Sunday, April 19, 2015

Ex-Post vs. Ex-Ante: Thoughts on Climate Shock by Wagner and Weitzman

In 1972,  Issac Ehrlich and Gary Becker wrote an important JPE paper on Self Protection and Insurance.  An ungated version is available here.   To provide some intuition, consider a random variable such as your house catching on fire.  If this event occurs, you suffer both financial damage and perhaps a loss of life.  Ex-post insurance will offer you some relief if this horrible state of the world takes place.  But, the probability that this horrible event happens depends in part on ex-ante choices that you take. Do you smoke in bed?  Do you leave matches around?  If people enjoy smoking in bed, then access to ex-post insurance creates a moral hazard because this insurance implicitly subsidizes taking risky actions (i.e smoking in bed).  Ehrlich and Becker discuss the tradeoffs between taking costly early action to reduce a probability of a bad event versus letting the probabilities play out and if and when bad things happen then picking up the pieces.

Flash forward to the year 2015 and two friends of mine have released a new book "Climate Shock".  In Wagner and Weitzman's new book,  they present a well written analysis of the tradeoffs we collectively face as we unintentionally unleash climate change.  They argue that a risk averse person or nation should buy insurance to protect itself --- especially when the losses from climate change are ambiguous and fat tail risk could be huge.   The book is well argued and I highly recommend it.  The economic approach to discussing climate change offers a new prospective relative to the issues that climate scientists focus on.

What is missing in their book is a reasoned discussion of the economics of climate change adaptation. They devote a chapter to geo-engineering but to my surprise, they are not willing to engage on the topic of adaptation. In Weitzman's famous work on climate change for which he already has roughly 3000 Google Scholar citations,   he always writes down a one sector model of the world economy.   Such a macro model implicitly assumes that there is no potential for adaptation because it rules out spatial substitution.  In his setup, there is no "higher ground" to move to.  The whole big world is equally at risk.  To zero out so many margins of adjustment is a modeling assumption but it also affects your thinking about the real issue.

The world is a big place featuring hugely different geographic conditions and many different opportunities for where and how we build our cities.  Cities insulate us from climate risk.  This is the main thrust of my Climatopolis work. I'm disappointed that these scholars have not been willing to engage me in a debate on this topic.   In my "model" of adaptation, even under severe climate change --- we can identify pieces of land that are on "higher ground" and are relatively safe in the face of new risks. We move there and build our cities there.  If specific places are under siege, then our engineers build with materials that can "take a punch" and that have option value. Consider Lego Pieces.  Kids build them and then dissemble them.  I can imagine that future cities will have an infrastructure more like Lego such that if a specific geographic area is at risk, we remove the capital and the people and move to higher ground. Consider Wall Street, if it is below sea level -- then Wall Street can reconstitute in the higher ground of Hedge Fund Connecticut.    Climate Shock chooses not to discuss these issues. Of course, poor nations will face greater challenges in adapting but South Korea and now China show how nations can grow quickly. Climate Change creates an imperative to accelerate economic growth in the developing world.  With higher incomes, individuals and their nations are better able to adapt (purchasing air conditioners , cell phones and a variety of other products that help them to adapt).   Wagner and Weitzman could do a better job following Ehrlich and Becker and considering Ex-Post adjustment to what we have unleashed.   For some technical writing on this issue see my paper.   For an easy version read this.

I agree with Wagner and Weitzman.  We should buy the climate insurance now and sharply decarbonize  but the median voter is a suburbanite and is currently living a high carbon lifestyle.

Environmental economists have been wary of considering the micro economics of climate change adaptation.  Why is that the case?  Which parts of Julian Simon's core arguments do they reject?  An issue that I would like to see debated among the leading environmental economists is the rational expectations hypothesis versus behavioral theories of expectations formation.  Do we model individual households as forward looking and risk averse? Or do we model them as "idiots" who just ignore the climate science and place themselves at risk and do not take Becker style pre-cautions to be ready for the shocks that we have unleashed?

In 2015, are Becker and Lucas correct about how they model households or do Akerloff and Thaler have a better model of human behavior in the face of emerging, ambiguous risks?

Saturday, April 18, 2015

Media Economics: Newspaper Trends in China Bashing

Today the NY Times has a front page piece on the mistreatment of specific dogs in China.  The Times reports that you don't want to be Tibetan Mastiff.  Here is a memorable quote: "

"There once was a time, during the frenzied heights of China’s Tibetan mastiff craze, when a droopy-eyed slobbering giant like Nibble might have fetched $200,000 and ended up roaming the landscaped grounds of some coal tycoon’s suburban villa. But Tibetan mastiffs are so 2013. Instead, earlier this year Nibble and 20 more unlucky mastiffs found themselves stuffed into metal chicken crates and packed onto a truck with 150 other dogs. If not for a band of Beijing animal rights activists who literally threw themselves in front of the truck, Nibble and the rest would have ended up at a slaughterhouse in northeast China where, at roughly $5 a head, they would have been rendered into hot pot ingredients, imitation leather and the lining for winter gloves".

So, the Chinese are faddish and cruel?  Or, only their .01% at the top if the income distribution and political power are?   So, China fits neatly in the NY Times over-arching narrative that the world is going to hell as the 1% seize all $ and all power.

The NY Times has an incentive to rough up the Chinese Communist Party.  Its reporters have been denied Visas perhaps in retaliation for past NY Times unflattering articles about China.

