The NY Times has published a nice piece about the rise of power couples and their implications for household inequality. Intuitively, if two top economists who have a stay at home spouse choose to divorce and marry each other then household income inequality increases.  Now, If I may boast for a moment; Dora Costa and I wrote a big paper on power couples back in 2000.

The Times piece implicitly alludes to Gary Becker's work on the economics of marriage.  

Here is a direct quote that I'd like to talk about:

"The nature of marriage itself is changing. It used to be about the division of labor: Men sought homemakers, and women sought breadwinners. But as women’s roles changed, marriage became more about companionship, according to research by two University of Michigan economists, Betsey Stevenson and Justin Wolfers (who also contributes to The Upshot). Now, people marry others they enjoy spending time with, and that tends to be people like themselves.

“Husbands and wives had different roles in different spheres, so that was the opposites-attract view of marriage,” Mr. Wolfers said. “Today you want people with shared passions, similar interests to you, similar career goals, similar goals for the kids.”"

I slightly disagree with this quote.  For decades, economists have been interested in the "make versus buy" decision. If you want coffee, do you go to Starbucks to buy it or do you make it yourself?

When Gary Becker first started writing about the economics of marriage, he was thinking about "household production".  In his setup, households are "firms" that produce quality children and a happy, comfortable household.  In a "closed economy",  spouses must produce all of these goods and inputs to produce the output of quality children and a happy, comfortable home. If the family wants hot oatmeal, one of the family members must make it after buying the oats. Recognizing this fact, spouses faced a time allocation decision concerning who worked and who stayed home and provided his/her time to provide key services.  Comparative advantage led to predictions of the husband working and the spouse staying at home.

In recent decades, more and more educated couples are living in cities.  By the definition of cities, cities feature more markets and the opportunity to go out for dinner, hire a nanny, to pay a dry cleaner to wash your clothes, to pay someone to come over to clean up your house. So, note the "make versus buy" decision. In this Uber age, you can now easily subcontract through the market to provide these "households services".  This change in market structure means that households are more likely to sort on preferences because the efficiency gains within the household are no longer needed as the market can now provide these services.

So, I like Dr. Wolfer's quote but he implies that "preferences have changed" over time.  As a Gary Becker student, I would explain the facts by arguing that market structure has changed.  Almost all household services can now be subcontracted out and this has affected who marries whom.

Mark Zuckerberg is an honorable young man but does he fully understand the consequences of his invention?  The NY Post quotes him getting pretty righteous as he declares that FB causes World Peace.   Now Facebook may cause "Meta World Peace" but does it cause World Peace?  Economics offers some clues here.

A Zuck Quote

“Facebook’s mission and what we really focus on is giving everyone the power to share all of the things that they care about,” Zuckerberg, recipient of the first-ever Axel Springer Award for outstanding entrepreneur personality, told the media company’s CEO, Mathias Döpfner, in an interview in Berlin on Thursday.

“What they’re thinking about, what they’re experiencing on a day-to-day basis, and the idea is that everyone has the power to share those things, then that makes the world more understanding, it helps people stay closer to the people who they love, all these good things that we value,” gushed Zuckerberg.


"Makes the world more understanding"  --- He might want to return to Harvard to take some writing classes because I don't know what that 4th grade phrase means.

Facebook accelerates communication and the diffusion of ideas and slant within networks.  Individuals who are part of my network can see what I post to FB and react to it.  In the past, this occurred through face to face meetings or telephone. Now it occurs through a multiplier effect.  You don't have to be a good game theorist to see that there are multiple equilibria here.

A bad Equilibrium --- go back and read Glaeser's political economy of hatred ---   Glaeser would posit that entrepreneurs use FB to accelerate the diffusion of falsities that make scapegoats of certain groups.  For example, if you can "blame the Jews" for a particular problem then FB solves a co-ordination device as like minded people will quickly access the same information and be aware that their peers are accessing the same information.  This can lead to convergence to a "hatred equilibrium" which is re-enforced by the existence of Facebook as individuals do not seek out independent news signals.  In this case, those who seek their 15 minutes of fame may then commit an atrocity and film it and post it to earn the praise of this "social network".

Does Zuckerberg ever engage on recognizing that there is  a "dark side" of social capital?  There is a sociology literature on this.    There can be benefits for society of not allowing a "mob mentality" break out.  Facebook's "acceleration" does not allow for a cooling off period and thus may raise the risk of violence.

For some NBER research on the benefits of a cooling off period for peace and safety read this about urban teenagers. 

A Good Equilibrium  --- If Facebook allows optimists to meet on the Internet and allows people scattered across the world to co-ordinate on solving a social "wicked problem" then of course FB is a force for social good.  If there is a person in a rural place who has never met another gay person, then FB can play a key role in facilitating interaction and community.  Of course this matters and is very valuable.  FB can contribute to "World Peace" if it promotes bridging social capital and reduces mutual mistrust of strangers. But is that happening? I doubt it.

