Saturday, August 01, 2015

Do Supply Curves Slope Steeply Up? If "Yes", then Why?

Cornell's Robert Frank has written many times about the "arms race" for status goods.  Such goods, such as slots at Harvard, are inelastically supplied and thus a doubling of everyone's effort (through studying and SAT prep courses) simply cancels out because relative performance is what supposedly matters.  

I found similar logic posted as a comment on John Cochrane's blog.  


" MartonSeptember 30, 2014 at 11:17 AM

DIRECT QUOTE (not me speaking)

"John, as a seasoned economist I thought you would take into account positional goods and their relationship to inequality here.

A large part of what determine's most people's happiness are positional goods - choice of their spouse and their friends, choice of university spots etc. The 99% don't care too much that trustfund babies, bankers or whatever other "undeserving rich" have private jets and fancy cars. They care very much that these people have access to a pool of marriageable people, to university spots, to , to a pool of chefs etc that others are unfairly "priced out of".

In a meritocratic society with equality of opportunities, if you work hard enough and contribute enough to society, you have a chance to go to Harvard or Chicago and you stand a chance to marry a high-status spouse - actor, supermodel, anything. Therefore you are incentivised to contribute to society and better yourself in order to raise your wealth and status.

In an unequal society (I don't mean high gini, I mean low intergenerational mobility in SES) there is much less incentive for meritocratic competition. Your parent's wealth will get you into Harvard, your last name will get you into the "right" parties where the people with money hang out, and the Lambo you got for your high school graduation will get you into any lady's panties. For everyone else, this is a disincentive to strive - since they are doomed to lose out from the get-go.""

Note the words; "unfairly priced out" --- this must mean that the supply curve for such a good is quite steep because if a product such as pizza is produced with constant returns to scale technology at average cost of $2 a slice, then everyone can enjoy a slice of pizza for $2. My demand does not "crowd you" out of the pizza market.

For "positional goods" such as nice homes in San Francisco or slots at Harvard, a new question arises. Why is supply upward sloping? If zoning laws change in San Francisco or if new excellent universities enter the market then the supply of elite products increase. What hinders the entry of such new supply? In the case of San Fran housing , the answer is incumbent zoning.  Change the zoning laws and supply will be more elastic. Why doesn't Harvard double in size? Why don't excellent competitor universities rise in quality to match Harvard and thus to expand the supply of excellent slots? That's  an open question --- but for many products such as using Google Facebook or going to Starbucks there is an elastic supply curve of services and we can all use it.

Implicit in the doom and gloom of Frank and others regarding the cost of income inequality is the belief that the supply curve of key attributes in our utility function is inelastically supplied.  But is this statement true? If it is true in the short run, then doesn't some entrepreneur have an incentive to introduce a substitute?  Welcome to econ 101.

The Chore Wars Revisited: Contrasting the Perspective of Sociologists and Economists

Millennial Men are dudes ages 18 to 35.  In surveys, they have stated that they would like to live a balanced lifestyle of working but also spending significant amounts of time at home rearing their children.  The NY Times has a long piece today arguing that this group has not achieved this worth goal and extensively quoting sociologists  saying that the configuration of jobs is causing the problem.   The author of this piece didn't interview any economists.  Sociologists often view choice as an outcome of binding constraints that only government can remove. Economists counter that work conditions evolve as a function of demand and supply conditions.  If workers demand more flexible work conditions, then many firms will have an incentives to change the work environment to make it more family friendly. Such firms will have an easier time recruiting and retaining workers and will be able to pay them less.

A few quotes from this "sociology" article:

DIRECT Quote #1

  Millennial men — ages 18 to early 30s — have much more egalitarian attitudes about family, career and gender roles inside marriage than generations before them, according to a variety of research by social scientists. Yet they struggle to achieve their goals once they start families, researchers say. Some researchers think that’s because workplace policies have not caught up to changing expectations at home. “The majority of young men and women say they would ideally like to equally share earning and caregiving with their spouse,” said Sarah Thébaud, a sociologist at the University of California, Santa Barbara. “But it’s pretty clear that we don’t have the kinds of policies and flexible work options that really facilitate egalitarian relationships.”