Both the NY Times and the Wall Street Journal regularly critique China's government and life in China. It would interest me to see a quantitative study to see if the time trends of negative coverage (versus positive coverage) has accelerated over time and to see whether such trends can be explained.

Even in articles that are not about China, there is a still an anti-China vibe.   Here is another front page article today   bemoaning how the USA is no longer playing the world's economic leader and statesman as the nation's economic power slips. Unmentioned until 1/2 way through the article is the real point about the rise of China and China eclipsing the USA in exercising soft power.

Thursday, April 16, 2015

4 Hours of Led Zeppelin a Day: Productive Time Use

When I was a teenager, I would listen to Cream and Led Zeppelin nonstop.  I was not a productive teen.  Now that I'm no longer a teenager, I've returned to listening to 1970s rock.  On Google Play, I just keep looping through the same 5 Led Zeppelin albums over and over again and it really helps my paper writing and editing.  Why? It acts as a commitment device so that I don't check my email incessantly and I actually focus on the task at hand.  

Now that Jimmy Page looks like Robert Mundell, I can listen to this band and link it back to my scholarship.

Image result for robert mundell  Image result for Jimmy page 2015

See what I mean?

Do You Learn "Wisdom" and "Ethics" in Humanities Classes?

In an OP-ED today, Nicholas Kristof offers a feel good convexity hypothesis that humanities people need to study more economics and STEM and that science nerds need to read their Shakespeare.  Here is a direct quote:

"My second reason: We need people conversant with the humanities to help reach wise public policy decisions, even about the sciences. Technology companies must constantly weigh ethical decisions: Where should Facebook set its privacy defaults, and should it tolerate glimpses of nudity? Should Twitter close accounts that seem sympathetic to terrorists? How should Google handle sex and violence, or defamatory articles?

In the policy realm, one of the most important decisions we humans will have to make is whether to allow germline gene modification. This might eliminate certain diseases, ease suffering, make our offspring smarter and more beautiful. But it would also change our species. It would enable the wealthy to concoct superchildren. It’s exhilarating and terrifying. To weigh these issues, regulators should be informed by first-rate science, but also by first-rate humanism."

Kristof poses some interesting questions but does the modern philosophy and humanities education provide a "toolkit" or even a methodology for answering any of his questions?   In the classroom, what do humanities professors do?    When I was a student, in my college humanities courses; we would read books and talk about them. I enjoyed having a commitment device that forced me to read authors whose work I would not have likely studied.  But, I don't see how these courses (unless they have radically changed in 30 years) help to create a new wise King Solomon in Silicon Valley.  Is he saying that MIT has an incomplete education program because it does not invest much in the humanities?

I am interested in his hypothesis that there is a synergy between studying the "hard stuff" and the "soft stuff" but is this true? How would we test this?  Can we ask Mark Zuckerberg about whether he would be a better CEO if had taken more humanities courses?    If he told the truth, what would he say?

There is a battle for scarce resources at Universities now taking place.  Which departments should grow and which should shrink?  For each department, how does it show that its value added is high?  Gov. Jerry Brown is asking the UC these questions and each department within each branch of the UC should have to answer this question.

Tuesday, April 14, 2015

Calmly Assessing Quality of Life Progress in China

I just finished reading Prof. Ezra Vogel's biography of Deng Xiaoping.  This book has sold over 800,000 copies in China.   This is a fascinating book.   Prof Vogel views Deng to be a major figure whose policies sharply improved China's overall quality of life.   While Deng was a proud member of the CCP, he was willing to experiment.  Way before J-PAL, he was running many policy field experiments (but he wasn't writing up the results for a top 5 journal).   I have also been fascinated by Western reviewers' reactions to Prof Vogel's book.   Here is the review of a author born in China who was expelled from the CCP.   Here is a calmer review of Vogel's book.  Here is the NY Times review of Vogel's book.

It appears to me that Western intellectuals are very cynical about acknowledging the improvement in the standard of living in modern China.   How many people in China today would prefer to live in China in 1990 or in China in 1970 or in China in 1870?  This "time machine" test is one revealed preference test of improvement in the quality of life.   Would urban China be a better place to live if the nation had open and free elections and political competition?  That's a tough counter-factual but this is a different question than asking; "under its current institutions and rules, has quality of life improved sharply in China over the last 30 years for 99.9% of its people?"  So, do we use Rawlsian criteria or the average person's well being for judging progress?  In this age of anxiety about inequality, I think this is an important question to ask.

I have a personal stake in the "Vogel Debate" on progress during the CCP's leadership because Prof. Siqi Zheng and I are about to publish a book on environmental progress in China.  Our argument is a 2nd cousin of some of Professor Vogel's ideas.   We posit as explained here that China's cities are already experiencing environmental progress and that this progress will accelerate.   The possibility that quality of life can improve under one party's leadership is repulsive to many intellectuals.  An open question in political science concerns when "regime change" takes place. I wonder if intellectuals hoping for a bloodless regime shift hope that quality of life deteriorates in China so that this accelerates regime change.  In this sense, our hypothesis (if true) would concern the western intellectuals because such quality of life progress strengthens the CCP's ongoing leadership position.

