Working with my friends at Fudan University, we have released a new paper on the unintended consequences of China's recent water pollution regulation.  You can read the paper here. 

When it was announced that Gary Becker won the Nobel Prize in Economics, there was a press conference at the University of Chicago.  At that October 1992 conference, he stated at the start of the event that he would not answer questions related to issues far from his research (such as the 1992 Presidential Election).   I recall that he was asked a question about whether his rational addiction research would help the City of Chicago to address its drug problem.  He sketched an answer but he clearly didn't want to be anointed as an "expert" on topics for which he wasn't.   Modesty has its virtues.   I recalled this story after reading the Nobel Laureate Shiller's piece in today's NY Times.  It appears that Dr. Shiller is less modest than Dr. Becker was.  I applaud Dr. Shiller's concern about the consequences of income inequality and he is asking a great question but I don't believe that he provided a great answer.

Permit me to play "Devil's Advocate".   Could rising income inequality actually improve our long run quality of life?   As wealth is accumulated by a subset of the population and there are more billionaires, what do these people do with their dough?   Some of them (think of Mike Bloomberg at Johns Hopkins or David Geffen to UCLA) give hundreds of millions to Universities.  Regardless of why they give this money, the net result is that our best universities have the funds to push the frontier of research. Directed technological change provides us with the tool to "cure" cancer, to figure out new energy sources, to better understand social dynamics.  As our research universities make progress, the possibility that all of us can have a great life increases.

So, ask yourself the following question. If every person on the planet shared equally the world's GNP, what would be the endowments of our best 200 world universities?  Versus, what would be the endowments of the world's best universities in our unequal world?   In the equal world, the great universities would have much worse funding and the world's technological progress would slow down sharply.

Given that ideas are public goods, once the nerds (fueled by the best labs and equipment) have made discoveries , we all benefit from them.   Say what you want about the super rich but their investments in our best universities have played a major role in fueling innovation.  Such innovation is our best shot at continued improvements in our quality of life.

You might conjecture that in a world featuring perfect equality that people would each voluntarily vote for taxes to finance hundreds of University of California level public universities where great research would take place.   I wish this were true but such an equal world would not offer sufficient incentives to work hard and invest in human capital (which is necessary for the innovation to take place).  I also am not convinced that in this counter-factual world that these "middle class" people would vote for such enlightened policies of long run research investment.  Politics would also play a key issue as the public universities would be funded in every state and place (given our place based politicians).  Fewer great ideas would emerge from this more uniform distribution of resources across space.

Now, permit me to be politically correct.  Like Shiller, I worry about the quality of life of the poor. I am now writing a piece for the Brookings Institution on how the urban poor will cope with climate change.  My piece (which will be published in December) offers several policy proposals.  I 100% endorse Jim Heckman's agenda of investing in early education for all kids.  Like Shiller, I worry about the Luddite conjecture that machines will take over ever more low skill jobs. This is due to health insurance, substance abuse and labor relations --- machines are "lower maintenance" than human (pun intended).

The NY Times is creating a "green job" as it will hire a new climate change editor.  Given that Dora and I have written a recent paper on how the NY Times covered the urban mortality transition from 1890 to 1930, I will offer this important newspaper some unsolicited advice.

1. Report on "good news".   Yes, I understand that newspapers love "bad news" and this was a focus of my paper with Dora. We document that there was little coverage of the good news trend that deaths from infectious water borne disease fell sharply. Only where there upticks in the death rate, did the historical NY Times cover the story.

There is plenty of good news on the climate change front.  Yes, the Times can profile Elon Musk and talk about solar panels but that's not what I mean.  Instead, there are new markets and funky ways that urban capitalism is evolving to handle the climate change adaptation challenge.  The doom and gloom perspective of the NY Times is fashionable but is it correct?  

