Thursday, February 26, 2015

Some Recent Comments on the NY Times Webpage

For those professors starting to write economics final exams, I suggest that you post the following two comments that were posted on the NY Times webpage.  Ask your students for an evaluation of the logic behind each of them.  Each quote highlights that economists have  failed in our educational mission to foster a society of workers/consumers/voters who understand and appreciate how free markets operate.  Economists of the world, we have more work to do!


Brattleboro Vermont 25 minutes ago

There has been a commodification of many necessities: phones, internet, healthcare, housing, healthy food, education; as well as a weakening of regulations that would keep our air and water clean; our food safe; and of course with climate change there is no meaningful regulation that can help us feel secure about our future. These facts are creating stress at so many levels: financial; philosophical; existential. Jobs are just part of it.


30 minutes ago


The symbol of 'free-trade' neoliberalism based on foolish Milton Friedman's cruel & selfish economic policies.

Universities have churned out MBAs brainwashed in so-called 'free trade' ideology.

It follows that USA politicians, Republican & Democrats bailed out the banks, and left millions of homes foreclosed.

We expected better from President Obama but we didn't get it.

Different Cities Adjust to Inflows of Chinese Tourists and Doctors Bowling with Ebola Symptoms

In the year 2015, our cities are increasingly safe, clean and green.  Yet, the NY Times points out  new challenges that cities around the world now face.    Example #1 is Jeju, South Korea.  This article sketches the recent trend that large numbers of wealthy Chinese tourists are visiting this island.   This is a tale of "too much growth".

"The Japanese imperial era is long over, but Mr. Shin and many residents of this subtropical resort island say they are now worried about what some call a new foreign “invasion” — waves of Chinese tourists and investors sweeping into Jeju, famous for its honeymooners, palm trees and golf courses overlooking a turquoise sea.

“Planeload after planeload of them arrive, some buying up land around here,” Mr. Shin said, as he and his wife packaged strawberries in their greenhouse. “I sometimes wonder whether this island this time is not turning into a Chinese colony.”"


Of the 6.1 million Chinese tourists who visited South Korea last year, nearly half visited Jeju, a fivefold increase from 2011. The Chinese have also become Jeju’s biggest foreign investors. They recently broke ground for what was billed as Asia’s largest family theme-park and casino complex. And Chinese business people are building or have announced plans for several high-rise hotels and condominium developments, which local people fear will be snapped up mainly by Chinese.

Although Chinese-owned land in Jeju is still less than 1 percent, it has grown to 2,050 acres last year from just five acres in 2009. More than 70 percent of $6.1 billion in foreign investments in Jeju announced between 2010 and last year came from China."

So, would South Korea prefer that fewer tourists visit?   How would the Jeju economy be doing without their new Chinese friends?  Suppliers need customers!  Paul Krugman always writes about the need for greater aggregate demand and China represents "aggregate demand".

Example #2 comes from NYC and the infected Doctor who set off great concern about bring Ebola to a very dense city.  Craig Spencer has written a piece for the New England Journal of Medicine presenting his recent autobiography about his ordeal handling being infected with Ebola.  He was stigmatized and labeled as a "Typhoid Mary" as fear of epidemic spread.

 But, his case does raise an interesting Coasian issue related to public health in cities.   Who has the property rights here?  After he treated people in Africa, he was at risk of catching the disease. Is he presumed to be "innocent or guilty" here?   In an ideal world, he should have been sent to some "clean quarantine site" until doctors cleared him for release into the general population.  Yes, this isolation would be annoying and it does represent a tax on those who commit themselves to fight rare diseases in exotic places. BUT, at the same time it reduces the probability of a major public health disaster (i.e Typhoid Mary).  Given how risk averse we are, is this tradeoff so terrible?  The population could reward doctors such as Dr. Spencer by investing in pleasant "clean quarantine sites" so that it does not feel like a prison.

Wednesday, February 25, 2015

How Will the World Cup in Qatar Adapt to Climate Change?

The 2022 World Cup will be played in Qatar.  The NY Times reports that Qatar is hot during the summer.  Anticipating that soccer players are less productive running around in 115 degree heat for 90 minutes, there is now a proposal to move the World Cup to the cooler months of November and December. Talk about adaptation!   There are lots of folks complaining that this change in plans interferes with existing league schedules.    I don't really care but this is a nice case study of how we adapt. There are many margins of adjustment including this one.  This "solution" did not require a lot of ingenuity.   It is no accident that Singapore springs into life at around 9pm as it gets cooler and everyone heads outside.

Tuesday, February 24, 2015

Why Isn't the USA an Energy Research Leader?

The NY Times asks a good question related to basic energy research.  Given that the world needs cheap, green energy,  why aren't more US top research nerds working on this topic?  Part of the answer is related to our global endowments of fossil fuels, increased ability to access them (i.e fracking) combined with the absence of a carbon tax. Together, these two factors lead to low energy prices and hence a lower rate of return on investments in alternative energy.  But, the new point I would like to make is that we don't have the equivalent of the NSF or the NIH in the case of energy.   Instead, the Department of Energy makes the mistake of giving "The National Labs" a monopoly on $.   According to this budget document, the DOE spends around $9 billion a year on energy related research.  For example, $1.2 billion of this goes to the Oak Ridge National Lab each year.  

Folks, recall what the word opportunity cost means.  Suppose we shut down some of these National Labs (I recognize that their Congressional Reps might not vote in favor of this) and instead created a new branch of the NSF dedicated to energy research.   Nerds at research universities would compete for this funding and research would sharply accelerate.  Monopoly is dangerous.  We need more competition in our market economy!

UPDATE:  I should add that this concentration of research funds at the National Labs has frustrated some of my research and limited my ability to run some field experiments related to increasing household energy efficiency.  In an open competition for such research funds, would the National Labs researchers win?  If these individuals worked at research universities, rather than being concentrated at Labs --- would they do better research?  I realize that there are some national security issues here related to some technologies but this appears to be a relic of the Cold War and an excuse for erecting barriers to entry that protect the incumbents from competition.

Monday, February 23, 2015

An Economic Analysis of Superbugs and Optimal Equipment Reuse

 The Times reports the sad  and scary case of the spread of a superbug at UCLA as an invasive piece of medical equipment was used on multiple patients without being properly sterilized after each use.    Economic risk analysis can be used here to analyze the tradeoffs between costs incurred in purchasing durable equipment and the expected loss in life from reusing the equipment.

