Wednesday, July 23, 2014

Human Capital Mitigates Many Pollution Exernalities

At the University of Chicago, I was taught human capital theory by several future Nobel Laureates and Clark Medalists (Becker, Heckman, Murphy) and by a man who would have won a Nobel Prize.  None of these scholars ever mentioned the link between human capital and environmental economics.  

In this blog post, I'd like to highlight an exciting research agenda that investigates how human capital helps to reduce pollution externalities and then I will turn the discussion around and discuss how environmental externalities affect human capital accumulation.

Human capital is the investment in skills and problem solving.  A flexible person can solve a wide range of problems and such capacity helps a person thrive in the modern capitalist economy where employment sectors are constantly being hit by new shocks and face shifting competition and market conditions.

A few years ago, Nick Bloom and co-authors wrote a paper using data from UK manufacturing plants that those plants whose managers were of higher quality were more energy efficient.   I interpreted their findings to mean that more skilled managers are less likely to leave $20 bills on the ground and to achieve the efficient allocation of resources. These guys are able to read quickly and keep up on trends and to talk to a large number of experts to keep up on cutting edge energy savings technology. They are likely to be patient and willing to make long run investments that require upfront costs but yield long term energy efficiency gains.   Such skilled managers are less likely to suffer from what Frank Wolak terms the "cost of action" problem.

This discussion is relevant for an article in the NY Times today about the pollution created by the U.S  military in Afghanistan.   Our troops have been burning garbage there in open fire pits that have exposed our troops to high  levels of toxic emissions.

Camp Leather Neck spent $11.5 million on incinerators, but, during several inspections in 2013, the vast majority of its waste continued to be thrown into the two-story-high flames of the burn pit on the edge of the base because there was no contractor to run the incinerators. “As a result,” a previous report said, “possible long-term health risks to the camp’s personnel continue.”
The contractors had the human capital and skills to run the incineration equipment that would have reduced toxic exposure by some amount but since these guys were not around the troops were exposed to extra pollution. This is a simple example of how human capital protects us from pollution externalities. Another example is well trained nuclear engineers. The risk of another Chernobyl from nuclear power shrinks sharply if we have well trained nuclear engineers.

Now let's turn the argument around; how does pollution affect human capital?   Start with Jim Heckman's dynamic complementarity model of skill development.  A child who is sickly  learns little as a young student and may never catch up.   Janet Currie and co-authors have extensively examined how child health is affected by pollution.  A healthy child is more likely to successfully launch to grow up and achieve her full potential.  Similar work is now being done in developing countries. Authors such as Paulina Oliva are conducting important research at the intersection of labor and environmental economics.


Tuesday, July 22, 2014

Climate Change and Indoor vs. Outdoor Hockey

Ice melts when temperature exceeds 32 F.  Many Canadian kids have practiced hockey on frozen outdoor ponds and lakes. If climate change warms winters, will the quality of NHL hockey suffer?  This article says "yes".    An economist might posit that indoor hockey rinks are a close substitute for outdoor frozen lakes. While it will be more costly in terms of time in travelling to an indoor rink, players will gain from learning how to play on a "real regulation size" rink rather than on some piece of outdoor ice.   No NHL arenas are outdoors. In the big leagues everyone plays inside.

This hockey example raises a key issue for climate adaptation optimists.  In the near future, how much time will we spend outside versus inside?  How close substitutes are the two activities?   In cities such as Houston where it is hot and humid, how much time do people spend inside versus outside in summer? As we reallocate our time to cope with new climate conditions, do we lose pleasure or do we learn that walking at night and in the early morning outside is fine while during the heat of the day one spends it enjoying indoor air conditioning?

Similar with hockey, who are these Canadian rural hockey players who lose their chance to play hockey if the ice melts early?  What adaptation strategies do they have? Will their parents move closer to cities where there are indoor rinks?  The pessimists are afraid to admit that we have a large number of coping mechanisms for facing the new challenges we have unleashed.

Sunday, July 20, 2014

Apocalypse Romm

For some pessimism about quality of life in the year 2393 read this blog entry by Joe Romm.  He indicts free markets ideology with encouraging an individualism that chips away at collective action solutions. In the absence of a collective solution such as a global carbon tax, he argues that we we will face nasty days of pain caused by cruel climate change.  I agree and I disagree with Dr. Romm.

1. I agree that if we could overcome the global free rider problem, we could commit to a global rising carbon tax that would defuse the threat of climate change.   I continue to hope that small ball experiments such as California's AB32 Cap & Trade will teach the world that carbon trading can be introduced without large economic costs imposed.  Such experimentation and learning offers a possible optimistic path forward.

2. I disagree that capitalism is the sole source of the free rider problem. In poorer nations, their poverty is the cause of their unwillingness to tackle the issue and capitalism has a causal effect on reducing poverty.  In richer nations, Romm ignores issues  of political economy that some key voting blocks make their $ selling fossil fuels (think of Russia and Texas) while hundreds of millions of people live in suburban areas and have locked in to a lifestyle that is high carbon at least in the short run and thus would face higher costs in the short run from adopting a serious carbon tax.

3.  I agree that it is a deep shame that the world has not built up better global institutions for hammering out mutually beneficial treaties that embody incentive compatible terms so that every nation agrees to sign as it tradeoffs the new incentives it will face and the transfers it will receive.

Romm and the historians he favorably quotes  have a very active imagination in predicting how the world will look like in over 350 years.  Let me offer a counter-narrative that involves the power of free markets;

1.  Water pricing to reflect its rising scarcity
2.  Insurance pricing for real estate structures that reflects changing probabilities of natural disasters and other shocks
3.  improvements in air conditioning technology
4. improvements in food refrigeration technology
5.  increased international migration
6. economic development
7.  urbanization
8.  innovation in agricultural production to find robust ways to grow food across space and time in the face of volatile climate conditions
9.  rising labor market opportunities for women in cities (and thus shrinking families)

The 9 of these factors together will offset much of the doom and gloom that Joe Romm and friends sketch in their narrative.

