As Elon Musk's Tesla ramps up production of the Model 3, will the firm enjoy large learning by doing gains in productivity (and lower costs due to "pin factory" specialization by parts suppliers due to economies of scale) or will quality decline due to the "big rush"?  Do serious IO economists have a prediction to make here regarding whether there is a quantity vs. quality tradeoff in differentiated product markets for new goods.

Recall the WW 2 battleship case.

Thompson P. How much did the liberty shipbuilders learn? New evidence for an old case study. Journal of Political Economy. 2001 Feb;109(1):103-37.


"This paper offers some new estimates of the contribution of learning to the rapid increases in labor productivity observed in the construction of Liberty ships during World War II. The study exploits new data on physical capital investment and vessel quality constructed from contemporary records held at the National Archives. Estimates of the rate of learning are shown to be sensitive to the inclusion of the new capital data, and data on vessel quality provide evidence that part of the measured productivity increases were secured at the expense of quality. "

This abstract suggests that Musk faces a quantity vs. quality tradeoff.

Here is a new paper by Walker Hanlon on this broad issue.

For years, I have argued that climate change will boost real estate prices in regions of the U.S that prove to have an edge in adaptation (i.e relatively cool summers and warm winters).  I published my paper back in 2009 and then several other teams started doing similar work.

My wife asked me; why don't we make a $ bet on the places that you are optimistic about.  Why aren't we buying property in Washington state and Oregon?  I returned to this thought today after I read this NY Times piece about a young man who has bought a rental property in Atlanta. He has never seen it but he used an online website to buy it and to hire a management company who collects rents for him and takes care of property specific problems.

This young man bought his Atlanta home through Homeunion.  I went to the firm's website and I see that their geographic coverage of homes offered for sale does not include the Northwest.  So, I still haven't found an investment vehicle that allows me to buy liquid assets in this relatively narrow geographic part of the country.

Each day new products are offered in the market place.  Why hasn't this product been offered? Is there really insufficient demand for it?

I understand that a REIT with a narrow geographic focus (say just Oregon) would not be spatially diversified but investors can form their own portfolio and use these "Oregon REIT" shares as one of the assets.  For example, a worker in Boston could achieve diversification by having a job and a house in Boston and investing 30% of her savings in an Oregon  investment.

UPDATE:  I have been told that CrowdStreet offers investment access to NW properties.    Ideally, there would be more competition here to offer lower fees and expanded investor choice.

Economists have taught zillions of students that if investors are risk neutral and forward looking that the value of a piece of real estate today is the expected present discounted value of its future rents.   As North Korea's ability to shoot nuclear missiles improves, will real estate assets in the Western U.S drop as this "new news" is reflected in prices?   This Fox News piece suggests that people in Japan are investing in precautions.

Without engaging in science fiction, this example raises interesting issues related to risk perception and the compensating differential that people require for taking a risk.  The standard way to teach this is to refer to Russian Roulette.

If  you know that there is a gun with 100 chambers and that one random chamber has a bullet, how much must I pay you to face a 1% chance of death? If the answer is $34,000, then you have revealed that your value of a statistical life is $3.4 million.     A group of 100 identical people must be paid at least $3.4 million dollars to play a game in which one of them will die.  This gory example highlights how economists think about risk tradeoffs.

In the case of North Korea, we don't know whether they would really launch this weapon, where they would aim it and whether it would hit the target but we do know that this ambiguous risk (that it will hit my house) has increased.  When an ambiguous risk's probability increases, how do asset markets incorporate this new news?  Do they over-react to the news or ignore it?

It appears that the North Koreans may help to improve financial economics research by offering a new test of the efficient markets hypothesis.  Perhaps this is the real goal of their Leader?

Finally, why would California home prices fall? If we are in the range of their North Korea Missiles while Boston is not, then this new risk makes Boston relatively more attractive and investors will bid more aggressively for its real estate. This is the two sector general equilibrium model at work.  Economic activity moves to "higher ground" (i.e the safe sector).

UPDATE:  For those looking for good empirical work on this subject, here is a real estate paper using rocket attacks on Israel.

also

Arbel, Yuval & Ben-Shahar, Danny & Gabriel, Stuart & Tobol, Yossef, 2010. "The local cost of terror: Effects of the second Palestinian Intifada on Jerusalem house prices," Regional Science and Urban Economics, Elsevier, vol. 40(6), pages 415-426, November.

Read this piece.  It suggests that we will face increased "fat tail" risk in the future as climate change will raise the probability of several different corn regions having low output crops.  How will capitalism help us adapt to this potentially serious problem?

