I have taught my undergraduates that a non-profit foundation that engages in cost minimization will have more $ to allocate to its core missions such as improving LDC public health or reducing U.S poverty.  This would suggest that such entities have incentives to respond to market signals.  At the same time, there are principal-agent models that predict that those who run foundations and non-profits will engage in empire building and use their information advantage (i.e that the principal (the Board of Directors) cannot easily monitor what the foundation does all day) to pursue their own agenda.  The same questions arise for research universities.  As job opportunities for humanities Ph.Ds shrink, do such programs enroll fewer entering students? Or to flip things around, as the demand for economics Ph.Ds grows, do such programs now enroll more students?

The NY Times has published an interesting piece about Exxon and its shifting position on climate change.  I want to discuss one section of the article.  Here is a direct quote:

Ultimately, the cap-and-trade bill was unsuccessful, passing the House in 2009, but failing to reach the Senate floor. The bill died for many reasons, including a struggling economy. But intense lobbying against the bill by energy companies, including Exxon, had an effect.

In my 2013 paper, we study the determinants of how the U.S Congress voted on Waxman-Markey.   Representatives from  Congressional Districts that were poor, Conservative and had a high carbon footprint were more likely to vote "No".

So, taking this point as given, the "coastal elites" (and I'm including myself and Tom Steyer) in this group --- need to offer a new deal of the following flavor;

In Econ 101, we teach our students that if you are going to change the prices that people pay for goods that you should consider giving them enough purchasing power so that they can consume their "old bundle" at the "new prices".    I recognize that this is taught in the context of Laspeyres Price indices but I'm reposing this as a political issue of how one interest group (the greens) compensates another interest group (the coal people) for agreeing to change relative prices and hence lower their purchasing power.  

So let's do an example together. Suppose that Frank consumes 1000 gallons of gasoline each year and 2000 pizzas.  Suppose the price of a pizza is 4 and the price of gasoline is 2.  To purchase this bundle, Frank needs $10,000.  Now suppose that coastal elites seek for the price of gasoline to be $3 because this will "price the carbon externality".  Frank is no dummy. He can calculate that this regulation makes him poorer.  If he continues to consume his "old bundle" then at the "new prices" he needs to spend  1000*3+2000*4= 11,000.  So,  this regulation has made Frank poorer.   If the coastal elites who support carbon pricing would transfer the $1,000 to Frank then he would not vote against the carbon pricing.   

The original 2009 legislation did not have this targeted transfers from progressives to non-progressives and thus the voting results are not surprising.  Now, a critic might say; "How will we know who really supports climate change policy? Won't they hide their type and lie and say they want  a check to compensate them?"

Read this September 2016 University of Chicago poll, it claims that a large share of people are willing to pay to fight climate change. Let's create a political market to allow them to do so and then we will see how many free riders there are.  

I believe that there are gains to trade here.  The rich progressives are willing to pay to "buy" the veto from the carbon bill blockers.  Let's create the possibility for them to do so.   Right now the Clean Power Plan and other regulations are a "takings" of the right to emit rather than an effort to purchase the right to emit. If the coastal people admit that the inland people have a right to pollute, then the Coasian bargaining can begin!

There was a time at the University of Chicago when investment in human capital was viewed as a "good thing".  Robert Lucas wrote down models where it was the key to long run economic growth.  Gary Becker, Sherwin Rosen, and Jim Heckman wrote down micro models of optimal investment in such capital. In these models, there were no "negative externalities" associated with human capital investment. But now fast forward to 2017 and I see that the new University of Chicago's scholars worry about the "downside" of family human capital investment.

The Harris School Prof appears to be telling a story that there is "too much" parenting as parents compete for scarce elite slots at Ivy League schools and Wall Street.

Does the inelastic supply curve really determine the payoff of investment in human capital?  Why can't the supply curve of slots become more elastic over time?  For on this point, read my blog post from August 2014 here.

Cong Sun, Siqi Zheng and I have just published a good paper  that studies how households combine public goods (clean air) with private goods (air filters and masks) to produce "household goods" such as safety and comfort.  Our paper adds to Gary Becker's Household Production Function approach.  The figure below was cut from the paper because we did a bad job explaining it to the reviewers but in this blog I will try again to explain it.  In the back of my mind, I was thinking about Figure 1 in this old Peltzman JPE paper.

