Friday, November 27, 2015

Wednesday, November 25, 2015

Some Simple Economics of the Paris COP21 Climate Meetings

Starting on November 30th, negotiation teams from all over the world will go to Paris. Many academics will be there but you won't see me. I"ll be at sunny USC.   The final treaty won't have a hard carbon cap with enforcement nor will there be a global carbon tax.  Without these real incentives, can the global carbon curve be bent (let alone decline in absolute value)?  I doubt it.

Take a look at these data from 1960 to the present. I see a linear trend despite plenty of talk about solar panels and "green energy".

Now some optimism;

1.  Around the world, households firms and governments are now awake and talking about climate change adaptation. This will translate into private and public actions that aggregate up to making more resilient in the face of new climate shocks. If you anticipate a punch, you can duck!

2.  What the COP21 will achieve is shifting expectations. Returning to the early Rational Expectations literature in macro (think of Tom Sargent), it is important to send credible "Rules of the Game" signals.  If long term investors anticipate that there will be a rising price for carbon emissions (such as more nations following California and introducing Cap & Trade for GHG emissions), then some of these business investors will substitute to natural gas and cleaner fuels and invest more in energy efficiency.  So, this shift in expectations concerning future policies incentivizes a greener set of investments now.

Note that the key point here is that rational forward looking investors anticipate climate change risks and climate change policy risks (i.e that the carbon tax could rise in the future), these self interested actors take actions to protect themselves.  So the invisible hand allows us to adapt to the shifting objective reality and policy environment.

To summarize this blog post.  COP21 represents a change in the global rules of the game. GHG emissions will no longer be an unpriced externality.  Those innovators who figure out how to economize on such emissions will make good $.  Given ongoing population and income growth, it is unlikely that the GHG tons will fall over the next 30 years. We must prepare to adapt and I am optimistic that we will figure out how to do so.  

An interesting issue is why fast growing nations such as China and India are offering anything here regarding emissions intensity cuts.  Why place a constraint on your economic growth? Why not simply free ride and let the rich nations cut back?  One answer is that they seek "soft power" and that climate politics are bundled with other global issues in signalling world leadership. Perhaps a good international relations scholar could model this?

Tuesday, November 24, 2015

Dynamics in Climate Science Beliefs: The Role of Exxon and Media Slant

The Washington Post reports about a new study that argues fossil fuel corporate interests (think of Exxon) have confused the American people through a relentless "mis-information" campaign regarding the causes of global warming.   PNAS has published the paper and it is available here. 

Here is the abstract of Justin Farrell's paper (he writes like an academic);

"Drawing on large-scale computational data and methods, this research demonstrates how polarization efforts are influenced by a patterned network of political and financial actors. These dynamics, which have been notoriously difficult to quantify, are illustrated here with a computational analysis of climate change politics in the United States. The comprehensive data include all individual and organizational actors in the climate change countermovement (164 organizations), as well as all written and verbal texts produced by this network between 1993–2013 (40,785 texts, more than 39 million words). Two main findings emerge. First, that organizations with corporate funding were more likely to have written and disseminated texts meant to polarize the climate change issue. Second, and more importantly, that corporate funding influences the actual thematic content of these polarization efforts, and the discursive prevalence of that thematic content over time. These findings provide new, and comprehensive, confirmation of dynamics long thought to be at the root of climate change politics and discourse. Beyond the specifics of climate change, this paper has important implications for understanding ideological polarization more generally, and the increasing role of private funding in determining why certain polarizing themes are created and amplified. Lastly, the paper suggests that future studies build on the novel approach taken here that integrates large-scale textual analysis with social networks."

I salute the new empirical work but it raises several questions.  I must also admit that I haven't read the whole paper yet because it is behind a firewall.  

1. We learn that for profit companies act in their own self interest. Is that surprising?  People look to Exxon to sell them gasoline. Do they really look to Exxon for intellectual content?  Now, I do agree that to avoid conflict of interest concerns, all authors who take corporate $ need to report their potential conflicts of interest.

2. Does the media have a large causal effect on our beliefs and actions?  Who are these susceptible people?  When you read the NY Times does it inform your world view or confirm what you already believed? Treatment or selection effects revisited.

3. If the media does have such a large effect on shaping us, why didn't the "greens" launch a counter-revolution?  If you say that they didn't have the $ to achieve this, then you haven't been to Hollywood, New York City or Berkeley.  If so say that the greens face a free rider problem, then why haven't "green" corporations launched a counter-revolution boosting their narrative?  People like Elon Musk and Tom Steyer are trying and investing their money here.  Why didn't they start earlier? Why did they permit the "fossil fuels industry" to have the microphone for so long?

4. I thought that Al Gore's movie was watched by millions. Is there a similarly popular anti-global warming movie?  I thought that Hollywood releases dozens of crisis movies each year. Is it obvious that the fossil fuel lobby has the higher ground in the fight for the nation's focus?

Here is Justin Farrell's Google Scholar page.

For those economists who are interested in this general theme, read Jesse Shapiro's paper available here. 

Abstract A journalist reports to a voter on an unknown, policy-relevant state. Competing special interests can make claims that contradict the facts but seem credible to the voter. A reputational incentive to avoid taking sides leads the journalist to report special interests’ claims to the voter. In equilibrium, the voter can remain uninformed even when the journalist is perfectly informed. The quality of information transmitted is greater on less partisan issues, and communication is improved if the journalist discloses her partisan leanings. I use the model to explain persistent public ignorance on climate change, and I test the model’s implications using data on media coverage, public opinion, and journalism in OECD countries.

