USC didn't win the Rose Bowl this year.  USC has been in the news recently.  Despite these setbacks, USC Economics is building up a real strong department.  To give our PHD program a boost (or at least a laugh), I am teaching 6 micro theory lectures this fall.  I will teach our new students how Gary Becker and Sherwin Rosen thought about the world.    A free copy of my notes is available here.

This is not romantic but it captures some economic logic.

1. Calculate your lifetime expected utility.  Show your algebra.
2. Now you can marry another person.   Each year, this person draws from a pizza endowment with independent draws over time distributed N(6,1).   The correlation of your endowment and this person’s endowment = -.3. You have agreed to the following risk sharing contract, each year your consumption = (person a’s endowment + person b’s endowment)/2   .
3. Measured in slices of pizza at time 0, how much would you be willing to pay to marry this person?
4. Repeat #2 under the assumption that the correlation of your endowments = 0.
5. How does your answer to #2 change if at age 0 you are given for free a bond that pays you 1 slice of pizza each year until you die?  Explain why this reduces your willingness to pay to marry.

The NY Times has published a piece about a new NBER Working Paper that finds that the average judge appointed by a Republican issues more stringent sentences against African-Americans than the average judge appointed by a Democrat.  Since such judges are randomly assigned to cases, this result is interpreted as a "treatment effect" (rather than as a "selection effect").

Such research cannot answer "why" this fact is a fact.

Given this point, let me turn to a more subtle issue.

Will this research "matter"?   If we as a society do not want there to be "differential sentencing" for the same offense, then this research could change our society in two different ways.

Case #1:  The Republican judges were unaware of their "hidden bias".  Now that the NBER detectives have uncovered this result and taught the world about this bias, the Republican judges will converge back to the average sentencing norm.

Case #2  The Republican judges were aware that they were engaging in this behavior but the rest of us were unaware of this.  This is the asymmetric information case.  Now that the Republican judges know that their "secret" is out, the New York Times and other progressive outlets will hold them accountable.  As they are now watched the muckraker press, there will be two effects. First, there will be a selection effect as judicial appointments will initially be more heavily scrutinized. Second, judges will have lost some of their discretion because the media will be more carefully watching their ruling. In this age of "Big Data", it is easier for young Assistant Profs of Law to write these types of papers to test in real time for differential sentencing.

I am very interested in economics of the principal/agent problem in the context of government and our institutions doing their job.  Who is held accountable  and what institutions create such "rules of the game"?   An optimistic paper studying this is the Besley and Burgess QJE paper.

Besley T, Burgess R. The political economy of government responsiveness: Theory and evidence from India. The Quarterly Journal of Economics. 2002 Nov 1;117(4):1415-51.

Based on data from India, they argue that when people have more education --- they demand more sophisticated newspapers that have incentives to invest in Woodward and Bernstein Watergate style muckraking reporting. This creates accountability as political leader "private information" vanishes.  

San Francisco, New York, Boston, Los Angeles, Seattle, and Portland are booming.  Such areas offer great opportunities for our best young minds.  These progressive cities limit housing supply and this limits population growth, causes suburbanization, and contributes to sky high local real estate prices.  Moretti's local multiplier effect hypothesis posits that the booming local economy creates local opportunity for middle class people.

We all know that other places are not doing well.  The geography of upward mobility and despair is a major research topic. Raj Chetty claims that "place" is central for determining upward mobility for the next generation.   James Heckman makes some brilliant comments on Chetty's "geography hypothesis" in this Princeton video.   Case and Deaton quantify the suffering taking place and this suffering has implications for political polarization and voting patterns.

What is the link here to Dr. Krugman's remarks on coal?    During his great career, Dr. Krugman has moved from Yale to MIT to Yale to MIT to Stanford to Princeton to CUNY/NY Times.  He has shown a willingness to move to new opportunities.  Not all people are willing to move.  The economics of social networks and endogenous migration costs is quite interesting and Glaeser,Laibson and Sacerdote have written this key paper.

In recent work , Austin, Glaeser and Larry Summers take seriously the importance of investing in place based policies.  While most Chicago economist sneer at such policies, in an economy featuring middle aged people who are "stuck in place", they must be reconsidered.

This brings me back to Dr. Krugman.  Coal miners are "stuck in place" (West Virginia) and stuck in a declining industry (coal miner).  They do not want to substitute from either.   President Trump and their local elected officials have offered an enticing vision that they can turn back the clock to a better earlier era when aggregate demand was higher.

Dr. K is stating "the obvious" point  that this group must face the facts and adapt to the new realities.   What is fascinating is that this statement features correct economics but naive politics.  Aggregate demand creates supply.  If I am the only bald man in the world, then no drug company makes an anti-baldness drug.  The same logic applies in politics.  If enough people have the same problem (a desire to remain in an unproductive place with mismatched skills for the new economy), this creates an aggregate demand for politicians who can introduce socially inefficient policies to achieve this desired political equilibrium.

Johnathan Eyer and I explore this in our 2017 NBER Paper.   

In recent years, the share of U.S electricity generated by coal has fallen from nearly 50% to 33%. The costs of this transition are spatially concentrated, and mining states have already lost income due to the reduced demand for coal. Coal states have enacted policies to encourage local power plants to purchase from within state mines. We document that power plants in states and counties with substantial mining activity are more likely to be coal fired and to purchase more within political boundary coal. These results are robust to including flexible controls for the distance from power plants to mines. While coal states benefits from local protectionism, these efforts impose social costs because coal mining and coal burning creates significant environmental consequences. We quantify these effects and find that a one-percentage point increase in the proportion of coal plants in a NERC region with an in-state coal mine results in approximately 2.3 million additional annual tons of CO2 emissions.