Facebook is like a virtual city but it is a city where you choose who you will interact with. There is less randomness to interaction on FB than in Cambridge, MA.  Just like real cities, virtual city living has its benefits and its costs. Cities have police and regulations to limit the social costs of activities.  What "laws" will the city of Facebook introduce? It is a for profit firm claiming that it is a force for "social good".  Do those two objective conflict or are they in beautiful harmony?

Nick Stern has some tough things to say about Integrated Assessment Models that are used to judge the cost of climate change.   It would interest me to hear what Bill Nordhaus would have to say about this critique.  Dr. Stern's remarks echo some of Bob Pindyck's sharp criticisms of this research.    I agree with several of Stern's points except for his strange embrace of agent based models. Those models violate the Lucas Critique as mechanical agents follow rules of thumb for reasons that are never explained. Non-optimizing agents is not the right way to model people , firms or governments.

Dr. Stern's remarks feature some weak urban economics.  Here are a few quotes from his piece:

"Furthermore, many of the largest potential impacts are omitted, such as widespread conflict as a
result of large-scale human migration to escape the worst-affected areas.
For instance, there is evidence that temperature increases of 1.5°C and 2°C would
lead to differing extents of sea-level rise and extreme weather events , with obvious implications
for small island states and coastal communities. These differences are simply
not represented in the flawed estimates of economic losses."

Why must migration cause conflict? In most models of international trade, migration raises global income. Dr. Stern seems to have a law of physics in his head about the role that migration plays in "causing" conflict. But, if climate change induces rural people to migrate to productive cities, then such accelerated urbanization can actually increase global income and help us to adapt.  He implicitly embraces the "environmental refugee" model that assumes that nobody wants the migrants and as migrants arrive that the Tragedy of the Commons is exacerbated and violence emerges as starving people fight for the last gallon of water and food.   But this "Mad Max" pessimism  ignores the large set of adaptation margins. Why would migrants move to an area offering low economic returns? Why won't they migrate to areas where their factor returns are high? Why does Dr. Stern forget basic economics here and the Roy Model? He should give Professor Heckman a call to relearn this material.  Where is the demand side here? In this age of Globalization, why aren't firms emerging to hire these individuals? Why aren't there gains to trade in the low skill labor market?

Then he turns to worrying about small island states and coastal communities. What is his social welfare function? What % of the world's population live sin small island states and coastal communities? Why can't these groups seek out "higher ground"?   Will the coastal communities be inundated with flood water?As I have blogged about many times, once you start to think about the urban economics of coastal adaptation, you start to appreciate that there are a huge number of adaptation margins that facilitate our being able to adapt. Stern has written a political statement as he seek to inflate the social cost of carbon but once you introduce a multi-spatial sector model of our economy and admit that capital is durable but not infinitely lived that a much more optimistic vision of our urban future emerges.  For those not trained in economics read this  and for those who know some economics read this.   

My 2010 book Climatopolis provides a full vision of our urban future.  I was ahead of my time and I'm proud of that!

Justin Gillis is a consistent writer for the New York Times.  Here is his piece from today talking about a new paper published in PNAS.   Yes, coastal areas will face challenges from sea level rise but such areas face strong incentives to adapt to these challenges.  Mr. Gillis never engages with the micro economics of climate change economics. Why is he so pessimistic about our ability to adapt to the challenge that he has clearly alerted us to?   For long time readers of this blog, you know that I have written out a clear vision for how coastal areas will adapt and posted it here.  

Mr.Gillis needs to take a course in general equilibrium. If certain land along the coast is lost, then demand for other land that is on higher ground will increase.  This will cause a land value windfall for those who own this "higher ground" land. While the NY Times is happy to talk about the billions of dollars of lost land on the coasts, it never talks about the opposite effect as safer land becomes more valuable.   (To crack a half joke, recall that in the Superman movie that Lex Luthor had purchased Colorado real estate because he planned to nuke California. He recognize that he would own the next beach front property. The loss to California home owners would end up in his pocket. )
Such general equilibrium effects are easy to ignore if you haven't studied economics or your world view is such that you want to dismiss equilibrium concepts.  Self interested people will seek out higher ground, will identify where it is and build there.  This is the micro economics of adaptation and a stronger more resilient economy emerges.

Now my critics say; "but Matt there are structures built up on the coasts".  As I argue in the paper posted above, those structures are not going to live forever and the investment in their upkeep and maintenance is a choice variable.  We even have the option of disassembling those structures and taking their materials to higher ground (this is the Lego Economy that I sketch).