Sunday, November 22, 2015

Microfluidics and Adapting to Climate Change

Cooling vests offer one pathway for keeping us cool in future summer heat and also warming us up when it is too cold.  The Economist Magazine reports  about ongoing innovation taking place at Finland's VTT Technical Research Center.  Do you see the simple econ 101 point that demand brings about supply?

Many "doom and gloomers" forget the simple economics of introducing new product varieties.  If there is sufficient aggregate demand for solutions (caused by aggregate misery from heat waves, coastal flooding etc), then there are very strong incentives for innovators to engage in climate change adaptation innovation.  Too many scholars are studying climate change mitigation innovation. Daxuan Zhao and I will soon release a paper on induced climate change adaptation innovation.

A very valid question here would ask; how much does VTT charge for their technology? Won't only the rich elites afford it?  At first the answer is "yes" but the beauty of the global supply chains and the rise of generics is that this company will face competition and its monopoly will vanish in the medium term.  This means that even low value added outdoor workers would have access to such products in the medium term. The more interesting economics issue is the incidence of such products. Will outdoor wages decline as firms provide these cooling jackets to workers?  Compensating differentials and climate change adaptation is an interesting subject.

Saturday, November 21, 2015

Network Effects: Evidence from NBA Players Receiving Free Movie Screenings

Sociology lives on.  The NY Times reports that when NBA teams visit sleepy cities such as Indianapolis or Salt Lake City  that the visiting team players grow bored.  Hollywood has figured out that this is a great time to offer a free screening of new movies such as Spectre so that the players can watch , be photographed watching the movie and then will tweet to their followers about what they liked about the movie.  This successful identification of the "focal points" in the social network allows the movie makers to achieve some free organic advertising and allows the NBA teams to know that their human capital is not depreciating that night at a late night bar (see Charles Barkley for data from the 1980s).

The Times ends its piece on a witty and elitist note;

"Recognizing this, studios are increasingly trying to combine the right team, in the right city, with the right film.

“I don’t know if you want to show them ‘The English Patient,’ ” Rice said."

Will somebody write the Public Editor that this borders on statistical discrimination?

Thursday, November 19, 2015

How Should State Governments Prepare for Climate Change?

While the challenges vary on a state by state basis, here is one current report card grading states on their preparation for climate change.  Here I list a set of "free market" policies to facilitate adaptation.  For those who have read my 2010 Climatopolis book, this will be familiar.

1.  Sign up more households, farmers, industrial and agricultural customers for dynamic pricing of water and electricity.  By exposing consumers to dynamic pricing, this will encourage conservation and purchasing more resource efficient durables. The net effect will be that heat waves and drought cause less "shortage" and blackouts and rationing.   Prove this to yourself by contradiction. If water and electricity prices do not rise when demand is high, there will be shortages of water and blackouts and climate change will exacerbate these peaks.

2.  The state governments should create spatial maps of places featuring fire risk, flood risk and air pollution spike risk and share these data widely and update them over time.  This will incentivize behavioral change.

3. State governments should work with local governments to increase upzoning in relatively safer areas of cities. For example, Santa Monica is really low density along the Wilshire corridor in West LA. Why aren't 50 story buildings built all up and down this corridor?   Read my paper on this subject. 

4.  State governments should work with the insurance industry to actively encourage it to price discriminate across space.  If you insist that you want to build a house in an increasingly fire risk areas of Malibu, your fire insurance for your property should be really high but you should receive a discount if you build with flame retardant materials and if you clear the vegetation.  Google Earth could be used to check the 2nd point. We need more price discrimination to adapt to climate change. Will progressive politicians allow this to take place or must all properties be treated "equally"?

5.  There should be an "open source" process in which citizens declare what they believe are emerging threats caused by climate change --- for example the San Francisco airport flooding -- and the governor could then commission serious scientists to study the issues that citizen voters voice the most often.
With this process in place, our cities (even the coastal ones) will continue to thrive.  To see some thinking about coastal cities read my new durable capital paper.  

Wednesday, November 18, 2015

Apply to USC Econ's PHD Program

In the past, I've done some writing on social capital and civic engagement.   I just put the theory to the test by volunteering to serve on USC Econ's PHD Admissions Committee.     USC Economics is world renown for its excellence in econometrics.   With Antonio Bento, Dana Goldman, me and Arie Kapteyn now all at USC (and many other research active Price School faculty),  a talented student can take his/her knowledge of econometrics and apply it to the economics of aging, health, the environment and cities.  There are many exciting possibilities and permutations here.  I strongly encourage serious students to apply. I'm especially interested in attracting students who are graduates from U.S undergraduate institutions.  Please contact me if you have any questions.

For those of you who already have a Ph.D., perhaps it is time for you to do a refresher course to see if you are still at the frontier. It is sunny and 80 degrees today on November 18th 2015 in LA. Can you say the same thing about where you are now standing?

Tuesday, November 17, 2015

William Fischel's New Book: "Zoning Rules! The Economics of Land Use Regulation"

Now that I have moved from UCLA to USC, I have the opportunity to teach undergraduate urban economics again.  I taught this course at Columbia and Harvard back in the 1990s but I haven't taught it since 1998.   My friends are trying to help me to teach a good course.    Walker Hanlon has given me his UCLA course material  .  Jan Brueckner's book is both excellent and affordable.    Today, I just received a new book by William Fischel called "Zoning Rules!".  This book will greatly improve my housing supply lectures.   Here the Lincoln Press webpage for the book.