DIRECT Quote #2

With millennial men and women too, life hasn’t hit the fan, so we’re still seeing more idealized expectations,” said Pamela Stone, a sociologist at Hunter College. “These are couples that are negotiating a work and family world grounded on an old model that really called for men to step up to the breadwinning role big time, and women to step back from employment and into more traditional roles.” “It’s not that they’ve thrown over their ideals, it’s just enacting those are much harder given the workplace and cultural structures they’re encountering,” she said.

Direct Quote #3

In their study, Ms. Thébaud and Mr. Pedulla suggested that workplace policies might have a greater effect on men if they were specifically aimed at them, such as paternity leave policies that reward men for using them. Another approach might be to create policies that change work for both sexes, like reining in long hours.
Changes in the way Americans work come more slowly than shifts in personal expectations. But now that millennials are the largest generation in the work force, and as they climb the executive ranks, they might shape policies that more fully reflect the way they want to balance their lives.

Observation #1;

The NY Times seeks to transform the United States into Sweden.  Would there be any long run costs from this transition?

Observation #2;

If young people greatly demand flexible employment, why don't startup firms that offer such conditions pop up and employ these individuals?   The article is naive in its absence of discussion of the "supply side".  What attributes are bundled into a job? Why do jobs offer health insurance? (this benefit isn't taxed)  Why do some firms have long hours, while others have short hours?  A more subtle analysis would discuss what types of employment can have workers swapping out for each other. For example, in tag team wrestling you can clap your partner and he comes into the ring and takes over for you.  Do you get my half joke?   For what jobs are workers perfect substitutes so that they are interchangeable?  Consider medicine. My father handles some very complicated cases. It would take him hours to explain the details of a case to another doctor. Such transaction costs means that it is efficient for my father to work the long hours rather than wasting time training his replacement.  There may be other jobs where the task can be simply described (find the bugs in the 2nd page of computer code) and this could be broken into piece work allowing people to work just a few hours and then handing it off to the next person.

If there are talented dudes age 32, who want to spend more time at home with their family --- then employers will emerge who will hire these guys at a discount and provide the job flexibility. There will be a culture at that work place that "family matters". Such a firm will self select "nice guys" to work there and the culture will be good.

Kandel and Lazear studied this a long time ago.

Kandel, Eugene, and Edward P. Lazear. "Peer pressure and partnerships."Journal of political Economy (1992): 801-817.

Their work is an extension of my mentor Sherwin Rosen's hedonic research. Rosen studied the creation and pricing of differentiated products. A differentiated product such as a job or a car has many attributes bundled into it. For profit firms will choose what to bundle into it. A job is a wage, vacation schedule, work hours, work conditions (such as air conditioning) and the rational firm will tradeoff the profit incentives in offering each of these attributes. If potential workers value flexibility, they will pay for it through receiving lower wages. This is the compensating differentials model.  The NY Times isn't honest that the workers seek a free lunch.  They want their current wages with better work conditions.  In competitive labor markets, they will only receive this if they are really productive. No government mandate will bring this about.

To get a better sense of Rosen's thinking read his 2002 AEA Presidential Address.  

So, note that implicit in Sociologists' logic is that workers do not have a choice over who they work for.  Implicit in this monopoly-capitalism model is that only government intervention can protect the exploited worker. Economists dismiss this view. People who live in Los Angeles have hundreds of potential employers. This competitive labor market means that no one employer controls a worker's fate.  Profit maximizing firms will offer "better" work conditions if this saves them money through having happier, more productive workers who they can pay less (because the workers are happy with their work conditions). In this sense, competition for attracting talent in the labor market protects the workers.  Sociologists tend to ignore this point and call for the government to step in.

