The media keeps running articles that Greta Thunberg and a majority of the world's young people worry that "society is doomed" because of climate change. I understand that they seek to create a political movement to enact a global carbon tax. I support the carbon tax but do they really believe their rhetoric?  Are they really such adaptation pessimists? What are the implications of their mindset for their mental health and their investment in themselves at this key point in their life-cycle?

Joel Slemrod is a top economist at the University of Michigan.  In 1986, he published a paper that today only has 40 citations. It was titled; "Savings and the Fear of Nuclear War" .   The point of this blog post is to rehabilitate his paper in a new context.   Here is his paper's abstract;

The hypothesis of this article is that the performance and, in particular, the rate of saving in the postwar U.S. economy has been influenced by the changes in the public perception of the threat of a catastrophic nuclear war. An increased threat shortens the expected horizon of individuals, and thus reduces their willingness to postpone present consumption in favor of investment. The hypothesis is tested by expanding a standard savings function estimation technique to include a measure of the perceived threat of nuclear war. Several alternative measures of the perceived threat are considered, based either on the setting of the “doomsday” clock published monthly in Bulletin of the Atomic Scientists, which reflects the editors' judgement about the likelihood of a nuclear conflict, or on an index of the extent of press coverage of nuclear war issues. The tests all support a large and statistically significant impact of the threat of nuclear war on the rate of private saving. These tests are not viewed as conclusive evidence in favor of the economic impact of the perceived threat of nuclear war. Nevertheless, this research suggests that economists may have been overlooking an important source of influence in the postwar, postnuclear U.S. economy. Conceivably, it could affect not only the private savings rate but also other economic variables such as the level of investment in human capital, the level of asset prices, the term structure of interest rates, and the rate of inflation.

Substitute the word climate change for "nuclear war" and let's focus on young people who are still being "Formed".   The last sentence of the article is what really interests me.  Based on standard life-cycle investment models, if the young truly believe that we are doomed;  this creates several predictions;  relative to a world where we are "not doomed";

Predictions due to over-estimation of future "doom"

The young will be more likely to currently engage in substance abuse

The young will focus on leisure (Instagram, social media)

The young will be less likely to bear the fixed costs of training that only payoff in the future

The young will not invest in understanding our institutions.

If youth is an essential investment stage such that at middle age we can't reverse our past choices, then the current "doom and gloom" will affect humanity through the OLG mechanism.  The current young will inherit this world.  

Older economists will see that this is a repeat of David Meltzer's University of Chicago thesis on the causal effect of AIDS in Africa on educational attainment there in the 1980s.

I will be writing more about this but adults who agree with this blog post should encourage their teens to read my 2021 book and to study some economics. 

 The Washington Post has published a piece stating that the Secretary of Transportation, Peter Buttigieg, is the big winner of the Biden Infrastructure Bill as he will be attending many ribbon cutting ceremonies as grateful local mayors shake his hand. 

Economic research offers many insights here about the efficiency and equity effects of this multi-billion dollar investment.

Point #1:  This is an irreversible investment.  When a city builds a new subway line, this billion dollar project cannot be later sold on Ebay and use the $ to do something else.  In contrast to light rail and subway lines, dedicated buses feature more option value because they can be sold off or redeployed on different routes in the same city. Given that we don't know how cities will develop over time, this real option has value.

Point #2;  Past expansions of public transit have not significantly increased ridership with the exception of Washington DC.  In the case of Los Angeles, improves in rail service (such as the Light Rail on Exposition that I ride) has taken bus riders away from the bus.  See our 2005 paper.      If crime rates continue to be a concern in cities then the middle class will be even less likely to use the "shiny new" infrastructure.  The poor do rely on public transit to move around cities and an expansion will improve their quality of life. An economist would ask whether they value this benefit more than the cash equivalent?

Point #3:  The older infrastructure in the nation is located in older cities, where the population is barely growing (or shrinking) and where the voters are mainly Democrats.  

