Alfie Kohn has written a provocative opinion piece for the NY Times in which he argues that standard "pay for performance" incentives do not matter and often create a backlash effect.   Economists should take note because his piece is an implicit jab at 98% of the ideas embodied in economics research.  If "incentives do not matter", then this has many implications for the progressive agenda.  The minimum wage can be raised without employers substituting away from labor.  Taxes on the rich can be raised without them fleeing to a low tax haven or reducing their Silicon Valley effort to devise the next "big thing" (think of Musk or the Zuck). 

Mr. Kohn does make a series of interesting points.  I certainly believe that there are cases when paying people for a specific task does not yield a large response. He also points out based on some field experiments that a short term experiment (such as paying a person for a task for a few months and then stopping the payments) does not have a long term effect.

There are two separate questions here; First, when do incentives matter?  Second, why do incentives matter?   In our Econ 101 classes, we teach our students that in a world featuring considerable diversity of talents and our own "conception of the good life", there will always be a set of individuals who are  "at the margin".  This set of people will change their behavior if they receive a nudge.  This nudge might be a $ incentive or it might a social incentive such as community celebration or shaming. 

For example, if we need more young men to sign up for the Army --- how do we achieve this? Do we increase the pay for serving in the military? Or do we increase the prestige of serving? Do we increase the "on the job training" that such men receive? Or do we increase the later life health and retirement benefits from serving?  The military has strong incentives (since it faces a budget constraint) to pilot different strategies to identify the most cost effective ways of recruiting prospective troops.

A deeper question is why are some people "at the margin"?  In the aftermath of James Heckman's Nobel Prize win in the year 2000, more and more economists work on the economics of heterogeneity.  Why do we have different goals and aspirations?  Does the same person have the same goals as she ages?  How do life experiences and one's own choices interact with each other to shift "who you are and what you want"?   A given individual knows what motivates her to choose where to live or whether to quit her job, the economist seeks to learn this person's willingness to  substitute one choice for another.   Mr. Kohn's piece suggests that economists are looking to the wrong motivating factors when we crassly focus on $.  In truth, $ matters more than ever because in this Internet economy there are a huge number of ways to use $.  You can buy private goods or donate it to a cause you are passionate about.

Paul Sullivan has written an interesting piece that details his investment advice to help NY Times readers continue to earn a good rate of return in a world facing increased climate risk.   He really has in mind that carbon taxes will soar over the next few decades and this will punish firms with a large carbon footprint and favor firms that produce low carbon substitutes or whose cost structure is such that they economize on carbon emissions (see his Walmart discussion).

So, his piece is really about investing in a world featuring rising carbon taxes.  I'm not convinced by his investment advice.  There is considerable uncertainty about the future of carbon mitigation policy and the future price path of energy used for transportation and the price of electricity.

An even more interesting piece would investigate what is the right investment portfolio to reduce exposure to climate risks induced by climate change (not by energy price dynamics and policy dynamics).  Here there are questions about which pieces of real estate have a comparative advantage in handling future shocks? Will new REITs specialize in Canadian and Northern U.S properties and earn high rates of return?  Is Warren Buffet correct that the insurance industry will make higher profits because of climate change?  Are there credit default securities that will have higher probabilities of soaring if "fat tail" risk is as bad as climate scientists claim?  If fat tail risks become increasingly likely due to climate change, which assets will be at risk?  I would like to teach a business school course on this in the future.  Devin Bunten and I discuss some of our ideas in this 2017 paper.  

Marc Benioff throws a punch at Milton Friedman (calling him "myopic") in his interesting NY Times Opinion Piece today.  Recall that back in 1970 that Milton Friedman argued that the responsibility of corporations is to maximize profits and allow their shareholders to spend their money as they please.  Read Tom Coleman's remarks here .  Mr. Benioff implicitly calls Friedman selfish and "outdated".

As an enlightened businessman who has long lived in San Francisco, Mr. Benioff argues that businesses are located in a specific geographic area and thus have a responsibility to boost that area and to help the less fortunate in that area.  He calls for political support for Proposition C   (and read this) that would tax rich local companies to pay for services for the homeless.

A few points.

1.  Publicly traded companies located in San Francisco have shareholders who do not live in San Francisco.  These individuals are being asked to sacrifice some capital gains to provide for San Francisco's homeless population.  Such individuals would have used their capital gains in part for their own charities that they support (and for their own private consumption).  Who owns these big companies, the shareholders or the people of San Francisco?  Friedman would call this spending "other people's money".

2.  The San Francisco Chronicle opposes Prop C with an interesting economic argument as it argues that by "throwing more money at the problem" that this diminishes the incentive to be scientific here and learn what actually is a cost effective solution for helping the homeless.  Necessity is the mother of invention in solving challenging urban social problems!

3.  In fairness to Mr. Benioff,  prior California research has documented that you can tax rich people without them moving away. Texas is not a close substitute for Malibu read Brueckner and Neumark 2014.  

But, if San Francisco City adopts Proposition C, an urban economist would posit that economic activity will migrate to just outside the city boundary and this represents a type of "tax haven".  Mr. Benioff is implicitly assuming that the productivity and amenity effects of working in San Fran City will outweigh his tax hike.   Economists call this the cross-elasticity effect.

So, what would Milton Friedman say here?  There is a real homelessness challenge and what can be done?