The key feature of capitalism that Joe Romm and friends are unwilling to acknowledge is freedom of choice. The ability of individuals to express themselves through markets offers a very wide set of adaptation strategies that will only grow larger over time.  Yes, there is a role for government to provide public goods and to charge taxes to provide those goods. Yes, government should provide a basic safety net for the poor but at the end of the day --- each household makes it own choices about its conception of the "good life".  Suppliers evolve over time to deliver those products that offer them a profit. If households need more market goods to help them to adapt to climate change, the market will supply it.  Businesses in this Big Data age have strong incentives to rationally plan for emerging future demands. I would argue that Joe Romm's doom and gloom helps us to adapt to climate change by waking up entrepreneurs to dream about what new products will be in demand in the coming days of pain.  Such products will go a long way to offsetting the punch. How far will they go? That's an empirical question that merits careful study.

Don't forget what I had to say several years ago about Jared Diamond's past doom and gloom.

"“Expectations of future scarcity create incentives to innovate now. Implicit in Diamond's work is a type of mass-behavioral-economics myopia where he and a few other "wise men" are the only ones aware of the coming day of scarcity. I am more democratic and optimistic that if there is a future arbitrage opportunity that a few ambitious young capitalists will seek out the profit opportunities and be ready with the next "Toyota Prius" that will help to mitigate future scarcity challenges. (Environmental and Urban Economics)


Allen Iverson and many NBA players offer a Test of the Permanent Income Hypothesis

NBA basketball players know their age, their contract's terms and the likely length of their playing career, and they can form a good guess of their post-career earnings.  Why isn't this information sufficient for planning one's lifetime consumption so that one saves while earning the high salary and lives off the savings when the player is retired and middle aged? Wouldn't Milton Friedman view such players' upfront earnings profiles as offering a good test of his permanent income/life cycle theory of consumption?

There are investment markets that allow for income smoothing over time such that if you earn a lot of $ while young and will earn nothing while old that you can have  a very good lifetime consumption flow.   When we see cases such as the consumption dynamics of Allen Iverson,  what do we conclude?  Does the NBA self select a set of people with hyperbolic preferences?    What share of NBA players have consumption paths that resemble Iverson?   We know we can augment the consumption model to include altruism for one's extended family (his 50 person entourage) or to include Keeping up with the Jones (showing off "bling") --- must these factors be included to explain NBA player spending patterns?   What % act as if they are following Friedman's standard consumption rules?  

Saturday, July 19, 2014

The Shanghai 2014 International Forum on Public Policy and Governance

On July 5th and 6th, Ed Glaeser and I participated in a large Shanghai conference at a very elegant Howard Johnson Hotel.   Throughout the conference, a Lamborghini sports car was parked in front of the hotel. It did not belong to me.  Here my slides for my Shanghai 2014 talk.  

Here is a photo of Ed Glaeser and myself and many of our new friends.



Friday, July 18, 2014

The 1% in Academic Economics Over the Last Ten Years

This REPEC index converts each economist's output (measured in 38 different categories) over the last ten years into a single index that can sorted so that 40600 registered economists are ranked.   I'm ranked #340 but I still will complain that three of my books and about 25 of my peer reviewed environmental papers are not counted (including my co-authored 2013 PNAS bullet train paper). Based on this REPEC metric, I'm #2 at UCLA with Andy Atkeson ranked in front of me at #198.    Of the top 100 economists, the University of Chicago is home to 8.  Not a bad market share!

Thursday, July 17, 2014

The Tesla Model III Will Offer a Clean Test of the Coase Conjecture

It has been reported that a $35,000 Tesla make will be sold in the year 2017.  How will the expectation that you can buy this make in the medium term affect the pricing of Tesla vehicles today?   The Coase Conjecture would predict that Tesla will have to drop its prices today if these two makes are close substitutes.  Whether they are close substitutes is an empirical question but I can offer one data point. I was preparing to buy a Tesla but I now plan to wait and buy the $35,000 version in 3 years.    Am I typical?

What is the Coase Conjecture?  These slides provide an answer;

"In the paper “Durability and Monopoly,” Nobel Laureate Ronald Coase proposes the startling
hypothesis that the monopoly seller of a durable good will tend to price at marginal cost, absent
some mechanism for committing to withhold supply. (Such mechanisms include leasing rather
than selling, planned obsolescence, increasing marginal cost (which makes delay rational), and
promises to repurchase at a fixed price.) The logic takes three steps. First, having sold the
monopoly quantity at the monopoly price, the seller would like to sell a bit more, because the
seller need not cut price on units already sold. Second, consumers will rationally anticipate such
price cuts, and thus will hold out for future prices. Third, if the seller can change prices
sufficiently fast, the path must go to marginal cost arbitrarily quickly, that is, the price will be
marginal cost. This idea came to be known as the Coase conjecture.

Essentially the Coase conjecture holds that a monopolist compete with future incarnations of
himself. Even though the most profitable course of action is to sell the monopoly quantity
immediately, and then never sell again, the monopolist cannot resist selling more once the
monopoly profit is earned. That is, subgame perfection condemns the monopolist to low profits."



My 5 Nation World Tour is Over

I have been outside of the USA for 37 days.  I went from Italy to Croatia to Turkey to Israel to China.    On Blue Sky days, I saw amazing islands as I flew from Israel to France (on my way to China). In  Turkey, I had the chance to give a talk to over 500 economists and in China a few hundred people showed up to a conference in Shanghai.  You can read the Chinese version of the remarks here.    In China, I visited Shanghai,  Beijing and Chengdu. I saw pandas and I ate turtle and pig heart and other stuff I don't even want to think about.   I toured each of these cities walking the downtowns and residential neighborhoods.

I spent half the trip with my family but went to Turkey, Israel and China on my own.  My many many friends in China took wonderful care of me.   I have acquired the ability to fly for 13 hours and sleep for 75% of it and suffer no jetlag on the back end.   I have been working on  research over the trip and now am ready to address the 4 revise and resubmits and a zillion other things I now have to get done. It is good to be home.

My only complaint about China is having Google blocked and thus not being able to search or blog or read most blogs including this one.  Still, China is a very exciting place and my two weeks there will make my book with Siqi Zheng even stronger because I have had dozens of new ideas about how to improve our project.

My friend Professor Jie Chen,
Director of Institute of Real Estate Research
Principal Investigator, Institute of Public Policy and Governance
School of Public Economics and Administration,
Shanghai University of Finance and Economics (SHUFE)

sent the following email related to our Shanghai Conference.

