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!


Sunday, January 18, 2015

A Quick IQ Test

In this new world where more scholars are focusing on the development of a child's non-cognitive skills, it still is interesting to ask where you stand in the pecking order with respect to your cognitive ability.  Today, the lead piece in the NY Times Book Review is written by someone named Leon Wieseltier.  This gentleman mocks economists when he writes;

"Meanwhile the discussion of culture is being steadily absorbed into the discussion of business. There are “metrics” for phenomena that cannot be metrically measured. Numerical values are assigned to things that cannot be captured by numbers. Economic concepts go rampaging through noneconomic realms: Economists are our experts on happiness! Where wisdom once was, quantification will now be. Quantification is the most overwhelming influence upon the contemporary American understanding of, well, everything."

These were the only sentences I understood in his long erudite essay. Your IQ test is for you to read his strange piece and see if you understand it. If you do, then a lower bound on your IQ is clearly 180.  Good luck!

Future Gentrification in Hyde Park Chicago Caused by the Obama Library

Back in the 1980s, Hyde Park in Illinois looked a little run down.  The housing stock was a series of single family homes and brownstones that looked old and battered.   Flash forward to November 2014 (my last trip to Hyde Park) and tremendous reinvestment has taken place making this area look a lot better.  Much of this investment must be tied to falling crime, and improvements in local quality of life and the increased vibrancy of the University of Chicago.   As reported in this article , the University of Chicago hopes that the future President Obama library will open up nearby;

"The University of Chicago has suggested two possible locations: in Washington Park, a 380-acre space designed by Frederick Law Olmsted, where surrounding neighborhoods could use the economic boost a sparkling new library would bring. The second location, Jackson Park, on the South Side lakefront, has considerable support."

Here is a map showing both locations.   Washington Park is just West of the University of Chicago close to its main Hospital.    Jackson Park is just East of the campus.

When I was a student at UC from 1988 to 1993, we were discouraged from going to Washington Park. We were told that it was a "tough part" of town and I never even walked there even though I lived for two years at 55th and Drexel.

I can imagine that the creation of the Obama Library at either of those locations will gentrify the local area and create a larger footprint and connectivity of the UC campus as a whole.   In terms of urban economics, I'm confused about what is the "multiplier effect" from attracting a Presidential Library?  In this Internet age, will historians show up to look at documents there? Will South Korean tourists show up to go to the Museum feature of the Library?  Will fancy restaurants pop up nearby?

Chicago's South side always appeared to have a lot of land and buildings were not high.  What activities in terms of businesses and people will cluster near the new library?  I could imagine that high end housing nearby would be attractive for young doctors at the UC hospital who work the night shift.

In terms of real estate investment, should investors be buying properties close to the Washington Park site where the Library will be built?

Here is the Ronald Reagan Library.  You judge what the multiplier effect for Hyde Park will be.

Saturday, January 17, 2015

A Meaningful Life?

The NY Times achieves quite a feat today. It simultaneously gossips about Prince Andrew's life while it also gets philosophical and ponders what is a meaningful life.  I am impressed with this "two for one bundle".    This "news item" implicitly gives Prince Andrew "thumbs down".  At the mere age of 54, he is written off as a has been who has been pampered and had too much fun during his life.   This article raises deep issues that all academic economists should ponder.  Are we like Prince Andrew? Are we having too much fun? What have we done for the social good?  Or is our rugged pursuit of "self interest" sufficient?  What is your double bottom line?   I would also ask the New York Times the same question.

Wednesday, January 14, 2015

A Very Good Book about UCLA's John Wooden

My long plane ride to Boston for the annual ASSA meetings provided me with the chance to read a biography of UCLA's great coach John Wooden and Leon Panetta's autobiography.    At UCLA, John Wooden's long run of multiple NCAA College Basketball Championships sets a high bar for the athletics program. His success also poses a challenge for the nerdy UCLA faculty because everyone thinks of basketball when you think of UCLA. I would much prefer if people thought about "Economics" when UCLA is mentioned but this link hasn't been made by many.

John Wooden lived to the age of 99.  During his long life, he was straight arrow who did not drink or curse and he was always trying to teach his players.  A Midwesterner, he had to adjust to teaching "individuals" such as Kareem and Bill Walton. The book portrays him as a "square" in the midst of the turbulent 1960s and Vietnam, race relations and the Hippies raised issues on  the college campuses. Through all of this turmoil, he kept his cool and just did his job.

