, and researchers who are willing to give the Chinese Communist Party some credit for quality of life progress under its leadership.   Every day provides life learning lessons.  Now that I'm growing more confident that our book will soon be published --- I no longer feel ill will towards this anonymous person but I would like to look him on Google Scholar and see what he has accomplished.
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  7. Boston is a cold city. I lived here for 8 years over two different time periods. now I'm just another guy renting a room at the Sonesta Hotel. it is 90 degrees today in Los Angeles and I'm not used to wearing a coat. I'm not used to seeing dirty snow on the ground and I'm not used to cold rain. I had forgotten about gray skies.  There are some good active economists who work in Boston.   Face to face communication still has value.  Not for networking (I am too old for that), instead I am here to learn.
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  8. The NY Times editorial board has mixed feelings about Lee Kuan Yew's legacy.  During his decades of leadership, Singapore's poverty rate plummeted and the nation/state is now strong and prosperous.  For a nation so close to the equator,  scholars such as Jeff Sachs must be surprised by such a nation's economic growth.  Leadership matters.  During my two trips to Singapore (and I have spent 4 weeks there in total), I saw a nation whose leaders embrace economic incentives.   Road pricing takes place and public transit works smoothly.  The streets are clean and safe.    Despite these accomplishments, the New York Times throws some punches.

    A NY Times quote:   "He was also an autocrat who silenced critics and sent opposition leaders to jail, suppressing dissent and intimidating the press."

    It is clear that the NY Times yearns to have Jeb Bartlett as the world's leader.   For those who can't remember the West Wing TV show of the 1990s let's listen to Wikipedia.

    "Bartlet attended Phillips Exeter Academy, where his fpather was headmaster. Bartlet scored a 1590 on his SAT. Later he retook the exam, and received the same result, something both Leo McGarry and Dr. Stanley Keyworth find humorous.[8] He was accepted to Williams, Harvard, and Yale, but instead chose to go to the University of Notre Dame, as he was considering becoming a priest, though decided not to after meeting his wife.[9] He graduated summa cum laude with a B.A. in American studies and a minor in theology. He received a Masters and Ph.D. in economics from the London School of Economics, as well as an Honorary Doctorate in Humane Letters from Dartmouth College, where he was a tenured professor prior to entering politics.[10] He speaks four languages, including Latin, English, and German.[11][12][13] He is a Nobel Laureate in Economics, and is generally portrayed as a macroeconomist sympathetic to Keynesian views. He was required to split his Nobel Prize with another economist, a much more conservative Japanese man whom Bartlet respects but does not particularly like. He is the author of a book entitled Theory and Practice of Macroeconomics in Developing Countries,[10] and his research in economics is described as being focused on the developing world.  Bartlet's wife, Abigail Barrington, is a thoracic surgeon and they have three daughters: Elizabeth Anne Westin, Eleanor Emily Bartlet, and Zoey Patricia Bartlet."

    Have the people of Singapore suffered under the long leadership of Minister Lee?  What do their indifference curves defined over personal liberty versus per-capita income look like?   For those who say, "give me liberty or give me death",  do they mean that?  How many people in Singapore would say this?  Or is this a statement made by intellectuals sitting comfortably in their spacious living rooms in New York City?





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  10. A highly cited paper published in 2000 in the New England Journal of Medicine reports that;

    RESULTS


    There were 136 reports about 19 diverse treatments, such as calcium-channel–blocker therapy for coronary artery disease, appendectomy, and interventions for subfertility. In most cases, the estimates of the treatment effects from observational studies and randomized, controlled trials were similar. In only 2 of the 19 analyses of treatment effects did the combined magnitude of the effect in observational studies lie outside the 95 percent confidence interval for the combined magnitude in the randomized, controlled trials.

