Adapting to a Strategic Opponent vs. Adapting to Climate Change

Bill McKibben has written a piece that merits reading but his premise is off.  He supplies his New Republic readers some red meat (or should I say tofu?) that will get them excited but is he correct?  He wants to argue that we must mobilize now to fight a World War 3 against climate change.  Free market economists would say that our entrepreneurs are already placing their bets (Elon Musk is working hard on his Tesla). Of course, there are government incentives such as a carbon tax that would accelerate these investments.

Here is a paper that I published 6 years ago.  I argue that it easier to adapt to climate change than to terror because Mother Nature isn't a strategic opponent.  Mother Nature has a predictability to her.   The same geographic areas (New Orleans) face greater flood risk.  The same geographic areas (Las Vegas) face extreme heat.  When there is a predictability to weather conditions, we can plan ahead forecast and be ready for them.

In contrast, the whole point of terrorism is to be unpredictable.  When we have no idea what bad things will happen to us next, we are anxious and vulnerable.  A strategic opponent intentionally randomizes to confuse you. Mother Nature doesn't do this.

Bill M. implicitly assumes that we have no ability to forecast future shocks or to prepare for them. He engages in powerful rhetoric attributing the Zika Virus to climate change but is this correct?

I respect Bill M's goal but why is he so sure that collective mobilization is the right response rather than letting individual entrepreneurs launch their efforts?  The U.S built the atomic bomb but it didn't create Facebook or Google.  Are the set of solutions we need to adapt to climate change more like Google or more like an atomic bomb?

I think we need;

1.  Energy efficient air conditioners and refrigeration

2.  Green cost effective power

3. architecture that can take heat, extreme rain and flooding.

4. A food supply that is more resilient to climate shocks and that can be stored over time and traded across space at relatively low cost.

Will governments or the private sector supply these?  I bet on the second one.

Now the role for government is in public goods provision, we need to invest in remote sensing to provide the "Big Data" so the entrepreneurs and the product demanders know about the new risks now playing out that vary across space.

This is a good example of the interaction between government public goods and free market entrepreneurship that will allow us to avoid BM's nightmare.

China's Water Pollution Regulation

Working with my friends at Fudan University, we have released a new paper on the unintended consequences of China's recent water pollution regulation.  You can read the paper here. 

Shiller's Conjectures About the Long Run Consequences of Income Inequality

When it was announced that Gary Becker won the Nobel Prize in Economics, there was a press conference at the University of Chicago.  At that October 1992 conference, he stated at the start of the event that he would not answer questions related to issues far from his research (such as the 1992 Presidential Election).   I recall that he was asked a question about whether his rational addiction research would help the City of Chicago to address its drug problem.  He sketched an answer but he clearly didn't want to be anointed as an "expert" on topics for which he wasn't.   Modesty has its virtues.   I recalled this story after reading the Nobel Laureate Shiller's piece in today's NY Times.  It appears that Dr. Shiller is less modest than Dr. Becker was.  I applaud Dr. Shiller's concern about the consequences of income inequality and he is asking a great question but I don't believe that he provided a great answer.

Permit me to play "Devil's Advocate".   Could rising income inequality actually improve our long run quality of life?   As wealth is accumulated by a subset of the population and there are more billionaires, what do these people do with their dough?   Some of them (think of Mike Bloomberg at Johns Hopkins or David Geffen to UCLA) give hundreds of millions to Universities.  Regardless of why they give this money, the net result is that our best universities have the funds to push the frontier of research. Directed technological change provides us with the tool to "cure" cancer, to figure out new energy sources, to better understand social dynamics.  As our research universities make progress, the possibility that all of us can have a great life increases.

So, ask yourself the following question. If every person on the planet shared equally the world's GNP, what would be the endowments of our best 200 world universities?  Versus, what would be the endowments of the world's best universities in our unequal world?   In the equal world, the great universities would have much worse funding and the world's technological progress would slow down sharply.

Given that ideas are public goods, once the nerds (fueled by the best labs and equipment) have made discoveries , we all benefit from them.   Say what you want about the super rich but their investments in our best universities have played a major role in fueling innovation.  Such innovation is our best shot at continued improvements in our quality of life.

You might conjecture that in a world featuring perfect equality that people would each voluntarily vote for taxes to finance hundreds of University of California level public universities where great research would take place.   I wish this were true but such an equal world would not offer sufficient incentives to work hard and invest in human capital (which is necessary for the innovation to take place).  I also am not convinced that in this counter-factual world that these "middle class" people would vote for such enlightened policies of long run research investment.  Politics would also play a key issue as the public universities would be funded in every state and place (given our place based politicians).  Fewer great ideas would emerge from this more uniform distribution of resources across space.

Now, permit me to be politically correct.  Like Shiller, I worry about the quality of life of the poor. I am now writing a piece for the Brookings Institution on how the urban poor will cope with climate change.  My piece (which will be published in December) offers several policy proposals.  I 100% endorse Jim Heckman's agenda of investing in early education for all kids.  Like Shiller, I worry about the Luddite conjecture that machines will take over ever more low skill jobs. This is due to health insurance, substance abuse and labor relations --- machines are "lower maintenance" than human (pun intended).

