Wednesday, September 17, 2014

Ingenuity and Flood Protection

When people fear a flood they buy sand bags and create a type of "sand wall",  these entrepreneurs claim that they have created a substitute for such sand bags.  Will the HydroGuard be an effective product? Who will be the guinea pigs who try it? If the product is effective but unknown, how quickly will word spread that this is an adaptation friendly product? Will its creators become rich?  What will  be the market price of this product if it can be mass produced in a LDC and exported back to richer nations?   How much flood damage will be avoided because of their innovation? When young inventors in the future hear about this success story that supports the Julian Simon thesis, what products will they focus on designing?  This is free market adaptation.  What is the weak link in the argument?

Who Loses if Washington DC Faces More Flood Risk in 2050?

The NY Times acts as Paul Revere citing a report that Washington DC will face increased flood risk in 2050.   Who will bear the costs of such sea level rise? Will the American people be hurt if Congress is not in session?  Will the Congress all drown or will they move to higher ground?  You know my answer. Self interested people and property owners will have the right incentives to make investments in protecting themselves and their property so that none of the doom and gloom estimates reported actually materialize. This is adaptation.  If the building owners in Washington DC are unable to make these investments, they will sell their property at a discount to someone who has the financial capability to do so (comparative advantage).   If there are no market investments that can protect the at risk property then the asset's value will decline and the owner will not engage in upkeep and maintenance.  This means that the property will be obsolete and worthless when the sea rises. Yes, the land owner will lose asset value but other pieces of land near the Capitol on higher ground will rise in value. This is the general equilibrium effect that the NY Times refuses (or is unable) to understand.  For an economic analysis of these issues, read my NBER paper with Devin Bunten.  

Tuesday, September 16, 2014

How Will Old Ivy League Dorms Adapt to Climate Change?

In my recent public lectures on climate change adaptation, I have argued that we need a less durable building capital stock.  Today, Columbia University's student newspaper offers a funny example.  Such Ivy League schools as Harvard, Princeton and Columbia have 100 year old and older dorms that do not have central air conditioning.  Guess what?   It can be very hot when school is in session and the young people who are living in these rooms are very uncomfortable. The Columbia article goes on to sketch some adaptation strategies for how students are coping with the heat.   Multi-Billion dollar Ivy League schools could visit Phoenix to see some relatively low cost design approaches that include central AC.

 What slows down this adjustment of the capital stock is union contracts and fear of campus disruption. If Columbia knocked down an old dorm such as Lerner Hall, there would be a displacement of students in the short run and union work crews would mean that the job would take a fairly long time.  Ask yourself the following question, if a crew from China was brought in to do the work; how long would it take?  Don't crack jokes about quality of construction, that could be contracted on and monitored.

To return to my point at the top, if dorms only lasted for 15 years and then vanished --- Ivy League schools would use prefabricated materials and this would allow them to quickly remove the old dorm (like lego pieces) and assemble the new one.  Many of NYC's adaptation challenges are due to its old building stock.  Engineers could be very useful in sketching out what is the marginal cost of retrofitting or replacing "obsolete buildings" and what free market innovations would lower these costs so that future Columbia Students can keep studying and learning when it is 95 degrees outside. Singapore shows that this can be achieved but their campuses do not have 100 year old buildings.


California Sushi Price and Quality Dynamics and Adapting to Drought Through Regional Trade

There is a long article reported here  that California sushi prices could rise because of lasting drought.  The causal claim is that drought will reduce the supply of "sushi rice" that is traditionally grown in California.  But, at the end of the article there is the following quote highlighting how regional trade will solve this problem:

"While California rice may be in short supply, rice growers in other parts of the country are expecting a bumper crop. In fact, overall rice production in the U.S. is expected to increase by as much as 21 percent this year, according to the latest Department of Agriculture forecast.
Farmers in Arkansas, Louisiana and elsewhere in the South have historically grown long-grain rice, but these states have begun ramping up production of medium-grain in recent years.
However, sushi chefs are prejudiced in favor of the California variety, said Morris. Farmers there grow special varieties of Japonica rice that make the state the only source for Japanese importers, he said. It’s perceived as tasting better and having a better mouth feel.
There are certainly some export customers that may be willing to take Southern medium-grain rice in lieu of the California product, said Chuck Wilson, director of the University of Arkansas’ Rice Research and Extension Center, but he doubts sushi restaurants in the U.S. are ready to make the switch."

You don't have to be a great general equilibrium theorist to see that nature (and capitalism) abhors a vacuum. If California producers can't deliver then someone else will. When there is money on the table, somebody picks it up.  This simple point is always missing in the doom and gloom that is published every day.

Now I recognize that the California and the Arkansas variety of rice may not be perfect substitutes. The key issue is how close substitutes are they? In this article , it says "chefs are prejudiced in favor of California varieties"?  Why are they? Would more experience with the Arkansas rice erode this prejudice? Why is this prejudice a permanent fixed effect? Do preferences evolve over time?  

I predict that there will be little impact on equilibrium prices or quality and that people will learn a lesson in how spatially diversified trade in durable produce (rice) protects us from location specific shocks. Folks need to go back and review their Econ 101 notes!

Trade economists have long noted that trade in goods is the same as trade in water when the water is used to make goods. If California has less water, then it can import water intensive goods.  Ask David Ricardo.

Monday, September 15, 2014

A Podcast of My 9/9/14 Cal State Long Beach Univ. Lecture on "Climate Change and Cities"

Here is a MP3 file  of my recent Cal State Long Beach University Lecture (from 9/9/14) titled "How Will Los Angeles Adapt to Climate Change? An Economist's Perspective".  The podcast starts about 2 minutes into my talk and you will need to click Music Player for Google Drive to listen to it.   I think I make some good points and in the middle of the podcast, I fall off the stage and cause a tumolt as I shake off the pain and get back on stage and back to work.  For those who want to see my slides for this lecture, click here.