2. Building on #1, the NY Times needs to explicitly embrace and admit its philosophical embrace of behavioral economics. The NY Times is a pinch elitist implicitly arguing that people are fools and are ignorant that "we are all going to die" because of the climate change we have unleashed. The bad news is that we are all going to die but we choose when.

To be concrete, the NY Times should write much more about climate change adaptation.  Are we really passive victims in the face of new shocks or are we forward looking and investing accordingly to build up our resilience?

3.  The NY Times needs to be more honest about political economy.  Rather than lobbying for suing Exxon and celebrating the latest thoughts from Joe Romm and Bill McKibben, an alternative strategy would be to delve into the details of what $ compensation would be required to pay the coal mining regions to keep their coal in the ground. Are there gains to trade? Are the progressives willing to pay to stop the coal extractors around the world from extracting their property and burning it?

4.  The NY Times could do some detailed case studies of entrepreneurs who seek to start businesses that both reduce our carbon footprint (think of a great tasting tofu steak) or shield us from climate change. For these young men and women, what is their idea?  What financing do they need to launch their firm? What random events would help them to succeed versus fail? Are venture capitalists willing to invest in them?

5.  Will the NY Times embrace land use reforms to change local zoning policy such that once we identify relatively safer areas, that developers can build taller buildings there? More generally, we need to have a discussion of how the federal and local government inhibits adaptation.

6.  The NY Times is the paper of record and it must drop its favorite morality narrative that resembles themes from Star Wars. In Star Wars, there was "good" and "evil".  The distinctions were clear and there was no gray.  That isn't our world.  Burning coal has benefits and costs.  Let's quantify both. Let's figure out who has property rights. Let's figure out a way to facilitate a trade that makes both coal burners and everyone else better off.

For 6 years now, I have argued that capitalism will allow us to adapt to climate change. I encourage the NY Times to report on this optimistic claim.

Paul Krugman is correct and Mr. Trump is wrong.  Quality of life has never been better in American center cities.  Of course, Mr. Trump knows that his section of Manhattan is doing great. His real estate there is worth more than ever.  From simple supply and demand, given the inelastic supply --- any price dynamics is driven by demand , thus a high price signals a high demand.  Nobody (except people with school age kids) is excited about suburban living anymore.  This matters because blacks and Hispanics disproportionately live in center cities (but not necessarily in Mr. Trump's part of town).   Many urban economists including myself have been studying urban trends in quality of life.  Of course, income and unemployment are two important metrics but other metrics such as local crime and pollution and access to public transit (many urban minorities do not own cars) also matters.

I have always greatly admired the work of Davis and Haltiwanger on gross employment flows.   Dora Costa and I have some new work up and going on Federal and local government employment dynamics.  Take a look at our new figure below.  This figure is my homage to Davis and Haltiwanger.
This is just the tip of the iceberg we are studying.  The graph covers federal employment from 2005 to 2015.  We graph new hires (worker inflows) and quits (worker outflows).  Note that during the recession the government sector expand both because new workers join and because quit rates (the red line) declines.   The growth of government employment in a given year equals the vertical distance between the yellow line and the red line; so "net employment" grows the most in 2009 and declines the most in 2013.  Interesting?   Wait 6 months and our real paper on a related subject will emerge.

The LA Times has written an informative piece describing new real estate construction in downtown LA paid for and constructed by Chinese investor teams.   This piece raises several interesting economic points.  Only in the recent past, "Made in China" was viewed as a signal of low quality.  I bet that these new buildings are high quality construction produced in a cost effective way.  One of the themes of my 2016 book is the investment by China in human capital and improved management (i.e MBA education) fuels efficiency.   It is funny that the piece goes on to say that the complicated regulatory process through which LA issues permits has slowed down the Chinese builders.  This point is a theme of my 2011 paper.

