James Heckman has written many papers  (and see this) about the importance of developing non-cognitive "soft skills" in young children.  He argues that such early age investments can build up these skills and that these skills pay off in terms of higher future wages.   A standard approach for measuring such soft skills is the Big Five Personality test.    Such a test measures you on;  5 major dimensions of personality: Openness, Conscientiousness, Agreeableness, Extraversion, and Neuroticism.

I would like to make a research suggestion in this Big Data age.   Each Uber customer has a personal Uber rating.  I propose that researchers use this as a "Crowd Sourced" Big 5 personality test.  Those of us with high scores are charming individuals who are agreeable and conscientious!

As you know, the University of California's salaries are in the public domain.   A hard working graduate student could take each UC professor and staff member's salary and link by name and city (i.e Matthew Kahn of Los Angeles) to our Uber data.  Uber knows our name and our location and our Uber rating.  By merging these data, one could then run a regression including zip code of residence fixed effects (Uber knows our home address and thus our zip code) and you could run regressions of the form;

Annual income of UC Employee =   controls + b*Uber score  + U

This would be a fun and easy paper to write.  Is b greater than zero?

New York City runs 11 very expensive public hospitals that cater to the city's poor.  The New York Times reports that the Mayor wants to inject $2 billion dollars in subsidies to help the public hospitals to balance their budgets.  There are several interesting pieces of economics here. As the poor's health insurance has improved, many of them have chosen to "vote with their wallet" to seek care from other hospitals and local service providers.  So, the demand for their product is falling.

A Direct Quote:

"As previously uninsured low-income New Yorkers have gained insurance, they also have gained new health care options. The city system has been losing those patients to other providers that are seen as more upscale or convenient to patients. At the same time, it remains the major source of care for nearly one million city residents who remain uninsured, many of them unauthorized immigrants who are ineligible for public insurance."

NOW some algebra.

The public hospitals provide jobs for 40,000 people and according to this document the total salary expenditure is $4 billion dollars per year in the year 2014.

Take $4 billion and divide by 40,000 =   $100,000 per year per employee.    This says that 3,300 doctors work for New York's HHC.

Suppose that the average doctor who works for HHC makes $250,000.

Let's solve for the average public sector pay for the average worker who isn't a doctor who works at the hospital.

(36700/40000)*X + (3300/40000)*250000 = 100000

Don't forget your weighted average algebra!

Solve for X =  $86,500

This strikes me to be a very high wage for low skill work.  This is public sector redistribution in a unionized, liberal city.    Read my recent NBER paper for some discussion of the economic issues here. 

I realize that $86,500 includes some managers and other occupations but this average is quite high.

Last month, Rhiannon Jerch, Shan Li and I released a NBER Working Paper studying the cost of moving a public sector bus one mile and how this varies across cities and over time.    We argue that this standardized government service measure offers a useful "measuring rod" for comparing government efficiency in providing basic services.

Here is the abstract for our paper;

"Local governments spend roughly $1.6 trillion per year to provide a variety of public services ranging from police and fire protection to public schools and public transit. However, we know little about public sector’s productivity in delivering key services. To understand the productivity both over time and across space, we examine public bus service, which represents a standardized output for benchmarking the cost of local government service provision. There is significant dispersion across transit agencies in the operating cost per bus mile with the highest being more than three times as high as the lowest among top 20 largest cities by population. We estimate the cost savings from privatization and explore the political economy of why privatization rates are lower in high cost unionized areas. Our analysis finds that the full privatizaton could result in cost savings of $5.7 billion in 2011 and that the gain in economic efficiency from more closely aligning bus fares with production costs would be worth at least half a billion dollars."

Now, I'm starting to think more about public pension generosity across the U.S.   Stanford's Joshua Rauch has done some of the big work on this topic.  Here is a citation to his 2014 AEJ paper.    His abstract quickly reveals the policy challenge.

Abstract

We calculate increases in contributions required to achieve full funding of state and local pension systems in the United States over 30 years. Without policy changes, contributions would have to increase by 2.5 times, reaching 14.1 percent of the total own revenue generated by state and local governments. This represents a tax increase of $1,385 per household per year, around half of which would go to pay down legacy liabilities while half would fund the cost of new promises. We examine sensitivity to asset return assumptions, wage correlations, the treatment of workers not currently in Social Security, and endogenous geographical shifts in the tax base.

Citation

Novy-Marx, Robert and Joshua Rauh. 2014. "The Revenue Demands of Public Employee Pension Promises." American Economic Journal: Economic Policy, 6(1):193-229.


A $1400 per household per year tax?  If the next Democrat President seeks to introduce a carbon tax will she also introduce this tax?  Or will the 1% be taxed with progressive taxation to retire this huge tax bill?  If 1 in a 100 pay this tax, then this would be an increase in taxes of $140,000 per 1% household per year to retire this debt.    Public finance may make a comeback as a field of study and debate.