    CONCLUSIONS

    We found little evidence that estimates of treatment effects in observational studies reported after 1984 are either consistently larger than or qualitatively different from those obtained in randomized, controlled trials.
    Under what models of human behavior will randomized field experiments and observational studies yield the same "treatment effects"?   The answer hinges on the underlying population heterogeneity and individuals' knowledge of their type (i.e where in the bell shaped Normal are they?)
    Consider the following model of attending college.
    Each person must choose whether to go to college.  There are high and low ability people and these types are exogenously determined. 50% of the population is high ability and 50% is low ability.
    If a high ability person goes to college, he earns $0 in year  1 and $100,000 per year. If he does not go to college, he earns $25,000 each year.  If a low ability person goes to college, he earns $0 in year 1 and $50,000 in year 2  and if he doesn't go to college he earns $20,000 per year.
    Assume that the cost of college is $X  and the interest rate is 0%.  
    If people select whether to go to college and people live just one year after graduating from college, a  high ability person will go to college if   100000 - X> 25000 + 25000   ,  a low ability person will go to college if 50000 - X >  20000 + 20000 
    Each person knows his type but the statistician seeking to estimate the returns to college does not know who is who in the population and doesn't know that 1/2 of the population is high ability and 1/2 of the population is low ability.
    Let's look at several cases;
    1. RANDOM Assignment to college  --- in this case, the econometrician would estimate that the mean earnings given that you go to college = .5*100000 + .5*50000 = 75000.  The mean for the control group (those randomly assigned to not go to college) = .5*25000 + .5*20000 = 22,500. So the average treatment effect of going to college = 75000 -22500 = 52500.
    2. Now suppose that people know their type and self select whether to go to college but the researcher doesn't know this.   Suppose that X = $15000.  So tuition is 15,000.  Convince yourself that no low types would go to college (this is a Spence Separating equilibrium) and all the high skill guys will go to college.  In this case, the treatment effect of going to college will be calculated as;
    E(earnings | attend college ) = 100000  and E(earnings | not attend college) = $20,000 so the treatment effect from the observational study is $80,000.  But, this is an "apples" and "oranges" comparison.
    Note that the observational study's finding given a tuition level > field experiment's finding.   But, the abstract at the start suggests that this is not true.   Convince yourself that if we at random manipulate $X (the tuition) that the treatment effect from the observational study will change.  For example if tuition is set at X=$1000 , everyone will go to college and there won't be a control group!
    Essential heterogeneity is the case where economic decision makers base their decision to take the treatment based on what they expect to gain from taking the treatment. If economic actors differ with respect to their treatment effect and they know this, then the econometrician seeking to recover the distribution of treatment effects across a diverse population has a serious problem.  Heckman has showed how to solve this problem if you can continuously vary the X above but I doubt that the medical researchers have thought about this issue.












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  11. Read this piece in the NY Times by Prof. Susan Dynarski about the huge amount of student debt and then ponder the following issue.   Suppose a university graduate runs up a $50,000 debt majoring in the humanities at some university.   She then has trouble finding a "good job" and subsequently defaults on her loan.   Unlike in the case of car loans or home loans, the lender can't claim the collateral.  What went wrong here? Do we blame "the Macro economy" or did the debt contract induce many young people to major in fun stuff that doesn't teach marketable long term skills?

    Given that the median young college graduate earns $46,900 per year,  this person would clear after taxes roughly $32,000 per year and could pay back $6,000 in debt and thus be clear of her debt in roughly 12 years.

    So, the debt challenge appears to be an issue for the left tail of the distribution.  Either this group's parents can't help with the debt or their job market after their undergraduate experience is such that they are not earning enough to cover their debt.

    What did they major in --- in college?     Take a look at this picture from The Economist


    Your choice of major matters in determining your lifetime earnings and thus your future loan default rate. I would make an even smarter point that this differential will grow even larger as the market for lawyers continues to deteriorate. In the past, people could major in history or English and then go to law school but that option will not be attenuated and this will increase the STEM and Economics wage premium.

    I wonder if more young people would major in more high payoff fields if they knew they couldn't default on their loans.  What is the punishment for defaulting on student loans?

    This website lists some costs to the borrower from defaulting but this doesn't look like such a loss relative to shedding a $50,000 debt.    The self interested rational strategy is to default and this suggests that moral hazard and major choice is a serious issue.

    An economist would argue that the interest rate should be higher for those who major in riskier subjects such as the Humanities.  Would this price differentiation create adverse selection?  How can a debt contract be designed for those who choose to invest their time and human capital in low economic returns fields?    Would the Humanities faculty say that these students should pay less tuition?

    I am an applied economist.  Let's see some data on major choice by loan defaulters.  My hypothesis is that econ majors and STEM majors have much lower default rates.  This due both to selection and treatment by the major.  Let's do some data analysis here!

    UPDATE:  I minored in history in college but I also took several mathematics courses, statistics and econometrics, and learned computer programming.   My point is that college students are young adults and they are responsible for their own choices. If they choose to avoid quantitative classes that would provide them with the skills to manipulate "Big Data"  after they graduate, they cannot claim that they were duped during their undergraduate years and now regret their choices.   The ability to form a hypothesis and to rigorously test it should be probably be the only requirement that every university has on its books. For example, GIS is a very useful skill that can be used in very creative ways.

    There are two other margins here.  How many of the defaulters attend one of these for profit colleges?  If the borrowers knew they couldn't default, would fewer of them attend such colleges?  Also, for humanities majors --- if they studied STEM material how much would they gain from it?  I understand the concept of comparative advantage.  How would humanities students perform in STEM classes?  Would they gain from these classes?