Dear Professor Glaeser and Professor Kahn
 
Many thanks for your generous support to the 2014 international forum on Global Cities Governance. It is your participation and wisdom that made the forum a great success.
 
Your speeches at the forum have drawn massive attention in Chinese media. Below listed are a few samples from the most influential media in China, including the People’s Daily, the Xinhua News, the China Government Website, CCTV (China Central TV), etc. Many of their reports cited your remarks on the forum and then spread your insights on urban governance across China.
 
 
 
An interview report of Professor Glaeser by China Business Newshttp://www.yicai.com/news/2014/07/3989900.html
 
The online live broadcast by Sina, the largest Homepage website in China:http://supports.house.sina.com.cn/chat/shanghai/3615.html
 
The full text of Professor Glaeser’s speech on the forum:
 
The full text of Professor Kahn’s speech on the forum:


Wednesday, July 02, 2014

Do I Want to Connect with my Mother on LinkedIn?

This is my last blog post for 3 weeks so I will leave you with a deep thought about LinkedIn connections.  I'm wondering if the rate of progress in economics would double if LinkedIn would stop sending all of us crazy emails that take time to contemplate and respond to. Here is the one I received today supposedly from my mother.

Hi Kahn,
 
I'd like to connect with you on LinkedIn.
 
Carol Kahn
 
Appellate Attorney
 
 

I do not believe that my mother actually sent this email because she has never called me "Kahn" before.  The only people I know who would call me that are Gary Becker and Ed Glaeser.   I certainly agree that all three of them have earned the right to call  me that.  

Tuesday, July 01, 2014

Random Thoughts

I have now spent one day in Tel Aviv and soon will fly to Shanghai.  When I am in China, this blog will not be updated because I won't be able to access it.  When I return to LA in late July, these entries will start up again.  Tel Aviv is a modern beach city. It feels like a slightly more humid Los Angeles.   Most people here are well tanned and look physically fit.

Yesterday I was in Istanbul and gave a lecture to somewhere between 500 and 1000 people.  This was a great opportunity to talk about cities and adapting to climate change. I have the feeling that I was the only University of Chicago economist in the room.   I tried my best to say some smart stuff.  In a recent post, I linked to my slides.  For reasons I don't understand, the conference organizers didn't bother to videotape my talk. I would have paid for them to have done so.   Maybe they anticipated that it would be a low quality talk?




Sunday, June 29, 2014

Some Thoughts about Istanbul Turkey

I flew from Croatia to Istanbul three days ago and have spent my time touring the city  and attending some environmental economics sessions.   I want to share some impressions of Istanbul.

1.  The city is "greener" than I expected.   We are lucky to be here at a time when the temperature is quite cool.  I had expected that local PM10 and dust levels would be higher.  The air quality is good.  The vehicle stock is newer than I expected.  Rome, Italy smells worse from their cars' emissions.   The main river is cleaner than I expected.  On our boat ride, groups of dolphins were happily swimming away.  Unlike in Rome, I have not seen piles of garbage stacked around.  I recognize that I may be spending my time in the richer part of town but I still like these features.  There are stray dogs and cats walking around and I tried to avoid them.

2.  There is a very active night life and I saw no rowdy behavior.  In terms of local demographics, this is a young city with thousands of young adults walking in certain districts late at night.

3. You can hear many Americans close to the main tourists sites and there are very aggressive business guys seeking to sell all sorts of stuff to them.

4.  I like the food here especially a liquor called Raki. 

5.  There appears to be an ongoing debate here about balancing the rights of individuals to pursue their religious beliefs while also respecting other groups who do not share such beliefs.

Michael D. Intriligator: A UCLA Star Faculty Member

I'm very sorry to hear that my colleague Michael Intriligator has passed away.    When I joined UCLA, Mike had already retired from the full time faculty but he was a day to day colleague playing a key role in organizing our important interdisciplinary Marschak Colloquium .   To appreciate his academic influence, you can take a look at his Google Scholar citation list.    You will see the breadth and quality of his publication record.  Mike was a very kind and optimistic man.  I will miss him.

Saturday, June 28, 2014

Economists in Istanbul

I am in Istanbul, Turkey.  Tonight the World Congress for Environmental Economics starts.  Today I went for a two hour boat ride with Jing Cao and Shan Li and took this photo.  We had a great time on the water.


Displaying 20140628_134056.jpg

Soon, I will arrive in Tel Aviv.  This has been an action packed trip as I have visited two cities in Italy, three 4 cities in Croatia and now am in Turkey.  Israel and China are my next stops.

A slight piece of boasting.  Google Scholar informs me that I have reached 7,000 career cites.    For a 1993 Ph.D, that averages out to roughly 1 cite a day for 21 years.   My medium term goal is to reach 20,000 GS cites in 5 years.   That would be a respectable number of cites.




Tuesday, June 17, 2014

Teaching Environmental Economics During the 2014-2015 Academic Year?

What would you say if I told you that your students can read a $1 textbook that teaches, through a number of "real world" examples, the leading ideas in environmental economics?  What if I told you that the book contains a number of free market environmentalism ideas that will simultaneously interest your students and get them to focus and challenge their neo-classical econ teacher?  Enough of the hard sell, here are the facts;

Dear Professor Smith,

Thanks for getting in touch.  I've attached a .pdf of the current draft.  In mid-August 2014, I will drop the price on Amazon to $1 a book and my students (and yours if you adopt it) can buy my Fundamentals of Environmental Economics book here.

Note that at this Amazon website students can download an App so they can read it on any device. They wouldn't have a physical copy of the book unless they print it.

In case it helps, you can download a lot of my powerpoint slides for the book here.

The book isn't flashy.  There aren't text boxes as photos of smoky factories.  There are equations and econ graphs but they are not professionally produced. Instead, I have intentionally chosen to make a low tech book that contains the key vision for why I chose to become an environmental and urban economist. I would like to believe that my University of Chicago teachers would view this book to be pretty good as it takes basic price theory and applies it to a key social issue.  

Best,

Matt

Michael Crow, ASU, Ants and Biosphere 2

Joe Nocera has written a loving tribute to ASU's President Michael Crow in this NY Times piece.   To his credit, Dr. Crow is thinking hard about how to make his school stand out from other public universities and to achieve the double bottom line goal of increasing access to higher education for all people.  Such "out of the box" thinking is exactly what competition fosters.    More ambitious universities should be thinking about strategies to differentiate themselves from the rest of the pack.