My Advice for the NY Times as it Searches for a "Climate Change Editor"

The NY Times is creating a "green job" as it will hire a new climate change editor.  Given that Dora and I have written a recent paper on how the NY Times covered the urban mortality transition from 1890 to 1930, I will offer this important newspaper some unsolicited advice.

1. Report on "good news".   Yes, I understand that newspapers love "bad news" and this was a focus of my paper with Dora. We document that there was little coverage of the good news trend that deaths from infectious water borne disease fell sharply. Only where there upticks in the death rate, did the historical NY Times cover the story.

There is plenty of good news on the climate change front.  Yes, the Times can profile Elon Musk and talk about solar panels but that's not what I mean.  Instead, there are new markets and funky ways that urban capitalism is evolving to handle the climate change adaptation challenge.  The doom and gloom perspective of the NY Times is fashionable but is it correct?  

2. Building on #1, the NY Times needs to explicitly embrace and admit its philosophical embrace of behavioral economics. The NY Times is a pinch elitist implicitly arguing that people are fools and are ignorant that "we are all going to die" because of the climate change we have unleashed. The bad news is that we are all going to die but we choose when.

To be concrete, the NY Times should write much more about climate change adaptation.  Are we really passive victims in the face of new shocks or are we forward looking and investing accordingly to build up our resilience?

3.  The NY Times needs to be more honest about political economy.  Rather than lobbying for suing Exxon and celebrating the latest thoughts from Joe Romm and Bill McKibben, an alternative strategy would be to delve into the details of what $ compensation would be required to pay the coal mining regions to keep their coal in the ground. Are there gains to trade? Are the progressives willing to pay to stop the coal extractors around the world from extracting their property and burning it?

4.  The NY Times could do some detailed case studies of entrepreneurs who seek to start businesses that both reduce our carbon footprint (think of a great tasting tofu steak) or shield us from climate change. For these young men and women, what is their idea?  What financing do they need to launch their firm? What random events would help them to succeed versus fail? Are venture capitalists willing to invest in them?

5.  Will the NY Times embrace land use reforms to change local zoning policy such that once we identify relatively safer areas, that developers can build taller buildings there? More generally, we need to have a discussion of how the federal and local government inhibits adaptation.

6.  The NY Times is the paper of record and it must drop its favorite morality narrative that resembles themes from Star Wars. In Star Wars, there was "good" and "evil".  The distinctions were clear and there was no gray.  That isn't our world.  Burning coal has benefits and costs.  Let's quantify both. Let's figure out who has property rights. Let's figure out a way to facilitate a trade that makes both coal burners and everyone else better off.

For 6 years now, I have argued that capitalism will allow us to adapt to climate change. I encourage the NY Times to report on this optimistic claim.

Dr. Krugman is Correct about Urban Quality of Life Progress

Paul Krugman is correct and Mr. Trump is wrong.  Quality of life has never been better in American center cities.  Of course, Mr. Trump knows that his section of Manhattan is doing great. His real estate there is worth more than ever.  From simple supply and demand, given the inelastic supply --- any price dynamics is driven by demand , thus a high price signals a high demand.  Nobody (except people with school age kids) is excited about suburban living anymore.  This matters because blacks and Hispanics disproportionately live in center cities (but not necessarily in Mr. Trump's part of town).   Many urban economists including myself have been studying urban trends in quality of life.  Of course, income and unemployment are two important metrics but other metrics such as local crime and pollution and access to public transit (many urban minorities do not own cars) also matters.

Let me point you to some research;

1.  My 2000 research on how the Clean Air Act has reduced Hispanic exposure to air pollution in California.     Air quality progress has mainly occurred in the dense city centers.  The suburbs have always had cleaner air.  As we learn from Flint, MI --- older poorer cities have other environmental problems.  I discuss the challenge of facilitating inner city investment to rebuild such areas below.  

2. My work on urban quality of life progress (congestion is the only challenge that we haven't made good progress on because we don't engage in real time dynamic parking pricing and road pricing).  

3. My co-authored handbook chapter on "Cities and the Environment".  

4.  Raphael's work on car ownership and earnings.

5.  My work on public transit use in major cities;   Also see my 2005 Brookings paper with Baum-Snow. 

Mr. Trump could look at a simple metric.  Chinese tourists visiting U.S cities.  This footloose group reveals which U.S cities offer great quality of life based on where they go to spend time and $.   It is also no accident that center city universities including my USC are booming right now.  Life in the center city is quite good.

There are still issues;

1.  Will crime keep falling if the BLM movement leads the police to be less aggressive in policing?

2.  Will the teachers unions allow for reforms to improve center city schools?  As middle class people move to "tougher neighborhoods" will they send their children to the local schools?  How will the mixing of richer and poorer people in schools take place?  Richer people with more options will only send their kids to such schools if this option beats their alternatives. There has to be competition and reform.