Here is the book's Abstract

Zoning has for a century enabled cities to chart their own course. It is a useful and popular institution, enabling homeowners to protect their main investment and provide safe neighborhoods. As home values have soared in recent years, however, this protection has accelerated to the degree that new housing development has become unreasonably difficult and costly. The widespread Not In My Backyard (NIMBY) syndrome is driven by voters' excessive concern about their home values and creates barriers to growth that reach beyond individual communities. The barriers contribute to suburban sprawl, entrench income and racial segregation, retard regional immigration to the most productive cities, add to national wealth inequality, and slow the growth of the American economy. Some state, federal, and judicial interventions to control local zoning have done more harm than good. More effective approaches would moderate voters' demand for local-land use regulation—by, for example, curtailing federal tax subsidies to owner-occupied housing.

Bill Fischel has taught economics at Dartmouth College since 1973. His scholarship focuses on local government, especially land use regulation and property taxation. Bill has served on the Hanover, NH, zoning board and on the board of directors of the Lincoln Institute of Land Policy.

I will have more to say after I carefully read this book.

Sunday, November 15, 2015

Melting Ice Sheets and Coastal Real Estate Investment Under Uncertainty

To better appreciate my 2015 November Journal of Regional Sciences Lecture at the Portland Regional Sciences Meetings, you should read this NY Times long piece about melting Ice Sheets and their potential impact on our coastal cities.  Here is a quote relating the environmental science to real estate risk:

"We might imagine a rapid collapse of the ice sheets in B-­movie terms: sudden and terrifying, with enormous waves of water cresting over beachside homes in Malibu, Calif., and nature reclaiming the Rockaways. In truth, the remoteness of the sources of new icebergs means no devastating tsunamis. Because the calving would happen over the course of many decades rather than weeks, the catastrophe would manifest over time. First there is water in the basements, gutters and subways; then, storms regularly bringing water into the streets. Year by year, the rise accelerates. Brine infiltrates drinking-­water systems and sewer plants; electrical grids spark out. Flood-­insurance policies are discontinued, and home values plummet. Row by row, seaside homes are abandoned. Still the rise continues. Large-­scale evacuation then becomes imperative — as long as inland cities and funds are available for relocation. In low-­lying countries, however, the implications of significant sea-­level rise, and the occasional storm surges that amplify the floodwaters, move beyond the economic to the existential. ‘‘On these longer time scales,’’ says Anders Levermann, a sea-­level expert at the Potsdam Institute for Climate Impact Research, ‘‘the magnitude of the sea-­level rise could get so big that we have to evacuate New York, Calcutta, Hong Kong, Shanghai, Hamburg and most of the Netherlands.’’

So, you can see that there are interesting economic implications here and we have been warned about their consequences. Coastal real estate owners have incentives to plan and invest accordingly.  My JRS Lecture (joint with Devin Bunten) explicitly studies this issue of how coastal investment patterns will be affected.  Capital does not live forever and we have choices over where we place it,how we build, how we maintain it and how we protect it that together reduce our risk exposure.  This is the micro economics of adaptation such that a zillion individually rational and small ball decisions add up to a safer urban future despite the serious risks posed by climate change. Anticipate and react!

For a free copy of my paper; click here:

Saturday, November 14, 2015

Urban Economists in Portland

I am back in the sunshine after spending two cold, gloomy, rainy days in Portland.  The Regional Science and Urban Economics Association Meetings just took place there.  While I do not like to sit in a Southwest tight seat for more than 2 hours, that was the only airline from LAX offering direct flights.   While the trip was nasty and the weather was bad and the pasty people of Portland need a tan, the actual conference was great.  I had the chance to talk to six of my ongoing co-authors on different projects and a chance to reconnect with many old and new friends. The discussion of urban economics was so intense that I was hoarse by the 2nd day after non-stop talk for 10 hours a day.

I will declare that my JRS Lecture was a success and David Albouy wins the award for the best discussion of a research paper.     My student Devin Bunten had the chance to discuss his work and to introduce himself to many prominent scholars in the field. While I won't be returning to Portland soon, I did enjoy my trip.

Monday, November 09, 2015

Green Power Creates Free Electricity in Texas: Will this Increase Night Industrial Economic Activity?

The NY Times reports that Texas households are being offered free electricity after 9pm because wind power generators are generating a surplus that cannot be stored and the physics of the local grid (which is not connected to the national grid) are such that the power must just flow and be consumed locally.  

Suppose that Texas could commit to low industrial night electricity prices.  This would create a large economic incentive for energy intensive industries to locate in this Right to Work State. For a list of such industries, read my 2013 paper with Erin Mansur.      If such industries substitute towards night work, then the nature of work would change. Firms would have to pay higher wages for workers to work the night shift but it would be cooler outside and any productivity disadvantages of heat and the need for air conditioning would decline.  Economists such as Yoram Weiss have written about time use and work over the course of the day.  Such night workers would face less road congestion.  

So, I don't understand why Texas has only made this "free electricity" available to residential customers rather than industrial customers.   It would be a pro-growth strategy to allow all consumers of electricity (especially industrial) to have access to cheap night power.

Sunday, November 08, 2015

Two November Days at the University of Chicago

On November 5th and 6th, I was back at the University of Chicago.  I was there to participate in a Media Economics conference organized by Matt Gentzkow and Jessie Shapiro.    Luigi Zingales and the conference participants provided really useful criticism of our paper.  I learned that we still have a fair bit of work to do that will improve our paper.  An old draft of our "Death and the Media" paper is available here.