The most interesting part of the book is how little his players really knew him when he was their coach.  He was a private man and he wasn't a cheerleader or their buddy.   In his later life, his wife died relatively young and he spent his later years reconnecting with his old players.  The book does a wonderful job sketching how his players (who were now grown men and middle aged) sought to connect with their old coach and how at this later date he was willing and able to connect with them. While the players (especially the bench scrubs) didn't fully appreciate the life lessons he was teaching them when they played for UCLA, in later life these same athletes each had an epiphany concerning the role that Coach Wooden had played in their life.  Many professors can read this book and wonder whether we are having a similar impact. While we spend fewer contact hours with "our players" (the students), we should still aspire to have the same impact that he did.

China's Marriage Market

Gary Becker's theory of marriage appears to be receiving empirical support based on new evidence from China.  The China Daily reports "Love is not the only criterion for marriage in China. A recent survey shows that more than 40 percent of Chinese look to marry someone who suits them in appearance, educational background, social status, income and other characteristics."

Tuesday, January 13, 2015


This University of Chicago Booth webpage reports the unanimous agreement among some 25 top economists with the statement that; "The recent decline in oil prices will promote higher real GDP in the US over the next couple of years." So, I must ask a symmetry question.  If we introduce carbon pricing and thus raise gas taxes, are these economists saying that real GDP would be lower over the next couple of years?   What is the macro economic cost of combating climate change?  In California, it has been claimed that our AB32 Legislation will increase economic growth.  

Friday, January 09, 2015

How We Learn: Evidence from Virgin Atlantic

Before every flight there is a safety announcement concerning seat belts, water landings and oxygen. Most experienced flyers ignore this.  Anticipating this point, Virgin Atlantic does not have  a verbal presentation.  Virgin presents this video instead.  I have seen it twice now (thanks to ASSA in Boston) and can't get the music out of my head.  The interesting research question is whether I have retained more safety info because of this video.  Have I?   If "yes", why?

Raise Gas Taxes Tomorrow --- A Thaler Twist

This blog post will borrow some ideas from Shlomo Benartzi and Richard Thaler's Save More Tomorrow proposal and apply them to raising gas taxes.   They identified a problem that we are not saving enough for retirement.  They proposed that a credible solution to this problem is for people to commit to save a given fraction of future raises in their earnings.

"Our goal was to design a program to help those employees who would like to save more, but lack the willpower to act on this desire," write Thaler and Benartzi.

Using principles drawn from psychology and behavioral economics, the plan gives workers the option of committing themselves now to increase their savings rate later. Once employees join, they stay in the plan until they opt out.

The SMarT plan has four basic components: First, employees are approached about increasing their contribution rates approximately three months before their scheduled pay increase. Second, once they join, their contribution to the plan is increased beginning with the first paycheck after a raise. Third, their contribution rate continues to increase on each scheduled raise until the contribution rate reaches a preset maximum. Fourth, the employee can opt out of the plan at any time."

Could this same idea be applied to the gas tax?  Such a policy change would raise revenue and reduce greenhouse gas emissions.  When the price of gasoline was $4 a gallon, could the U.S Congress have passed an act that said, for every 50 cents future decline in gasoline we will raise the gas tax by 25 cents?

Would Republicans vote for this?    Yes, the price of gasoline would rise for consumers relative to the no tax scenario but the price of gasoline over time would still fall for consumers.   Such legislation would collect more gas revenue when prices fall and would send a clear signal to Hummer lovers that they should continue to seek out fuel efficient vehicles.

I realize that if the price of gasoline becomes more volatile around the same mean then this  proposal would keep raising the tax each time the gas price falls.

My point here is that that the Benartzi and Thaler logic implies that even Republicans might be willing to share a fraction of "future price declines" with the government if they trust government to use the collected funds wisely.

The interesting point here is whether Congress could pass "contingent policies".  Such a policy would state:  if the price of coal or gasoline declines, then we will raise this tax by x%.

UPDATE,  my co-author David Levinson recently posted this on this broad issue.

Thursday, January 08, 2015

Behomm Promotes Home Swaps Among the Sophisticated

Behomm connects sophisticated artists and design experts and creates a social network or a club whose members can swap homes.  I learned about Behomm from this NY Times article. Here is a quote:

"What makes Behomm different (and a likely harbinger of home-exchange sites to come) is its peer-to-peer network. All its members are visual artists, designers or allied professionals. To join, they must work in one of 98 creative disciplines listed on the application, from animator to window dresser."

 I don't believe that "economist" counts as one of the 98 "creative disciplines".  This screen clearly keeps out the proletariat.  From the photos I saw the homes that one can rent are really cool and distinctive.