3.  Real estate permitting needs to change to allow entrepreneurs to raise rents and convert decaying center city structures and rebuild them.  Too many progressive center cities make it very difficult for developers to improve an area because of renter fear of "gentrification".  But, there is no free lunch --- as area quality of life improves --- rents will rise. Do the incumbent residents really prefer their status quo or are they just lobbying for a free lunch?

The Federal Government's Gross Employment Flows from 2005 to 2015

I have always greatly admired the work of Davis and Haltiwanger on gross employment flows.   Dora Costa and I have some new work up and going on Federal and local government employment dynamics.  Take a look at our new figure below.  This figure is my homage to Davis and Haltiwanger.
This is just the tip of the iceberg we are studying.  The graph covers federal employment from 2005 to 2015.  We graph new hires (worker inflows) and quits (worker outflows).  Note that during the recession the government sector expand both because new workers join and because quit rates (the red line) declines.   The growth of government employment in a given year equals the vertical distance between the yellow line and the red line; so "net employment" grows the most in 2009 and declines the most in 2013.  Interesting?   Wait 6 months and our real paper on a related subject will emerge.

China's Value Added in Rebuilding U.S Cities

The LA Times has written an informative piece describing new real estate construction in downtown LA paid for and constructed by Chinese investor teams.   This piece raises several interesting economic points.  Only in the recent past, "Made in China" was viewed as a signal of low quality.  I bet that these new buildings are high quality construction produced in a cost effective way.  One of the themes of my 2016 book is the investment by China in human capital and improved management (i.e MBA education) fuels efficiency.   It is funny that the piece goes on to say that the complicated regulatory process through which LA issues permits has slowed down the Chinese builders.  This point is a theme of my 2011 paper.

Another interesting point in the piece is that the Chinese investors expect that Chinese real estate buyers will be the main demanders for these new properties. This suggests that Mayors in other cities who seek to attract Chinese foreign direct investment must build an "eco-system" that attracts Chinese people to want to live and buy there.  Such individuals demand good public schools, and low crime. Which U.S mayors can deliver such local public goods?  Where can Chinese people prosper and be treated with respect?  Those U.S cities will receive an influx of this Chinese capital.  This is competition and rewards those mayors who actually do their job.

Real Estate Investment and Modeling Flood Risk Uncertainty

Imagine a scenario in which you must choose whether to invest $500,000 in a sunk investment in a new house (that will live on for 40 years and then turn to dust) overlooking a beautiful body of water.  Based  on the last 500 years of data, there is a 1% chance each decade that your house will be destroyed by flooding.  Assume you are risk neutral and you will live in your home for 40 years and the interest rate is 0%.  Assume you gain $B dollars per decade you live in the house in terms of pleasure due to the view.

Standard project evaluation would say that you should make this investment;  if the expected discounted  benefit is greater than the cost or;

B + .99*B + .99*.99*B  + .99*.99*.99*B - 500000 > 0

Now suppose that due to climate change the 1% probability of disaster increases but due to model uncertainty it increases by an unknown amount.  Different people will have different expectations and only those people who are more optimistic (naive?) about future disaster probabilities and/or truly love the view will choose to make the sunk investment.

Now suppose that government offers subsidized flood insurance based on the old 1% per decade disaster $.  So, if insurance is actuarialy fair,  $500,000 can be insured for $5,000 per decade.  How does this insurance change the investment decision?

Define 1-g as the new post climate-change probability each decade that the investor believes the home will be destroyed. This parameter will vary across investors (heterogeneous expectations).  Where 1-g > .01

The new investment decision is;

B + g*B + (1-g)*500000 +  g*g*B + (1-g)*(1-g)*500000 + g*g*g*B + (1-g)*(1-g)*(1-g)*500000 - 500000 - 15000 > 0

The last term represents the PDV of the insurance payments.

Now let's consider the case if people couldn't buy this subsidized insurance.  Define g = probability of  no disaster .

B + g*B + g*g*B  + g*g*g*B - 500000 > 0

The key point here is that people with lower B will now sink the investment relative to who is the marginal preference person in the absence of government insurance based on the old probabilities.

In the absence of government insurance, only people with high "g" or high "B" will invest in the climate impacted areas. These are the optimists and the coastal lovers.  

I wrote this blog after reading this NY Times opinion piece. 

An Economic Analysis of the NY Times Bashing of Exxon on "Carbon Stranded Assets"

John Schwartz has published a front page "article" on the NY Times business page claiming that Exxon has huge problem because it owns billions of dollars of assets (oil) that will be a stranded asset in the near future.     This is an interesting claim.  He is hinting that Exxon could go bankrupt in the future and that this will have ripple effects as this company's shareholders learn that the core assets of the business are highly risky.  What here is true?