1.  Storage.  Don't forget Hotelling's Rule.  Expected high prices in the future create incentives to store the commodity during boom times.  Here are some technical details on corn storage. You have to lower the temperature and keep creatures out of the silos.  Capitalism can figure this out.   We have plenty of land for placing these storage centers.

2.  Futures markets --- if corn futures go further into the future, then the basic Grossman and Stiglitz (i.e Hayek ) logic will unfold and entrepreneurs will follow these new profitable opportunities.  I see that this corn futures market only goes out to December 2019.  Why doesn't it go further out into the future? In the future, will it go out further into the future?

3.  Substitution possibilities on the demand and supply side.  Who consumes this corn?  What else could they consume?  On the supply side, where else can we grow corn?

Notice that I haven't even mentioned GMO corn here.

I don't doubt the new risks that corn growers will face due to climate change but I have sketched out thousands of new adaptation margins.

I also haven't mentioned that as a nation grows richer that its people spend ever less of their budgets on food.  So, if food prices rise by 20% but food is 20% of your budget, then you face 4% higher prices. Your real income hasn't actually fallen much.   Of course, this adopts the urban buyer's perspective.  The sellers of the product will care about their revenue with and without climate change.  Now, a Ricardian would ask how the land prices for farmland will be affected. Yes, Kansas could lose some value but in a future with faster transport speeds such land could be "suburbs" of some future city.  The agriculture to urban transition is another adaptation margin.

Here is MTA's 2017 budget.  It will spend $17 billion dollars to keep the New York City region's buses and subways moving. That's a lot of $!  Look at the pie chart on page I-1.  Only 23% of the budget is spent on capital goods.  60% is spent on labor and 17% is spent on paying back past debts (these debts in turn must be mainly caused by past labor expenses).    On average, 8.8 million people ride this system each weekday (see page II-11).  The MTA has 69,000 total employees.  

Let's calculate the expenditure per average worker =  17 billion*(1-.4)/69000 =  $148,000 .  Now, this includes salary and benefits but doesn't that look a pinch high to you?  I will return to public sector unions in a moment.

Let's now calculate labor expenditure per passenger trip =

17 billion*(1-.4)/(8.8 million * 365)   = $3.18

Amazingly, I don't see enormous economies of scale here. I see an UberX fare.  Recall that MTA charges you $2.75 to ride the subway or bus so the MTA is losing $ on every trip people take!   Note that in my calculating $3.18 , I"m ignoring capital costs and I'm underestimating the value because ridership is lower on weekends and I'm assuming that weekday and weekend ridership is the same.

If MTA credibly threatened to privatize some of its bus routes,  the MTA's budget would be in much better shape.  Read our public service privatization paper and our bus procurement papers.   Public Sector Unions focus their efforts on large Progressive cities.  Lot's of rents to extract there.

1. Matthew E. Kahn, 2017. "Is Local Public Sector Rent Extraction Higher in Progressive Cities or High Amenity Cities?," NBER Working Papers 23201, National Bureau of Economic Research, Inc.
2. Rhiannon Jerch & Matthew E. Kahn & Shanjun Li, 2016. "Efficient Local Government Service Provision: The Role of Privatization and Public Sector Unions," NBER Working Papers 22088, National Bureau of Economic Research, Inc.
3. Li, Shanjun & Kahn, Matthew E. & Nickelsburg, Jerry, 2015. "Public transit bus procurement: The role of energy prices, regulation and federal subsidies," Journal of Urban Economics, Elsevier, vol. 87(C), pages 57-71.

Politico's piece is interesting.  If Larry Summers and Glenn Hubbard were members of Congress, would we have "better" tax policy?   If climate scientists ran the Energy Independence and Climate Change Sub-Committee, would "better" policies emerge?  For example, would we be more likely to have a carbon tax now?   The Arrow Impossibility theorem would appear to be relevant here.  Would self interested Representatives listen "to the experts"? Or would they politely listen and then vote their self interest?  

When do experts improve policy design?

My answer is simple. If we agree on the goal,  for example --- if we agree that we need a military weapon to defeat our  enemy then a Manhattan project takes shape and the nuclear bomb emerges with high probability of success. If we agree that our goal is to achieve 4% economic growth, then the experts can figure out how to do it.  If we agree that our sole goal is to reduce the cost of entitlements then the experts can figure this out.

But, if we don't agree on the goal --- then I'm not sure that having the experts on the inside cooking up the legislation makes a big difference.

So, in my vision of democracy --- the messy process sets the goal and then the experts decide on what is the cheapest way to achieve the goal.  Again, if we haven't set the goal and we disagree about the goal, will having experts on the inside matter?