I believe that these points need to be debated and discussed. Do Western Intellectuals hope that China's economy collapses and its environmental quality keeps being degraded?   An odd coalition appears to exist. The U.S Military must hope that this unfolds in order to slow down China's build up. Environmentalists who associate economic growth with pollution would also support this and this blog post posits that Western intellectuals also support this.  So, is China's economic growth and environmental progress good or bad for China and is it good or bad for the United States?

Monday, April 13, 2015

Are Two Heads Better than One? Hillary and Bill and the "One Chair" in the Oval Office

Secretary Clinton would be a fine President of the United States.   While I would prefer for President Obama to serve a third term, I realize that this is unlikely event.  I am troubled by the idea of having a married couple in the White House where one is the current president and one is a past president. I would be happier with her 2016 Administration if they divorce.  An ex-President should not be living in the White House.

There are issues of messaging, issues of foreign relations and issues of the command structure.  Are two heads better than one?   Alan Blinder and John Morgan have written a paper on this subject.  Here I provide some exact quotes;

"So these are the two central questions for this paper: Do groups such as monetary policy
committees reach decisions more slowly than individuals do? (We have never heard it suggested
that groups decide faster.) And are group decisions, on average, better or worse than individual

From the start, our interest centered on the first two findings:
* Do groups reach decisions more slowly than individuals? According to these
experimental results, groups appear to be no slower in reaching decisions than individuals are.
* Do groups make better decisions than individuals? The experimental answer seems to
be yes. And the margin of superiority of group over individual decisions is astonishingly similar
in the two experiments—about 3 1/2%.
If groups make better decisions and require no more information to do so, then two
heads—or, in this case, five—are indeed better than one. Society is, in that case, wise to assign
many important decisions, like monetary policy, to committees."

So, Blinder and Morgan disagree with me and they have lab results supporting their findings. I do think that my general thesis needs to be discussed and debated.

A future President Jeb Bush would only occasionally invite W. and #41 to the White House.

Sunday, April 12, 2015

A Beckerian Theory of Watching Pro-Baseball: Longer Games ==> The 1% No Longer Watch

It is a well known fact that baseball games now take much longer to complete than in the past.  An average of  3 hours and 8 minutes is a major investment of time.   A fan who wants to watch such a game has an opportunity cost for that time. For those who make a serious wage per hour, this can add up to a very high $.   Simple economic logic predicts that the college educated would respond to this increased time investment by substituting to another sport or leisure activity with a lower Beckerian price.  Has some undergraduate already written this paper?  MLB is aware of this challenge and has passed new rules to  speed up the game.  Will the 1% return to watching and caring about baseball or is "time money"?

Now, baseball addicts will say that I'm wrong and will point out that even among high wage people that there are a subset of people who love baseball and will watch longer games.  But, if attendance and viewership among the highly educated (and wealthy) isn't dropping then why is MLB trying to shorten the games?  During a longer game, people will order more food and drinks at the stadium.  The advertisers can show more commercials on TV.   Who  are the marginal people who no longer watching baseball as the games became much longer?  

Filling Swimming Pools During a Time of Drought

I live in West Los Angeles in a neighborhood where  75% of the homes have private swimming pools (we don't one).  Here is a home for sale and it has a pool.  In the midst of California drought, I asked myself  a deep question. How many gallons of water does it take to fill a pool?  Google provided me with this website and for the fictitious pool that I created, this website told me that it needs 36,000 gallons to fill it up.  Residential water is currently priced at roughly .5 cents per gallon in Los Angeles.  This website says that a pool owner should change his water every 7 years.   So, a pinch of algebra suggests that the annual water cost of pool ownership is;  36000*.5/7 cents per year or $25.7 dollars per year.   That strikes me as a low current price.

There are roughly 4 million home owners in Los Angeles.  If 33% of them have swimming pools (I'm making up that number), then these guys alone are consuming 4 million * .33 * 5142 gallons of water each year on filling their pools.  Now I'm assuming that each of these guys owns a big pool!

Under these assumptions, LA's private pool owners are consuming 6.8 billion gallons of water a year for their private swimming pools!

Jerry Brown could save us all by banning swimming pools!  I am kidding but I want you blog readers to do some thinking about basic arithmetic and to think about demand curves for under-priced resources.  We can adapt if we allow the price mechanism to do its job.

Adam Smith would not vote for Jerry Brown.  The Governor should return to UC Berkeley and enroll in David Card's class.

Saturday, April 11, 2015

A Productive Trip to Las Vegas

You might think that a trip to Las Vegas represents an opportunity to gamble, drink, smell 2nd hand smoke, see large drunk people and admire people's strange tattoos but I want to sketch an alternative vision.  On Thursday night, I encountered everything I listed above at the MGM Hotel but on Friday I gave a seminar at UNLV Econ.     My friend Ed Coulson has joined their faculty and I presented a new paper of mine on China's industrial parks.     Today, I'm going through the comments I received at the seminar and I'm really happy about what I learned by presenting there.  There are some future reviewers of my paper who will have fewer opportunities to beat up this paper because of what I learned yesterday.   I want to thank my new friend Herman Li for the chance to be productive and learn in Vegas.

Thursday, April 09, 2015

Water Pricing in Beijing: Will Communists Embrace the Price Mechanism Before Jerry Brown Does?

As California continues to ignore the obvious solution of raising water prices to adapt to lingering drought, let's turn to China.  The New York Times has a "doom and gloom" piece on its front webpage declaring that if the 2022 Winter Olympics take place in the suburbs of Beijing that  water shortages will become more severe in China.