While people point out that UChicago has lost some of its superstars, let me sketch out what two days are like at my old home.

I flew in late and arrived at the Hyde Park Hilton at 130am Thursday morning.  I woke up on Thursday at around 8am and talked to Matt Gentzkow about the media's role in both helping and hindering our ability to adapt to climate change. That breakfast actually gave me some ideas for writing a new paper (so that was a very good breakfast).   I then walked Hyde Park and saw some familiar sights such as Jimmy's bar on 55th and Woodlawn but I also saw a lot of new dormitories being built and wondered if my son will live in one in the future.  Once I got to campus, I went to the magnificent  new Economics Building and met with my friend Koichiro Ito who told me about several of his exciting new energy economics and air pollution papers.  He gave me a tour of Michael Greenstone's EPIC research center.  I then went to the media conference for the afternoon and conference dinner where we talked about economics late into the night.   I had never met Andrea Prat before and he had many interesting things to say.  The next morning I went back to the Media Conference and heard a fascinating paper about Israel, cottage cheese boycotts and the role of the media in co-ordinating protests by Igal Hendel.   Steve Berry gave a great presentation that touched on a number of points related to recent research in environmental economics related to consumer restraint.   Davide Cantoni then presented a very interesting paper on the role of early life exposure to curriculum on later life attitudes based on data from China.

At that point, I left the conference to find Casey Mulligan and we walked over to the Ida Noyes Hall where roughly 1000 people showed up to see a discussion between Tomas Piketty, Steven Durlauf and Kevin Murphy.  Jim Heckman moderated this discussion.  As we walked into the packed Ida Noyes, I mentioned that I hadn't seen such a big crowd in the Hall since in 1991 when I attended an early showing of Sharon Stone's Basic Instinct.  A prominent current UChicago faculty member joked to me that this debate would offer similar thrills as that movie.

While Tomas Piketty is a very talented man, his points did not win the day. Steven and Kevin made a number of very interesting points about both the causes and consequences of inequality and more generally how we discuss inequality.    This discussion between Saez and Murphy sounds a lot like what I heard from Piketty and Murphy last Friday.  Durlauf emphasized the importance of creating broad environmental conditions that allow all children to flourish and he stressed that income alone does not measure our well being. I highly recommend watching the YouTube video.  After this discussion panel, I returned to the Media Conference and then I met with two new Ph.D. students at UChicago Econ. One of them is my student Haishi Li and I'm very happy that he is hard at work at Chicago. He showed me the graduate student space in the New Econ Building. I must say that the faculty have a much nicer space than the Students. Perhaps somebody should address this 'inequality" issue. Or a Chicago economist would say that this inequality creates the right incentives to work hard!

After meeting with these guys, Casey Mulligan, Rick Flyer and I had a  UChicago Econ reunion and had a great time talking about economics today and the "good old days".    I woke up Saturday morning at an airport hotel and flew home eager to return to my family and the sunshine but I felt intellectually refreshed and eager to get back to work.  Chicago is getting colder and it was time for me to return to the warm sunshine.

UPDATE:  UChicago Econ remains strong. Of course it misses a young Becker, Rosen, Lucas and the rest of the gang but it is up to the new generation of scholars to leave their lasting mark.

Urban Economics in Portland on November 13th

If you manage to scroll down to the 103rd session posted here,  you will see that the LSE's Henry Overman and I will each present separate JRS Lectures at the upcoming conference.

Journal of Regional Science Special Session Friday Nov 13 | 4:00 PM-6:00 PM | Grand Ballroom II

Henry's talk is titled;  How Can We Improve the Evaluation of Urban and Regional Policy?

My current draft of the paper is available here.  My co-author is UCLA's Devin Bunten.  Devin is on the job market and you can look at his research here.

Optimal Real Estate Capital Durability and Localized Climate Change Disaster Risk

Devin Bunten


Matthew E. Kahn


November 8th 2015


The durability of the real estate capital stock could hinder climate change adaptation because past construction in beautiful but increasingly risky coastal areas anchors the population.  But, coastal developers anticipate that their asset also faces more risk and this creates an incentive to seek adaptation strategies ranging from; self protection, to reducing capital durability to seeking an exit option. The option value offered by short lived capital is greater if the volatility of local shocks increases over time.  Climate change is likely to increase such volatility.   Building on past work that has studied the consequences of persistent local labor demand declines, this paper studies how persistent local new climate risks impact the real estate investor’s joint decision of locational choice, self protection, capital durability and maintenance.     

Wednesday, November 04, 2015

Calm and Sensible Climate Adaptation Discussion in the NY Times

The front page of the NY Times reports that China's coal consumption is 17% higher than had previously been reported.  On the Opinion Piece page, NYU's Steve Koonin has a nice piece talking about the need to adapt to climate change.

Here is a calm and sensible direct quote;

"Adaptation can be effective. Humans today live in climates ranging from the tropics to the Arctic and have adapted through many climate changes, including the Little Ice Age about 400 years ago.

Adaptation is also indifferent to whether the climate change is natural or human-induced; it can be proportional, depending upon how much or how quickly the climate changes; and it can be politically easier to accomplish because it does not require a global consensus and has demonstrable local and immediate effects. Adaptation will no doubt be more difficult if the climate changes rapidly (as it has done naturally in the past), and, like emissions reductions, it will induce inequalities, as the rich can adapt more easily than the poor. Adapting ecosystems to a changing climate will require a more careful monitoring and deeper understanding of the natural world than we have today.

