Environmental and Urban Economics

Pension Investing and Seeking Out High Rates of Return in LDCs

2012-02-02T08:48:00.000-08:00

In the developed West, individuals seek to have a comfortable retirement and have saved trillions of dollars in private savings and mutual fund holdings and retirement plans. The institutional investors are aware that U.S Treasuries pay 0% right now. Will the U.S Stock Market yield a 7% annual return over the next decade? It is possible but this would mean that the Dow Jones will be rise to 25,000 in the year 2022. If the Dow Jones experiences such a rise, then Glassman and Hassett will be selling more copies of their 2nd edition of Dow 36,000.

So, I predict that institutional investors will turn to the developing world seeking higher returns but what are the risks of seeking those returns? Will Moodys and S&P invest in highly trained institutional analysts so that Western investors actually know the true risks that they face in investing in the developing world?

I predict that the asymmetric information issues that we faced with the mortgage backed securities in the U.S will be even more severe here.

There is also the issue of political risk. How will the ratings agencies use econometric models to predict whether there will be a coup in Egypt and whether the new government will renege on foreign debt? I recognize that if investors know that they don't know these risks that they will demand a larger risk premium in terms of higher interest rates.

As the U.S has trillions invested in certain LDC nations, will we ask our military to get involved to protect our interests in these nations? In the past, there were multinational companies such as Exxon who had invested in irreversible capital in such nations but I'm anticipating that moving forward that hundreds of millions of Americans will have a financial stake in the health of these LDCs because the productive growth is taking place there and our capital has been invested there. Will this "skin in the game" make our people more interested in foreign affairs? Will more Congressmen get a passport?

Tropics of Chaos: Cherry Picking Some Wacky Quotes

2012-02-01T20:37:00.000-08:00

In 2011, a book titled Tropic of Chaos: Climate Change and the New Geography of Violence was published. The author is Christian Parenti. Here is the amazon page for this strange book.

From Google Books, I quote from his page 8; "Societies, like people, deal with new challenges in ways that are conditioned by traumas of the past. Thus, damaged societies, like damaged people, often respond to new crises in ways that are irrational, short-sighted and self-destructive. In the case of climate change, the prior traumas that set the stage for bad adaptation, the destructive social response, are Cold War era militarism and the economic pathologies of neoliberal capitalism. Over the last forty years, both of these forces have distorted the state's relationship to society --- removing and undermining the state's collectivist, regulatory and redistributionary functions while overdeveloping its repressive and military capacities. This, I argue, inhibits society's ability to avoid violent dislocations as climate change kicks in."

While I have some trouble understanding what in the heck he is saying, it appears to be the mirror opposite of my Climatopolis' logic. That's funny.

Mr. Parenti will eventually learn that he will owe the invisible hand an apology. Big, bad "neoliberal capitalism" will offer him a series of solutions to the challenges we will face.

Income and Coping with Extreme Weather Shocks: The Case of Heavy Snowfalls and Plows

2012-02-01T10:35:00.000-08:00

I was surprised to read that Japan's Western region has suffered many deaths due to recent heavy snow storms. The details are posted here. The article states the following; "Western Japan has been battered by one snowstorm after another since the beginning of the year, overwhelming cash-strapped cities struggling to keep up with cleanup efforts. In the Niigata Prefecture, officials said nearly half of their 30 cities had run out of funds set aside snow removal. Further north in the Aomori Prefecture, the government had already applied for additional funds from Tokyo, after draining its budget."

The article goes on to say that "Residents, frustrated by the slow response, have taken it upon themselves to clean up the winter mess, resulting in deadly consequences. Nearly all the storm-related deaths have been a direct result of snow removal."

So, the deaths are taking place because guys are having heart attacks moving heavy snow with a shovel. This is horrible but it highlights how urban income protects us from shocks. Don't forget John Henry and the Machine. We substitute capital (snow removal trucks) for labor (guys with shovels) and this is progress but it takes money to do this. Richer nations are better able to adapt to these shocks and this creates an imperative to encourage economic growth.

Out of State Tuition as the Last Revenue Source for Ambitious Public Universities

2012-01-31T10:13:00.000-08:00

This WSJ article about Penn State raises some interesting issues. Ambitious public universities are finally recognizing that state governments will no longer fund them. Anticipating that overhead from the NIH and NSF is about to dry up, such schools are aggressively raising out of state tuition. Parents of potential out of state freshmen have the right to ask themselves; "am I getting my money's worth at School X?"

Each public university (including UCLA and Penn State) is running an experiment where it sketches out its demand curve. In the case of UCLA, we have sharply raised our tuition and applications have increased! One convenient explanation for this violation of the law of demand is that "all else isn't equal". There is an exogenous increase in foreign applicants as India and China grow richer and as UCLA collects more tuition $ it raises its quality and such quality improvements translates into increased demand to attend.

But, President Obama's speech the other night highlights that schools will start to be under more pressure to not be too aggressive in raising tuition. The President seeks to "jawbone" both the health insurance industry and universities into slowing consumer price increases. He is implicitly making an assumption about how free markets and competition works that he feels that he must get involved.

Returning to Penn State and UCLA, there is the interesting issue of how parents and their teenagers shop around and choose such "products". We know that the College Rankings matter in terms of perception but I would hope that the decision makers do their homework before making this important investment. Too many parents seem to focus on the quality of the buildings and local amenities (dorms and gym) and things you can see on a tour. I would hope that parents are smart enough to scout out the "unobservables" such as whether students really interact with the faculty and what goes on at the dorms late at night.

Why Are Coughing and Sneezing Kids Sent to School?

2012-01-31T08:13:00.000-08:00

My son has been sick the last couple of days and I'm in deep thought about the social costs of local contagion effects. When I pick him up at school, I see that many parents send their sneezing and coughing children to school. Who are they and why do they do this? I don't think they are cruel to their children and I doubt that they embrace Nietzsche's line about "what doesn't kill you makes you stronger". Instead, I view it as an ethical lapse and a failure of the Coase Theorem.

Basic price theory can explain why parents send sick kids to school.. For parents who face a high price, in terms of inconvenience and out of pocket expense, for keeping a kid at home --- they send their sick kids to school. Dora and I have special jobs that allow us to adapt on the fly and to pull our son out when we need to. He doesn't go to school when he is sick.

If this logic is correct, then parents with less income and more young kids (under age 6) should be the most likely to send their sick kids to school. This conjecture could be tested.

I do not mean to stimulate another discussion of class warfare. Instead, I'm interested in the broader question of who chooses to internalize potential externalities and takes steps to internalize such social costs rather than impose them on others. If capitalism is efficient, then why don't new markets arise to nip such costly externalities?

To be precise about my terms, consider the following example. You love to smoke cigars and go to the movies. You are allowed to smoke at the movie theater. At the movie theater, there are 10 asthmatic children who will get sick if you smoke there. Do you smoke? This example highlights that there is an activity you enjoy , smoking, that injures others but you have the right to engage in it. You don't know these children in the movie theater --- do you smoke?

I see no difference between this example and the parents who send their sick kids to school. I understand that children become sick at random times but there is a question of how you adjust your schedule to those times. The Coase theorem makes a sharp prediction. If parents of sick kids at a School face a babysitter financing constraint, they could call the non-sick kids' parents and ask them to jointly finance a babysitter. In a class with 30 kids --- if two kids are sick then 28 are healthy. If it costs $100 to hire a babysitter, then the cost that day for the healthy kids' parents would be 2*100/28 = $8. Most parents would be willing to pay this to reduce their kid's exposure to a sick kid for the day. So, my point is that there are gains to trade here. The parents of the sick kid have the property right to send their kid to school. The "victims" in the classroom should make a transfer to these parents to keep the kid home on these days when the kid is sick. I see no moral hazard effect from this scheme.

Note that I'm merely financing a safety investment. I'm not excluding anyone or asking anyone to suffer. Staying home from school when sick is the socially efficient investment but this isn't taking place and I'm offering a financing solution to raise the probability that this takes place and disease contagion is minimized.

In an earlier time period when women's labor force participation was lower, did fewer sick kids go to school?

Why Are There Fewer American Born Economists at the Top of the REPEC Rankings in Recent Cohorts?

2012-01-29T14:24:00.000-08:00

When I entered the University of Chicago's Ph.D. in Economics in 1988, I believe that my entering class was 50% foreign. Today, I would guess that UCLA's entering class is 20% domestic and I've heard similar numbers for other programs. If fewer young U.S citizens enter Ph.D programs and if U.S born students and foreign students are of equal ability, then we should see a growth in foreigners at the top of new cohort rankings of top economists. I look at the names of the top ranked REPEC research scholars at this website and I think I see a sharp reduction in "U.S names" for the 5 year and 10 year cohorts versus the 20 year cohort. Even for the 20 year cohort, I believe that only 25% of the names are U.S born. I am proud to be #74 in the 20 year cohort and I will point out that my 3 books are even counted in that ranking! Keep in mind that roughly 900 Ph.D. economists are produced each year so there were roughly 18,000 people in this "birth cohort".

So, the 5 year cohort is the set of Ph.D economists who graduated after 2007 , the 10 year cohort is the set of Ph.D economists who graduated after 2002 and the 20 year cohort includes Ph.D. economists who graduated after 1992. These data highlight the globalization of academic economics. Is this bad news for U.S economics? I don't think so but it has implications for which subfields of economics are "hot" such as development.

Here are the UCLA statistics by rank;

Full Professor; 8 of 15 are born in the USA

Associate Prof: 0 of 6 are born in the USA

Assistant Prof: 3 out of 14 are born in the USA

So, that's an example of the regime shift.

Interesting Urban Links

2012-01-29T08:44:00.000-08:00

We know that the CPI doesn't account for the fact that different income groups consume different bundles of goods. If you are concerned about the CPI for the rich (and hence the true purchasing power for the 1%) then you should read this article about private school tuition prices in NYC. Economists have documented that the rise of Walmart and Chinese exports has lowered the prices of many durables we consume. But, what about the prices for goods that the rich disproportionately consume? We know that the quality adjusted prices of private jets have declined. But, the rich now face higher private school prices and lower probabilities of their children being admitted into these schools and Ivy League schools. OWS needs some economists on payroll to calculate real wage inequality.

In other urban news, David Lee Roth provides a detailed interview about Van Halen in today's LA Times. He is a wise man.

Reputation in International Capital Markets and Sovereign Default

2012-01-28T14:49:00.000-08:00

At UCLA, there are often working paper reprints sitting around in the mail room. I'm guy who knows how to read and I skim through these piles to see if there is any new work that I might learn from. A paper called "Sovereign Defaults: The Price of Haircuts" by Cruces and Trebesch caught my eye. Here is their abstract:

"A main puzzle in the sovereign debt literature is that defaults have only minor effects on
subsequent borrowing costs and access to credit. This paper comes to a different conclusion.
We construct the first complete database of investor losses (“haircuts”) in all restructurings
with foreign banks and bondholders from 1970 until 2010, covering 180 cases in 68 countries.
We then show that restructurings involving higher haircuts are associated with significantly
higher subsequent bond yield spreads and longer periods of capital market exclusion. The
results cast doubt on the widespread belief that credit markets “forgive and forget.”"

As a person who continues to invest his own reputation, I'm glad to see that building a reputation has long run consequences. Before I stumbled across this paper, I had been quite puzzled by this literature. The past international macro evidence defied my training in risk premiums and updating; "fool me once --- shame on you, fool me twice --- shame on me".

These findings have important implications today as Greece must make some tough decisions.

Building Green Cities Using Public/Private Partnerships

2012-01-28T08:28:00.000-08:00

Public investment in urban infrastructure raises the value of nearby private investments. Examples include new subways and parks in Beijing, seawalls in New Orleans and this example of nice riverside parks in New York City. The article provides the details about the tug of war of who will pay the bill for the upkeep and maintenance to keep the nearby piers on the West side of Manhattan looking good.

Here is a quote from the NY Times article:

"Capital funds from the city and state have fallen to just $7 million from a high of $42 million in 2008, because of the recession. Meanwhile, two of the park's planned revenue-producing commercial piers have yet to be developed, leaving the Hudson River Park Trust, which runs the park, short of the money it needs for routine maintenance.

Adding to its woes: A lawsuit filed in November by the owners of Chelsea Piers, the sports and entertainment complex, which leases three piers from 17th to 23rd Street from the trust. The suit seeks to force the trust, and by extension taxpayers, to spend "at least $37.5 million" repairing damage its piers have sustained over the past two decades from small marine borers known as gribbles and teredos.

This month, the trust fired back in court with a motion to dismiss, arguing that the lawsuit amounted to nothing more than a "for-profit commercial venture trying to secure a huge public bailout for longstanding problems of its own making and for which it bears the sole legal responsibility.""

The interesting piece of economics here focuses on the fact that the public investment in "nice parks and piers" both benefits the public and directly benefits the nearby commercial businesses and property owners who now attract more people to want to spend time there. In a "fair world", the commercial real estate owners and residential property owners nearby would be asked to pay for a larger share of these improvements since they will gain a windfall in benefits from higher rents as the amenity improvements will be capitalized into higher rental prices nearby as more people will be demanding services there and want to spend more time there. The profit seeking businesses seek to share the costs of the public improvements broadly and then gain the extra revenue. That's good business!

So, there are really two issues here. 1. What is the optimal level of investment in "greening" the river parks and piers? 2. Who should finance this investment? If you believe that the beneficiaries should pay, then the nearby land owners should pay more for the local improvements in parks. Again, as the parks and and river area become nicer --- commercial landlords will be able to charge tenants more for locating there.

Gardeners Adapt to Warmer Winters

2012-01-26T17:49:00.000-08:00

Here are the facts. This is a simple example of the Lucas Critique at work. As the "rules of the game" change, we change our strategy.

UCLA's Pritzker Briefs on Environmental Policy

2012-01-26T16:13:00.000-08:00

Tony Pritzker has supported many worthy activities at UCLA. One of these efforts is the UCLA Law School's Pritzker Briefs. At this website, you can download three of these environmental policy briefs. Prof. Tim Malloy's January 2012 piece is directly related to a deep interest of mine and I highly recommend his piece.

The Chronicle of Higher Education Offers Articles on Sprawl's Bad Effects and on University President Pay

2012-01-25T14:32:00.000-08:00

If public universities cap salaries for their Presidents, will they recruit less able leaders? The California State Universities may soon be running this experiment. The Chronicle also has an interesting article on my UCLA colleague Dick Jackson. Dr. Jackson is a leading scholar at UCLA's School of Public Health. Here is a quote from the Chronicle of Higher Education;

"His center had already been dealing with problems that he suspected had origins in the built environment—asthma caused by particulates from cars and trucks, water contamination from excessive runoff, lead poisoning from contaminated houses and soil, and obesity, heart conditions, and depression exacerbated by stressful living conditions, long commutes, lack of access to fresh food, and isolating, car-oriented communities. Treatments could come in the form of pills, inhalers, and insulin shots, but real solutions had bigger implications. "More and more, I came to the conclusion that this is about how we build the world that we live in," he recalls, speaking over the phone from San Francisco."

Can better urban design make us healthier?

This raises a fundamental selection versus treatment question. Put bluntly, do people with a proclivity to be sick self select to live in nasty neighborhoods featuring bad air quality, little access to good public transit and shopping opportunities? Or do, people who for random reasons choose to live in those areas subsequently become sick? The first is a selection effect while the second is a treatment effect.

Consider the example of smoking; if we observe that smokers tend to suffer from sickness --- again is this selection or treatment or both? Do the most impatient people in society smoke and such individuals tend to under invest in their health and subsequently are more likely to become sick or does smoking have an independent treatment effect on making you sicker? The answer is that both effects are likely to be playing out.

I find that public health researchers tend to ignore fundamental issues of self selection on unobserved attributes (one of Jim Heckman's early homeruns) and implicitly assume that households are randomly assigned across space so that any observed differences in outcomes are due to "treatment effects". In the absence of randomized trials (where residential locational choice is determined at random), this is a hard topic to work on.

Matthew Turner and co-authors have written an under-appreciated paper that was published in the Journal of Urban Economics. Here is the abstract of their paper titled "Fat City"

"We study the relationship between urban sprawl and obesity. Using data that tracks individuals over time, we find no evidence that urban sprawl causes obesity. We show that previous findings of a positive relationship most likely reflect a failure to properly control for the fact the individuals who are more likely to be obese choose to live in more sprawling neighborhoods. Our results indicate that current interest in changing the built environment to counter the rise in obesity is misguided."

Intuitively, Turner estimates a fixed effects regression using panel data where he tracks the same person over time for people who move from the center city to the suburbs or vice versa. If sprawl makes us fat, then the average person who moves from the center to the suburbs should be gaining more weight over time than the people who never leave the center city or never leave the suburbs. Turner rejects this hypothesis.

So, there is plenty of work to be done here but it remains an open question of how urban form affects our behavior. I've been especially interested in this question focused on our carbon footprint as a function of urban form.

Birds Gone Wild

2012-01-25T10:12:00.001-08:00

It is 80 degrees today in West LA. I'm sitting outside at our patio table typing away. I hear some guys mowing lawns but I mainly hear birds chirping and flying around. They think that it is Spring time. They may be right!

Adapting to the Heat through Increasing Per-Capita Income

2012-01-24T16:29:00.000-08:00

Money can't buy you love but it can protect you from the heat. Michael Greenstone has some smart things to say at the end of this piece. This is a clean example of how economic development mitigates the sting of Mother Nature's punch and this is only the tip of the iceberg. As I shed in my 2005 Restat paper, the same logic holds for deaths from natural disasters.

To quote the article:

"India and the United States provide a stark example of this. Michael Greenstone, a professor of environmental economics at the Massachusetts Institute of Technology, and his colleagues have pored over death records for the past several decades in those countries to see how changes in temperature affect national death rates. He found that hotter days have only a modest effect on the U.S. mortality rate. In rural India, however, changing just a single day from a comfortable low 70s to a stifling low 90s increases the annual mortality rate by more than 1 percent. That’s from just one day of additional heat. The scary part of the research is that most climate models predict a far more dramatic change than that, with 30 or more additional days of extreme heat in India by the end of the century.