This blog post represents a piece of marketing and a commitment device.  As I think about the next 3 to 5 years, I'd like to sketch out an optimistic vision for intellectual growth of USC Economics.  In 2016, USC Economics is known for econometrics, behavioral economics, development economics and health economics.   There are natural synergies between these fields and building up environmental economics.

Our plan is very simple;

1. Recruiting a new cohort of Ph.D students to USC Economics and the Price School  --- Antonio Bento and I will be writing a letter to all of our friends at the top 120 universities in the U.S and abroad alerting them about our ambitions.  Frankly, it is now very difficult to be admitted to the very best universities (i.e Harvard, Stanford and MIT).  This creates an opening for USC as we seek students who are eager to be well trained by our econometrics group but who seek to work on applied topics.   We will ask the faculty we write to nudge their students to consider USC for a Ph.D.

2.  Attracting Visiting Scholars and Post-Docs  --- USC has the funds and Los Angeles is just beautiful so it will be easy to attract very talented visitors to join for different lengths of time.

3. Creating research opportunities for undergraduates and graduate students  --- USC has a terrific Spatial Sciences Institute and I'm already employing students to work on my projects.

4. Raising private funds to build up environmental economics at USC.  

5. Running a weekly environmental economics seminar (to see our first set of speakers click here).

6. Identifying units on campus who seek to build up in sustainability studies --- cross-campus faculty appointments will become an attractive way to build up our capacity.

7.  Teaching really good rigorous classes at both the undergraduate and graduate level  --- environmental studies doesn't have to be based on a set of tired "soft" political slogans.   I would hope that both Gary Becker and Milton Friedman would respect what I teach when I give my environmental economics lectures (for a $1 taste order this). 

8.  Reaching out to the public  --- through editorial writing and community engage in Los Angeles.

When I worked at UCLA, I didn't have any of these opportunities.  The UCLA School of Public Policy doesn't have a Ph.D. program and the Economics Department didn't view environmental economics as an exciting priority.  There was a lot of talk about "Interdisciplinary studies" but few were actively engaged in it.

Permit me to point out some great stuff in today's Sunday Review section. Let's start with a piece by Kasia Lipska.  Dr. Lipska is an endocrinologist at Yale Medical School but she appears to believe that she "moonlights" as an industrial organization scholar. She has the noble goal that she wants insulin prices to be lower in order to help diabetic health.  She delves into economics with the following quote about the consequences of entry into the drug market.  First she reveals that she prefers Europe's system of regulation to ours:

"IN the meantime, we need a fair and transparent system for setting prices. In much of Europe, insulin costs about a sixth of what it does here. That’s because the governments play the role of pharmacy benefit managers. They negotiate with the manufacturer directly and have been very effective at driving down prices. In the United States, we rely on the private sector and a free market for drug pricing. But in order for this to work, we need to regulate it better and demand greater transparency."

She then presents structural estimates of how equilibrium drug prices are affected by competitor entry into a market;

"The first generic competitor usually sets a price that is only slightly below the branded insulin. Research shows that once there are two manufacturers of a generic drug, the price typically drops by about half; with eight, it drops to about a fifth. But because insulin is a biosimilar, the decline may be more modest. And this will take time; additional testing is needed to ensure the safety and effectiveness of each new generic before it is approved."

So, this could have been a very interesting piece if she had teamed up with one of Yale's IO economists to write this piece.  In the last sentence, she touches on a key tradeoff. If a drug is "risky" but lowers prices in the market, is it "good or bad"?  In a world with no free lunches, how risk averse are we? What are these risks? How do we tradeoff lower prices for risk?  These are economic questions but the NY Times commissioned a bench scientist to write the piece.  Interesting!

As the NY Times roots for the U.S to become Europe, it should try harder to sketch out the key economic issues at play here and actually get some economists involved.

Her piece ends with some editorializing without any evidence:

"In general, our faith in newer and “better” drugs — coupled with our unwillingness to police this marketplace — has done little to help Americans like Mrs. B. Sure, we need to protect the intellectual capital of pharmaceutical companies so that they continue to invest in innovative new drugs. But those drugs should ultimately result in better health for patients, not just wider profit margins."



SWITCHING Gears: Now consider the following letter to the Editor.

To the Editor: David Brooks’s column is based on the faulty premise that American innovation is driven principally by the desire to make money, and that without free-rein capitalism, there would be no motivation to invent the next iPod.

I believe that most Americans are driven to innovate by the restless, imaginative energy that is part of our country’s daring fabric, and that Thomas Edison or Bill Gates would have invented what they did even if the United States had a high tax rate, free medical care, clean, cheap transportation and minimal poverty.

I cannot imagine Alexander Graham Bell saying to his assistant: “Watson, don’t come in here. There’s no money in this thing. Let’s forget it.”