The critical role of adaptation in responding to the realities of climate change demands a deeper analysis and more prominent discussion of the nature, effectiveness, timing and costs of various adaptation strategies. But whatever the outcome in Paris, or of future discussions of emissions and the climate, the reality is that humans must continue to adapt, as they always have."

As my readers know, this quote aligns with what I have been writing for the last 5 years.   Here is my 2 pager on Climatopolis.  You can buy my 2010 book for $10 here.

Permit me to take Koonin's logic further.  The world is urbanizing and cities have an edge in adapting.  This means that world trends (that we are becoming richer and more educating and we live in cities) are all working together to help us to adapt. The role of urbanization in allowing us to adapt and the competition between cities to see which will experience job and population growth (because they have demonstrated the ability to continue to thrive in our hotter future) is a key theme that even the NY Times will need to start to explore.

When my Climatopolis was published in 2010, I knew that I had an optimistic and correct argument but I didn't realize that I was so many years ahead of my time.  For Ph.D. economists, take a look at  my paper #1   and paper #2

Saturday, October 31, 2015

Teaching Urban Economics Again

In Spring 2016, I will teach Urban Economics at USC and will have 49 students.   I haven't taught Urban Economics since I taught it at Columbia back in 1999.  I will use Jan Brueckner's book and augment it with a bunch of papers written at a Journal of Economics Perspectives Level.  

Once I complete my lectures, I will take my notes and write a new urban economics book for Amazon titled Fundamentals of Urban Economics and sell it for $1.

My USC Class


Topics/Daily Activities
Some Issues
Deliverable/ Due Dates

Week 1

Why Cities Exist
A counter-factual: challenges if we lived at rural densities?  Benefits of density, costs of density?
Optimal density?
Does a  market economy achieve this without government?

Week 2

Analyzing Urban Spatial Structure

What do these words mean?  When you fly into a city airport, what land patterns do you see?  Why? Why does the durability of capital matter here?


Week 3

Land Use Regulation and housing supply

 Why is land use regulated? How is it regulated? How do we measure the intended and unintended consequences of such regulation?

Week 4

Traffic Congestion within and across cities

 Why is there traffic congestion? How much? Is it costly or some of us enjoy being stuck in traffic? What is an economic solution for congestion? Why haven't mayors listed to Economists? Lessons from Singapore and London?
commuting by rich and poor in cities (uber vs. bus)

Week 5

Housing Demand and Tenure Choice

 Why don't all of us live the same type of housing? What role do demographics and income play in housing demand?
Should we rent or own?
Tradeoffs, variation across income groups

Week 6

Housing Policy
 Why is there any housing policy at all? Equity versus efficiency? Focused on supply or demand side?

Week 7

Local Public Goods and Services and taxation

 Definition, geographic variation, demand and supply; public schools, clean streets

Week 8

City Quality of Life and Markets
 The modern Consumer city vs.  the old "producer city"

Week 9

Urban Pollution and the environment 

 Green Cities; costs and benefits;  Pittsburgh today,  Beijing tomorrow

Week 10

 Why does it exist? What are its consequences? What do we know about
optimal policy here? Economic incidence as crime falls?

Week 11

Learning in Cities for Households and Firms
 Modern growth theory, Glaeser, spillovers across people and firms

Week 12

Cross-City Competition for jobs and households
 The system of cities and the benefits of competition and option value and credible threats

Week 13

City Growth in the Developing World
 World Bank research on the challenges and opportunities in LDC
fast growing cities

Week 14

Urban Governance in the Developing World
 The incentives of mayors in LDCs to represent the interests of the rich, poor and middle class

Week 15

Review: Opportunities and Challenges

Friday, October 30, 2015

Greg Ip on Moral Hazard and Coastal Defense Against Rising Natural Disaster Risk

Read Greg Ip's WSJ piece talking about his new book.  He appears to believe in a "lulling hypothesis" that ignorant urbanites will continue to live in increasingly risky cities below rising sea level (think Miami and NYC) because they have been lulled by big government mega projects into feeling safe.  This argument suggests that public investment in protection crowds out private self protection. Kousky et. al. discuss this point in their 2005 paper and Leah Boustan and Paul Rhode and I discuss this point in this paper.   I like his emphasis on spatial moral hazard but I believe that he is over-stating his point.

Ip is working on ideas that I sketched out five years ago (I would like a citation from him!). For the shortest (and ungated version of my thinking) read this 5 year old document I wrote for Vox Eu.    Superstar cities compete against each other.  As has been shown in the IO literature, rival products have strong incentives to point out the flaws of their rivals. If Manhattan is at risk while Chicago is at less risk, Chicago's land owners and Mayor has strong incentives to send out this news.  Ip, implicitly has a model of PT Barnum's "suckers" in mind. In this age of Twitter and the Internet, I reject this logic. We know that we don't know what risks climate change poses to coastal areas and we will build in more resilience and flexibility (i.e options) so that we don't suffer as much from the next Hurricane Sandy.

The future mayors of NYC have a strong incentive to invest in the city's resilience. There will be a brain drain if NYC does suffer significantly from sea level rise. The only ugly scenario that I foresee would occur if there is a large gap between perception and reality of risk. Suppose that future Don Trumps convince the naive public that Southern Manhattan is safe when in reality it isn't. In this case, people will move to the area and "let their guard down" and not be ready when disaster strikes.

