Recent news reports have focused on VW's Emissions cheating scandal.  The fully story is available here.  For those interested in the costs and benefits of regulation, this case study reveals information about the cost of environmental regulation.  VW must have viewed this regulation as very costly to comply with. Otherwise, why would they risk a PR scandal if the company was caught cheating?  This point matters because leading economists have been celebrating the benefits of the Clean Air Act for life expectancy. Read Michael Greenstone's piece here.

He wrote:
"
As the United States and other nations continue to debate the costs of environmental regulation, they can do so with the knowledge that the benefits can be substantial."

Does the VW case change our priors about the costs of achieving these gains?  Why did this rational profit maximizing company cheat? What were the expected profits from doing so?  Did it really believe that the probability that it would be caught cheating was 0%?

 

Each Sunday I read David Warsh's piece.  This week's column reports a strange quote from Harvard's Larry Summers.

David Warsh writes;

"Summers hinted at how his thinking had changed when he told an audience at a meeting of the Institute for New Economic Thinking at Bretton Woods, N.H., in March 2011,

I would have to say that the vast edifice in both its new Keynesian variety and its new classical variety of attempting to place micro foundations under macroeconomics was not something that informed the policy making process in any important way.

Instead, Summers said, Walter Bagehot, Hyman Minsky, and, especially Charles Kindleberger had been among his guides to “the crisis we just went through.”


MY Questions:

1. Does Larry Summers mean to say that the 1st year Macro Curriculum is worthless in helping the Fed and the Board of Governors to form counter-cyclical policy?  In this case, should there be more non-Ph.Ds in Economics sitting in at the Fed's main meetings?  For example, the President of the Atlanta Fed is a very impressive man who does not have a Ph.D. in Economics.

2.  "informed the policy making process" is a funny phrase.  There is a factual issue of whether Core Macro was used in this process versus the more important issue of whether it should be used.

3.  Many economists view Kydland and Prescott's Rules vs. Discretion as a critical paper (having already garnered over 7800 citations) in modern economics as it demonstrates the central importance of credibility in macro "games".    Does Dr. Summers really dismiss this paper as well as providing no "blueprint" for selecting policies?   A cynic might conjecture that Professor Summers is well aware that the policy fun in devising policy goes way down if the government commits to clear rules.  Discretion conveys more power to the key decision makers.  Is Professor Summers willing and able to confront a simple political economy model of decision making?

4.  It appears to me (and I recognize that I'm a failed UChicago macro economist) that the Fed's active policies starting in 2008 has been all about building hard to quantify "confidence" as it attempted to signal to the world's markets that it was the lender of last resort.  This suggests to me that Ben Bernanke had a model in his mind of how confidence is built up and how to minimize the chance of bank runs, fire-sales and asset depreciation leading to a further chain of bankruptcies.  Does Dr. Summers not embrace the Bernanke and Gertler credit channel worldview?   Would Professor Summers embrace this paper by D and D as being relevant for studying the challenge of 2008 and onward?

Diamond, Douglas W., and Philip H. Dybvig. "Bank runs, deposit insurance, and liquidity." The journal of political economy (1983): 401-419.

Economists since Hicks and Keynes have invested many hours of our scarce time in building up the human capital to explain and predict human behavior.  Is Professor Summers saying that the subset of scholars who were studying macro have been collectively wasting their lives?  Has he recommended that the macro sequence be cancelled at Harvard Econ?

Finally, where does Dr. Summers stand on modern growth theory? If the economy returns to its "steady state" growth, then won't the 2008 negative hit vanish from our collective memory?

On September 16th 2015, I taught my USC environmental economics class from 2pm until 345pm that day and then took my overnight bag and got on a train to Culver City.  From Culver City, I took Uber to a UCLA Institute of the Environment retreat near Malibu.  Fortunately for me, I missed the afternoon meeting discussion and showed up just in time for drinks and dinner. After dinner, we had more drinks and talked about my UCLA Institute's future. This photo was taken the next morning. You can see that I haven't shaved and that I'm having fun.




Economics professors have a very good deal when we are able to teach and research at research universities.    I strongly encourage economists who are roughly my age (49 and older) to keep working.  The field of academic economics is stronger if people can withstand the urge to consult and to get caught up in state and federal policy making.  Academic economists should stay in the game and keep being academics.

In a relatively close distance to Syria, there are many nations such as Romania who might be willing to participate in a migrant auction.  One possible mechanism would have such nations participate in an auction in which the nation agrees to accept an annual payment and up to 5 million new migrants who will be settled in a new charter city.  Such an auction would allow for information revelation as those nations that value expanding their nation's population would be rewarded for doing so.