Suppose that it costs $F to purchase one of these devices and that it has a marginal cost of $c to clean it each time. Suppose that this device will be used n times before being thrown away.  Assume the interest rate = 0%.  Under these assumptions, the total cost of using this device n times = F + c*n.
Note the economies of scale here that the more it is used the average fixed cost declines.

Now define p(n) as the probability of a superbug infection that kills an individual and assume that p(0) = 0 and that p(n) is an increasing function of n such that the more the equipment is used that this raises the probability of a superbug infection disaster for the next patient.  Suppose that each person for who the equipment is used on values her life by $V.

What is the optimal number of times to use the equipment if the patients at the hospital are risk neutral?

Suppose you set n = 1,   in this case --- nobody dies from the superbug infection but the hospital bears a cost of $F each time and for N total procedures; the total cost is N*F

suppose you set n = 2,    then the total cost to society of treating the two patients =   F + 2*c + p(1)*V

the first person the new piece of equipment is used on has no chance of dying but the 2nd person does have a chance to die;

suppose you set n = 3 , then the total cost to society of treating the three patients  =  F + 3*c + p(1)*V  +  p(2)*V

The general problem:   choose n to minimize F + n*c + sum  from 0 to n of p(n-1)*V 

UPDATE:  A reader named "Glenn" correctly pointed out that I need to be clear about the aggregate demand.   For example, if the hospital must conduct 100 procedures, what is the optimal configuration here to minimize the cost of achieving that goal.

A researcher who knows the parameters;  F, c, p() and V could solve this economy and figure out the optimal reuse.

Note the comparative statics, as the value of a statistical life goes up (V), the hospital should not reuse equipment.  As demand for 1 time use equipment rises, some firm would create this and this would lower F.  Of course, the ideal would be to set p(n) = 0 for all n but that is asking for a free lunch.

This is a classic Gary Becker risk tradeoff model similar to his crime deterrence work.

Now, you might ask; does the hospital know the p(n) function?  If they knew that they did not know the function, what issues does that raise?

Sunday, February 22, 2015

Micro Apartments in NYC

I learned a piece of algebra recently.  Did you know that rent per month = ($/sqft)*sqft?     Where "sqft" = square feet of the apartment and $/sqft = price per square foot.  In major coastal cities,  price per square foot continues to rise.   This is caused by both supply and demand forces.  One way to continue to have affordable housing units in desirable cities is to allow developers the ability to supply micro-apartments.  This article talks about the demand for 400 square foot apartments.   I recognize that this would be a tight fit for families with kids but increasing the menu of housing options will be very attracting to the 20-29 year olds just starting out in the big city.  Relax building height restrictions in Manhattan and allow micro-apartments and much of the "housing crisis" that the NY Times drones on about will vanish. These free market solutions are much better policies than rent control or requiring developers to set aside a % of their new units but having them build "poor doors" as these units are set aside for lower income populations.

UPDATE:  As urban crime falls in big cities, young people (both men and women) are more willing to go out at night and don't need a big apartment.  In fact, they do not need their own kitchen.  Cities are about gains to trade and why not engage in comparative advantage and purchase your food in the city.  If apartments no longer need their own kitchen, then think about our future ability to arrange economic activity.  In a free market, you would be faced with a menu where some apartments do and do not have kitchens. A kitchen takes up space and that could be your home office!

Saturday, February 21, 2015

How Will NYC Adapt to Sea Level Rise?

Citylab reports some great stuff in this blog post.  Such information plays the same role as Paul Revere did a long time ago.  Now that we know that coastal Manhattan has a problem, the efficient markets hypothesis makes some testable predictions about how asset prices will adjust. Investors will see these price signals and adjust their investment patterns. You do not need to be Einstein to predict that Manhattan's future Don Trumps will have strong incentives to identify "higher ground" on the island and to seek zoning law changes to allow them to build high rises there.  This is capitalist adaptation.  Look at this picture below, you will see that "higher ground" exists.  Self interested individuals who do not want to drown and capitalist real estate investors will figure out new types of building materials that are built on "higher ground" and even Manhattan can continue to thrive.   If it can't, then Wall Street would simply join the hedge funds on higher ground in Connecticut.  Environmentalists have to distinguish between short run transition costs and long run productivity effects of sea level rise.  In the short run, such sea level rise represents a type of Keynesian stimulus as we would have to rebuild infrastructure on the higher ground and this would create construction jobs for low skill workers.

For those who are willing to think about the economics of climate change adaptation, read my 2014 paper.

Friday, February 20, 2015

How is Bangladesh Adapting to Increased Flood Risk?

Optimists of the world unite.   While this piece does not discuss the cost of constructing and operating floating schools,  it demonstrates the power of the Climatopolis Two Step;  Anticipate a challenge and invest accordingly.

"Bangladesh — a country of waterways — is one of the most threatened by rising sea levels. About a third of the country is covered by water during monsoon time, but with climate change, water can soak two-thirds of the country.

An amazing nonprofit, Shidhulai Swanirvar Sangstha, has developed solutions that can be used in many parts of the world.

When there's too much rain, students take classes aboard solar-powered boats, often for four months a year. There are now 22 floating schools, five floating health clinics and 10 libraries. A new two-tiered school has classrooms on the lower level and a playground on top.

And in the watery world that's taking over, they are even helping people create floating farms. The nonprofit provides training, seeds, feed and the entire structure for farms that include ducks, fish and even a vegetable garden."

Note the emphasis on human ingenuity.   Who is Shidhulai Swanirvar Sangstha?  Here is its webpage.  Who is providing their $? Is the Gates Foundation Investing?  This is one way through which capitalism accelerates the adaptation process.

Here is a direct quote from this organization;

"One third of Bangladesh floods annually during the monsoon season, but extreme floods cover up to two thirds. Every year, during the rainy season, monsoon winds brings plenty of rainfall that causes its’ hundreds of rivers to swell and overflow onto the land. Due to floods, thousands of schools are forced to close and many children miss school days.

Shidhulai Swanirvar Sangstha came up with a creative solution ‘floating school’ to address this issue and brought the school to the students during the flooding. Also the organization runs a fleet of boats acting as libraries, adult education centers and solar workshops. Boats themselves are outfitted with solar panels that power computers, lights and other equipment. But the boats bring more than services to these cut-off areas - they bring electricity. Shidhulai also runs floating clinics that have doctors and paramedics."

