I have co-authored a new book that argues that the answer is "YES" but there are many people who disagree with this claim.

 At Johns Hopkins University, I taught Urban Economics in Spring 2020.  Many of my students were skeptical about the possibility that "gentrification" of cities such as Baltimore would improve the quality of life of local long time residents.  I brought in one speaker from the City Government who told my class that she hoped that no billionaires would move to Baltimore.  On my Twitter feed, I often "meet" people who voice deep concerns about the consequences of "unlocking the economic potential" of post-industrial cities such as Baltimore and Detroit.

What do we know about shared prosperity?  Is life a zero-sum game such that what I gain , you lose? 

The City of Baltimore is home to 600,000 people and 25% are poor.  What do we know about the consumption and quality of life for these 150,000 poor people?

Let's start with a person's budget constraint;

private Consumption = Government Transfers + Earnings -  Rent

Note my assumptions;

1. The person pays no taxes on earnings

2. The person has no assets such as stocks or savings so he isn't earning interest on assets

One's well being  is also a function of local public goods including;  school quality, environmental quality (i.e clean air, clean water, garbage pickup,  public cooling places), public transit quality and street safety.  Suppose we have a formula for measuring the quality of all of these services offered by a city such as Baltimore in 2021.  Suppose that everyone in a given neighborhood is offered the same level of these local public goods.

We are now ready to answer the core question.

If Matthew is poor and lives in West Baltimore in 2021, is my quality of life improved as Baltimore grows richer? If Matthew has two children of ages 6 and 11, do they have a brighter future because Baltimore is gentrifying?

The formal economic analysis features the following steps.   As more rich people move to Baltimore, as more Chinese tourists arrive in Baltimore, as more rich suburbanites visit the City, what happens next to all of the algebra terms I introduced above?  

Here are some predictions;

1. Government transfers to the poor would increase because the City Government is less poor.

2.  The Poor's earnings would increase because new service sector jobs would be created.  Since many of the poor do not own cars, the money would be spent in their local communities and this would increase demand for small businesses and offer a second round of economic growth.

3.  Local rents will increase.  The amount they will increase hinges on housing regulation. If real estate developers are allowed to build with little red tape then the City's rents do not soar.  Progressive cities introduce more red tape and this creates an inelastic housing supply curve. In this case, rising demand leads to soaring rents.

4. Local public goods improve (schools, safety, local greenness) as the city becomes richer. It can pay civil servants more and build up a higher quality , lower turnover public sector.  

5.  The Children of the poor gain as the city makes a comeback because they have a brighter future local labor market. The expectation of local opportunity creates a type of self fulfilling prophesy.  Both history and expectations are crucial in determining a city's dynamics. We discuss this point at length in the conclusion of our book.

Unleashing the private sector is the key to reversing the challenges that post-industrial cities have faced.  President Biden's transfers to cities are not sufficient to help the poor to achieve their goals.

Shared prosperity is built up through coordinated investment along 4 key dimensions;

people in their skills

firms in creating businesses

real estate interests rebuilding a crumbling city

government providing the rules of the game and the local public goods that create a safe, green setting where people want to spend their time and $.

For more details on this vision, click here. 

Returning to the locational choice of the Billionaires,  it is an exaggeration to say that they alone cause local economic growth. Instead, I would say that their migration to cities such as Baltimore and Detroit would signal that these cities have enjoyed a large enough improvement in their quality of life so that the super-rich are eager to live there.

In our emerging Work from Home economy, urban quality of life becomes even more important in determining which cities attract and retain people going forward.  See my paper #1 and paper #2.

During a time of great growth in the Federal Government transfers, I understand that urban thought leaders are trying to make the case for larger transfers to their cities.  Such short run stimulus is not a substitute for long run investment in building a robust city economy.  

Finally, for those who are Emily Badger fans, we had a great talk with her about urban gentrification and here is the YouTube Video.

California real estate is desirable.  I own property there.  Zillow teaches us that it has the most valuable land in America with a Zillow average price of $644,000 in April 2021.     The national Zillow price is $276,000.   Is this difference caused by supply or demand?

Over the years, I have written several papers about what makes a place such as California so desirable (and thus featuring high demand). 

My 2006 Green Cites book --- on the rising desirability of great places to live.  The rise of Work from Home only enhances this point going forward. 

Power Couples are attracted to living in its cities due to the amenities and the thick local labor markets.

The demand to live in great climate zones has risen across the decades. 

Cragg, Michael I. & Kahn, Matthew E., 1999. "Climate consumption and climate pricing from 1940 to 1990," Regional Science and Urban Economics, Elsevier, vol. 29(4), pages 519-539, July.