Friday, July 31, 2015

Is Neo-Classical Economics on the Ropes?

In Summer 2015 we are witnessing a mildly interesting phenomena that economists are less respected than we used to be.   Part of this shift may be due to the fact that leading economists appear to reject Econ 101 logic.   Several Nobel Laureates in Economics are lining up to endorse sharp increases in the minimum wage.   Sharp increases in capital gains taxes are being proposed by progressive economists advising policy makers. If we take a leading Econ 101 textbook such as Greg Mankiw's, what % of the book are now being reconsidered?  How did this reformation take place? In what ways did the "old" model fail?

As a 49 year old Ph.D. in Economics (from Chicago), I am an interested party. My human capital is locked in. Did I make the wrong bet? Is the spot market price of economic knowledge about to decline?

Milton Friedman was born 103 years ago today. If he were alive, I think he would be really surprised by the success that Dr. Krugman and Stiglitz and Piketty have had in seizing the higher intellectual ground.  Where are the new generation of University of Chicago economists?  Take a look at their current roster;  which of these important scholars will step into the ring and defend sensible Econ 101 ideas?

Take a sober look at David Brooks' column today.  He is a smart guy and it is mildly interesting that he thought that he needed to even write this piece defending the benefits of capitalism.

Now take a look at my twitter feed featuring another smart guy.  Matt Yglesias knows enough economics to make him dangerous.  Here is what he recently posted.

    1. The Council of Economic Advisors is a weird idea. Where’s the council of IR scholars? Or sociologists? Or normative ethicists?
    2. my old friend & teacher Bill Nordhaus said the CEA's job was similar to good gardening: 10% planting seeds, 90% pulling weeds

My answer to Matt is that the CEA exists because there is a  demand for such "in house" consulting services.   While macro economics remains a work in progress, micro economists have made tremendous intellectual progress and have a keen understanding of how free market economies operate and how to design experiments to learn about those parameters that we know that we do not know.

These other phantom groups he mentions would exist if there was similar demand.  Demand creates supply!   Implicit in his cute tweet is that economists are no better than any other scholars.  While I respect his call for equality, at the end of the day researchers do differ with respect to our marginal product.  You would not watch NBA Cavs games if I replaced LeBron James.

It appears to me that much of the attack on "free markets" and "free market economists" is due to the rise of income inequality.  What is the root source of this income inequality? I believe that it is different investments in human capital across familes.

You do not need to be Milton Friedman to appreciate that our K-12 public schools have not delivered the educational quality that children need.  Progressives need to ask themselves  a hard question about why this has been the case.  Economists call for experimentation, competition and accountability.  If the private sector was allowed to educate poorer kids, then more effective long run human capital would be built up and our macro economy would be stronger.  

Dirty Urban Water in Brazil and Olympian Productivity

In fast growing cities in the developing world, the local water can be quite polluted.  Cumulative sewage disposal in the water and industrial emissions can generate high levels of various types of water pollution.  Today's NY Times sports section has a piece discussing the consequences of this pollution for the athletes who will compete in the Summer 2016 Olympic Games in Rio de Janeiro.

Here is a photo from the piece.  Please note that this is not a real baby floating down river.

What does environmental and urban economics have to teach us here?   There are two separate issues.  First, with any urban river there is a Tragedy of the Commons problem.  Public property gets abused.   Can the Mayor of this city identify how pollution enters this river and who has produced that pollution? In this age of Big Data, this must be knowable.  By identifying the industrial polluters, the mayor could introduce a credible emissions monitoring program and this is a necessary step in holding polluters accountable.

If sewage disposal is the major cause of the pollution, then the mayor will need to invest in a modern sewage treatment facility that has the capacity to collect and dispose of the sewage.  Households in poor areas will need to be connected to this grid through pipe installation. Who will pay for this?