A good revealed preference paper could be written if one could access all of the trade requests in the network.  Homes could be described by their physical attributes, city and location within the city or countryside.   No $ changes hands so if two people make a trade, you learn something about both of their preferences over housing and spatial attributes. From observing the universe of offers and accepted offers a good economist should learn something about the demand for these attributes.  A journal referee would complain that the preferences recovered represent those of an elite set of people who chose to join Behomm in the first place.

Wednesday, December 31, 2014


I'm looking forward to the New Year.  I remember when I was a teen there was that MTV video by U2 called "New Years Day".    For economists, the New Year starts with the annual meetings where thousands of economists agglomerate in some cold dreary city to meet and laugh.   The Winter Quarter then starts at UCLA and I'll be teaching MBA's Micro economics and later in the quarter I'll be teaching freshmen "environmental science".  

I have some big hopes (career wise) for 2015.  I hope that my book manuscript is accepted for publication at a strong academic press.   I hope that some of my new working papers get cleaned up and submitted to some good journals.  I hope that some of the half baked ideas I've written down can be developed into new working papers.   I'm also thinking about making some big changes in my life that will help me to achieve some goals that up to now I've haven't been able to reach.  So, the New Year does focus my mind on resolutions and achieving medium term goals.

Tuesday, December 30, 2014

The Sources of Comparative Advantage

An Oregon reporter named David Sarasohn has written a funny piece for the LA Times about Oregon's potential natural advantage in adapting to climate change. He makes the mistake of claiming that a coming Dust Bowl is about to unfold in California and tens of millions of people will migrate away in search of water.  Instead, a micro economist would say that the price of water will rise for agriculture. California agriculture will cut back on growing water intensive crops. California suburbanites will rip out their grass and will recycle water and the "crisis" will vanish.  What I do like about his piece is his thinking through that people in the USA do have a choice where they live their lives and millions of people may head to the Northwest.  This will create new opportunities for real estate developers and will shape and shift the culture of areas such as Oregon and Washington.  This is adaptation.  For a more nuanced discussion of the urban economics of climate change read my NBER piece titled "Climate Change Adaptation: Lessons from Urban Economics".  

One of the themes of my work on climate change is that different geographic areas offer different delineated attributes (such as winter temperature, summer temperature, rainfall, natural disaster risk).  Some of these attributes are God Given (i.e due to geography and topography) while others are an emergent property of what types of policies are adopted by local governments (i.e investments in Sea Walls and wetlands, water pricing that reflects scarcity ).  Together these endowments and policy choices determine the ability of different cities to cope with climate change.  Those cities that are unable to adapt will suffer a brain drain, and an out-migration of people, and declining local real estate prices this potential "voting with your feet" creates a strong incentive for politicians to address climate change adaptation.  Competition between cities to attract and retain the skilled helps to protect urbanites. Doom and gloomers who focus on the fate of specific places ignore this point.  

Friday, December 26, 2014

The Law of Demand: Evidence from the City of Los Angeles

Not all of my ideas merit publication in a journal. That's why blogs exist.  In this post, I would like to write about the City of Los Angeles' demand for gasoline.   After seeing our Controller speak about his open data policy, I went to this website  and downloaded every expenditure the City has made since 2011 on gasoline. The data provided the date, the quantity, the expenditure (and thus the price per gallon).  I merged to these data, weekly data for California on the price of gasoline.  From basic supply and demand this price of gasoline changes as world events unfold.    I sought to use these data to test:

1.  Does the City of California pay market rates for gasoline?
2.  Does the City purchase less when world shocks to gasoline raise the price?

For those who know some econometrics, I did two simple things;

1.  Correlate(City of Los Angeles weekly price of gasoline, State level price for gasoline in the same week)   and I found a very high correlation;

2.  Two stage least squares:     regress Quantity of gasoline =  a + b*price Los Angeles pays per gallon +  U

first stage:  Price Los Angeles pays =  c + d*state level price +  V

so I used the state level price as an instrument for the average price that LA pays and I found a fairly large negative price effect.

The weakness of my "study" is that I don't know the storage technology that the city of LA has. How much gas can it buy during times when the price is low and simply hold inventories? I also don't know how budgets work.  Do the guys making the procurement decisions get to keep $ they save by buying oil when it is cheap?

I had hoped to write a corruption note that the Government agencies are not responding to market incentives but this is false.

