Gov. Jerry Brown has announced some even "greener" medium term GHG reduction goals.  No economists are cited in the NY Times article so permit me to fill the void.   Recall the facts. California is unilaterally deciding to sharply reduce its GHG emissions.  Acting alone, this will have no aggregate impact on climate change.  California is too small  a player in the world economy to make a difference but its effort represents a "green guinea pig" field experiment to signal to the rest of the world how costly it would be to reduce global emissions. Ideas are public goods. Those "good ideas" (such as the nascent cap and trade market) can be adopted elsewhere.

Point #1:  California does not have much energy intensive manufacturing so the aggregate "job loss" caused by higher electricity prices will be tiny (see Kahn and Mansur 2013 for an analysis).

Point #2:  Electricity prices will rise in California because of this regulation. Both the renewable portfolio standard and the cap and trade markets will lead to higher electricity prices.  Energy economists continue to debate how much.

Point #3:  Suburbanites create more greenhouse gas emissions than center city residents because suburbanites drive more and live in larger homes that use more electricity which is often generated using fossil fuels.   See Glaeser and Kahn 2010 and Holian and Kahn 2014.    and Holian and Kahn 2013.   Suburbanites tend to oppose carbon pricing.

Point #4;  Suburbanites tend to live in single family homes that they own. This creates the possibility that these single family home owners will choose to install solar panels and buy an electric vehicle fueled using the power from their panels. These private market choices would decarbonize the suburbs and increase their residents' propensity to vote in favor of carbon taxes. See Delmas, Kahn and Locke 2014.   Why?  If suburbanites who own solar panels and an EV create zero carbon, then they are not reducing their disposable income by voting for a carbon tax. Demand curves slope down! As the "price" of voting for carbon taxes decline, more individuals will buy this insurance against risky climate change.

Point #5;  More educated liberal areas are more likely to enact environmental regulation and this explains why California is a first mover here.  See Kahn 2002.  

While Gov Brown has good intentions here, there will be losers from his policies. Electricity prices will rise. Local gasoline prices will rise.  Those who love big muscle cars will be less able to purchase new ones with these attributes.  Industries such as cement and oil refining will have higher costs of doing business and will try to pass these costs on to final consumers.

Will California's efforts create "green jobs"?  Some for short term jobs such as installing solar panels but the panels are likely to be made in China.  No IO economist has written a good paper on local job creation caused by local low carbon regulation.

In a world where we know that we don't know the path forward, we need more policy experiments.  California is providing intellectual public goods for the rest of the world. President Obama and China would write my Governor a check to reward him for his risk taking.

Note that everything I discussed above cannot be analyzed with a computable general equilibrium model. The whole point of AB32 is to set the California economy on a path that we have never seen before. For new goods to be created and diffused. This cannot be quantified using a CGE model yet this is the standard tool for "judging" the macro consequences of the governor's policies.

Richard Baldwin's Vox is an excellent platform for spreading economic research ideas.  My eleven pieces on Vox have been downloaded roughly 160,000 times.  My mother can't have downloaded all of those copies?  Dora Costa and I have just published a new Vox piece.   Our Death and the Media piece melds ideas from media economics research and urban economic history.  If you read it, you'll see some creative thought.  

The NY Times argues that California's economy will crumple because of drought.   Its reporters sketch a tail of the rich fighting the poor over an essential resource (water) resulting in class warfare.  The NY Times wants to kill two birds with one stone as it attempts to focus attention on inequality between the 1% vs. the 99% while also pointing out the dangers of climate change. This is intellectually quite an impressive bundling feat but the doom and gloom is off the mark.   The long article cites my UCLA colleague Stephanie Pincetl and that's great but the article bugs me;

1. It implies that nobody is at the margin and can adjust their behavior as water prices rise.  Urbanites use 1/2 of our water outside.  Rural farmers use water for all sorts of water intensive stuff (rice) that can be substituted away.   California is about to run a field experiment and we will learn how elastic is demand.

2.  The article has mixed feelings about increasing block tariffs for water.  This is the "King Solomon" way to protect the poor from price "gouging". I oppose such tariffs and believe that we all should face the same higher price per gallon of water with income transfers to the poor to offset the income effect of higher prices.  Wealthy people complain about the introduction of an even higher top pricing tier.  The article makes clear that California believe they have the right to zero price water. This is crazy. No free lunch!

3.  One interesting quote is supplied by John Sears;

Continue reading the main story

The Parched West

Articles in this series will explore the impact of the drought that has hit states from the Pacific Coast to the Great Plains.