The NY  Times has published another article highlighting that life isn't fair.  This is a fair point.  In this case, the article is about product differentiation documenting the fact that the wealthy are treated better than everyone and that everyone knows this.  In the past perhaps, ignorance was bliss?   Is the world on a "highway to hell"?

Permit me to provide you with some direct quotes from some leading economists.

1. In theory, according to Steve Tadelis, a professor of economics at the Haas School of Business at Berkeley, “when an industry is able to create a richer line of products for people looking to spend their money, that makes everybody happier. But getting it right in reality is very, very hard.”

2.  Even though this kind of pampering might be good for business, and delight those on the right side of the velvet rope, the gap between the privileged and the rest may ultimately leave everyone feeling uneasy, said Barry J. Nalebuff, a professor of management at Yale. “If I’m in the back of the plane, I want to hiss at the people in first class,” said Mr. Nalebuff, who has advised many Fortune 100 companies. “If I’m up front, I cringe as people walk by.”

Professor Tadelis and Nalebuff are great economists but I will let you grade these quotes.

More importantly,  the NY Times forgets that the .1% demand for such niche products creates jobs for everyone else.  Last Wednesday, I heard a new co-authored macro paper by my USC colleague Nir Jaimovich.

Here is his abstract:

We document two facts. First, during recessions consumers trade down in the quality of the goods and services they consume. Second, the production of low-quality goods is less labor intensive than that of high-quality goods. So, when households trade down, labor demand falls, increasing the severity of recessions. We find that the trading-down phenomenon accounts for a substantial fraction of the fall in U.S. employment in the recent recession. We study two business cycle models that embed quality choice and find that the presence of quality choice magnifies the response of these economies to real and monetary shocks.


So, the NY Times has the argument backwards.  According to Nir's logic, as the 1% consume higher quality goods, this creates more service sector jobs.  The NY Times is focused in this article on differential treatment of the very rich, rich, middle class and poor in the product markets but it ignores the labor market opportunities for the poor from catering to the very rich.

On April 7th 2016, the USC Economics Department held a great event in downtown LA.  Three leading macro economists, Michael Melvin of Blackrock and my USC colleagues (Prof. Joshua Aizenman and Prof Hashem Pesaran) joined me to discuss the state of the world economy.



I must admit that the setting was a little bit "stuffy" for my style but the discussion was great.  USC has a clear vision for rising in the quality ratings.

I am actively looking for more USC alumni to get in touch with us.  There is much work to do.

Nature has published a new paper that has enraged some climate activists for the wrong reasons.  Here is an example of the headlines it is generating.  Let's introduce some basic concepts from environmental and urban economics.

Let's assume that a person wants to survive and wants to eat pizza and wants to live in beautiful weather.

Define the probability of survival for the next year if you live at location A = Prob(A).
Let's define your pizza consumption if you live in location A =  Income at A - Rents at A.

An expected utility maximizer will gain an expected utility equal to

Prob(A)*U(pizza at A, Weather at A) =  Prob(A)*U(Income at A - Rents at A, Weather at A)

There are many locations for example indexed from A to Z.  In this discrete choice problem, a person will choose that location that is best for them.

Stare at this equation. There is no free lunch.  If a city offers a high probability of survival and great weather, then people will migrate there and this will raise rents and lower incomes there (because of the supply of labor located in that area).  In an open system of cities, one pays implicitly for locational tied amenities such as climate.   This is why San Francisco is so expensive.

Suppose that a coastal place has beautiful weather but has a higher probability of death.  In such an area, rents may not be that high.  A key question is whether the U.S has wonderful weather places that are objectively safe P(A) high.  Can we build more housing there?  If not, is the reason zoning? Why can't we reform our zoning codes?

The authors of this paper argue that Americans are increasingly concentrating in areas with "better" weather.  This amenity pursuit is actually grounds for optimism about our ability to adapt to climate change. If an area's quality of life suffers because of climate change, then people will move away from it. This incentivizes local government officials to be proactive to help their area adapt.  Competition for the footloose skilled is a key adaptation pathway!

The authors cite one of my papers on quality of life but I've written several;

 Kahn, Matthew E., 2015. "Climate Change Adaptation: Lessons from Urban Economics," Strategic Behavior and the Environment, now publishers, vol. 5(1), pages 1-30, June.

Cragg, Michael I. & Kahn, Matthew E., 1999. "Climate consumption and climate pricing from 1940 to 1990," Regional Science and Urban Economics, Elsevier, vol. 29(4), pages 519-539, July.