An extension would ask the following;  as the price of gasoline on the national market rises; the sellers of gas have an incentive to raise the price they charge the City of Los Angeles because otherwise they are throwing away revenue but what about the flip case? As the price of gasoline declines, does the non-profit City of LA aggressively seek out cheaper gasoline or does it "over-pay" in the short run because it is lazy?

Tuesday, December 23, 2014

A Trillion Dollar Coastal Loss in 2100?

When I'm back in LA, I will read and blog about this new article that claims that climate change could impose a trillion dollar loss on our coasts by the year 2100.   Two things I would ask readers to think about.  One is discounting,  at an annual interest rate of 3% this future loss has a present discounted value today of $78 billion dollars.   Second, sit down and read my recent paper .   I would bet $10,000 that the authors of this paper ignore the following points;

1. endogenous depreciation
2. general equilibrium

Endogenous depreciation is the idea that if sea level rise is expected to swamp coastal properties then owners stop investing in their upkeep and the actual sea level rise causes less damage when it occurs because the finite lived and depreciating asset that gets destroyed wasn't actually worth much at that time.

General equilibrium:  if coastal Florida floods, other pieces of real estate rise in value because demand is deflected there. These gains in value in the inland higher ground places were caused by the flooding along the coast. In this sense, a type of "zero sum game" emerges such that the losses predicted by the people such as the authors of this report are balanced out by land price gains on higher ground.

Climate scientists who are forecasting the impacts of climate change on the economy and people would be wise to take a course in economics.  Self interested individuals have choices and anticipate the shocks that are likely to take place. We have many options where to build our future cities so that the current distribution of economic activity vastly over-states where we will be in 100 years. We are not the Titanic. We see the iceberg.  Read Climatopolis.

Monday, December 22, 2014

Accidental Environmentalists? (A New NBER Paper)

Magali Delmas, Stephen Locke and I have just released a new NBER Working Paper.   Stephen is on the rookie job market this year.   I always try to write "original" papers on subjects where I hope that a new literature will emerge.  Let me sketch this paper's big ideas.

As usual, we are thinking about the economics of climate change.

Point #1:   A cliche in the environmental policy community is the following statement;  "If the United States and the world adopted a carbon tax, then the demand for energy efficient products such as solar panels and electric vehicles would increase."    The logic supporting this statement is simply a comparison of the present discounted value of the operating costs of conventional fossil fueled products versus their "green" substitutes.

Point #2:  As Matt Holian and I demonstrate, suburban households today have  a larger carbon footprint than center city households and they know this and the former group are more likely to oppose carbon pricing.  Given the suburbanization of U.S voters, median voter politics hurts the prospects of a majority U.S coalition supporting low carbon policies.

The starting point of my new paper with Delmas and Locke is the synergistic possibilities offered by jointly owning solar panels and an electric vehicle. Suppose that in the near future that suburban households can supersize their panels to generate enough power for their house and power their EV.  New battery storage would hold the power until night when the car would recharge.  Such a suburban household's carbon emissions would decline to zero.  Based on Point #2, such suburbanites would no longer oppose carbon pricing.

Note that this logic flips point #1 above.  The adoption of green products in the suburbs would increase suburban support for carbon pricing.

Why would the adoption of the EV and solar panels accelerate in the suburbs? That's the point of our new paper.  The product quality is improving (think of Tesla) and the quality adjusted price is falling (and new financing options such as leasing are becoming available).  We study a number of supply and demand side trends that strongly suggest that "accidental environmentalists" (those who seek to own a EV and solar due to cost minimization and product quality rather than because they want to please Al Gore) are a growing share of the buyers of these products and that this part of the potential customer base is ripe for growth.

Such accidental environmentalists provide public goods by accident.  They bought the product because of the private benefits the product offered.

Industrial organization economists often study quality improvements for new goods but they rarely link the quality improvements to mitigating Pigouvian externality challenges or to affecting voting outcomes (i.e support for carbon taxes) our paper represents a "missing link".

Tuesday, December 16, 2014

Los Angeles' Mayor Anticipates One Fat Tail Event

How much do cities suffer from "fat tail" extreme events such as Hurricane Sandy or Katrina?  The LA Times reports today that the Mayor of LA is forming contingency plans for an ugly scenario where an earthquake in Los Angeles disrupts the aqueducts that carry water into the city.  The Mayor is seeking proposals that offer some "bang for the buck" in terms of reducing the probability of disaster per $ spent.   This is wise planning. How will he pay for this? Will the people of LA (including me) be grateful?   Here the key issue is keeping voters aware of what the actual probability of such fat tail events could be and what we would lose if such an event occurred and we were not ready for it.  A good economist would also ask whether the people of LA are risk lovers or risk averse or risk neutral.   Our ability to imagine our future is one key difference between us and other creatures. An active imagination leads to the search for solutions and means that we are not passive victims in the face of expected natural disaster risk.