As Brazil grows richer, there is a greater tax base to pay for this. Also land value capture should be considered. Those who own the land around the polluted water ways will enjoy a huge capitalization gain if the water is cleaned up. In all cities in the U.S, land near clean rivers and coasts is quite valuable.  This is an amenity zone where successful people want to live and play. If Brazil's cities clean up the local water, then a similar effect will play out there.

Good research could be conducted here quantifying the damage that dirty local water causes this city. How much of this damage is related to disamenities? How much is direct health effects as risk of infectious disease rises?  This could be studied using hospitalization data and real estate pricing in a vicinity of the dirty water.  Are properties closer to the water selling for a discount? This would be the market test of the nasty stink.

Thursday, July 30, 2015

Catastrophic Climate Change? Lessons from Urban Economics

The Economist Magazine has published a "philosophical" piece about climate change mitigation.  I'd like to blog about a single paragraph in this piece related to the benefits of reducing global GHG emissions. A DIRECT Quote: "However, estimating these benefits means that we need to determine the value of a reduction in preventing a possible future catastrophic risk. This is a thorny task. Martin Weitzman, an economist at Harvard University, argues that the expected loss to society because of catastrophic climate change is so large that it cannot be reliably estimated."

1.  What is our definition of "catastrophic climate change"?  Does it unfold in a matter of seconds? What is the spatial distribution of this catastrophe?  Is its impact uniformly distributed?  Is this catastrophe predictable?  How much time will there be between the diagnosis of "catastrophe" and the actual effects?

2.  There are 7.3 billion people on the planet.  The total land surface area of Earth is about 57,308,738 square miles, of which about 33% is desert and about 24% is mountainous. Subtracting this uninhabitable 57% (32,665,981 mi2) from the total land area leaves 24,642,757 square miles or 15.77 billion acres of habitable land.  (source)

3. Hong Kong's population density is:  18,200 per square mile.

So, if the world urbanizes and lives in Hong Kong style cities, we will need 7.3 billion/18200 square miles of land = 401,000 square miles;     

But there are 24.6 million square miles of possible land.  So, our climate scientists would need to identify the 1.6% of the world that offers us the best quality of life under the new climate change conditions.  Would life at this location truly be that horrible?

While I cannot answer that question, there are many different geographies and topographies to build our future cities.  We have the technologies to protect us from floods, and heat waves.  City design and individual choice provides many adaptation options.  While I do not want to live in this world, this simple logic highlights the fallacy of even starting to talk about "catastrophic climate change" when we have so many spatial adaptation possibilities. Yes, there are adjustment costs but there are always adjustment costs. There is always a new generation of young people who have not locked in to a lifestyle.

The macro economists who write about climate change make a big mistake in not acknowledging the multiple sectors and self protection strategies that we have access to.   Their 1 sector models of the economy assume away an almost infinite number of small ball adaptation strategies that each act to insure our future quality of life.    Don't be lulled by this point that we should do nothing about carbon mitigation. That is not my point!  Instead, economists have to think harder about the social cost of carbon in a world with many spatial possibilities and a growth of cities and urban competition.  This is adaptation.

If this interest you, then read my 2010 book Climatopolis.  For young urban and environmental economists searching for relevant research questions, I encourage you to work on this topic.  Read my overview paper available here.

For those who interject that agriculture will supply no food, this doom and gloom is based on a geographic theory that no amount of ingenuity over crop choice or growing techniques can offset mother nature.  Is that true?  Our diet might change. Storage techniques might have to be improved. Transportation across large physical areas to connect farmers and the cities may have to take place to diversify spatial risk but this is globalization.  Won't anticipated crisis create opportunities for those who can solve these problems?  How resilient are farmers in the face of anticipated challenges?  Even if the average farmer fails, what matters here is the best farmers.  The best ideas will ultimately protect us from climate change.  Economists need to revisit the models of CEO span and control but reconfigure the analysis to study agriculture.   