Who would pay the "annual payments"?   In addition to the usual suspects such as the USA, China and Germany;  foundations such as Ford and Gates and "do gooders" such as Tom Steyer could contribute their $ to pay the nations who accept the migrants.  The nation could be paid a bonus stream of $ if it commits to allowing for a different set of institutions and rule of law (i.e Swiss or Canadian rules) than the home country's rules.

How would the migrants' rights be protected? In this age of Twitter and drones, there could be full surveillance of what life is like in the new cities.    Note that by making the payment an annual flow that this would incentivize the host nation to "play nice" with the new migrants.

The refugees provide a test of whether new mega-cities can be formed. This represents a viable alternative to "congesting" existing cities.     Ideally, a nation would both create the new cities (and receive the payoff from the richer nations) and would give the refugees the option to live and work there versus moving to existing cities.

New urbanists could use the new cities as a laboratory for testing their ideas about social capital and social interaction and urban productivity in an area without a past. NBER economists and J-PAL economists could run their field experiments to see what works in these cities.

How long would it take to launch the city? We have past examples from projects such as building the Los Alamos New Mexico complex during WW2.

Show some imagination here.  Think differently (I'm cracking  a Steve Jobs joke here)!   We need to increase the menu of locational choices and reward those who are willing to increase the choice set.   This unfortunate natural experiment creates a great lab for economists, engineers and political scientists to work together to help these refugees achieve their life dreams for themselves and for their children.   My grandfather arrived in this nation in 1921 off of a tough boat ride.  His son went on to great success.  Why can't this old story repeat itself again and again?

Haishi Li is a brand new Ph.D. student at the University of Chicago's Economics Department.   He is a friend and co-author of mine.  He sent me a photo of himself next to a photo of the 1988 Entering Class at the University of Chicago.     This photo is now 27 years old.  For those with good eyes, you will see a young Ed Glaeser in the fourth photo from the left (near Haishi's ear).   You will see me down one row in the 3rd photo from the left.   Peter Ireland is to my left and Hedi Kallal is to my right.    You can't see Erzo Luttmer, or Phil Strahan. Ethan Ligon is down and to the left.   You can see half of Alberto Bisin (top row 3rd from left).   The University of Chicago had a lot of talent back then.  Did the faculty know that?

Nick Kristoff has written a NY Times piece that I learned from and enjoyed reading (a first!).   He celebrates the rise of "fake meat".

He writes;

"So look out. If the alternatives to meat are tasty, healthier, cheaper, better for the environment and pose fewer ethical challenges, the result may be a revolution in the human diet.

“The next couple of years will be exciting ones,” says Joseph D. Puglisi, a Stanford University professor of structural biology who is working on meat alternatives. “We can use a broad range of plant protein sources and create a palette of textures and tastes — for example, jerky, cured meats, sausage, pork.”

So, note the optimism about the role that human ingenuity plays in directing technological change.  Demand creates supply.

Note that entrepreneurs, not government, are the driving force here bearing the risk and expecting a future payout.

Another Quote:

" Puglisi is advising Beyond Meat, a start-up that is a leader in the field, with investments from Bill Gates and both Biz Stone and Ev Williams of Twitter fame, not to mention Kleiner Perkins Caufield & Byers, the venture capital firm that backed Google and Amazon. Beyond Meat says its sales are doubling each year.

“We’re really focused on the mainstream,” said Ethan Brown, the founder of Beyond Meat, over a lunch of fake chili, meatballs and hamburgers. It was a banquet of the bogus.

Brown, 44, is deeply concerned by climate change and spent eight years in a company making hydrogen fuel cells. But he read that livestock cause more greenhouse gases than the entire transportation industry, and he wondered if he shouldn’t focus more on food."


Now a serious climate change mitigation study would compare the greenhouse gas emissions from producing our current meat diet (and would forecast forward the extra emissions as people growing richer in India and China and other LDCs consume more meat) versus what our GHG emissions from our diet would be if high quality "fake meat" is invented. This would be a very nice carbon footprint study.

This week, I am declaring that Paul Romer wins the competition for posting the most interesting blog post among the economics heavyweights named; Krugman,  Romer ,  Cochrane and Summers.    In his piece titled; "Let them come and they will build it" , Professor Romer writes about the European refugee crisis;

"The real problem is not that people are queuing up to get into Europe. Rather, it is that tens or hundreds of millions of people live in a place where a failing government precludes any chance at the basics that any person wants: safety, dignity, opportunity, hope."