Point #1  The article editorializes.   Here is a direct quote:

"But many scientists have suggested that if the world were to burn even just a portion of the oil in the ground that the industry declares on its books, the planet would heat up to such dangerous levels that “there’s no one left to burn the rest,” Mr. Schneiderman said."

So, to "save" the world -- we need to bankrupt the oil companies?

Point #2;   First a question.  Are Exxon's oil inventory assets going to be stranded in the future? Let's return to Econ 101.  Suppose you own 1 million gallons of gasoline.  Ignoring uncertainty, inflation and discounting, suppose you believe that the price of a gallon of gasoline will be $5 in the year 2030. This means that you own a $5 million dollar asset as of the year 2030.   Investors will be willing to pay for your stock because this entitles them to a piece  of your future profit stream.

Point #3;    Now suppose that the U.S does enact a carbon tax that ramps up slowly over time and reaches $50 per ton by the year 2050. In this world, do Exxon's oil reserves become "stranded"?  No, Exxon will  have several adaptation pathways. It could extract the oil earlier in time before the carbon tax gets high. Standard Hotelling logic makes precise predictions on this pathway (which would depend on the shape of the cost of extraction function and the interest rate).    Second,  Exxon could transport this oil to nations that don't enact the tax (such leakage can also be called "international trade").    Point #4, Exxon could try to pass the tax cost on to final consumers.  This last economic incidence case hinges on the elasticity of demand for gasoline. I do hope this elasticity increases over time as electric vehicles improve over time.  Note that the expected ramp up of the carbon tax actually accelerates the carbon emissions by Exxon as it sells its inventory early and drivers all over the world use it.

So,  both John Schwartz and Al Gore are vastly over-stating the case for concern over carbon stranded assets.

To believe the "carbon stranded asset" story, here are the set of the assumptions that would need to hold.  Tomorrow, the whole world commits to  a $100 a ton carbon tax.  In addition, the price elasticity of demand is -2 or greater in absolute value. In this case, Exxon would have a huge problem and its stock price would plummet.

While I support the NY Times agenda to decarbonize our economy, I don't support pseudo-analysis.  

Here is Exxon's stock price over the last 5 years. Do you see panic?

Cutting Edge California Carbon Policy: Nudging Bus Operators to Use Garbage as Fuel

Robert Catell has written a great OP-ED for the NY Times that captures another reason why I'm a proud Californian.   California's Air Resources Board (ARB) has a mandate to reduce the state's ambient air pollution and greenhouse gas emissions from the transportation sector.  The ARB is enacting new rules to encourage major bus entities such as the City of Los Angeles and the City of Santa Monica to run its next generation of buses on food waste.  Such "renewable natural gas" is a green fuel because if this same food waste was sent to a dump it would create methane and this methane is a potent greenhouse gas.  So, this is a great example of "green accounting" that ecological economists love to talk about.  A waste "food waste" has been turned into a productive input in production (fueling the buses).

A Direct Quote.

This is no futuristic pipe dream; it’s happening now. Cities like Sacramento; South San Francisco, Calif.; and Grand Junction, Colo., are producing renewable natural gas from local waste sources and using it to power refuse trucks and other municipal vehicles. In Southern California, Orange County, Long Beach, Culver City and Santa Monica have committed to using the fuel in their transit buses.

Santa Monica has also ordered 100 “near zero” natural gas engines for its bus fleet. Recently certified by the Environmental Protection Agency and the California Air Resources Board, these engines steeply cut emissions of greenhouse gases and smog-producing chemicals. The Los Angeles County Metro is inviting bids to run its entire bus fleet on renewable natural gas. Private companies like UPS and Ryder are getting in on the act, too, turning to the renewable fuel to power their trucks.

...

Equipping all 2,100 trucks in the agency’s fleet with near-zero engines using renewable natural gas would cost about $100 million more than buying new diesels.

An optimist would posit that this extra cost will shrink over time as the technology improves and due to specialization of input makers as the scale of the market grows (think of Adam Smith's pin factory).  

So, this is a very nice example of how a regulatory agency can nudge capitalism to producing cleaner goods without severe unintended consequences.  The article doesn't mention if the United States has a comparative advantage in producing this new generation of buses.  Relative to the "conventional diesel and natural gas buses", are these new "green" buses more likely to be produced by U.S companies?  In a 2015 paper, we explore the consequences of the "Buy America Act" for how public sector buses are produced. The  supply side of the public bus creation differs greatly from the private car market.

A final thought. California's efforts provide benefits to the people of Texas and other skeptical states on two margins. First, the "laggards" can laugh at progressive California but more importantly, the rest of the country can free ride and wait for the results of the "Green Guinea Pig's experiment" to play out.  If an idea works in California (and is shown to do so), then the rest of the nation holds an option to follow this approach in the future.  In a world with uncertainty, everyone benefits from the existence of a brave "green guinea pig" (i.e California).  

