I am happy to see that the sophisticated NY Times Arts Section is filled with "elasticity of demand" hypotheses in this piece. The Metropolitan Museum of Art is "free" but has a suggested donation. To the deep surprise of non-economists, this isn't yielding that much revenue. Apparently, there are free riders among us. Based on some statistical sampling, the museum believes that 66% of its visitors are from outside NYC. There is a proposal to charge this set of tourists. This raises "demand" issues. At a price of $20 per visit, what will be demand? How much revenue will be collected? Will donations to the museum decline as the museum transforms itself into being another tacky capitalist institution (like a movie theater or a NBA basketball arena) that actually charges people for entering. Recall Titmus' thoughts about voluntary blood donations in a world where we start to pay people to give blood.
CROWDING OUT IN BLOOD DONATION: WAS TITMUSS RIGHT?
Authors
Abstract
In his seminal 1970 book, The Gift Relationship, Richard Titmuss argued that monetary compensation for donating blood might crowd out the supply of blood donors. To test this claim we carried out a field experiment with three different treatments. In the first treatment subjects were given the opportunity to become blood donors without any compensation. In the second treatment subjects received a payment of SEK 50 (about $7) for becoming blood donors, and in the third treatment subjects could choose between a SEK 50 payment and donating SEK 50 to charity. The results differ markedly between men and women. For men the supply of blood donors is not significantly different among the three experimental groups. For women there is a significant crowding-out effect. The supply of blood donors decreases by almost half when a monetary payment is introduced. There is also a significant effect of allowing individuals to donate the payment to charity, and this effect fully counteracts the crowding-out effect. (JEL: C93, D64, I18, Z13)
The Director of the UCLA Institute of the Environment (my old home) is Peter Kareiva. Here is a recent Variety Fair piece he wrote with a very successful business man. They seek to use Hollywood's influence to nudge perceptions about the risks posed by climate change. A quote:
"So, in confronting this unsettling and urgent challenge, we pose the question: How can the entertainment industry — the most powerful network of storytellers in history — help spark and sustain the public determination necessary to restore the balance of nature before climate change, ocean acidification and extinction pass a point of no return?
In the story of Noah, a prophet’s swift action to save Earth’s biodiversity was successful. In today’s crisis, the outcome of our story is still uncertain — and up to us. Together, let’s write an ending that makes us all proud."
Now those who know me, know that I have many ideas. Permit me to propose 5 Climate Change movie plot lines;
Story #1: Coastal home owners adapt to rising sea level by putting their homes on stilts and moving to higher ground. For a more detailed sketch of the plot click here.
Story #4; As agricultural productivity suffers in the heat, people move to cities and work and live inside and are shielded from the negative effects of extreme heat. For a more detailed sketch of the plot click here.
Story #5; As nations experience more natural disasters caused by climate change, the death count from these shocks declines because of free market economic growth giving people and governments the resources they need to offset increased risk. For a more detailed sketch of this plot click here.
So, I have just given you 5 new movie plots. In each of my plots, climate change is a real threat. A subset of the population is aware of this and they pursue their own self interest to protect themselves. The power of free markets in aggregate helps them to adapt and live on. So, my movies have happy endings. This is Climatopolis. Will you pay $12 to watch any of these? I doubt it. I wish we didn't have to live through any of these movies but the suburban and coal politics that I have analyzed in these political economy papers; Jonathan Eyer & Matthew E. Kahn, 2017. "Prolonging Coal’s Sunset: The Causes and Consequences of Local Protectionism for a Declining Polluting Industry,"NBER Working Papers23190, National Bureau of Economic Research, Inc.
Chris Blatmann and Stefan Dercon have published a great NY Times piece about their new field experiment set in Ethiopia. Throughout the developing world, urbanization is taking place. People who were farmers are moving to cities to take industrial jobs. In a world of uncertainty and risk, some people might regret making these moves away from the "sure thing" and social network of the countryside. Yes, cities pay more and offer more excitement but there are urban risks. Blatmann and Dercon run a field experiment in which five factories use a lottery to decide which job applicants to hire. This lottery system means that they have a "treatment group" (those who receive an urban job) and a "control group" (those who do not receive this specific job). This is a "funky control group" because they are highly likely to find some other urban job and this means that the treatment is hard to define but let's ignore this. Among the treatment group, many of those who were randomized in to receive the urban factory job left the firm after just a couple of months. This surprised the researchers.
There are two different labor economics theories for why new workers at a new firm might not stay long. First is the old job matching theory. A worker doesn't know his productivity at a specific firm/job and this can only be learned by trying it. A bad match quickly is terminated.
