An Opinion Piece in the LA Times argues that the NSF should do a better job prioritizing its strategic investments in basic science.   Here are  some direct quotes:

"Do the mandarins of the social sciences really believe that a study of depictions of animals in National Geographic magazine (which the foundation funded) should take precedence over research to identify markers for Alzheimer's disease or pancreatic cancer? A large fraction of highly ranked, important grant proposals are not accepted because of limited resources.

The House of Representatives passed legislation in May that would go a long way toward stopping the creep of mediocre scientific research funding at the foundation.

In recent years, Congress has annually approved a $6-billion allocation to the NSF to spend as it sees fit. The America COMPETES Reauthorization Act of 2015 would instead designate some scientific disciplines as more important than others by restoring the congressional practice of allocating funds by research areas. It also sharply reduces the foundation's ability to fund the social sciences and the geosciences.

.....

"The proposed changes are no-brainers. Some of the SBE directorate's projects — such as a major program to develop the next generation of mathematical and statistical algorithms for the detection of chemical agents and biological threats — are worthy. But only some.

The foundation has directed millions of taxpayer dollars to studies such as how to ride a bicycle, whether political views are genetically predetermined, whether parents choose trendy baby names, when is the best time to buy a ticket to a sold-out sporting event and why the same teams always seem to dominate the NCAA basketball playoffs.

As for the geosciences, research on climate change is legitimate — when it is performed by meteorologists, oceanographers, physicists and biologists. But the NSF and other federal agencies have been funding redundant, politically overheated and even ludicrous climate change boondoggles. For example, the NSF has wasted millions of dollars on projects that include a climate change musical ($697,177), a series of games ($449,972) and art shows ($2.51 million)."

THIS discussion made me flashback in time.  Back in 1990, I had lunch with a prominent economist who is now a Nobel Laureate.   Being a wiseguy and a very young man at the time, I asked him why economists deserved to receive any money from the NSF.  He looked at me with slight disgust and then he answered and said that the social value of;  1. Milton Friedman's work on the causes of hyperinflation and the 2.  the Black/Scholes Option Pricing Formula were of such value as to permanently justify ongoing NSF Funding of Economics research.  I heard him and had no witty response. I just munched on my muffin and pondered his point.

 

Back in 1972,  Issac Ehrlich and Gary Becker wrote a very important JPE paper on endogenous probabilities.   Consider a simple example of a fire that burns down your house.  This event is a random variable that every family fears.  The probability of this event is partially under the family's control. If nobody in the house smokes or lights candles, this reduces the probability of this horrible event.  If the members of the family enjoy smoking, then it is costly for them to "self protect" by choosing not to smoke.  Avoiding smoking is an ex-ante choice that lowers the probability of a fire.  Market insurance represents an ex-post payoff if you suffer from a disaster such as your home burning down.   Interesting cases arise in economics (namely moral hazard) when the expectation that you can access market insurance at a relative low price causes a household to take ex-ante risks (such as smoking in the house).   As we teach young economists, ex-post insurance implicitly encourages ex-ante risk taking (i.e smoking in bed).

This is a long winded introduction to my discussing my new co-authored NBER paper.   Everyone knows that cities such as Beijing have extremely high air pollution levels.   Urban China’s high levels of ambient air pollution both lowers quality of life and raises mortality risk.  China’s wealthy have the purchasing power to purchase private products such as air filters that allows them to offset some of the pollution exposure risk.  Using a unique data set of Internet purchases, we document that households invest more in masks and air filter products when ambient pollution levels exceed key alert thresholds. Richer people are more likely to invest in air filters, which are much more expensive than masks. Our findings have implications for trends in inequality in human capital accumulation and in quality of life inequality in urban China. 

For an example of another self protection paper take a look at Mu and Junjie Zheng's very nice recent paper available here.  

Tyler Cowen's Uber Column  makes several very interesting points.  Every time I'm in an Uber car, the driver starts talking about his Uber rating.   This rating is some moving average of how his last X riders have rated him.  Today, Uber knows this rating for each driver at each point in time and each driver knows his rating.   Many potential employers of Uber drivers would like to know this working quality rating.    Suppose that Uber could sell this information to potential employers of this person.  Would Uber make money from this?

Just as Car Fax allows you to track a vehicle's history over its life,  this Uber rating would provide some useful information about a potential employee's reliability, driving, and personality traits.  Some businesses would greatly value this information. It would interest me if the Uber rating does a better job predicting actual workplace performance than the interviewers who currently handle such recruiting.

Uber would face a tradeoff.  Does it make its money from having people drive for it?  Or by having people drive, earn a reputation and then move on to another job?

From a worker's perspective, if you earn a good reputation at one firm --- how do you cash in on this fact with firms that don't know you have a good reputation? How do you signal your quality? In the past, an Ivy League degree or a Mensa membership card helped but in this economy --- will workers soon have a vector of crowd sourced metrics that they can display to potential employers? A future labor economist could then run hedonic wage regressions to test how the labor market rewards each of these metrics.