The WSJ reports some optimism  about aggregate water demand by California golf courses. Recall that golf courses are well watered but California is in the midst of serious drought.  Is golf "doomed" in California?  Of course not.  

A direct quote:

"Most of California’s 900-plus golf courses, particularly those in the dryer southern half of the state, have been working on conservation for years with their local water districts. More than a third are hooked up to recycled water, which does not fall under the new restrictions. Many have replaced unnecessary acres of maintained turf with drought-tolerant native plants and installed high-efficiency irrigation systems, which by themselves can reduce water usage by up to 20%.The spiraling cost of water is the primary motivation. In the Los Angeles area, for example, water supplied by the umbrella Metropolitan Water District has more than doubled in cost since 2005. Water is often the biggest single budget item for a golf course, costing as much as $700,000 a year."

So folks, this is adaptation at work.  In our diverse capitalist economy, everyone has dozens of margins on which he/she can change his behavior. Such small ball choices add up so that supply and demand come back into balance.  For the "green invisible hand" to work, we need a well functioning price system to signal resource scarcity.  Demand curves slow down. Raise the price of increasingly scarce resources and this triggers demanders to demand less and incentivizes suppliers to innovate to come up with new solutions. This adaptation "recipe"  is that simple.  Let markets work.

I encourage academic economists to join me in studying the following question;  "For every sector of the urban economy, how does climate change affect day to day life?  If climate change has a serious effect, what adaptations would help to mitigate the challenge?  How expensive are these adaptations? What innovation would further lower this price? Are profit maximizing firms already working on developing and diffusing these innovations? If not, why not?   This is the simple dynamics of how urban capitalism helps us to adapt to climate change.   Yes, I have been arguing this for 5 years now but some folks are starting to listen.

What motivates people to conserve water?  Most economists would recite the "the Law of Demand".  1/2 cent a gallon water provides weak incentives to conserve --- so Californians face Jerry Brown's water restrictions and crazy prices.  While California is home to 100s of top economists, we face deadweight loss because of our lack of influence on designing policies to achieve the efficient allocation of resources. This raises the question of why the University of California hires so many economists.    I live close to the St. Alban's Episcopal Church and here is its explanation for why it is changing its behavior and reducing water consumption.

Each morning I read the NY Times backwards as I start by reading the Sports Section. In the print edition on most days, the Sports Section is in the back of the Business Section.  My eye immediately spotted Orly Ashenfelter's name in this piece about labor versus capital income.  I did not see David Neumark quoted nor were any University of Chicago labor economists quoted.  Why not?  

Here are some direct quotes from this puzzling article:

“It’s puzzling that we can get away with paying so little for what are really terrible jobs,” Professor Ashenfelter told me.

"What this suggests is that the job market — that most critical institution of capitalist societies, the principal vehicle to distribute the nation’s wealth among its people — is not working properly. This raises a fundamental question: If the job market cannot keep hardworking people out of poverty and spread prosperity more broadly, how will it be done? Is public assistance our future?"

and then this direct quote:

"While the reasons for these shifts are still intensely debated, the changes suggest that education, the standard prescription, may not be enough to secure a good job. In that case, argues Prof. Richard B. Freeman, a labor economist from Harvard, we need entirely new mechanisms to distribute income across the economy. “The best solution is that these people get their income through some citizen’s ownership of the capital stock so that they are like rich people with much nonlabor income,” he said. That “will take some policies to make the most highly unequal part of income — ownership of capital — more equal.”"

What is Professor Freeman proposing?  Facebook currently has shareholders who own shares in this company. Is Professor Freeman asking these individuals to voluntarily hand over these shares to other people in the same nation?  How will this redistribution of capital take place?     What is Professor Freeman asking Marc Zuckerberg to sacrifice? Is he asking or demanding?  These are radical ideas.  What does Mr. Zuckerberg receive for generously transferring his private property to strangers?  Who owns what in 2015 America?    

So, it appears that Professor Freeman advocates some nationalization of the nation's capital stock.
Or, would the government buy these assets at market prices (using Chinese loans?)  or would the capital be seized from the incumbent capitalists?  The government would then give per-capita dividend stream to each American to create stakeholders in America's equity portfolio.

Eduardo Porter should have gotten Jim Heckman or Kevin Murphy on the phone.  The University of Chicago still has some high quality researchers who would have offered a different perspective.

