While we have trouble adapting to the Fed's feints and hints about where its inconsistent policy is going, we will have less trouble adapting to future heat waves.  It turns out that Mother Nature is more predictable than Janet Yellen.  The NY Times reports that "deadly heat waves" can now be predicted two months in advance (see source).  You don't have to be too much of an adaptation optimist to predict that thanks to this "Paul Revere" type early notification that death rates caused by heat will sharply decline.  We are increasingly able to take a punch.

Of course, the poor have the least ability to protect themselves from such punches. How do we protect this group? First, the price of air conditioners continues to decline.  The EPA should create a price index for key adaptation goods and measure how their purchase price and operating cost have changed over time. This CPI for adaptation would inform environmental justice research.

In the case of Los Angeles, public cooling centers exist. We must make it easier for people who do not have access to cars or even UberX to access these centers. Here is the list of centers.     These small private and public steps are how we adapt.

It appears that Dr. Krugman will not be the head of the Trump CEA.   This creates an opening for Delong, Summers, Kahn, Hubbard, Thoma, Lucas, Mankiw and Wolfers.   When I saw the lead for this piece, I thought it was going to be great.  Dr. Krugman points out a  "reversal of fortune".The republicans are now the party with more "anti-free trade" thoughts.  What is going on here? How did this reversal occur? What implications will it have for my son's future?

To answer these questions,  what is the job of the economist?

First, we must admit that this is a hard task.  Consider everything you buy and everything you sell.  The prices per unit of each of these can be observed. For example, I sell bad lectures and sometimes good papers.    I buy plenty of things ranging from Uber rides to coffee to socks and other stuff such as food.

For each of these objects,what would their price be if the United States returns to being a closed economy of if we inch towards that by raising trade barriers?  An economist , using an expenditure function approach, would need this information to judge whether you will be better off under Trump's new trade rules.

Now, if Donald Trump is bluffing and just wants to use tough negotiations tactics to get America a better deal then we are back in the realm of game theory. Dr. Krugman should have discussed this in his piece. I thought that his MIT was the center of game theory. What do he and Drew and Jean predict will be the global equilibrium in the midst of a trade war?

In my humble opinion, my piece for the Chronicle had more ideas packed in than this NY Times piece arguing that we should measure water use.  Of course we should, the interesting economics arises regarding how we use these data to run incentive experiments to encourage conservation.

Shanjun Li, Rhiannon Jerch and I have released a new NBER Working Paper.   This paper is a sequel to our 2015 Journal of Urban Economics paper.    This new paper presents evidence on the role that unions and privatization play in determining the average cost of providing a standardized government service (a bus mile).  Here is our abstract for our new paper:

Here are some quotes from Nick Kristoff's NY Times Opinion Piece titled; "Overreacting to Terrorism?" 

"The basic problem is this: The human brain evolved so that we systematically misjudge risks and how to respond to them."

The NY Times has published an impressive obituary for a Harvard Philosopher named Hilary Putnam. As a C+ philosophy student at Hamilton College (but something of a late life intellectual), I sat down to read about some of his best work.  He was clearly a very highly cited scholar.

I will now reproduce a direct quote from the obituary and then I will present an economic analysis of the idea.

"In the theory of language, Professor Putnam is known for the assertion that meaning is not “in the head”; rather, he said, what we call the meaning of a word is informed by external factors — the context in which a concept is encountered.

...

In a 1975 paper called “The Meaning of ‘Meaning,’” Professor Putnam further illustrated his argument with a famous thought experiment called Twin Earth. He imagined a planet alongside our own that was a facsimile in almost every way, including holding a replica of each person. The only difference on Twin Earth was its water. Though it looks like H2O, tastes like H2O, fills the lakes, rivers and oceans and performs the same functions as H2O, Twin Earth’s water had a different chemical makeup, abbreviated as XYZ.

Therefore, if an earthling named, say, Oscar, were to travel to Twin Earth and visit his doppelgänger, Twin Oscar, when they referred to water, they would actually be talking about two different things, even though they appeared to be the same. Because Oscar and Twin Oscar are identical in every way, including their thoughts at a given time, Professor Putnam argued, meaning cannot simply be a function of what is formulated in someone’s head."