Dora L. Costa & Matthew E. Kahn, 2003. "The Rising Price of Nonmarket Goods," American Economic Review, American Economic Association, vol. 93(2), pages 227-232, May.

At the same time that demand is rising,  progressive and educated areas such as California have limited the supply of housing.

Kahn, Matthew E., 2011. "Do liberal cities limit new housing development? Evidence from California," Journal of Urban Economics, Elsevier, vol. 69(2), pages 223-228, March

Kahn, Matthew E. & Vaughn, Ryan & Zasloff, Jonathan, 2010. "The housing market effects of discrete land use regulations: Evidence from the California coastal boundary zone," Journal of Housing Economics, Elsevier, vol. 19(4), pages 269-279, December.

When demand is rising and supply is limited, prices rise and middle class people are priced out and move elsewhere such as Texas.  Economists have not spent enough time discussing the consequences of these "cross-price" elasticities.  Intuitively, the demand for Texas property increases as the price of California property increases.

Ed Glaeser and I explore the carbon footprint implications of this dynamic in this paper;

Glaeser, Edward L. & Kahn, Matthew E., 2010. "The greenness of cities: Carbon dioxide emissions and urban development," Journal of Urban Economics, Elsevier, vol. 67(3), pages 404-418, May.

This dynamic also has implications for the Electoral College.  I claim that if California, Oregon and Washington had the same zoning rules as Texas that these 3 states would have at least 200 electoral votes.   Imagine if real estate developers could purchase adjacent single family homes in California and replace them with 6 story buildings.  Think of the improvements in middle class quality of life and the growth of the state.

In this sense, local housing supply determines national politics.  I explored this theme in these two blog posts back in 2016.    In those posts,  I intentionally embrace a provocative  position and argue that West Coast land use regulation greatly contributed to the election of Trump in 2016.

 In February 2021, Johns Hopkins University Press published my new co-authored book Unlocking the Potential of Post-Industrial Cities.  Mac McComas and I have written an urban economics book that takes a sober and realistic look at urban economic growth and quality of life in the key center cities of Baltimore, Cleveland, Detroit, Philly, Pittsburgh and St. Louis.  Up until now, the book isn't generating much interest.

To do a better job marketing the book, I have recorded a video where I read chapter 1.  We have also recorded plenty of other free book related content that is available here.

As a social scientist, I am curious about why our book isn't generating more interest.  Our  book embraces the logic of neo-classical economics.  When cities lose population and jobs, this is a revealed preference test that people are "voting with the feet" to not be there.  What can these cities do to better compete for footloose residents and jobs?  I view this to be a key question.

At the end of the day, the future of these cities hinges on having the private sector grow and thrive.  An alternative view is that the public sector should grow to provide basic services for people in these cities.   I do not view this to be a cost effective solution or a long run sustainable solution.   The young people in these cities (who are likely to continue to live in these cities) deserve to have access to safer streets, and a better education that prepares them for work in a market economy.  

Our book embraces that capitalism is a positive force in improving urban quality of life.  In 2021, is that an unpopular view?

A blog post that responds to Noah Smith's provocative piece titled Why Has Climate Economics Failed Us?.   It raises a deep question.  What is the point of climate economics research?  I will respond below.  Dr. Smith's piece also throws some low blows.  My friend Richard Tol is singled out for reasons I don't understand.  Go to Professor Tol's Google Scholar webpage and read his work.

First, a preamble.  I am a microeconomist.  I do not write down Integrated Assessment Models. I agree with Robert Pindyck's points in this tough JEL piece.  The Lucas Critique demolishes these IAM models.  My new book Adapting to Climate Change provides a microeconomic account of the underpinnings of the Lucas Critique's causal effects.

Noah Smith argues that the Biden Administration is serious about prioritizing policies to slow the climate change challenge but that climate economists are not supplying ideas that would both increase economic efficiency and that can be implemented in a divided democracy.   He hints that economists have been too smug as some of us chant "enact Carbon Taxes" and then let the magic of the market play out such that the economy decarbonizes and new firms (the next Tesla) grow.  As new firms produce green products , learning by doing raises the probability that they will export to the rest of the world.

I agree with him that too few climate economists work on political economy issues.  Soren Anderson and co-authors have a nice paper on carbon tax voting in Washington State.     I have published a 2013 paper and a 2015 political economy paper on carbon tax voting.  My 2011 paper with Matt Kotchen on political economy of regulation was discussed by Rush Limbaugh on his radio show!

The proof that climate economics is succeeding is based on revealed preference.  Very talented young people are entering the field and are well trained in Big Data analysis and machine learning techniques. This allows them to uncover very interesting correlations that may not have been known before hand.  An example is the Heat and Learning study. 