The Value of a Statistical Life Revisited: Evidence from Hostage Negotiations with Iran

The US government paid Iran $400 million dollars to guarantee the survival of 4 Americans.   So, my calculation suggests that the U.S government values a statistical life at $100 million.  This is a lot larger than the $7 million that is the standard number used in government cost/benefit regulation calculations.   At $100 million per life saved, many regulations will now pass a cost/benefit test.  This will expand the scope of government.   Dora Costa and I have a paper documenting how the value of a statistical life grows over time but $100 million appears to be high relative to past revealed preference estimates based on mandatory seat belts or job fatality risk.

Some Economics of Persistent Social Networks

Dora Costa, Swen Wilson, Chris Roudiez and I have released a new NBER Working Paper   that I must admit that I like.  There have been plenty of "peer effects" papers written by economists.   A novel feature of our new paper is that we look at "long term" peer effects in an important historical setting.   Consider the following example.  You are a white male Northerner who was born in 1840.  During the U.S Civil War, you fight for the Union and you are 22 years old.    Using Robert Fogel's great data, we can reconstruct your peer group during the war (defined as the 99 other men in your war company and the other sampled men in you regiment --- there were 10 companies in a regiment).

If you survive the war, what do you do with the rest of your life?

In earlier work, Dora and I have studied the propensity to desert the army and the propensity to survive POW camps as a function of your local peers' attributes.  These were "short run" peer effect papers.   The abstract of our new paper tells you our key findings;

At the end of the U.S Civil War, veterans had to choose whether to return to their prewar communities or move to new areas. The late 19th Century was a time of sharp urban growth as workers sought out the economic opportunities offered by cities. By estimating discrete choice migration models, we quantify the tradeoffs that veterans faced. Veterans were less likely to move far from their origin and avoided urban immigrant areas and high mortality risk areas. They also avoided areas that opposed the Civil War. Veterans were more likely to move to a neighborhood or a county where men from their same war company lived. This co-location evidence highlights the existence of persistent social networks. Such social networks had long-term consequences: veterans living close to war time friends enjoyed a longer life.

I would note that the modern University roommates literature that studies how freshmen are affected by their local peers can't study our questions of long run effects of friendship.  We would need to wait until these 20 year olds are age 85.  Also, in this Facebook age; living close to each other is no longer necessary for retaining a friendship.   Spatial location mattered more for preserving friendship in a time before telephones and the Internet.  What would Zuckerberg have invented had he lived in 1880?

How Durable is Durable Real Estate Capital?

Read this "doom and gloom" piece suggesting that coastal home owners will lose a fortune over the next decades as "1.9 million homes are submerged by the year 2100".    The question I want you to ponder is the following Paul Revere riddle. If we know that the "sea is coming", what will be the end capital still in place as the sea rises?  Why won't the asset owners have stripped the land of all of its valuable capital and stopped investing in maintenance as they depreciate the unit. The assets already built in the at risk area will simply slowly depreciate in value. Their owners will gain a 84 (2100-2016) year rental flow from the property rather than the PDV of the sum of future rents. So, the right question to ask is; if a property that was built in 1970 would live for 140 years if there is no flood then sea level rise lops off 10 years of the future flow of rents. At any reasonable interest rate, the present discounted value of this loss is tiny and rational investors would simply strip the property of its valuable assets. I present these arguments in this recent Lego paper available here.  

The other obvious  point that folks ignore here is that if some land is submerged then other land on higher ground becomes more valuable (think 2 sector general equilibrium).  The intellectuals point out the asset loss but never note the windfall gain.  A more subtle thinker would net these out when pondering the impacts of sea level rise. Of course, we need to change zoning law on higher ground to allow more people to live there.

Urban Governance Challenges in the City of Rio de Janeiro

Michael Powell has published a great piece about income inequality and urban governance dysfunction in Rio.  Below are some thought provoking direct quotes from the piece;

#1

“I am so upset,” she said. Her eyes turned red-rimmed. “I have not gotten my retirement check for a month. Our hospitals and schools are broken. Shooting every day, and they spend all of our money on this Olympics.

“The rich play, and we die.”

#2

Billionaire developers and media magnates have made a fortune off the Olympics; bribe and corruption investigations arising from these Games are a growth industry, with construction companies and hundreds of congressional deputies potentially in the dock. An extremely expensive subway was built to run the length of this city’s well-to-do south coast from Copacabana to the Olympic site. A forest of towers to house athletes rose on publicly owned land; afterward, the developer will turn these into luxury housing. On the route from the international airport to the south shore, Olympic organizers put up colorful walls so that visitors could not see the favelas.

#3

Rio is all but bankrupt. Teachers have gone months without pay. Retirees are months behind on pension checks. University professors gather to mop floors and empty overflowing garbage cans.

#4

The police were responsible for one-fifth of all murders in Rio last year, according to Human Rights Watch and Amnesty International.

#5

Hers was an often repeated observation. Residents want peace, but they harbor no particular rooting interest in the army or the drug gangs or the paramilitaries composed of retired cops: All armies are lethal.

We scrambled up a hardscrabble path to the new police precinct that commands the hill like a medieval castle keep. Inside, three police officers in body armor nodded warily.