Millions of "Mark Zuckerbergs" will focus on innovation geared towards climate adaptation. Ideas are public goods and the winning ideas will diffuse.   Julian Simon would understand and appreciate this logic.  Do you?

Thursday, February 19, 2015

Are Low Gas Prices Good or Bad?

Michael Greenstone has a nice quote on Marketplace making the green case for raising gas taxes now.  At the same time, the NY Times recently reported that Ragu Rajan is celebrating that importer India is now paying low gas prices.  "With crude prices now halved, fuel costs for trucks and cars have plunged, pulling down transport expenses and inflation. The cost of government fuel subsidies has nose-dived, helping curb the country’s chronic budget deficits. “We’ve got essentially a $50 billion gift for the economy,” said Raghuram G. Rajan, the governor of the Reserve Bank of India."

It would interest me to see the cross-national relationship between economic growth and the growth of GHG emissions for nations with different gasoline prices.  Ideally such gasoline prices would be randomly assigned but I recognize that this would be a hard field experiment to implement.

The Make vs. Buy Decision: How the LA Super-Rich Avoid the 99%

The NY Times engages in the guilty pleasure of checking out how my Bel-Air neighbors live in their 40,000 square foot homes.   This is "50 Shades of Green".  One quote from the piece caught my eye;

"Mr. Landry learned how to design for the special needs of the rich and famous. Two kitchens, one for family and one for staff. Large, open foyers with direct flow to give fund-raiser crowds easy access to the backyard. Wings that could be closed off, so that a large house becomes a series of smaller ones, inhabited by the owners, extended family and houseguests. And amenities like home theaters and spas that account for all that square footage — and, more important, make interaction with the public avoidable."

Read that last sentence again.  The point of the mega-homes is to create an urban oasis so that you can access the city when you want to but to recreate the city's retail strip within your home so that you don't have to interact with guys like me.

Wednesday, February 18, 2015

Anticipating the Impacts of Climate Change on Massachusetts

This is a useful new report that anticipates how climate change will impact Massachusetts.  The most novel predicted impact relates to the future of the state's cranberry production.  Here is a direct quote:

"Cranberry Production

Massachusetts growers have cultivated cranberries since the 19th century, though Native Americans and early settlers in the Northeast harvested them long before that.[87] In 2012, 43,918 acres of cranberries on 1,040 farms were harvested across the United States, concentrated primarily in Massachusetts (14,070 acres) and Wisconsin (20,641 acres).[88] In Massachusetts, cranberries make up the vast majority of the berry harvest, which generated more than $100 million in sales in 2012 in total.[89] Cranberry production should not be expected to end in Massachusetts due to climate change, but yields may suffer and producers may need to shoulder financial burdens in order to maintain their current level of production.

Like apples, cranberry vines grow according to a chilling requirement, meaning depending on variety, they must experience a specific number of days under a certain temperature threshold in order to produce fruit.[90] Earlier, warmer spring temperatures could prevent crops from achieving their chilling requirement.[91] What’s more, even if spring temperatures arrive earlier, cranberry producers must be vigilant in terms of night time frosts that threaten cranberry vines. Producers do have methods at their disposal to avoid frost damage, but they may require a significant financial investment.[92]

Increasing temperatures in the summer months will have implications for cranberry growth and productivity. A 1996 study found early cranberry growth to be most rapid in areas with moderate temperatures between about 60 degrees Fahrenheit and 86 degrees Fahrenheit.[93] If there were more hot days in July or more cold days in August, the study found berries took longer to grow.[94] A 2013 study found flowering time changes for Massachusetts cranberries are related to changes in temperature, similar to other plants in the Northeast.[95] The study found on average, cranberry flowering occurs two days earlier for every 1 degree Celsius increase in May temperatures.[96] Though flowering times had not experienced statistically significant changes on average since the 1980s, the authors of the study note in years when flowering times occur earlier, workers need to be available earlier and harvesting and processing must happen earlier.[97] In those years, which may occur more frequently in coming decades, producers must compare the advantages and disadvantages of early harvests to late harvests.[98]

Though cranberry vines thrive in wetland conditions, increased precipitation could cause flooding that submerges vines for longer than they can stand, which impacts productivity.[99] Rising sea levels are concerning for similar reasons; ocean incursion may flood bogs at non-ideal stages of cranberry development and saltwater can have detrimental effects on the crop."

Note that at the end of the first paragraph the authors acknowledge that they can adapt to the new challenges.  I respect their honesty.  This adaptation isn't costless but they don't bother being specific about how costly it will be or who will bear the incidence (i.e final consumers or producers in MA).

Note that for each of the challenges listed above, human ingenuity and investment can offset these challenges.  Cranberries will continue to thrive.

Improvements in Quality of Life While You Are Hospitalized

The NY Times reports that Harvard and Yale Hospitals have figured out that hospitalized people enjoy sleeping through the night rather than being woken up every couple of hours to be poked and probed!    While it is amazing that it took these great hospitals 100 years to figure this out, note that competition played a key role here in fostering this learning.

A major theme in my life's work is the importance of non-market "quality of life" factors in our overall standard of living.  Yes, income is not a sufficient statistic for your well being but how do you go beyond the "Great Man" studies of Stiglitz and Sen (see their French Report) and actually make progress on this squishy idea?  The Ivy League hospitals are surveying their hospitalized guests (on a  scale of 1 to 9 are you enjoying how I take your blood?) but this is cheap talk.

In my own work (that builds on Sherwin Rosen's work), I have investigated how much people pay for non-market goods as this reveals their priorities for what they want in terms of their city's attributes.  Unfortunately, when you are lying in a hospital bed there are no markets that allow you to "vote with your feet" and express your priorities. Since the hospital you are lying at has a monopoly at that time, it had little incentive to cater to the patient's short term emotional needs.  Increasing competition leads to "nicer suppliers".

For some examples of my quality of life work; read my 1st Handbook Chapter or my first China paper.

Tuesday, February 17, 2015

Econ 101 Lessons: Raise Water Prices in Drought Stricken Sao Paulo Brazil

The New York Times has published a long article about water shortages in one of Brazil's major cities but never mentions what is the current price of water nor does it ponder what is the price elasticity of demand for water.   This direct quote suggests that the price of water is extremely cheap.

