Perhaps I should move to Oklahoma? I had a great talk with Trent England in this radio segment. We spoke about urban quality of life and the free market's role in improving our quality of life during a time of increased climate risk.
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Here are some questions that I do not know the answer to: How much economic damage will Hurricane Harvey cause? Given that 11 trillion gallons of rain have fallen on Houston, will Houston's long run economy be injured? How quickly do modern cities bounce back from natural disasters?
More closely related to my research; it appears that this disaster's death count (and death rate per million people) is low (relative to Sandy and Katrina). Searching the Internet, I see that 5 people have died in the storm. An economist would ask, over the typical weekend in a large city such as Houston, how many people die. The difference between these two numbers is the extra death caused by Harvey. For example, were there fewer violent shooting deaths this weekend in Houston because of the heavy rain? My 2005 work suggests that as our information technology and income rises, and our ability to invest and efficiently deploy first responders increases that the mortality cost of natural disasters will continue to shrink.
Unlike irreversible death, all other losses can be reversed through new investments. These investments will actually stimulate the Houston economy as the old decaying capital stock is replaced. Each building that was damaged was on a replacement cycle (capital is durable but only lives say 70 years), this disaster simply accelerates this replacement cycle and if the new housing stock is more sturdy then the next disaster will cause less damage. See my 2017 paper with Devin Bunten. Interesting distributional research will study whose homes were injured in the flooding? I see that Rice University is basically fine. Are the homes that have flooded located in lower middle class areas? If these homes sell for $200,000 each and and each has suffered a 10% loss in value due to flooding then this is a significant income effect for the lower middle class. Such distributional effects of natural disasters would be a fascinating research agenda.
Other interest groups will now grow rich in rebuilding Houston.Contractors, builders, construction guys will all now have a boom in demand for their scarce services. Watch the wage premium they will earn. Young men will now move to Houston to help with the rebuilding effort.
Will the refineries be crippled? How long will it take them to boost production? Will the oil companies claim they are crippled in order to exert market power in the oil market? Keep an eye on that.
How will the insurance industry be affected? Did the sellers of home insurance in Houston hold diversified portfolios? Did they encourage self protection investments to reduce flood damage? Will national tax payers bail out these insurers? -
Here is a scary news piece claiming that exposure to certain types of yoga mats increases a woman's risk of being infertile. This claim is based on this technical research article. I'm blogging about this because I did some consulting for the State of California's Department of Toxic Substances Control related to its Green Chemistry Initiative. Take a look at my 2012 paper, I think it is quite a good piece of work on the economics of phasing out potentially harmful chemicals in commonly used products.
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While economists fixate on the top 5 "general journals", there are several other journals that publish interesting research. Take a look at this special issue of the Asian Development Bank's main journal. I"m proud of my paper on climate change adaptation and urbanization.
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President Trump's team seek to renegotiate parts of NAFTA to encourage the revitalization of U.S manufacturing. How is consumer welfare affected if there is some domestic protectionism to keep foreign imports out? In our 2015 paper, we explore this theme in the case of public transit buses. We argue that the "Buy America Act" encourages urban transit agencies to purchase U.S produced buses. This shield stops cities such as Santa Monica from buying cheaper, more energy efficient buses from Japan and South Korea. This protectionism gives some monopoly power to small inefficient U.S producers. The net effect is a more expensive fleet that is less fuel efficient than the rest of the world's. Is our sector case study a preview of our medium term future?
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We are teaching our 16 year old son the dark art of econometrics. I asked him the following question. Nutritionists claim that eating peanut butter makes you fat. A statistician (who is not trained in economics) has attended a "field experiment" conference in Cambridge and has received a big grant to randomly assign jars of peanut butter to people. To keep this simple, let's assume that people assigned to the treatment group always eat their peanut butter (no free disposal, no secondary markets in selling peanut butter). The statistician observes the weekly weight of each person in his sample and observes whether the person is randomly assigned to the treatment group and knows the date when the treatment starts.
Since assignment to treatment is randomly assigned, the simple regression for person j in week t can be run without "fear" of violating the classic OLS assumptions;
Weight_jt = intercept_j + B*Treatment_jt + U_jt
Intercept_j represents the average weight for person j in the absence of the treatment
Treatment_jt indicates if person j is receiving free peanut butter in week t
U_jt are the unexplained determinants of weight for person j in week t
B is the key coefficient of interest. The nutritionist's key hypothesis is that B> 0 and statistically significant .
Since treatment (i.e receiving free peanut butter) is randomly assigned, there appears to be no "bias" from running OLS.