A second theory relates to Sherwin Rosen's famous work on compensating differentials and non-wage attributes of the job. Companies such as Google have great workplace amenities to keep skilled workers with firm specific human capital. Such non-wage benefits (think of health insurance) are not taxed and this provides an even greater incentive for firms to provide these. But, in Ethiopia, the authors argue that these jobs are risky and nasty with bad work conditions. In this case, if the wage is low and the job attributes and hours are horrible, people have an incentive to quit and go back to their agricultural life. This is the theory of compensating differentials. Think about the words "combat pay". You have to pay a wage premium to keep workers at a firm or industry (think of coal mining) that is nasty.
University of Chicago Price Theory predicts that urban firms in LDC nations with nasty work conditions will have to pay more to keep talent. Or, they will have an incentive to improve the work conditions at their sweat shops. So labor market competition will induce the capitalist to provide a nicer, air conditioned, safer work location. In such a case, capitalist competition is necessary and sufficient for improving worker quality of life. Note that this argument hinges on labor demand being high. If firms know that there is an "infinite" amount of rural labor who can be hired at a low wage then the "sweatshops" will continue. The key here (from a poor person's point of view) is for the supply of labor to be upward sloping and for these workers to have some firm specific training that will be lost if these workers leave the firm.
My first two years at USC have flown by. As I prepare to become the New Chairman of USC Economics, I look forward to helping our #22 ranked department take its next steps. A big part of my focus will be undergraduate and graduate education. An Ivy League quality school must have an Ivy League quality economics education. It is that simple. The New York Times today celebrates one piece of USC's rising excellence. Read Frank Bruni's piece on "Lifting Kids to College". Here are the details about our Neighborhood Academic Initiative.
This is the right way to build up skill. Jim Heckman (a member of USC's Schaeffer Center) should approve of this human capital investment strategy.
USC’s Neighborhood Academic Initiative (NAI) is a rigorous, seven-year pre-college enrichment program designed to prepare low-income neighborhood students for admission to a college or university. Those who complete the program, meet USC’s competitive admission requirements and choose to attend USC are rewarded with a full 4.5-year financial package, minus loans. The program was established in 1989 and enrolled its first scholars in the 1991-92 academic year. Pulling together private as well as corporate resources, the NAI encompasses three major components: the USC Pre-College Enrichment Academy, the Family Development Institute and the Retention Program.
The academy offers enhanced classes at USC on weekday mornings, the Saturday Academy, after-school tutoring, remedial and enrichment sessions, workshops on time management and study skills, PSAT and SAT1 preparation, cultural field trips and recreational activities.
Before school each day throughout the academic year, NAI scholars meet on the University Park campus from 7:30 to 9:30 a.m. for enhanced classes taught by teachers from their home schools. The scholars receive full academic credit for these courses, which cover the following subject matter:
Grade 7: pre-algebra (students must complete Algebra 1 prior to graduation from 8th grade)
Grades 7 and 8: language arts
Grade 9: English and geometry
Grade 10: English and algebra
Grade 11: American literature/expository composition and math analysis/trigonometry
Grade 12: Advanced-placement English literature and either advanced-placement statistics or calculus
Supplementing these early-morning classes, NAI scholars attend the Saturday Academy, which meets for four hours every Saturday to provide enriched as well as remedial instruction in English/language arts and mathematics. Courses incorporate lectures, tutoring and small-group exercises, and are taught by professional teachers, paid and volunteer tutors and teaching assistants from USC’s student body, and NAI alumni. In addition, peer tutoring and cooperative learning activities maximize opportunities for scholars to learn from one another and reinforce the knowledge they have gained.
NAI scholars also receive two hours per week of structured after-school tutoring.
Last week Paul Krugman pointed out the negative labor market consequences of the rise of Amazon over downtown retail. Today, the University of Chicago's new Dean of the Harris School suggests that the health care sector should reduce its labor/output ratio in order to reduce its costs.
As President Trump seeks to fulfill his campaign pledge to create millions more jobs, the industry would seem a promising place to turn. But the billionaire businessman also campaigned to repeal Obamacare and lower health care costs — a potentially serious job killer. With Mr. Trump renewing his push to replace Obamacare, he faces a dilemma.
“The goal of increasing jobs in health care is incompatible with the goal of keeping health care affordable,” said Katherine Baicker, a Harvard University health economist who sees advantages in trimming the industry’s growth. “There’s a lot of evidence we can get more bang for our buck in health care. We should be aiming for a health care system that operates more efficiently and effectively. That might mean better outcomes for patients and fewer jobs.”