Monday, December 15, 2014

Voting with Your Fins (Cod Adapt)

At the NY Times, Michael Wines and Jess Bidgood must have studied some economics.  They playfully recast Tiebout "Voting with your Feet" for Cod saying that these fish "Vote with their Fins" as the fish seek out cooler water.  Climate change has heated up the local waters and reduced the catch of local fishermen.   How good are the Cod at adapting to the new Ocean temperature? That's the job of marine biologists to study this.   The NY Times focuses on place based fishermen and their concerns given their human capital and their place based investments in local mortgages, and their boats and their children's schooling and social network where they live.

How many workers in the Modern U.S economy face such "endogenous migration costs" such that they have locked in to a location specific industry (cod fishing) and a specific housing market whose prices would decline if the local fishermen earn less money?  Let's think about the broader urban economics issue here.

Contrast Portland Maine with Los Angeles.  Los Angeles is a diversified local economy. If one industry collapses (perhaps because of climate change reducing the supply of natural resources to harvest), there are other industries to move to. This transition will be easier for workers with general human capital.  How many of the Cod Fishermen went to college?  Home prices in LA will not decline if "Cod Fishing in LA" (I realize nobody works in this non-existence industry) collapses because LA is a diversified local economy.  Again, do you see my point.   The problem that the Cod Fishermen face in adapting to climate change is that they made a risky gamble as they invested their human capital in an industry whose productivity is a function of climate shocks and they bought a home and planted roots in a community whose value hinges on Cod being abundant.

I have been to Portland Maine.    If the tourist industry can attract enough business then a collapse of Cod Fishing in the region would have less of an impact on local home prices. This raises the issue of what economic activities can the local areas substitute to if their old "bread and butter" industry no longer offers a daily living.

Young workers will see these changes to the local economy and will not move there. The economic incidence of the new news (i.e the Cod swimming away) is borne by local land owners and those middle aged guys who have invested their human capital in this declining industry.  Note that this is a short term effect because younger guys will not enter the industry.

Sunday, December 14, 2014

The Marginal Carbon Footprint of Flying Part Two

A Tufts Agricultural Economist named Parke Wilde has nudged me to write out a few more thoughts about the carbon emissions from flying.  First, some assumptions based on this web source.

Assumption #1:

Los Angeles is 2400 miles from New York City and it costs 10 cents per seat mile on a plane with 120 seats to make this flight. So, the total operating cost is:  $30,000.

Assumption #2:

The airline cancels the flight if its revenue does not exceed the operating costs.

Assumption #3:   First class customers (assumed to be 16 pay $1000 each) and economy class customers pay $350 each.

Assumption #4: The plane uses $2600  of fuel to make the journey. So with $3 gas that equals 866 gallons of fuel

Under these assumptions, the plane will only fly if  16*1000 + N*350 >30000 so the cutoff assuming first class is full is N =56 people.

If fewer than 56 get on, the airline will cancel the flight. I'm ignoring the airline's dynamic reputation concerns.

With 56 people on board, the average carbon footprint in tons = (866*20/2000)/56.  Valuing the social damage of a ton of carbon dioxide at $35 a ton yields an average damage of $5.41 dollars each.  This is not a lot of social damage for the average person on the flight and number shrinks as more people get on the flight.

If more people get on the plane, their marginal footprint is tiny.   If only 1 person got on the plane, this guy would not "be marginal" because the airplane would not fly.   The airline makes the decision over whether to fly the flight or not.  Flights are often cancelled.   Revenue must cover operating costs.  I will not feel much guilt as I fly to Boston in 3 weeks.

If an airline added additional flights because an academic conference was taking place at some location then I agree that the conference caused new carbon emissions.

Severin Borenstein's Excellent LA Times Op-ED

Who knew that the LA Times could cover topics unrelated to Kobe Bryant!  In today's LA Times, Severin Borenstein has an excellent piece about the political economy of California's nascent carbon cap & trade market.  Starting in January 2015, gas refiners will be included under the cap and at $12 a ton for carbon dioxide this will raise the price of California gas by 10 cents a gallon. Severin correctly notes that the refining lobby has over-stated the doom and gloom for Suburban residents and being an excellent economist he is also clear that there is "no free lunch".  Fossil fuel prices will rise in California and this will trigger behavioral change and some pain for middle class suburban households (see Holian and Kahn 2014).  