Wednesday, July 29, 2015

Do Relaxed Capital Market Constraints Explain the Declining Trend in the Quality of Marine Corps Officers?

From the year 2000 to 2006, I was colleagues with Michael Klein at the Fletcher School. He and a co-author have released an important working paper that is discussed here.  Based on a Freedom of Information Request, they document that newer cohorts of Marines are scoring lower on a standardized test.  Why?  What are the implications of this trend?

I believe that a simple model from labor economics can explain the facts.  When I was a kid, the people who attended the War Academies were smart, highly motivated people from relatively poor families.  While these people were patriots, they also wanted their tuition to be paid for free by someone besides for their parents.

As more private universities offer better financial air packages (see Harvard's),  many of these lower income but big brains people will no longer attend the War Academies and this will be reflected in average test scores by calendar year.  

What are the consequences of the trend that Klein has spotted?   I want to make two points here;

1. A regression focuses on a conditional average. So for example, it will yield an estimate of the average height for men at UCLA   (if we regress a sample of people's heights on a gender dummy and an attend UCLA dummy).  But, the basketball team only cares about the right tail (the 12 tallest men on campus).  The average height can be low but the team can still be tall enough to dunk. Klein's study would be more interesting if he presents some quantile regressions.  Being an officer is a superstar technology, we need the 99th percentile people to be really smart.  See the CEO literature on scope and control (Lucas , Gabaix etc).  Many officers leave the Military after 7 years.  For national security what really matters is the aptitude of those who will be career officers. 

2.  In this drone age, how does capital substitute for labor in producing national security?  If capital is productive enough, do we still need Einsteins in our military?  What is the structural production function for producing national security and how does this change over time?  Has there been a deskilling of the u.S military because technology is "fool proof"? This is a key issue for judging the cost of the trend that Klein and his co-author have spotted.

Tuesday, July 28, 2015

Working at USC

I have now figured out how to operate my office PC and how to deposit a paycheck.  At USC Econ, I've even gotten some work done.   I'm editing the proofs for my JEL review of Jeff Sachs' new book and I'm finalizing my forthcoming Princeton Press book (joint with Siqi Zheng) focused on pollution dynamics in China's cities.  As I write this, I'm listing to Led Zeppelin's The Rover. I was unable to download a strong chess program to this office PC but maybe that's a good thing.  In 37 minutes, Prof. Antonio Bento will meet me here and we will begin to plan out activities at USC for the next year and talk about mutual research interests.   This is a new start for me.


Monday, July 27, 2015

Reducing the Urban Damage Caused by Floods

Climate scientists continue to warn us that flood risk in coastal areas is increasing because of sea level rise. How do we adapt to this anticipated but vague threat?  The threat is vague because we don't know when and how severe and where will any specific flood occur. We are able to form some general predictions about times of the year when it rains hard. We know which areas are close to the sea.  What can property owners in these places do to defend their turf and reduce damage?    What can local governments do to defend the turf?  How can we design incentives to reduce the probability of government effort crowding out private household self protection?

First some specifics:  (Source) is Terry Sheridan

Safeguard in-home electrical and climate systems

Raise switches, sockets, circuit breakers and wiring at least a foot above the expected flood level in your area, the IBHS website advises.
Modify your furnace, water heater and any other anchored indoor equipment so that it sits above your property's flood level.

Anchor and raise outdoor equipment

Fuel tanks, air-conditioning units and generators should be anchored and raised above your flood level.
Unanchored fuel tanks can break free, and severed supply lines will contaminate surrounding ground, the IBHS warns.
Jose Mitrani, engineer and professor at the OHL School of Construction at Florida International University in Miami, cautions that electrical power units and generators should never sit on the ground.
"These backup facilities will be inundated (by water) and useless," he warns.