LEE KALCHEIM

New York


Yikes!   I won't bother to add any comments on this one.  My only comfort here is that I don't believe that reading this newspaper has a large "treatment effect" on one's thinking. I believe that confirmatory bias is at play here as people read stuff that reconfirms their prior worldview.

UPDATE:  The common idea across these two pieces is the belief that both drug companies and other innovators would engage in the same effort even if their marginal returns were lower.  This "inelastic effort" hypothesis is a structural claim that can only be tested using a potentially very costly experiment.  By asserting the value of key structural parameters (such as the supply curve of effort's slope as a function of after tax returns), without estimating such parameters, we are in danger of making a foolish policy choice.

Today I was on at the Cal State University Northridge campus.  It is a beautiful campus that looks nicer than both UCLA and UC Berkeley.  The buildings are nicer and the campus has a nicer layout (I realize that land is cheaper in Northridge than in Westwood and  Berkeley).  Let me sketch a simple model of campus beauty. I would guess that at UCLA and UC Berkeley that faculty and senior staff salaries and benefits represent roughly 75% of the total expenditure of the university.  Given that UCLA and UC Berkeley try to hire and retain some of the world's leading scholars, the average salaries at those schools may be more than 100% higher than at CSN.  CSN by economizing on labor costs retains $ to spend on capital.  So, I'm making a point about Isoquants at Universities.  CSN has chosen to be capital intensive (K/L) while UCLA and UC Berkeley have invested more in labor.  Which university has made the right choice? CSN looks great and its in state tuition is $5,400 and thus is roughly 60% cheaper than UCLA.  What does "excellent education" mean?  How does an excellent research faculty improve the intellectual quality of life of the average student?

My USC colleague Antonio Bento is a hard working man.  Thanks to his effort, we now have an environmental economics seminar.  While I tried to launch this at UCLA, it didn't work.  The faculty and students at UCLA just weren't interested. I'm highly optimistic that this new USC effort will succeed.  I'm hoping that Prof. Schwarzenegger may attend some of the seminars.

Unlike at UCLA, USC has the resources to invest in environmental economics. UCLA had built up in specific fields in applied micro (namely demography, labor, economic history, industrial organization and public finance) and thus their faculty were already attending seminars and recruiting students. Environmental economics actually represented a "threat" because it would have picked off resources and students from established fields. At USC, there is strong health economics and development economics but there is the open possibility for environmental economics to step in and add great value to the campus. Antonio and I will recruit both new Ph.D. students and Post-Docs to work with us and we will train them.  From there, we will begin to hire new faculty to help us teach and do research with us. Over the next 3 to 5 years, something great will emerge at USC and I'm very excited about playing a leadership role in making this happen. After a lifetime of free riding, I'm ready to provide some public goods.

The NY Times recently published a piece on the "dark side" of teachers teaching falsities to impressionable young people.  The article quoted survey research claiming that 30% of American teachers teach their students that climate change is caused by "natural causes" (rather than by our fossil fuel burning) and that American teachers spend much less class time on climate change than International teachers.

Here is the formal article. 

Here is a letter published in the NY Times today.


2/17/2016 Teaching Climate Change The
New York Times

The Opinion Pages | LETTER
Teaching Climate Change
FEB. 17, 2016

To the Editor:

“Science Teachers Lag on Climate Change” (news article, Feb. 12) reports
on a survey indicating that science teachers in American high schools and
middle schools spend only one to two hours on average per year teaching about
climate change, and that 30 percent of them tell students that recent global
warming “is likely due to natural causes.”

This sounds serious; in fact, it is catastrophic. The fate of the world
literally depends on the education of the American public and its
understanding of the impending crisis.

DAN BLOOM
Chiayi City, Taiwan
The writer, an American expatriate, is a frequent blogger about climate
change and climate fiction.

Mr. Bloom embraces an interesting social science theory that the views we are exposed to as students permanently changes our world view.  If people are taught something false in High School, do they remember it? Do they really never seek out new information that would allow them to update their beliefs? Are we such "puddy-clay" creatures that once our views are formed that we never change them?  Are we such dogmatic Bayesians?

I thought that school teaches you how to think and analyze problems rather than giving you "knowledge" that you carry for the rest of your life. Have I been badly educated?

In the name of "saving money", the leaders of the University of California have made the pensions for future hires much less generous.   Logical people (i.e the economists) have pointed out that if the PDV of a future pension shrinks that potential new hires will demand higher upfront salaries to compensate them for their smaller pension. While neo-classical economics makes this prediction, behavioral economics would predict that you can trick the people as they are assumed to not be able to calculate PDVs of future payments.

Critics of the new UC Pension rules sound a lot like neo-classical economists here. Read about the issue here.