Sunday, September 14, 2014

Some Specifics about Urban Heat Wave Adaptation

LA's heatwave continues.  The climate modelers predict it will be over on Wednesday.   My family responded by staying inside today. My son didn't even bother to get dressed.  The Beverly Hills Farmers' Market featured more people shopping at 9am rather than waiting until it was hotter in the middle of the day.  How many people cancelled golf outings today? How many people avoided yard work or going jogging?  For people who work outside such as repair guys and construction workers, how many teams will take tomorrow off or work a 1/2 day?   In LA, what % of workers work outside?  I would guess that the answer is 1%.  It would interest me to interview my postman on how he adjusts to hot days.     LA homes do not have basements. In Boston, our Belmont basement stayed cool even on really nasty days.  

At school tomorrow, what % of students in LA study at a school that does not have central air conditioning?   UCLA (a public institution) cranked up the AC last week.  In gym classes tomorrow, will gym teachers insist on kids jogging around hot tracks or will they show common sense and stay in shaded areas and do some low impact aerobics?  

LA faces elevated fire risk.  There are national forests close to the city.  Given that we know this, how are workers at these forests using drones and surveillance to keep an eye on nascent fires? What technologies can they access to put out such fires before they spread?

Will Los Angeles be less productive this week because of the heat?  I don't think so.  There will be fewer outdoor social interactions but so what?  The outdoors in LA is about pleasure and entertainment. In fact, the heat outside may nudge people to work harder because they are displaced inside.  This is a testable hypothesis!

With the rise of Big Data, we will have better time diaries on how people spend their days. Merging these data to hourly climate data will provide a real time snap shot focused on how people re-optimize their time use when faced with expected heat or rain.

The doom and gloomers always implicitly assume that the shock is a surprise and that we have very limited set of options for protecting ourselves.   In fact, all of this logic is wrong. The weather forecasters can predict heat waves and disseminate this information.  We are free to choose concerning how we choose to use this information.

In the near future, cities may compete with respect to which are most "fun" on extremely hot days. In Singapore there is a whole indoor mall culture that in part thrives because it is inside.    Such competition will reduce the cost imposed by heat waves because people will have more adaptation strategies.  This evolutionary nature of capitalism is lost on a whole set of people who are highly pessimistic about the power of human ingenuity and unleashing self interest.

A key issue will arise concerning our annual well being if we spend hot nasty days inside and wait for temperate days to run around outside.


Saturday, September 13, 2014

Other People's Money and Coastal Defense

For the last five years I have argued that coastal areas all around the world should be required to pay for their own defense.  Given that $ does not grow on trees, why should one area of the nation insure another area of the nation?  If people want insurance, they can buy private insurance policies.   Generous public insurance creates perverse incentives such that people take on more risk.   The politicians who represent coastal places reject this logic because their power scales up as more assets (both people and buildings and firms) agglomerate within their boundaries.

Here is a self interested letter published in today's NY Times.

To the Editor:

Re “A Beach Project Built on Sand,” by Robert S. Young (Op-Ed, Aug. 22):

After Hurricane Sandy, the Army Corps of Engineers delineated the devastation on Long Island, saying “the dune and berm system along Fire Island is now depleted,” increasing “the potential for storm damage to shore and particularly back bay communities.”

As our first line of defense, it is important to bolster Fire Island, which hosts more than four million visitors a year and is home to New York’s only federally designated wilderness, with 17 communities of 4,500 houses nestled along its perimeter.

Mr. Young is among those who advocate abandoning the coast and allowing nature to take its course. Coastal engineers disagree with that approach.

Dr. Lawrence Swanson, a marine scientist at Stony Brook University, has said: The corps’ work “could significantly reduce the impact of waves and wave run-up on the mainland of Long Island. It will aid in providing an environment for marsh to survive, reducing velocities of storm-generated currents and thus lessening the impact of a storm.”

Mr. Young did not mention the acres that we designated as piping plover habitat and the 40 houses we are removing to put in place a 14-foot dune and an 8.5-foot berm that stretches 16 miles, exclusive of the far-reaching wilderness area.

Nature must be respected, but we cannot ignore our obligation to defend the homes of hundreds of thousands of residents and tens of billions of dollars in property. And for Suffolk County, that defense begins at our barrier beaches.

STEVE BELLONE
Suffolk County Executive
Hauppauge, N.Y., Sept. 10, 2014


Read the last paragraph of the letter.  Who is the "we" here? Is it the people of Suffolk County? The people of New York State? Or the people of the USA?    Where in the Constitution does it say that I must pay for your coastal house?    If you want to take a gamble, either cross your fingers or buy a private insurance policy. If private insurers will not insure your investment, then that has some information embodied in it!  Such profit maximizers must anticipate risk that the home owner does not want to admit to.

As I said in Climatopolis, the day after the Super Bowl there are many losing bettors who want to change their bet.  Las Vegas does not permit this.


Friday, September 12, 2014

What Should Campus Environmentalists Do All Day Long?

Many college campuses feature large number of environmentally conscious students.   What should these optimistic young people focus their efforts on?  One active branch of activism is nudging their campus leaders to divest from carbon intensive companies.  Here is the discussion at Yale.   I side with Harvard's Drew Faust.  I make my students read her statement on why Harvard isn't divesting.  Here is an alternative agenda for young greens:

1.  prepare to enter the business world --- the decarbonization of the world economy will occur through entrepreneurship, and the marketing of new products.   For example, the Tesla (when it becomes middle-upper class more affordable car) would help to sharply lower suburban carbon emissions.  Such students should take micro and intermediate micro to understand how capitalism works and how it can be directed to tackle environmental challenges.