"More than 30 percent of the city’s treated water is estimated to be lost to leaks and pilfering. In a statement, the water utility said it was seeking to reduce leaks. It has been offering discounts to reduce consumption, while starting to impose steep fines this month on high water use."

Discounts to reduce consumption?  How about acknowledging the law of demand and raising water prices?   Yes, there are "carrots" and "sticks" but why only use "carrots"?

I have searched the Internet and cannot find the market price of a gallon of water in this city. Even The Economist doesn't bother to list the price.

The Water Authorities in this city should run a simple experiment.  Assuming they bother to meter water consumption (do they?), let them raise the price of a gallon of water by 20% and let's see how much consumption declines by.  I would guess that the answer will be 30%.   They an alert the population that they will take this action and that they will use the revenue collected to fix the leaky pipes (which will enhance the supply of water).

My mother will say that the poor do not have the money to pay an extra 20%.  Well, you don't have to be Milton Friedman to think about how to offset this with an income transfer.  Define  P as the original price per gallon and assume that each poor person was consuming G gallons per year.   Now the price under my new rules would by 1.2*P which would require total expenditure of 1.2*P*G for the poor to be able to afford their old bundle. Given this algebra the City would need to transfer to each poor person;  1.2*P*G - P*G = .2*P*G dollars per year to be able to afford their old water bundle at the new prices.   If there are N non-poor people in the city and M poor people then to keep a balanced budget; each non-poor person would transfer  .2*P*G*M/N to each poor person.  

If the middle class revolt against this transfer then maybe the Gates Foundation will pay this?

Let markets work and "scarcity problems" vanish.  The NY Times needs to read Greg Mankiw's Econ 101 book.

Monday, February 16, 2015

How Will Miami Adapt to Sea Level Rise?

Miami will adapt to sea level rise by anticipating the challenge.  Such a challenge creates opportunities for the next generation of architects.  Julian Simon would salute young architects such as Jorge Rodriguez who is quoted here ;

Jorge Rodriguez, a graduate architecture student who helped design the exhibit’s layout, said “Miami 2100” has gained a lot of attention for sea level rise in the community, but has been met with some skepticism about the scientific proof behind it.  “We’re not providing proof this is going to happen,” said Rodriguez, “but we are prepared.”

So, the real debate over climate change adaptation concerns our ability to form rational forecasts of the future and to have the resources to take action.  

Rational Forecasting:   The behavioral economics revolution claims that nobody forms "rational expectations" of the future. This is an exaggeration.  In truth, we are a mixture of types of people and there certainly are some individuals who form "backwards expectations" or have myopic expectations of the future. It is an empirical question to measure whether they are 10%, 50% or 80% of the population.   Even if there are Homer Simpsons and Climate change deniers among us; the insurance industry and land use zoning regulation will direct these guys (perhaps against their wishes) to higher ground.

The Poor  --- Their existence creates an imperative to embrace Heckman's agenda for investing in young children to reduce the next generation's poverty. Economic growth and skill formation are our best tool for adapting to climate change.

Wacky Weather and Lost Consumer Surplus in Boston

Boston has been hit with several recent blizzards.   How would an economist measure the aggregate damage caused by these storms?  Recall from intermediate micro the concept of an expenditure function.  The expenditure function represents the minimum income you would need to have to achieve a given level of utility.   To solve this out, you would need to know each person's utility function and the market prices of every good that the person might buy.

For example,  suppose my utility function = 20*beer + 2*pizza  and the price of beer = price of pizza which equals 1.    Suppose we want to solve for the minimum income, I would need to achieve 500 utiles of happiness.  From staring at this consumer problem, it is immediate (given the linear utility function and the prices of the two goods) that I will spend all of my money on beer and buy no pizza.  To achieve 500 utiles, I would need to drink 25 beers and at a price $1 each, I would need $25 to achieve my goal at the minimum cost. Note that I also could have ate 250 pizza but this would have cost $250 and thus is not the cost minimizing solution to this problem.

In a more serious example, this same approach could be used to measure the damage that the recent storms have caused to the people of Boston. The storms are a local public bad as they affect everyone in the area.   In a Becker Household Production Function framework, the storms raise the price of commuting to work, shopping and meeting friends. When you face such "higher prices" , how much higher income would you need to be equally happy as you would be on a February day without the storm?  That's what the expenditure function approach measures.  Each person's willingness to pay (WTP in $) to not be exposed to the snow could be quantified and then added up to yield the metro area's total damage from the event.    WTP to avoid snow =  expenditure needed to achieve baseline utility level if snow -  expenditure needed to achieve baseline utility level if no snow.

Some examples:  So, suppose you are a Harvard Professor --- do you get more work done on snow days because all of your meetings are cancelled?  Suppose you are a suburban soccer mom in Newton --- do you have a bad day as your kids are home with you and are going stir crazy?  Or do you have a wonderful day with your kids as you treasure how finite this gift actually is.   Suppose you are school teacher whose day at school is cancelled.

For Boston's metro area residents, yes shoveling the snow and maneuvering around is a hassle but I bet that people anticipated the event and bought food ahead of time. There are issues of roofs facing heavy weight and concerns about carbon monoxide levels but I bet that the people of Boston are doing pretty well as they adapt.  They won the Superbowl and they have seen snow before.

What about the stores in Boston and their displaced sales?  This lost revenue counts for them but the money that they did not collect doesn't vanish. The  buyers can purchase stuff later or buy from Amazon.  The loss to the Boston retailers is not a loss to the macroeconomy.  Pessimists often forget this point as they fixate on physical places without thinking about the "big picture".

We all know that it snows in the Northeast in winter, who would set up a crucial meeting that can only happen face to face at such a time?  The expectations of shocks leads us to make choices so that we are not at economic risk from these shocks. This is adaptation and we will only get better at this.

Now are the urban poor especially suffering in Boston due to the snow?   The Christian Science Monitor writes about this issue.   and here is what the City of Boston is now providing.   I support this redistribution and would note that a richer city is better able to provide such services. In this way, free market growth is one of our key strategies to adapting to climate change.

Sunday, February 15, 2015

The Secret to Living to Age 115 is Raw Eggs and Avoiding Men

I turn 49 soon so this article profiling Emma Morano's life caught my eye.   She is 115 years old and has lived during 3 different centuries!   She even has a causal theory for explaining her long life;  a raw egg diet and no husband.   A quote from the article:

"Ms. Morano has no doubts about how she made it this long: Her elixir for longevity consists of raw eggs, which she has been eating — three per day — since her teens when a doctor recommended them to counter anemia. Assuming she has been true to her word, Ms. Morano would have consumed around 100,000 eggs in her lifetime, give or take a thousand, cholesterol be damned.