Chinese urbanites want to breathe clean air.   Both across Chinese cities and within Chinese cities, there is real estate pricing gradient such that nicer areas command a price premium.  In the figure below, a Chinese person's pizza consumption represents Income - rents.  So if rents are higher, then private consumption (pizza) is lower.  The non-linear line below is the household's hedonic budget constraint. Siqi Zheng and I present empirical evidence on China's urban real estate hedonic in this Beijing paper and this cross-city paper.  

In our new 2017 paper, we recognize that there are market goods such as air filters and masks that Chinese urbanites can buy to further increase their exposure to clean air.  In the figure below, we represent this as the linear line. So, a household provides clean air for itself through a two step process. It first chooses a neighborhood and then chooses how much to self protect.

In the paper, we discuss the fact that the rich live in better neighborhoods than the poor and then conditional on where they live, they invest more in self protection.  While masks are cheap, air filters are more expensive.  Such market goods that are mainly bought by the rich, means that gaps in pollution exposure between the rich and poor widen further because the rich have more adaptation options.

So, I'm happy to make an economic contribution to the study of pollution in China by merging some ideas of my teachers (Sherwin Rosen and Gary Becker).

The NY Times has published a thoughtful book review of a book written by a Yale Professor.  Let me point out one direct quote that contradicts most economics training:

“Propaganda is characteristically part of the mechanism,” he writes, “by which people become deceived about how best to realize their goals, and hence deceived from seeing what is in their own best interests.” This is achieved by various time-tested means — by appealing to the emotions in such a way that rational debate is sidelined or short-circuited; by promoting an insider/outsider dynamic that pollutes the broader conversation with negative stereotypes of out-of-favor groups; and by eroding community standards of “reasonableness” that depend on “norms of mutual respect and mutual accountability.”

This quote hints that there is a danger to free speech.  Note that the word "pollute" is explicitly mentioned and to an economist such a negative externality usually needs to be corrected through the introduction of a tax.

An interesting question is why is the supply of propaganda rising now?  Is it because Facebook has made the spread of information too cheap?  At Columbia University, I had a colleague (I"ll give you a hint; he runs long races) who argued that it should cost a penny to send an email.  This would have reduced the supply of spam!

Of course, the NY Times wants to discuss President Trump here but let's think a pinch more deeply.

"People become deceived about how best to realize their goals."  I wonder how Becker and Stigler would respond to this.  Note that the author does not disaggregate the data.  Are Ivy League graduates as responsive to propaganda as high school graduates?  Who is "at risk" to have their views warped by a  charismatic leader barking at them?  Go read Benjamin and Shapiro's "Who is Behavioral?"

If the NY Times is aware that this dynamic is playing out, how will it "deprogram" the "Ideologically infected"? How "Infected" are the infected?  Will they wake up and come "to their senses" or only when it is too late?

Recall the Star Trek where Spock is infected by the spores, he eventually snaps out of it but Kirk does have to rough him up.  I am half kidding.

Many economists have trouble publishing their personal histories of their own economic thought. Since, I run this blog, I have accepted the following entry for publication and I will soon make an interesting point.  At Hamilton College in Spring 1988, I wrote my undergraduate thesis on a mild extension of Robert Lucas's famous empirical Phillips Curve work.     In fall 1988, I entered the University of Chicago's PHD program and had the brief opportunity to tell Dr. Lucas about my new work.  Let's just say that he didn't encourage me to continue this line of research.  As he walked away, I said to myself;  "Maybe I'm not a macroeconomist".  

Until late 2014, I never had another thought about macroeconomics.  But, every story has a happy ending.  Today,  Josh Graff-Ziviin and I have released our new NBER Working Paper.  Here is the abstract:

How will a nation’s aggregate urban productivity be affected by climate change? The joint distribution of climate conditions and economic activity across a nation’s cities will together determine industrial average exposure to climate risk. Air conditioning (AC) can greatly reduce this heat exposure. We develop a simple model of air conditioning adoption by heterogeneous firms within an industry. Our analysis suggests that high productivity firms are more likely to adopt AC since they suffer larger productivity losses when it is hot. Given that the most productive firms produce a disproportionate share of industry-level output, we present aggregation results highlighting how the industry’s output is insulated from the heat. Our empirical analysis of the impacts of heat on total factor productivity in U.S manufacturing yields findings broadly consistent with our model’s predictions.