As an economist, I asked myself "what is the price per gallon of water in urban China"?  Two seconds of Google searches yielded the answer based on this Reuter's source.  

"While more than 90 percent of households will see prices rise by just 1 yuan ($0.16) per cubic metre, from 4 yuan to 5 yuan, there will be a much larger increase for big industrial consumers, Xinhua news agency said.

Major water consumers such as car-washes and bath houses will see prices jump to 160 yuan per cubic metre, from the a previous range of between 61.68 yuan and 81.68 yuan, the report said.

Golf courses and ski resorts - many of which rely on artificial snow machines in arid Beijing - will also pay for 160 yuan per cubic meter, it added."

Dear Readers, there are 264.2 gallons of water in a cubic meter.  Converting Chinese yuan into USA cents, you quickly see that Beijing residential households now pay 80 cents for 264.2 gallons of water. Divide and you find that they pay .3 cents per gallon.  That's 40% cheaper than California water.  Let's repeat this exercise for golf courses and ski resorts. So, let's do the math again.  160 yuan = $25.6 dollars for 264.2 gallons or 10 cents a gallon.

Communist China can do California a favor by running a field experiment in which it raises Beijing water prices and alerts the people about the rising marginal price of water.  I predict that we will quickly observe both demand side adjustments and supply side innovation such that the water shortage crisis vanishes.

The New York Times reporters need to return to Harvard and take Greg Mankiw's Ec 10 course for a grade. You don't have to be Hayek to see how the price signals from free markets will solve both California's and Beijing's challenge. Allow free markets to operate and our climate change adaptation challenge will be much easier to achieve.

Wednesday, April 08, 2015

The Future of Economic History?

The Economist Magazine makes the  "macro case" that economic history is a highly relevant field.  It hints that if the world economy follows a stationary time series process then we need to look back for hundreds of years to collect enough booms and crises to improve our understanding of business cycles and governments' attempts to reduce their amplitudes.   It suggests that such stars as Piketty, Reinhart and Rogoff represent the best of what economic history can hope to achieve.

Macro history doesn't interest me. I'm interested in Robert Fogel's "micro history".   In 1987, I earned a degree in Economic History from the LSE.  I am married to an economic historian. I have published an economic history book and I have published in the Journal of Economic History (both a paper and a book review). I am currently finishing two economic history papers.  I am friends with roughly 80% of the NBER's DAE group and haven't yet met the remainder. So, I can offer a few comments about the current state of the field of Economic History.

Economic history is a first cousin of applied micro with a couple of big differences.

1. The economic historians cannot run field experiments. Their subjects are all dead.  In this age of "clean identification" this poses challenges for how such scholars devise credible identification strategies.  Back in the 1990s, one could declare that a natural experiment generated some "exogenous variation" in a key explanatory variable and thus E(UX) = 0 but smart guys can always tell some story that challenges this key assumption.

2. The economic historians must collect their own data. Robert Fogel and Stan Engerman's work highlighted the key role that original data collection plays in basic research.   The challenge here is to demonstrate that your sample is representative of the universe of possible subjects that could have been sampled back then and that the estimates generated from that sample are still relevant for today.

3. Institutions matter.  Economic historians must understand how the world differed back then but how it is similar to the world today.  You can't find these answers in a 1st year PHD econ text book.  There is an art to this.  Recall Frank Knight's famous quote.

There are plenty of young scholars hard at work on important economic history topics.  Take a look at the Working papers listed here.  Most of this research focuses on applied applications that tie into cutting edge issues in modern economics but take advantage of special features of the past that allow the scholar to generate new insights based on old data about a cutting edge open research question. In this sense, economic history is a lab.  The key for such research to be "relevant" is to build a bridge that explicitly tackles the issue of demonstrating that the new facts generated by the historical research are still relevant for today.  Those who study business cycles try to do this but I question whether their "apples" from the past can be compared to the "oranges" from today.

Should economic history be a required course for new economists?  Yes, I think so.  My University of Chicago did not have such a requirement and I think this slowed down my intellectual development.  The first two years of classwork do not teach young economists about the "detective work" required to be a good scholar.    Economics would be a stronger discipline if applied researchers knew more theory and if theorists (both in theory and econometrics) knew more about data collection, cleaning, and institutions.  There are gains to trade here that have not been fully realized.   Yes, specialization matters but UChicago's Nobel Laureates boast that they are generalists.  Economic history helps to make an economist a more sophisticated intellectual who "sees the big picture".  While this can transform you into a talking blogger, it can also make you a better scholar and a more interesting person.

Monday, April 06, 2015


The March 2015 REPEC rankings are posted and here is one funny "border pairs" duo based on productivity over the last 10 years.    Neither his famous book nor my books are counted by REPEC so we could have both ranked higher.

261Thomas Piketty 204.03
262Matthew Edwin Kahn

29 of the economists ranked ahead of me are at Harvard.   That's a talent agglomeration.  

Past Media Coverage of Urban Infectious Disease Death Dynamics: Causes and Consequences

Infectious disease was a major threat to urban quality of life in the late 19th century.  Research from Germany, France, and from the United States has documented this claim.  In a new NBER  paper,  Dora Costa and I study how the local media reported about infectious disease outbreaks.  A recent literature has studied the causes and consequences of media coverage.  We contribute to this literature with a focus on urban quality of life dynamics in the presence of infectious disease risk.