2. Focus on classes related to applied statistics and econometrics --- the future will be quantifiable benchmarks using big data provided by smart phones and other real time information collection devices.  In a diverse world, how do you take the pulse of what is happening?   Big Data will reveal this (for example consider crime maps of a city at multiple points in time) --- this is just a taste of our increased ability to monitor quality of life dynamics.

3.  Focus on how how to use social incentives on campus to nudge the local campus sustainability agenda.  For example, reducing garbage clutter on campus, enhancing energy efficiency and reducing smoking on campus.

4. Learn how to calmly discuss controversial issues with people who do not agree with you.  Many of the challenges that we face related to climate change are because Republicans are not engaging on this issue.  This does not mean that Republicans are "bad people".  Much of the blame here falls on liberals who have recast the climate change challenge as one between altruistic people and "bad people".  This isn't Star Wars.

5.  Intern with a real world company to see the incentives and the mindset of what goes on day to day in a real firm.

6.  Work as a research assistant for a professor who is conducting environmentally related research.  Activism is fun and satisfying but it doesn't foster skill formation.




Thursday, September 11, 2014

Adapting to Heat Waves: The Case of Los Angeles this Weekend

The LA Times is reporting that it will be over 100 F degrees this weekend in LA.   How much will we suffer from this shock?  My optimistic prediction is that very few (and perhaps nobody) will suffer fatal heat stroke.  We have been alerted to the event people will plan out their weekend to spend more time indoors, hydrate and over exert themselves.   A more interesting economic question is what is the loss in consumer surplus from having to rearrange one's day? Are indoor leisure and outdoor leisure perfect substitutes?  There will be plenty of college and NFL football games to watch and many LA people will enjoy watching them in their air conditioned surroundings.  Wealthy LA provides cooling centers for poorer residents.  Here is a list of them.   If a sociologist visited such centers this weekend, will the people there be miserable?  Or, does the air conditioning work at these centers allowing the visitors to have a good day?  This is the small ball of climate change adaptation. We use our forecasting technology to anticipate upcoming shocks and we take proactive actions to adapt.   The net effect is a relative small cost of such shocks.   Urbanites can adapt to the new normal.

Tuesday, September 09, 2014

Casey Mulligan on the Unintended Consequences of the New Health Care Law

In today's WSJ,  Prof. Mulligan makes a series of predictions about the medium term consequences of Obama Care.   This piece gives an overview of his new book Side Effects.  The book uses basic ideas from price theory to predict that this well meaning legislation will have ugly unintended consequences for millions of Americans.  Why?  Employers will reconfigure the attributes bundled into jobs and the theory of compensating differentials predicts that equilibrium wages and hours worked will be affected.  This type of prospective general equilibrium analysis is quite useful and shows what economists are supposed to be doing.  He will face many critics.  These critics should focus on which behavioral responses is Casey over-stating?  

Here is the review I wrote on Amazon of Casey's e-book;

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The University of Chicago's Professor Casey Mulligan has published a new $3 e-book titled "Side Effects". He provides an in depth examination of the future of health care in the United States. Building on some of the ideas discussed in his WSJ profile, the book provides a nitty gritty analysis of the unintended consequences of the new health care law. It offers a number of predictions about the medium term future that can be compared to data to see if his theory is correct. At its core, this book focuses on incentives both of workers in terms of hours worked and on the demand side focusing on the incentives of firms to bundle how many hours into how many jobs. Intuitively, under the new law, will firms seek to hire many part time workers or fewer full time workers?

I am not a health care expert but as I read Mulligan's book, I was reminded that there are many behavioral elasticities that health economists designing the law are assuming equal zero. Mulligan questions this optimistic (and lazy) assumption. Put simply, if the NFL adopted Canadian Football rules, more teams would punt on 3rd down! As I understand Casey's argument, many Obama health economists are implicitly ignoring the Lucas Critique.

A critic might say that this is a "fancy" way to defend denying health care to poor people. That would be a "low blow". Instead, Professor Mulligan is demonstrating how a "public intellectual" who is a Ph.D. economist goes about using his skills to hone the public dialogue. We economists believe that incentives matter. Mulligan is investigating what are the incentive effects embedded in President Obama's new health care law. From an intermediate micro economics perspective, he is studying how the new law leads to kinked budget constraints and induces optimizing households and firms to move to corners and kinks. Such individually rational choices have social consequences. At a time when our economy features "secular stagnation", we need to be smarter about what tradeoffs we are making in the name of achieving a worthy goal such as an expansion of health care for the poor.

Today, economists are really interested in salient effects. Raj Chetty has written several papers on tax salience. To understand what is "salient", let me define the converse. If you pay for your electricity bill using automatic credit card billing then this isn't salient. You never see the bill and "out of sight is out of mind". Without being confronted with such price information , you are less likely to invest in energy efficiency. Mulligan is arguing that there are several new taxes embedded in the new Obama Health care law that are not salient. This may be intentional by the White House to reduce political opposition but to economists it is crucial that we foresee the full price tag and potentially distorting effects of a major piece of new legislation. At a time when our economy isn't creating many "good jobs", could this law further slow this process? Shouldn't economists be studying this?