“When these results are combined with the predictions from one of the more popular climate-change models, they indicate a 50 percent increase in the annual mortality rate in India by 2100,” says Greenstone.

Why does the United States deal so much better with heat than India? We have plentiful access to heating and cooling technologies and the resources to smooth out our consumption patterns, according to Greenstone. If extreme heat — or extreme cold, for the matter — increases the cost of food, most Americans could take out loans to get themselves through the lean time. Indian farmers don’t have that option. Their resources are stretched as far as possible in good times, and they rely on the cash that comes with the harvest. If it falls short, many are pushed to death."

Now, I think it is nuts to extrapolate out to the year 2100 for India. If India's economy grows by 4% a year for the next 88 years, then it will be more than 16 times richer then than it is now. I believe that it will be sufficient income (given product improvements) for a large share of its population to achieve the adaptation that we in the U.S take for granted.

Again, this MIT economist's work highlights that economic development is an excellent path for helping us to adapt to climate change. Now, this economic development doesn't have to scale up the mitigation challenge.

Ben Franklin's Early Natural Experiment on Geo-Engineering

2012-01-23T15:36:00.000-08:00

Do you miss the 1990s? Those were the days before field experiments and RCTs where the typical paper might start, "This paper exploits a natural experiment to study the effect of X on Y." I have just learned that Ben Franklin was way ahead of us. Back before the QJE existed, in 1784 to be precise, Franklin noted that after volcano eruptions that temperatures were lower. Geoengineering has some empirical basis. How do I know this? I attended a Freshmen lecture at UCLA today.

To quote Scientific American and Karen Harp, "In 1784, Benjamin Franklin made what may have been the first connection between volcanoes and global climate while stationed in Paris as the first diplomatic representative of the United States of America. He observed that during the summer of 1783, the climate was abnormally cold, both in Europe and back in the U.S. The ground froze early, the first snow stayed on the ground without melting, the winter was more severe than usual, and there seemed to be "a constant fog over all Europe, and [a] great part of North America."

Now that empirical economists are working on climate change adaptation, what other research could be conducted on geo-engineering and its direct consequences and unintended consequences? Will a future James Bond movie plot focus on Bond having to help or kill a "geo-engineer"?

USC or Bust

2012-01-22T11:03:00.000-08:00

While I'm watching NFL football today, on Tuesday I will speak at USC. USC continues to remind the folks in Westwood that it is on the rise and will soon converge to UCLA's level of excellence. As a believer in competition, I respect their investments and I would like to see UCLA raise its game to try to keep its lead in the Battle for Hearts and Minds in LA.

When I read my bio below, I am unimpressed. If a man can be boiled down to two paragraphs, there must be more to me than this? No mention of Dora or Alex or Climatopolis? No mention of my law school or Anderson School appointments at UCLA? No mention that I was born in Chicago? These are key details that could have attracted more people to my talk.

For my timid ego's sake, I would like to see some more ambitious language here; "An economist who dares to be funny, is creative as hell and sometimes on target --- he sees links between questions that others fail to see and figures out how to cobble together funky data to make empirical progress. His research agenda creates new openings for others to build upon as he moves on to new topics." That would be sweet but would it be true?

The Economics of Green Identity or How to Get Newt and Al Gore to Hold Hands and Jointly Support Reducing GHG Emissions

2012-01-21T10:04:00.000-08:00

Joe Romm presents some useful time trends on public opinion focused on concern about global warming broken out by political party. You will see the divergence between liberals and conservatives on this issue. The calm Dr. Romm (good rhyme?) seeks to defend Al Gore against the charge that he has caused climate change as conservatives have opposed this issue because Al Gore has been so associated with concern about this issue (good rhyme?).

Economic analysis offers some useful insights here. The Nobel Laureate Akerlof and Rachel Kranton published this paper that greatly influenced my thinking in two pieces of my research. Their paper considers how identity, a person’s sense of self, affects economic outcomes.

Dora Costa and I have written about the role of community social norms in influencing where Civil War deserters live after the war. Are they welcomed back in their original pre-war residential community? Second, in my work on Prius and solar panel demand, I have studied how your neighbors' attributes affects your probability of purchasing such products. If you live in a "green Berkeley", why does this increase the likelihood that you purchase green products?

The open question in the green identity literature is to understand the divergence across political parties. As the Democrats embraced climate change as a "serious issue", why did Republicans embrace opposition to this issue as part of their platform up there with "opposing abortion" and "gay marriage"? The economics of identity posits that people gain utility from taking actions that adhere to the community's norm. Where this norm comes from remains an open question.

I have written a political economy paper with Mike Cragg, titled

Carbon Geography: The Political Economy of Congressional Support for Legislation Intended to Mitigate Greenhouse Gas Production

Abstract

"Stringent regulation for mitigating greenhouse gas emissions will impose different costs across geographical regions. Low-carbon, environmentalist states, such as California, would bear less of the incidence of such regulation than high-carbon Midwestern states. Such anticipated costs are likely to influence Congressional voting patterns. This paper uses several geographical data sets to document that conservative, poor areas have higher per-capita carbon emissions than liberal, richer areas. Representatives from such areas are shown to have much lower probabilities of voting in favor of anti-carbon legislation. In the 111th Congress, the Energy and Commerce Committee consists of members who represent high carbon districts. These geographical facts suggest that the Obama Administration and the Waxman Committee will face distributional challenges in building a majority voting coalition in favor of internalizing the carbon externality."

Our paper focused on voter self interest while assuming away social interactions and economic identity effects. Such "identity" effects will re-enforce the initial differences in support for green legislation based on self interest.

Think of Berkeley, California. If Matt Kahn lives there and has an initial low carbon footprint then it is easy for me to support policies and politicians that vote for carbon taxes. As I travel to the UC Berkeley campus and talk to other greens then further re-enforces my "green support" as I meet like minded people and I recognize that the social norm is to be "pro-green".

So, how do we break out of this bad equilibrium? What would shock conservatives into action? Do we need to nudge them to visit Berkeley , California?

Do Famous NFL Quarterbacks Endorse "Sustainability"?

2012-01-21T06:50:00.000-08:00

The NY Post reports that NFL great Tom Brady has built a new house with some "green" features. The article suggests that the "green" touch was his wife's idea. Do Tebow and Vick have solar panels as well? Could Brady set off a "contagion effect" as his fans and other rising QBs mimic him?

Brady covering the spread

By ANDY SOLTIS

Last Updated:4:20 AM, January 21, 2012

Posted:12:47 AM, January 21, 2012

If Tom Brady doesn’t make it past the AFC Championship game tomorrow, he and Gisele Bundchen — and a couple thousand of their closest friends — can enjoy watching the Super Bowl at their California mega-mansion.

The spectacular home, just finished, is spread over three-plus acres and nestled in a canyon in Los Angeles’ exclusive Pacific Palisades area.

Among the features:

* A six-car garage, so each member of the New England Patriots’ offensive line has his own place to park his limo.

* A lagoon-shaped swimming pool with ample room for Brady’s wide receivers in six reclining deck chairs.

* Eight bedrooms, in case Brady and his supermodel wife want to invite over members of their fan clubs.

* Solar panels to help power the 22,000-square-foot house.

* His-and-hers cardio-exercise and weight-training rooms so both Brady and Bundchen can stay in Beautiful People shape.

* Other amenities, including a wine cellar, an elevator, and a bridge connecting the mansion’s two wings.

Brady and Bundchen bought the land for $11 million in 2008, a year before they wed in Santa Monica, Calif.

He is believed to have chosen the site — just down the road from former Gov. Arnold Schwarzenegger, Heidi Klum and other celebrities — because it is close to where the mother of his first child, actress Bridget Moynahan, lives with their son, John Edward Thomas Moynahan.

Construction began in 2009, but only after the couple had the blueprints redrawn to make the Mediterranean-style mansion even bigger.

Bundchen also insisted their dream home be eco-friendly, with rainwater-recovery systems, energy-efficient lighting and the solar panels.

The mansion is believed to have a large nursery for the couple’s 2-year-old, Benjamin.

Tuition at the University of California

2012-01-20T14:42:00.000-08:00

Students want an excellent education and low tuition but a "free lunch" is hard to find during these tough times. The LA Times has some choice quotes over the pain and frustration playing out in California. As I understand it, all nine UC Campuses charge the same tuition prices. This is the problem.

I suggest that each UC campus be allowed to set its own tuition and that the rules are such that 10% of the collected revenue is redistributed from the top 4 schools in terms of tuition is sent to the 5 campuses that charge less. If the UC feels innovative, it could charge different tuition prices by campus and by major. Such customization of tuition would generate more revenue, offer students more financing options. One definition of discrimination is to treat different UC campuses the same.

While people moan about rising UC tuition, they forget that the UC is much cheaper than Ivy League schools (our peers!) and that many students transfer into the UC from a community college. This means that their effective tuition is roughly 30% lower because the formula (assuming an interest rate of 0%) becomes .5*community college tuition + .5*UC in-state tuition.

Switching subjects: I would like to show my appreciation to my uncountable number of blog readers by revealing my blog royalties for the last 3 months.

Publication:
Environmental and Urban Economics

Earnings This Reporting Period:
$28.30

So, over the course of 3 months I post around 100 entries. If it takes me 10 minutes to write each of these then that's 1000 minutes or roughly 16 hours so $28/16 = $1.6 an hour ---- not bad for a big bad full prof at UCLA?

LDC Migration and Climate Change

2012-01-19T06:23:00.000-08:00

At the World Bank yesterday, I learned about this impressive project . While there are a lot of papers to choose from at this website, the "big picture" is sketched below in the report's Executive Summary.

The following is a direct quote (you will note that some "fs" are missing, this is a very strange feature of cut and paste):

"This report considers migration in the context of environmental change over the next 50 years.

The scope of this report is international: it examines global migration trends, but also internal migration
trends particularly within low-income countries, which are often more important in this context.

The report has the following key conclusions:

● Environmental change will affect migration now and in the future, specifically through
its inluence on a range of economic, social and political drivers which themselves affect
migration. However, the range and complexity of the interactions between these drivers
means that it will rarely be possible to distinguish individuals for whom environmental
factors are the sole driver (‘environmental migrants’). Nonetheless there are potentially grave
implications of future environmental change for migration, for individuals and policy makers alike,
requiring a strategic approach to policy which acknowledges the opportunities provided by
migration in certain situations.
● Powerful economic, political and social drivers mean that migration is likely to continue
regardless of environmental change. People are as likely to migrate to places of environmental
vulnerability as from these places. For example, compared to 2000, there may be between 114
and 192 million additional people living in loodplains in urban areas in Africa and Asia by 2060,
in alternative scenarios of the future.This will pose a range of challenges to policy makers.
● The impact of environmental change on migration will increase in the future. In particular,
environmental change may threaten people’s livelihoods, and a traditional response is to migrate.
Environmental change will also alter populations’ exposure to natural hazards, and migration is, in
many cases, the only response to this. For example, 17 million people were displaced by natural
hazards in 2009 and 42 million in 2010 (this number also includes those displaced by geophysical
events).
● The complex interactions of drivers can lead to different outcomes, which include migration
and displacement. In turn, these types of outcomes can pose more ‘operational’ challenges
or more ‘geopolitical’ challenges.There are powerful linkages between them. Planned and
well-managed migration (which poses operational challenges) can reduce the chance of later
humanitarian emergencies and displacement.
● Environmental change is equally likely to make migration less possible as more probable. This
is because migration is expensive and requires forms of capital, yet populations who experience
the impacts of environmental change may see a reduction in the very capital required to enable
a move.
● Consequently, in the decades ahead, millions of people will be unable to move away from locations in which they are extremely vulnerable to environmental change. To the
international community, this ‘trapped’ population is likely to represent just as important a policy
concern as those who do migrate. Planned and well-managed migration can be one important
solution for this population of concern.
● Preventing or constraining migration is not a ‘no risk’ option. Doing so will lead to increased
impoverishment, displacement and irregular migration in many settings, particularly in low
elevation coastal zones, drylands and mountain regions. Conversely, some degree of planned and
proactive migration of individuals or groups may ultimately allow households and populations to
remain in situ for longer."

Job Leakage and Local Regulation: Evidence from the Dirty Movie Industry

2012-01-19T04:26:00.000-08:00

Los Angeles has some leading industries. We have tourism, Kobe Bryant and our Universities (I'm including health care at the hospitals there) and dirty movie production. We are about to run a natural experiment concerning the unintended consequences of unilateral regulation. Los Angeles has mandated condom use in its "adult films". I applaud public health efforts but I wonder whether this regulation will be effective or whether production will move to a "pollution haven"? A "pollution haven" would be another location that has not past and doesn't plan to pass such regulation. The interesting part here is that activists here are aware of this possibility.

To quote the piece:

"Mr. Weinstein (the president of the AIDS Healthcare Foundation) said the argument that the pornographic film industry would move out of Los Angeles is a “big lie.”

“They cannot just pick up their stakes and move to another state,” he said. “They’d hardly be welcomed in West Virginia or Utah or Mississippi, or even a place like Nevada, where legal prostitution is highly regulated and condoms are required. And we will follow them wherever they go.” "

The actors can get on an airplane and film in a developing country. Who would bear the incidence of this extra cost? Will there be off-shoring of these jobs?

Going Home

2012-01-18T13:15:00.000-08:00

For the last 3 days, I have been at Duke and the World Bank. It was a very good trip. I went to a great dinner at Duke where the 5 of us (I won't name the group) discussed a broad range of subjects including Jerry Hausman and how we met our wives. There is no link between these topics! We cracked a lot of good jokes and actually talked about some important policy issues.

At the World Bank today, I gave an optimistic presentation of how migration within and across cities within developing nations will help urbanites to adapt to the "new news" of climate change. The very smart World Bank Team pushed back that migration rates are much lower in the developing world and that this raises two issues. First, if people face significant migration costs then they are less able to protect themselves against risks even if they perceive them. Second, if migration is costly then "moral hazard" concerns of people moving to disaster prone areas receiving international funding are muted. I countered that given rising educational attainment in LDCs that I predict that we will see the rise of a "system of cities" in LDC nations. Improvements in information technology and airtravel will allow urbanites to have access to their family and social networks even if they live far away from their origin. The benefit of such urban mobility is that the urbanites have a greater menu to choose from and have better control of their destiny.

Switching subjects, do you believe that economics is controversial?

This paper is the source of the controversy as these economists have documented that African American students at Duke are more likely (relative to other groups on campus) to transition from being science majors but ending up as humanities majors. This empirical fact has caused trouble.

Read this and this .

Interdisciplinary Environmental Research is Hard: The Case of a MIT Full Prof's Estimates of Wind Damage Caused to Property

2012-01-15T12:32:00.000-08:00

Kerry Emanuel is a climate scientist at MIT. He has the misfortune to be receiving nasty emails related to his research. I was interested in who he is and what he does so I went to his research webpage and downloaded this paper titled "Global Warming Effects on U.S. Hurricane Damage". Professor Emanuel does not believe in technological change. In equation (1) of his paper (see page 264), he writes down a time invariant function of local wind speeds causing property damage. Apparently, there are no investments or improvements in the building stock that can be made that would reduce the impact of wind speed on our building stock. This sounds silly to me and I will return to this point below.

Here is the abstract for his "economics paper"

"While many studies of the effects of global warming on hurricanes predict an increase in various metrics of
Atlantic basin-wide activity, it is less clear that this signal will emerge from background noise in measures of
hurricane damage, which depend largely on rare, high-intensity landfalling events and are thus highly volatile
compared to basin-wide storm metrics. Using a recently developed hurricane synthesizer driven by large-scale meteorological variables derived from global climate models, 1000 artiﬁcial 100-yr time series of Atlantic hurricanes that make landfall along the U.S. Gulf and East Coasts are generated for four climate models and for current climate conditions as well as for the warmer climate of 100 yr hence under the Intergovernmental Panel on Climate Change (IPCC) emissions scenario A1b. These synthetic hurricanes damage a portfolio of insured property according to an aggregate wind-damage function; damage from ﬂooding is not considered here. Assuming that the hurricane climate changes linearly with time, a 1000-member ensemble of time series of property damage was created. Three of the four climate models used produce increasing damage with time, with the global warming signal emerging on time scales of 40, 113, and 170 yr, respectively. It is pointed out, however, that probabilities of damage increase signiﬁcantly well before such emergence time scales and it is shown that probability density distributions of aggregate damage become appreciably separated from those of the control climate on time scales as short as 25 yr. For the fourth climate model, damages decrease with time, but the signal is weak."

In the conclusion of the paper, the author issues the caveat; "A number of caveats apply to the present analysis. First, we have held constant the distribution and value of insured property, not accounting for changing demographics or adaptation strategies that might reduce vulnerability to damage."

So, I respect his honesty. He is admitting that he has chosen to focus on the worst case scenario and to ignore the highly likely behavioral response to changing actions by Mother Nature. The climate scientists need to incorporate adaptation into their models but they assume it away because they do not know how to model it. That's not productive. These smart guys need to return to the rational expectations and investment under uncertainty models that economists have developed over the last 30 years and read their Lucas Critique. As a starting point, they should read Climatopolis!

Permit me to make a prediction. Due to endogenous innovation the relationship between wind speed and property damage will sharply decline over time. The good new ideas that engineers and architects will figure out will be spread around the world and the resulting damage caused by windstorms will decline sharply. How quickly will this occur? I do not know that but the MIT professor needs to remember that necessity is the mother of invention. So, our disagreement concerns how far human ingenuity can go to mitigate Mother Nature's wraith. Some of his MIT students are likely to come up with the solutions that will make his projections look like a sharp upper bound!