Point #4:   The highways tend to be built in the suburbs where the voting base leans Republican.  My 2011 Brookings piece with David offers several constructive ideas for how to "build back better" here.

Point #5:  If progressive cities gain better infrastructure due to the Biden Investment AND if they don't build much housing (the progressive city NIMBYism is well documented)  , then housing prices will rise and the poor and middle class will be further squeezed by this new investment.  

Point #6:  There are many economics consulting firms that intentionally offer extremely optimistic ridership estimates ex-ante and this helps ambitious government officials to justify projects (i.e to say that it passes a cost/benefit test) when in reality --- ex-post evaluations show low usage of the new infrastructure.  See Pickrell 1992.

Point #7:  Given that unions are powerful in progressive cities, what is the marginal cost of infrastructure creation in these cities?  Is the Department of Transportation seeking to build a new capital stock or to enrich a special interest group that supports the Democrats?  How many middle class new construction jobs will be created?  Will the expansion of the public capital stock crowd out the expansion of the private capital stock as construction crews work on transport infrastructure rather than building private sector projects?  What is the shape of the construction supply curve?

Point #8, once the new infrastructure is completed --- will this greatly improve urban quality of life in cities such as Baltimore that have been shrinking?  How will the Mayor and local civic leaders and private sector stakeholders change their investments and policy decisions? What positive synergies might emerge?   Our 2021 Unlocking Book explores some of these themes of investment co-ordination between the private and the public sector.  

 Bill Gates argues that we were insufficiently prepared for COVID-19.  Does our failure to adequately prepare for this crisis portend a future under-investment to invest in self-protection to reduce our exposure to climate change risk?

In the case of COVID, we had enjoyed 100 years of little exposure to vast contagion.  This certainly played a role in lulling us into a complacent mindset.  Building on the work of Chuck Manski, a good research project (armed with a time-machine) would take the research back to each year before February 2020 to ask different people around the world about their perception and degree of worry about infectious disease risk as a major global challenge. I predict that few people would have ranked it has a major concern.

Imagine if a Presidential Candidate in 2016 had said, "I will set aside 1% of the Federal Budget (so roughly $30 billion a year) to spend on vaccine preparation and logistics." This candidate would have been mocked for wasting money.

Why didn't the drug companies invest in the architecture to have vaccines ready to be mass produced?  My guess is that the answer is time-consistency.  These for profit firms anticipated that the probability of a major contagion is low and if this state of the world occurs governments would not allow them to "price gouge".  So, by backwards-induction --- it isn't profitable to take the risk to invest in such surplus capacity for a product that is highly likely to not be demanded.   Activist government destroyed the incentive to take this risk!

Pivoting to Climate Change Adaptation

My optimism about our rising capacity to adapt to climate change has only been increased by the COVID crisis.

We now have zoom and major firms are roughly as productive working fact to face as WFH.  Workers are now free to live where they want to live and this opens up many new permutations and possibilities.

We now have more imagination that scary scenarios can suddenly occur and that we can't rely on government to "save us". We are adults and we must use markets and market forces to cope with these changes.

Unlike with COVID, there is much more cross-sectional variation in shocks caused by climate change. Mother Nature is running many more experiments here as different places face a Texas Freeze, a West Coast Fire or  a Hurricane Ida.  Similar to Batting practice in baseball, this experience helps us to learn. An ideas are public goods.

In contrast, with COVID --- we didn't have enough experience with adapting to such risk and despite this major progress was made in keeping our economy humming along during crisis.

A key point that I want economists thinking about is that a "climate shock" is a shock to a place.  This shock affects people who live and/or work at that place or own assets there or use products grown and produced there.  Markets mediate the effect of the shock to a place on different people.  In the case of a COVID-infection --- this is a shock to a person that can be directly amplified to another person through physical contact.  Under what circumstances does a shock to places (climate shocks) look a lot like shocks to people (COVID infection)?

My 2021 book Adapting to Climate Change and my 2022 book Going Remote build on these themes.