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  12. My UCLA teaching is now completed.  In the Spring 2015 quarter, I will teach a 20 person pass/fail Freshman Fiat Lux focusing the economics of adapting to climate change.   The class will meet 5 times for two hours each on occasional Fridays. I don't view this as "teaching". All of the students will pass the class. There will be no exams, no grading and no papers. Instead, I will talk and they will ask me questions. I will figure out who is smart and awake in the room and I will focus my discussions on getting this subset of students to think and engage.

    Our main focus will be how capitalism helps us to adapt to the known unknowns of climate change.  I will evoke Julian Simon and convey an optimism to the students about the power of free markets to improve everyone's quality of life and the overall standard of living. Milton Friedman's ideas do not receive enough attention at UCLA.   As UCLA's leaders look to Sacramento and the Governor to send us more $, we do not think hard enough about what is the "golden goose" that provides the governor with the funds to allocate to his pet projects such as High Speed Rail.   We need to prepare our students to succeed in the private sector.  We need to encourage our students to become leaders in the private sector.  My Fiat Lux will explore (and celebrate) the role that the private sector plays in improving our quality of life.  I predict that these 20 students (perhaps my final 20 Bruin students) will finish my short course in June 2015 with an increased appreciation for the power of capitalism as a force for good in achieving our sustainability goals.

    HNRS 19, Seminar 3  Schedule of Classes
    Thriving in Hotter Los Angeles: An Economist's Perspective
    KAHN, M.E.

    Climate change adaptation will become a crucial public policy issue over next few decades. Those cities successful in adapting to new emerging challenges posed by climate change will have a bright future. Is Los Angeles up to challenge? We will approach this question from perspective of social science. Students learn about the power of free markets to improve the quality of life of all people including the  rich and poor. Class meets on April 3, 17, May 1, 8, and 15 in 2278 Public Affairs Building.

    Matthew E. Kahn is a Professor at the UCLA Institute of the Environment, the Department of Economics, the Department of Public Policy, the UCLA Anderson School of Management and the UCLA School of Law. He is a research associate at the National Bureau of Economic Research and the IZA. He holds a Ph.D. in economics from the University of Chicago. Before joining the UCLA faculty in January 2007, he taught at Columbia and the Fletcher School at Tufts University. He has served as a Visiting Professor at Harvard and Stanford University and the National University of Singapore.
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  14. Amy Zegart served on the UCLA Public Policy faculty for several years.  Today, she has published a thought provoking piece about drone warfare in the WSJ.  She paints a picture of future "aircraft carriers in the sky" such that the Mother Ship launches thousands of little unmanned ships that fly around an pinpoint their targets and collect detailed real time data.

    Note that investment in drones represents substituting labor for capital.  The expected cost in terms of lost lives of our soldiers declines as there are no more "boots on the ground".  Such human soldiers can die in combat and the photos of our troups being hurt zaps the will of Democracies to fight.  If we now can "send in the drones"  (Do you remember the song "send in the clowns")  ,   will we more eager to fight and to keep fighting?   I'm assuming that the fight is not occurring on USA soil.

    What is the price elasticity of demand for war?  How much do drones lower the price of fighting war?  If 50,000 US soldiers died in Vietnam and a statistical life was worth $3 million dollars each then --- the loss in life was worth $150 billion dollars and this doesn't include the injured or the capital costs we paid.  

    Does Zegart predict that the US Military will shrink in employment size such that we need fewer soldiers? This would sharply reduce the cost of military service provision.  Fewer pensions, veteran's administration hospitals, fewer court-martial lawyers and judges.  Drones just fly around.  They don't need to be trained, or nursed back to health.

    In the language of economics, what is our military's marginal product of output from an extra drone versus soldier. I believe these inputs are substitutes. Am I correct?  How does the U.S military produce peace and safety for us?

    Now a game theorist would add that if the USA can commit to fight with unlimited drone attacks, then perhaps there will be fewer fights because of the deterrence effect.

    The rise of drone warfare would appear to give democracies an upper hand relative to authoritarian states because democracies are more likely to have domestic squabbles (think of the Berkeley's views of the Vietnam War in the 1960s) and this undermines the Leader's strength in international negotiations (ask Nixon and Kissinger).  

    So, the point of this blog post is the following;

    1. drones will reduce the cost of protecting the United States because we will substitute from labor to capital in our military production function.
    2.  Democracies will invest more in drones
    3. Drone armored Democracies will talk tougher than democracies whose armies rely on "boots on the ground"

    Does this make the world as a whole safer?   We need a game theorist here to solve for that equilibrium.


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