UPDATE: Let's assume that Prof. Emanuel is correct that we never figure out how to produce buildings that can withstand the wind. He then faces a new extrapolation issue. As the wind grows more intense in specific geographical areas, and we are aware of this, why do we keep building in those areas? The answer is we won't. We will migrate to a safer area and build our cities there. Implicit is so much "climate change science" is a behavioral extrapolation that we will continue to live under a BAU (business as usual) scenario even when the rules of the game have changed (i.e climate change). This violates 50 years of modern economics and I don't believe this. The smart scientists at MIT need to walk down to E-52 and take a course in rational expectations investment theory with Acemoglu or anyone else on the floor.

The Frozen Tundra of NFL Playoff Football Revisited

2012-01-14T12:04:00.000-08:00

The Green Bay Packers have figured out how to adapt to Mother Nature's challenges. The Frozen Tundra is no longer frozen. "The ground at Lambeau Field, legendary home of the Green Bay Packers, is heated. It has not been frozen during a football game since it was dubbed the “frozen tundra” more than 40 years ago. And that impossibly green grass these days, despite the calendar turn to January? Trace it, in large part, to a new system of artificial lighting employed to counter the meek late-autumn sunshine in Wisconsin. Green Bay’s famed “frozen tundra,” besides being redundant — tundra is, by definition, frozen — is downright tropical, even during the N.F.L. playoffs."

This case study supports the claim that we can augment and offset Mother Nature once we understand what she is up to.

Some Specifics About Florida's Adaptation to Climate Change

2012-01-13T19:41:00.000-08:00

From this webpage, I found this document discussing sea level rise (SLR) in Florida. As far as I can tell, the piece never discusses the geography of what this SLR will mean for different Florida areas or how many people currently live in the affected areas or whether there are any strategies that these individuals and their government officials can take to protect themselves and their property. With climate change models predicting increased risk of SLR, will insurance firms start to charge higher rates in the at risk zones? Will they price discriminate and offer insurance policy discounts for those who build their homes and structures in ways that are more flood resistant? The funny thing about the paper that I reference above is that it doesn't mention humans.

In contrast, I like this report much more. It provides a detailed account of the risks that the City of Punta Gorda faces and what its citizens can do to reduce their climate change exposure.

If you read the paper, you will see the educational component such as this;

"Figure 7: The Adaptation Game board helped participants recommend locations where possible adaptations should take place." See, adaptation can be fun!

Armed with these "early warning" maps, self interested people will take actions to cope with these expected threats. Such adaptation isn't costless but when we see a punch coming our way, we can take steps to duck the punch. We have many strategies at our disposal to deal with such challenges and necessity will nudge us to discover more. This is the "small ball" of adaptive learning. With so many people seeking solutions, I am highly optimistic that we will discover good ones. If all of these efforts fail, then yes --- parts of the coast of Florida will have to be evacuated. The losers will be those who own that land but we are a mobile people who can move to higher ground and rebuild there.

Since the publication of my September 2010 book Climatopolis, I haven't heard too many smart rebuttals that make me question the book's core optimistic logic. I'm a fan of the collective wisdom of crowds and decentralized free markets.

An East Coast Trip

2012-01-13T11:24:00.000-08:00

Early next week, I fly to Duke and Washington D.C. At Duke, I will see my old friends and hopefully make some new ones. Duke has built up an excellent set of environmental economists and I'm eager to speak there. I will be talking broadly about my recent energy demand work but then I will focus on my Nudge paper with Costa. When I speak at the World Bank, I will serve up some "big think". Here is a preview;

BBL Sponsored by the Urban Environment and Climate Change Thematic Group
at the Urban Development and Local Government Anchor

LIC Urban Growth During a Time of
Climate Change Adaptation:
Policy Challenges and Opportunities

Wednesday, January 18, 2012
12.30 pm – 2:00 pm
Room J B1-075
World Bank Headquarters, Washington, D.C.

ChairAbha Joshi-Ghani
Sector Manager, FEUUR

Speaker
Matthew Kahn
Professor, Institute of the Environment and Sustainability, Department of Public Policy, Department of Economics, UCLA

As world greenhouse gas emissions continue to rise, more cities will grapple with the challenge of climate change. While the specific threats will vary by city and will emerge over time, today we can anticipate several of these challenges. Development banks with their human capital and financial resources are in a unique position to aid LIC (Low Income Countries) cities in providing public goods and attempting to mitigate urban externalities. Climate change will further increase the demands that such cities place on the development banks.

As LIC nations urbanize, within a system of cities, new urbanites will have many choices over where to live. While individual migrants will seek out the cities and communities that maximize their own private well being, do such individual choices lower society's overall well being? If yes, what can development banks do to encourage "better" urban growth patterns?

Development banks are more likely to improve quality of life in developing countries if their staff can anticipate the consequences that well meaning policies are likely to have. Matthew Kahn, a Professor of Economics at UCLA, and the author of the free markets book Climatopolis (2010 Basic Books) will lead a discussion focused on the unintended consequences of urban adaptation efforts. To provide one example, engineering efforts intended to fortify cities and protect the populace from natural disaster risk can attract more people to live in the city and thus displace private self protection efforts.

Kahn will discuss an empirical research agenda to assess the quantitative importance of such arguments.

Matthew E. Kahn is a Professor at the UCLA Institute of the Environment, the Department of Economics, and the Department of Public Policy. He is a research associate at the National Bureau of Economic Research. Before joining the UCLA faculty in January 2007, he taught at Columbia and the Fletcher School at Tufts University. He has served as a Visiting Professor at Harvard and Stanford. He holds a Ph.D. in Economics from the University of Chicago. He is the author of Green Cities: Urban Growth and the Environment (Brookings Institution Press 2006), of Climatopolis: How Our Cities Will Thrive in the Hotter Futureand the co-author of Heroes and Cowards: The Social Face of War (Princeton University Press 2009). His research focuses on environmental, urban, real estate and energy economics.

Electricity as a Differentiated Product

2012-01-13T07:42:00.000-08:00

Economists view products as bundles of attributes. Put simply, what is a car? If all cars are the same, why does a Mercedes cost 3 times as much as some Toyota? The answer is that the typical Mercedes has bundled into it high quality attributes and consumers are willing to pay a price premium for this bundle. In the case of electricity, is it a differentiated product or is a kilowatt a kilowatt? In the later case, buyers should just seek the lowest price. But, as this article highlights , in New York City there is a deep debate about the electricity generation source. If its source is nuclear, is it bad? If Gov. Cuomo scraps the nuclear plant and its capacity is replaced by a higher polluting natural gas plant and if these emissions end up in Harlem, is that bad? The economic geography of where people live relative to where dirty power plants are has been a topic that I've written about. Don't forget this classic 2009 RSUE paper!

In case you are lazy, here is the abstract:

Coal fired power plants emit high levels of air pollution per unit of power generated. A comparison of emissions factors (pounds of emissions per megawatt hour of power generation) based on year 2004 data reveals that the average coal fired power plant emits six times as much nitrogen oxide and more than twelve times as much sulfur dioxide as the average non-coal fired power plant. This paper uses data on the population of all electric utilities in the United States and evidence on population growth across regions to document that; pollution levels are higher in counties with coal fired plants, and that the population is moving away from regions such as the Midwest where the dirtiest coal fired power plants are located. Population growth is taking place in the South and West. Especially in the Western region, the power plants are newer and cleaner and less likely to be coal fired. In the South and West, population growth has a smaller impact on power plant emissions growth than in the Northeast and Midwest.

A Case Study in Rising Health Care Costs

2012-01-12T21:22:00.000-08:00

This article tells an uplifting story of a man who had trachea cancer who has had a new surgery that may allow him to live a full life. The article says that the procedure cost roughly $500,000. The recipient is young and works as an electrical engineer. A cold hearted economist might crunch the PDV of his earnings stream and conclude that this was a good investment to keep him going. But what if he had been 84 and senile? Are you a supporter of the "Death Panels"? Without such technocrats how will the medical system's costs be reigned in as our great surgeons continue to make progress and innovation gives them the tools to do their thing? Once this procedure becomes more routine how much will it contribute to rising health care costs? Have we over-innovated?

A cold hearted libertarian would say that individuals should be given the option to purchase catastrophic health insurance and if they fail to buy it and then get sick that they should make a strong You Tube video to raise the private funds they will need for the procedure. Implicit in such an argument is a rejection of behavioral economic logic that people are myopic and not forming "rational expectations" of possible future events and planning for such scenarios.

California's High Speed Rail Derails

2012-01-12T16:38:00.000-08:00

The head of California's High Speed Rail project has resigned. You would think that a multi-billion dollar, 30 year project would offer some intellectual challenges for its leader but "Roelof van Ark, chief executive officer of the California High-Speed Rail Authority, announced this afternoon that he is quitting, the latest setback for the state's beleaguered campaign to build a nearly $100 billion rail network in California."

What is going on? We know that California and the Federal Government both have large fiscal deficits and this may be part of the issue but what happened to the momentum?

As a guy who flies to Northern California often, and who has traveled on a Chinese Bullet train, I haven't supported this train. I figure that for political reasons that it will stop too often between San Fran, LA and San Diego and thus never achieve the MPH that it has promised. I assume that its ridership will be too low to cover the enormous fixed cost of constructing it. Once people arrive in these cities, and get off the train --- they will still need a car to connect them with their ultimate destination --- so, the real issue here is what is wrong with air travel? I know that HSR has a smaller carbon footprint than air travel but what would have to be the value per ton of GHG emissions for HSR to be a wise investment? I would guess that it would have to be close to the $200 per ton that was calculated for the Cash for Clunkers program.

In the absence of Federal subsidies, how will California finance this train? $100 billion dollars in a state with 35 million people works out to $3,000 for each man, woman and child. Are we willing to pay that average cost?

The LSE Bookstore Has Good Taste

2012-01-11T11:28:00.000-08:00

When I returned to speak at the LSE last September (after having been away for 25 years), I went to its bookstore. I quickly found Glaeser's Triumph of the City and my colleague Larry Smith's The World in 2050 but I couldn't find a copy of my Climatopolis. I felt sorry for myself but today a student of mine at the LSE was kind enough to send me this photo from the LSE bookstore. I see that my book is 3 to the left of Lomborg. That sounds about right doesn't it?

A Video of the September 2011 LSE IGC Session on Urban Infrastructure

2012-01-11T06:28:00.000-08:00

You Tube includes clips of Van Halen's new song tattoo, NFL players flipping into the endzone and now a two hour clip of some pretty good economists talking about urban infrastructure in the developing world. In September 2011, I participated in this session at the LSE's Annual IGC Conference. My remarks focus on China's investment in infrastructure.

Some Very Good News for UCLA's Institute of the Environment

2012-01-10T10:33:00.000-08:00

Heal the Bay's Mark Gold named to UCLA environmental post

Alison Hewitt, ahewitt@support.ucla.edu

310-206-5461

Heal the Bay President Mark Gold plans to move inland a few miles on Jan. 30, when he will become an associate director at UCLA's Institute of the Environment and Sustainability.

The prominent environmentalist will use his decades of experience to guide and deepen the institute's engagement with government agencies, policymakers and the environmental community. He will help spearhead efforts to build the institute's education, research and public outreach program.

Gold, a UCLA alumnus, will also conduct outreach to donors, provide leadership to the institute's Coastal Center, and continue his work as an adjunct professor at UCLA. He announced today that he will step down as president of Heal the Bay but will continue to serve on the organization's advisory board.

"I'm excited to become part of UCLA's efforts to build the Institute of the Environment and Sustainability," Gold said. "UCLA's education enabled me to become an environmental leader at Heal the Bay, and I'm grateful for the opportunity to give back to the university through teaching, fundraising and providing leadership."

Glen MacDonald, the director of the institute, said Gold's 23 years of experience at Heal the Bay give him a breadth and depth unmatched by anyone in Southern California.

"Mark has a genius for translating science so that it can be useful to local and state government agencies," MacDonald said. "He also knows virtually everyone in the environmental community. The nexus that he can create between UCLA's strengths and the environmental community will be a tremendous benefit, not just to the university but the whole region."

Gold will also strengthen the bond between UCLA and Heal the Bay, MacDonald added. "We are delighted that he will stay on in an advisory capacity with them, because we really value our relationship with Heal the Bay."

At UCLA, Gold will work half time for the Institute of the Environment and Sustainability and half time for UCLA's development arm to attract donations to the institute. Gold is one of the institute's original board members and already teaches its "Leadership in Water Management" course, for which he attracted funding from the Annenberg Foundation. He is also a triple alumnus from UCLA, with a bachelor's and master's in biology and a doctorate in environmental science and engineering — and was also born in a UCLA hospital and attended a UCLA preschool, he noted.

"So obviously, I have a strong Bruin affiliation," Gold said. "For me to play a role in building up the institute is really exciting. There's so much that happens, environmentally, in Los Angeles that UCLA should be one of the foremost leaders of environmental science in the nation. The opportunity to build that and have a hybrid job that's part academic, part development is really appealing."

Tony Pritzker, chairman of the institute's board of advisors, described Gold as "one of the hardest working guys I've ever met." The two also served together on Heal the Bay's board.

"He knows the science, and he's a great educator," Pritzker said. "He also understands that business has to continue and we have to build roads and schools, but his special quality is that he knows how to balance that with environmental needs. He also has the ability to pick up the phone and talk to anybody like a friend and make his case in a very cogent way. Those are all qualities that we want to bring to UCLA."

Gold joined Heal the Bay in 1988 as a staff scientist and the agency's first employee. He became executive director in 1994 and president in 2006.

He has worked extensively over the last 25 years in the field of coastal protection and water pollution and is recognized as one of California's leading environmental advocates. He has authored or co-authored numerous California coastal protection, water quality and environmental education bills. Among many other achievements, Gold was at the helm when Heal the Bay began releasing their Beach Report Cards in 1990 and when the organization opened the Santa Monica Pier Aquarium in 2003.

"Everyone who lives in or visits Southern California has benefited from Mark Gold's tireless efforts to keep our waters safe and clean," said Matt Hart, chairman of Heal the Bay's board of directors. "We thank Mark Gold for his leadership and service to Heal the Bay and wish him the best of luck in his new career at UCLA."

The Institute of the Environment and Sustainability is an educational and research institute that unites disciplines: physical, life and social sciences; business and economics; public policy and urban planning; engineering and technology; and medicine and public health. IoES includes multiple cross-disciplinary research centers, and its environmental science undergraduate degree program is one of the fastest growing majors at UCLA. IoES advises businesses and policymakers on sustainability and the environment and informs and encourages community discussion about critical environmental issues.

UCLA is California's largest university, with an enrollment of nearly 38,000 undergraduate and graduate students. The UCLA College of Letters and Science and the university's 11 professional schools feature renowned faculty and offer 337 degree programs and majors. UCLA is a national and international leader in the breadth and quality of its academic, research, health care, cultural, continuing education and athletic programs. Six alumni and five faculty have been awarded the Nobel Prize.

Experimentation and Innovation: Don't Forget India

2012-01-10T09:10:00.000-08:00

In thinking about pollution and international trade, China receives most of the headlines but India should not be forgotten. This long piece highlights the synergies between urban growth and green innovation in India's Bangalore. I would like to write a trade paper on global supply chains in developing green products such as wind turbines and the role that LDC cities play in this process. As of now, I've written a "macro paper" on this general subject, but I haven't been able to identify data that connects individual exporting firms in India to individual importing firms in the United States to examine the dynamics of such supply chains.

Back to Work

2012-01-09T16:38:00.000-08:00

UCLA is back in session. There were so many students filing out of a classroom that I was stuck on a staircase for a few minutes unable to walk up two more flights of stairs. I did have the pleasure of talking to Professor Michael Dukakis. The world would have taken a different path had he defeated George H.W Bush in the 1988 election. I told him that I had spent the weekend with thousands of economists in Chicago. He didn't seem that impressed.

I went to some meetings today and tried to arrange some internal environmental economics and urban economics seminars at UCLA. Next week, I go to Duke and the World Bank. I wrote down some notes about the deep points I'd like to make when I'm there.

Adaptation via Migration

2012-01-09T09:18:00.000-08:00

During this time of Tebow, it is important to remember Tiebout. In 1956, Charles Tiebout taught us the power of "voting with your feet". Migration represents both an investment decision and an implicit insurance policy. If your current geographical area goes to hell (either because of industrial shifts or climate change), there are other locations to choose from. The case of Las Vegas highlights how quickly a city can expand to absorb new entrants. In today's NY Times, there is a nice case study of one man's migration to China. This ex-pat is a China booster.

Migration breaks the link between shocks to places and shocks to people. In a mobile world, land owners in affected cities will suffer and this incentives them to be an interest group to protect that city's jobs base and quality of life. Yes, if 2 million people try to move to the same geographical area over night the place will be over-run but why would they all move to the same place? The key is to have choice and a menu of geographical options to choose from. Each individual decision maker will choose the best location from her own perspective (but not from society's). Such an individual will seek out areas whose local labor markets are hiring people who look like her. In this sense, market signals are like traffic cops directing migrants to the "right location".

I am back from the Chicago AEA meetings. The people of Chicago appear to like climate change. The 50 degree January days had everyone smiling at the meetings wondering why they brought a heavy coat. It was good to see my old friends and I met a number of new friends. Economics are part of the social network.

Uncertainty, Investment and Climate Change

2012-01-03T20:12:00.000-08:00

Thanks to forward looking "doom and gloomers" such as the Asteroid Miner (see below) we have been warned about future threats to our food supply.

I quote this source "

Asteroid Miner
Illinois

FLAG

Make it very short: If GW (Global Warming) is not stopped, there will be no food some time in the 2050s. Food production is already being impacted by GW.

Dec. 25, 2011 at 9:08 a.m

"

In a world with 7 billion people, if some folks agree with AM (Asteroid Miner)'s forecast then they will have strong incentives over the next 38 years to seek out new ways to grow food. Such individuals would recognize that there is a chance that AM is wrong but that global warming raises the probability that he is right.