In earlier work, I have contrasted adapting to terror attacks versus climate change.  New risk adaptation work could explore the lessons learned from adapting to terror risk, infectious disease risk and climate change risk.

 The Biden Administration is about to enact a new infrastructure law that will spend more than $1 trillion dollars on rebuilding America's infrastructure. Cities such as Baltimore, Cleveland, Detroit and St. Louis need new investment to boost the local economy, reduce local poverty, and increase the quality of life of children in these cities. My co-authored 2021 book; "Unlocking the Potential of Post-Industrial Cities" explores the synergistic investments that are needed to help the many poor people who live in poor cities to achieve their own "American Dream". Unlike other urban books, our book focuses on how to use free markets and the private sector to be the catalyst here. The microeconomic approach to thinking about urban revitalization offers many new insights for how such post-industrial cities can escape the local poverty trap.  My book (co-authored with the wise Mac McComas) has received six 5 star reviews on Amazon.  This average rating is much higher than my book ratings for my other books. 

Urban economists have written about the synergies between investments in people and place based infrastructure. In a series of co-authored papers, I have measured these effects. Here are a few examples;

Siqi Zheng & Matthew E. Kahn, 2013. "Does Government Investment in Local Public Goods Spur Gentrification? Evidence from Beijing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 41(1), pages 1-28, March.

1. Dora L. Costa & Matthew E. Kahn, 2015. "Declining Mortality Inequality within Cities during the Health Transition," American Economic Review, American Economic Association, vol. 105(5), pages 564-569, May.

Seungwoo Chin & Matthew E. Kahn & Hyungsik Roger Moon, 2020. "Estimating the Gains from New Rail Transit Investment: A Machine Learning Tree Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(3), pages 886-914, September.

1. Dong, Lei & Du, Rui & Kahn, Matthew & Ratti, Carlo & Zheng, Siqi, 2021. "“Ghost cities” versus boom towns: Do China's high-speed rail new towns thrive?," Regional Science and Urban Economics, Elsevier, vol. 89(C).
2. Kahn, Matthew E. & Sun, Weizeng & Wu, Jianfeng & Zheng, Siqi, 2021. "Do political connections help or hinder urban economic growth? Evidence from 1,400 industrial parks in China," Journal of Urban Economics, Elsevier, vol. 121(C).

Since Mac and I know that we do not know all of the answers about the likely impacts of the Biden Infrastructure plan for distressed cities, we have participated in a series of enlightening interviews.

Poor cities that experience job growth and improvements in quality of life often experience gentrification. We discuss this complex issue with Emily Badger of the New York Times.

Job Creation and entrepreneurship is essential for a city to flourish. We discuss barriers to entry with Harvard's Edward Glaeser

In recent years, Pittsburgh has made a comeback. What are the lessons to be learned from this important case study? We speak to Richard Florida of the University of Toronto.

In our book, we emphasize the key role that mayors play in determining the local "rules of the game" and setting policies and expectations. We discuss Michael Bloomberg's success as Mayor of New York City in an in depth discussion with NYU's Mitchell Moss

Small businesses can be a key piece in the puzzle for creating wealth and private sector jobs in cities. We speak with NYU's Arpit Gupta about issues related to urban economics and corporate finance in helping startups to launch in cities.

From my two years living and working in Baltimore, I saw a city with great potential whose leaders need to embrace the free market approach to help all of its current and future residents to thrive. The upcoming investments by the Biden Administration in such cities will only have a lasting impact if these cities have created "rules of the game" that increase the investment by; 1. young people investing in their skills, 2. business investment in creating new firms and private sector job growth, 3. government creating a business friendly environment and a safe, green, clean city, 4. real estate interests investing in upgrading the city's aging physical capital stock.

For an overview of the entire book, watch this video that covers Chapter One of our book:

 A few thoughts about the pending Infrastructure Bill.

What Criteria Will be Used to Allocate the Money?