Dr. Crow and I were once colleagues at Columbia University.  What I remember about him are the ants taking over his Biosphere 2.  Here is what the NY Times reported in 2003 about Biosphere 2.


"It is difficult to say what kind of scientific promise the giant structure, an eight-story steel and glass terrarium, might hold. From the day in 1991 that eight men and women and 4,000 plant and animal species were sealed with great fanfare into it as part of an experiment to simulate the earth's ecology, Biosphere 2 generated fascination and skepticism. Biosphere 1 is the earth.

Critics called Biosphere 2 a ''scientific crapshoot.'' When the human guinea pigs left the structure after two years, crops had failed, noxious gases had built up, the water had turned acidic and the site was overrun by ''crazy ants'' and morning glories.

But Columbia officials decided that with some modifications it might hold some promise, and its decision in 1995 to take on Biosphere 2's management seemed to confer academic legitimacy to the project.

As recently as 1999, the collaboration seemed to be going well, as Columbia announced that it would invest $20 million over five years and manage it until 2010. And in 2001, the university said it would start a science and public policy graduate program at the center.

But Biosphere 2's chief champion, Columbia's executive vice provost, Michael Crow, left for Arizona State University, and a new president, Lee C. Bollinger, took the helm of the university. After two panels reviewing the site offered negative evaluations, Columbia expressed questions about further investment.

In March, Decisions Investments sued Columbia, saying its decision to end education programs there and its failure to hire faculty and build a new laboratory had diminished the property's value and were a breach of contract."
 

Monday, June 16, 2014

Tim Groseclose's New Book Examining UCLA Admissions Policy

In April 2014, Tim Groseclose published his book "Cheating An Insider's Report on the Use of Race in Admissions at UCLA".   Admissions to elite universities is highly valued.  Who should be admitted and what criteria should be used for judging files?  To his credit,  Tim provides all of the admissions data he was able to access through a California Public Records Act request.  You can download the data here.  For those applied econometrics teachers consider having your students extract a random subset of these records and estimating some "production functions" in which the key outcome variable is whether a UCLA applicant is admitted.

Your students can test for the role of the student's;

1.  race
2. household income
3. standardized tests
4. grades in high school

as inputs in determining the probability of being admitted.

Using a linear probability model, the students can estimate multivariate regressions and the regression coefficients will have the interpretation of index weights and students will learn a good lesson in "isoquants".   Such an analysis represents a revealed preference test of the UCLA bureaucracy's formula for being admitted to this prestigious institution.

This is clearly a highly controversial subject but Tim has performed an important service by bringing this subject into "the light".   Admissions officers have great power and discretion.  Big data methods allow us to take a close look at what they actually do rather than on relying on what they say they do.   Such cross-checks on power create good incentives and guarantee the continued strength of our key institutions.  We all need to face competition and cross-validation (by arms-length evaluators) that we are doing our jobs.  I believe this statement holds for professors, administrators, deans and admissions officers.


Within NBA Team Income Inequality and Player Performance

Nobody has a strong preference to be a "low ranked monkey".  Whether in the NBA or at the University of California,  workers are unhappy when they know they are below the median earners.   But does being "unhappy" translate into being unproductive?

In this blog post, I will provide a sketch of a good undergraduate economics honors thesis.  There are many economics students with strong quant skills who aspire to be the next Nate Silver.

Suppose that a student can access the universe of all player statistics for every team for the last 30 years.  For each team in each year, the researcher would calculate the income inequality measure for the team in that year and knowing each player's salary and the median salary could calculate whether the player's salary is above or below the median.

Key outcome statistics for the team would be its wins and how far it went in the playoffs

Key personal stats for the player would be some "sabermetrics" indicator of points, rebounds, assists, turnovers,  shooting efficiency, defensive prowess, etc.   Time varying controls would include the player's age and cumulative minutes played and recent injury history.  Suppose this can be boiled down to a single variable called X for each player in each year.  So if a team has 12 players this is a 12 dimensional vector each year. A similar metric could be constructed for the coach's quality based on past playoff and winning percentages.


The following multivariate regression would then be run;

Using the team/year aggregate data: a conditional logit model could be estimated of the form:

probability team j wins the title in year t =  f(X ,  coach quality,  team income inequality)

If the team income inequality variable has a negative coefficient then this indicates that team income inequality is "bad" for performance.

The player/year level micro data could then be used to test whether player performance suffers when they are on a team that has more income inequality and they are a low ranked monkey (LRM).

Define X1 as  a player's single quality index for that year (as defined above) and define X2 as his teammates scores for that year (this variable could be lagged).

The researcher would estimate:

X1 =  player fixed effect + player age + player injury + coach fixed effect + B2*X2 +  B3*team income inequality +  B4*LRM  +  B5*LRM*team income inequality +  final year of contract  + U

The income inequality is "bad" hypothesis would posit that    B4 is less than 0 and B5 is less than zero.

Why is NBA data important?  It isn't but it represents a collectable measure of productivity across hundreds of millionaires.  These guys have no real wants or needs.

The ambitious researcher could then re-estimate the micro regression above and study whether the player was traded in the subsequent year.  Traded players may indicate that the player was unhappy in the situation and disgruntled .

For those interested in other work investigating how individual performance is affected by the composition of the group one participates in, take a look at my paper with Dora Costa from 2003.








  

Sunday, June 15, 2014

Climate Change as a Threat: How Big of a "Threat"? Write Down Your Economy's Equations

On Twitter, I see some chuckling that 51% of people polled in a Bloomberg Survey view climate change to be a "minor" or "no" threat.    While we don't know how people interpret the question;  what does the word "threat" mean and to whom and when,  what information would an empirical analyst need to answer the threat question?

To sketch a brief answer to this question; let's assume that every person is a risk neutral expected utility maximizer.

In each year, the following sequence plays out;

1.  The person either lives or dies.  Suppose the person dies with probability 1-h and this probability never changes and is independent over time.

2. If the person lives, there is a probability 1-g she is unemployed and receives pay of $0.   There is a probability of g that she is employed and earns a payment of $W.