The funny thing is that the anticipation that he could be right raises the probability that his prediction will be wrong! If 1% of 1% of the world's 7 billion people get to work on this food scarcity problem, then we will have 700,000 people working on the problem. Could they all fail as venture capitalists and others with funding fund this group to come up with new ways to grow food in our hotter future? We don't need each of these 700,000 to succeed. A future farming Steve Jobs will emerge from this set and he will become quite rich and we will continue to eat and Asteroid Miner's kids will thank him for playing the role of Paul Revere.

Revealed Preference Revisited: David Beckham Prefers LA to Paris

2012-01-03T16:05:00.000-08:00

From observing his locational choice and his budget constraints, we learn that Bend It Beckham must prefer LA to Paris. Why? A Paris team offered him twice the $ to leave LA and he rejected it. Now, I'm assuming that his endorsements compensation doesn't depend on where he plays. But, under this assumption, Beckham is acting in accord with the logic of my classic 1995 JUE paper.

Migration and Climate Change

2012-01-03T09:32:00.000-08:00

A long blog piece has just been published on the political challenges that climate change induced migration may cause during the 21st century. The piece makes some good points and sketches out some plausible scenarios but I could find no mention anywhere in the piece about individual optimization. Migration is a costly choice. Individuals have a strong incentive to seek out cities and communities that offer them a higher quality of life than their origin location.

Self interested individuals will have a large number of options of places to move in our "hotter future". Some will be domestic and some will be international. Could all of them be hellholes? From a portfolio point of view, this could only be the case if geographical areas (spread out by large distances) are hit with the same shocks. In reality, different geographical areas will be hit with different shocks and the shocks could even have a negative correlation such that when one area is suffering from drought another area is experiencing heavy rain fall.

The authors implicitly assume an "victim" model that new migrants to a city unintentionally destroy the paradise they expected to find. But, think of New York City in the 1920s. As immigrants arrive, the city changed but I don't think that my grandfather destroyed it. Urbanization is a key in absorbing migrants. A point I make in Climatopolis is that there can be gains to trade in the labor market. As billions urbanize, they will seek out cities offering opportunities. Some cities will demand such young, low skilled labor and firms there will be pay wages to these new urbanites to work. These urbanites will earn an income and can send money back to rural areas. Such income will help the adaptation process.

The authors of this blog and report appear to embrace a "Mad Max" vision of future anarchy. Trading cities that are innovating and employing people and sharing newly generated wealth will help to keep future Mel Gibsons sober and happy. Yes, people can be displaced from their origin location but they will seek out new options.

The key here is choice. Nations needs to open up more cities for people to chose from and international migration should be encouraged. Crisis can only occur if individuals have no choice for how they adapt to the uncertain new risks that climate change will pose.

Innovators Pursue Green Profits

2012-01-03T07:43:00.000-08:00

Matthew Wald of the NY Times reports that two companies called SolarReserve and BrightSource are thinking ahead about profits they can earn when state electric utility commissions enact the combined policies of aggressive renewable portfolio standards (RPS) and time of day pricing. A RPS of 33% would mean that an electric utility must purchase 33% of its power from renewable sources such as wind and solar. If total demand peaks each day at around 3pm and then declines throughout the rest of day gradually , then the price of electricity could soar at around 6pm each day because the sun is no longer shining and solar won't be generating much electricity. Anticipating that there could be serious profits to be earned by those generators who have capacity to sell at that hour, these companies are developing storage technologies that will allow them to sell at that hour.

Note the key synergy here. Solar power becomes more "feasible" if there exists such a storage technology so there will be greater investment in solar. As there is greater investment in solar, this encourages more investment in storage technology. Similar to peanut butter and jelly, the two go together. Now is government $ needed here? The DOE is betting on SolarReserve. Will this be another Solyndra? In the absence of government $, would the private sector have funded this? Is VC capital aggressive or highly risk adverse?

Sean Collins: A Surfer and Innovator

2012-01-01T09:09:00.000-08:00

The next time my UCLA graduate students tell me that they went surfing rather than sitting down and working on a problem I will be more understanding. Why? I have read this obituary for Sean Collins.

Here is the key quote from this article;

"Before Surfline, dedicated surfers would hang out on the beach for weeks at a time, dropping everything, including work and relationships, when the surf came up. Mr. Collins’s forecasts meant surfers could use their time more efficiently. It allowed them to continue to chase swells through what he termed “the responsible years,” and gave rise to a breed of plugged-in surfers who make their living through high-dollar contests or by chasing monster swells."

So, Mr. Collins was smart enough to come up with a way to provide surfers with credible information and self interested surfers who want to use their scarce time efficiently went to his website (millions of them did) to receive real time information about good surfing conditions.

He helped surfers adapt to changing wave conditions and the surfers responded rationally! I just visited Surfline.com and I see that he offers 5 day forecasts of wave conditions.

Mr. Collins embodies the optimism of Climatopolis. Surfers know that they don't know what future wave conditions will be. Each surfer doesn't know how to predict them. Mr. Collins (somehow) worked with scientists to design a predictive model and then he sold the forecasts to surfers. Again, just like in the case of Facebook --- we don't need the average person to innovate. We need a few extraordinary (and lucky?) individuals to sense a market need and then they do the hard R&D and produce a product that helps us to adapt. Surfers all over California must have been grateful. A good structural IO Ph.D. thesis could be written on the willingness to pay for his forecasts. Surfers would value this more if their value of time is high and if their experience surfing is highly dependent on the realized wave heights. For example, if some surfers enjoy a challenge but worry about drowning from big waves then his information would help them to decide whether to take a gamble or not.

In thinking about future climate change adaptation, I'm amazed at how many environmentalists pin their hopes on government as the main source of "protection" from future threats. Government will help if there is competition and economic resources (i.e economic growth) but people like Mr. Collins represent our best chance to continue to thrive. New ideas will provide us with more options and coping strategies.

My new research on the broad topic of climate change adaptation will focus on this interplay between private and public efforts. Environmentalists would be wise to take a second look at the private sector as the leader in future adaptation efforts.

Moving to Higher Ground

2011-12-31T08:53:00.000-08:00

Leah Boustan, Paul Rhode and I have completed a draft of our paper that we will present at the Chicago AEA meetings next week. Here it is. After writing my Climatopolis book, I have sought to continue to do research on the microeconomics of climate change adaptation. The problem for an empirical nerd is that this adaptation will take place in the future and this makes empirical work hard. Climatopolis offers many predictions about how capitalism will help us to adapt to climate change but as of 2012 it is too early to "fail to reject" these predictions.

Similar to Michael J. Fox in Back to the Future, I have teamed up with two leading economic historians to take a look at how young men in the 1920s and 1930s in the United States coped with natural disaster risk. Young people are highly likely to migrate to areas that offer good earnings and quality of life. If an area has recently experienced natural disasters such as floods, tornadoes and hurricanes then such individuals can protect themselves by not moving to such areas or moving away. This is private self protection in the sense that Gary Becker and Ehrlich used this term.

Now, government can invest (think of New Orleans and Sea Wall construction) to make an area safer. This is public investment in protection. Our paper argues that it is likely that Public investment displaces private investment. In a Peltzman sense, an unintended consequence of government place based investment in climate proofing an area is to attract more "victims" to live there. The rise of the New Deal in the 1930s (relative to the no New Deal 1920s) allows us to test this hypothesis.

Here is the paper's intro;

"Naturaldisasters cause significant loss of life and property damage in the UnitedStates. In 2005, Hurricane Katrina destroyed large sections of New Orleans,resulting in the death of thousands. This salient disaster highlights thatmillions of people have chosen to locate in geographical areas that are at riskof natural disasters. In fact, the attraction of coastal living has encouragedmore and more people to move to areas at risk from hurricanes and flooding(Rappaport and Sachs, 2003). Despite the fact that developed nations sufferless than poor countries from a disaster of a given size, natural disasters areimposing larger economic costs over time (Kahn, 2005; Pielke, Jr., et al., 2008).Many forecasters predict that climate change will only exacerbate these risks.

An individual’s exposure to naturaldisaster risk is a function both of private choices and of governmental decisionsover land use zoning and infrastructure investment. Government actions intendedto protect the public can reduce the incentive to engage in privateself-protection. An intuitive example of such “crowding out,” analyzed by Kousky,Luttmer and Zeckhauser (2006), is building new sea walls in New Orleans. Morepeople will stay in or move to a risky area if they believe that sea walls willbe built. In this case, government investment can displace self-protectionagainst risk (Peltzman, 1975). Such efforts could be disastrous if the publicis overly optimistic about engineers’ ability to protect the public.

Inthis paper, we examine one form of private self-protection, net migration away fromdisaster-struck areas, during the 1920s and 1930s, a period of high disasteractivity taking place before the advent of coordinated federal disastermanagement. In this era, disaster relief was directed by the American Red Cross(ARC). We use ARC documents to compile all major natural disasters from 1920 to1940. Floods and tornados are the two most common types of disaster events; ourdataset also contains a small number of earthquakes and hurricanes. Migrationactivity is measured in two new panel datasets, the first following individualsfrom 1920 to 1930 and the second tracking location from 1935 to 1940, bothusing Census sources. We find that, on net, young men move away from areas hitby tornados but are attracted to areas experiencing floods. Early efforts toprotect against future flooding, especially during the New Deal era of the late1930s, may have counteracted an individual migration response.

Migrationaway from tornado-struck areas in this era before significant governmentprotection is consistent with Hornbeck (forthcoming), which documentsout-migration from the Dust Bowl in the mid-1930s. This historical pattern is insharp contrast with Deryugina (2011), which finds no net population change incounties struck by hurricanes in the 1980s and 1990s. Instead, affectedcounties receive $356 (2008 dollars) per capita in immediate disaster aid and$670 per capita in additional federal transfers, principally throughunemployment insurance and income maintenance programs, over the next tenyears. She speculates that these federal transfers may create moral hazardproblems, “leading individuals to live in riskier places” (p. 3). The decliningprivate response to natural disasters over the twentieth century provides supportfor the “crowding out” hypothesis. An unintended consequence of the growth in disasterrelief and government investment in protective infrastructure may be to exposemore people to risk as they choose not to leave disaster-prone areas or to moveto such areas."

Do First Year Classes at Yale Law School Influence Student Ideology?

2011-12-30T10:56:00.000-08:00

Yale University's Law School produces stars. Due to the diversity of the Yale Law School faculty, and the fact that students are randomly assigned to first year classes, researchers have the opportunity to tease out whether taking Law classes with friends of Adam Smith shapes law students. While Yale is known to be a liberal law school, there are some faculty sketching the benefits of pursuing "efficiency". According to this paper, students who were randomly assigned to the "neo-classical economics" sections for courses such as torts and contracts reveal themselves to be more likely (on average) to act like economic man. If you look at the tables in back, you will see that the "Tiger Mom" is one of the instructors. She is coded up as "neutral". Future research should study whether attending her class has a causal effect in shaping students.

This research interests for 2 reasons. First, it is funny. Second, as a free market environmentalist --- I'm quite interested in how we set up institutions and incentives to encourage "green growth". Why are people in Berkeley such liberal/greens? Is it selection (i.e hippies choosing to live with each other) or is it treatment (i.e if Rick Perry were forced to move to Berkeley he would assimilate and start eating tofu and would eventually like it). During this ideological age, where does our ideology come from? (our parents?) and how does it evolve over time?

Somehow, liberal Democrats have triggered a perverse reaction by Republicans. There is no reason that Republicans must now have a litmus test that all "green action" is communism and over-reach by the state but many in this group have adopted this view because liberal/greens have been so sanctimonious about environmental issues. The enemy of my enemy is my friend?

If we understood more about ideological dynamics (at the individual level), then social science would make progress in predicting and explaining voting behavior and in anticipating the political economy of what public policies could actually be supported by a majority.

Some Drought Economics

2011-12-29T20:45:00.000-08:00

The NY Times recently reviewed two books that go on at length that the U.S Southwest is an unsustainable hellhole that will soon suffer greatly because of climate change and drought. What is striking about the article is that it never mentions the price of water in Phoenix, Las Vegas or other Southwest cities. The Econ 101 solution to this real challenge is ignored.

Here is a quote from the review about one of the books;

"In his hands, it is a sweeping story, encompassing global weather patterns, the mysterious histories and farming practices of the native people whose settlements rose and vanished in the desert, and the firefighters, biologists, anthropologists, water administrators and others who deal with increasing dryness today and seek to plan for an even drier tomorrow.

In interviews in their offices and in the field, they tell him they fear the story will play out — in forest fires, invasions of insects that prey on trees weakened by drought and heat, die-offs of native grasses, and prolonged dryness and thirst. Rains, when they come, will fall less often in the gentle, soaking precipitation Native Americans call “female rain” and instead will be its “male” counterpart — short, sharp downpours that flood the arroyos, erode the canyons and run off before they can do much to recharge underground water supplies already burdened by overuse."

So what is the price of a gallon of water in Phoenix today? According to this official website, the average Phoenix household consumes 136,000 gallons of water each year and pays $58.5*12 for it. So, this works out to a 1/2 cent per gallon. May I propose a solution to drought in Phoenix? Let the price rise to 2 cents a gallon and there won't be any more drought. Demand will decline as the green grass will go and households will substitute along a variety of margins so that supply and demand are in balance again.

Why did the author of this book review ignore the obvious economics? Perhaps the Climatopolis style optimism that relies on pricing signals and individual choice is a turn off? Such a "simple solution" doesn't offer enough gloom and doom? We control our destiny. There is an interesting political economy question of why water prices aren't rising. The Phoenix authorities did raise them by 7% on February 2011.

Scientists should do their core job of investigating the likely consequences of climate change for cities such as Phoenix. Spread this information and then allow the market to do its thing. Politicians will inhibit climate change adaptation if they don't allow prices to signal scarcity. Note the teamwork here, the science only matters if we have free markets where prices reflect all available information about new risks and opportunities.

Too many scientists appear to believe in a magical West Wing government in which a benevolent leader saves the day. Martin Sheen isn't up to the job and neither is his son Charlie. Instead, look to the market.

My Disagreement with Stanford QB Andrew Luck

2011-12-29T08:40:00.000-08:00

In this morning's SF Chronicle, Scott Ostler writes about Stanford QB Andrew Luck's choice to take easy classes this semester as he focused on his Saturday games and his chance to win the Heisman Trophy. Here is the quote that caught my eye.

"Luck needs two more classes to graduate. He will skip the upcoming winter quarter to prep for an NFL career, then come back in the spring to pick up the classes.

Luck did dial it back a tad academically this past quarter, as he dealt with Heisman Trophy hoopla and Stanford football. But it's relative.

A month ago he told me, "At this point you realize, 'I'm not going to take classes in school that are going to tax my time completely.' Which is not to say that I don't put the effort into the classes. But I'm not going to take the maximum amount of units, or a hard studio class for architecture."

Luck said he took two art history classes and a course in urban sustainability, whatever that is. Easy courses?

"I wouldn't call 'em easy," Luck said, uneasily, "but on the lighter workload side. I wouldn't want to disrespect the professors."

You know how big-time football stars hate to disrespect their professors.

Luck, due to some oversight, never received the College Superstar Athlete Manual. He attends classes, gets good grades (around a 3.5 GPA), rides his bicycle around campus and lived in the dorm his first three years."

So, Dr. Ostler --- you dare to mock "urban sustainability"? Allow me to offer you a short course on this subject.

You have a job at the SF Chronicle because there is a city called San Francisco. If there were no cities, you would be a farmer and would spend your days doing hard work just to make sure that your family has something to eat. You wouldn't have a tractor because such farming equipment is made in cities. Good luck using your hands and other primitive tools.

All over the world, billions of people are moving to cities and becoming richer because they are moving to cities. If everyone in India and China achieves the American Dream of earning a good wage and then buying a home and a car and consuming electricity, will we run out of oil and other natural resources? Will we unintentionally exacerbate the challenge of climate change because of the fossil fuels we use in powering our economy? Could we unintentionally kill off the golden goose because our cities are growing? These are some of the major themes of urban sustainability? You and Mr. Luck should pay more attention in class. This is an exciting field. If you would like to learn more, go to this webpage and start reading!

Now, maybe Stanford is to blame for not offering rigorous urban sustainability classes? I taught for one year at Stanford in 2003-2004 and was very happy with the students but I doubt that "urban sustainability" is taught by an economist. So, Mr. Luck's experience may be an example of why serious universities should be hiring more economists so that we can teach these classes. The rigorous tools of economics can be applied to many subjects that appear to be far removed from "supply and demand".

Dr. Ostler and Dr. Luck have both chosen to live in the San Francisco metropolitan area. It is well known to be a "Green City". Do they believe that this status was simply caused by god giving it good temperate climate and some topographical beauty? This is surely part of the equation but don't forget the human aspect. The area self selects liberal, educated, sophisticated people (think of Berkeley) and these folks vote for policies that further "green" the area. This in a nutshell is "urban sustainability". When Andrew Luck is playing for the Colts in Indy, he may want to go back to his notes to think about how to make that city nicer. Don't simply blame the cold weather. Chicago is "green" these days. Why? Take a course in urban sustainability and stay awake this time!

Can Safe Public Parks Cause More Crime?

2011-12-28T16:42:00.000-08:00

Macro economists do not have a monopoly on term "crowding out". The NY Times uses it today in an article about the night use of Central Park. As crime has fallen in the Big Apple and people are feeling safer, they are dropping their guard and taking more risks by walking in the park at night. So, the cops, abortion, and anti-lead reduce the crime and this "public investment" in safe streets displaces "private self protection" as people unlock their front door and go for a walk at night.

Leah Boustan, Paul Rhode and I will present a new paper at the AEA meetings next week that will make a similar point. We study U.S migration patterns in the 1920s and 1930s as a function of several variables including local natural disaster shocks. Our current results suggest a similar "crowding out" hypothesis. Back int the 1920s before the New Deal and large place based federal transfers, young men were less likely to move to areas that had experienced natural disasters. While in the 1930s and more recently, it appears that migrants are actually attracted to disaster areas as these areas are rebuilding and attracting Keynesian rebuilding funds. Robert Barro would appreciate this result, do you?