Here is the NBER's research program in environmental economics. You will see that there are dozens of interesting studies taking place.   Individual researchers have their own career concerns.  We write our papers both hoping to create new knowledge, win the esteem of our peers and to influence policy debates.   

The rise of the Big Data revolution has brought new excitement to the field.  I worry that some of the young scholars in climate economics believe that the reduced form statistical relationships they measure are "iron laws" similar to science.  Nothing we do in economics yields such stationary estimates. In fact, by estimating these relationships we help to shape the future economy. As economists play the role of "Paul Revere" in highlighting surprising connections between climate change and economic outcomes, our findings actually change future reduced form estimates of the damage from climate change.  I discuss this point in my 2020 LSE Lecture.    Put simply, our research helps to reduce the damage of climate change both by changing public policy but also by fueling private sector adaptation.  Noah Smith ignores this point.  

Another sign that climate economics is on the rise is the cross-field synergies with researchers in other fields ranging from finance to real estate and development economics.  For too long, environmental economics was intellectually isolated.  Other researchers in economics are eager to work with the young environmental economists because of the cross-field synergies.   

The one weakness that I see in climate economics is a lack of intellectual diversity and methodological diversity among the young scholars.  My guess is that 98% of climate economists are progressive intellectuals and 95% of the scholars use reduce form causal effects models.  Marty Weitzman wrote an important paper on diversity.     What further progress would climate economics make today if the field is more diverse on these margins?

Climate change is a very important challenge that we already face and my son's generation will struggle with.  The job of the economist here is to study the tradeoffs we face as individuals, voters and members of society. It is also our job to help the public to understand the role that markets play in offsetting risk and assigning ownership decisions to those who can best handle the risk.   Skill can be built up. LeBron James wasn't born a NBA player. Jim Heckman wasn't born a Nobel Laureate. We build up skill in those sectors where there is a high returns to investment.  In an economy where productive firms can grown (think Amazon's growth), more and more of the economy is insulated from threats when we grow "star power" to manage more of the economy.  Read my 2016 paper with Josh Graff-Zivin.

UPDATE:  Climate economists are teaming up with scientists to conduct some original research. The economics of geoengineering opens up many fascinating questions related to risk tradeoffs in the face of Knightian Uncertainty.  For an example, read this Harvard Crimson piece.

Finally, I do think that Noah Smith raises a key issue of whether neo-classical economists aren't as influential in the Biden Administration as in the Obama Administration.   The causes and consequences of this "fact" merit study.  

 In this blog post, I'd like to sketch out some "rules of the game" to raise the likelihood that Americans will earn a good rate of return on the $2 Trillion dollars that the Biden Administration has proposed to be spent on infrastructure.

I will spend no time here discussing the specifics of pieces of capital (highways, airports, seawalls) that will be invested in or the money that will be spent on human capital programs (worker training, encouraging more under-represented people to enter STEM education fields).

I have written two Hamilton Project Papers for Brookings on specific infrastructure investments focused on highways and climate resilience.

In any investment decision, there is a selection of which projects to invest in and how to measure its stream of future benefits and how to pay for the project.  These issues become even more important when the investment's cost is measured in Trillions.

My Questions;

1.  What process will be used to select which projects get implemented?   How will the distribution of political power in the US Congress affect the economic geography of which areas get these contracts?  Put simply, will $ flow to where it has the greatest economic benefit or to the political districts featuring the most powerful political leaders?  

2.  What process will be used to select which firms get the contracts to do the work?  If the "Buy America Act" binds here, what international firms could have done a better job building the infrastructure?  What do we lose in terms of time to completion, cost and quality by relying on domestic firms? 

3. For the firms who win the contracts, what are their incentives to do high quality work at the agreed upon cost?  Who will verify the quality of the work?

4. Will the Federal Government create an open data base of which firms are obtaining which infrastructure contracts, to do what work, at what price tag?  If the United States has competitive auctions for major contracts, then this will improve the cost effectiveness of infrastructure investment.

5. What are America's performance criteria for judging whether the new infrastructure is of high quality and has a causal effect on improving our quality of life?  If New York's airports are rebuilt, how will we know that they have offered a much better experience?  If new Seawalls are built to protect Florida, how will we know that they are effective?  What are the performance criteria for judging the impact of this public investment?  What is the "counter-factual"?  An economist would seek a revealed preference method for inferring how much people value the new infrastructure.  From such data, one could estimate the aggregate consumer surplus it generates each year and compare the present discounted value of this stream to the full costs of the project.  In English, was the Boston Big Dig a cost effective project? If your answer is "no", why was it built?

6. Should local jurisdictions have significant "skin in the game"? For example, if a local highway will be upgraded, should the local jurisdiction have to pay 40% of the project cost?  This would have two beneficial effects. It would nudge the local elected officials to prioritize which projects they really want done and local taxpayers would pay attention to actual decision and implementation because they won't perceive the $ as "free money".  