There are two pathways to optimism here;

1. rational expectations --- that perceptions of risk are strongly correlated with actual risk

2. Robust decision rules and risk aversion --- people don't like risk and know that they don't know the emerging risks and thus build in options to protect themselves.

Does IP reject #1 and #2 for what % of the population?

Wednesday, October 28, 2015

A Return to the Midwest

I was born in Chicago. I met my wife in Chicago and I learned some economics there.  It is always a thrill to return.  The University of Chicago's Economics Community has turned over almost completely since I started there in 1988.  The faculty who I interacted with back then who are still active faculty include; Hansen, Heckman, Murphy, Topel, and Davis. That's a high quality but small set!  I will be back in town to participate in this media conference.  

Three Years After Hurricane Sandy: How is the NYC Metro Area Adapting?

The NY Times Room for Debate section has an excellent, calm (and sane) discussion of the small ball actions households, firms and local governments are taking that together will help NYC to adapt so that the "next Sandy" causes much less damage to the area.   I see a group of self interested spatially tied actors not being naive and "crossing their fingers" and hoping that another Sandy doesn't occur. Instead, they are investing under uncertainty and a silver lining of Sandy is that they have learned some hard lessons. To quote The Who "We won't be fooled again." This has been my "Climatopolis" logic for the last five years.  I'm happy to see that the "real world" is catching up to my core logic.  Behavioral economists are going to lose this fight!

Rational expectations is alive and well but in a world of ambiguous risk, the key point here is that we are risk averse and we now know that we don't know what climate change holds in our future. This creates strong incentives to invest in resiliency and to have option values (i.e to be able to identify and move to higher ground).

Two key issues arise in thinking about urban adaptation to climate change. In a world where people differ with respect to how they update their beliefs about future risks, are people converging in their beliefs about risks?  The climate scientists and the New York Times are working hard to scare the hell out of people concerning the risks that climate change will pose.  This helps us to adapt because no West Side intellectuals in NYC can say that they weren't warned. The other key issue here is place based politicians' incentives. Do they have an incentive to play down the risk or to invest funds to fight the risk and thus to reduce it?  One of my key points is that coastal areas should defend themselves with their own $.  Spatial moral hazard emerges when taxes paid by people who live on "higher ground" is used to subsidize cities in flood zones. This must cease.

For those interested in applied microeconomics of climate change adaptation, read this piece.  

Here is the abstract from my paper;

In an urbanizing world economy featuring thousands of cities, households and firms have strong incentives to make locational investments and self protection choices to reduce their exposure to new climate change induced risks. This pursuit of self interest reduces the costs imposed by climate change. This paper develops a dynamic compensating differentials model to explore how the “menu” offered by a system of cities insures us against emerging risks. Insights from urban economics offer a series of testable hypotheses concerning the economic incidence of spatially tied climate change risk.

Monday, October 26, 2015

The Lulling Hypothesis: The Case of Tesla's Autopilot System

Crowding out is a powerful idea that always has the same core theme.   One change to an economy has unintended ripple effects.  Social Security crowds out private savings.   FEMA investment in coastal protection crowds out private self-protection of moving to higher ground.  Child proof caps on medicines lulls parents into thinking their kids can't open the bottles (see Viscusi's study).  

Today, the WSJ reports a new Tesla case of the lulling hypothesis.  The lulling hypothesis states that people "lower their guard" when they feel safe and they thus end up less safe than if they had remained vigilante.

A Direct Quote:

"Massachusetts Institute of Technology robotics expert John Leonard said Tesla’s Autopilot system is risky because people are treating it as more capable than intended, and even its name gives the impression that it can operate a car autonomously.  “Tesla owners need to stop operating their autopilot systems in conditions that it was not designed for; it’s not a toy,” he said. “Failure to use good judgment and common sense jeopardizes not only their own lives but the lives of others. Filming themselves while operating the Autopilot is extremely reckless.”

Moral Hazard lurks everywhere.   When risk taking is subsidized, people will take risks!

Historial Persistence: Implications for Economics and International Relations

A growing field of applied economics examines long run correlations and uncovers some startling patterns.   Daron Acemoglu's work on institutions heavily relies on long run persistence.   In recent years, startling new facts have emerged. Areas that were anti-Semitic in the 14th century were more likely to be anti-Semitic in 1920s Germany.   Today, the NY Times reports another persistent fact.   The geographic location of Cross-national Internet cables that lie at the bottom of the ocean can be predicted by 1860s cross-national cable routes.  

"Mr. Sechrist noted that the locations of the cables are hardly secret. “Undersea cables tend to follow the similar path since they were laid in the 1860s,” he said, because the operators of the cables want to put them in familiar environments under longstanding agreements.

The exceptions are special cables, with secret locations, that have been commissioned by the United States for military operations; they do not show up on widely available maps, and it is possible the Russians are hunting for those, officials said."

The front page NY Times article worries that Russia is planning to cut these cables.  For those who argue that globalization is "evil" will they support this Russian potential attempt to send us back to national autarky?

Sunday, October 25, 2015

The Economist Magazine Turns Pessimistic on Climate Change Adaptation

The Economist Magazine recognizes that Singapore is rich and hot (and air conditoned) but rejects this optimistic vision for the world's urban future.  This linked piece reports some "doom and gloom" based on a new important paper by Burke, Hsiang and Miguel.  These three excellent scholars have published this piece in Nature which I plan to take a careful look at.