If you like some math in your life, I suggest that you read this paper by Kousky, Luttmer and the Zech. For lazy people, here is the abstract to their paper

"Hurricane Katrina did massive damage because New Orleans and the Gulf Coast were not appropriately protected. Wherever natural disasters threaten, the government—in its traditional role as public goods provider—must decide what level of protection to provide to an area. It does so by purchasing protective capital, such as levees for a low-lying city. (“Protection” also consists of prohibiting projects that raise risk levels, such as draining swamps.) We show that if private capital is more likely to locate in better-protected areas, as would be expected, then the marginal social value of protection will increase with the level of protection provided. That is, the benefit function is convex, contrary to the normal assumption of concavity. When the government protects and the private sector invests, there may be multiple Nash equilibria due to the ill-behaved nature of the benefit function. Policy makers must compare them, rather than merely follow local optimality conditions, to find the equilibrium offering the highest social welfare. There is usually considerable uncertainty about the amount of private investment that will accompany any level of protection, further complicating the government’s choice problem. We show that when deciding on the level of protection to provide now, the government must take account of the option value of increasing the level of protection in the future. We briefly examine but dismiss the value of rules of thumb, such as building for 1000-year floods or other rules that ignore benefits and costs."

Two Green Links

2011-12-28T09:41:00.000-08:00

Washington DC will soon make a major investment in cleaning up its rivers. The details are provided here. Such infrastructure investment takes serious $. As more cities, ranging from Chicago to NYC to Boston to London to Seoul, have discovered that beauty is one of their main "golden geese" for attracting tourists and keeping the skilled amenity seekers happy, they have strong incentives to invest in "greenness". This isn't hippie stuff but merely good business.

UC Berkeley's Dan Kammen has a strong editorial in the SF Chronicle focused on solar investments. He points out that solar installation creates five times more jobs than the investment of a similar capacity natural gas plant. I didn't know that. He also returns to one of my favorite themes.

"Solar simply doesn't provide a lot of manufacturing jobs in any country, and the number is dwindling further with automation. That's why blocking imports is beside the point. The jobs of tens of thousands of Americans employed in the solar industry, however, rely on the supply of quality solar panels from many nations, including China.

China certainly should do a better job of reporting on its subsidy programs, in accordance with World Trade Organization requirements, and the U.S. government should demand such compliance. However, subsidy policies may have their place, as they do in the United States, to help build a strong, job-producing solar energy industry.

Even Sen. Jeff Merkley, D-Ore., who supports a petition to punish China for unfair trading practices, has acknowledged that punitive tariffs against Chinese solar panels would immediately result in job losses to American installers. Longer-term benefits are even less clear.

This raises the question of why the U.S. government would attempt to effectively pick technology winners by applying punitive tariffs against Chinese companies when what is needed is to encourage competition among all promising companies."

Dr. Kammen is a University of Chicago free trader! We need more globalization and international trade in order to bring about the "green economy". When I wrote about this subject for the NY Times blog, I received a lot of crazy comments. Everyone should read my paper with Aparna Sawhney. on international trade in renewables equipment!

Electricity Demand in China

2011-12-27T09:01:00.000-08:00

As China grows richer, electricity demand will rise. Given that China's urbanites are buying cars and that China is a net importer of oil, it appears to be a reasonable home market strategy for China's powerful state to nudge forward the production of electric cars. As this article discusses, the grid operators in China anticipate that the rise of the electric car will further increase the demand for their services.

From an environmentalist's standpoint, they must "pick their poison". From a carbon mitigation perspective, do they prefer Chinese cars to run on oil (and hence bid up the price of world oil and this may trigger innovation for more fuel efficient vehicles) or for Chinese cars to run on electricity generated by dirty coal fired power plants? Of course, the greens will prefer that the cars run on electricity created by renewables but we haven't reached that point on the cost curves yet.

With several co-authors, I recently published a paper on Chinese urbanite resource consumption using their 2006 National Survey. For a copy of the paper, click here. This paper was published in the Journal of Economic Geography in 2011.

The Wisdom of Crowds

2011-12-26T17:08:00.000-08:00

You know that you are growing older when the obituary section is your favorite part of the newspaper. Say what you want about the NY Times but it has a very solid obituary section. When I was a 5th grader, we took a class trip to the NY Times and I was shocked that they already had written 80% of many leading living people's obituaries. I recall that they showed us the lead in for some baseball player who I admired.

Why do I tell you this? Well, this obituary impressed me. Mr. Farrell must have been a modest man. He knew that "he didn't know" what people wanted by the way of endings to Hollywood movies. So, rather than taking a gamble and allowing the artists who made the movie to choose their ending; he polled actual movie viewers to see whether they liked an ending and if the focus groups said "no" -- he nudged the movie makers to adjust the movie. In the case of Fatal Attraction, this worked perfectly (in terms of making $). While I had never heard of Mr. Farrell, he embodied a key element that we all need --- humbleness. I am only pessimistic about those people who think they know but truly don't. Those who don't know that they "don't know" will have much more trouble adapting in the face of change.

I can also report that Berkeley in late December is a delightful place to be. No rain this winter, and daily high temperature of around 65. My basketball game is pretty good these days and my son is hitting jump shots from between the free throw line and the top of the key. For a 10 year old kid, that isn't bad! He is now wearing a shark tooth necklace and appears to be pretty cool. He also now has a pair of sunglasses that allow him to make movies as he looks at you (there is a video camera in the sun glasses). We are stimulating the economy.

I am trying to write something for the Journal of Economic Literature but I'm tired of talking about other people's work. I am being nice and only saying nice things about everyone. I'm trying to set an example for the rest of the profession.

Lost in Translation?

2011-12-25T16:29:00.000-08:00

I am making plans to visit Fudan University in Shanghai this summer. To prepare for this trip, I enlisted Google to teach me a bit about its economics department. Since I can't read Chinese, I have to rely on English translations and I found one here. Permit me to quote the first 2 paragraphs and please read the 2nd paragraph which Dora and I both think is very funny.

"The School of Economics Fudan University consists of Department of Economics, Department of World Economics, Department of International Finance, Department of Public Economics, Department of Insurance, Research Institution of World Economics, Research Center for China Socialist Market Economy, Research Center for China Venture Capital, Fudan Research Center for Environmental Economy, Research Center for Geriatric Economics, Research Center for Economics of the real estate, etc.

The school has totally 138 faculties, among whom there are 34 professors and 42 associate professors. Not only does the school owns geriatric economists well-known by the world, but it owns young and middle-aged economists rising in the economics theory circles for the past few years, which made the school in leading position in the field of domestic economics."

We liked the words "geriatric" and "owns". That is funny!

As I have said many times, U.S universities should require mandatory retirement at age 65 and recall those faculty who are still hard at work. If there is a life cycle productivity effect such that people do their best work before age 50 and then reduce the quantity and quality of their research output then nations who are hiring younger faculty and nudging out older faculty will have higher average research productivity. If there are spillover effects that depend on your average colleague's quality, then these research universities with a younger active faculty will be more productive. This implies that the U.S advantage over other nations in research productivity at our leading universities will shrink over time.

Long Run Trends in Government Employment

2011-12-24T09:31:00.000-08:00

This book chapter taught me several facts. Based on its Table 2.1, 3.9% of workers worked for government in 1900 and this percent grew to 6.7% in 1935, 15.1% in 1970 and shrunk to 14.1% by 1984. The military is not included in these percentages. Here is the break out of employment in 2010 by sector for state employees. If I'm reading this BLS table correctly, roughly 17% of national employees work for government in the year 2010. As government seeks to reduce its deficit, how many government jobs will be shed?

As federal, state and local government reduces its employment, who will bear the incidence of these declines? Are center city residents more likely to work for government and local hospitals than suburban residents. Are minorities more likely to hold these jobs? This issue matters for public policy because cities such as Detroit face tough choices over how to reduce their deficits. Mayor Bing is likely to turn to President Obama and HUD for some financing. Will Republicans push back and say that local deficit reduction must be financed with reduced expenditure rather than increased Federal transfers? Economists have examined public employment as a form of local redistribution. Here is a well known paper. During this time of "Occupy Wall Street", I believe that this issue will arise again.

If center cities respond by raising their taxes, will we observe a new "Laffer Curve" as this will create tax flight as mobile skilled people and firms will suburbanize even faster?

2012 and Climate Change Adaptation

2011-12-23T09:09:00.000-08:00

2012 will be an election year and in the Summer of 2012 there will be an intense focus on London and its Olympics and whether the Miami Heat will win a NBA title. Putting these issues to the side, I predict that in 2012 that there will start to be a serious discussion about climate change adaptation. Articles such as this one by CNN will mushroom. Where economists can inform this debate will be discussing whether free market capitalism will lead the charge in protecting us (both urbanites and farmers) from the expected and unexpected shocks caused by climate change. To return to a key theme in economics, is the private sector and government intervention complements or substitutes in reducing our risk exposure?

In my Climatopolis book, I argue that because information is a public good that government should specialize in funding new climate science work and then sharing this information using GIS maps and reports so that nobody can claim that they are unaware of the new risks they will face. But, the free market plays a key role here. One person's misery is another person's opportunity. As people become aware of the new risks they will face, some firms will step up and supply products and solutions to help people cope. This is the evolutionary feature of capitalism. After all, we only needed one Mark Zuckerberg to have Facebook. We need a few entrepreneurs to step up a long a number of fronts such as; air conditioning efficiency, renewable power generation, water desalination, building design that minimizes risk of extreme heat and flooding. We need new agricultural crops that are more resistant to drought and extreme climate conditions. Are you betting against human ingenuity? I don't. We have enough lead time here and there is enough profit to be earned by stepping up and addressing these issues that I'm quite optimistic that we will adapt to our hotter future.

I would love to see us reduce our GHG emissions now but when I travel in China --- I see a lot of gas. It is time to start thinking hard about adaptation.

Localized Externalities and the Coase Theorem

2011-12-22T10:32:00.000-08:00

For those micro teachers seeking to spice up their classes, consider teaching this case. Apparently, there are some obese people who fly in the coach section of airplanes. If such an individual sits in a middle seat next to you, what happens next? This article explores the "spillover" effects. It raises a broader issue of how we share common space. What are your rights? When has someone intruded on "your" space?

Preparing for a Busy 2012

2011-12-21T19:37:00.000-08:00

2011 has been a good year but I hope to get more work done in 2012. In calendar year 2011, I taught 5 courses. Doesn't that sound like a heavy teaching load for an old guy? I taught a MBA course twice (Real Estate Finance), undergraduate environmental economics (twice), and a seminar on California Sustainability Challenges.

2012 will be a year of travel. I need to write my plans down somewhere so it might as well be here;

January 2012; Chicago and later Duke and World Bank
February 2012; UC Davis and later New York City
March 2012; Manila
April 2012; Santa Barbara and maybe go to Merced
May 2012; Illinois and Kansas City and Stanford
June 2012: Budapest
July 2012; Singapore and Shanghai, Boston and New York City
August 2012; Berkeley

If you know of somewhere else that I'm supposed to be, please email me!

In 2012, Siqi Zheng and I will complete our China manuscript and I also have big plans on a number of other research fronts. You won't see me teaching 5 classes in 2012!

If you insist on wanting to see me teach, then you can curb that urge by watching this.

How Will California Achieve its 33% RPS Goal?

2011-12-19T18:30:00.000-08:00

Today, California's electricity is mainly generated using natural gas. By the year 2020, AB32 legislation requires that 33% of the state's power come from renewables such as wind and solar. This is the renewable portfolio standard (RPS). For years, I have wondered what will be the cost of achieving this ambitious goal. In recent days, the CEC has released documents from a recent conference on the RPS. As usual, I see lots of talented engineers presenting stuff but unless I'm mistaken I don't see any economic analysis. Is that puzzling? Why should economists be involved? I would think that economists could model the likely impact on electricity pricing from substituting to renewables. I would think that residential, industrial and commercial consumers will care about such a prediction. In terms of formal economics, what does the state's supply curve for power look like? How binding a constraint is the 33% RPS? In english, what would be the price per kWh if we continue to use natural gas as the energy source versus what would the price be under the 33% RPS? For an optimistic opinion on this issue read this.

From an economic science point of view, this big green push offers an excellent test of the "learning by doing" hypothesis. Does the average cost per kWh of renewable power decline with more cumulative production? As the industry matures, is there more investment in renewables? Is Adam Smith's pin factory of specialization taking place here?

Also don't forget about international trade and globalization. As the United States imports renewables equipment from India and China, our costs of installing such completed systems decline. MIT's Technology Review has published a nice piece on this. For some facts about recent international trade patterns, read my paper joint with Aparna Sawhney.

Here is our sexy abstract:

We track US imports of advanced technology wind and solar power-generation equipment from a panel of countries during 1989-2010, and examine the determining factors including sector-specific US FDI outflow, country size, and domestic wind and solar power generation. Differentiating between the core high-tech and the balance of system equipment, we find US imports of the both categories have grown at significantly higher rate from the relatively poorer countries, particularly China and India. US FDI is found to play a significant positive role in the exports of high-tech equipment from both rich and poor countries, especially for the balance of system equipment. For the core wind and solar equipment, we find domestic renewable power generation played a significant positive role, and the effect is more pronounced for the rich countries as well as China compared to other poor countries.

and here is a well written paragraph from the paper's introduction:

There is a certain irony that trade with developing countries is accelerating the development of the “green economy”. The trade and environment literature has studied the conditions such that poor nations would be pollution havens for rich countries as dirty factories could escape tight regulation in rich countries by re-locating to poorer nations (Copeland and Taylor 2003, 2004). This literature emphasizes that the location of dirty economic activity will be determined by both factor endowments and regulatory intensity.

In the case of “green energy” trade, the poorer South is emerging as a key provider of cheap equipment for renewable-power generation to the rich North for its production and consumption of clean energy. If clean energy prices decline then they are more likely to induce a composition shift as nations choose to substitute them for fossil fuel generated electricity (i.e coal and natural gas). Such a composition shift could significantly reduce national greenhouse gas emissions associated with power generation.

I hope you agree that I should teach less so that I can devote more time to writing such witty prose?

On an unrelated note, I will soon be in Berkeley, CA to restore my liberal/green street credibility. If you want to see me, look for me at Strada.

Are Economists Good People?

2011-12-18T14:03:00.000-08:00

A funny economist has written a funny OP-ED for the NY Times. You can read Yoram B's piece here. He returns to the old question of whether jerks self select and choose to be economists or does studying economics transform angels into pedantic Darth Vaders?

Permit me to defend my wife and myself. Economics makes you a better strategic thinker. You begin to anticipate how others will respond to a particular stimulus. Such an appreciation for unintended consequences distinguishes us from other thinkers. We also have a growing understanding of disentangling causation from correlation. We are quite sophisticated with respect to how we crunch data to tease out "freakonomic" facts. Both of these are useful skills. The world faces so many problems that some people want to believe in the magic bullets that policy entrepreneurs are peddling. Yes, economists are a cynical crew and idealism is refreshing but I'm confident that naive idealism will only cause trouble and abuse. Be prepared!

Our intense focus on the role of incentives and establishing an agenda for identifying "causal effects" should score us a lot of points with the general public.

Yes, economists free ride and many of us prefer to be rewarded with monetary compensation rather than "social recognition" for our good deeds but Economists are a diverse group spanning both the political left and right. If you want to see some economists who care, then visit this webpage.

A Link on Climate Change Adaptation

2011-12-17T21:03:00.000-08:00

I am not surprised that more and more reasonable people are starting to think about climate change adaptation. Such thoughts begin to offer an escape route helping us to sidestep many of the challenges that climate change will pose. After all, if you can anticipate a threat (even if the threat's impacts are vague and uncertain), you can begin to set up a series of options that will offer you flexibility in responding as you learn about the emerging threat. So, link #1 is from a California article highlighting what my state is doing to begin to cope with the new challenges (thanks to Neil Lessem for this link).

Where I differ from many other commentators is in my belief that the free market (both individuals and firms) rather than governments will be the leaders in helping us to adapt. Local governments will only take such actions if their leaders fear that there could be a brain drain and a tax base loss due to climate change under business as usual strategies. But, note that it is the threat of exit by both firms and skilled individuals that will nudge politicians to act. For my two pager sketching my optimistic free market view on adaptation read this.

The View from Honolulu

2011-12-15T23:59:00.000-08:00

Have you ever wondered what is the view from Room #1421 at the Ala Moana Hotel in downtown Honolulu? From my balcony, I could see "Soviet Style" architecture and the Pacific Ocean. While Honolulu is quite attractive, I am a pinch surprised that this coastal community hasn't invested that much in new "nice" buildings. I had assumed that it would be like Santa Monica in LA but this wasn't the case. You can judge for yourself.

Why have I been in Honolulu for the last 3 days? Well, that's what faculty do. I helped my friends to organize an Asian Development Bank conference to discuss environmental and urban economics and we chose to hold it here. I had never visited Hawaii before.

When I return to LA, I will actually do some paper grading and then will root for my son's robot team as they compete this Saturday in the Championships.

Adaptation Discussion at Durban

2011-12-12T10:11:00.000-08:00

This 3 page memo is a promising step for having an honest discussion about climate change adaptation. To repeat my long held view. Climate change is a real challenge that is exacerbated by economic growth in population and per-capita income. The world free rider problem precludes a serious anti-carbon incentive from being adopted and so GHG emissions will continue to rise. Adaptation is crucial and the magic of capitalism, freedom of choice, competition and innovation will help us to adapt to many of the challenges that climate change will pose. We are not passive victims and we are not morons. Instead, necessity is the mother of invention.

Now that I've put my cards on the table, let's look at the Durban 3 pager's first 7 points.

1. Mainstreaming adaptation as a key informant of all local government development planning

We commit to climate change adaptation as a key consideration in all key local government development strategies and spatial development frameworks. Institutionally climate change should be located in a high level integrating office such as the Executive Mayor or City Manager’s office of the local authority.