THE ECONOMICS OF MEANING

In the language of economics, H2O and XYZ are perfect substitutes. Even though Oscar and Twin Oscar view them to be different objects, they each provide the same flow of services in a Beckerian Household Production Function. Both H2O and XYZ provide the same cleansing services and both replenish the body when drank.  Both Oscar and Twin Oscar would have the same marginal willingness to pay for an extra ounce of H2O or XYZ.  Thus, they are the same thing. 

To an economist, objects are bundles of attributes.  Soap is a collection of attributes that we demand because when combined with water, we can wash ourselves.   "Meaning" is meaningless to me.  We acquire bundles of attributes through markets or household production.  We know what we want. We know our budget constraint and time constraint and we act in our self interest.

 Where "meaning" may matter is in the following case;  suppose I want to be nice to you but I don't know how you interpret language.  If I say "hello", that may be a curse in your language (note the word has different meanings). If I am aware that I know that I don't know how you interpret words then I will be very cautious in how I approach you. I will smile. I will not raise my hands.  I will mimic how you act and will watch your body language and your eyes to sense your sense of danger.

For example, right now progressives say that Don Trump is speaking in code and is sending signals to "his people" . This suggests that words have different meanings to different people.  If we disagree about what words mean, then this will interfere with our ability to trade with each other and our economy will be poorer because of this. Language commonality is a co-ordination device such that we can more cheaply (using less time) convey ideas and goals.   Trade is facilitated by  common currency and an agreed up on language.  This has meaning to me.

Once you acknowledge that all objects are collections of smaller items then we enter the world of Sherwin Rosen's hedonics.  A BMW is a bundle of vehicle attributes while a Mercedes is an object that has bundled into it a different set of vehicle attributes. Most people view these products to be close but not perfect substitute.  Through markets, we learn the "meaning" of how people value objects.  If this is what Putnam meant by "informed by external factors" then he was a sloppy economist because he simply should have said;  value is determined by the interaction of "supply and demand".

As the economics job market concludes, I would like to share a comment that I offered on the American Economic Association's Job Openings for Economists survey.    In an age where economists do not have secretarial support, it is fantastic that the JOE makes it easy for me to load a letter of recommendation for a young Ph.D. who seeks an academic job.  The JOE then distributes this letter  to all interested employers.  The universe of these letters archived on the JOE's cloud servers creates a "Big Data" set that is ripe for analysis!

So, here is my point.

"The AEA should scrape letters of recommendation posted to the JOE webpage to identify which letter writers say that a student should be placed "top 10" (top 30 etc) and compare that to ex-post job placement outcomes. This ex-ante vs. ex-post comparison can be used to invert back which letter writers on average inflate their recommendations.  Such a ranking of adviser fixed effects (i.e ex-ante selling versus ex-post placement) could be used by REPEC as another indicator of economist quality.  Our market would be more efficient if advisers didn't "over sell" students and this proposed market mechanism would discipline this "inflation process"."

Do you see my point? The scrape data set would reveal the name of the adviser and whether the student received a placement at a top 10, 10-25, 26-50, 50+ ranked school.  The AEA could pay a RA to then code up whether the student received a job at the rank of these categories or better.  A dummy variable = "matched" could be created. Collapsing this "matched variable" by adviser and sorting this from highest to lowest would yield the ranking of "most accurate" adviser.

Theorists talk about informative information signals.  Letters of recommendation are a prime example of such signals.  Schools receive noisy signals about the ability and tenacity of a young job market candidate. Potential employers know the student's pedigree and skim a job market paper and read 3 letters of recommendation. Is this enough information to make a 7 year hiring commitment?  Could the letters of recommendation be "more informative"? Would my suggestion help?

If you reject my suggestion, then advisers will continue to over-sell their students because no readers have the memory power to recall which advisers consistently over-sell.  My mechanism uses the Hayek information aggregation mechanism to over-come this issue and thus enhances market efficiency.