Now let's do some economics; The researcher runs this experiment and is shocked to find that he can't reject the hypothesis that B=0. What inference do you make here?
My starting point with my son is that the production function of weight presented above is vague. The U_jt term reflects hundreds of unobserved determinants of weight. Suppose that one of them is exercise. Suppose that people believe that peanut butter does make you fat. Suppose that people do not want to gain weight. Under these assumptions, those who are randomly assigned to eat peanut butter respond to this treatment by exercising more. This behavioral response generates the B=0 finding.
If "all else (including exercise) had remained equal at the time of the treatment" then the nutritionist would have recovered a positive B. So, the random assignment to treatment actually causes a change in U_jt. This point has not been discussed enough in the literature and is relevant in almost all Regression Discontinuity studies. When economic agents are aware that they have been assigned to treatment, they often change their behavior on other margins and the statistician observes a "net effect". See my paper with Randy Walsh.
An example. A prominent QJE paper uses school attendance boundaries to document that home prices are higher on the good school district side and concludes that the total differential across the boundary explains this price jump. So the simple regression is:
home price = border fixed effect + B*(Home in Good School District) + U
What is U?
Suppose that richer people live on the good school district side and suppose that people have a utility function such that good schools, ping pong tables and Jacuzzis are complements. In this case, the homes on the good school side of the boundary will install these unobserved (to the statistician) features and the researcher will over-estimate B because the U jumps up at the boundary on the good side. Economic relationships play a key role in driving the statistical patterns that we see. "Random assignment" to treatment does not solve this problem if economic agents can reoptimize once they know their "endowment" (i.e whether they have been assigned the peanut butter or assigned to live in a good school district).
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Aug19
Misallocation vs. Solving Co-Ordination Failures: The Case of China's Investment in Industrial Parks
China's economy is growing faster than the U.S economy. Yes, China is "catching up" to the rich U.S but what role does the activist, rich and powerful Chinese Communist Party play in explaining this? There are two different views on this subject. Milton Friedman would argue that China's economy would be growing even faster if the CCP allowed the invisible hand to operate and didn't play political favorites. This is the political misallocation hypothesis that I will return to below. The second hypothesis is a type of Keynesian "Big Push" claim that activist government can solve co-ordination failures. I will return to this below.
My 2017 Journal of Urban Economics paper (see 2015 NBER early version) presents new evidence on these claims. While the American Economic Review rejected this paper, I think we wrote a really good paper and I thank the JUE for recognizing this. MIT News just published a write up of this paper.Markets allocate scarce resources. In the absence of political favoritism, capital will be allocated to the entity who values it the most because this entity will be willing to pay the highest interest rate to borrow the lender's capital. This logic predicts that in equilibrium that each potential borrower of capital will have equalized the "bang per buck borrowed". The anonymous markets allocate capital to equate the marginal valued added from having access to capital across firms.Now suppose that the Powerful State plays favorites and allows certain firms to borrow at special rates such as an interest rate of 0% and to receive free land to build factories on. These entities will use more resources and this could lead to a serious misallocation if these favored entities are less productive or simply diminishing returns to capital exist. Read this great 2017 misallocation paper and read my USC colleague Joel David's work.
But, there can be growth benefits when government plays favorites. While I am a pure UChicago economist, consider the following economy. At the fringe of major cities in China, there is farmland growing low value added crops. Imagine if a powerful leader could cheaply payoff the farmers to vacate and that the cleared land is zoned for employment. Roads are built, infrastructure (sewers and electricity) are installed and then the following recruitment process occurs; anchor companies are recruited at cheap rents and other incentives are lured to open up production in the park. As in the suburban mall setting, these anchor tenants attract other firms who seek to coagglomerate with them and a productive new edge city forms. In our China paper (see above), we document that this is exactly what happens when parks feature few state owned enterprises and attract high human capital firms.So, our paper documents both misallocation and the fact that the state can solve co-location problems. Why the second? Firms that seek to colocate can have trouble facing the land assembly problem. In big cities, there are few adjacent parcels where large firms can locate next to each other. This is possible at the fringe of a city. The urban economics literature (see Ellison and Glaeser and Rosenthal and Strange) has documented the benefits of firm agglomeration but there hasn't been enough research studying why agglomeration is costly. The answer is that in Major Cities in the U.S that the real estate capital stock is durable and tenants sign long term leases; these frictions limit the ability of firms to "co-agglomerate" and thus enjoy the benefits in terms of learning and lower transportation costs from being next to each other.Since we study 110 expensive parks in China, we document heterogeneous treatment effects. Our paper is cool because we document heterogeneous costs of such parks (the opportunity cost of not using the land at the fringe for purely suburban housing) and heterogeneous benefits (that we parameterize as a function of standard urban agglomeration forces). Similar to Hsieh and Klenow , we find that the presence of State Owned Enterprises lowers the productivity of these parks. So, public capital is best used when it lures productive private firms who gain from co-agglomerating next to each other. We argue that due to the land assembly problem that these firms would not have been able to achieve this in the absence of the creation of the new park.