One feature that I really like in Mulligan's book is taking the theory of compensating differentials seriously. Adam Smith would respect this and my mentor Sherwin Rosen would also salute this. If jobs offer greater benefits then workers will accept a lower wage. If firms must pay out greater benefits then they will only hire workers at a lower wage.

Monday, September 08, 2014

My "Future of Los Angeles" Talk at CSULB Tomorrow

Tomorrow, I will give a lecture at Cal State Long Beach focused on the future of quality of life in Los Angeles which will touch on how cities all over the world will adapt to the challenges posed by climate change. My slides are posted here.

UPDATE: The Podcast is now posted on my blog on the 9/15/2014 entry.

Sunday, September 07, 2014

Think Tanks for Sale?

The NY Times has published a long data informed piece "naming names" and claiming that Washington's leading Think Tanks are taking too much international money and that a consequence of this is a type of self-censorship such that these Think Tanks supply slanted research that says nice things about the sponsors.  The Think Tanks defend themselves saying that their researchers have independence.   Can you bite the hand that feeds you?

Economists have studied media slant starting with Groseclose and Milyo.   Part of the Gentzkow and Shapiro research agenda further studies this issue.   International influence on think tanks can be modeled as introducing a second dimension of differentiation.  Think tanks are already ranked on the political left/right spectrum but now can also be ranked on whether their donations mainly come from OPEC oil money or from Asia or from Europe.   Reporters will be aware of this as they shop around for whom to interview as they look for quotes for a new story.

Think about what Washington DC Think Tanks do.  They issue reports and they hold conferences and they hope to be quoted in the media and to be invited to testify to Congress and to be consulted in private by Congressional and White House aides as policies are being drafted.

In essence, these think tanks are public consulting firms and thus are middle men standing in between clients and policy makers.   In this sense,  there isn't really a big difference between Brookings and McKinsey?

The main difference between a Brookings and a private consulting firm such as McKinsey is that the Brookings researchers seek to publish in cutting edge peer reviewed journals.    Many of these individuals were junior faculty in leading US universities.  So, a Brookings wants the best of both worlds --- it wants to convey that it is a thought leader but also that its staff are power players in Washington DC.   Universities such as UCLA actually hope that their social science faculty play a similar role in the local policy arena.  There is some risk here of crossing the line and entering the world of advocacy.

The Times raises the issue of self censoring and this is an important "what if".   All public intellectuals face this issue and I'm not convinced that university academics do not also face this pressure.

The NY Times appears to endorse a "Bloomberg World" where institutions with influence have acquired a large enough endowment that they are not beholden to any interest group.   Alternatively, the NY Times may naively believe that government should fund all think tanks.  This is China's model and this monopoly is not a long run answer.    If the NY  Times is merely asking for more annual transparency from these Think Tanks in terms of the sources of their funding, then this is good gossip and is fine with me.   There is a certain cynicism implicit in this article that the truth is suppressed.  In this Internet Age, a Watergate style cover-up of ideas is quite difficult.  The truth will be tweeted about!




Saturday, September 06, 2014

Google Fiber Offers a Test of Say's Law

Does supply create demand?  Google has introduced ultra fast download capability to the people of Kansas City. Will this transform this city into the next San Francisco?   The NY Times hints at an interesting scale issue.  Computer programmers are not building Apps that use such fast download capability because few people have access to this technology.    Will Chess Champions move to this city to play really good chess computers who can now analyze even more positions per second?  Will flash stock traders move there to place their buy orders even faster?  Or will teenagers who want to quickly look at hacked phone photos move in droves to this area?    Aggregate demand for Google Fiber will be the sum of some interesting idiosyncratic demanders.

Friday, September 05, 2014

Updated Again

In preparation for the new school year, I have updated my $1 Amazon book titled Fundamentals of Environmental and Urban Economics.   This book can be used by undergraduates, Masters students and even as a quick read for Ph.D. Econ students.  I have packed the book with enough micro economics, statistical hypothesis testing and ideas focused on the big ideas in environmental and urban economics that I think that a lot of people can gain from reading this cheap book.

Michael Katz and Thinking on the Causes of Poverty

The NY Times published an obituary today of Prof. Michael Katz of UPenn.  The Times celebrates his work on the causes of poverty.  It appears that the Times likes his overarching thesis that larger social forces (not individual choices) are responsible for causing poverty.   Here is his Google Scholar page.  I'd like to offer some thoughts about what recent empirical work in economics has to say about Prof. Katz's main thesis.

Here is a direct quote from the obituary:

"Throughout American history, Professor Katz wrote, there was a fundamental tension between the micro and macro views of poverty. In the micro view, individuals were the authors of their lives and impoverishment proof of their moral failing. In the macro analysis, large historic forces and economic trends — war and peace, the shifting interests of capital — favored some people and disadvantaged others.  Professor Katz saw the predominant thinking in the Reagan and Clinton administrations as updated versions of the micro view. "

Permit me to present a slightly more nuanced view that both micro and macro forces play a role in determining that a person grows up poor and that the two factors interact.  Let's adopt a linear probability model;

Probability that Matt lives in poverty =   a + b1*micro factors + b2*macro factors +  b3*micro factors*macro factors  +  U

a = constant

micro factors =  a vector of attributes such as my own educational attainment, my non-cognitive skills, the values I received from my parents, my peer group.

macro factors = a vector of state and national attributes such as;  how generous is redistribution to the poor,  did my school have good funding?,  was the macro economy growing when I finished school.

U =  unobserved determinants of poverty that the researcher has not collected data on.

A statistical study recovers estimates of "b1" and "b2" and "b3".  These slope parameters represent the marginal impact on poverty of a small change in the micro and macro factors respectively.