#6

Officials cut several bus lines that run north to south during the Olympics, in hope of keeping gangs from invading the tourist zones of Copacabana and Ipanema and the central business district. Many tens of thousands of working-class Cariocas, as natives of Rio are known, spend two and a half to three hours commuting to distant jobs, journeys made far more arduous during the Games. Anderson’s mother lives in a favela. She is in her ninth decade and has never visited the white sand beaches of Copacabana and Ipanema.

So, what do we know about how to reduce violence in these areas?  

Here is one relevant article.

Can any lessons be learned from the U.S inner city experience in the 1970s and 1980s?  When crime was high, talented people move away and no new capital was invested.   While the causes of the U.S crime decline continue to be debated, the effect of this crime decline can't be.  Re-investment both by people and by real estate developers took place.

There appear to be 2 separate issues here;  how to police the gang activity and how to police the police.    

The choice to join a gang can be studied using standard occupational choice models.   If the potential gang members have more human capital (see Heckman's dynamic complementarity theory) and if there are more market opportunities in the legal labor force then fewer young people will enter the "gang sector".     

On the supply side, I would like to know how drones and other "Big Data" measurement techniques are being used to monitor activity.

How do you clean up a corrupt police force? Must Al Pacino's Serpico be dusted off to learn some Portuguese?  I keep thinking back to Acemoglu and Robinson's Institutions work.  I'm not sure they taught me what is the recipe for how a nation with "bad institutions" can change them.    If the great leader of Singapore returned today to run Brazil would he be able to make a difference? 

”Old School” Econ 101 for the New Generation of Economists

USC's fall term starts on August 22nd.  I give my first "Econ 101" lecture to 150 students in 8 days.  I haven't taught Principles in 18 years.   Several of the Principles students that I taught at Columbia University are now tenured economics professors.    I'm really looking forward to returning to teaching my favorite course.  UCLA wouldn't let me teach this.    As I stated in a recent post, I will be using this free textbook.  None of the superstars of econ will make a single royalty dollar from my students.  I apologize to them but at $200 a copy, their books aren't worth it.   I have been reading the text by Greenlaw and Taylor and I can honestly say that at a price of $0 it is an excellent deal.  


 I have a clear vision for how I will teach the class.  Take a look at the course plan below. As I think about my return to teaching Principles, I am going to add one new wrinkle. Over the next 14 weeks, I'm going to write a new book that will be a supplement to the Greenlaw and Taylor text.  I will sell it for $1 on Amazon and it will be called;  "Old School" Econ 101 for the New Generation of Economists.

In each chapter of my new book, I will start from the key ideas in each Greenlaw and Taylor chapter but I will then provide my riffs on how the Univ. of Chicago Price theory giants such as Becker, Friedman, Stigler and Rosen would use these tools to say some interesting things about modern policy debates and for thinking about day to day life.    At the end of each chapter, I will pose many verbal problems (similar to a Gary Becker problem set) without giving out the answers.  Will this book sell?  

	Topics/Daily Activities	Readings	Deliverable/ Due Dates
Week 1	Why Study Economics? Scarcity	Chapter 1 and 2	8/23/16  8/25/16 HW #1 will be handed out
Week 2	Supply and Demand I	Chapter 3	8/30/16  HW #1 will be due and HW #2 will be handed out 9/1/16
Week 3 Dates	Supply and Demand II Elasticities	Chapter 3 and additional materials Chapter 5	9/6/16   HW #2 is due and HW #3 will be handed out 9/8/16
Week 4 Dates	Using Supply and Demand to understand labor markets and the economics of poverty and immigration	Chapter 4 and 14 and 15	9/13/16   HW #3 is due and HW #4 will be handed out 9/15/16
Week 5 Dates	Using Supply and Demand to understand financial markets	Chapter 4 2nd half and Chapter 16 and 17	9/20/16   HW #4 is due and HW #5 will be handed out 9/22/16
Week 6 Dates	Consumer Choice	Chapter 6	9/27/16   Class paper is due
Week 7 Dates	Theory of the Firm	Chapter 7	10/4/16  HW #5 is due and HW #6 will be handed out 10/6/16
Week 8 Dates	Industrial Organization I	Chapter 8	10/11/16 HW #6 is due 10/13/16  MIDTERM
Week 9 Dates	The Economics of Monopoly and a brief introduction to strategy and game theory	Chapters 9 and 10	No Class on 10/18/16 and HW #7 is handed out 10/20/16
Week 10 Dates	Finish game theory discussion and Government Intervention in the Market I Consumer Protection	Chapter 11	10/25/16 HW #7 is due and HW #8 will be handed out 10/27/16
Week 11 Dates	Government Intervention in the Market II Environmental Protection	Chapter 12	11/1/16 HW #8 is due and HW #9 will be handed out 11/3/16 GUEST Lecture
Week 12 Dates	An introduction to statistics and economic hypothesis Testing	Alan Sykes’ article	11/8/16 No HW and HW #9 is due 11/10/16
Week 13 Dates	An introduction to the economics of politics (public choice and taxation)	Chapter 18	11/15/16 HW #10 is distributed 11/17/16
Week 14 Dates	The Economics of International Trade and economic development	Chapters 19 and 20	11/22/16 HW #10 is due 11/24/16  NO CLASS