Another interesting point in the piece is that the Chinese investors expect that Chinese real estate buyers will be the main demanders for these new properties. This suggests that Mayors in other cities who seek to attract Chinese foreign direct investment must build an "eco-system" that attracts Chinese people to want to live and buy there.  Such individuals demand good public schools, and low crime. Which U.S mayors can deliver such local public goods?  Where can Chinese people prosper and be treated with respect?  Those U.S cities will receive an influx of this Chinese capital.  This is competition and rewards those mayors who actually do their job.

Imagine a scenario in which you must choose whether to invest $500,000 in a sunk investment in a new house (that will live on for 40 years and then turn to dust) overlooking a beautiful body of water.  Based  on the last 500 years of data, there is a 1% chance each decade that your house will be destroyed by flooding.  Assume you are risk neutral and you will live in your home for 40 years and the interest rate is 0%.  Assume you gain $B dollars per decade you live in the house in terms of pleasure due to the view.

Standard project evaluation would say that you should make this investment;  if the expected discounted  benefit is greater than the cost or;

B + .99*B + .99*.99*B  + .99*.99*.99*B - 500000 > 0

Now suppose that due to climate change the 1% probability of disaster increases but due to model uncertainty it increases by an unknown amount.  Different people will have different expectations and only those people who are more optimistic (naive?) about future disaster probabilities and/or truly love the view will choose to make the sunk investment.

Now suppose that government offers subsidized flood insurance based on the old 1% per decade disaster $.  So, if insurance is actuarialy fair,  $500,000 can be insured for $5,000 per decade.  How does this insurance change the investment decision?

Define 1-g as the new post climate-change probability each decade that the investor believes the home will be destroyed. This parameter will vary across investors (heterogeneous expectations).  Where 1-g > .01

The new investment decision is;

B + g*B + (1-g)*500000 +  g*g*B + (1-g)*(1-g)*500000 + g*g*g*B + (1-g)*(1-g)*(1-g)*500000 - 500000 - 15000 > 0

The last term represents the PDV of the insurance payments.

Now let's consider the case if people couldn't buy this subsidized insurance.  Define g = probability of  no disaster .

B + g*B + g*g*B  + g*g*g*B - 500000 > 0

The key point here is that people with lower B will now sink the investment relative to who is the marginal preference person in the absence of government insurance based on the old probabilities.

In the absence of government insurance, only people with high "g" or high "B" will invest in the climate impacted areas. These are the optimists and the coastal lovers.  

I wrote this blog after reading this NY Times opinion piece. 

John Schwartz has published a front page "article" on the NY Times business page claiming that Exxon has huge problem because it owns billions of dollars of assets (oil) that will be a stranded asset in the near future.     This is an interesting claim.  He is hinting that Exxon could go bankrupt in the future and that this will have ripple effects as this company's shareholders learn that the core assets of the business are highly risky.  What here is true?

Robert Catell has written a great OP-ED for the NY Times that captures another reason why I'm a proud Californian.   California's Air Resources Board (ARB) has a mandate to reduce the state's ambient air pollution and greenhouse gas emissions from the transportation sector.  The ARB is enacting new rules to encourage major bus entities such as the City of Los Angeles and the City of Santa Monica to run its next generation of buses on food waste.  Such "renewable natural gas" is a green fuel because if this same food waste was sent to a dump it would create methane and this methane is a potent greenhouse gas.  So, this is a great example of "green accounting" that ecological economists love to talk about.  A waste "food waste" has been turned into a productive input in production (fueling the buses).

A Direct Quote.

The US government paid Iran $400 million dollars to guarantee the survival of 4 Americans.   So, my calculation suggests that the U.S government values a statistical life at $100 million.  This is a lot larger than the $7 million that is the standard number used in government cost/benefit regulation calculations.   At $100 million per life saved, many regulations will now pass a cost/benefit test.  This will expand the scope of government.   Dora Costa and I have a paper documenting how the value of a statistical life grows over time but $100 million appears to be high relative to past revealed preference estimates based on mandatory seat belts or job fatality risk.