Consider two different cases:

Case #1:  Objective infectious disease risk (typhoid) is declining in neighborhoods but because the media isn't covering this, people are not aware of this issue.  In this case, the hedonic rental gradient will not reflect the new news of the improvement in local quality of life.  The economic incidence of improved local public goods will be gained by renters not home owners because rents won't rise because outsiders won't enter and bid up prices in these communities.   (note how our study combines ideas from urban economics and public health with media studies!)

Case #2:  Objective infectious disease risk is rising in neighborhoods and the media covers this emerging crisis.  Households will engage in greater costly self protection (see Ehrlich and Becker 1972) to protect themselves and this will help to endogenously reduce the spread of the disease. Note how the newspaper plays a role of coordinating economic activity as it encourages greater individual investment in self protection that in aggregate should make the city safer in the face of the elevated infectious disease risk.

Smart stuff?  I think so.

NBER Program(s):   DAE   EEE   PE 

In the late 19th Century, cities in Western Europe and the United States suffered from high levels of infectious disease. Over a 40 year period, there was a dramatic decline in infectious disease deaths in cities. As such objective progress in urban quality of life took place, how did the media report this trend? At that time newspapers were the major source of information educating urban households about the risks they faced. By constructing a unique panel data base, we find that news reports were positively associated with government announced typhoid mortality counts and the size of this effect actually grew after the local governments made large investments in public goods intended to reduce typhoid rates. News coverage was more responsive to unexpected increases in death rates than to unexpected decreases in death rates. Together, these facts suggest that consumers find bad news is more useful than good news.

Sunday, April 05, 2015

Non-Linear Commodity Pricing: The Case of Water

When you walk into a Starbucks, a medium sized coffee is priced at roughly $2.  This price doesn't change as a function of age, education, race or income or any other demographic attribute.  The price is the price and you purchase if your willingness to pay for a cup of coffee is greater than this price.  In the case of California water, there is no "law of one price".  Everyone is paying different prices and everyone (especially farmers) is paying too low of a price.

The LA Times today picks up on the 1% versus the 99% inequality theme by talking about how the rich are not conserving water.     An economist might ask why?  First water prices are so low, that there is little incentive to conserve.  Richer  people are also more likely to live on larger properties and to live in a single family home with a swimming pool.   But, let's return to LADWP water pricing.

"For Single-Dwelling Unit Residential Customers (Schedule A), the breakpoint between first and second tier usage is based on lot size (five categories), temperature zone (three zones), and household size (the household adjustment involves a sliding scale of allowed extra first tier usage for households of seven to households of thirteen or more)."

So, if you live on a property with a larger lot then you face a lower marginal price for your next gallon of water than a household who lives on a smaller lot.    To appreciate this point, study this data matrix.  People who live on larger lots (which tends to be people living in the suburbs and/or rich people) pay lower marginal prices for water.  Why?  A gallon of water is a gallon of water.   I discuss this non-linear regressive pricing of water in my Climatopolis book published in 2010.  Back then, nobody was ready to talk about the microeconomics of climate change adaptation. Times change!  

Saturday, April 04, 2015

China's Comparative Advantage in Drug Innovation

Imagine a large centralized nation with a desire to create new intellectual property, rising research universities, and a willingness to try out risky new products with minimal "human subjects" concerns (academics imagine if there was no IRB approval needed for research).  There is such a country and it is called China. It is likely to become the new center of drugs research.  The WSJ reported on some of the recent news in this piece.  This general issue raises some interesting economics questions.

China's market size means that there is a large enough domestic market to sell to if Chinese drug companies dream up a new product.  This creates incentives to invest costly irreversible R&D.  See Acemoglu and Linn 2004.     China's growing economy and subsidies for research universities will lure academics to work on these problems.  Industrial parks close to these universities will help their nerds to commercialize their discoveries.  The ability to recruit "guinea pigs" to take the experimental drugs in large clinical trials will allow China to fast track new drugs in ways that the U.S with its smaller population and its large population of torts lawyers could never achieve.  U.S people who demand new effective drugs will gain benefits from being able to purchase from the Chinese exporters.   As President Obama seeks to "bend" the health cost curve, competition from Chinese drug exporters will help him to achieve this goal because U.S drug companies will have less market power as they face greater Chinese innovation competition.

So, the U.S liability law's toughness is likely to have the unintended consequence of leading to a transition of cutting edge innovation to move from the U.S to China.  Can U.S scientists gain from piggybacking on China's innovations? This will depend on international patent protection versus open source technology agreements and collaboration.   Read Josh Lerner's stuff on this topic. 

Tuesday, March 31, 2015

How Will the Aspen Forests Adapt to Climate Change? What Do We Lose if they Can't?

Justin Gillis reports that the Aspen Forests in the American West are threatened by climate change.  The causal mechanism is drought and heat.    For those who want to delve into these issues, read this piece.  Here is an important quote from the 2nd piece:


So what does the future hold for aspen in a warming world? The answers may depend in part on how the aspen reproduce. Aspen have two means of reproduction: Some are seed spreaders, and some are sprouters. In the East, where aspen are seeders — reproducing via cottony seeds floating on the wind — the future looks brighter. Like many trees, they may be able to simply move up in elevation to find suitable habitats in a warmer world. However, aspen is not a dominant species in these forests, nor is it likely to be in the future.