An efficiency criteria would state that it should be allocated to those places and on those projects within such places that offer the greatest economic and quality of life impact.  Before we make such irreversible investments, how do we know what these effects will be?  Is the public ready for spatial general equilibrium models to guide this prospective work?

If the political process diverts $ to be spent in the districts of powerful Congressional leaders, how will economists measure the opportunity cost of such "misallocation"?   This raises the true "price" of this bill and increases cynicism about the efficacy of government expenditure.  

Who Will Oversee the Construction of the Infrastructure?

What would be the costs and benefits of asking the Chinese CCP to build this infrastructure for us?  Their Bullet Train system looks like it has been built more cheaply and more quickly than California's nascent bullet train.  I am 1/2 kidding here.  A cynic would ask;  "Will this infrastructure bill simply create high paying construction jobs for U.S union workers?"  Perhaps that is the real intent of this bill.  Will there be a competitive bidding process for garnering these contracts?  Does the Boston Big Dig cost over-runs foreshadow what will happen here?

How Does "Better Infrastructure" Improve Our Economy's Performance and Quality of Life?

Here I would say that there are key complementarities.  Our leaders must introduce road pricing, water pricing, dynamic electricity pricing to reflect fundamental supply and demand forces. I predict that our true gains from this Keynesian expenditure scaleup will be much greater if the pricing of this infrastructure uses our growing supply of "Big Data" to signal the dynamics of resource scarcity.

For example, Texas will suffer less from the next Texas Freeze if the grid is more reliable and more consumers are incentivized to sign up for dynamic pricing. 

Better Data

I would like to see Mayor Pete in his position at the Department of Transport commit to complete transparency over which entities are getting the subcontracts to implement this work and to see the bidding process details. How will the American tax payers know if the "rules of the game" are designed to protect us from corruption and so that we get our $'s worth from the $ that is about to be spent.

The Low Tide Beckons

No more Economics Talk 

I will Tweet later.  

 Imagine if there is an infectious disease that spreads within cities but not across cities.   Throughout the COVID crisis, the city specific infection rate has varied across cities at each point in time.  In a city facing a rising infection rate, people can adapt by either engaging in costly self protection (self isolating) or through public health interventions --- such as vaccinating the local population.  In this case, public health substitutes for private health protection investments.  To be safe, one can either isolate and not be vaccinated or continue with life as usual and be vaccinated.

Suppose that there are two generations, the young and the old.  The old have already chosen where to live and they don't move across cities. The young must choose where to live their adult lives. They have full information about each city's productivity, amenities real estate prices, and quality of life and one element of quality of life is local infection risk. There are other quality of life factors such as air pollution and local climate and topography.

In spatial equilibrium, young people must be indifferent between living in the different cities. Those cities with higher death risk will feature lower housing prices.  The old's quality of life will rise and fall with the infectious disease risk but the current young will be indifferent.  The young will engage in dynamic programming and will anticipate that they are "locking in" to a given city and they will do their best to forecast each city's quality of life in the future when they are old. If there is a city whose quality of life is expected to decline (perhaps due to persistent infectious disease risk), then they will demand even lower rents to compensate them for moving there now.

Economists should note that in this model public health expertise represents a city production function parameter. Effective public health in a city lowers the marginal cost of a city providing a low infection rate for everyone in that city.  Land owners in the city benefit from such location specific productivity.  Increases in such productivity raise the well being of the old who are "stuck there".

For a more formal discussion of these issues in a different setting, read my co-authored 2019 NBER paper.

In our 2015 paper, Dora and I document the historical mortality gains that cities achieved back in the 1930s by investing in clean water infrastructure.  

If infectious disease spreads across cities,  does spatial compensating differentials theory offer useful ideas?  Are we compensated by labor and real estate market for taking the risk of moving to an increasingly risky city?  If every spatial market faces the same rise in risk, then the answer is no.  If people are unaware of these changing risks, then the answer is no.  