If I understand the obituary correctly;  Katz's claim is that b3=0 and that macro factors are more important than micro factors.  An economist would posit that all three sets of these variables matter but we need to use econometric models to test for their relative importance. No qualitative history analysis can answer the empirical question of what is the relative importance of micro and macro factors in determining a person's probability of living in poverty in a given nation in a given year.

My read of Jim Heckman's work is that the family is central to helping children start off well and live up to their full potential.  In a household with two parents living there, where children are read to and intellectually nourished and the TV is turned off, such kids have a much lower probability of being poor as adults.  Yes, a booming economy would create jobs for kids who score low on cognitive and non-cognitive scales but even in a boom; even with a generous welfare state; these kids are likely to still be poor.    This suggests that "b3" is the key parameter in the equation presented above.

Economists are studying the consequences of being a young adult and looking for work during a recession.  See Lisa Kahn's work and Paul Oyer's work.  

A human capital theorist would posit that young people make investments in anticipation of the macro economy that they will work in. The choice of total educational attainment, industry and occupation is a function of wages and opportunities one could earn.  In this sense micro choices are linked to "macro" conditions.

As China and India show, the best way to reduce poverty is to foster long run economic growth.   How household investments in children evolve as the national average income rises is an open question.   A Keynesian would interpret this discussion to suggest that we reduce poverty through a massive job creation program because this would send a credible signal to high school students that they will receive a job if they finish high school as they will work for the government.

Non-Keynesian would say that this public sector expansion will require higher future taxes and that the distortionary effects of such taxes will lower long run growth.


Thursday, September 04, 2014

Winner's Curse and The Nevada Payoff of Attracting the Tesla Factory

I have read that Tesla's new battery factory will open in the Greater Reno Nevada area.   As discussed by Tim Bartik more than 20 years ago, when a new factory opens up jobs (in this case 6000) are created. Most of the jobs go to people who move in to the area rather than to the local unemployed or to those out of the labor force.    Now the work by Greenstone, Moretti and Hornbeck would counter that there is a local multiplier effect such that the new firm creates increased demand for intermediate input suppliers and this further stimulates the economy. In the case of Tesla is this correct?  Tesla produces a very special product.  Will the Reno Economy (centered on gambling?) have an edge in producing specialized equipment to ship to the Tesla plant or will the Tesla plant be vertically integrated such that there is no multiplier effect from attracting this plant? I bet the answer is the second one.

Also don't forget Winner's Curse. When different bidders have diverse beliefs about the true value of an object. The most optimistic bidder wins the bidding but overpays as the average belief is a better measure of the true value of the object being bid on (in this case the Tesla plant).    Nevada is likely to regret this investment.  For me to reject this claim, I'd have to be convinced about some type of domino effect that by attracting Tesla that this will have a causal effect on raising the probability of attracting other green firms to locate there. I'm having trouble seeing how this chain of events will unfold.


Dust Bowl Economics and Climate Change Adaptation

Joe Romm reminds us that drought affects places.   He does not mention that allowing water prices to rise is a straightforward adaptation strategy.  What happens to people who live in places that experience "dust bowl" conditions?   Rick Hornbeck's 2012 AER paper shows that many people moved away from the Dust Bowl affected counties.

This raises two deep economic issues.  How costly is it to migrate away from one's origin area as you leave your friends and your familiar circumstances?  Second, what opportunities are created for you when you do move?    Consider an extreme example of a lazy genius who would discover a cure for cancer if he got up from his sofa.  The Dust Bowl evicts such a guy from the sofa and he goes on and does great things.  Consider the universe of people who lived in Dust Bowl affected counties, the interesting thought experiment is to study their earnings dynamics as some of them move.  How much did they suffer (or gain) in terms of lifetime PDV of earnings because they did move?    Writers such  Romm and Hornbeck focus on physical places such as affected counties.  From a welfare perspective, we care about the people and migration breaks the link between the two.    The key economic concept here is willingness to pay; how much would the people of the Dust Bowl have been willing to pay for the Dust Bowl not to have occurred?   The ability to migrate reduces this willingness to pay.

But, returning to natural resources again.  Water pricing will be the mechanism through which we get supply and demand back in balance again and trigger directed R&D for augmenting our water supplies. The Dust Bowl people of 1930 didn't have the science knowledge that we do. Human Ingenuity guarantees that the past does not repeat itself.

Tuesday, September 02, 2014

Adapting to Drought: The Case of Painting Brown Lawns Green

The NY Times has published a good case study of how Los Angeles home owners are adapting to climate change and drought conditions.  With water use restrictions (rather than water pricing), some lawns are turning brown. We don't have a lawn because we pulled out the grass and planted low water plants.  For those who insist on continuing to have lawns, this article highlights that capitalism offers a solution. You can pain your lawn green!

Consider the following quote:  this is a microcosm of how we will adapt to climate change.

"There are few people who see an upside to the record-setting drought in California, but Drew McClellan sees a path to business. Earlier this summer, when a friend began complaining about his browning front lawn, Mr. McClellan thought back to his childhood in Florida, where he often spotted golf courses using sprays to dye their greens. When a brief Internet search failed to show any local business offering a similar service, Mr. McClellan decided it was a prime opportunity."

Anticipated crisis ===> $ opportunity === > solution.   What will that solution be?  I can't say but in a world with 7 billion people looking for such solutions the best ideas will be quite good.  Julian Simon would smile.