In the West, where aspen play a bigger role in forest composition, they might be slower to make the transition because there, they are sprouters, not seed spreaders. Most aspen in the West reproduce from the roots of existing trees, sprouting new trunks, called ramets, in a steady march across the landscape. Entire groves, then, can be clones of a single original tree.

The largest of these clonal groves ever documented is a 108-acre stand in Utah called “Pando,” Latin for “I spread.” The Pando Grove contains more than 40,000 trees and is estimated to have existed for at least tens of thousands of years. For a single clonal grove to be successful, it must have just enough disturbance to keep conifers from taking over, while escaping any grove-eliminating catastrophic events. Pando, in the rolling snow-covered plateau country of central Utah, has found that perfect place.

Groves of clones like Pando add a unique beauty to the landscape: They can be distinguished from neighboring aspen families during spring, when the trees leaf out, because a single clonal grove will usually leaf at the same time. The same visible distinctions are seen in autumn, when aspen turn their brilliant yellow and orange, sometimes directly adjacent to a grove that still retains its summer green.
Fall colors in the relatively drab West might be the single most attractive element of aspen to humans, but food and shelter are primary drivers for a multitude of animal species that call aspen groves home. Mice, voles, picas, rabbits, beaver, porcupine, deer, moose and elk all prefer aspen-dominated habitats. Ruffed grouse depend on them for forage, breeding and nesting. Goshawk, Cooper’s hawk, sharp-shinned hawk and pygmy owl nest and hunt and live there, too.
For these aspen-loving species, the forecast doesn’t look good. On the one hand, more droughts and warmer temperatures — conditions forecasted by most climate scientists for much of the aspen’s prime range — spell disaster for this moisture-loving species. There is little doubt that in marginal habitats — Arizona’s pine-oak woodlands, Colorado’s south-facing slopes, Alberta’s prairie edges — aspen is on its way out. Conversely, more forest fires could open new habitat for aspen, and some studies have shown an increase in atmospheric carbon dioxide aids aspen, producing longer roots and faster growth rates. The prevailing consensus, however, is that while some areas might see more aspen in the years ahead, overall aspen range is retracting. “I think aspen will have a more difficult time adjusting to climate change than many other species,” says Dr. Kathryn Ireland, who researched aspen decline in the Southwest at Northern Arizona University’s School of Forestry.
In many ways, aspen is a resilient tree, boasting two means of reproduction, high levels of genetic variability and productive living bark. It’s little wonder that P. tremuloides spans from the Arctic Circle to the Tropic of Cancer. In a changing world, however, its time of glory might be waning. A lauded study by Gerald Rehfeldt of the U.S. Forest Service’s Rocky Mountain Research Station used three future climate models to extrapolate aspen success for the remainder of this century. The verdict? More than half of current aspen stands in the central Rockies will no longer be there by 2060. The huge iconic groves of the Rockies will have to rely on high-altitude fires to clear out spruce forests adjacent to existing aspen groves, where new ramets can crawl uphill. Will they be able to keep up? Only time will tell."
Suppose that everything written in the above quote takes place, if nature abhors a vacuum; what activity will take the place of where these forests now stand?  How much do we value these forests in terms of their existence value?  What ecosystem services is this forest now providing us?  How could an empirical economist quantify this loss caused by climate change?   Does this loss of biodiversity offer us any benefits?  Will any economic activity expand into these forest areas?  Which cities are close to these areas? Will new cities pop up in these currently forested areas?

Sunday, March 29, 2015

My May 2015 LSE Lecture on Quality of Life and the Environment in China

I am a 1987 graduate of the LSE.  In less than two months, I return to the LSE to see my friends there and to give several lectures. One will be a public lecture  where I discuss the big themes of my China research.  Most of this research is joint with Siqi Zheng of Tsinghua.   One of my China pollution papers, which will soon be published in AEJ, is joint with Pei Li and Daxuan Zhou.

My year at the LSE (1986 to 1987) played a pivotal role in my early training.   From 1984 to 1986, I attended a liberal arts college.  There were no graduate students at my college.  Relatively few of the faculty were active researchers. Instead, these smart faculty taught and held office hours and served on campus administrative committees.   Few of my classmates were intellectual nerds who aspired to become professors.   In this setting, I became a cocky guy and a bit of "know it all".   At the LSE, I met students who had a better training than me and who were smarter than me.  The LSE attracts students from all over Europe and the Middle East and these individuals viewed life much differently than a dude from the suburbs of New York City.   Together, this was an eye opener.   By the end of my year at LSE, I had a much better sense of what pro economists really do and where at that moment I stood in the "ability" distribution.  I returned to my college for my senior year better trained and aware of the objective reality.  My very good exam grades at LSE must have played a key role in helping me to get admitted to Ph.D. programs.  This was my start and I've tried to make the most of the opportunity.

When I return to LSE as a 49 year old guy (and folks know that I'm a strange public speaker with a very distinctive style that most professors would never dare to use), I hope that there will be some 20 year old in the audience who is interested in the substance of my remarks and is slightly inspired to learn that economics continues to be a fascinating subject offering great questions, now better data, and very good job prospects for those who demonstrate the potential to push the frontier forward.  

Saturday, March 28, 2015

Air Conditioning and Urban Adaptation to Intense Heat

On Thursday night, I gave an after dinner talk for a group of NBER economists.  My talk focused on the impact of climate change on urban economic growth and urban quality of life.  I argued that urbanization and the system of cities will together greatly help us to adapt to the emerging threat of climate change.   Below, I provide my notes for my talk.