She is also convinced that being single for most of her life, after an unhappy marriage that ended in 1938 following the death of an infant son, has kept her kicking. Separation was rare then, and divorce became legal in Italy only in 1970. She said she had plenty of suitors after that, but never chose another partner. “I didn’t want to be dominated by anyone,” she said.

Gerontologists agree that there is no one key to longevity. “You talk to 100 centenarians, you get 100 different stories,” said Valter D. Longo, the director of the Longevity Institute at the University of Southern California, whose studies suggest that diet is an important factor in living longer."

The article raises an interesting question of the following;  take a random sample of people born in the United States in the year 1880, 1881, 1882 , 1900, 1901, 1902, ....,  1915 --  what is the probability such a person lives to age 100 and what are the predictive correlates of living that long?  (gender, education, genetics, habits).   How predictive are these correlates or even with really good micro data we can't really predict who will live that long.  Over time for newer birth cohorts, do explanatory variables such as education become even more important predictors?

Friday, February 13, 2015

"Contrarian Scientists"?

Justin Gillis expands his readers' vocabulary by introducing the term "contrarian scientists" in describing perceptions of climate change's future impact.  Here is the definition;   "Contrarian scientists ... tend to argue that the warming will be limited, or will occur so gradually that people will cope with it successfully, or that technology will come along to save the day – or all of the above."

Given this definition, I am willing to state that I am one of these folks.   I do support a carbon tax now but I'm confident that urban capitalism will evolve and adapt to protect us from what we unleash.  It would be cheaper, and less risky for the vulnerable who live in risky places and face serious migration costs, for us to "buy insurance" now by reducing our GHG emissions but I reject that we doomed.

I am not a scientist so I do not know if the warming will be limited (this is the mapping from CO2 concentrations on global average temperature).    Implicit in Mr. Gillis' quote is some deep pessimism about our individual and collective ability to read the NY Times and to process information that would simultaneously help us to adapt to the new challenges we have unleashed.  Gillis also questions whether future entrepreneurs (think of Musk and Zuckerberg) are up to the challenge of designing technology that will meet our future demands for safety and robust risk avoidance in the face of climate change.  We will need;

1. drought and heat resistant sources of food
2. Buildings that function in extreme climate scenarios
3.  Buildings that can withstand flooding
4.  distributed energy generation so that the grid isn't knocked out.
5.  distributed water purification systems
6.  redundancies in supply chains to insure against inevitable shocks (i.e snowplows at airports where it rarely snows such as Atlanta)
7.  The ability to migrate across cities to increase our menu of options of where to live.

For every urbanite, think of your daily life. If climate change will disrupt this life, then what can you do to protect yourself to minimize the impact? If your current location is not well suited for these shocks, then home prices will fall there but you can move and rebuild on higher ground.  Changes in zoning laws will allow more homes to be able to be built there.  To see more about these thoughts, read my paper;   Climate Change Adaptation: Lessons from Urban Economics.

Thursday, February 12, 2015

Is Climate Change a Greater Threat than Terrorism? An Economic Analysis

While I agree with President Obama that climate change is a bigger threat than terrorism,  I would encourage him to read my paper on this subject.   My paper is titled; Urban adaptation to low-probability shocks: contrasting terrorism and natural disaster risk" and you can download it here. I argue that Mother Nature's shocks are more predictable than a rational terrorist's attacks. Since Mother Nature's shocks (i.e hurricanes hitting New Orleans, tornadoes in the mid-west) are more predictable, we are better able to adapt to them. In contrast, a terrorist plays a strategic game with his potential victims and actively uses randomization to continue to scare the opponent by being unpredictable! This rational strategy means that we potential victims of terrorism are less able to adapt to it because the next shock (where , when and how) is so unpredictable. Read my paper for more details!

Urban adaptation to low-probability shocks: contrasting terrorism and natural disaster risk , book chapter in a Edgar Elgar book edited by Kerry Smith and Carol Mansfield.   An early draft is available here.

Wednesday, February 11, 2015

An Economic Analysis of Two Quotes from Progressive Intellectuals

I'm an economist with a passing interest in persuasion.   So, I read the NY Times Opinion page to try to learn some new ideas and to learn about how the NY Times tries to persuade the select set of people who read its weighty stuff.  My own interest in persuasion mainly focuses on how "climate hawks" attempt to nudge people to embrace low carbon living and to support low carbon policies.  Despite their well meant efforts, the population continues to vote on low carbon legislation based on a narrower concept of self interest. See my paper #1 and paper #2. 

Below, I report some direct quotes from its letters section and its OP-ED section.   I leave it to this blog's readers to decide if this is comedy or opinion.  After reading these quotes, I see that quite a few NY Times authors must have slept through Econ 101 or avoided taking this course.   This makes me sad because I would like to believe that when smart people study economics that our course material sharpens their logic.

Here are the quotes:  Source

To the Editor:

Hillary Rodham Clinton’s search for new ideas and inspiration concerning the plight of middle-class Americans is timely and of extreme importance. As the American dream slips away from far too many, new solutions must be found. You report that under consideration are ideas “such as providing incentives to corporations to increase profit-sharing with employees.”

Every quarter, when earnings are announced, the stock market values of businesses rise or fall depending upon their perceived performance. There have been instances in which a profitable corporation has lost a billion dollars of market value because it “missed earnings” by as little as a penny. This essentially means that a benevolent company that spends money to increase profit-sharing, give raises or contribute to the well-being of a community can have its stock pummeled because some of its income was diverted to employees rather than to its shareholders.

If a corporation earns a bit less per share, but the lives of the workers are enhanced, the company should not be punished but lauded. Instead, we too often see wonderful companies that do all the right things being attacked, broken up or bought outright to “unlock shareholder value.”

As things are now structured, there is little incentive for corporations to raise the incomes and living standards of their employees.

Woodstock, Md.

This first letter bemoans perfect competition and wishes that the benevolent monopolist would make a comeback.   Econ 101 reminds us that we are all both buyers and sellers of goods and services. Yes, I wish that UCLA paid me $1 million a year but my pay is set by market forces and I benefit from purchasing goods I want from competitive markets.  Under Mr. Feeland's system, the prices of goods and services would be much higher.