Cragg, Michael & Kahn, Matthew, 1997. "New Estimates of Climate Demand: Evidence from Location Choice," Journal of Urban Economics, Elsevier, vol. 42(2), pages 261-284, September.

Kahn Matthew E., 1995. "A Revealed Preference Approach to Ranking City Quality of Life," Journal of Urban Economics, Elsevier, vol. 38(2), pages 221-235, September 

Gyourko, Joseph & Kahn, Matthew & Tracy, Joseph, 1999. "Quality of life and environmental comparisons," Handbook of Regional and Urban Economics, in: P. C. Cheshire & E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 3, chapter 37, pages 1413-1454 Elsevier.

Terrible heavy rain (16 inches!) has hit Houston on Monday 4/18/2016.   To protect its population Rice University cancelled school on Monday and Tuesday.    When a major storm hits a multi million person rich U.S city, how much damage occurs?  There are at least 5 confirmed deaths right now and wide spread flooding, but will the city's productivity be disrupted? Will institutions such as Rice open up later this week? Will they quickly catch up for the lost productivity?  How much damage did the flooding cause?

I was very sorry to read Prof. Stan Wellisz's obituary.    Stan and I were colleagues from 1993 to 1996 and from 1998 to 2000.  Columbia's Economics Department was a distinctive place in the mid 1990s.  There was a very famous senior faculty (think of Mundell, Bhagwati, Findlay, Phelps, Lancaster, Mincer, Vickrey) and there were some famous young senior faculty (such as Bloom, Caplin, Hayashi, Hubbard, Rodrik) and then there were a huge number of junior guys such as me.  Late at night at the Department, the junior guys would be sitting around and cracking jokes and Stan would join us. He would work late into the night and he had a great sense of humor.  He sensed that I had wide ranging interests and we would talk about many things.  Back in the mid-1990s, I said to myself that when I'm in my mid-60s that I hope that I will have Stan's positive attitude about life and economics.

Here is his Google Scholar page.  You will see that he published in top journals with Calvo and Findlay.

In Iowa in February 2016, among voters between the ages of 17 and 29, Bernie Sanders won 84 percent of the vote to Hillary Clinton's 14 percent.  If the young love Bernie, then does this mean that they reject the logic of Econ 101?  How much of Greg Mankiw's textbook would Bernie agree with?  Permit me to quote from Senator Sanders' Webpage  (all quotes are from here).  (I omit some of his agenda but these quotes provide his full statement on each issue.)

AS PRESIDENT, SENATOR BERNIE SANDERS WILL REDUCE INCOME AND WEALTH INEQUALITY BY:

1. Increasing the federal minimum wage from $7.25 to $15 an hour by 2020. In the year 2015, no one who works 40 hours a week should be living in poverty.
2. Putting at least 13 million Americans to work by investing $1 trillion over five years towards rebuilding our crumbling roads, bridges, railways, airports, public transit systems, ports, dams, wastewater plants, and other infrastructure needs.
3. Reversing trade policies like NAFTA, CAFTA, and PNTR with China that have driven down wages and caused the loss of millions of jobs. If corporate America wants us to buy their products they need to manufacture those products in this country, not in China or other low-wage countries.
4. Fighting for pay equity by signing the Paycheck Fairness Act into law. It is an outrage that women earn just 78 cents for every dollar a man earns.
5. Making tuition free at public colleges and universities throughout America. Everyone in this country who studies hard should be able to go to college regardless of income.
6. Expanding Social Security by lifting the cap on taxable income above $250,000. At a time when the senior poverty rate is going up, we have got to make sure that every American can retire with dignity and respect.
7. Guaranteeing healthcare as a right of citizenship by enacting a Medicare for all single-payer healthcare system. It’s time for the U.S. to join every major industrialized country on earth and provide universal healthcare to all.
8. Requiring employers to provide at least 12 weeks of paid family and medical leave; two weeks of paid vacation; and 7 days of paid sick days. Real family values are about making sure that parents have the time they need to bond with their babies and take care of their children and relatives when they get ill.
9. Enacting a universal childcare and prekindergarten program. Every psychologist understands that the most formative years for a human being is from the ages 0-3. We have got to make sure every family in America has the opportunity to send their kids to a high quality childcare and pre-K program.
10. Making it easier for workers to join unions by fighting for the Employee Free Choice Act. One of the most significant reasons for the 40-year decline in the middle class is that the rights of workers to collectively bargain for better wages and benefits have been severely undermined.

USC Economics has had a very good day.  We have now heard from almost all of the Ph.D students who were admitted into our program and our yield is extremely good.  Our recruiting committee worked quite hard to recruit an excellent group and we have done our job.  UCLA Econ should keep an eye on us.  We did lose a student or two to UCLA but this won't continue for much longer.