Finally, now suppose that only 50% of the population believe that public health efforts have a causal effect on improving one's health. For example, suppose that 50% of the population do not believe that vaccines are effective.  In this case, a new type of spatial separating equilibrium will emerge as like minded people will move to the "safe cities" and follow the advice of the public health experts.  Real estate prices may not rise much in these cities if the young who do not adhere to the public health expert advice do not want to move to those cities.  

This Tiebout separation (based on differences in beliefs about the effectiveness of public health expertise) is a cousin of my 2017 paper.   

Climate change will increase the risk of temperature extremes. Induced innovation could offset some of this threat. This paper explores the demand and supply for climate adaptation innovation in a market economy. Such innovation attenuates the past relationship between the population death rate and extreme heat. Climate change induces this innovation because the rising temperatures increase demand for self protection products and for profit firms respond to these incentives. We then augment the model to introduce “climate skeptics”. Such skeptics reject the claim that the world’s average temperature is rising and thus do not increasingly demand adaptation products. In an economy featuring no government to enact optimal taxation, we quantify how rational agents are affected by the presence of climate skeptics.

 My wife and I own a well known Electric Vehicle that monitors our driving in Southern California. The car company knows how many miles we drive and the car company knows that Dora is a safe driver based on her average speed and the braking she engages in and the fact that she doesn't engage in stop and go driving.  While I have a driver's license, I do not drive.

Six months ago, I asked Dora; "Why doesn't Tesla sell car insurance?  We would get a better deal from Tesla because it knows that you are a great driver."  The Wall Street Journal reports that GM is now selling car insurance.  As usual, I am ahead of my time as I can see the future!

An interesting self selection issue will now arise.  If you are the boss of a stand alone insurance company, how should you price insurance to the select sample of Tesla and GM car owners who chose not to buy insurance from those companies?  Do you see that these are the risky drivers?  As stand alone insurers raise rates on these folks, will a death spiral emerge?  I think the answer is no because all drivers must be insured.  The "sick" drivers will no longer be quoted low rate and they will pay more for their bad driving.  If driver "quality" is a choice, then these drivers will have an incentive to improve their driving and our roads will become safer due to the rise of Big Data and the risk pricing that GM and Tesla and other new insurers can engage in.

Death to the pooling equilibrium!  In the case of health insurance, I understand why a pooling equilibrium offers cross-subsidies to sick people. In the case of driving insurance, the pooling equilibrium hurts society because we want bad drivers to have an incentive to invest in becoming better drivers.  In the case of health insurance, yes we want people at risk of getting very sick to engage in healthy habits but this "transformation" is likely to be more challenging (given genetics) than transforming a bad driver into a safer driver.  

 Politico reports on the policy challenge that the Biden Administration faces.  There are thousands of Haitian immigrants living in squalid conditions under the Del Rio International Bridge.

A dynamic incentives issue arises.  If the Biden Administration engages in humane policies to help these immigrants then this will attract more immigrants to move to the area as they will anticipate that they will be treated well.  If the Biden Administration is tough on this group, then the group suffers and the Biden Administration angers its progressive wing and immigrant children will suffer.

Spatial equilibrium logic is crucial here.  The immigrants have taken a gamble.  They have compared the expected benefits of migrating to the U.S with the costs of doing so.  The costs include what they leave behind in their home nation (in this case Haiti) and the migration costs they incur.  The expected benefits depend on the probability that they will actually enter the U.S and the probability that they will not be deported to their origin and the financial and emotional gains they and their family will enjoy if they actually live and work in the U.S.

Spatial Equilibrium logic offers several constructive ideas here.  Potential immigrants will move to the U.S when their expected lifetime utility in the U.S exceeds their expected lifetime utility from remaining in Haiti net of migration costs (including lost social networks).

This model makes several predictions and offers insights;

1. Economic development in the home country would slow down migration to the U.S.

2.  If the U.S could commit to being tough on illegal immigrants and have a process for legally migrating to the U.S, more potential immigrants would pursue this path.  