While the Sports Section doesn't have any new NBA news, the NY Times has published two really interesting pieces related to major themes in urban economics. One focuses on the garbage problem in the NYC subway and the other examines the challenge of high property tax payments (as a function of current market value) in Detroit due to falling home prices combined with "sticky" earlier property value assessments.

Subways and the Tragedy of the Commons -- some cities such as Washington DC ban food eating on the subway.  This imposes private costs on busy commuters but offers social benefits as the common space is less disgusting.  In NYC, "anything goes".  The NY Times ignores one point here.  The article highlights that "industrial" vacuum cleaners are expensive but it fails to note that due to aggressive public sector unions that garbage workers are also expensive ($144,000 is good money).  It is possible that the city doesn't hire as many garbagemen as it would had it been able to pay market (i.e lower) wages for this help.   Read our 2015 NBER paper on public sector bus driver compensation and my 2017 California paper.  

Detroit --- The New York Times tells a behavioral economics story.   Poor people who are home owners in Detroit aren't aggressive in having their home re-assessed due to inertia and this anchoring has caused them to pay "too high" property taxes.  Permit me to explain.  Suppose your home is assessed at a value of $80,000 and you face a 1% property tax so your annual payment to the city is $800.  Now market forces lead the price of your home to fall to $50,000.   If your home isn't reassessed, then you are now paying 800/50,000 > 1% while more "with it" individuals will have their homes reassessed.  The NY Times author is arguing that this process should be automatic.  This is an interesting economic incidence point that those who are slow to demand reassessment are stuck with a larger % of the tax bill as prices fall.   This would be a nice future research topic for those who study behavioral economics and public finance.

The USC fall semester starts in about 4 weeks.  Our football team is ranked #4 in the pre-season and the economics department is ranked #22 (on USA REPEC).    The University is investing to upgrade the building capital stock. Here is the new University Village.   I took this photo today and I like what I see.  I walked past the new McCarthy Honors College and I hope my son considers living there in two years when he goes off to college.




My colleagues in the USC Economics Department hope that we will be "next on line" to receive an upgrade of our office conditions.  I'm in talks now for fresh paint and carpet.

USC Economics is unfortunately located on the Western most part of the University close to a Taco Bell on Vermont Avenue.  Our building (located in the same building as Math, Anthropology and Civil Engineering) is over .5 miles away from the other economists on campus.  I have been trying to argue that USC will be even more productive as an economics research community if the economists at Econ + Marshall + CESR + Schaeffer + Price were all sitting close to each other.  Proximity matters for face to face interactions!   USC as a research community actually has quite a good global ranking on REPEC.  We will be an even more productive research community if we can move into one of these shiny new buildings like the ones you can see above.

Zillow reports that the median home price in Alabama is $126,000 while in California it is $500,000.  Why?  The NY Times reports today on this issue.

In this self serving blog post,  I want to point you to my demand side papers that explain why California home prices are so high and my supply side papers.

Demand Side:

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.

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.

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.

Matthew E. Kahn, 2000. "Smog Reduction's Impact on California County Growth," Journal of Regional Science, Wiley Blackwell, vol. 40(3), pages 565-582.

Dora L. Costa & Matthew E. Kahn, 2000. "Power Couples: Changes in the Locational Choice of the College Educated, 1940–1990," The Quarterly Journal of Economics, Oxford University Press, vol. 115(4), pages 1287-1315.

Dora L. Costa & Matthew E. Kahn, 2003. "The Rising Price of Nonmarket Goods," American Economic Review, American Economic Association, vol. 93(2), pages 227-232, May.

Kahn, Matthew E. & Walsh, Randall, 2015. "Cities and the Environment," Handbook of Regional and Urban Economics, Elsevier.

When I walk around the Venice Beach area, I see plenty of two story buildings and homes that could be knocked down and rebuilt with 6 story and taller buildings. The WSJ poses a great puzzle today on why more housing isn't being built in this paradise.  My friends Issi Romem and Jed Kolko are both quoted.

My simple economic explanation for why supply isn't keeping up with demand is the fact that Venice Beach is a progressive community with much of its land located within the Coastal Commission's jurisdiction.  Both of these factors create more regulation and zoning which leads to an inelastic supply of housing and thus higher demand leads to higher prices and prices out young people seeking to rise on the housing ladder.

For evidence on progressives and California housing construction, read my 2011 paper.

For evidence on the effects of the California Coastal Commission, read my 2010 paper.

For those who know some formal economics, read Devin Bunten's important paper.

For those of you who don't know Jim Morrison (the door's) old stomping grounds.  Take a look at these pictures.