In today's Economist, there is a long piece about Minister Lee of Singapore.  He died this week.  Here is a direct quote from the piece:

"Among a number of 20th-century luminaries asked by the Wall Street Journal in 1999 to pick the most influential invention of the millennium, he alone shunned the printing press, electricity, the internal combustion engine and the internet and chose the air-conditioner. He explained that, before air-con, people living in the tropics were at a disadvantage because the heat and humidity damaged the quality of their work."

Note the optimism. Note the ability of a physical place to protect itself from a threat.  Economic development offers this possibility.  As air conditioners become cheaper, this same effect will be observed in every city around the world and the impact of climate change caused heat on death and lowered productivity will be sharply attenuated.

NBER dinner

·         Thank Don , remarks will be brief! 

·         Two major issues related to cities and climate change

·         1.  How does urban growth and a specific city’s urban form affect GHG emissions?    

o   Billions moving to cities.   Cities raise our income due to learning and specialization and trade
o   Engel curves and the resulting GHG emissions;   Davis and Gertler’s work,  cars everywhere,  fridge, air conditioner,  Catherine Wolfram’s work.  Growing urban middle class all over the world is buying energy consuming durables that improve their private quality of life but exacerbate the climate change challenge given that fossil fuels are used to produce the electricity for these products.    
o   Glaeser and I on carbon footprints for cities around the world that differ in climate and in compactness.  

·         2. How will climate change impact urban economic growth and urban quality of life? 

·         My thesis is simple;  urbanization greatly helps us to adapt to climate change especially within nations with a large system of cities that provide choice and competition. 

o   How far do cities go to protecting us?  That’s the empirical question. 
o   My remarks build on ideas I first presented in my 2010 Climatopolis book!   Also build on many NBER scholars’ recent work. 

·         The right micro approach is to adopt an expenditure function approach within a Gary Becker Household production function framework;

o   we seek to be safe, healthy and happy; 
o   how does climate change’s shocks and trends affect each of these?
o   For every shock that urban households can experience due to climate change, loss in consumer surplus? 
o   Role of capitalism and new products to protect us from  that shock

·         Income insulates us;  

o   Death Toll from natural disasters  -  my 2005 RESTAT paper

o   Heat waves -- The Greenstone and co-authors work on air conditioning reducing the “sting” of heat waves, USA 20th Century and true in India, my time in Singapore;  Cities and air conditioning go hand in hand

o   The urban poor and adaptation;  If income protects us, will those with less income be able to protect themselves?  As quality adjusted prices for sturdy housing, cell phone, air conditioning, fridge decline then even poorer urban people will have the capacity to protect themselves.

New Threats

  • Sea Level Rise in coastal cities such as Miami and New York;   Durable capital and endogenous maintenance;  Lego pieces and option value of disassembling;   Known unknowns and how plan for them
  • System of cities;  if coastal cities do a bad job adapting, skilled people will leave and urban growth in these cities will slow. This creates an incentive for local leaders to step up and be pro-active.
  • Zoning in cities.  Climate scientists will improve their modeling predictions and will identify where is "higher ground".   We need to change local zoning laws to allow for upzoning in safe areas.   Glaeser has noted that the whole world can live in Texas at medium population density.  There is enough land.   Yes, sea level rise will lead to the loss of coast line but there will be a pecuniary externality as higher ground land will rise in value.    A type of zero sum game.   

High Frequency Reoptimization and the Smart Phone

·         Matt Neidell's work on self protection and real time information;  Internet 

·         Frank Wolak work on dynamic pricing and keeping the grid from blacking out, same for water pricing;

Migration and Urban places versus people

·         Urban people versus urban places ;   

o   Those cities that do a bad job adapting will suffer home price loss (Rosen) , mayor will have less property tax revenue. 
o   Migration costs and voting with your feet;  Timmins and Kennan and Walker;   place based people how help them?    The elderly and the less educated face higher migration costs
o    FEMA creates spatial moral hazard  .  Why are we subsidizing living in risky areas?

Urban Production and climate shocks disruption to the economy

·         Extreme weather events and team production, who must meet face to face to create output?  My conjecture is that the productivity impact of extreme climate events will shrink over time as more economic takes place in indoor cities which are insulated from such shocks.  Professors get more work done on a nasty day.  No team production , and thus can work at home.

·         Air conditioning in LDC firms;  as human capital rises;  firms will endogenously supply air conditioning.  My work with Josh Zivin on urban TFP in the face of shocks,  Chicago’s productivity on a very snowy day; who can work from home? Who really needs to go to work in this internet age? Extremely hot day   


The LDC Research

NBER Researchers are creating a new field of study that will become increasingly important;  cities in the developing world;  development economists have focused too much on farmers.

·         Farming    --- important to study which farmers in which nations are able to adapt to changing climate conditions. To make sure that urbanites have access to affordable food we need; futures markets and free trade across nations in agricultural goods. This allows for risk diversification. We also need crops that we can hold in inventory to smooth risk.  ; 

·         Orderly rural to urban migration in the face of climate shocks? Adaptability of farmers;  system of cities; many cities to choose from;  Borjas, Freeman and Katz and the ripple effects of immigration to cities as natives move from the immigrant port.

·         Ted Miguel's work on country side violence in Southern Africa exacerbated by climate change;  urbanization will help to diffuse this threat.