In many blog posts I expressed disgust at the failure of Econ 101 teachers to convey some of our most important ideas.  Since people sleep through intro micro, many go on to not anticipate the unintended consequences of bad policies such as raising the minimum wage.  In today's NY Times, there is a ray of sunshine.     Some actors are opposing raising the minimum wage because they anticipate that the "show won't go on" because negative profits will lead plays to shut down. This will occur if the minimum wage increase increases the average cost of producing a play such that costs may be greater than revenue.  Why can't the theater raise prices?  In a perfectly competitive market where the audience has alternatives to how it takes its leisure (think watching Netflix), the theater doesn't have the market power to pass these costs along to final consumers.  I respect that there are some wise actors who are aware that raising costs to the "capitalist" is not merely a zero sum game transferring resources from his pocket to the workers. Instead, there can be real effects of inflating costs.   In competitive labor markets, wages reflect skill, experience and non-cognitive traits.  If people want higher wages, they need to invest in their marketable skills and in their Big-5 traits.

In 1972,  Issac Ehrlich and Gary Becker wrote an important JPE paper on Self Protection and Insurance.  An ungated version is available here.   To provide some intuition, consider a random variable such as your house catching on fire.  If this event occurs, you suffer both financial damage and perhaps a loss of life.  Ex-post insurance will offer you some relief if this horrible state of the world takes place.  But, the probability that this horrible event happens depends in part on ex-ante choices that you take. Do you smoke in bed?  Do you leave matches around?  If people enjoy smoking in bed, then access to ex-post insurance creates a moral hazard because this insurance implicitly subsidizes taking risky actions (i.e smoking in bed).  Ehrlich and Becker discuss the tradeoffs between taking costly early action to reduce a probability of a bad event versus letting the probabilities play out and if and when bad things happen then picking up the pieces through market insurance.

Flash forward to the year 2015 and two friends of mine have released a new book "Climate Shock".  In Wagner and Weitzman's new book,  they present a well written analysis of the tradeoffs we collectively face as we unintentionally unleash climate change.  They argue that a risk averse person or nation should buy insurance to protect itself --- especially when the losses from climate change are ambiguous and fat tail risk could be huge.   The book is well argued and I highly recommend it.  The economic approach to discussing climate change offers a new prospective relative to the issues that climate scientists focus on.

What is missing in their book is a reasoned discussion of the economics of climate change adaptation. They devote a chapter to geo-engineering but to my surprise, they are not willing to engage on the topic of adaptation. In Weitzman's famous work fat tail risk and climate change, for which he already has roughly 3000 Google Scholar citations,   he always writes down a one sector model of the world economy.   Such a macro model implicitly assumes that there is no potential for adaptation because it rules out spatial substitution.  In his setup, there is no "higher ground" to move to.  The whole big world is equally at risk.  To zero out so many margins of adjustment is a modeling assumption but it also affects your thinking about the real issue.

The world is a big place featuring hugely different geographic conditions and many different opportunities for where and how we build our cities.  Cities insulate us from climate risk.  This is the main thrust of my Climatopolis work. I'm disappointed that these scholars have not been willing to engage me in a debate on this topic.   In my "model" of adaptation, even under severe climate change --- we can identify pieces of land that are on "higher ground" and are relatively safe in the face of new risks. We move there and build our cities there.  If specific places are under siege, then our engineers build with materials that can "take a punch" and that have option value. Consider Lego Pieces.  Kids build them and then dissemble them.  I can imagine that future cities will have an infrastructure more like Lego such that if a specific geographic area is at risk, we remove the capital and the people and move to higher ground. Consider Wall Street, if it is below sea level -- then Wall Street can reconstitute in the higher ground of Hedge Fund Connecticut.    Climate Shock chooses not to discuss these issues. Of course, poor nations will face greater challenges in adapting but South Korea and now China show how nations can grow quickly. Climate Change creates an imperative to accelerate economic growth in the developing world.  With higher incomes, individuals and their nations are better able to adapt (purchasing air conditioners , cell phones and a variety of other products that help them to adapt).   Wagner and Weitzman could do a better job following Ehrlich and Becker and considering Ex-Post adjustment to what we have unleashed.   For some technical writing on this issue see my paper.   For an easy version read this.

I agree with Wagner and Weitzman.  We should buy the climate insurance now and sharply decarbonize  but the median voter is a suburbanite and is currently living a high carbon lifestyle.

Environmental economists have been wary of considering the micro economics of climate change adaptation.  Why is that the case?  Which parts of Julian Simon's core arguments do they reject?  An issue that I would like to see debated among the leading environmental economists is the rational expectations hypothesis versus behavioral theories of expectations formation.  Do we model individual households as forward looking and risk averse? Or do we model them as "idiots" who just ignore the climate science and place themselves at risk and do not take Becker style pre-cautions to be ready for the shocks that we have unleashed?