HE CONTINUES

To see what a real solution would look like, you need only remember three things:

1. It takes only a few cities, on very little land, to accommodate tens or hundreds of millions of people.

2. Building cities does not take charity. A city is worth far more than it costs to build.

3. To build a city, do not copy Field of Dreams. (“Build it and they will come.”) Copy Burning Man. (“Let them come, and they will build it.”)

How do we know that cities are worth more than they cost to build? Just look at the value of the land they sit on. Building a city on top converts land that used to be worth very little into land that is extremely valuable. The increase in the value of the land is the sign of the gains that can finance the cost of offering people a government that can create the conditions that offer residents safety, dignity, opportunity, hope.


Creating these conditions does require a local government; even at Burning Man, there is no libertarian free-for-all about where you can set up camp and where the public space will be. The local governing entity determines this before anyone shows up."

MY Thoughts

WOULD the Gates Foundation be willing to buy land somewhere and create its own Charter City?  Call it Gatesland or "Windows" or Ballmerville.   Would Germany and the other European nation who are not excited about importing large numbers of refugees be willing to help to create these new cities? How long would it take to build these?  The Chinese work crews could be brought in to show how to build a 15 story hotel in 48 hours.

Note that Professor Romer is thinking "outside of the box".  Why can't we increase the menu of cities for individuals to choose from? What are the fixed costs for creating a city? Are these fixed costs shrinking over time?   How durable would the new capital have to be?  Think for a moment. The new urbanites in Gatesland would need;

1. shelter
2. food
3. water
4. electricity
5. sewage disposal
6. garbage disposal
7. transport services for moving within the city and for trading across cities
8.  The children would need schools
9. basic health care

For each of these, what is the production function for producing such goods? Wouldn't Keynesians get excited about the "multiplier effects"? It would be ironic if Europeans from high unemployment countries such as Spain and Italy moved to this new Gatesville to work there!

To paraphrase John Lennon, Give Paul Romer's ideas a chance!

Don't worry, this will be a G-rated story.  For the last day, the UCLA IOES core faculty  held a retreat at the Topanga Canyon Inn.  Since I'm on leave this year, I haven't seen several of my colleagues for months.   I arrived just before dinner on Wednesday night.  At this dinner, we sat around a big table and there were roughly 12 of us.   We had a group talk about many environmental issues and the group discussion was wide ranging. I mentioned three new economics papers related to the dinner table conversation and my colleagues were quite interested.  After dinner, we continued to talk and drink wine and I only stumbled up to my hotel room by 10pm.

In a relaxed atmosphere with no anxiety or appointments or other distractions, everyone was in good spirits and eager to chat and to get to know each other better.   Such social capital is very valuable stuff.    This morning I woke up and I wore a t-shirt and shorts.  My casual dressing was noted by my colleagues.   The Inn's staff made breakfast for us. We again sat at a table like a big family and ate together and then had a post-breakfast spirited discussion for 2.5 hours.  During this time, we discussed our hiring strategy and our hopes and goals and concerns for the new academic year.

I walked out of the retreat with a renewed hope and optimism that UCLA does have its act together. I was highly encouraged by what I saw, heard and participated in.   There is a general lesson here that academia is an unusual workplace.  On one level we are small shopkeepers all selling our wares on the same block.  We compete against each other but we also work together to make the block look good.  Our "output" is multidimensional as we conduct research, try to influence the policy debate, train graduate students and try to get undergraduates to invest to learn more about our subject matter.
Before the retreat, I questioned why I was showing up during a year when I'm at USC but now I know why I attended and I"m glad that I did.  

Professor Timothy Snyder of Yale must be a very smart guy.  He is tenured at Yale and my wife greatly respects his book Bloodlands.    Google Scholar suggests that has been his big work. We own this book and my wife advised me not to read this WW2 book about Stalin and Hitler because it would depress me.  In today's NY Times, Professor Snyder has published a scary piece in which he predicts that in a climate change suffering world that China will steal Africa's land (in its  quest to feed its people) and that this action will cause millions to suffer in Africa.  As a historian, he appears to be working too hard to build a bridge between his historical studies and modern events.   As I discuss below, he ignores the point that new markets help us to adapt so that the future does not resemble the past and our past experience can actually help us to avoid making the same collective mistake.

A DIRECT Quote

"The danger is not that the Chinese might actually starve to death in the near future, any more than Germans would have during the 1930s. The risk is that a developed country able to project military power could, like Hitler’s Germany, fall into ecological panic, and take drastic steps to protect its existing standard of living.