·         The Future of Bangladesh --- Acemoglu and Linn  --- induced innovation;   anticipated challenge creates profit opportunity

·         Not chanting that the free market will “solve all”,  Instead --- the role that urban economic growth plays in protecting us from an emerging threat.  Self interested “victims”?  investment under uncertainty --- reconsidered. 

Should Microeconomics Be a Requirement at UCLA?

The UCLA Daily Bruin sometimes reports polls of its readers' views.    While surveys may attract a non-random sample of respondents, note that 66% of UCLA students support water rationing. Note that "water pricing" isn't even included as an option for adapting to drought conditions.   A charitable chap might suggest that the third option "the state will find a solution" includes water pricing but I'm not that chap.    This evidence suggests that UCLA Economics needs to increase its "treatment effect" in educating our students about the allocation of scarce resources and the productive role that the price system plays in allocating such resources.  Starting in August, I will see first hand whether USC students exhibit a greater appreciation for market solutions to public policy challenges.


In a March 12 Los Angeles Times Op-Ed, Nasa scientist and UC Irvine Professor Jay Famiglietti explained how California only has one year of water left and no concrete plan to deal with the low water supply. How do you feel about this matter?
  • The low water supply is alarming, and the state should immediately start rationing water as Famiglietti suggests (66%, 194 Votes)
  • Though the information is alarming, before implementing water rationing, California residents should first try to decrease their individual water usage (20%, 60 Votes)
  • The state will find a solution to the low water supply before the situation becomes dire so no immediate action should be taken (9%, 28 Votes)
  • I don't know how I feel about this matter (5%, 14 Votes)
Total Voters: 296

Thursday, March 26, 2015

A Defeat

Have you ever written a book manuscript and submitted it to a leading academic press and received four favourable reviews all recommending publication? But then based on a negative report from a scholar who doesn't have an econ degree, your manuscript is rejected.  A bad day. An embarrassing day.   When this book is finally published,  perhaps in the year 2067, you will see that it is quite good.

UPDATE:  If you don't believe me, watch the podcast of my May 26th 2015 Public Lecture at LSE.  I am eager to use this opportunity to show that our work is both very high quality, policy relevant and fascinating.

Five days have now passed.  The market for good books is competitive. We now believe that we have found a new publisher for our book.  If all goes right, it will be published in September 2015.  We will see if my USC colleagues read this book.

Cambridge, MA

Boston is a cold city. I lived here for 8 years over two different time periods. now I'm just another guy renting a room at the Sonesta Hotel. it is 90 degrees today in Los Angeles and I'm not used to wearing a coat. I'm not used to seeing dirty snow on the ground and I'm not used to cold rain. I had forgotten about gray skies.  There are some good active economists who work in Boston.   Face to face communication still has value.  Not for networking (I am too old for that), instead I am here to learn.

Monday, March 23, 2015

Celebrating Lee Kuan Yew's Life

The NY Times editorial board has mixed feelings about Lee Kuan Yew's legacy.  During his decades of leadership, Singapore's poverty rate plummeted and the nation/state is now strong and prosperous.  For a nation so close to the equator,  scholars such as Jeff Sachs must be surprised by such a nation's economic growth.  Leadership matters.  During my two trips to Singapore (and I have spent 4 weeks there in total), I saw a nation whose leaders embrace economic incentives.   Road pricing takes place and public transit works smoothly.  The streets are clean and safe.    Despite these accomplishments, the New York Times throws some punches.

A NY Times quote:   "He was also an autocrat who silenced critics and sent opposition leaders to jail, suppressing dissent and intimidating the press."

It is clear that the NY Times yearns to have Jeb Bartlett as the world's leader.   For those who can't remember the West Wing TV show of the 1990s let's listen to Wikipedia.

"Bartlet attended Phillips Exeter Academy, where his fpather was headmaster. Bartlet scored a 1590 on his SAT. Later he retook the exam, and received the same result, something both Leo McGarry and Dr. Stanley Keyworth find humorous.[8] He was accepted to Williams, Harvard, and Yale, but instead chose to go to the University of Notre Dame, as he was considering becoming a priest, though decided not to after meeting his wife.[9] He graduated summa cum laude with a B.A. in American studies and a minor in theology. He received a Masters and Ph.D. in economics from the London School of Economics, as well as an Honorary Doctorate in Humane Letters from Dartmouth College, where he was a tenured professor prior to entering politics.[10] He speaks four languages, including Latin, English, and German.[11][12][13] He is a Nobel Laureate in Economics, and is generally portrayed as a macroeconomist sympathetic to Keynesian views. He was required to split his Nobel Prize with another economist, a much more conservative Japanese man whom Bartlet respects but does not particularly like. He is the author of a book entitled Theory and Practice of Macroeconomics in Developing Countries,[10] and his research in economics is described as being focused on the developing world.  Bartlet's wife, Abigail Barrington, is a thoracic surgeon and they have three daughters: Elizabeth Anne Westin, Eleanor Emily Bartlet, and Zoey Patricia Bartlet."

Have the people of Singapore suffered under the long leadership of Minister Lee?  What do their indifference curves defined over personal liberty versus per-capita income look like?   For those who say, "give me liberty or give me death",  do they mean that?  How many people in Singapore would say this?  Or is this a statement made by intellectuals sitting comfortably in their spacious living rooms in New York City?