Monday, September 01, 2014

Repairing LA's Aging Infrastructure is Inhibited by the Generous Public Sector Wage Premium

LA boomed in the 1950s and 1960s and much of this infrastructure is now old and depreciating. Durable capital depreciates over time.  Walk around my Little Holmby neighborhood in Westwood and you will see some ugly 1950s homes whose current owners are investing in upgrading.  These are private homes and the owner has the right incentives to invest efficiently. In the case of the public capital stock, will it be upgraded efficiently?  The NY Times reports a long piece about the challenges of upgrading this city's infrastructure.  As I read the piece, I could find no mention of high LA public sector wages.  While this is good news for those who have these jobs, these wages paid by LADWP means that for every $1000 it spends on repairing infrastructure that the physical quantity of new and improved infrastructure is low because the wages and benefits it pays are so high.  I would guess that if these jobs could be filled through competitive markets that the cost would fall by 60% to 75%.  Demand curves slow down. Labor is the major cost in improving infrastructure. If labor could be purchased at a 75% lower price, there would be much greater demand for improving LA's infrastructure.  The NY Times again drops the ball as it refuses to engage in discussing the real econ 101 issues at the heart of many issues it investigates.

I'm now co-writing a new paper on the causes and consequences of urban public sector wages and will blog about this issue in the future.  

Heterogeneous Treatment Effects? The Case of Deprogramming British Radicals

If I'm reading this correctly,  the British Prime Minister will require that British citizens who have spent considerable time in Iraq and Afghanistan will have to attend "deprogramming" classes if they return to England.  The enormous economics literature on "treatment effects" has some insights to offer.

I have several questions;

1.  Do the treated subjects have any incentive to take the treatment seriously? Will they just sit there and meditate and ignore the talk and videos?

2.  What is the treatment's substance?  How do you deprogram a person?  How many hours of training are completed?  How will the subjects be evaluated to judge whether in the short run that they have been deprogrammed? Will it be a signalling equilibrium such as shaving a beard and wearing Western clothes?    Will MRI brain scans be used to monitor how the lobes of their brains light up to different stimulus such as a photo of ISIS vs. Hilary Clinton?  Such brain scans would be more expensive than simply surveying these individuals and would be less likely to yield "cheap talk".

3.  Given that people differ, what % of those assigned to treatment are at risk to be "deprogrammed"?  Who is at the margin?

4. Is there a risk of backlash so that by taking the treatment, a subset of those treated become more radical because they hate the idea of "Big Brother" mind control?

5.  Once these individuals are released back into their British communities, will their family report to the government how their day to day progress is going?  Will there be the equivalent of a parole officer?  How will he/she judge progress and worrying signs?

UPDATE:  My wife thinks that the British government may intend to use this program to profile this group to find out who are the risky ones among the bunch. It would interest me if the British government is shrewd enough to be able to achieve this partition of the entire sent into "risky guys" and "low risk" guys.



Sunday, August 31, 2014

International Port Competition and Urban Growth

I spent a lot of time in Singapore in the Summer of 2012 and 2013.  I was amazed at the amount of land that Singapore (a small city/state) devotes to its port.  Such land could be used for other purposes that might yield more long term economic growth?  Few wanted to have this discussion with me. The port was viewed as vital to Singapore's long term growth.  But, Singapore faces competition from several local ports.  I don't believe that a good urban economics paper has been written on ports and international trade and its impact on city growth.

With this in mind (and as a LA home owner), I read that the widening of the Panama Canal may impact U.S Western Port cities (think of Oakland and Long Beach and Los Angeles).  If you want to ship stuff from Asia to the U.S Northeast, is it cheaper to go through Panama or to load up trains and trucks in Los Angeles? If the answer is the former,then how big of a problem does my metro area of LA have? Who will lose? What is the multiplier effect? In 2014, how important is the LA port to LA's growth? Has it produced union jobs or a large number of middle class jobs?

To solve for the cheapest shipping option for a given tonnage of goods from Asia to the New York area must be a standard operations research problem?   You face a choice of renting a cargo ship to go all the way from Asia through the Panama Canal or renting a cargo ship to go to LA and unload onto trucks and trains there to ship to the final destination.  Are there economies of scale here?

Here is an example of an OR article discussing this but it is gated.

Saturday, August 30, 2014

Why Are There Few LA to Boston Flights? Airplane Routes Signal City Co-Agglomeration

The annual economics meetings will take place in January 2015 in Boston.  Today I booked tickets for my wife and myself from LA to Boston.  There are very few direct flights (especially non red-eye) flights connecting these cities.   In contrast, United has plenty of direct flights from San Francisco to Boston (I see seven on January 2nd).  Doesn't this suggest that there is more trade between San Fran and Boston than between LA and Boston?  Why would that be?

A city is a bundle of industries and tourist attractions.  San Fran is the high tech mecca and so is Boston.  Los Angeles is trying to do high tech but is off to a slow start and LA's high tech seeks to complement the entertainment industry.  The programming and science skills of the nerds at MIT and Harvard may not be a good match with the sleek beauty of the LA set.  So, I'm not surprised that there are so few flights between LA and Boston.  Expected demand may affect the willingness to supply flights!

I have tried to use Google Scholar and I can't find serious papers using city to city airplane visits as a measure of "closeness" of industries.     Almost 20 years ago, Ed Glaeser's Harvard student
Takuo Imagawa studied a slightly related issue.  Google Scholar is not helping me to track down his thesis.



  

The John Quigley Special Issue of RSUE

Back in October 2012, the Lincoln Institute hosted a great conference celebrating the work of UC Berkeley's John Quigley.    After a long and thorough review process,  RSUE (one of the leading urban and regional economics journals) has published a special issue based on revisions of the conference papers.  All of the papers are available here.   Ed Glaeser wrote a powerful history of John Quigley's Economic thought.   For any student interested in urban, I highly recommend that they read Ed's paper.