2. Understand climate risks through conducting impact and vulnerability assessments

We will undertake local level impact and vulnerability assessments to determine the exposure, sensitivity and adaptive capacity of human and natural systems as guided by best available science and traditional knowledge.

3. Prepare and implement integrated, inclusive and long-term local adaptation strategies designed to reduce vulnerability

We will prepare evidence-based, locally relevant adaptation strategies and will develop and adopt measures to ensure that the objectives of these strategies are implemented, monitored evaluated and mainstreamed into statutory government planning processes. This planning will guide the development of infrastructure and investments that are climate-smart and environmentally sustainable, and that ensure that urban and rural development provide opportunities for adaptive, sustainable development.

4. Ensure that adaptation strategies are aligned with mitigation strategies

We will ensure that adaptation actions taken are in synergy with mitigation actions in order to promote cost-effective and sustainable solutions, and limit increases in the production and release of greenhouse gases. Similarly, we will ensure that mitigation activities do not increase vulnerability or result in mal-adaptation.

5. Promote the use of adaptation that recognises the needs of vulnerable communities and ensures sustainable local economic development

We will ensure that the use of Community Based Adaptation (CBA) is prioritised in order to improve the quality of life in our communities, including the urban and rural poor, who are vulnerable to the harmful impacts of climate change, especially vulnerable groups such as women, children, youth, the elderly, physically and mentally challenged, disadvantaged minority and indigenous populations. We will engage our citizens in our actions to address climate change, and will support proposals from civil society that efficiently and cost-effectively encourage changes in lifestyles that contribute to our local climate actions. We will assess climate adaptation strategies for compatibility with local economic development strategies.

6. Prioritise the role of functioning ecosystems as core municipal green infrastructure

We will ensure that sustainable management, conservation and restoration of ecosystems and the related ecosystem services are used to enable citizens to adapt to the impacts of climate change, which is known as Ecosystem-based Adaptation (EBA). We will strive to maintain and, enhance resilience and reduce the vulnerability of ecosystems and people to the adverse impacts of climate change.

7. Seek the creation of direct access to funding opportunities

We will build our climate financing through generating funds internally and through seeking the development of innovative financing mechanisms that enable direct access to national and international funding for our registered adaptation actions. We support the creation of a local adaptation thematic window in the Green Climate Fund, and in so doing we will seek the support of national governments and multilateral funding institutions.

This all looks good to me but it is vague. I see no discussion of the synergies between the private sector and government activities listed above. I fully support the role of government as trusted information provider. As I talk about in Climatopolis, updated GIS maps of hazards and pollution levels will play a key role in helping individuals and firms and governments to make "better" choices over a host of margins. As I argue in my book, cities that do not prepare to adapt will suffer from inevitable climate change blows and these shocks to their quality of life will cause a reduction in home prices and the flight of the skilled who seek out quality of life. As these cities lose their skilled, they will suffer the same fate as Detroit and Cleveland. Anticipating this "brain drain", wise city officials will have strong incentives to adapt.

The Ultimate Field Experiment: New Rules in Honduras and the Rise of the Charter City

2011-12-12T09:55:00.000-08:00

Who volunteers to be a guinea pig? Common sense suggests that you must be desperate for a cure (to sign up for a risky new drug) or committed to the cause (such as California unilaterally pursuing reducing its GHG emissions sharply under AB32). This week this Economist article about Charter Cities in Honduras highlights another guinea pig path.

When I first started graduate school way back in 1988, I loved Tom Sargent's intuitive discussions of rational expectations focused on the "rules of the game". If the rules of the game change, then optimal behavior changes. For example, if the NFL switched over to Canadian Football rules that you only have 3 downs to achieve a first down, then more teams would punt on 3rd down. I understood this point and would think about it back in 1988. See page 9 of this paper.

But, back then, there wasn't a subtle discussion of where the "rules of the game" came from and if the current rules are bad, why the rules don't change to something better? The field of political economy hadn't really made much progress up until that point. Perhaps the old rules had been "optimal" at an earlier time but the economy has evolved so that the old rules need to be updated?

I think I understood that there would always be incumbents who benefit from the status quo rules but I optimistically assumed that if a Hicksian Pareto Improvement were possible through new rules (i.e if the total economy would grow under the new rules then the losers could be compensated for giving up their veto to change the rules), then the economy would move to the efficient equilibrium. How much of poverty in the developing world is due to "bad rules"? To answer this question, we need some nation to take the "treatment" of switching rules at least for some piece of its geographical territory and that is what a "charter city" will be.

I am excited that Honduras may launch this experiment. There is an information externality here. The rest of the world's poor nations should give Honduras a payment for launching this experiment. Why? The lessons learned (especially about what works) can be replicated elsewhere. Honduras appears to be volunteering for this "guinea pig" role. I salute them but they should ask for a side payment.

Grading

2011-12-10T12:07:00.000-08:00

I may have forgotten what Ricardo taught us about comparative advantage. Why doesn't Michael Jordan mow his own lawn? Why is Matthew Kahn doing his own grading? Maybe the answer is comparative advantage. As the University of California has less cash these days, there are fewer teaching assistants for courses. My 75 student environmental economics class didn't merit a graduate teaching assistant or reader. Fortunately, I was able to hire two outstanding undergraduates to hold office hours with students (I also hold my own office hours) but I must handle all of the grading. Since I ask "Becker style" questions on exams, students write out long answers that must be read by somebody to see if they merit any points.

In my humble opinion, the class was a success. I gave 19 environmental economics lectures and you can look them over here. For the first time in my 20 year career as a teacher, I didn't give one bad lecture!

Now that I've finished my grading, I am exhausted and will go to Hawaii next week to recover. I've learned a good lesson this quarter, if I teach this class again at UCLA --- I will cap the enrollment or make sure that some lucky Ph.D. student has the chance to work with me in co-teaching this class.

Pollution Havens and International Trade in Lead

2011-12-08T15:56:00.000-08:00

When we dispose of products such as computers and car batteries, what becomes of them? The NY Times reports on another version of the pollution havens hypothesis. Our car batteries go to Mexico and the lead is plucked from them. This work increases exposure to some nasty stuff. I have mentioned Jessica Reyes' work on lead exposure many times. To my surprise, the long NY Times piece doesn't mention the 1990s Larry Summers memo on a similar topic. Should exports of used batteries be illegal? Or, do you support encouraging people in developing countries to take on risky, relatively high paid work? Can we figure out whether these workers are aware of the short term and long term health implications of working with batteries? If these workers are not informed about the true risks, does your answer change? The Obama team embraces benevolent paternalism so how should it handle this issue?

The real issue that I believe the NY Times wants discussed is endogenous innovation. Imagine if the U.S didn't have the option of sending toxic trash to LDCs. In this case, where we would know that we are "stuck with the trash", we would simultaneously nudge our engineers to engineer a substitute that is less toxic and we would also develop end of life cycle ways to recycle valuable resources. When we know that we can "outsource the problem", we have less of an incentive to innovate and come up with a green solution. The NY Times appears to believe that necessity is the mother of invention and that globalization eases the necessity of finding a novel solution.

Adapting to Wacky Weather

2011-12-07T19:51:00.000-08:00

Optimists of the world unite. This article talks about cities making capital investments in "winter weather equipment, which will help better prepare the roads for travel when the weather hits. Dallas, Atlanta and Chicago have all readied themselves for the upcoming season by purchasing new snow plows and other equipment. " Doesn't this sound like learning from experience and investment under uncertainty? This is the "small ball" of adaptation. Now, will London's airports buy some snow plows? I believe that the answer is "yes". Capitalism offers many products for adapting to new weather patterns. Where there is demand, supply will follow.

Economic theory predicts that we do not make the same mistake twice. We learn from past mistakes and change our behavior to protect ourselves from scenarios such as wacky weather that become more likely because of climate change. When we know "that we do not know" what extreme weather will be, we purchase certain types of "insurance" such as having extra plowing equipment in case an extreme snow storm takes place. Be prepared! While adaptation is not costless, this forward looking approach (armed with the financial resources to finance the equipment purchases) helps to protect us.

Doom and gloomers are implicitly adherents of behavioral economics. If we are myopic and we do not update our prior probability assessments then we can certainly be blindsided by climate change but as this Wacky Weather example highlights, investment patterns are changing in anticipation of the "new normal". Again, this is the logic of Climatopolis!

Induced Innovation

2011-12-07T08:05:00.000-08:00

The NY Times reports that for profit drug companies smell new opportunities to sell pills in Asia and are responding by increasing their R&D to make new pills targeted to diseases that people in Asia are more likely to suffer from. "Merck and its rivals have a better chance of success fighting diseases like hepatitis B and esophageal cancer — both far more common in China than elsewhere — if they conduct research and trials on the ground." My guess is that China will allow clinical trials that the USA might block.

Note that this example supports the core claims of Acemoglu and Linn's important 2004 QJE paper. I point to this line of work because I hope that sick people in Asia enjoy increased access to drugs that help them but in addition this example highlights how capitalism evolves to provide us with new products that we need. This is a key idea in my climate change adaptation Climatopolis work. Many environmentalists are afraid to engage with the idea that capitalism is a force that can protect us from environmental harm and reduce the core source of the harm. At UCLA on Monday, I gave a talk about my new work on China. I continue to be surprised by my non-economist faculty's ambivalence about capitalism. Who signs our checks at UCLA? The answer is Adam Smith! The market place has generated the $ to support excellent research universities.

Smoggy Beijing

2011-12-07T07:36:00.000-08:00

Every two months, the NY Times publishes an article about China's environmental pollution challenges. Today, there is a piece about recent high levels of air pollution in Beijing. Permit me to say a few things. The article hints that the powerful Chinese State intentionally measures the "wrong thing" that it measures PM10 while the real threat to public health is PM2.5. While this statement may be true, it is important to note that the US EPA started monitoring PM10 in 1988 and switched to monitoring PM2.5 in 1999 (see this). Research studies have documented that the correlation between ambient PM10 and PM2.5 is between .5 and .9 (see this study from Greece and this study from Thailand). My friends in Beijing have told me that the U.S Embassy (where the "independent" PM2.5 readings are being taken) is in the center of the city near a highway. Both of these factors will lead to elevated readings. The Center City features a higher population density and proximity to roads will lead to hot spots of local particulate levels. So, the NY Times needs to be subtle about how "Beijing Pollution" is measured. Do you take a spatial average? A population weighted average? Or do, you measure at the most polluted geographical point in the city?

I read the NY Times article through an optimistic lens. The growing middle class are concerned about environmental issues and are demanding government attention. This is how "democracy" works. I predict that we will see environmental progress in Beijing and other Chinese cities in the near future.

Carbon Intensity Reduction in China?

2011-12-06T21:33:00.000-08:00

Why is China setting out credible energy intensity reduction targets? Have they been motivated by pep talks by Tom Friedman and Al Gore? I don't believe that this will cut global GHG emissions but it will slow the growth of global GHG emissions and it will accelerate the introduction and diffusion of new technologies that will break the link between GHG emissions and economic growth. Perhaps we aren't doomed. We still don't fully understand why China is offering the world such a "gift". Does Beijing value losing the tag of being a global green villain? Are their leaders concerned that Peak Oil is a real threat and they want to have an implicit insurance policy in case the ecological economists are correct?

Does China Offer a Better Quality of Life than the United States?

2011-12-05T18:04:00.000-08:00

Professional athletes market their skills on an international market. Such a market offers a revealed preference test of which nation is the best. Stephon Marbury has voted with his feet and claims that China is the place to be. Now, a cynic might ask what basketball wage he would earn in the United States but as Mr. Marbury compares the bundle of China's wages and quality of life vs. what he would in the USA, he claims that he prefers the East. Economists are increasingly studying the migration patterns of superstar athletes. This study offers some international "Laffer Curve" evidence of how stars respond to marginal tax rates and seek out the tax havens.

Who Occupies Malibu?

2011-12-04T09:10:00.000-08:00

The LA Times provides clues here. I don't know of any UCLA faculty who live there. Road speeds are too slow in LA. You can only move around at roughly 15 MPH so it is quite frustrating to be in "close" proximity to some destination but that it takes too much time to actually get there.

This is finals week at UCLA and I have been hard pressed to dream up new questions. I am too old to be writing exams. I write challenging exams that Gary Becker would approve of. Students are astonished that they can't find answers to these questions in their lecture notes or on Google. They actually have to sit and think! My, my.

Now that UCLA has no $, I don't have graduate TAs for my classes so I am writing and grading my own exams. This may not be the best use of my time? Next year, I think I will use my own research accounts to hire graduate students to work for me but I will need to cover Ph.D. student tuition (which is usually waived for those who TA for an assigned class). The total cost of hiring a graduate student for a single quarter could be $12,000. That's a pretty serious 10 week expenditure for faculty to pay.

If I successfully grade all of these finals, I then will go to Hawaii, then Berkeley and then to Chicago. Do those 3 locations have anything in common? As I think back on 2011, I have been to some fun places this year. In no particular order; London, Beijing, Tianjin, Maastricht, Rome, Florence, Sienna, Pisa, New York City, Boston, Bozeman MT, Washington DC, Denver, San Francisco, and LA.

The only good news for me is that fall 2011 was my tough teaching quarter. I have plenty of research to do in 2012 and I know that my co-authors are waiting for me to deliver.

Does Google Books Offer Too Much Intellectual Property?

2011-12-03T13:48:00.000-08:00

Click here to read huge chunks of Dr. Glaeser's Triumph of the City for free. Click here to read huge chunks of my Climatopolis for free (chapters 1,3,6 and 7). I'm hoping that my friends at Google can explain how this is legal? Could the publishers of these books really agree to this deal? I like the idea that everyone on the web can read 40% of my book for free but can that be a $ maker for the publishers?

China's Future Green Cities

2011-12-02T08:10:00.000-08:00

On Monday, I will be speaking at lunch time at my UCLA Institute of the Environment about my China research. Over the last five years, Professor Siqi Zheng of Tsinghua University and I have written seven papers about environmental quality in China's cities. We are now starting to write a book about this topic.

If you want to prepare for my lunch time talk, please read the following.

1. This
2. This
3. This
4. This
5. This
6. This

Mapping the UCLA Anderson School's Global Impact

2011-12-02T08:00:00.000-08:00

Maps can be powerful tools for conveying information. This map highlights that the UCLA Anderson School of Management has had an international impact. I like how it nudges people to participate in this social network by nominating themselves or a friend to provide information about this new person's accomplishments. I'm sure that this creates a domino effect as more people sign up.

I am a professor at the Anderson School. If I could survey, all of our graduates over the last 30 years and learn their current salary and work location, it would interest me to test for nation and city size effects. Intuitively, in which nations does the same degree (an Anderson MBA) offer the highest payoff and how does this payoff vary as a function of economic sector (i.e finance vs. consulting vs. industry) and city size. For those nations and industries with high "economic returns", is it the case that new Anderson graduates are moving to those cities? So, I am imagining an economic study that examines both the geographic migration decision of MBAs and their earnings in the city and industry they choose to work in.

Labor economists always face the challenge that in the typical data set, we may observe that a person has a "college degree" or a "graduate degree" but we do not know from what type of school. If you focus on a specific population (those with an Anderson MBA), this would help to measure the returns to human capital.

For an example of the type of study I envision, here is a very nice paper that uses survey data from the University of Chicago's Booth School of Business. They have a 31% response rate to their survey. Relative to the typical survey, that is an outstanding response rate but the usual concerns about bias arise. I would need the Dean of the Business School to use her influence to help me have a 100% response rate from the Universe of Anderson graduates!

Occupy Harvard Prepares for a Cold Winter

2011-11-30T06:58:00.000-08:00

This Harvard Crimson article provides details about the plans that Occupy Harvard participants are taking to continue to camp out even as it gets cold outside. This is another (and funny) example of expectations causing ex-ante adaptive efforts that help us to cope with changing climate conditions. The Harvard "radicals" are good data points for the Climatopolis world view. They will use market products (better insulated tents) to lower the probability that they suffer when it is very cold soon.

"The occupiers are currently considering a number of different methods to transform the frame into a shelter, including installing a plastic skin that would waterproof the dome and additional insulation to keep it warm, according to Bhalla.Another option includes turning the dome into a green house that would be heated by natural light. This approach would allow the walls of the dome to be transparent while maintaining warmth even in five-degree weather, said Timothy S. McGrath, a student in the Graduate School of Arts and Sciences."

For those who say we are myopic and don't adjust our expectations until it is too late, I say "Occupy Harvard".

An Update on My Dad's Publications

2011-11-28T20:55:00.000-08:00

I agree with others that bloggers such as myself have nothing new to say. So, rather than talking about Greece or Paul Krugman, I want to talk about my father's recent publications. Here are some titles of his work that you are unlikely to see in the QJE.

Influence of the hepatic eukaryotic initiation factor 2alpha(eIF2alpha) endoplasmic reticulum (ER) stress response pathway on insulin-mediated ER stress and hepatic and peripheral glucose metabolism

Is it open or is it closed? Thrombosis of a St. Jude's tricuspid valve prosthesis

Doppler echocardiography and computed tomography in diagnosis of left coronary arteriovenous fistula

If anybody knows what any of these words means, please get in touch with me.

Vain Economists

2011-11-28T16:12:00.000-08:00

Economists like to compete and Google Scholar has given us a new way to compete with a ranking system that is merely one mouse click away. Is this metric better than the REPEC metric? We don't care. We just want to compete. We will soon see how many well cited economists register so that they can stand out in the pecking order.

Somebody should write a paper on this! Such a researcher would face a riddle. When I looked at the top 220 people (ranked by cites) who have already registered, only 12 are women. Are women less vain or less cited? You can use REPEC to answer the 2nd but how will you answer the 1st question?