7.  As taxes rise to pay for these public investments, what are the real effects of higher taxes?  What investment decisions will households and firms not make as their taxes rise?

8.  Given the fundamental nature of uncertainty in the modern world (did you anticipate the COVID crisis of 2020) and given ongoing progress in civil engineering, will the new infrastructure designers incorporate "option value" so that they build a capital stock that can be easily retrofitted in the future as we learn more about engineering and we learn more about the severity of emerging threats (climate change)?

9.   The Biden Administration is wise to invest in both human capital infrastructure and physical capital infrastructure.  Economic efficiency requires that the "bang per buck" be equated between these two investments. How will the Administration's talented economists figure out this balance?  

Together the answers to these questions determine what is the "bang per buck" when we spend an extra dollar on infrastructure.  What is the tangible improvement in our capital stock (both physical and human capital) when government spends more money?   This blog post has sketched out a group of ideas that if they could be implemented would raise the "bang per buck" and this would increase the confidence of the taxpayers in supporting President Biden's plans.

Trust but Verify!

 A case study about petty crime.  A risk neutral thief will steal if the expected benefits are greater than the expected cost.  The expected cost of theft (for those without a guilty conscience) equals the probability of detection multiplied by the $ punishment if caught.   The expected benefits depend on what the person steals.  What is the resale value of the object? How much does the thief value the object if he doesn't sell it.

This background now allows me to tell my story.  A friend of mine bought my new Yale Press Book;  Adapting to Climate Change.     The book was delivered to his porch in a box.   A porch pirate opened the box and left my book there without taking it!

While I realize this is a small N=1 study, what inference would a structural microeconomist make here?  

To end this true story, permit me to note that this is an example of how economists operate. We observe a clue about a decision maker (in this case, did he keep my book) and then we infer new information about his preferences, goals and information (does he know my book is good). I explore these themes in my one of my Amazon e-books (An Introduction to Empirical Microeconomics).  

In their important book: The Race Between Education and Technology,  Claudia Goldin and Larry Katz use a supply and demand framework to discuss changes in the U.S labor markets over the last 100 years.   For decades in the middle of the 20th Century when manufacturing was thriving in the U.S,  the wage premium for being highly educated was steady over time and more Americans were graduating from high school and these two facts combined meant that income inequality was declining.   My old friend Bob Margo wrote this great paper with Claudia on the "Great Compression". Most of our income is generated from renting our time to an employer.  Our skill determines the value per hour of our time (our wage).

Professors Goldin and Katz argue that in recent decades that technological shifts in our economy have meant that the economic returns to skill have sharply increased and this has created an unequal superstars economy where a declining share of workers earn a rising share of total income.  The "race" they discuss focuses on the relative speed of how fast society trains skilled workers versus what is the demand for skilled workers.  Prices rise when a commodity is increasingly demanded and there is scarce supply.

I have sketched out this importance race because it helps to set up the pitch for my new Yale Press book "Adapting to Climate Change".    My book emphasizes that an important race is now taking place.  Greenhouse gas emissions will continue to rise over the next decades and this will exacerbate climate change risk in both predictable and unpredictable ways.  This is the  bad news.

The Good News is that each day we are becoming better at building up a more resilient economy so that Mother Nature's increasingly hard punches cause less damage.

How does this occur?  My 300 page book sketches out the unsexy microeconomics about how the people, firms, places and governments who are the pieces of an economy make new investments that together add up to build up resilience.  

I face a challenge that climate change adaptation isn't sexy and it happens quite quietly.  The CIA claims that we will never know the disasters their brave agents have stopped so we can't estimate their benefits since we don't have the "what if" --- What if the CIA didn't exist, what extra damage would the USA suffer?  In a similar sense, as we adapt we don't know what would have happened to our economy if we hadn't made these investments. 

Even the Texas Freeze in February (a $100 billion dollar event) is a small percentage in a $21 Trillion dollar U.S economy.  The next Texas Freeze will cause much less damage as optimizing economic actors learn from the experience. That's the adaptation hypothesis.

In 2017, Dora and I published a paper focused on how the news media covers public health progress.  Bad news generates media coverage while public health progress "isn't" news.  We understand why this is the case.  Policy activists seek to capitalize on salient events to gain the upper hand in interest group competition to enact new regulations.  The acknowledgement that we are now making significant adaptation progress should be celebrated.  My book makes this case. Our living standard improves as our risk exposure declines.

I have been working on this broad topic for 20 years now. My 2005 RESTAT paper on the Death Toll from Natural Disasters was my first paper on rising resilience.