END of Quote
So, we need Silicon Valley to enter the health care sector? How would Silicon Valley sell personal services currently provided by doctors and nurses? Where is the inefficiency and the waste? In a world of heterogeneous patients who differ with respect to their personalities, non-cognitive traits (such as staying on prescribed medicines) and initial health conditions, how can computer Apps substitute for the human touch? What will be lost by such labor to capital substitution? I understand that for a standardized service such as transporting me from USC to home that there are many close substitutes to achieve this. In the case of heterogeneous patient care, could Silicon Valley offer a "better product" than what we now have? As the Boomers age, will robots tend to them? If "yes", how much $ would be saved? What would be lost?
As more states introduce living wages and higher minimum wages, how will this affect the demand for robots in the health care sector?
The NY Times Magazine has published a whole issue today about climate change. I've skimmed all of the articles and I believe that the magazine chose to avoid the economists (except in a brief correct quote here) for some insights. Below is a "subtle" cartoon from the Mooallem piece and here is some standard "doom and gloom" from a psychologist named "Kahn" ;
"Still, we insulate ourselves from the disorientation and alarm in other, more pernicious ways, too. We seem able to normalize catastrophes as we absorb them, a phenomenon that points to what Peter Kahn, a professor of psychology at the University of Washington, calls “environmental generational amnesia.” Each generation, Kahn argues, can recognize only the ecological changes its members witness during their lifetimes. When we spoke recently, Kahn pointed to the living conditions in megacities like Kolkata, or in the highly polluted, impoverished areas affected by Houston’s oil refineries, where he conducted his initial research in the early ’90s. In Houston, Kahn found that two-thirds of the children he interviewed understood that air and water pollution were environmental issues. But only one-third believed their neighborhood was polluted. “People are born into this life,” Kahn told me, “and they think it’s normal.”"
Kahn calls our environmental generational amnesia “one of the central psychological problems of our lifetime,” because it obscures the magnitude of so many concrete problems. You can wind up not looking away, exactly, but zoomed in too tightly to see things for what they are. Still, the tide is always rising in the background, swallowing something. And the longer you live, the more anxiously trapped you may feel between the losses already sustained and the ones you see coming.
On some level, we’ll live on, in exile.
Such shifting baselines muddle the idea of adaptation to climate change, too. Adaptation, Kahn notes, can mean anything from the human eye’s adjusting to a darker environment within a few milliseconds to wolves’ changing into dogs over thousands of years. It doesn’t always mean progress, he told me; “it’s possible to adapt and diminish the quality of human life.” Adapting to avoid or cope with the suffering wrought by climate change might gradually create other suffering. And because of environmental generational amnesia, we might never fully recognize its extent. Think of how Shel Silverstein’s Giving Tree, nimbly accommodating each of the boy’s needs, eventually winds up a stump.
On the most fundamental level, Kahn argues, we are already adapting to climate change through a kind of tacit acquiescence, the way people in a city like Beijing accept that simply breathing the air outside can make them sick. “People are aware — they’re coughing and wheezing,” he told me, “but they’re not staging political revolutions.” Neither are we. And, Kahn went on, we risk imprisoning ourselves, through gradual adaptation, into a condition of “unfulfilled flourishing.” A wolf becomes a dog, genetically; it wants to fetch tennis balls and sleep at the foot of your bed. But imagine a dog that isn’t yet a dog, that still wants to be a wolf.
Sure, I told him, but at some point it would all be too much. Potentially, Kahn said. But assumptions about the future, no matter how self-evident they may feel, don’t automatically come true. “The amazing thing is that none of this seems to work the way we think it should. When I was growing up in the Bay Area in the 1970s, the traffic was really bad. And I said, If it just gets a little bit worse, you’re going to have a major upheaval in consciousness. And every five years it got worse.” He went silent for a second, then continued, “I’m just thinking about how many five-year periods I’ve lived through.”