Now consider, Marc Bittman's column.   Here is a direct quote from his piece.

"It’s clear to most everyone, regardless of politics, that the big issues — labor, race, food, immigration, education and so on — must be “fixed,” and that fixing any one of these will help with the others. But this kind of change must begin with an agreement about principles, specifically principles of human rights and well-being rather than principles of making a favorable business climate.

Shouldn’t adequate shelter, clothing, food and health care be universal? Isn’t everyone owed a society that works toward guaranteeing the well-being of its citizens? Shouldn’t we prioritize avoiding self-destruction?

Plenty of Democrats, even those who think of themselves as progressive, would not answer yes to those questions. Some would answer, “Don’t be naïve, that’s impossible,” and others would say, “All we need to provide is equal opportunity for all and let the market sort it out.” (To which I’d reply, “Talk about naïve!”) I’m fine with disagreement, but I’m not fine with standard public questions like “How do we create a better climate for business so it can provide more jobs?” Consider what this implies about the purpose of people, to say nothing about the meaning of life. The business of America should not be business, but well-being."

Mr. Bittman might consider focusing on food rather than "big think".   He seems to embrace a Star Wars view of public policy that there are good guys and bad guys but let's think about Milton Friedman's Negative Income Tax.   The NIT would use free market methods to achieve Mr. Bittman's goal. Thus, would he support it?  I doubt it.

For goods such as food and education, can we agree that they should be provided at minimum cost (and hence privately provided) but that every person should be provided with a voucher of a given $ amount so that even a poor person could afford the basic level to guarantee "well being"?   If Mr. Bittman really believes his rhetoric then does he support public education which raises the cost of providing such basic education?

Mr. Bittman is an expert on nutritious food. Has he read the University of Chicago's Nobel Laureate George Stigler's linear programming piece written over 70 years ago on how cheap it is to deliver such a healthy diet? Read this review piece.

Tuesday, February 10, 2015

Peltzman Revisited: Why Don't Downhill Skiers Use Airbags?

The NY Times reports the puzzle that competitive downhill skiers such as Bode Miller could protect themselves if they adopt a new "air bag" but few are using them.  One theory is that these protective devices are heavy and uncomfortable and thus lower the probability of winning any given race.  A Peltzman argument would counter that armed with such an "air bag", the skier could be more aggressive because she is protected against ugly crash scenarios.   Unlike the case of driving, this induced risk taking does not impose a social externality because the skier is the only one skiing at a point in time. All of the benefits and the costs of the risk taking are internalized by the skier.  Human capital theory would also posit that if the skier seeks to maximize the expected PDV of her earnings racing then she should take steps to lower injury risk.  The NY Times hints at a theory of conformity; that it isn't cool to be the first one wearing this armor but is this a correct theory?  Are skiers under-estimating the risks of an accident or under-estimating the expected benefits of being more aggressive as they ski?

Will Universities Lower their Endowments by Dis-Investing from Fossil Fuel Companies?

Young people want a free lunch.  A benefit of aging is the wisdom of finally understanding the tradeoffs that we must reckon with (the one's your Econ 101 Prof droned on about).    Consider the case of University divestment from fossil fuel companies.   President Faust's eloquent discussion appears to have had a minimal treatment effect on young greens' views.   Now the Chair of Lexecon has released a new working paper exploring the unintended consequences of divestment.  You can read it here.   He identifies three costs of dis-investing and concludes that they add up to a large loss for such righteous universities.  He stresses that a dis-investing university would pay;  1. transaction costs as it changes its portfolio,  2.  diversification costs ,  3. monitoring costs as it would need to continue to update whether its current portfolio consists of "bad guys".  I believe in competition. Let's see a green well trained finance student counter his arguments.

Thursday, February 05, 2015

Should Econ 101 Be a Required Course at Every University?

Econ 101 continues to be a very popular course at Harvard.   I expect that Prof. Mankiw does a great job teaching and he must be familiar with the textbook he has selected for the course.   If Econ 101 is so popular at our leading institutions,  shouldn't we simply agree that it should be a required course for every undergraduate in the USA?  What would be the benefits and costs of such a requirement?  At UCLA right now, new course requirements are being introduced.  This opens up the possibility to consider my proposal.

Benefits:   First, the economic approach for explaining and predicting human behavior is powerful stuff.  Read Gary Becker's Nobel Prize Address if you need a quick proof of this claim.  Econ 101 makes you a smarter, more subtle problem solver.  Isn't that the whole point of a liberal arts education? Second, we live in the age of "Big Data".  Economics is the best suited approach for organizing such data in order to think about causal statements.   For example, would raising taxes on the rich increase income equality without slowing down US economic growth?  Can you answer that question, or even think about that question without having taken Econ 101?   Third, Economists such as Jim Heckman have figured out how to fuse insights from statistics and economics to build a powerful set of tools that even undergraduates can appreciate.  Many young people will make their names using "Big Data" and a basic training in economics provides them with a higher probability of lifetime success.  Fourth, many young people are naive about the role that government plays in our life.  A little bit of cynicism about government official's true objective and about the unintended consequences of almost all public policies will help to actually foster better public policy because such educated citizens will be "smarter" consumers in the political market place.  

Costs:  If Econ 101 is required, then students will not take some other course at their University.  What course will that be? What is the value of that marginal course?   I have a vested interest in arguing that this competitor course has low value added.   For every student who never takes Econ 101, go ask them what their least favorite class in college was.  I would argue that Econ 101 will always offer greater flow value of fun during the class and lifetime extra human capital than that "despised class".

Would the UCLA Senate approve my proposal?  Economic theory says "no" because the non-economists have many more votes than the economists and self-interest would lead the former to oppose this pareto-improving policy.

Monday, February 02, 2015

Playa Vista: New Urban Living in Los Angeles

Before Superbowl Sunday, I took 25 sleepy UCLA freshmen on a field trip to see the Playa Vista community located just north of LAX, 2 miles from the beach and just south of Marina Del Ray and Venice.  This was my 2nd trip there and I'm still a big fan of the entire project.  This upscale housing has created a new walkable small town where there is a community pool, park and good stores and restaurants that people can walk to.  There were plenty of children and dogs running around.  While no buildings there appear to be over 4 stories tall, there is still much higher population density than in Santa Monica's 90402 zip code because people in Playa Vista live in townhomes rather than having their own back yard.   Several of my students expressed their desire to have their own backyard.  While they have the right to consume such housing products, these students didn't fully appreciate the private benefits they would enjoy if they lived in Playa Vista rather than some suburban home in the Valley.