This world already exists in academic economics.  REPEC does a pretty good job of ranking us.  For those at public universities, you can look up our salaries and correlate it with our REPEC rankings. You will see a very high positive correlation.   Academic economics can be modeled pretty well as  a perfectly competitive labor market.  There is an element of crowd sourcing to REPEC rankings as citations and paper downloads are some of the metrics used to create the single index of economist "quality".

In such a "metrics" based labor market, would this be a more efficient market? It would create strong ex-ante incentives for people not to shirk (to show up late, to drink on the job) because your quality ratings would decline. Asymmetric information issues (the lemons problem) would vanish in labor markets and this would encourage ex-ante skill formation and ex-post efficient rewards.  A better, more fair society would emerge.  Would "inequality" rise?   This hinges on the investment phase of the game.

David Leonhardt has written a nice piece about a recent 2015 Stanford Study by some Sociologists.  The Stanford Study is available here.     I am slightly amused because Denise DiPasquale and I made this point 16 years ago in our published 1999 Real Estate Economics paper.   An ungated version of our paper is here.    While our paper has only generated 38 cites, I think its results are still interesting and relevant.   The empirical sociologists would be wise to read some of the older literature.

Here is our abstract:

In today's WSJ, Prof. Lazear has written a piece highlighting the importance of a state's "business climate" as a driver of local growth.  He focuses on "Right to Work" legislation as a key empirical benchmark for identifying "business friendly" states.   While I agree with him, it is important to note that "unfriendly" states such as California can thrive because it has unique exogenous attributes (climate and amenities) that cannot be found anywhere else in the U.S.  A deeper question is whether the "high tax" leadership of state and local policy in California use the tax revenue to implement regulations that makes California an even better place to live such that it attracts the Zuckerbergs despite the high taxes?  To repeat that point again, Conservatives implicitly assume that a state's high taxes just subtract income from the motivated.  A more optimistic narrative (that may or may not be correct) is that taxes create a pot of $ that can be used to supply a set of local public goods that the successful value.

A revealed preference economist would say that the proof is in the pudding. For states that raise their taxes or have high taxes, do the mobile skilled stick around or do do they leave? If they stay, then a revealed preference argument suggests that the locality but have desirable attributes (either exogenously or due to the taxes that have been enacted on this group).

My own research provides empirical support for several of Ed Lazear's points. In our 2013 Journal of Public Economics paper, Erin Mansur and I conduct the following exercise.

We use County Business Patterns for every county in the United States for a time period of roughly 15 years. For each County, we observe its count of establishments and employment in hundreds of industries.  Industries differ along 3 dimensions;  Some industries are labor intensive, some are energy intensive and some are pollution intensive.   Counties differ along 3 dimensions. Some counties are located in anti-union Right to Work States (think of Texas), some feature low electricity prices and some are lightly regulated by the Clean Air Act.    We use an econometric approach that compares "border pairs". Intuitively, these are physically adjacent counties and we exploit variation in the 3 factors listed above.    We find that labor intensive industries tend to locate on the anti-union county (relative to its adjacent county twin --- which is our control group). We find that energy intensive industries tend to locate in the low electricity price county and same for pollution intensive industries.  Why do firms engage in this behavior? Cost minimization is an obvious explanation. A labor intensive firm can reduce its costs by avoiding a geographic area that has strong labor protection. If there is a nearby geographic area which features more lax regulation, then why not produce there?   Our results highlight that progressive states do "leak" jobs as a direct consequence of their policies.

Our results suggest that state policy does shape the set of industries that tend to cluster in a given geographic area.   Governors such as Jerry Brown of California face a disadvantage that our state features high electricity prices,  union protection and several major cities are regulated under the Clean Air Act.  What light manufacturing jobs will continue to be in California?  Few.  So, what opportunities will lower middle class workers have outside of the service sector and the construction sector?  Few.

If Jerry Brown sat down and with an open mind read Ed Lazear's piece, what thoughts would run through his smart mind?  What does Jerry Brown believe is California's future golden goose for non-college graduates in the state?  As the minimum wage increases in California's major cities, what jobs will remain here?

I will spend the 2015-2016 academic year at USC.   I'm running this "field experiment" to see if I'm a better match teaching USC undergrads and advising USC graduate students than what I've achieved at UCLA.   While my UCLA undergraduate classes feature too many students, I have tried my best to deliver a serious education.   Go to "Bruinwalk" and you can read this description of my past teaching.

An Anonymous UCLA Student Wrote the Following; 

Took his Econ M134

All I can say about this professor is that obviously he devotes his life to the research of environment economics. He's not only a genius but also a crazy, enthusiastic environmentalist. I am not a fan of protecting environment or doing research, but I found his class very interesting even from the first meeting, not only because of his great sense of humor(includes the way he talks) but also because he uses his real world experience to help you realize the concepts. The tests are not hard. Lots of past exams will be provided. Even if the test is difficult, there will be a reasonable curve. Definitely recommend to take this class.

In gentrifying Brooklyn, early property owners are getting rich. In this piece, we learn about the life story of several residents. Here I would like to provide a couple of direct quotes that provide some useful insights about urban housing markets.

