Emily Badger has written an excellent piece for the NY Times.  Perhaps due to space constraints, she does not discuss one key issue.  Most of the challenges of building "high tech" cities emerge because of durable capital.  My proof goes as follows.  Suppose that urban infrastructure only lasts for 1 month and then turns to dust. In this economy, you always have the option to rebuild the city using "modern infrastructure --- including sensors and subways" at the end of the month.  Yes, there would be fixed costs to rebuilding but the city would always be at the technological frontier.

When a city builds a very impressive subway system that is meant to last for 70 years, it is locking into a given technology that will soon be out of date.  Less durable capital embodies an option to cheaply rebuild later at low cost.  This was one of the key points in Bunten and Kahn (2017).

Another example can be seen by riding the subway in Shanghai versus NYC.  One is a modern subway the other isn't.  Go to an Asian airport such as Singapore's vs JFK. Again and Again we see, new capital = good, old capital = dated.   We need strategies that allow us to easily dissemble older capital (think of Lego pieces) and ways to take older capital and reconfigure them for the modern world.  Our urban planners need to build new infrastructure with such option value ideas in mind.

My own USC is running into this issue.  USC Economics is housed in this 1960s building that is not exactly "cutting edge".  If building capital had a shorter life, we would rebuild a modern economics department building with better architecture, design and ventilation.   It is a tribute to the vitality of San Francisco that a great tech hub emerges despite the persistence of the capital stock in place.

In this blog post I haven't tackled the urban politics question of whether a "modern San Francisco" featuring road sensors and other cutting edge technology would be more willing to adopt dynamic pricing and follow Singapore to price roads, electricity and water to reflect true scarcity.  The real green , "smart city" combines both cutting edge technology with dynamic pricing.  Would the urban median voter allow such dynamic pricing to be adopted or would concerns about price gouging the poor lead to a veto?

At USC this term, I am teaching a new class on "the limits to growth".  My course is a fair fight between Paul Ehrlich and Julian Simon.   My class features 90% non-economics majors and many have never taken a course with an economist before.   I sense that they side with Ehrlich.   Their consensus is that we are on a path to destroy our planet and that only dramatic changes in politics and lifestyles can save us.  It is possible that they are correct.  As they make these points in our seminar class, I ask them;  "if you know this, why doesn't the suburban median voter know this?"  They eventually sketch out ideas related to free riding and the Tragedy of the Commons. 

I sense that a majority of my students are uncomfortable with the claim that free markets are the major source of improvements in all of our well being.   We read this piece and it set off quite a good debate. 

My students are quite smart and they have figured out that economic models focus on individual choice.  I choose to drop out of school.  I choose to study rather than to party.  I choose to take actions that raise my risk of pregnancy. I choose to walk in  risky place at night.  When bad things (such as poverty) happen to good people, how much of this outcome is due to their own choice versus bad luck (a health shock, graduating during a recession)?     I have shown them James Heckman's argument that we must expand early education for all because children do not choose their parents.

If outcomes are due to luck, then a risk averse society will engage in more taxation and redistribution than in a society that believes that life outcomes are directly related to costly effort (i.e Lebron James is a great basketball player due to his long hours of practice).

My students also believe that the American Dream of upward mobility is vanishing.  But schools such as USC are providing more financial aid and opportunity for first generation students.  My students believe that U.S public schools are under-performing in preparing young people for college but they oppose privatization and Milton Friedman style school vouchers.  They must implicitly believe that parents are not be "sophisticated shoppers" in choosing a school.

I sense that many of my students would have voted for Senator Bernie Sanders in 2016.   I am learning from my experience teaching non-economists. I hope that my ideas and empirical claims are resonating with them.   I sense that some of my students are surprised to be confronted with a University of Chicago trained economist.  The market place for economics ideas needs to expand and enter the classrooms of humanities majors (the bulk of my students).

My students reject the perfect competition model.  Many voice a dark vision that powerful elites control government and markets and pay such that the "little guy" has few choices and just suffers.   I steer discussions back to human capital and skill formation and the possibility to engage in personal investments such that one commands a wage premium.   I am learning.

The typical academic economist does not leave the "comfort zone" and teach non-majors. 

The WSJ has published a fascinating piece  that points out an inconsistency in the expressed views of the leaders of Oakland's city government.  This coastal city is suing Exxon and other fossil fuel companies for engaging in business that threatens Oakland's future (i.e fossil fuel burning causes sea level rise that will impose costs on Oakland).   Oakland's inconsistency occurs in the municipal bond market.  Oakland seeks to borrow a large amount of $ by selling bonds. In the bond risk disclosures, climate change is played down.  In this setting, Oakland has a strong incentive to state that it is a low risk because low risk borrowers can borrow at a lower interest rate.

The author of the WSJ asks a simple question;  which truth does Oakland believe? Is it over-exaggerating the risk it faces to win the Exxon law suit while simultaneously downplaying a possible risk in the municipal bond market?   Did Oakland's officials anticipate that they could engage in such "mixed messaging"? 

In truth, Oakland will need to borrow $ to help it engage in capital upgrades to prepare for sea level rise. The market will set the equilibrium interest rate to reflect the risk.   If investors know that coastal cities have an incentive to lie and understate the true risk then new risk providers such as the nascent Jupiter project will emerge to provide this information.  To put this simply, when you buy a used car --- do you just ask the current owner for her assessment of its quality?  Don't be a sucker, do your homework.

The Exxon lawsuit raises major issues.  I understand transaction costs but why aren't the litigants suing gasoline car makers and gasoline car buyers?  This lawsuit is an indirect court induced carbon tax.  If the litigants succeed, what would be the economic incidence of this tax? Would Exxon's profit decline?

A good debater might argue that the municipal bonds are issued for 30 years and over this time horizon, coastal cities do not face a serious challenge and thus the bond default risk is low.  But, as you make these arguments think back in time.  1988 was 30 years ago.  Technology has made some progress.  By the year 2048, I have a feeling that our technological frontier will have leaped forward to help us to adapt to the new normal.  The coastal capital stock will be less durable and we will be prepared.

Read our 2017 paper on coastal real estate in the face of climate change risk.