In 2015, are Becker and Lucas correct about how they model households or do Akerloff and Thaler have a better model of human behavior in the face of emerging, ambiguous risks?

UPDATE:  The University of Chicago giant (Becker and Lucas) viewed adults as forward looking and self interested.  The Rational Expectations hypothesis was a big part of my late 1980s Ph.D. education.   Today, many scholars want to drop this hypothesis and introduce a myopia assumption on forecasting that one might learn in a UC Berkeley behavioral economics class.   Note the contrasting hypotheses here on how people form expectations.  Perhaps in a diverse world, different shares of people form Rational Expectations while another share of these people form myopic expectations of the future.   In this case, we need smart structural econometricians to use the Heckman and Singer style models of two type heterogeneity to recover what share of economic agents have each of these respective preferences.  If we could have profiled which demographic attributes (such as education?) are correlated with being a behavioral forecaster then a new generation of jobs will be available for climate consultants to work with these Homer Simpsons to help them plan for their risky future.  The key here is that the Rational Expectations subset "know that they don't know" what climate change will do and this increases their demand in options to allow them to re-optimize in the future and this insulates them from risk. The Berkeley agents "do not know that they do not know" and this places them at risk.  But, if there are Rational Expectations "Social workers"  who " know that the Berkeley agents don't know" then these Rational Expectations "Social Workers" can advise the Homers.  Will the Homers listen?  If they are Bayesian updaters, they soon will as they slowly realize that they under-estimated the threat of climate change.  

As this quick verbal sketch highlights, there are plenty of frontier research topics here related to heterogeneous risk perception and the role that cities play in protecting all of their residents. If the coasts are beautiful but risky, what will be the pricing of this real estate? Who will take the risk of living there? Should we allow them to do so or will flood plain zoning laws tighten to not allow Homers to take "bad risks"?

Wagner and Weitzman choose not to spend much time discussing how the "climate shock" affects different people and different urban places and how the spatial general equilibrium is affected.  They should write a sequel investigating these topics. It would resemble my Climatopolis book.

Today the NY Times has a front page piece on the mistreatment of specific dogs in China.  The Times reports that you don't want to be Tibetan Mastiff.  Here is a memorable quote: "

"There once was a time, during the frenzied heights of China’s Tibetan mastiff craze, when a droopy-eyed slobbering giant like Nibble might have fetched $200,000 and ended up roaming the landscaped grounds of some coal tycoon’s suburban villa. But Tibetan mastiffs are so 2013. Instead, earlier this year Nibble and 20 more unlucky mastiffs found themselves stuffed into metal chicken crates and packed onto a truck with 150 other dogs. If not for a band of Beijing animal rights activists who literally threw themselves in front of the truck, Nibble and the rest would have ended up at a slaughterhouse in northeast China where, at roughly $5 a head, they would have been rendered into hot pot ingredients, imitation leather and the lining for winter gloves".

So, the Chinese are faddish and cruel?  Or, only their .01% at the top if the income distribution and political power are?   So, China fits neatly in the NY Times over-arching narrative that the world is going to hell as the 1% seize all $ and all power.

The NY Times has an incentive to rough up the Chinese Communist Party.  Its reporters have been denied Visas perhaps in retaliation for past NY Times unflattering articles about China.




Both the NY Times and the Wall Street Journal regularly critique China's government and life in China. It would interest me to see a quantitative study to see if the time trends of negative coverage (versus positive coverage) has accelerated over time and to see whether such trends can be explained.

Even in articles that are not about China, there is a still an anti-China vibe.   Here is another front page article today   bemoaning how the USA is no longer playing the world's economic leader and statesman as the nation's economic power slips. Unmentioned until 1/2 way through the article is the real point about the rise of China and China eclipsing the USA in exercising soft power.

When I was a teenager, I would listen to Cream and Led Zeppelin nonstop.  I was not a productive teen.  Now that I'm no longer a teenager, I've returned to listening to 1970s rock.  On Google Play, I just keep looping through the same 5 Led Zeppelin albums over and over again and it really helps my paper writing and editing.  Why? It acts as a commitment device so that I don't check my email incessantly and I actually focus on the task at hand.  

Now that Jimmy Page looks like Robert Mundell, I can listen to this band and link it back to my scholarship.

  

See what I mean?