A quote from the Economist Magazine;

"Countries can try to mitigate the effects of warming, but cooling things down is expensive. In Singapore, air conditioning consumes 40% of the power used in buildings. If nothing is done to stop global warming, the world will see an 83% increase in electricity consumption between 2010 and 2100, due simply to greater use of air conditioning, fans and refrigeration, according to a paper published in the journal PNAS in March by Lucas Davis and Paul Gertler. Richard Tol of the University of Sussex points out that homes and offices in cold countries are built to conserve heat, with large south-facing windows. Refurbishing such buildings could help keep people cool, but at great cost."

Note that the economist magazine reports no estimates of the $ cost of adaptation and cooling. Singapore is doing quite well. Innovation in electricity generating and air cooling clearly has a bright future. Is the Economist Magazine really that pessimistic about induced innovation?

UPDATE: Note the pessimism implicit in this quote above contrast that with this optimistic piece about our increased ability to shield ourselves from the cold at low cost.  Will induced innovation really not come up with great ideas in a world with 7 billion people and venture capitalists seeking to fund "the next Uber"?  If 1 in 1 million people has a good energy efficiency idea then we will have 7,000 good ideas to choose from to provide our future electricity.  The best idea from this set will earn the profits of "Facebook today". Order statistics represents a powerful (and optimistic) concept.

The Economist Magazine is engaging in a pinch of cheer-leading before the December 2015 Paris Climate Treaty meeting.   Here is the conclusion of the piece that reveals this.

Moreover, even if rich countries manage to fend off the worst effects of global warming, they will still feel its repercussions. Trade with more vulnerable places would decline; refugees would proliferate. The Paris climate conference this December is supposed to come up with policies to avoid such outcomes. The new findings on the baleful impacts of high temperatures should give rich countries an extra incentive to compromise.

For an ungated piece stating my vision for our urban future; read this.  

Friday, October 23, 2015

The Economics of Red State vs. Blue State Carbon Politics

Successful  "low carbon" people in San Francisco such Thomas Steyer face a fundamental challenge.  Much of the U.S relies on fossil fuels to create their jobs, to generate low electricity prices and to allow for cheap transportation services. These individuals are aware of this point and they are voting their pocket book and thus opposing carbon pricing.  The NY Times discusses the fact that 25 states will oppose President Obama's new carbon policies.

Permit me to point you to my low carbon politics research.

1.   My JPAM 2000 paper documents that suburbanites drive more and consume more electricity than urban residents.

2. My 2011 JUE paper documents that center city liberal resident NIMBY zoning regulation has deflected more development to the suburbs where people live a high carbon life (see paper #1 above) and then oppose carbon pricing.

3. My co-authored 2013 JPUBE paper documents that energy intensive manufacturing industries seek out cheap electricity price areas.  Whether U.S carbon pricing and the resulting higher electricity prices would nudge them to move oversees remains an open question.

4.  My co-authored 2012 EER paper documents that more educated people are more likely to have installed solar panels and to go off the grid and thus not pay higher electricity prices.

5. My 2013 EI paper documents that Congress Representatives oppose carbon mitigation regulation when they are conservative, their district is poorer and their district is high carbon.  Nancy Pelosi and Tom Steyer are in liberal, rich, low carbon San Francisco.  There, it is easy to comply with carbon regulation.  They will pay few new costs for such low carbon regulation.

6. My co-authored 2015 JAERE paper documents that even in California and within counties that suburbanites vote against low carbon regulation relative to center city residents. Since we control for the fact that liberals live in center cities, this 3rd variable does not explain the urban form/voting correlation.

7.  In my co-authored 2015 JUE paper we document that U.S protectionism through the Buy America Act has hindered the improvement of our bus fleet as a green technology.

8.  My co-authored 2015 EE paper shows that the carbon footprint from transportation is smaller in cities whose "vitality" is centered downtown (versus in the suburbs).  In this sense, local center city quality of life (i.e good restaurants and culture downtown) and being a low carbon metropolitan go hand in hand.

So, I encourage Tom Steyer's people to call me to talk about how to navigate these realities.  I want to see the U.S introduce a carbon tax but we need to be honest about the "playing field" and the adjustment costs for achieving the "green economy".  The losers from this transition are well aware of what they will lose.  How will Mr. Steyer smooth this transition?

Now I do have one optimistic paper on carbon mitigation. In this co-authored 2014 paper,  we argue that improvements in battery technology,  EV quality and solar panels could decarbonize the suburbs and this would affect support for carbon taxation see #6 above.

Thursday, October 22, 2015

Why Are Major US Companies Pledging to Reduce their Carbon Emissions?

President Obama has talked several U.S companies into pledging to reduce their respective greenhouse gas emissions.  Why have these companies signed these pledges?

"The companies that have made the pledge include such iconic American brands as Levi Strauss & Company, McDonald’s, I.B.M. and Procter & Gamble."

Permit me to propose some different hypotheses;

1. Talk is cheap and these companies won't follow through with their promises.
2. These companies believe that they have earned "good will" with President Obama that will yield regulatory leniency in the future and thus this pledge will pay for itself.  Tom Lyon and John Maxwell have been the leading scholars discussing this point. Read their paper.
3. There is a principal-agent problem that the CEOs of these firms are buddies of the President and want to feel his warmth but the shareholders of the company will ultimately bear the costs of higher energy prices but since the CEO isn't a major shareholder he/she avoids bearing these costs.
4. These firms already are energy efficient so it is easy for them to sign a pledge that doesn't require any marginal new costly actions.
5.  These firms anticipate that energy prices are rising (perhaps because of future democrats introducing a carbon tax); anticipating higher energy prices they are already investing in energy efficiency (to lower their future energy bills) and thus it is easy for them to announce that they will take the pledge because it doesn't require any actions that they weren't already planning to take.