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The NY Times has published an interesting piece about the rise of Chinese Tech companies. For decades, China was known to "borrow" Western technology but now this large nation is becoming a producer of intellectual property and I have argued that this will lead this nation to enforce intellectual property laws.
As China has invested in its own universities and sent millions of young people to study at Western Universities, the nation's stock of human capital has increased. In our 2016 Princeton Press book, Siqi Zheng and I argue that the rise of the human capital economy in China has two effects.On the demand side, more educated people are richer and more sophisticated and more patient and they demand blue skies. The brain functions better in a low pollution setting.On the supply side, such "high tech" people work in jobs that are not threatened by environmental regulation. These two forces together lead to the coastal sophisticated cities in China to be tightening pollution regulations.Now, what about the low skilled? They continue to face Faustian Bargain and do prefer a coal mining job and pollution to no job and less pollution but this activity moves to the poorer parts of the nation. -
My term as the Chair of USC Economics starts this week. Proper decorum suggests that I should no longer be blogging. I've decided on a compromise path. I will no longer write about current events or politics or my humor. I will write about my own research and about activity at USC Economics. Of course, I will be a cheerleader for USC and readers are free to filter my slanted messages.
What needs to be said about USC Econ? USC is a school that people love to gossip about. It is a rich private university in a beautiful city. It aspires to be equal in rank to Columbia and Stanford. Like NYU, it is the "new kid on the block". Yes, there is sometimes drama on campus but there are many promising trends. One that I'm especially proud of is that our undergraduates are really smart. The University offers merit scholarships to hundreds of students and these young men and women could certainly have thrived in the Ivy League.
My efforts as chair will have two main foci:
1. improving education at the BA/MA and PHD level. I will share these thoughts. We also need to help our BA and MA students to find their first job. I will be actively involved in recruiting students to USC (selection) and upgrading their education (treatment).
2. Fundraising. What is the case for giving $ to an economics department? Here USC Economics is reaching out to our many past graduates and successful business people in the area to reconnect with the University. I've already attended many lunches with friends of the University and I've enjoyed meeting people who use their economics training to succeed "in the real world".
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Economists are much better at pointing out "Hicksian Pareto Improvements" in policy rather than pure "Pareto Improvements". Road pricing and pollution permit pricing represent the former but are unlikely to be the latter. In Los Angeles, many poor people drive and this group would prefer to waste time stuck in traffic rather than paying $ for a toll road. Economists have not thought hard enough about how to implement our clever ideas so that the losers from a change in the status quo policy are actually compensated, and expect to be compensated in the future as the new policy persists. This point arises again and again. Read this excellent New York Times piece about the challenge that France's President Macron faces in reforming his nation's labor laws. In a nutshell, Europe's pro-union labor laws create terrible incentives for French firms to actually hire workers. These policy induced labor market frictions affect the young's well being and thus their human capital accumulation and training. Firms who know that they can't fire workers won't hire and won't take a chance on unproven workers.
Is President Macron smart enough to offer the unions a deal that compensates them for giving up their veto power? What would such a deal look like? The challenge here is that the union seeks to protect its current members and hopes to have future young people pay dues to join the union. Macron would probably like to make a one time payment to these incumbents to accept the changes in return for a large lump sum amount of $. The problem is one of "time consistency". Some unborn future person will read Piketty's "Capital Book" and form a union in the future to protect "labor" from the interests of "capital". Some future Macron will say, "wow, I thought that old man Macron back in 2017 took care of this issue, why do I need to pay Picketty Jr?" Put simply, unions today cannot tie the hands of future young people to not re-unionize in the future.
Recognizing this point, Macron could pre-commit to the following rules; "If our nation grows by over 3% per year, I will contribute $xx billion to this pro-poor fund each year. If our nation grows by less than 3% per year, I will discontinue these contributions." The people could then vote on whether to accept the bundle of reforms. Note that my proposal gives "the people" a stake in the aggregate growth of the nation.