1.   Information on the real time value of housing is a valuable commodity.  Proof?  Consider this quote:

"She would go on to sell the house for $1.7 million through Ban Leow, a well-known broker in the neighborhood who moved to New York from Malaysia 22 years ago to work in his family’s restaurant business. The sale cemented Mr. Leow’s reputation as an unlikely hero among some older black residents. “When I sold my house for 1.7, I ran and told everyone because I didn’t want people getting ripped off anymore,” Ms. Sidbury said. “Nobody shared information. Your neighbor would sell a house and nobody would know. ‘Don’t let anybody know your business.’ That’s what some people think. Everything is a secret. We’re still in a slave mentality.”

Zillow should solve this information asymmetry problem.


2.   Gary Becker's 1956 work on discrimination is still relevant for today.  Race preferences can be costly.    A DIRECT quote:

"Ms. Sidbury has worked to balance her real estate interests with an eye toward profit and preservation. A few years ago, she told me, she chose to sell another house she owned to a young black psychiatrist who offered her $830,000 instead of selling it to a white buyer who had offered her over $1 million. While the notion of privileging one race over another might seem problematic, the women see themselves as agents of a continuing history that seems more and more under assault. When Ms. Fryson and her husband bought their house four decades ago, she said, the seller told her a white buyer had come to the house with a bag full of cash. “She said, ‘But I wanted you children to have this house.’ ”

On Twitter, I am a "follower" of Los Angeles Mayor Eric Garcetti.  Here is a "retweet" from Twitter and a happy photo of a set of big city mayors.  This group of optimistic and happy people is convinced that they have helped the 99% by raising the minimum wage.   Why are they so confident about their supply and demand economics?  Given that econ 101 rejects the basic logic of their policy experiment, why is this group so proud of itself?  Are they right or are the grumpy economists right?





The Mayor of Los Angeles has signed a bill to raise the minimum wage to $15 an hour by the year 2020.

Are economists brave enough to predict what will be the general equilibrium impacts for the liberal cities that enact these laws?

Last month, I posted my predictions here.

In this age of Keynesian Economics and Behavioral Economics, are there still economists who believe in the basic ideas of neo-classical economics?  I am one of these folks but I don't know how many others there are.

For everyone out there who received a grade of B+ or higher in their econ 101 course, how can these happy Mayors (see the photo above) have just helped their local economy by passing this legislation?
Would the Liberal City mayors be willing to run a field experiment, where we randomly assign 1/2 to raise their minimum wage and the rest to a control group who does not implement this policy?  In this age of field experiments, how can we randomly assign policies to learn whether they are effective or not?

Slate has a thought provoking piece about the quality of future Universities if faculty do not have tenure.  Economics offers a few insights here.

Point #1:   Salaries would rise to compensate faculty with outside options for taking on the "risk premium" of being fired by their Deans.

Point #2:  Faculty contracts would become much more complicated as a type of "piece work" would arise where some engineers who have other jobs at companies would agree to teach one course a semester.  The line between consultant and Professor would be blurred as more academics in bio science, medicine, economics and engineering would be both.

Point #3:  Risk averse people would be less likely to enter the field.   People who expect to run out of new ideas when they are 50 will be less likely to enter this field.

Subtle Point #1:  Which Deans are smart enough to evaluate each member of the faculty each year to see if Professor Jones merits a new contract?   Deans will certainly use this monopoly power to pursue their own agendas.  For example, a Dean who seeks to diversify the faculty demographics would keep few older white men on the faculty.   A Dean who views economists as overpaid and overly fond of free-markets would seek to congest the Economics major to deflect students to other subjects such as political science, sociology and statistics.

An optimist would posit that Deans seek for their schools to be top rated and thus will be objective in keeping excellent research faculty.  The challenge here is that  faculty produce several dimensions of output and Deans may have a different view of the index weights concerning which output is most valuable.  With our current tenure system, the most weight is placed on academic output and external letters are crucial for evaluating promotion candidates.  There is no way that Deans could ask outsiders for letters on each faculty member every 3 years.  The quality of these letters would plummet to 0 and they would not be informative.   Also, who appoints these Deans? Ultimately the Provost and President of a University would have a monopoly on power.  Who picks these powerful people?  The Board of Directors of the University.  These tend to be very successful people but what do they know about running a University?

As Carmichael pointed out a long time ago, in a world without tenure --- incumbent faculty have incentives to nominate idiots to be their colleagues because the idiots will make the incumbents look good.  Tenure provides an implicit stake in the long term  health of the institution and this incentivizes the faculty to take a long term perspective in making key hiring and retention decisions.

Carmichael, H. Lorne. "Incentives in academics: why is there tenure?." The Journal of Political Economy (1988): 453-472.

The Economist's Voice has just published my short essay that states six predictions about how we will adapt to climate change. I contrast predictions based on behavioral economics model of expectations and investment behavior and contrast this with the predictions based on a rational expectations investment under uncertainty model.  I argue that climate change offers us an excellent "laboratory" for testing whether Berkeley or the 1980s University of Chicago has the right model for explaining and predicting human behavior in the face of an known unknown.

You can access my piece for free at this website.    You will have to register with the publisher.