Note that the list of "iconic" companies listed above are not in energy intensive industries. Their main GHG production occurs from transportation of workers to work and shipping product.  What transportation pledges will these companies make to reduce their GHG emissions?

Permit me to tell a story.  When I joined UCLA back in 2007, I scheduled a meeting with UCLA's Parking people because I had the following idea.  UCLA's parking permit data base allowed the parking office to know what car every employee drives.  UCLA's database indicates where every employee lives.   Given this information, it is easy to calculate the gallons of gasoline every worker at UCLA consumes every day he commutes to UCLA.

For example, a person who lives 10 miles from UCLA and owns a Hummer that achieves 10 MPG would consume 2 gallons of gasoline each day in UCLA commuting roundtrip.  This information could be used to calculate every UCLA commuter's carbon footprint.  UCLA administrative data also includes information on each employee's salary and department.  Using linear regression techniques, I wanted to create an index of which departments on campus have the highest carbon footprint WHILE controlling for a person's income.   Consider the following regression:

Tons of CO2 from commuting per year =  a + b1*Department  + b2*Annual Income + U

This regression would have allowed me to rank departments by estimating "b1" for each department. The transit people threw me out calling me a nut but 9 years later my idea looks quite good.   Big data can be used in constructive ways but UCLA won't give me a chance.  

Tuesday, October 20, 2015

My Recent Talk at UCSB

I am grateful to the UCSB Economics Department for offering me the opportunity to give the 3rd Annual Babcock Lecture. I tried my best to give a serious (but funny) lecture for a general audience of undergraduates, graduates and faculty focused on the microeconomics of climate change adaptation. My lecture video is posted here.   It was a hot day and my talk was in the late afternoon.  For those who prefer that economists be level headed and calm, I apologize.  During my day at UCSB Econ, I was reminded that it is a great department. Unlike at UCLA or USC, environmental economics is one of the core fields.  The place is packed with environmental economists and graduate students who are working on environmental and urban topics. I felt at home by the beach and had a great day there.

Sunday, October 18, 2015

My Father's Interview About His Experience as a Student and as a Professor at NYU Medical School

Watch Dr. Martin L. Kahn's interview here.  Here is the transcript.    You can contrast his public speaking with my style.

The Rising Returns to Social Skills?

You are a bundle of traits (through nature, nurture and their interaction). Empiricists can measure your muscle, math problem solving ability and your personality traits.   The competitive labor market values each of these traits and offers you a payoff ($) for each of them (this function does not have to be linear).   Over time, this payoff function changes.   The tractor meant that farming required less muscle.  The computer compensated for your inability to match von Neumann's output.  So, moving forward --- our comparative advantage is our personality.  Those who are "people persons" might have an advantage in the new economy. This piece of optimism is discussed in the NY Times today and in David Deming's recent NBER Paper.

A few thoughts about the "friendly" economy.

1.  Suppose that tasks are becoming more ambiguous.   Let me explain by counter-example.  Producing a pizza isn't ambiguous.  There is a clear recipe and if you follow the steps --- a pizza emerges.  But, suppose that a team has an ambiguous task such as "improving Microsoft Window's next version".  If there are cranky people in this team, chaos may emerge as the team starts falling apart when inevitable bad times occur in the uneven process of designing a "new thing".  In such a setting, social skills may play a key role here of encouraging effort.  Empathy may play a key role here to diffuse yelling and screaming and keeping the group focused on the possibility that a happy ending may ensue.

2.  Permutations ---  Paul Romer discusses the permutations of combining different ideas but a necessary condition for these interactions to occur is for people to feel comfortable and eager to share these ideas with each other. Personality and social skills "reduce the price" of interacting with others. If you are a cheerful person who doesn't shoot down all ideas brought to you then more people will bring you ideas and the permutations and possibilities increase.   I realize that if you are a cheerful moron then your cheer is unlikely to create magic.

3. Tit for Tat games.   In Matt Rabin's theory of fairness work -- kindness is reciprocated.   In such settings such social capital facilitates interacting with more people.

4.  Don't forget Gaspar and Glaeser's key paper.  They argue that the Information technology is a complement of face to face interaction.  Knowing that if you make a new friend (from face to face interaction) that you can permanently find them again through text messaging and the Internet email --- encourages you to make more friends and more connections.  This rising network of connections not only helps in finding jobs (think Linkedin) but also in exhausting the permutations of ideas.

G and G's abstract

"Will improvements in information technology eliminate face-to- face interactions and make cities obsolete? In this paper, we present a model where individuals make contacts and choose whether to use electronic or face-to-face meetings in their interactions. Cities are modeled as a means of reducing the fixed travel costs involved in face-to-face interactions. When telecommunications technology improves, there are two opposing effects on cities and face-to-face interactions: some relationships that used to be face-to-face will be done electronically (an intuitive substitution effect), and some individuals will choose to make more contacts, many of which result in face-to-face interactions. Our empirical work suggests that telecommunications may be a complement, or at least not a strong substitute for cities and face-to-face interactions. We also present simple models of learning in person, from a written source, or over the phone, and find that interactive communication dominates other forms of learning when ideas are complicated."