Supply or Demand? Understanding Regional Price Variation

I slightly disagree with Dr. Cochrane on this one.   In this blog post, he posits that "supply constraints" is the reason that land rents vary across the U.S.   Demand also matters here.  When he moved from Chicago to Stanford , how much of his rent increase is due to the great amenities of California over flat Illinois?  From my early days as a Sherwin Rosen student, I would argue that more of the variation reflects the demand for underlying attributes.  For example, San Fran has great views and weather.  In spatial equilibrium, local wages and rents adjust so that people are just indifferent across living in different cities.  Cities with low quality of life will feature higher wages and lower rents.  I have tended to view real estate prices as the main adjustment mechanism.




But, Dr. Cochrane disagrees.  He writes;

"This data ought to focus more attention on housing supply restrictions -- the main reason that rents vary so much."

I slightly disagree with him.

I would say that California has much more housing regulation and better amenities. The question is whether both cause both or is the regulation a barrier to entry independent of the amenities?  Read my coastal commission paper in JHE on this point.  

An open question in urban economics is the following;  when liberal areas regulate housing; does this merely have a monopoly supply constraint effect or does the regulation cause the area to become nicer and more valued?  For example, if zoning enhances beauty and preserves wonderful natural capital --- then won't rising rents reflect supply constraints that both limit supply and increase demand?

Chinese Environmentalism and Effective Protests in a One-Party State

While the NY Times continues to publish pieces arguing that the Chinese Communist Party hinders freedom and quality of life for Chinese urbanites, it has also recently published a piece documenting that the CCP is responsive to the desires of "the people".   In this case, many urbanites in Lianyungang were protesting the opening of a nuclear fuel plant.   The government didn't send in the military to disperse these people. Instead, the government changed its siting policy.

“The people’s government of Lianyungang has decided to suspend preliminary work for selecting a site for the nuclear cycle project,” it read, referring to a proposed plant for reprocessing used fuel from nuclear plants.

So, what have we learned?   My new book;  Blue Skies Over Beijing: Economic Growth and the Environment in China discusses both the rising demand for improved environmental protection in China and the incentives of local and national officials to supply such pubic goods.  In a nutshell, China's urbanites are increasingly well educated and sophisticated.They have visited the United States, they own a cell phone and they do not rely solely on the CCP for information about their quality of life.  Unlike the old Soviet Union, the new generation of "Chinese communists" are not communists.  They seek to be healthy, productive and safe.  Clean water, food and air are necessary steps for achieving their goals.  Self interest drives them to seek environmental progress. The CCP are no dummies. They seek to remain in power and thus have increased incentives to step up to address these challenges. This is what our book about. To the chagrin of the New York Times, the CCP is changing its game and playbook to keep power in the new urban sophisticated China.  Self interest has implications for both supply and demand!

Of Mice and Men: Contrasting Climate Adaptation Risk for Creatures vs. Urbanites

Here is a news release that reports on research that overlays the spatial distribution of primates and the likely future spatial distribution of future weather conditions to study how much more heat and weather variability such creatures will face due to climate change.

A DIRECT QUOTE

"They found that overall, 419 species of non-human primates—such as various species of lemurs, lorises, tarsiers, monkeys and apes—will experience 10 per cent more warming than the global average, with some primate species experiencing increases of more than 1.5 degrees Celsius in annual average temperature for every degree of global warming.

The researchers also identified several hotspots of primate vulnerability to climate change, based on the combination of the number of species, their endangered status and the severity of climate changes at each location. Overall, the most extreme hotspots, which represent the upper 10 per cent of all hotspot scores, cover a total area of 3,622,012 square kilometres over the ranges of 67 primate species.

The highest hotspot scores occur in Central America, the Amazon and southeastern Brazil, as well as portions of East and Southeast Asia—prime territory for some of the globe's best-known primates who call these areas home.

The ursine howler monkey, black howler monkey, and barbary macaque are expected to be exposed to the highest magnitude of climate change when both temperature and precipitation are considered. For example, the ursine howler monkey, found in Venezuela, will experience an increase of 1.2 degrees Celsius annually and a 5.3 per cent decline in annual rainfall for each degree of global temperature increase.

Read more at: http://phys.org/news/2016-08-climate-humanity-closest-cousins.html#jCp"

As I have posted here many times,  urbanites are not nude creatures searching for food and safety.  Urbanites have access to markets and a march larger set of adaptation strategies that give us a huge advantage in adapting to climate risk.  A future disciple of Darwin will note that those creatures that figure out how to use our urban structures to protect themselves will have an evolutionary advantage in adapting to climate change.  