Let's start in the labor market. Fewer people would be homeless if they had higher incomes. Friedman would repeal minimum wage laws, anti-firing laws and unionization to provide incentives for firms to be willing to take a chance on hiring workers whose quality is difficult to certify ex-ante.  Working builds up human capital and non-cognitive skill

Turning to the housing market;  Friedman favored housing vouchers but are the homeless able to make "good choices" for themeslves?  Which geographic areas would accept these vouchers? Would these receiving areas deteriorate in quality because crime would rise as more homeless move there?    Friedman favored the decriminalization of drugs.  Would such an approach help the homeless receive treatment and alter their drug regimen?    Friedman would have embraced Gary Becker's crime and punishment of patrolling the streets and enforcing laws.  These policies would have costs but they would protect the general public against emerging threats to their safety and quality of life issues.  Friedman would support the enforcement of property rights here. What are the rights of the homeless and what are the rights of the non-homeless?

Friedman would also argue (as did John Quigley) that low housing supply caused by NIMBY land use regulations raises rents and home prices and artificially inhibits gains to trade between middle class people and real estate developers.  If more middle class housing is built then rents fall and some homeless people could afford housing in San Fran.  Market solutions to the homeless challenge have been inhibited.

To quote Quigley's 2001 RESTAT paper; "Furthermore, rather modest improvements in the affordability of rental housing or its availability can substantially reduce the incidence of homelessness in the United States."  Milton Friedman would agree.

While the USC Football team is not playing as well as usual, things are humming along at USC Economics.   On Tuesday October 23rd 2018, USC Economics will host an interesting panel focused on "
The Economist’s Perspective on the Future of Silicon Valley, AI and Innovation".  I will moderate a panel that will include Preston McAfee, Simon Wilkie, Guofu Tan, and Pai-Ling Yin.  I will ask the following questions;

1.  How has the rise of the “new economy” affected consumer well being?
2. Does the growth of such firms as Amazon portend future “price gouging” as such firms exploit their “Big Data”?
3. What has Amazon done right as it has entered new markets such as Amazon Video?
4. What are the labor market implications of the rise of these major firms? What jobs do we gain and lose? Why are so many economists talking about monopsony power in labor markets? 
5. Does the rise of AI (artificial intelligence) threaten to create more unemployment and increased inequality in the labor market?
6. What regulatory challenges does the rise of New Economy  firms pose?
7. What regulatory rules would promote greater innovation and the growth of the New Economy?
8. Does Europe have “better rules” for regulating these firms?  Why does Europe have different New Economy regulation than the U.S?
9. What will be the next "Big Things" we will see achieved by the introduction of  AI in the modern economy?
10. Could anti-globalization trends disrupt Silicon Valley?
11. If Silicon Valley is disrupted, does California and the U.S lose? How much?  What about the rest of the world?  Would China gain from the decline of Silicon Valley?

I am delighted that Bill Nordhaus and Paul Romer will share the 2018 Nobel Prize in Economics.  A technical summary of why they have won is posted here.  I am eager to see if Professor Nordhaus engages with Prof. Robert Pindyck's arguments about the "danger" of taking Integrated Assessment Models seriously as predictive models of how the world's economy will be affected by climate change.

In my ongoing research, I argue that Paul Romer's work provides a framework for re-evaluating the Nordhaus core model.  I explore this theme in this 2018 paper with Zhao.   

Bill Nordhaus made a major contribution when he explicitly wrote out equations positing that economic growth causes climate change (through creating more GHG emissions) and the feedback equation that climate change (in his model a warmer earth) lowers economic growth.  This second equation is his "damage function".

For example,  take a look at page 23 (equation 2.16) of the Boyer and Nordhaus book.  I will soon submit a 300 page book to Yale University Press that solely focuses on this one equation.   My book argues that this equation is not a "stationary law of physics".   When a process is "stationary", the key coefficients (i.e the thetas in his equation) never change over time.  Endogenous innovation is such that these coefficients do change over time and the key to making scientific progress is to investigate this often messy process.    Due to rising human capital, innovation and free markets, each day we become better at adapting to the ambiguous risk that climate change now poses for us as individuals, firms and governments.

As a microeconomist who works on environmental and urban issues, I argue that that we are now an urbanized people and we live in many different cities that are continually reorganizing themselves to cope with new risks.  This "evolutionary process" is hard to mathematically model but Hayek would appreciate that this evolving approach means that no one set of "fixed" theta parameters exist (see the Nordhaus equation 2.16 again).  The impact of climate change on our economy is actually shrinking over time due to adaptation. The rate of this adaptation is determined by the ideas embodied in Paul Romer's work but these ideas are missing in the Nordhaus work.  Thus, there is a slight irony to the  2018 Prize.   Bill Nordhaus has given us an excellent foundation but to make real progress on thinking about our future, we must incorporate Romer's insights into the Nordhaus model.

For a preview of my book, let me point you to my writing from back in 2010 related to my popular press Climatopolis book.   My new book is much more academic than my Climatopolis book and does a good job sketching out what I have learned about adaptation over the last 8 years and where the academic literature has gone.

Here is my co-authored piece relating Romer's Charter Cities idea to climate change adaptation.

Finally, my friends at PERC published my piece back in 2016 that takes a fresh look at the urban economics of climate change adaptation.

Endogenous technological change is "messy" and it is difficult to predict the direction it will go. In Nordhaus' core model, there is no endogenous technological adaptation change. This simplifies the math but it has major implications for the inference and relevance of the model. It also zeroes out millions of behavioral margins of adjustment.   Take a close look at that  equation 2.16 that I point you to above and tell me if the rise of new ideas and human capital really have no impact on attenuating that "damage function"?  What would Paul Romer and Robert Lucas say?