I published two papers in this special issue.

1. Nils Kok and I investigate the "green building" price premium using a large California data set.   Controlling for zip code/street/time fixed effects, we find that Energy Star certified homes sell for about 5% more than observationally identical homes that do not have this certification.

2.  Siqi Zheng, Weizeng Sun, Danglun Luo and I have created a panel data set by city/year in China to investigate the correlates of what raises the probability that a mayor is promoted.  We document that local economic growth raises promotion chances. Controlling for several factors, we document that mayors are more likely to be promoted if their city is experiencing reductions in air pollution.  This result suggests that Chinese mayors now have a greater incentive to address local environmental challenges. We expect that this paper will be well cited in an emerging literature on the political economy of local mayor's incentives to invest in "green cities".

Elite Slots

When is supply elastic?  What technologies feature roughly constant returns to scale?  At a top restaurant in NYC, the lead  Chef faces a scope and control issue. If the restaurant tried to sharply scale up its number of seats, the Chef wouldn't be able to maintain the quality of the meals.  Contrast this case with housing near a beautiful coast.  In most such areas, the area is zoned for single family homes.  If the area was upzoned and thus allowed multi-family housing, single family homes (even those worth $20 million) would be bought and knocked down and a 50 unit building would be built with each condo selling for $1.5 million.  This change in the rules would increase access and the total value of the land.    The supply of housing near the coast would become more elastic. Yes, I understand that I'm equating a single family home with a condo as a "house" but if a $20 million dollar home can be "turned" into $75 million dollars worth of new condos then value has been created in allowing such transactions to occur.   The real estate law in this case is causing the paucity of elite slots.

Scholars such as Robert Frank routinely talk about the zero sum game for status goods but this pessimism hinges on non-tested assumptions about an inelastic supply curve.   Elite "product" producers such as Yale are  trying to increase their number of students through building new colleges. China is trying to create its own great universities.  I recognize that in a market where reputation matters it can take a long time to convince the public that the new "Kahn University" is a great school and merits comparison with old type great Ivy league schools.  

As I have blogged before the rise of the MOOCS can be thought of as creating a more elastic supply of elite slots.  If society has a shortage of a valued resource then somebody will figure out how to increase its supply.

This is a long winded intro for talking about my teacher Lester Telser's 2013 short paper available here.   He investigates why the cost of running elite non-profit universities is rising over time and links this back to Ricardian rents and rising demand.

For our existing great private universities, they would have trouble scaling up in size.  Most are in urban areas.  NYU has faced stiff internal resistance in its attempts to build up vertical to increase its physical space.   Columbia has had to pay a lot of money for marginal land in its attempt to build a new campus.  Land is expensive near these universities because these universities are there!

For rural campuses (and I can't think of that many major private research universities not in big cities --- in part because of their hospital service and biomedical research), land is cheaper but in this age of power couples could they attract the same quality faculty?

So, from basic supply and demand --- if the 1% want something will its price be high?  This hinges on the shape of the supply curve.    Even the NY Times appreciates this point.  Read today's main editorial.  




Friday, August 29, 2014

Casey Mulligan's New Book "Side Effects" is Published

The University of Chicago's Professor Casey Mulligan has published a new $3 e-book titled "Side Effects".  He provides an in depth examination of the future of health care in the United States.    Building on some of the ideas discussed in his WSJ profile,  the book provides a nitty gritty analysis of the unintended consequences of the new health care law.  It offers a number of predictions about the medium term future that can be compared to data to see if his theory is correct.   At its core, this book focuses on incentives both of workers in terms of hours worked and on the demand side focusing on the incentives of firms to bundle how many hours into how many jobs. Intuitively, under the new law,  will firms seek to hire many part time workers or fewer full time workers?

I am not a health care expert but as I read Mulligan's book, I was reminded that there are many behavioral elasticities that health economists designing the law are assuming equal zero.  Mulligan questions this optimistic (and lazy) assumption.  Put simply, if the NFL adopted Canadian Football rules, more teams would punt on 3rd down!    As I understand Casey's argument, many Obama health economists are implicitly ignoring the Lucas Critique.

A critic might say that this is a "fancy" way to defend denying health care to poor people.  That would be a "low blow".   Instead,  Professor Mulligan is demonstrating how a "public intellectual" who is a Ph.D. economist goes about using his skills to hone the public dialogue.  We economists believe that incentives matter.  Mulligan is investigating what are the incentive effects embedded in President Obama's new health care law.  From an intermediate micro economics perspective, he is studying how the new law leads to kinked budget constraints and induces optimizing households and firms to move to corners and kinks.  Such individually rational choices have social consequences.  At a time when our economy features "secular stagnation", we need to be smarter about what tradeoffs we are making in the name of achieving a worthy goal such as an expansion of health care for the poor.

Today, economists are really interested in salient effects.  Raj Chetty has written several papers on tax salience.   To understand what is "salient", let me define the converse.  If you pay for your electricity bill using automatic credit card billing then this isn't salient. You never see the bill and "out of sight is out of mind".  Without being confronted with such price information , you are less likely to invest in energy efficiency.  Mulligan is arguing that there are several new taxes embedded in the new Obama Health care law that are not salient. This may be intentional by the White House to reduce political opposition but to economists it is crucial that we foresee the full price tag and potentially distorting effects of a major piece of new legislation.  At a time when our economy isn't creating many "good jobs", could this law further slow this process?  Shouldn't economists be studying this?

One feature that I really like in Mulligan's book is taking the theory of compensating differentials seriously.  Adam Smith would respect this and my mentor Sherwin Rosen would also salute this.   If jobs offer greater benefits then workers will accept a lower wage.  If firms must pay out greater benefits then they will only hire workers at a lower wage.