Our paper has clear implications both in the cross-section and for a given nation over time in how to use micro data to study macro aggregates.   The Gabaix 2011 Econometrica played a key role in influencing my thinking here.  For those who read the paper, I hope you see how Sherwin Rosen's work on compensating differentials also influenced this paper.

The climate economics literature has been missing optimization and self protection and adaptation.  Our paper injects such "economics" into this literature.

Yesterday, I had the opportunity to talk to John Batchelor for 15 minutes on his radio show about my  Climatopolis work.  He likes my recent PERC publication: Climatopolis Revisited.    I argue that rich, educated cities can handle all of the challenges posed by climate change.  This adaptation will not be costless but through rational expectations and risk aversion, we will build a new set of robust and resilient structures such that urbanites will continue to thrive (think of Singapore today).  The developing world needs to urbanize faster to help it to adapt to the serious risks associated with climate change.

Economics plays a key role here because cities who are parts of nations that have low trade barriers for agricultural goods will more easily adapt.  Why?  The price of food will not bounce around as a function of local climate shocks if the nation imports from other nations.  Recall that under perfect competition that a buyer is a price taker and no one geographic unit is large enough to move the aggregate price.  Economists are also needed to introduce dynamic pricing for insurance, water and electricity.  All three of these goods should feature higher prices as scarcity increases and as risk increases.  To avoid moral hazard problems, risk must be priced.  Coastal real estate owners and investors will make socially better decisions if they face the costs of their actions.  I will continue to argue all of these points and now that it is politically correct to discuss adaptation, I'm eager to have a broader public discussion about these points.  Of course, the poor face greater challenges in the face of climate change.  We protect the poor through reducing their risk of poverty by embracing Heckman's Pre-K agenda and by encouraging innovation and trade so that adaptation friendly products (think of air conditioning) become cheaper.   Even the cell phone is a key piece of adaptation.  Such real time access to information greatly helps individuals to cope during a crisis and points them to strategies for coping.  For example, during a heat wave you can for free ask Google "where is the closest cooling center".   Uberx can deliver you there for $3.  This would be a good investment on a very hot day.   If $3 is too high a price, then maybe we do need government subsidizing Uberx on extremely hot days for qualified people just as some kids get free school lunches at public school.  

As I said to John Batchelor yesterday,  one person's crisis is another entrepreneur's opportunity.  Zuckerberg created Facebook because he saw the demand for social connection.  Analogous new products will emerge because of the demand for resilience and protection in the face of heat and floods.  Environmental economists need to re-read their Julian Simon because many of them have taken a step towards Paul Ehrlich.  In the name of balance, I will re-read my Ehrlich!

I believe that the Trump Administration will invest in climate change adaptation.  Mr. Trump owns many pieces of valuable real estate and he has an incentive to protect them.  Land owners in coastal areas have strong incentives to protect their assets. I do want them to use their own $ to pay for such protection.  Safe cities should not be cross-subsidizing the protection of at risk cities.  As I ask in my 2010 Climatopolis, if Milton Friedman ran FEMA how would he operate this agency?  

My Christmas Gift for all young economists is a free .pdf copy of my new book Introduction to Empirical Microeconomics.     This book is written for college Freshmen but I think that all economics students can benefit from reading it.  I have tried to take the "big ideas" that I learned from  the University of Chicago's greats (Gary Becker, Jim Heckman and Sherwin Rosen) and write down a set of empirical problems.  I argue that economists are detectives.  We observe clues and from these clues we "invert" the model to try to pin down the goals of the rational decision maker.  This "inverse problem" is at the heart of my new book.  I spend a lot of time on the concept of utility function and production function "identification".  From observing the choices of optimizing households and firms, what have learned about them?    I also teach the reader how to use field experiment research designs to learn more about the diverse decision makers.  For example, by rotating a budget constraint we can recover tighter bounds on a specific person's willingness to pay for a specific good.
My book celebrates revealed preference and provides a foundation for students who will enter the field of structural microeconometrics. My book uses no calculus and presents no econometrics ideas. It just uses algebra and some basic statistical theory.