 An important issue that economists must make progress on is the politics of "Dealing with Losers". I strongly recommend this book by Michael Trebilcock. 

So, what is the right spatial distribution of the population in 2018?  Do we change coastal zoning patterns and build to Hong Kong Density and pack people from West Virginia into NYC?  Do we tax the productive coasts to provide a Keynesian package for the small towns featuring many supporters of the President?

Or, do we reject this geographically tilted playing field and focus on Jim Heckman's agenda of promoting early skill formation and good parenting for all?    Are these place based policies and person based policies complements or substitutes?

Brad Plumer reports that Alaska's political leaders are crafting plans to reduce the state's GHG emissions.   The piece does not explain "why" these leaders are taking this action.  The piece names a few coastal parts of the state that are at risk of sea level rise and this could certainly occur.  But, Alaska's actions have no impact on local sea level rise. Local sea level rise is determined by global GHG emissions.   Free rider logic would predict that the state has no incentive to unilaterally take these actions. Alaska, alone, cannot stop climate change. Its contribution to world GHG emissions is tiny.  Yes, it produces oil (but even California produces the same amount). If Alaska exited this market tomorrow, how much would world gas prices rise by?  What other location would increase its production so that GHG emissions would barely change? 

If the state's leaders believe that the U.S will soon introduce a carbon tax, then this early regulatory ramp up may lower the long run costs of adjustment.  While this second argument could make some sense, I would like to know more about the perception that Federal carbon taxes will rise (from $0 right now) within the next years.

At the end of the article there is subtle discussion of the state's nascent climate adaptation efforts. Of course, Alaska has strong incentives to step up here and I agree with Nancy Fresco that Alaska's experiments in adapting will provide valuable lessons for other areas. This "guinea pig" effect is a key piece of my optimism that we can adapt to this serious emerging threat.

My Climatopolis was published back in 2010.  Take a look.  45,000 people have read this.

https://voxeu.org/article/climatopolis-how-will-climate-change-impact-urbanites-and-their-cities

A new law in California will require that every new home built starting in 2020 must have solar panels.   I have studied the housing price premium commanded by solar homes in this and this paper.

Who is this new law binding for?  There are homes that would not have installed solar panels in the absence of the law.  This is the "marginal set".

An energy economist will ask the following questions;

1. Where are these homes? Does the sun shine brightly on these areas?  That the home owners would not have chosen to install solar suggest the answer.

2. What is the hourly price of electricity in the areas where the law is binding? Economics would predict that the marginal price is low and this is another reason why the buyers of new homes would not have wanted the panels in the first place.

So, either the law is not binding (because the panels would have been installed in the absence of the law).

Or the law is binding and it is forcing new home buyers to have panels that won't generate much power or that generate power but have a low marginal benefit (because the price of electricity is low).

This "essential heterogeneity" caused by the mandate to take the treatment (i.e install solar panels) suggests that the marginal benefits from forcing the marginal homes to adopt solar will be low.

Now this pessimistic logic is false if this demand mandate leads to learning by doing on the supply side by solar installers and solar panel builders.  But, this needs to be tested.

There is also the Gruenspecht effect.  The new law (requiring solar panels on new homes) is an implicit tax on new  capital.  Given that homes are long lived durables, some incumbent home owners will choose to keep their old home longer and renovate it versus tearing it down and building a new house. If new homes are more energy efficient than older homes, this new law could reduce the California residential sector's energy efficiency gains!

Substitution effects cannot be ignored. 

Back in 2012, I had the opportunity to speak to Gary Becker.  I asked him about the real effects of higher taxes on human capital acquisition in the modern Internet economy.  In particular I asked him, "Would Mark Zuckerberg have invested an equal amount of time and effort in creating Facebook if he had to pay European tax rates on his earnings and stock options? "   I pose this now because Paul Krugman has written a NY Times opinion piece recently arguing that President Trump's tax cut will have little effect on increasing Apple's investments in real activity in the United States.  Dr. Krugman tells a tale of accounting balance sheets rather than a story about optimal investment and the after tax rate of return on capital investment.

Again my question to Gary Becker was;  "If Silicon Valley is the engine of the modern economy, could this golden goose be taxed more without destroying it?"  Dr. Krugman appears to be saying "yes" but I would like to see some empirical evidence.

Gary agreed with me that at the intensive margin that Zuckerberg's hours worked at Facebook is not sensitive to his real after tax wage.  My logic is that the Zuck loves his job so his hourly real wage does not play a key role in determining his effort.

But, Becker argued that if  young brilliant people in the U.S face such progressive European tax rates that fewer of them would invest in skills to become computer science majors.  So, he focused on the extensive margin (the choice of sector) not the intensive margin (hours worked conditional that you are a computer programmer).  He implicitly was saying that more Zuckerbergs would become poets if the young face European tax rates.  By a law of large numbers, this exodus of talent from computer science to poetry would slow down Silicon Valley in the future (i.e we would have fewer Future Facebook startups).

Still, we return to Krugman's conjecture.  For firms who already exist, is their productivity growth and their investment slowed by taxes?  A key question here would be their bidding for talent.  If workers earn a lower after tax earnings in Silicon Valley, due to a tax increase, would these workers still choose to work in this sector?  Who would bear the economic incidence of higher taxes?  The firm or the skilled workers?

As I think about Krugman's column, I wonder if Apple is a special company in Silicon Valley or whether his logic extends from Apple to the other major firms such as Google and Facebook?