The Future of the Coast

Anthony Flint appreciates the beauty of the Rhode Island coast but worries about its future.  With sea level rise, there certainly will be specific parcels of land and structures there that will vanish.  The owners of such parcels will lose.  Anticipating this, the structures will be allowed to depreciate and they won't have any valuable possessions (or people) in them when they submerge. This is an example of how expectations reduce the cost of climate change.  

As land is lost, other land becomes more valuable.  Other "higher ground" pieces of coastal real estate will go up in value.  Changes in zoning laws would allow more people to live there.  So, instead of having a single family house on a bluff with a view of the ocean there could be a 20 story building (see Ocean Avenue in Santa Monica).   Look at this building. Do you see its stilts. It overlooks the Pacific Ocean.  



This simple example highlights how adaptation takes place. Note that the free market guides this process.  No President or Governor guides this set of events.  

Thursday, August 28, 2014

What Can Humanities Professors Teach Us About Drought and Climate Change Adaptation?

The NY Times doesn't offer much of its space to economists not named Krugman.  Yes, I read the Business Section on Sunday but those pieces are short and often lack punch.  Today, the NY Times allocates some web space to humanities professors to see what they have to say about drought and adapting to climate change.  Comparative advantage?   While I couldn't understand 90% of the piece, I did like how it ends.  

Here is a direct quote that refers to Steve Slovic who is an English Professor at the University of Idaho (I don't know him):
"Mr. Slovic sees, if not action, then at least rising concern. “Climate cycles are not absolutely fixed and predictable,” he said, “and that may be the great lesson of the era that we’re living through right now. Whether we believe in human-caused planet-wide changes or whether we believe that these are natural cycles, I think all of us in the early 21st century have this sense of a kind of basic uncertainty about how conditions are changing.” 
He’s noticed a growing desire to find ways to adapt to these changes: “The more nimble we can be, the more lightly we can live on the planet, I think the more able we will be to adjust to various shifts that we see occurring every day right now and that are likely to continue to occur in the future, and I see this reflected in the literature.” 
We don’t yet know how to make it rain. But increasingly, we may be talking about what to do when the rain doesn’t come."

In the face of drought, water price will rise and the basic laws of economics will be tested and confirmed as significant supply and demand side responses take place. In the medium term, induced innovation will take place as R&D is directed to augment our water supply. Engineers will quickly make breakthroughs in a range of technologies from desalinization to others that I can't even imagine. Don't bet against human ingenuity.  But to trigger this directed search for solutions requires a price incentives --- so politicians need to allow water prices to rise to reflect the fundamental scarcity.

 

Will Cheaper Drones "Solve" the Principal/Agent Problem?

While Eric Snowden and friends worry about the costs of spying, new monitoring technologies also offer benefits.   This piece  discusses how drones are being introduced to patrol over nature parks to see if poachers are actively invading parts of a park.   Such information should help environmentalists to focus their enforcement efforts.  The big point here is that cheaper monitoring technology reduces the private information that agents have.  Such agents become aware that their actions are being monitored and this should reduce shirking and other forms of bad behavior.  This new information access should also affect contract design.

Years ago, Tom Hubbard wrote a QJE paper focused on how the trucking industry's contract design was affected by onboard truck GPS systems that relay to headquarters where the truck is at each point in time. Before such technology, these truckers had private information about their activity (had they gone to Vegas to gamble and go dancing) or were they actually driving their assigned route?  In such a case, the headquarters had to provide some incentive compatible bonus for actually delivering the goods on time.  With the new GPS system on board, the headquarters could just pay an hourly wage because the asymmetric information problem had vanished.

Other examples?  On midterms, teachers worry about cheating and must keep our eyes on the crowded classroom. If we could fly a drone, there would be even less cheating taking place.

For activities that take place out in the open with a spatial component, drones appear to have an edge in monitoring. I agree that if a bunch of guys are colluding by email that a drone won't spot this but if a group of workers in a field are goofing off then the drone will record this and when output is found to be low for that sector; the workers can't claim that there was "bad luck" as the cause for the low output because their lack of effort has been documented.

Will economists start to write papers about the benefits of "Big Brother"?   What are workers' rights to privacy?

Wednesday, August 27, 2014

Carpinteria, California

From time to time, I live in Carpinteria, California.  Located close to Santa Barbara and UCSB, this beach town is a special place offering a combination of ocean access, hiking, scenic views, temperate weather and a small town sensibility (and two Starbucks).   An 80 minute drive from Westwood, this town is great for relaxing and exercising.   When in LA,  I rarely travel to the Venice Beach or the Santa Monica Beach.  While in Carpinteria, I go to the beach every day.  I have even gone jogging for three straight days.  In LA that's unlike to be the case.   When I was a kid, we would vacation on Fire Island along the Atlantic Ocean.  With the bright sunshine and blue skies, the Pacific Ocean just looks better than the Atlantic.

USC Invests in the Social Sciences

UCLA is heavily investing in building a hotel/conference center, dorms, a music building, an engineering building, and many new medical campus buildings.   At the same time, the faculty's size is shrinking and the faculty are aging (see pages 15 and 16).   Over at USC,  I read that this school has just finished building an interdisciplinary social science building that will be home to many of its rising research centers.    How do universities prioritize capital projects?  Which projects improve research on campus versus which improve student quality of life? What is the right balance between the two?  Can economists be useful in helping to decide this?

At a time when UCLA is ranked higher than USC in football, is USC closing the nerd gap?  Which matters more in the formula for being a great university?