Modify water valves

A flooded sewer system can cause sewage to back up into your home. So that you won't find yourself knee-deep in you-know-what, install an interior or exterior backflow valve, IBHS advises.
The Federal Alliance for Safe Homes, or FLASH, recommends gate valves. They are more complex, and you operate them by hand. But they provide stronger seals than flap or check valves, which open automatically to allow water to flow out and then close when water tries to get in.
Valves should be installed on all pipes entering the house, FLASH advises.

Determine how water flows around your house

Called the grading or slope, the angle of the ground can direct water to or from your house. Obviously, it's best if the home was built so that water drains away from the building.
This is easy enough to determine by watching how water flows or accumulates during an average rainstorm, says FLASH President Leslie Chapman-Henderson.
If your street is prone to standing water even after a fairly ordinary rainstorm, talk to your county planning or environmental services department, advises Chapman-Henderson. "A major part of their job is water flow, and they can make suggestions."

Opt for a major retrofit

If your home floods frequently and moving isn't an option, you may need to take drastic and costly measures.
FLASH's home safety program suggests three options:
  • Raise your home on piers or columns so that the lowest floor is above the flood level. If that sounds expensive -- well, it would be. Experts tell FLASH that such an undertaking would cost $20,000 and up, Chapman-Henderson says.
  • "Wet-proof" your home by installing foundation vents that would allow water to flow through the building, instead of rising inside and causing more damage. You'd need at least two vents on different walls. A 1,000-square-foot house would require 7 square feet of flood vents, according to FLASH.
  • Do some "dry proofing" by applying coatings and other sealing materials to your walls to keep out floods.

Take last-minute measures as waters rise

  • Clear gutters, drains and downspouts.
  • Move furniture, rugs, electronics and other belongings to upper floors, or at least raise them off a ground floor.
  • Shut off electricity at the breaker panel.
  • Elevate major appliances onto concrete blocks if they're potentially in harm's way from flooding.

Read more: 

What does FEMA say?  Read this.

In this age of field experiments, we need to know how cost effective are each of these strategies? If you adopt 3 of the 6, how much does this reduce your damage caused by a flood? This is a test of the optimistic adaptation hypothesis.

Poorer households and "behavioral" households will be less likely to take these precautions.

Note that if coastal households believe that FEMA will bail them out if a disaster occurs, then households will be less likely to invest in these costly self protection measures.  This anticipated moral hazard effect induced by FEMA must be discussed and dealt with.

As I talk about in my 2010 Climatopolis book, I would like to see the insurance industry be allowed to engage in much more spatial price discrimination so that they can charge higher home premiums in riskier areas and created a nuanced contract that offers a cheaper premium if home owners invest in more flood precautions that can be cross-checked by the insurers.   These small ball choices represent how an urban economy becomes more resilient in the face of flood shocks.

To enhance adaptation, we need continuing spatial refined models of the geography of flood risk.  Which areas within a city are at the greatest risk?   Should housing in such areas be required to meet more stringent regulatory standards?   Should people who insist on living in such areas sign a form acknowledging that they will not receive a FEMA bailout if a disaster does occur?  Would such a social contract be "time consistent" or would the government renege on its original promise to the tax payers?

Sunday, July 26, 2015

The REPEC Fantasy League and My Initial Endowment of Economists

When I was a kid, I played Stratomatic baseball. This was a precursor to Billy Beane's Moneyball.  Now that I'm no longer a kid, I have signed up for REPEC's fantasy League and below I report my initial roster (that I was assigned at random).  I find it mildly amusing that I was randomly assigned Tomas Piketty.  I will trade him.  For those who enjoy rankings, keep an eye on my team. We are called "Diesel".  (Don't ask).

From my set of economists,  I know that I want to keep Alesina, Allen, Diebold, Jovanovic, Kolstad and Zucker (my UCLA colleague).   I am in deep thought about what other trades I should make.  I just tried to acquire myself and my wife.  We would be good teammates but I found that neither of us has been assigned to "play" for any team yet.

MyIDEAS Logged in

Matthew Edwin Kahn's IDEAS fantasy league portal

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