3. There should be an orderly process so that Haitian-Americans can sponsor a new migrant to move to the country.  This is an idea in the Posner and Weyl book.  The idea is presented and debated here.   

4.  The ugly living conditions at the Del Rio Bridge represent a type of tax on illegal migration.  Unlike a typical tax, no revenue is received.  Gary Becker endorsed a U.S passport market for auctioning off such passports.  The progressive Biden Administration is wrestling with the allocation of valuable property.  Economists such as Becker support using markets to allocate this scarce resource.

5.  U.S politician nudges saying "stay home" represent Cheap Talk and won't slow the flow.

6. If climate change differentially injures Haiti as compared to the U.S (because a richer nation is better able to adapt), then this issue will only grow in importance in the future. The U.S must begin to think through how climate change adaptation affects migration patterns. In this blog post, I offer some adaptive ideas.

In China, there is a Hukoo domestic passport system that limits where floating workers can receive government services. This approach creates a system of "insiders and outsiders" that allows a mayor of a city such as Shanghai to treat his poor residents better because unlike in the U.S , he anticipates that his actions do not have a "welfare magnet" effect because other poor residents in other areas cannot arbitrage the spatial variation in generosity towards the poor by moving from a poor city to a rich city.   What can the U.S learn from this system?  When are entry barriers good?

 The Biden Administration has made an announcement that it seeks to protect outdoor workers from extreme heat exposure.   What does the theory of compensating differentials in real estate markets and labor markets teach us about exposure to high temperatures.

I maintain two assumptions.

Assumption #1:  The apartment rental market is perfectly competitive and an area's heat risk is common knowledge. If heat risk rises in a location, all market bidders are aware of this.

Assumption #2:  The labor market for outdoor jobs is perfectly competitive and the job conditions (including heat exposure on the job) is common knowledge.

Result #1:  As climate change raises heat in certain areas, rents decline in such areas and this $ rental decline compensates those who choose to take the risk.   Facing lower rents, apartment renters can install more powerful air conditioners. Here are some products that Amazon sells for roughly $100. 

Result #2:   As climate change raises heat in certain areas, outdoor wages in such areas rise and this  $ wage increase compensates those who choose to take the risk.

Facing result #2,  for profit firms will have an  incentive to provide cooling products to workers if these are cheaper to purchase than to pay the higher "combat wages".   Amazon sells a collecting of cooling vests for under $70 each.     If outdoor workers are cash constrained, their employer will have an incentive to purchase these self protection devices for the workers. 

An environmental economist studying adaptation could run a randomized field experiment where she gives out these cooling vests and studies whether this treatment causes worker heat exposure on hot days to decline and for their productivity to rise.  Publicizing this result would lead more firms to consider making this investment rather than paying higher wages to workers exposed to high heat.   Sherwin Rosen has taught us that firms must offer a compensation bundle that is as good as your next alternative.

The key point here is that if outdoor workers (who are housing renters) participate in competitive markets then capitalism compensates them through higher pay and lower rents for taking on this risk.  This $ compensation gives them the resources to protect themselves through products that have proven to be effective (see this 2017 JPE "Remarkable" paper).

I conclude that the Biden Administration rejects the perfect competition model in the housing and labor markets and instead has an economic model of spatial monopsony in mind such that less educated workers are being exploited by a few powerful big employers.  Joe Tracy and I question this claim in this NBER Working paper titled "Monopsony in Spatial Equilibrium".   Migration offers a pro-active strategy to move to another local labor market that offers a thicker set of employers.   We are not passive victims as Mother Nature cranks up the heat.

FINALLY, people know themselves. If they are extremely sensitive to the heat --- they can move somewhere cool.  The Biden Team must have an implicit economic model in mind that migration costs are huge and that few people have strategies to protect themselves from Mother Nature's punches.  Is this logic correct?  What data has been collected to document the "passive victim" hypothesis?  Many development economists have documented the coping strategies that poor people in the developing world exhibit.