Since 2006, California has enacted new regulations to sharply reduce the state's greenhouse gas emissions. I have argued (see this 2010 interview) that such a "green guinea pig" effort is great as California runs a field experiment to reveal what policies are cost effective.   Back in 2008, I argued that these policies are not a "free lunch". I am on record stating that such policies as requiring 33% (now 50%) of our power to come from renewables will raise energy and water prices to households and firms.  Here is a NY Times quote. Recently, LADWP announced that it is raising its prices for water and electricity because of these climate mitigation regulations.   Prices will rise by 3% per year for 5 years so that is actually a pretty serious increase.  As water prices and energy prices increase, how do households and firms respond? If their demand behavior is quite elastic then their water and energy bills could actually decline!  How many households and firms are so nimble? How many will continue to consume their original levels of electricity and water and simply pay more?  We need more micro economic analysis to learn about such diversity of responses to higher prices.   California's regulators have pressed ahead with such regulation without knowing this distribution of "nimbleness" across the population and firms.

Mother Jones just published a great piece highlighting that AB32's implementation is going well but this isn't a "free lunch" for the state.

Read today's Room for Debate on Free Trade ,  why weren't two academic economists asked to debate?  Do "think tank" economists offer better debate partners than academic economists?   Or, does the NY Times view all workers to be perfect substitutes so any two economists can debate?  If we are all perfect substitutes, then any wage premium a worker earns is a "rent" that can be taxed without efficiency consequences and redistributed to someone else.  

Both authors appear to miss the main point.  If the U.S (as the global leader) moves away from its free trade ideals then this creates a dangerous precedent and we enter the world of dynamic game theory.  Google Scholar indicates that there hasn't been a well cited paper on dangerous precedent and that puzzles me.

As I wrote about in my blog post yesterday,  we don't know what will happen in such a dynamic game but it is highly likely to hurt all nations.

Last summer, I bought (and read) Dani Rodrik's Economics Rules .  I thought it was a great book on a number of levels.  Dani anticipated that his readers would be a mixture of economists (both pros and students) and skeptics.  He presents an honest debate in which he points out the strengths and weaknesses of our dark art (science).  He is a sober optimist as he argues that  economics is a great field of study but there is much work to do.  Adam Smith greatly contributed to knowledge back in 1776 but he and Alfred Marshall left much work for us to do.

This is merely a preamble to the crazy stuff I am now reading in the news about the possible retreat by the U.S on free trade if either Sanders or Trump is elected President.  In 2016, it is quite surprising that opinion pieces such as this one even have to be written.

The static case for "Free Trade" is simple. It increases the size "of the pie".  How we share the pie is the question of 2016.  Economics has less to say on this topic because as Paul Samuelson taught us 75 years ago, we can't pin down people's utility functions based on revealed preference (monotone transformations do not shift the marginal rate of substitution and only this MRS can be recovered from consumer data such as price, income variation and choices from these budget sets reveals our stable preferences).

The harder question related to "Free Trade" is the dynamic game theory issue. If the USA retreats on its support for free trade, what happens next? Does this trigger a trade war as nations "erect tariffs walls"?  (A bad equilibrium) --- or does the rest of the world say; "Wow, President Trump you are a manly man we surrender!".  "Wow, President Sanders you are the Colonel of righteousness, how can our nation help the U.S overcome its poverty?"  (I'm kidding in both cases).

Credible predictions based on Game theory and strategic dynamics is the weak point in economics.   The case for free trade is that it is a commitment device to the set of rules that "maximize the size of the pie". If we deviate from that rule in the short run, we simply don't know what will happen but we can "bound" that the new outcome can't be better in aggregate than if we all commit to free trade.

So, the US would be taking a gamble that it can grab a larger piece of a shrinking pie.

Consider some unintended consequences from building the "Trade Wall".   Suppose that a U.S maker of electric vehicles anticipates that if it outsources a factory to India or China that it may face a high tariff wall to reimport these vehicles back into the USA.  Where will it build the factory? If it builds the vehicle in the United States, is this good or bad?  First, the EV maker may choose to not even build the factory as it would face higher labor costs. It might build a factory in the USA that relies solely on robots with a high capital to labor ratio.

As America is poorer because we face higher prices for goods no longer made in China, will there be fewer non-tradeable jobs in construction and services?

I would like to see the NBER ask each member of the International Trade group to write a blog post on his/her thoughts on the implications of a retreat from free trade for the short run and long run global economy. I don't want to hear about CGE point predictions.  I want to hear some applied micro implications.