1.  It is nice and cool if you live 2 miles from the beach (think of Climate Change adaptation).
2.  Your commute to work in Santa Monica or downtown will be shorter
3.  You can walk and interact with more people who are likely to have a similar world view as you in this community.
4.  Good schools and services will pop up where there is concentrated demand for such services.
5.  This area does need access to good public transit.  As the scale of people living there increases, it is interesting to ask whether such lumpy investments are efficient.

Saturday, January 31, 2015

Introducing "Economy Plus" Seating at Public Universities

United Airlines is earning some extra revenue selling economy plus tickets on airplanes.   Such seats cost roughly 20% more but offer more legroom and early boarding on the airplane.  Could public universities offer a similar experience? Imagine if students could pay a tuition premium for the right to be in a smaller class with more Teaching Assistant support.  How many students would select this option?

 Take my UCLA environmental economics class as an example.  Suppose that instead of teaching a 90 person class with 1/2 of a reader that I could teach a 60 person class with a full time teaching assistant (TA).  Suppose that each of the 60 students paid an extra $2,000 for such a class.  I would be paid the same amount of money to teach the class and the University would collect an extra $120,000.   Pay the TA $10,000 for the class and the remaining $110,000 could be used to give 7 students (that the University could select) a full year in-state tuition scholarship of $15,000 each. I would really enjoy teaching this smaller class as I would get to know my students better and I would have better student support by having the TA.  I would like the idea that I'm providing 7 scholarships to deserving students by my teaching the "Economy Plus" course.  I am one of UCLA's top teachers and I'm proud of that.

Who would lose?  There would be "coach" students who wanted to take my premium class but didn't want to pay the extra $2,000 to take it.  I could teach my "coach" course (the 90 person course with the 1/2 time reader) every other year to meet their demands.   This Economy Plus option  would offer a new revenue model that would make teaching at a Public University a more exciting intellectual opportunity.   Students who pay the $2,000 would learn more in such classes and would be more likely to be able to receive a letter of recommendation from a Professor who actually knows them.

How much new revenue would "Economy Plus" generate for UCLA each year?  There are 5000 Freshman each year at UCLA.  Suppose that 10% of them elect to take one Economy Plus class then according to my arithmetic; the annual flow of revenue just collected from Freshman would equal $2000*.1*5000  =  1 million dollars per year ; so with 4 years of students at UCLA at any point in time; this would yield 4 million dollars in new revenue per year for the school. Given UCLA's concerns with income inequality, this $ could be used to provide 4 million/15000  = 266 full in-state scholarships to UCLA each year.

This "Economy Plus" would be voluntary for both students and faculty.  Would the "Economy Plus" be an elite set? It would be a mixture of richer students and students who really want to take a smaller class with a professor such as me.  They are voting with their wallet. Right now UCLA does not permit such markets and everyone is worse off because of this.


Thursday, January 29, 2015

The NY Times Implicitly States that the 1% Are the Key to Long Run Economic Growth

Read this NY Article about Internet freedom being limited in China.  Towards the end of the article, here is a direct quote: "The vast majority of Chinese Internet users, especially those not fluent in English and other foreign languages, have little interest in vaulting the digital firewall. But those who require access to an unfiltered Internet are the very people Beijing has been counting on to transform the nation’s low-end manufacturing economy into one fueled by entrepreneurial innovation."

So, the elite 1% of China's society are now being limited by President Xi's campaign to reduce Chinese Internet users access to Western content.  The NY Times worries that without access to tools such as Google Scholar that innovation in China will slow down.  This suggests that the NY Times views the elite as the engine of growth in China.  This is even more true as China's reliance on heavy manufacturing declines as it follows the San Francisco blueprint for economic growth.  

Another DIRECT Quote:

"In recent weeks, a number of Chinese academics have gone online to express their frustrations, particularly over their inability to reach Google Scholar, a search engine that provides links to millions of scholarly papers from around the world.

‘It’s like we’re living in the Middle Ages,” Zhang Qian, a naval historian, complained on the microblog service Sina Weibo.

In an essay that has been circulating on social media, one biologist described how the unending scramble to find ways around website blockages was sapping colleagues’ energy.

“It’s completely ridiculous,” he wrote of the wasted hours spent researching and downloading V.P.N. software that works. “For a nation that professes to respect science, and wants to promote scientific learning, such barriers suggest little respect for the people actually engaged in science.”

It is not just scientists who have come to depend on an unabridged Internet for their work. Cheng Qingsong, a prominent film critic, complained that it was more and more difficult to stream foreign movies. Andrew Wang, a professor of translation at Beijing Language and Culture University, worried that his students would be unable carry out assignments that require them to watch English-language videos on YouTube, which has long been blocked here."

So, there are two ways to interpret this story. 

1. The Internet is a consumption tool and fun in China for the elites who speak English will decline as they can't access Google and Facebook and other Western social media tools.  

2.  The Internet is a production tool and China's economic growth will slow as their elite's productivity will decline without access to the Western frontier knowledge.   Note that the 99% who do not speak English are nowhere mentioned here.  The NY Times embraces the idea that the 1% are the engine of China's future growth.  I find that interesting.  Do you?

Too Much Adaptation?

I was in Manhattan on Monday night as the big snow storm got ready to hit.   The Subway was closed and all vehicles were ordered off of the roads as of 11pm that Monday night.  These stringent measures turned out to be too stringent. Roughly 6 inches of snow landed and this stuff was quickly swept away.   How costly was it for the city and its residents to have their lives disrupted for a day?  On the production side, can the lost output be produced at other times?  Yes.  How about the value of the "home production" of spending an extra day with your family? I was snowed in with my mom and dad and we had a great time. For parents with young kids, did they go sledding that Tuesday?  Did they enjoy the experience? This pleasure (which is hard to quantify) needs to be subtracted from the economic costs to yield the true cost of the "lost day".    Better safe than sorry so I see the day of lost work as no big deal.    The challenge of storm tracking does raise a "Chicken Little" issue of whether people will listen to the Mayor the next time he states that the end is near.  Credibility is hard to earn and hard to maintain.