3.    She only gains utility from eating Apples and the market price of an Apple is $m.  There are period by period budget constraints so she can't  borrow or lend.  Her annual discount factor is B

With this setup:  a consumer's lifetime discounted expected utility equals

sum from t = 0 to infinity     (h)^t*g^t*B^t*(W/m)

In this bad notation the math symbol "^" represents that I'm raising the variable to the exponent "t".  Note that this economy features no actual choice by the consumer.  Events such as survival or having a job just occur and this person only continues on consuming if they do occur.

To some provide intuition here, with a payment of W dollars which she only receives if she is alive and has a job, she can purchase W/m apples because each apple costs m dollars.  Future apple consumption is discounted because she is impatient and prefers consumption now.

In this silly simple urban economy, we can now talk about whether climate change is a threat to this representative agent.  This is an urban economy because the consumer doesn't grow her own food. Instead she buys it at a market.   For us to see that climate change is a threat to her lifetime expected utility, the climate scientist must either argue that:

1.  Climate change will lower the probability of survival (i.e h will decline).
2. Climate change will increase the unemployment rate (i.e g will decline)
3.  Climate change will lower her income if she has a job (W will decline)
4.   Climate change will raise the price of apples (i.e m will rise).

In my urban climate change adaptation work,  I reject #1.  (Read this paper).   Air conditioning and quality housing shield the urban population from death from heat waves, floods and other natural disaster spikes.  Hurricane Katrina's impact on New Orleans was quite a fluke.  NYC will suffer many fewer deaths when the next Sandy strikes.

In my Climatopolis work, I argue that in urbanized economies that #2 and #3 are not serious concerns.  Especially for those who can migrate within a system of cities and thus have a menu of alternatives.

#4 could certainly occur if nations have closed boundaries with respect to trade in agricultural goods.  Certain nations can certainly have bad harvests and this reduction in supply will drive up the price.  In a world of open trade in agriculture and spatially uncorrelated climate shocks and with inventories and substitution possibilities (note that this economy only produced apples), #4 will be a minor effect.

So, in this stylized economy we find a small impact of climate change.    For those who state that climate change is a major threat, what is your economic model of how we lose serious consumer surplus? Why don't households have substitution possibilities?

Note that in this economy, I didn't even introduce technological innovation.  For example , apples that can be produced in hotter climates and are more immune to bug infestations.

The broader lesson here is that the NY Times and other "doom and gloomers" need to be more explicit about who suffers because of climate change and why they suffer and how much they suffer.  Why would these "victims" allow themselves to be victims?  Why didn't they see the punch coming?   Does bad old capitalism offer any escape options for these suffering individuals?

Saturday, June 14, 2014

The World Congress of Environmental and Resource Economists 2014

In two weeks many of the world's environmental and resource economists will gather in Istanbul Turkey.  I will give one of the three keynote talks and I will focus on climate change adaptation and cities.   Adaptation is the awkward topic that many intellectuals (including many Ph.D. environmental economists) feel uncomfortable talking about.  Why is that?  In this blog post, I offer some conjectures;

1.  Intellectuals genuinely worry that the world is going to hell.   Long run trends in improvements in well being as measured by rising life expectancy, heights, and the number of people on the planet are waived off as mere short run phenomena that will evaporate in the coming days of reckoning.  

2. Intellectuals love behavioral economics and the view of the average Joe as a short sighted myopic moron.  Consider this old quote I wrote about Jared Diamond and the vision he advanced in his book Collapse and in his NY Times piece. 

"Expectations of future scarcity create incentives to innovate now. Implicit in Diamond's work is a type of mass behavioral economics myopia where he and few other "wisemen" are the only one's aware of the coming day of scarcity. I am more democratic and optimistic that if there is a future arbitrage opportunity that a few ambitious young capitalists will seek out the profit opportunities and be ready with the next "Toyota Prius" that will help to mitigate future scarcity challenges." source 

3.  Intellectuals genuinely believe that any discussion of progress and the adaptive ability of capitalism to reinvent itself in the face of an ambiguous but anticipated threat (i.e climate change) lulls middle class voters to refuse to take their medicine and adopt higher taxes now.  This view implicitly assumes that we (the intellectuals) have to scare the heck out of people to get them to take action now.

4.  Trust in the ability of free markets to improve all of our quality of life is at a record low.  While the elites tweet away on free market supplied phones and take Uber to where they want to go and fly airlines to attend their conferences, the government is viewed as the key mechanism for supplying public goods.

In the case of climate change adaptation, an alternative vision is that the free market offers many adaptation strategies for coping with evolving new risks.  Risks for one group equals opportunities for those entrepreneurs who can devise solutions.  As I discuss in Climatopolis, there are many cases in which government will be the main hindrance of adapting to climate change.  One example is water pricing in drought prone areas.   To download an early draft of my slides for my Istanbul talk click here.


Tuesday, June 10, 2014

How Should Econ 101 Be Taught?

Twenty years ago when I was a young Asst. Professor at Columbia University, I was given the task of teaching Econ 101 to 350+ undergraduates.  I haven't taught this course in recent years but I have a few thoughts about how to do it right.   The appropriate topics and pace of such a course are discussed here.  Let's assume that the Professor teaches for 150 minutes a week for 12 weeks.  What can he/she hope to accomplish?

To simplify the task, I would ignore Keynesian economics and spent no time on accounting identities (C+I+G = Y).

At the start of each class, I would spent 20 minutes on some topic in the New York Times and highlight how the issue at hand is an economic question of tradeoffs, and incentives.  I would discuss my surprise that the Times tends to ignore economic analysis in its journalism and explain how the "economic approach to human behavior" adds insights and anticipates likely unintended consequences.

I start my class talking about Robinson Crusoe and his time allocation when he can't trade with anyone. I then teach comparative advantage by introducing another person who he can trade with.

We then populate the economy with lots of buyers and sellers and markets emerge. I talk about the necessary conditions for markets to emerge (i.e.  a currency of exchange, trust, co-ordinating on what location to meet to exchange the goods, property rights being well defined and enforced).    In each class, I would stress how to use the simple machinery of supply and demand to analyze markets and market behavior.

We would start on the demand side with a brief overview of what is each person's "conception of the good life" and how access to capitalist markets allows different individuals to purchase market goods that help them to achieve their goals.  We would spend a fair bit of time on budget constraints and contrast rich people and poor people and how price changes affect the feasible consumption set.  We would talk about how government policy changes the feasible budget set.