In Sudan, drought led to conflict and the displacement of many civilians. How might such a scenario unfold? China is already leasing a tenth of Ukraine’s arable soil, and buying up food whenever global supplies tighten. During the drought of 2010, Chinese panic buying helped bring bread riots and revolution to the Middle East. The Chinese leadership already regards Africa as a long-term source of food. Although many Africans themselves still go hungry, their continent holds about half of the world’s untilled arable land. Like China, the United Arab Emirates and South Korea are interested in Sudan’s fertile regions — and they have been joined by Japan, Qatar and Saudi Arabia in efforts to buy or lease land throughout Africa.

Nations in need of land would likely begin with tactfully negotiated leases or purchases; but under conditions of stress or acute need, such agrarian export zones could become fortified colonies, requiring or attracting violence."

So note that this non-economist is making dozens of implicit assumptions;

1.  Property rights over land will not be respected in the future (i.e Chinese invasion and colonization).

2.  Food is not storable.  This is a crazy assumption.  He appears to have a "Mad Max (think of Mel Gibson) vision of the future.  Why would the Chinese (or us) fall into this trap?  International trade in agricultural produce creates smooth markets with a law of one price adjusted for transport costs.

3.  If scarcity is predicted to rise in the future, why won't future prices signal this and why won't this induce innovation (i.e GMO innovation) and substitution to foods that continue to be grown?

4.  So, does Prof Snyder oppose international trade in agricultural goods and land leases?

5. The Chinese population growth is slowing and the population is aging. Yes, a richer nation eats more meat but is it obvious that China will demand a large % increase in calories in the year 2050?

6. Why would China make itself so reliant on Africa for agricultural exports?   A risk averse nation will see a diverse set of food exporters and international markets provide this.

7. If China develops a reputation for stealing other nation's land, then there could be WW3 but China would suffer greatly in such a conflict.  Does Dr. Taylor understand the deterrence concept?

The NY Times fears the rise of the Chinese military and seems to use every opportunity to use scarce inches of its newspaper to rail about potential threats. I respect Dr. Taylor's imagination but he does not discuss how free markets help to diffuse the dangerous scenario that he so eloquently sketches.

UPDATE:  At lunch today, I sketched this blog post to my wife and she said that a key issue here is whether the Chinese leadership  in the CCP are Malthusians.  If they embrace the Malthus view that technological innovation is not possible, then if they demand more calories and are unable to grow them and don't believe that markets will supply them then land grabs become the clear insurance mechanism for them to embrace.   If she is right, then this again highlights why economists need to teach the world's leaders how free markets work. Perhaps we need to send 1 million copies of Acemoglu and Linn's 2004 QJE to the Chinese Communist Party Leadership.

Here is their abstract (just substitute the word food for drug);

The NY Times often features Justin Gillis.  Mr. Gillis is very worried about our future if we fail to cap our greenhouse gas emissions. In a piece just published, I will report a few of his choice quotes.

QUOTE #1:

"Burning all the world’s deposits of coal, oil and natural gas would raise the temperature enough to melt the entire ice sheet covering Antarctica, driving the level of the sea up by more than 160 feet, scientists reported Friday.

In a major surprise to the scientists, they found that half the melting could occur in as little as a thousand years, causing the ocean to rise by something on the order of a foot per decade, roughly 10 times the rate at which it is rising now. Such a pace would almost certainly throw human society into chaos, forcing a rapid retreat from the world’s coastal cities."

Quote #2

"A sea level rise of 200 feet would put almost all of Florida, much of Louisiana and Texas, the entire East Coast of the United States, large parts of Britain, much of the European Plain, and huge parts of coastal Asia under water. The cities lost would include Miami, New Orleans, Houston, Washington, New York, Amsterdam, Stockholm, London, Paris, Berlin, Venice, Buenos Aires, Beijing, Shanghai, Sydney, Rome and Tokyo.

Nobody alive today, nor even their grandchildren, would live to see such a calamity unfold, given the time the melting would take. Yet the new study gives a sense of the risks that future generations face if emissions of greenhouse gases are not brought under control."


Mr. Gillis doesn't talk about what will be the land area of the globe still above sea level in this worst case scenario that he sketches could unfold perhaps by the year 2300.   I predict that there will still be significant land mass for us to build our future cities.  Here is a map of what are future land will look like.  There is a lot of land remaining.




   On this "higher ground", Singapore type air conditioned cities will emerge.  Is this future "waterworld" scenario so scary?  I see opportunities for those entrepreneurs who can devise solutions.

Yes, our famous past coastal cities have a problem but why will that cause big problems for our great, great grandchildren?    Mr. Gillis should read my new "Lego Economics" paper.

As a starting point, he should read my system of cities paper in the face of climate change.