Embracing An Example from Ecological Economics

2011-11-27T17:03:00.000-08:00

Neo-classical environmental economists have a strange relationship with our ecological economics brethren. The ecological economists seem to believe that natural capital is the ultimate limit to sustainable growth while neo-classical economists posit that new ideas and innovation can continuously allow us to avoid "limits to growth". We believe that through endogenous innovation that capitalism helps to accelerate the discovery of new ways to produce basic things we need such as food and energy services. In a salute to Paul Romer and other growth thinkers, we believe that new ideas can and will arrive that will save the day so that we do not starve and do not suffer in a changing world.

Today's NY Times has an example of ecological economics that I understand. The ecological economists are eager to turn waste (an output) into a productive input. Such general equilibrium flows would lead to a more efficient capitalism. As this article highlights, computers are major producers of heat. We all know that computers get hot and that big firms must run air conditioners to keep them cool. This NY Times article posits that a "win-win" would be to lock such computers in people's basements so that their furnace would no longer be needed. Instead, people would get their heat from the electric furnace (the computers). This is a groovy idea but it raises a couple of issues.

1. How would the home's electricity consumption be disaggregated into that which is consumed in the basement versus that which is consumed by the occupants of the home?

2. What do you do to minimize the probability that the basement floods? How do you minimize the probability of vandalism by outsiders?

3. What happens to the family ping pong table?

4. How does the family who lives in the home guarantee that no teenagers will break in and play around with the computers? How will two sided liability work?

5. Is there fire risk from all of these computers? How often would nerd technicians be entering the home to tinker around to make sure that the data centers are safe and clean?

But, I do like that the nerds are thinking outside the box of how to turn waste into a productive input. If energy prices rise, this would be even more attractive for households who want some heat coming up from the floor boards. Perhaps the ecological economists and the NBER economists can make the peace!

Is Social Science Becoming Too Sexy?

2011-11-26T11:09:00.000-08:00

This is a scary piece from the Chronicle of Higher Education. Academics want fame and we know what makes the headlines. Demand creates supply. In the case of baldness cures, that's good but in the case of funky social science research --- is it still good?

Energy Consumption in the Suburbs

2011-11-26T10:05:00.000-08:00

A NY Times opinion piece today argues that suburban buildings are major electricity consumers and that this is bad. The piece presents no facts about what a Microsoft Campus' per-worker energy consumption is and what it would have been had the campus been assembled in downtown Seattle. In this blog post, I'd like to talk through the issues.

I have some street credibility on this topic. As you know, I have written about suburb/center city differentials in energy consumption here, here and here. In new joint work with Nils Kok and John Quigley, we are studying commercial building electricity consumption using building level data from a large California utility.

The Professor who wrote the Times piece didn't answer the basic question; "Why are offices locating in the suburbs?" An easy answer is that land is cheaper there and when there are large residential suburban communities then this will attract offices for accountants, lawyers and other services that the residential community will demand easy access to.

A harder question is why so many major modern companies such as Microsoft, Google, Facebook want to have large suburban campuses. Why don't they locate downtown? The tradeoffs are pretty clear. In center cities, there is a land assembly problem. If Google wants to have low density buildings with green space, this will be hard to assemble in downtown San Francisco and very costly. There will be existing buildings which may have historic preservation status. In the suburbs, land is cheaper and converting farmland or suburbia into a corporate campus features many fewer headaches. The author of the editorial could have done a better job discussing how bad center city public schools and center city politician induced "red tape" stifles the desire of employers to locate new entities downtown. It appears that only Don Trump can make fast headway with downtown development.

Now, from an environmentalist perspective is suburban growth bad? As my past work has documented in terms of transportation she is right that people use the car in the suburbs and are much more likely to use public transit in the city. Since land is cheaper in the suburbs, people and commercial interests purchase more of this land than they would have had they located in the city. If air conditioning scales with unit size, then they will consume more energy than if they located downtown. More empirical work is needed to quantify these "counter-factuals". But, we also know that suburban buildings are newer than center city buildings. If new buildings are much more energy efficient than old buildings (even if they have been renovated) then she could be wrong. This is one of the questions that Kok, Quigley and I are investigating.
She could be right but there is an empirical research agenda here that she is assuming rather than quantifying.

If you want more center city "infill" development, then you should push for lower crime in center cities and increased public school flexibility so that more families choose to remain downtown. As center city quality of life improves, more employment will follow.

The rise of San Jose as a sprawled and productive center of "Silicon Valley" highlights that firms can be driving distance from each other and enjoy productivity spillovers. Cars certainly cause serious environmental challenges. To address this, we need higher prices for gasoline as this would accelerate the adoption of the electric car. Introducing a carbon tax would guarantee that the electric car's power source would be renewable power or natural gas. The end result would be greener cars and a suburban economy still offering the gains to trade but with a lower environmental impact.

Some Links for Today

2011-11-25T13:38:00.000-08:00

As gas prices rise, will small cities suffer as airlines cancel small jet flights connecting them to big cities?

Will fear of future drought nudge you to buy plants that thrive in Afghanistan?

Does The Sex Pistols' Wall Art Merit Historical Preservation Status?

2011-11-25T09:28:00.000-08:00

In a world where Elton John has been knighted, shouldn't Johnny Rotten's art work be preserved? London's thought leaders are now wrestling with this issue. To quote the Express Newspaper;

"The controversial band was based at an apartment in central London in the late 1970s, and drawings on a wall were found when the building was recently converted into offices.

The images, mostly by frontman Johnny Rotten, include a self-portrait of the singer sporting his trademark spiky hair, and a drawing of the band's manager Malcolm McLaren clutching a bundle of cash.

Now leading archaeologists are debating whether the graffiti should be preserved as a work of historical importance."

Ed Glaeser has argued that historic preservation has gone too far in limiting "progress" and such artificial barriers to urban housing supply are a major cause of high real estate prices in such "progressive" areas. Knowing how much Dr. Glaeser enjoys the sound of Johnny Rotten's band, I bet that Ed will reconsider his past work in light of the new news.

Triggered Budget Cuts Offer Another Test of the Efficient Markets Hypothesis

2011-11-23T08:31:00.000-08:00

Suppose that a military contractor's earns its revenue from selling hardware to the military. Suppose that this contractor makes a marginal piece of equipment such as those over-priced Osprey helicopters. If the market believes that the Super-Committee in Congress will fail to come to an agreement and this triggers military cuts, then does this company's stock price decline as the "new news" that the Committee has failed becomes public knowledge? This article says yes. What would be an empirical test that indicates that the stock price has "over-responded" to the new news? Perhaps these helicopters can be sold to China and the firm's stock price could rise? We want more free international trade, don't we?

Anticipating The Costs of Drought Induced by Climate Change

2011-11-20T20:03:00.000-08:00

I missed this piece by Joe Romm about future Dust Bowls caused by climate change. Here is a dramatic quote from this subtle thinker;

"Most pressingly, what will happen to global food security if dust-bowl conditions become the norm for both food-importing and food- exporting countries? Extreme, widespread droughts will be happening at the same time as sea level rise and salt-water intrusion threaten some of the richest agricultural deltas in the world, such as those of the Nile and the Ganges. Meanwhile, ocean acidification, warming and overfishing may severely deplete the food available from the sea….

Human adaptation to prolonged, extreme drought is difficult or impossible. Historically, the primary adaptation to dust-bowlification has been abandonment; the very word ‘desert’ comes from the Latin desertum for ‘an abandoned place’. During the relatively short-lived US Dust-Bowl era, hundreds of thousands of families fled the region. We need to plan how the world will deal with drought-spurred migrations (see page 447) and steadily growing areas of non- arable land in the heart of densely populated countries and global bread-baskets. Feeding some 9 billion people by mid-century in the face of a rapidly worsening climate may well be the greatest challenge the human race has ever faced."

Joe has provided us with the "early warning" of the challenge we will face. We should thank him for this. Note that he is quite pessimistic about induced technological progress. What do capitalist firms do all day long? A lazy view is that they play the cliche "bad guy" role that OWS focuses on as the "Fat Cats" sit around and count their $. A more nuanced view is that there are millions of entrepreneurs thinking about what will be the next "big thing". If food production will be the next big thing, then $ from venture capitalists will flow in. Will we continue to grow food the way we have in the past in the same locations that we have used? Perhaps not.

International trade in agriculture offers a diversified portfolio of exporters. Inventories offers another strategy for protecting us from shocks. In Climatopolis, I used the example of dried fruit as a simple example of this point. Much of the pessimism about human adaptation to climate change comes from not appreciating the path of endogenous innovation. Smart people are aware that the future will not be like the past and that climate change poses real risks. Such anticipation is the first step to helping us to adapt.

For 30 years, economists have written about investment being a function of future expectations. In the case of climate change economics, rational expectations lives on. If Dr. Romm is right, he should be investing his family's money in promising companies whose efforts can feed the world in the future. Under his scenarios, the price of food will start to rise and this will trigger demand and supply responses. The "doom and gloom" that he predicts will unfold is much less likely in a world featuring capitalist free markets and globalized trade and international migration. Of course, we should reduce our GHG emissions now but given that this is not happening it it time to embrace adaptation strategies and capitalist growth is our best adaptation strategy.

Of Birds and Men

2011-11-20T07:38:00.000-08:00

This piece published in the Sacramento Bee is not about pepper spray use at UC Davis. Instead, it focuses on how California's birds are and will adapt to climate change. There are several interesting patterns as some birds are becoming bigger while others are becoming smaller. A small bird needs less food to survive. If food supply is becoming more volatile then this is a wise evolutionary strategy. Recall that in my 2007 paper on surviving POW camps that shorter people were more likely to survive in the U.S Civil War. Same idea!

At the end of the Sac Bee article, there are some charming commentators whose views are welcome but highlight the ideological divide. Environmentalists need to think harder about why this divide has taken place. Why did climate change mitigation become an ideological issue versus when could it have been an "insurance issue"? I can imagine an alternative galaxy where a people agreed that climate change could be quite risky and thus chose to adopt the prudent strategy of buying some insurance by reduce GHG emissions. Environmentalists deserve a lot of "credit" (I'm being sarcastic) for turning off the other 50% by pointing fingers and "tsk-tsking" about the Hummer, suburban, BBQ life-style. Yes, the net result of these choices is more GHG emissions but only Santa Claus knows who is truly "naughty" and "nice". Smart greens should have anticipated that the typical Republican would have a price incentive (i.e his expected high carbon tax bill) to oppose such "green" incentives and thus to design policies to attract such an individual to support this regime shift. One way to have done this would have been to tie revenue collected from carbon taxes to reductions in capital gains taxes.

The Future of the Sierra Club

2011-11-19T09:12:00.000-08:00

The environmental movement is diverse and diffused. It faces transaction costs to working together to lobby for green causes. You don't have to be Mancur Olson to anticipate that it will face "David vs. Goliath" issues as it battles Big Oil, Big Coal, and Big Others in its attempts to green the economy. Now that it will be searching for a new leader, what direction should it take?

In my opinion, the League of Conservation Voters has the right model. They create new information and distribute it to the public. Their Scorecards represent real data that nerds can study. The non-profit advocacy organizations need to hold politicians accountable through issuing "Report Cards" based on objective data.

I believe that the Sierra Club and other well meaning organizations have made a mistake by not engaging with academics more. Such organizations would gain credibility and would learn how to make their claims more palatable to political moderates if they took a more nuanced look at issues. Not every piece of regulation offers a "win-win" of environmental protection and "green jobs". Many regulations are costly. If the environmental movement were more honest about the tradeoffs and known unknowns then it would have more success in its lobbying for new policies and regulations.

The Sierra Club should also continue to foster education for people who seek to visit nature and to meet other people interested in nature. Keeping the base engaged and growing the base makes perfect sense.

The Sierra Club should embrace running field experiments. I will provide one example. Imagine if it could talk ten electric utilities into sending out the same letter to each of their customers.

"Dear Customer,

If you sign up for green energy, you will help the nation achieve its energy independent goals (as we produce more electricity using domestic sources) and you will help to reduce greenhouse gas emissions from electricity production. In a partnership with the Sierra Club, we are offering you a one time deal. If you sign up for Green Energy, this will cost you $X per month and the Sierra Club will donate $Y each month (as a subsidy)."

The research team could randomize X , to see whether the public signs up for green energy programs when they receive a subsidy from the Sierra club. By randomizing X, the economics nerds could estimate a demand curve for green power. The Sierra Club could then approach its base to collect funds to finance this program and act as a Green Middleman Bank and then could claim that it played a key role in reducing GHG emissions from the residential sector.

This would be progress!

Where Can NBA Players Play This Year?

2011-11-19T07:20:00.000-08:00

If you are a skilled worker and you are displaced from your current job, empirical research on local labor markets say that you should migrate to another market where you can work. NBA players have read this research and are seeking out migration opportunities. This article highlights the challenges they will face. Apparently there are not many jobs out there waiting for them.

So, what should the players do? They might be wise to go back to college. I asked my students the other day why the players don't reconstitute their existing teams with new names? So the Boston Celtics would transform into the Boston Cucumbers (and would feature Garnett, Pierce, Ronjo et. al). The Los Angeles Lakers would turn into the Los Angeles Lasers. Where would they play? They could rent an arena and post good videos to Youtube. They would have to figure out how to share gate revenue and Internet Advertising revenue. Would it be "authentic" real basketball? That would be up to the players. Do they need the owners and the official NBA stamp? What is the product?

Arbitrage in Housing Markets

2011-11-17T07:42:00.000-08:00

This New York Times article is worth reading. You will learn about a fascinating arbitrage opportunity. Rather than buying an existing house, people such as Julie and Randy Olson in Brook Park, MN are purchasing land in one location and then buying a home in another location that is slated for demolition and then dragging the purchased home to place it on their purchased land. There is an arbitrage opportunity if:

Price of land + price of home that will be dragged + transportation costs

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Price of purchasing a similar home in the location where you want to live.

The article goes into great detail about what types of homes can be dragged and how improvements in technology makes this now more feasible than in the past.

This has important implications for urban economics. In 2005, Glaeser and Gyourko published an important paper in the JPE on Durable Housing and Urban Decline. Part of their paper focused on cities such as Detroit where there are large numbers of homes that are durable but there are few current people who want to live there. When Detroit made cars, there were lots of jobs and developers built homes but now the jobs are gone but the durable homes live on. Given this imbalance between supply and current demand, home prices there will be quite low and this will attract poor people. Detroit's mayor recognizes this and whole neighborhoods are being demolished. Now let's return to the Olsons. If arbitragers such as them purchase these cheap physical Detroit structures and drag them out of Detroit, then Detroit's home prices will begin to stabilize. The supply of homes there will shrink (there is little new home construction in Detroit).

Bad Apples

2011-11-16T17:30:00.000-08:00

Today, I was serving up one of my classic environmental economics lectures. I have posted all of my course materials here. I was presenting a sketch of Gary Becker's work on the "quantity versus quality" of children and the implications that the economics of demography has for environmental problems.

When I looked at the class, I saw that a student in the front row was texting on his smart phone. I asked him what he was doing and this guy told me that he was checking out today's stock market returns. I asked him to leave the class but he wouldn't budge. If I leave UCLA, I will point to this event as one of the triggers. Professors need to reclaim the classroom and teach students who want to learn!

For those who bother to check out my course webpage, keep in mind that this is 10 week class. In such a short quarter class, you are forced to really focus on core issues and strip away many of the details. I teach in an interdisciplinary program and many of my students haven't even had intro econ.

Does Harvard Cause Income Inequality?

2011-11-16T06:10:00.000-08:00

Staring in the 1980s, labor economists wrote thousands of empirical papers documenting the rising return to skill. If schools such as Harvard supply such skill, then "Higher Education" is a cause of income inequality as it leads to a separation of top workers from the rest.

But, this Crimson article makes a new point.

To quote the author; "Harvard’s true culpability lies in its complicity in the “brain drain” into finance and consulting, fields that produce very little and in fact leech off of other industries. These jobs are prestigious and lucrative, which explains why they are especially tempting for Ivy League types.

Here is one way that Harvard can solve both problems: abolish tuition as we know it in favor of a garnishment of future wages. This would instantly wipe away Harvard’s (already mistaken) reputation as a prohibitively expensive school available only to a wealthy elite as well as its habit of sending its brightest graduates into professions that revere avarice."

Now, I know that we need new jobs in the United States but who will be the Dean of Avarice who monitors each graduates' earnings and then demands 5% of this amount? Will graduates be on the Honor System to self report their earnings?

To be serious for a moment, I have wondered whether Economics Ph.D. programs are attracting the same talent that they attracted 30 years ago, or 20 years ago before the rise of Superstar pay on Wall Street. Given that Ph.D. programs have become much more International, you would expect that the quality of students should be rising because there is more competition. For evidence, don't forget this funky JPE paper on track and field records and globalization.

Has "too much" talent gone to Wall Street? If we believe the human capital externality models of Lucas, and Romer and the empirical work conducted by Glaeser and Moretti and others then there could be significant social costs from individually rational occupational choice decisions. I haven't seen an academic paper on the "Cost of Wall Street" that its rise could simultaneously increase income inequality and lead to a misallocation of human capital (i.e too many Ivy Leaguers betting on asset price dynamics).

Harvard's culture may also accelerate this occupational choice. If the "Social Network" at Harvard stresses the importance and "coolness" of high early pay and the possible quick sugar pot, then there may be young people there who choose to go to Wall Street rather than becoming a nerd Professor. Now, I am a full supporter of allowing the price system to send signals of what is scarce but there is an interesting question of how the "best and brightest" choose where to start their career and the role that Superstar Pay plays in directing talent.

Revolt at the University of California?

2011-11-15T07:43:00.000-08:00

This article surprised me. According to the LA Times, the UC Regents are not meeting this week because of fear of violence as OWS has created a license for some folks to roar.

The facts are simple. The State of California has sharply reduced its funding of the University of California. The UC is ambitious and wants to remain excellent so it must collect $ from somewhere. One source is China and one source is grants. The Federal Grant overhead will decline sharply as the NSF and NIH and NIA are cutback in the new round of federal budget deficit negotiations.