I would tease students who know calculus to think about how the simple graphs we make (of tangencies between indifference curves and budget lines) can be quickly solved for using the calculus.  This gives them a taste of intermediate micro.

I would talk about hard extensions such as introducing time and uncertainty.

We would sketch the perfect competition model and why it is a useful benchmark for studying many markets.

We would then flip over to study the supply side.  At what price will a pizza firm sell you pizza? What costs does a pizza firm incur?  Which of these costs are fixed and which are variable?   If factor input prices change or if there is technological advance, how does this affect the supply side?

Integrating supply and demand into one integrated framework allows me to then study economic incidence issues.  Who gains if immigration leads to lower wages for pizza makers?   How much consumer surplus is gained in this case? What is consumer surplus?

At the backend of the intro course, government is introduced.  Externalities and public goods are defined and explained.  What are the costs and benefits of government intervention in the free market? Who are the winners and losers? Is this a zero sum game or is there deadweight loss?  What is deadweight loss?  We have a philosophical Hayek like talk on whether the competitive equilibrium is a pareto optimum and these esoteric terms are defined.

At the end of the course, I discuss why I don't teach Keynesian Macro.  I say that an economy is not an airplane. With an airplane, when it flies too low we know how to get its altitude back on track.  To view the economy as an airplane and to actively engage in counter-cyclical policy is to entrust the Fed's economists with too much power.  How do we know that they know what they are doing?   I discuss the hard concept of uncertainty and investment under uncertainty with my students.

I end the course talking about how to use the micro tools we have focused on in applied fields such as health economics, urban economics, environmental economics.   In this field experiment age, I would also teach my students how to use randomization to test for causal role that incentives play in determining demand and supply side behavior.  For example, if I pay a person X cents per kwh of electricity below last month's consumption, by how much does a person reduce his electricity consumption?  Choose X at random for different people and keep track of the changes across people in their electricity consumption when they are given an exogenous incentive to conserve.   This experimental design sketches out a supply curve for conserving electricity.

I hope this vision is clear.   This isn't cute stuff.  The good student will take away from this class that economics is a hard but valuable subject that offers a series of tools that can be applied to many real world problems.

Why are poor people poor?
Will China's air pollution improve?
Why do so many kids in public schools receive bad education?
Why do people in the United States drive more than the people in Europe?
Why is obesity rising in the United States?

These are interesting questions and students who take econ 101 are able to provide coherent answers to these questions.  Can you?

I would spend 1.5 weeks of the class on macro but in this case I would focus on growth economics and in particular on long run trends in human capital accumulation at the individual, city and national level.  I would highlight the mistakes in the Malthus logic about unending population growth and instead highlight Becker's work on the economics of fertility and women's opportunities outside of the home.  

International Free Trade in Solar Panels and Domestic Tariffs

Do U.S environmentalists support the recent policy of the U.S Commerce Department to impose tariffs on Chinese solar panels?  Whether international trade is "good" for the environment is an old question that Larry Summers wrestled with in this memo and Copeland and Taylor have done great research on.    In this 2012 paper, Aparna Sawhney and I argue that free trade in "renewable power equipment" raises a new set of trade and the environment issues.

Here is the abstract:

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

The big point of this paper is that renewable power equipment is an example of a piece of capital that offers global externality benefits as its adoption reduces global GHG emissions.  This means that importing nations and the rest of the world gain if exporting nations such as China choose to strategically subsidize green industries such as solar panel makers and wind turbine makers.  Note that these  products are different than toys or cars that the mass production of these goods lowers the price of adopting green technology by mainstream U.S firms such as Walmart.  The U.S in its pursuit of protecting "U.S jobs" is sacrificing environmental progress.  Will mainstream environmentalists acknowledge this point?

Demand curves slope down. If tariffs rise sharply, then how much will U.S adoption of wind turbines and solar panels fall by in the short term and medium term?

Monday, June 09, 2014

Krugman on Carbon Mitigation, Self Interest and Ideology

Paul Krugman has written an interesting piece   He states; "So the real obstacle, as we try to confront global warming, is economic ideology reinforced by hostility to science."   I don't think this is right.  The real obstacle we face for why the U.S isn't taking the lead on this issue is sunk capital and suburbanization.  We are a nation of suburban voters.  Unlike his Manhattan fellow residents, most of us live and work in the suburbs where we use fossil fueled vehicles and live in large homes that use plenty of electricity which we expect that will be cheaply provided to allow us to use our home appliances and to run air conditioning to protect us from humid summer heat.  We want natural gas in the winter to heat and year round clean cooking.  Self interest guides why so many U.S suburban voters are not excited about carbon taxes.  Of course, Dr. Krugman is right that such carbon taxes would offer significant long term insurance benefits against the unknown costs of climate change. He is wrong to play down the costs that suburbanites will bear in the short run as we decarbonize the economy.     If all U.S citizens could trade in their fossil fuel vehicles at the purchase price and could be promised that their electricity prices would not rise, they would vote in favor of carbon taxes.  Self interest is an important determinant of public opinion.

In paper #1 below, we document that both ideology and self interest are determinants of support for low carbon policies.

Readers should read the following papers;

  1. Matthew J. Holian & Matthew E. Kahn, 2014. "Household Demand for Low Carbon Public Policies: Evidence from California," NBER Working Papers 19965, National Bureau of Economic Research, Inc.
  2. Matthew J. Holian & Matthew E. Kahn, 2013. "The Rise of the Low Carbon Consumer City," NBER Working Papers 18735, National Bureau of Economic Research, Inc.
  3. Michael I. Cragg & Yuyu Zhou & Kevin Gurney & Matthew E. Kahn, 2013. "Carbon Geography: The Political Economy Of Congressional Support For Legislation Intended To Mitigate Greenhouse Gas Production," Economic Inquiry, Western Economic Association International, vol. 51(2), pages 1640-1650, 04.
  4. Glaeser, Edward L. & Kahn, Matthew E., 2010. "The greenness of cities: Carbon dioxide emissions and urban development," Journal of Urban Economics, Elsevier, vol. 67(3), pages 404-418, May.
    • Siqi Zheng & Rui Wang & Edward L. Glaeser & Matthew E. Kahn, 2011. "The greenness of China: household carbon dioxide emissions and urban development," Journal of Economic Geography, Oxford University Press, vol. 11(5), pages 761-792, September.