Urbanization fuels adaptation.  This simple mantra explains where environmental and urban economics will now go as a field.

The Economics of Environmental Protests in China

The NY Times reports that in China's Lianyungang that there are protests related to reducing the population's exposure to a nuclear fuel reprocessing facility.   Such awakening "environmentalism" is a theme of my new book; Blue Skies Over Beijing.     Chinese urbanites are increasingly well educated and due to social media are well aware of the environmental conditions they face.  While the NY Times often writes about media censorship in China, the Chinese people continue to be free to express their concerns about environmental conditions.  The Central Government does worry that shrewd activists are using the environment as "cover" to facilitate group protests that really intend to achieve regime change.   

In our book, we argue that China's government officials have strong incentives to address public concerns about food safety and clean air and water.  Such pollution is easy to observe.  A government that seeks to remain legitimate and in power has an incentive to deliver public goods that the population values. As Chinese urbanites increasingly rely on their human capital as the source of their income (rather than the factory) such a transition means that people both for aesthetic and productivity reasons want to live and work in green cities.  We explore this theme in this 2014 paper. 

UPDATE:  The Wall Street Journal reports that the Communist Party is trying to crackdown on the protest.  As usual, I think this is an issue of a "snowball effect",  the CCP doesn't want an outcome in which mass protests and tens of thousands of people are marching around because they lose control of "order".

The people are saying things highly related to my book's theme.  Urban Quality of life is a key feature for attracting and retaining the skilled in this footloose age.  Those cities that don't offer high quality of life experience a brain drain and low long run growth (ask Detroit).    Here is a direct quote from the WSJ.

“I love this city and I don’t care how great the GDP is,” said one local resident who didn’t want to be named. “I just want a quiet and healthy neighborhood without risks.”

Videos posted online show thousands of protesters marching through Lianyungang’s streets in recent days. “Protect our homes, oppose nuclear waste,” they chanted in one. The footage couldn’t be independently verified.

Urban Economic Growth Causes Climate Change Adaptation

The NY Times has published an editorial on climate change adaptation. It argues that the poorest nations have the least capacity to adapt.  To flip this around, this implies that economic growth facilitates climate change adaptation.  Given that urbanization fuels economic growth, I see an endorsement of my view that urbanization  causes adaptation.  This has been a theme of my research for the last six years.  In its short piece, the editorial lacks nuance.  There is little discussion of how capitalism (beyond causing economic growth) fuels adaptation.   Try buying a cell phone in 1960 or logging on to Google at that time.  A wired world with “online” capacity is a huge step forward for having real time information about emerging threats.  Such information is “necessary” but not sufficient for adapting.  For individuals to adapt, they need a menu of locational choices and product choices.  This raises the issue of the “system of cities” and the real purchasing power a household needs to be able to buy adaptation friendly products such as safe housing, cooling, unspoiled food and access to medical care.  We take these services for granted in the U.S and in China, South Korea and Japan but they all become more common place with economic development.  As the developingworld urbanizes and grows richer, hundreds of millions of people are able to adapt to the new challenges that we have collectively unleashed.   The NY Times stresses sea level rise its piece.  Don’t forget about mymicro economics paper on this subject.

Does the Tesla + Solar City Merger = A Big Green Lobbying Machine?

Mergers make economic sense if there are economies of scope across the entities and if there are certain intellectual spillovers and specific investments that will take place in the new merged entity which wouldn't have occurred if the two firms had remained separate.   Mergers can also create a diversified conglomerate. Of course, mergers can create short run market power for the new big entity.  We know all of this.  In the context of the proposed merger of Tesla and Solar City, I would like to talk about "green subsidy" lobbying and firm size.  

First, some background.  In this NBER Working Paper,  we present some evidence on suburbanite demand for electric vehicles and solar panels. As battery technology improves, these products are certainly complements. Towards the end of the paper, we present some stock market return data where we document that Tesla and Solar City's stock prices are positively correlated.  So, there is little diversification value from merging these companies.    While I can certainly be convinced that the merger will  lead to a seamless product in which Tesla electric vehicles are charged using Solar City solar panels connected through batteries, I think this merger is about politics.

Elon Musk clearly thrives on green government subsidies.   If you don't believe me read this LA Times article from 2015.      My economic model is simply a new version of "Too Big to Fail".  If Mr. Musk controls this combined entity, will he collect more government green revenue from President Clinton and other progressives?  How much of the valuation of his company is due to the magnet effect that the green economy needs a "major win"?

I understand that in the absence of a carbon tax that certain strategic subsidies are needed to promote experimentation and creation of the green economy but this is a convenient argument that is making Mr. Musk very rich.

If I'm correct, then this merger shouldn't happen. It doesn't create social value if the main private benefit of the merger is rent seeking.  Now, if the merged company both achieves its rent seeking goals and it creates a better synergistic product,  I am not sure how to evaluate the merger.  Why? The opportunity cost argument is tough here.  What "green startups" won't be funded because of the Musk $ vacuum cleaner effect?