Permit me to make a few points; 1. Here is Professor Kahn's paper based on interviews with 24 people in Houston. 2. Note that there is "no supply side" here. Where are the entrepreneurs seeking out solutions? Where is Google? Where is the profit motive? 3. We live in the age of cell phones and Youtube. More than ever, people have full information about the risks where they currently live and what they would gain from living in other areas where they have never lived before. I think about USC and how much information about what it is like to live on campus vs what I knew back in 1984 and was applying to college. 4. The Bay Area traffic case is interesting but this is an example of politics (not allowing road pricing by time of day) not economics impeding the policy solution. While I like this piece, please note the "Doom and Gloom". The NY Times loves this theme that we are on a "highway to hell". 5. Note Kahn's certainty that we all suffer from the biases he claims to have identified. In an age of diversity, do people differ with respect to their having these biases? What % of people have these traits? If enough people have "rational expectations", how does this demand affect the markets for migration and innovation? Read my 2017 paper! We make the same point about China's air pollution problems in our 2016 book. The demand for solutions incentivizes both firms and local governments to take steps to address the issue. 6. They have now included Brad Plumer as one of their new writers. I hope he adds some intellectual balance to this group. Their climate coverage has been remarkably slanted. In a nutshell, all Paul Ehrlich and not one drop of Julian Simon! Now that I have read the work by the psychologist named "Kahn", I think he should reciprocate and should read some work by the economist named "Kahn" and start with this easy piece.
An airplane is an interesting "Commons". You pay for the right to enter the plane and if you pay more you enter earlier ("now boarding Business Class") and get a nicer seat. But, once you are on the plane the fight begins for overhead space, armrests and toilets. People start sneezing and eating stinky food and have strange conversations. How do strangers share the commons when you can't "opt out" and are stuck together for hours in an uncomfortable setting?
More interesting is the fact that flight attendants are the "first responders" on the front lines dealing with all sorts of people and issues. Given the number of miles people fly, it is surprising that there aren't more fights on planes. Now add in video taping of everything and we have the comical skies.
If everyone flew in their own "pod" none of these issues would arise.
While scale economies obviously highlight the benefits of sharing a technology (such as a plane and a pilot), the "congestion effects" from flying with others may be rising over time.
There are counter-veiling effects. In the past, trains were highly annoying as everyone would be talking loud having a private conversation on their phone. Now, few people make phone calls and instead text others what they are thinking and trains are now quiet due to technological change.
So, this has been a sociology post. Can we productively share common space with strangers? Or during a time of anxiety and fear of terrorism, we distrust all whom we are brought into close proximity to?
An airline that could develop a "good culture" on the flight might be able to obtain market share. I don't know how to achieve this but here is a case where psychology and sociology could be applied to improve quality of life during flight hours. Business Class always offers a good time but coach is painful for all. Must it be? Or as we age and grow fatter, there just isn't enough room or oxygen.
The NY Times provides an impassioned list of likely effects of climate change. While I skimmed the list quickly, it is notable that the list focuses on non-urban consequences. Yet, all over the world we live in cities. As I have been arguing for a decade, urbanites have an edge in adapting to climate change. Urbanites live and work inside in climate controlled settings (don't believe me, visit Singapore). Cities and human capital go hand in hand and human capital and financing give us an edge (over other creatures) to adapt to whatever challenge Mother Nature throws at us. As we learn about the new risks, there will be adjustment period as we seek out and move to "higher ground". This shift will not be costless and won't occur overnight. Yes, there are migration costs. Yes, there is durable capital. Yes, there are climate deniers and skeptics but in general equilibrium spatial prices adjust and markets clear.
Back 25 years ago, Sherwin Rosen tried to teach me many economics ideas. I think of him as I read Robert Reich's December 2016 piece "Have Liberal States Won America's Tax Experiment?" Here are a few quotes from Mr. Reich. "But what about so-called over-taxed, over-regulated, high-wage California? California leads the nation in the rate of economic growth — more than twice the national average. In other words, conservatives have it exactly backwards.
So why are Kansas and Texas doing so badly? And California so well?
Because taxes enable states to invest in their people – their education and skill-training, great research universities that spawn new industries and attract talented innovators and inventors worldwide, and modern infrastructure. "
I certainly agree that UC Berkeley, UCLA, UCSD and the other UCs are great schools. I think they would be even better universities if they went private. I believe that Mr. Reich is omitting the key variable. California's great quality of life (due to climate and topography and its coast) provides the "exogenous amenity" (or the golden goose) that can be taxed without consequence (Mitt Romney wouldn't sell his house) that raises the revenue that then can be spent on all of the stuff (including Jerry Brown's bullet train) listed above.
If California had the Texas climate and terrain, the state's public finances would be a train wreck because home prices would be 50% or more lower and the super-rich (think of Zuckerberg and Musk) wouldn't be living here.
A final question, if taxes enable such California human capital attainment, why are California's public schools so weak? California attracts talent because it is beautiful here. Unfortunately, I'm not convinced that California is good at taking lots of tax payer money and creating new human capital. Even UCLA and UC Berkeley are not that cost-effective at producing such human capital. When I retire, I will write a short essay explaining why (based on my 10 years at UCLA).
The answers (related to public sector union strength) can be seen in my two recent NBER papers posted here and here.