    Sunday, June 08, 2014

    Free Juice

    Have any energy economists written a paper documenting trends in airport electricity consumption over time as more and more travelers seek to find any spare electric socket to recharge for free their phones, tablets, PCs and other mobile devices?   Given my previous post on Tesla recharging and the search for "free juice",  I am now curious about how much electricity demand jumps when people face a zero marginal cost!    Airports represents a place where people are stuck with little to do but wait.  In other settings such as Universities, students face zero marginal cost pricing for water and electricity.  While we claim that we are making our universities "sustainable", an easier way to achieve this noble goal would be marginal cost pricing.  To my deep surprise, people don't listen to me.

    UPDATE:  Read this story about Chevy Volt recharging in a public garage.  While I don't know the facts, the author of this piece ignores the possibility that somebody in the condo complex was tired of paying the cross-subsidy for the other family's refueling.  I 100% agree that this doesn't justify vandalism but this example highlights that the heart of this blog post is relevant for civic engagement in settings where people share common resources. In this case, the electricity sockets.

    Slides for my World Congress Talk in Istanbul in June 2014

    In late June 2014, I will give one of the Keynote talks at the World Congress of Environmental and Resource Economists in Istanbul.   For those who do not plan to attend,  here is my talk outline.   As you will see, I focus on how the system of cities helps us to adapt to climate change.  I predict that the urban economics of climate change adaptation  will become a major research field.  For the basic economics of my story, just read this overview of my 2010 Climatopolis book.

    Free Tesla Charging at Multi-Family Apartment Complexes?

    I own a vacation condo close to Santa Barbara, California.  The condo is part of a complex of roughly 40 units.   Each apartment has a parking space.   My wife and I were walking the pretty grounds and as we passed through the parking lot I saw a Tesla electric vehicle recharging as a fancy extension chord was plugged into a wall electric socket.  Since I am an economist,  it flashed through my mind that the owner of the vehicle was receiving a free lunch!  Who was paying for the electricity that his vehicle was fueling up? The electric sockets in the garage were likely first installed for running appliances such as vacuum machines.   At first, I hoped that a sophisticated pricing system was billing his unit for the electricity used from that electric socket.  At second thought, I realized that a type of "tragedy of the commons" is taking place as all of the 40 unit owners are implicitly subsidizing his operating costs!  I'm paying for his "gas".   As a free market environmentalist, I am impressed with the owner's cunning and I salute his low carbon choice but I do not respect such implicit theft of my $.  How much $ is this guy grabbing?

    The Internet tells me that Tesla drivers are achieving 3 miles per kwh.  Suppose this guy drives 15,000 miles per year so he needs 5000 kwh.  Suppose that the average price of a khw is 10 cents.  To fuel his driving requires $500 per year. If he does all of his refueling at our Condo then the 40 apartments are each giving this guy $12.5 a year.   In contrast, the Tesla owner is receiving a total subsidy of $488 per year from everyone else at the Condo.

    This example highlights an unexpected transfer embedded in how we use and price collective resources (the electricity sockets).  Avoiding marginal cost pricing has consequences for efficiency and equity.

    Saturday, June 07, 2014

    President Obama to Offer a Subsidy for Past Humanities Majors

    Debt forgiveness is often an attractive policy for borrowers.   While such new "rules of the game" create bad dynamic incentives, we can understand why they are popular with a subset of people.  In their new book, Mian and Sufi argue that this group has a high marginal propensity to consume and thus there are macro aggregate demand benefits from reducing their debt level.

    Today we are told that many young adults have unacceptable levels of college debt. How did they become saddled with this debt?  Did they not understand the terms of the deal?  Did they naively assume that attending college would raise their earnings prospects by 50% regardless of what they studied?

    The NY Times reports that President Obama will now offer students some debt relief. The following quote caught my attention;
    "Mr. Obama’s main action will be to expand on a 2010 law that capped borrowers’ repayments at 10 percent of their monthly income. The intent is to extend such relief to an estimated five million people with older loans who are currently ineligible — those who got loans before October 2007 or stopped borrowing by October 2011."
    So, which Universities and which majors will be affected by this new law?  Suppose you major in Computer Science at MIT, I don't think law will affect you.  This group's monthly income will be high enough such that they would prefer to pay their current student debt rather than hand over 10% of their monthly income.

    Now consider universities with low value added and majors whose graduates do not earn a high salary, the average graduate from these programs will be more likely to embrace President Obama's new deal.  For an unemployed college graduate, how will this new deal affect what they pay?  If you reflect on this law for a moment it creates a moral hazard effect.   In its extreme form, President Obama is allowing people who borrowed money and went to college and partied and didn't study or didn't gain employable skills to now not pay their loans and instead let taxpayers pick up the bill.

    While the title for this blog post is a half joke, I would ask readers who have read to this point whether people are responsible for their choices.  What activities do we want to subsidize?  I had always thought it was those that offered a positive externality such as basic research.  This new policy will have little impact on economics and Big Data majors.  For professors from other fields, can you same the same thing?

    For everyone who qualifies for this new program, each person should have to reveal what university they attended and what they majored in.  The aggregate data could then be posted to inform the next generation to help them to make better choices.

    Now, I must state that I can't tell if this retroactive debt forgiveness will distort future major choices.  Will future undergraduates believe that they will also qualify for this generous program or is this debt program just a one time program?  It is a transfer from the average economics majors to the average humanities major.  Is that fair? Is that equitable?

    "Human Shields": A Thought About the Economics of Coal Mining Employment

    In this piece, Paul Krugman highlights that total employment in coal mining has declined from 250,000 jobs in the U.S in 1980 to roughly 80,000 today.  He makes the important point that coal extraction firms have substituted from labor to capital and that this input switching has decimated this industry as a creator of high paying jobs for low skill workers.  He stresses that technological change (not environmental regulations and liberals environmentalists) have caused this contraction of this sector of the economy that is concentrated in poor places such as West Virginia.

    After reading this piece, I had a new thought.  Suppose you own a coal mine and you seek to maximize the present value of your profits.  Wouldn't you have an incentive to make sure that you continue to have some actual workers working at your plant to reduce your regulatory burden?  Since machines do not vote and do not garner sympathy from elected politicians, a firm that substitutes completely from labor to capital will have less voice in the regulatory process. If a firm continues to have actual workers, they act as "human shields" reducing the likely regulatory burden the capitalist will face because he can credibly threaten to fire these workers.