So, student fees are a logical place to look for more $. Is UCLA expensive? Not relative to the Ivy League. Many of our UCLA students are transfers who have spent 2 years at a community college so they have effectively reduced their price of college by 30%. The President of the UC needs to allow each campus to set its own tuition. In this case, there would be expensive campuses such as UCLA and Berkeley and much cheaper campuses. Students on a tight budget would have a menu to choose from to tradeoff price and quality. You could spend 2 years at a community college and 2 years at UC Riverside. I believe that the total tuition for this 4 year education would be relatively low.

There needs to be a more honest discussion of differences in quality across the UC campuses. In capitalism, price and quality tend to be positively correlated but this is not the case at the current University of California.

The faculty at UCLA want to see a credible commitment to excellence. We want to see clear signals that the University will remain great. Concern that it won't could trigger the equivalent of a bank run as talent walks away to other schools. The students should be careful for what they wish for because both quality and tuition would decline. You get what you pay for.

What If Economists Ran Nations?

2011-11-13T14:04:00.000-08:00

Italy is about to run an interesting experiment as its new leader is an economist. I have argued before that relative to lawyers that economists are vastly under-represented in the U.S Congress. I have claimed that this discrimination against economists has efficiency and equity consequences. If Larry Summers was elected our President in 2012, would the U.S be in better shape in the short run and long run? After reading most of Run Suskind's "Confidence Men", I know that he would say "yes" and I agree.

Now, I realize that most economists are not electable. Ben Stein is the most charismatic among us. But, suppose we managed to achieve power through some trick such as when Kevin Kline seized power in that epic "Dave". What would we do if Paul Krugman and Robert Barro jointly served as "co-presidents"?

Here are my guesses;

1. pursue international free trade in goods and labor (i.e immigration restrictions would ease sharply).

2. credible short term and medium term budget targets would be announced and rules would be introduced to meet these targets.

3. early life investments in children would be increased.

4. A series of field experiments would launched to create an "evidence based" government who only intervenes in the free market after a serious cost/benefit analysis has been conducted.

5. The government would commit that no government funds would be used in "picking winners" or "subsidizing industries" unless large positive externality effects are demonstrated to exist by a group of blue ribbon economists.

6. Health care would be reformed to offer all Americans a basic package of services and citizens will be allowed to augment that care through private competitive markets. A group of health economists would agree to what services and procedures would be bundled into the "basic package". For example, nose jobs would unlikely be part of this list.

7. Retirement benefits will be adjusted to reflect life expectancy tables based on your birth year, age and sex. If you are part of a demographic group with a shorter life expectancy (i.e African Americans), then you can receive benefits earlier. To give people time to plan for this transition, anyone who is over the age of 52 would not be affected by these new rules.

8. The U.S Military would be given a fixed budget that is tied to the growth of the U.S economy. The Military can save any budget allocation that it does not spend in any fiscal year.

9. The U.S would enter an exchange program with China so that its leaders can travel in the U.S and vice-versa. Such an international exchange program would facilitate trust and mutual understanding.

10. The U.S government would take a close look at the unintended consequences of many of its policies. If these consequences are large and bad, then this would be used as a reason to end such programs. For example, as Casey Mulligan has argued --- many of the Obama Administration's well meaning policies regarding student loans and housing loans discourage work.

Here is some survey evidence that backs up some of my claims.

11. A vast majority of economists would support serious fossil fuel taxes and using this revenue to lower labor and capital taxes.

My "big" point is that in a world where deficits are high and economic growth is low, it is time to take a close look at the incentives embedded in our current rules.

I say; "give the economists a chance!". During this time of economic crisis, I predict that more democracies will hand the economists the ball. While there is a lot we don't know about macroeconomics, the case for the power of microeconomics to explain and predict human behavior is pretty strong.

Too Much Time on Your Hands?

2011-11-12T07:12:00.000-08:00

Do you remember that Styxs song? Well, for those of you with too much spare time and are interested in California Green Issues and enjoy watching KABC with David Ono, then you can watch this and this and see if I make any witty remarks.

Judging the Health of the California Economy

2011-11-11T09:44:00.000-08:00

If you enjoy seeing California suffer then you should study the data charts available here. We appear to be collecting less tax revenue and are making greater local assistance transfers. An alternative source of information on the state of the economy is available here. This is Ed Leamer's pulse index. The recent news for the Pacific states looks a bit better.

This budget information matters for UCLA because we continue to take $ from the State. I am on record stating that this is a mistake. We need to go "cold turkey" and not accept another dime from the state. To quote Mel Gibson, "Freedom". If UCLA chooses my path, we will continue to educate hundreds of thousands of Californians and the quality of education will improve. Yes, the price will go up but nothing worth buying is cheap (except for blog posts!). UCLA has been too kind to incumbent residents of California. There are millions of other possible students who currently don't live in California. If they are admitted and attend UCLA, they may choose to remain in California. Such in-migration will increase the human capital base of California and this will encourage economic growth.

Occupy Harvard: Round Two

2011-11-10T07:20:00.000-08:00

The Harvard Crimson Reports: “If Harvard is going to be a place that produces people with power, then Harvard must be an institution where the public good is more important than private profit,” McCarthy said. Earlier, he told a crowd that “Harvard has economists that teach us that profits are more important than people.”

I have no idea what this 2nd quote means but permit me to offer a few thoughts. Every econ 101 textbook has a graph depicting the efficiency vs. equity tradeoff. A more equal society (in terms of resource allocation not personal freedom) will be a less productive society as there will weak incentives to exert effort (i.e if you face a 90% marginal tax rate).

If the "Occupy X" crowd want to change the world, then I suggest that they embrace a two issue plank. They can join Simon Johnson and figure out how to diffuse "The Power" but they should also simultaneously read and think about James Heckman's policy push for early life interventions in investing in young children.

What does Harvard (and other leading universities) owe the nation? Such institutions create new knowledge and educate the next leaders of the nation. But, do these institutions also encourage "greedy" values and insular social networking such that this group only interacts with others like them? Could such institutions ever inculcate "betterr" values? How would this happen? A personal field trip to live and work in a poor area or poor nation? You are free to join the Peace Core.

Urban Noise Pollution and the Flight Path of Supersonic Jets

2011-11-10T06:50:00.000-08:00

At around 11am yesterday, a military jet flew at low altitude and real fast over the heart of Los Angeles. You could hear a loud and scary boom as it flew. There are 8 million people in Los Angeles and to keep this example simple, let's assume that each of us suffered $1 of pain from the surprise and noise. The Pentagon just caused $8 million dollars in damage. Could this have been avoided? Why was the plane flying so low? Why did the plane choose this route? If it had gone 70 miles north, there wouldn't have been anyone there. If the plane moves at 1000 MPH, then this extra 200 or so miles to loop around LA would added 12 minutes to its flight plan.

Climatopolis: One Last Time

2011-11-08T10:37:00.000-08:00

My friends at PERC were kind enough to give me the opportunity to write about the role that free markets will play in helping us to adapt to climate change. My new essay is published here.

The Choice of Undergraduate Major

2011-11-08T07:46:00.000-08:00

Why do so many young people major in Economics rather than "STEM"? Is it because our bloggers are so much wittier than their bloggers? Today in the letters section of the NY Times, we learn the answer . Permit me to quote Columbia's wise Prof. Firestein.

To the Editor:

Why do science majors change their mind? They wise up.

Your article makes it sound as if American science students are stupid or lazy, unlike their workaholic Chinese and Indian counterparts. This is glib and insulting.

It is in their second year that students typically join laboratories and see firsthand that their dreams of a scientific career include low-paying and highly competitive professorial jobs, that getting grants for scientific research is increasingly difficult and unpredictable, that they are facing many years of postgraduate work at ridiculously low salaries and that they would have a hard time supporting a family.

Compare this future with that of the economics major (lots of math) who goes to business school and can look forward to million-dollar yearly bonuses.

American students change their majors because they recognize that this country has stopped providing a reasonable future for scientists, with slashed budgets for the National Science Foundation, National Aeronautics and Space Administration and National Institutes of Health.

For Chinese and Indian students, science remains a way out of poverty. For American students, it’s becoming the path into it.

STUART FIRESTEIN
New York, Nov. 6, 2011

The writer is chairman of the department of biological sciences at Columbia University.

Now, I can assure you that not every econ major will earn a million dollar bonus! There appears to be missing information here. Prof. Firestein implicitly is assuming that every science major seeks an academic appointment. Where are the for profit companies that would seek to hire these students? While there is a free rider problem, they have an incentive to alert students to the types of industry careers they could have.

I agree with Prof. Firestein that an increase in the NSF and NIH budgets would lead more young people to become scientists. Some responsibility here must lie on the faculty. Science often appears to be a bunch of definitions and identities. Have the scientists figured out how to bring their subject to life? Do they compete to keep majors enrolled? Universities do not shrink science disciplines that have few students. If Departments lost faculty slots when they don't have students, then guys like Prof. F. would do a better job in the classroom.

Debt vs. Equity

2011-11-06T11:16:00.000-08:00

I realize that Grease is the Word but why must Germany lend more money to Greece? If Greek public sector workers want to continue to live the good life (and retire at 50), why doesn't the nation sell some of its valuable assets to Germany? My parents just had a wonderful trip to Greece. Here are just a couple of examples of the unique cultural tourist destinations that Greece has to offer. Following basic environmental economics, a simple travel cost methodology could be used to price these assets and Germany and Greece could agree to a trade. Germany would supply cash and Greece would hand over these treasures. Think of the efficiency gains! German precision would make the tourist lines shorter.

These unique geographical assets would act as a bond. Germany would know that Greece would not be happy to cede these assets and will seek to buy them back in the future. There will be no risk of future default if valuable equity is handed over. Debt vs. equity; folks --- this is a classic question in finance. Why isn't the EU talking about this?

Now, what am I doing? I'm flying back to LA to manage the debt crisis from there. I will be at UCLA and will be happy to answer your questions.

Road Trip

2011-11-04T08:34:00.000-07:00

I am on a bumpy Amtrak Train moving at 40 MPH from Boston to NYC. Is this high speed rail? If I make it before sunset, you can meet me at the Oxford University Press Office. Yesterday, I spent a great day at MIT. For some details about what David Albouy, Nate Baum-Snow and I were saying about low carbon cities click here. When the video is posted, you should watch it because it will be funny! Tonight, I see my brother, parents, niece and sister in-law and this weekend I will see my old friends. A Road Trip has its merits! Last night, I had dinner at Legal Seafood and this morning I had breakfast at the Charles Hotel with my old friend Mike Cragg. The Northeast has charm!

Serenity on the Plains of Kansas

2011-11-01T06:30:00.000-07:00

Neither Ed Glaeser nor Paris Hilton will be moving there, but this WSJ article sketches a high social capital, engaged lifestyle that you could enjoy if you move to Rural Kansas. I couldn't tell where the closest Starbucks is (The Denver airport is a 3 hour drive so that bounds the walking time at roughly 60 hours).

Thursday Night at MIT

2011-10-31T21:25:00.000-07:00

This Thursday, I have the opportunity to participate in an event at MIT's Department of Urban Planning along with my friends Nate Baum-Snow and David Albouy. All details are here. Bring your copies of Climatopolis and I will sign them! (As an aside, I teach MBAs at the Anderson School at UCLA and the other day I gave a signed copy of my book to one of my students who had done a good job in class the week before. He told me that he was likely to sell it on Ebay and expected to earn 50 cents. I respected his honesty).

What will the Dream Team of Albouy, Baum-Snow and Kahn be speaking about?

Economics and the Sustainable City
Thursday, November 3, 2011, 5:00-7:00pm
MIT 3-133

Three urban economists discuss how economic principles will help cities to create a smaller environmental footprint.

David Albouy, Assistant Professor of Economics, University of Michigan; Faculty Research Fellow, National Bureau of Economic Research; and Research Associate at the Office of Tax Policy Research
Nathaniel Baum-Snow, Assistant Professor of Economics, Brown University
Matthew E. Kahn, Professor, Institute of the Environment, Department of Public Policy, UCLA

Moderator: Frank Levy, Daniel Rose Professor of Economics, Department of Urban Studies and Planning, MIT

Responders:

Eran Ben-Joseph, , Professor of Landscape Architecture and Urban Design; Head of the Joint Program in City Design and Development, Department of Urban Studies and Planning, MIT
Judith Layzer, Associate Professor of Environmental Policy and Head of Environmental Policy and Planning Group, Department of Urban Studies and Planning, MIT

Now, I must note for the record that Nate has been promoted to tenured Associate Professor at Brown and as you know .--- this listing above omits 3 of my UCLA affiliations. In addition to the Institute of the Environment and the Department of Public Policy, I am also a Professor in the Economics Department, the Anderson School of Business and the Law School. So that's 5 and I want 5 more. Which ones? I respect the folks in the Anthropology Dept, Sociology, Political Science, Urban Planning and I like the Physicists.

So, that would equal 10 appointments and I'm already 1/2 way towards this goal.

I have very fond memories of MIT. That great school treated my wife very well during her 14 years on their faculty.

Some Comments on the WSJ's Editorial on California's "Green Tax"

2011-10-31T07:41:00.000-07:00

The Editorial writers at the WSJ have some tough things to say about California's AB32 carbon mitigation effort. The regulators at the Air Resources Board are called "elitists" who do not understand the unintended consequences of their well meaning regulations. The WSJ predicts that this regulation will further damage the California economy. This editorial merit some analysis.

First, allow me to quote the editorial in a couple of places to give you a flavor of its tone and main points.

"It may be time for California to formally apply for membership in the European Union. Its taxing, borrowing and regulatory policies are already more in line with the southern tier of Euroland than with other U.S. states, and the Golden State has taken another lurch in the Euro-direction by becoming the first jurisdiction in the nation to adopt a full-scale cap-and-trade tax to combat global warming. The new taxes and regulations will require a nearly 30% reduction in carbon emissions from power plants, manufacturers, cars and trucks by 2020."

I agree that this is funny and well written.

"So California will go it alone on cap and trade, and the economic fallout won't be pretty. Nearly every independent analysis agrees that water, electricity, construction and gas prices inside the state will rise. The only debate is about how much."

This is the key paragraph in the piece. The WSJ forgets that the Air Resources Board is aware of the general equilibrium impacts of its policies. The ARB is trying to change "the rules of the game" to get California polluters to expect that they will be charged a gradually higher price for carbon emissions. As these polluters update their capital stock and make investment decisions (and given this policy path expectation), they will make choices that allow them to adapt smoothly to the new incentives.

The WSJ implies that the policy regime shift is "cold turkey" but this is false. California polluters will only gradually face a higher price for carbon emissions. It is true that meeting the aggressive Renewable Portfolio Standard for electric utilities must be pushing them to raise their electricity prices (and the exact amount should be a leading economic consulting project) but the new cap and trade program will be gradual. Here are some facts.

To placate critics who view this as a "silly tax", "In California, 90 percent of the allowances will be given out free, but 10 percent will be sold on the open market, which some say could raise $500 million a year for the state's climate-change programs."

So, at the start of the cap and trade program --- the polluters will only be paying for 10% of their pollution and the price per ton will start low and only gradually rise. This is like walking into the ocean one toe at a time. This isn't the rise of Stalinism!

As I have said many times, California is running a major field experiment here and since ideas are public goods, the good ideas that California discovers will be applicable all over the world to reducing GHG emissions elsewhere. Of Course, California can't "solve" climate change by itself but by volunteering to be the "green guinea pig", we will generate new knowledge and good mitigation strategies that can be applied all around the world. Are we are hero or a sucker? The WSJ incorrectly calls us a sucker. As a subscriber to the WSJ, I must admit that I'm disappointed with their dogmatic editorial staff. This smart group has ignored that the leaders of the ARB are well aware of the political realities they face. There is no free lunch but it is possible to identify "win-wins" that internalize externalities.

UPDATE: The WSJ makes a mistake in citing a "cost of regulation" piece that claims that California households will be paying an extra $3,800 a year in new regulatory costs. To quote the sober Joe Romm, I have "DEBUNKED" that regulatory study in my own analysis . Unlike those authors, I was not paid for my report! You can also read my LA Times editorial (joint with Jim Sweeney) on this subject here.

What Can UCLA Learn from Ohio State University?

2011-10-30T13:53:00.000-07:00

Today's Business Section of the NY Times had some wild stuff. There was a large advertisement from the Stanford University Medical School announcing its new search for a Dean of the Medical School. Now, the interesting part was to announce this in the Business Section! Maybe medicine and capitalism are connected? There was also an article about Tom Sargent as he explained that he is both liberal and conservative but he doesn't like simple labels and slogans.

Finally, on the back cover of the Business Section was another Ad. The Ohio State University was announcing that it has borrowed a 1/2 $ billion dollars by issuing 100 year bonds to help it remain a great university. As I read this, I asked myself; "Why isn't UCLA doing this?". There are many great projects that we could invest in now (no, the New Hotel is not one of them) if we had the $. If we could borrow and pay interest for 100 years and then pay back the balance, we could do great things with such $. Ohio State will pay 4.8% on its bonds. I believe that serious investments in UCLA will generate a greater than 4.8% percent annual return.

Now, I'm not a lawyer but I believe that the University of California can already issue bonds. I propose that UCLA should be allowed to set its own tuition and that it be allowed to issue debt if it wants to.

Who would buy this debt? UCLA has over 300,000 graduates. Many of them have never given a penny to the University and many paid very low tuition to attend. Many of these graduates are successful and are looking for risk adjusted investments that pay a high rate of return. The UCLA bonds would offer a safe investment that would offer a loyalty payout. By buying our bonds, our graduates would be showing their support for UCLA moving forward. Casey Mulligan has documented a similar loyalty effect during World War II when people were willing to hold U.S bonds at a low interest rate. Such UCLA patriotism would mean that we could borrow at an even lower interest rate.

Research by David Cutler and Grant Miller found that when U.S cities were able to issue debt to finance new infrastructure investments in the early 20th century that death from waterborne diseases fell sharply. I predict that UCLA will achieve similar greatness if it can invest now using your savings!