This book is now in a "beta version" as I search for typos and wait for constructive criticism.  My hope is that I will be asked to bundle it with these free books.  

As the world urbanizes and faces more severe climate change, what will we eat?  It appears that we will have a lot of marijuana to smoke but what will we have to eat?  An interesting panel just convened at Harvard to discuss this but no economists were invited.    Permit me to make several points.

1.  Nations that drop their tariffs and quotas on agricultural imports will more easily adapt. Yes, these pro-competition actions will hurt domestic farmers but they will help urban consumers.  Why?  High domestic heat will lead local farmers to grow less output but supermarket prices won't rise as the local supermarket will stock the shelves with foreign imports that were not exposed to the same heat (the heat's impact at any point in time differs greatly around the world).

2.  We need futures markets for agricultural output that go out more than 2 years into the future.  Such scarcity signals would help both the demand side and supply side to respond.  For example, if the price of oranges in the year 2022 is expected to triple from today's price (and this would be revealed by forward markets), this is very useful information.   You don't have to be Hayek to see how this information would help us to adapt.

3.  Declines in transportation costs (due to larger container ships and freezing technology and computerization) all help us to adapt.    Why?   The world is a big place. At any point in time agriculture in a given place like Kansas is not hurt by an agricultural shock while in some part of Siberia , agriculture could be having a great year.  Such spatial variation creates a type of diversification. As transportation costs decline, the booming places can ship agricultural output to urban consumers.   No starvation in this case, and little international volatility in prices -- just trade taking place.

4.  Nations can insure against agricultural risk by spatial diversification in the cross-section (see point #3) above or they store produce.  Fruit can be dried and stored for two years.  Basic ideas from inventory theory and risk smoothing matter here.

5.  Agriculture will move north into Canada.  There is a lot of room up in Canada.  Kansas and Iowa may redeploy their land for other purposes.  For example, in a world of Elon Musk hyperloops they can become suburbs of Chicago.    Kansas is 750 miles to Chicago. If the hyperloop can move at 750 mph , then this is just 1 hour away (I'm half kidding).


UPDATE:  Professor Jeff Reimer of Oregon State University sent me the following note.

Agriculture will move north into Canada."
I wouldn't count on that.  In general the soils of Canada are much worse than those of the United States.  The reason is glaciers.  Over tens of thousands of years they pushed all the good soil down into the Corn Belt.  The soils of the Corn Belt are incredible, but they get worse the farther north you go.  Back in Canada on the high plains, there's a lot of thin soils, bogs, and bare rock.  So, there is no "new Illinois" or "new Iowa" to be found up in Canada.
  

6.  Even if agricultural activity continues to concentrate in its current locations, will output of wheat collapse in the future heat?  I am aware of this high quality empirical research but these are not structural time invariant estimates.  At a cost, new ways will be figured out for increasing yields in areas exposed to high heat.

7.  I haven't even mentioned GMO here but you can read UC Berkeley's David Zilberman's optimistic writing on this topic.  

8.  If the price of food increases in the developing world, then we need to help these nations unleash economic growth.  It is well known that the share of income spent on food declines as nations grow richer.  If the price of food is rising but food represents a smaller budget share, then this does not drag down even a poor family's overall disposable income.

So, my friendly doom and gloomers, which of the points listed above is false?  Which is "2nd order"? What is the weak point in the logic here?

A richer, urbanized world has the $ to demand high quality food.  I have argued that the world's population growth will slow and decline in an urbanized world (see Becker's work on fertility and the quantity-quality tradeoff).

The City of Boston has published a forward looking and optimistic vision for how it will invest to protect itself from the emerging challenges of climate change.   This doesn't surprise me.  Boston is rich and educated and it has strong incentives to adapt (given its coastal location).   As I have said since 2010, urbanization will help us to adapt to climate change.  Read this six year old document. I'm proud that it was ahead of its time.  If Boston fails to defend itself from sea level rise, then home prices will fall sharply. This provides strong incentives for the large numbers of home owners to pursue private strategies to protect their assets and their families and it also provides them with strong incentives to nudge their leaders to pursue collective action strategies that help to defend Boston. Self interest is a powerful force!   For those who want to read some technical details here, read this.