Tuesday, January 27, 2015

Escape from New York

I have been in NYC since Sunday night.  On Sunday night, I had the opportunity to sit snugly with some teenagers in the Economy Plus section of a United Flight.    I worked for several hours and then watched Think Like a Man.  Kevin Hart packs a punch.   When I fly back to LA tomorrow, I will sit in a larger seat with fewer close (or young) neighbors.  While my Manhattan Institute event was cancelled (due to the snow), I had a great time with my parents.  The silver lining of all of the snow was ample time to talk and laugh about many topics.  I've reached a fork in the road and it was quite valuable for me to have a frank talk with my parents about my plans.  I heard some of the things they said to me.  

Thursday, January 22, 2015

Middle Class Economic Progress Since 1980? The NY Times Authors Disagree with Each Other

The NY Times holds a diversified portfolio.  On page 3, I read an optimistic piece by David Leonhardt highlighting economic growth in Africa and the progress in their middle class' quality of life.  In the same front section, I read a pessimistic Opinion Piece by Nick Kristoff that since 1980 middle class life is going to hell in the United States.    A direct quote from Saint Nick;

"Since the end of the 1970s, something has gone profoundly wrong in America.

Inequality has soared. Educational progress slowed. Incarceration rates quintupled. Family breakdown accelerated. Median household income stagnated.

“It’s morning again in America” — that was a campaign slogan by President Ronald Reagan in 1984. But, in retrospect, the average American has been stuck since the Reagan era in a predawn darkness of stagnation and inequality, and we still haven’t shaken it off, particularly since 2000. Inequality has increased further under President Obama."

What can optimists point to that counters this gloom?

1. Life expectancy for all groups keeps rising.

2.  Crime is down sharply in U.S cities.

3.  Risk from airplane crashes, traffic fatalities keeps falling

4. Urban air and water pollution has fallen sharply.

5.  Smart Phones have diffused and the rise of the Internet have vastly increased social connection and entertainment opportunities. Does Nick Kristoff miss 8 track tape players and FM-radio filled with advertisements?

6. Relative to the year 1980, Minorities and immigrants have experienced a growth in their rights and respect they receive from other groups.

Turning to specific concerns stated in the OP-ED piece;

If the public schools stink, then does Mr. Kristoff endorse Milton Friedman's voucher approach?  Does he support legalizing drugs?  If poor kids had greater access to school choice and if drugs were legalized, what would these two policies do to "educational progress and incarceration"?    How would he rebuild the family?

Why is working age male labor market participation low?  What role will President Obama's health care plan play in affecting this?

How many people agree with Mr. Kristoff and would prefer to be young adults in 1970 versus young adults today? I doubt that many (any?) would be willing to trade places.

Wednesday, January 21, 2015

Chinatown Revisited: The Long Run Coase Theorem

The NY Times  returns to Owens Valley near Los Angeles.  Recall that that water from Owens Valley played a key role in the growth of Los Angeles (we do use water here but it doesn't rain).  A consequence of grabbing the Owens Valley water was that the lake dried up and dust from where the lake was blows around sharply raising air pollution in the Owens Valley area.

Several points arise.

1. There were gains to trade between the water sellers (the Owens Valley farmers) and the urbanites.  The people of LA valued this water more than the farmers of Owens Valley. Gary Libecap has done great academic research on this topic for an ungated piece read this.   Libecap argues that Los Angeles gained most of the consumer surplus from this trade but that the farmers still benefited.  

2.  The people who live near Owens Valley have suffered from elevated air pollution levels because of the dust.  The good news is that smart engineers have come up with a water efficient solution to reducing the dust;

"In what may be the most startling development yet, the end of one of the great water battles in the West appears at hand: Instead of flooding the lake bed with nearly 25 billion gallons of Los Angeles water every year to hold the dust in place — the expensive and drought-defying stopgap solution that had been in place — engineers have begun to methodically till about 50 square miles of the lake bed,  which will serve as the primary weapon to control dust in the valley."

Monday, January 19, 2015

Will "Big Data" Transform Lending?

The NY Times this morning wrote about three new companies that I have never heard of.  Each of them seeks to make loans to people who they believe will pay them back.  These potential lenders rely on crunching "big data" to determine if an individual is "worthy" of a loan.  A direct quote:

"None of the new start-ups are consumer banks in the full-service sense of taking deposits. Instead, they are focused on transforming the economics of underwriting and the experience of consumer borrowing — and hope to make more loans available at lower cost for millions of Americans.

Earnest uses the new tools to make personal loans. Affirm, another start-up, offers alternatives to credit cards for online purchases. And another, ZestFinance, has focused on the relative niche market of payday loans.

They all envision consumer finance fueled by abundant information and clever software — the tools of data science, or big data — as opposed to the traditional math of creditworthiness, which relies mainly on a person’s credit history.

The new technology, proponents say, can open the door to far more accurate assessments of creditworthiness. Better risk analysis, they say, will broaden the lending market and reduce the cost of borrowing."

Here is the key piece of the article that caught my eye;

"The data scientists focus on finding reliable correlations in the data rather than trying to determine why, for instance, proper capitalization may be a hint of creditworthiness."

What I like about these new firms is that they are using all available data to impute a person's permanent income. If someone is young and graduated from an Ivy League school but doesn't have any savings, this person may still be a "safe bet" to loan money to.   At the end of the article, an example is given of a woman who majored in Computer Science at Barnard and why she borrowed $850 from one of these firms to pay for a mattress rather than exceeding her credit card limits and paying 17% on the balance.  This is what I meant by the blog post's title.  

BUT,  this new set of firms should be aware that by basing on the whole business on the belief that past correlations are predictive of future correlations, they are subject to the "LUCAS CRITIQUE".

Intuitively, these firms will make $ if their data crunching allows them to identify low risk targets and make loans to these individuals.  Or if they charge higher interest rates to those they identify to be riskier.   If the low risk potential borrowers turn out to be high risk borrowers , then these firms will go broke.

The Lucas Critique focuses on times when there has been a large shock to the macro economy.  Dynamic optimization theory predicts that consumers (and hence borrowers) will change their consumption and savings patterns because of the shock.  If these firms do not update their models to incorporate these behavioral changes then these lenders are at risk of losing money because the macro shock has changed the "rules of the game".

This suggests that a potential weakness for these lenders is that they are engaged in naive reduced form prediction models of default when they should probably be hiring structural econometricians as consultants to help them make better "out of sample" predictions.

To see precisely what I mean, read paragraph 2 of this technical paper and keep reading!