    While economists such as Michael Greenstone and Erin Mansur and myself have written about the employment consequences of environmental regulation, none of us have written about the pre-emptive effect that a firm might keep its employment high in part to reduce its future regulatory burden.   Bigger firms have more clout in the political process and during a time of job insecurity such firms might be able to mobilize their political representatives to fight hard to "protect jobs".  I doubt that such politicians would fight as hard to "protect capital".

    Friday, June 06, 2014

    Hot Climate Adaptation: Evidence from LeBron James vs. Tony Parker

    LeBron James was in great pain last night as he played game #1 of the NBA finals in the hot indoors.  Other international players suffered less.  To quote Tony Parker;  "Felt like I was playing in the European Championship. We never have AC in Europe, so it didn't bother me at all."  The contrast between James and Parker has relevance for the recent literature on adapting to climate change.   Why would the international players be better able to cope with the heat? Because, they have experienced those conditions before.  In contrast, the "King" is pampered. His rugged body has always ran around in perfect climate controlled conditions.    This differential ability to cope with "new news" (i.e that the air conditioning is not working) is a key part of the economics of climate change adaptation.

     I am a climate change adaptation optimist.   In the short run, climate change imposes costs (see James' game #1 stats and his inability to play at the end) but the adaptability of the international players highlights our long run ability to cope.   How long is the short run?  Keynes half joked that we are "all dead in the long run" but this is over-stated.  Forward looking people who are eager to continue to thrive facing new climate conditions will make a series of adjustments in their lifestyle to thrive under the new conditions.

    I'm writing a new paper on this point related to the electricity consumption of hotels in hot versus cooler summer places. We posit that those hotels located in hot places (think of Phoenix) have made investments in durables such that they don't crank up their electricity consumption that much during hot days relative to colder places that are not ready for a similarly hot day.   Do you see the analogy between Parker and James in game #1? Maybe we will title the paper; "Hotel Electricity Consumption on Hot Days:  Parker vs. James".


    Thursday, June 05, 2014

    Greenhouse Gas Emissions and Becker's Household Production Theory

    Gary Becker did seminal research on household production theory.  In this blog post, I would like to talk about household production theory and its relevance for thinking about decarbonizing our economy.   Paul Krugman has a tough blog post about Roger Pielke Jr. today and my post will link back to some of Dr. Krugman's points.

    In Becker's basic setup, households gain utility from such producing such fundamental goods as "comfort", "quality children", "safety".    Households recognize that they face a finite time budget constraint and they have finite resources. Taking the market prices for commodities as given, they choose to allocate their time and their purchases of such market inputs as "furniture",  "energy", "private schools",  home structure, location, to maximize their utility.

    How does energy enter into the Becker consumer setup?   Depending on the outdoor temperature, the household will need heating and cooling services to be "comfortable".  The amount of energy consumed will depend on the durable goods the household owns and the size of the home and the number of hours that people are in the home each day.

    In the United States, many people have moved to the suburbs as they have sought larger homes, in better school districts, featuring less crime than in the center city.  The net effect of this suburbanization is to increase energy demand because suburbanites drive more and live in bigger homes.   Are you beginning to see the unintended consequences for household energy demand as a function of "quality" of lifestyle? The same points arise for commercial real estate as well.  

    This microfoundation explains why all else equal that energy consumption rises with income.   Today, there is a lot of talk about the identity that;

    World GHG emissions =  population * GHG emissions per $ of GNP per-capita  *  $ of GNP per-capita

    Paul Krugman correctly notes that the middle term of this equation would fall sharply if every nation adopted a carbon tax of roughly $30 per ton of CO2.  Such a tax would incentivize both demand side and innovation responses.   Such directed technological change would mean that we could "have it all" in that the world economy could grow and the risk of severe climate change would fall.

    The question Krugman can't answer returns to Becker's household production theory. For households who own fossil fuel cars and live in the suburbs and have "locked in" to an energy intensive lifestyle,  what will they lose in the short term and medium term by adopting a carbon tax?   There is a large suburban population who believe they should not have to pay for their past choices.   Holian and I document this in this paper.    To blunt this political opposition, moderate Democrats such as Mary Nichols of California's ARB are embracing a "go slow" ramp up of the carbon cap targets. The problem with this is that this relatively weak price signal will not induce innovation or behavioral change for a long time.  What happened to the "cold turkey" shock therapy approach that Jeff Sachs advocated in the 1980s in Eastern Europe?

    If this case was a Gary Becker problem set, he would ask us to solve an expenditure function problem to calculate the minimum amount of $ that a suburban household would have to be transferred such that its well being was no worse off in the presence of the carbon tax than in its absence.   Complicating this problem would be the Becker and Ehrlich self protection function that the student would need to calculate the marginal benefits of reducing the risk of climate change in the future relative to the current extra marginal cost of facing higher prices for producing safety, comfort and transportation services.  This would be  a hard homework!  The student would need to wrestle with issues of discounting, uncertainty, risk aversion, durables adjustment, global public goods and free riding (i.e if the U.S raises its carbon tax will any other nations follow?).

    Sunday, June 01, 2014

    What are the Risks of Relying on Natural Gas for Power Generation?

    Here are some data on time trends in natural gas prices.  Keep in mind that these are nominal units and the EIA doesn't bother to tell you which units!  Here is the graph starting in January 2002 and moving ahead one month at a time.


    From basic supply and demand,  if the world chooses to leave its coal in the ground and to substitute to natural gas for generating electricity and if world electricity demand sharply increases, then how high will natural gas prices rise?  What does the world supply curve for natural gas look like?      Here are some insights from MIT's energy researchers.

    Given the reliance by households on natural gas for cooking and heating,  could there be a significant increase in the expenditure by middle class households to provide basic household services?   The key counter-factual here is what the price of natural gas would have been had coal still been a permissible fuel to use for making electricity.  So, look at the figure above. Will it become much more volatile and upward sloping with the new rules that President Obama is now implementing?   As other nations also transition away from coal, what happens to the mean and standard deviation for operating expenses for urban households and firms as they seek heating and cooling services?