During a time when gas prices are falling, such suburbanites do not have too much to complain about. Do you remember Thaler's behavioral ideas of asking people to commit to save a % of future raises?  This gas price increase during a time of trending down gas prices is a first cousin and thus should face less backlash.

I agree with Severin's last paragraph of the piece that California is the green guinea pig and its ability to launch this field experiment will provide valuable lessons that the rest of the world has the option to adopt.

Saturday, December 13, 2014

Long Run Trends in Quality of Life by Race

Mark Bittman writes in the Sunday NY Times; "The progress of the last 40 years has been mostly cultural, culminating, the last couple of years, in the broad legalization of same-sex marriage. But by many other measures, especially economic, things have gotten worse, thanks to the establishment of neo-liberal principles — anti-unionism, deregulation, market fundamentalism and intensified, unconscionable greed — that began with Richard Nixon and picked up steam under Ronald Reagan. Too many are suffering now because too few were fighting then."

Those are tough words that many NY Times readers will nod along with as they read them on Sunday morning but are they correct?  Would most minorities voluntarily enter a time machine and live their lives 40 years ago?  Were the 1970s so great?  (We are not talking about Studio 54 here).  Since we don't have a market for time machines, we have no way for people to express the intensity of their preferences. Instead, the NY Times publishes strange nostalgia.   Let's look at some objective facts.

Let's look at life expectancy trends in the USA by race or read this piece.

Do see the convergence taking place over the last 40 years?  I see progress during the 1970s, not in the 1980s but sharp progress in black life expectancy from 1995 to 2010.  I assume the vertical axis is not correctly labeled. It should say "life expectancy".  

Let's look at trends in home ownership since 1990:

While the black home ownership line declines since 2004, I again see overall progress and some convergence.

For other optimistic evidence on Median income by race and poverty trends by race look at this Pew Report and you will see similar evidence of black progress especially with respect to the % living below the poverty line and in terms of educational attainment.

As an environmental economist, I suggest that you also look at trends in urban air pollution exposure. Blacks live closer to the city center than whites and there have been large air and water pollution and toxics pollution reductions in center cities.

Crime rates tend to be higher in center cities than in suburbs and this means that blacks live in areas with higher levels of crime. As crime has fallen in these areas, this means that blacks have been disproportionately exposed to less crime relative to whites who tend to cluster in suburbs.   This has not been a free lunch for renters as gentrification in Harlem demonstrates.

I understand that there are important policing questions that need to be asked and debated but Mr. Bittman's confidence in his own statement is a pinch amazing.   Is the world "going to hell"?  I don't think so.  In our imperfect world, we are making progress and our standard of living is improving.  If you want to go back in time, where do you want to go?  Germany in 1941?    To join Lincoln in 1861?  To join Archie Bunker in 1973?     You have to go somewhere.  I think you would pick the USA in 2014.  

Friday, December 12, 2014

Cities vs. Farmers: Who Can Adapt to Climate Change?

I have been arguing for five years now that urbanization will protect us from many of the blows that climate change will cause.  Cities (relative farming) have an edge in adapting to climate change. Cities always compete for talent.  Those cities that figure out how to adapt (either due to natural advantage or good ideas) will thrive and will attract talent.   This competition will protect footloose urbanites.  An urbanized world will suffer less from climate change and this is especially the case in world featuring economic growth.  Economic development through urban growth is our best defense for adapting to climate change.  You can read my thoughts here and here.  

I have also done recent work that liberal Democrats are more likely to live in center cities while Republicans tend to be in the suburbs and this suburban group will have to pay more for carbon legislation because they live a more carbon intensive lifestyle than tofu eating walkers who live in small apartments in downtown San Fran.   These spatial lifestyle patterns provide another reason for why Republicans vote against carbon mitigation legislation.  Now, Slate provides a new argument.  Slate points out an irony that farmers tend to be Republicans and that their districts tend to oppose carbon mitigation even though the claim is that they will suffer the most from climate change.   First, it should be pointed out that 80% of Americans live in metropolitan areas so there are not that many Republican rural Congressmen.  I agree that farming interests and ideology could have a greater impact on the Western Senators where each state just has 2 senators.

So, the irony here is that Slate wishes that Republicans voted their long run "self interest" rather than their ideology.   To recap, Slate is saying that Rural Republicans will have a brighter future if they fight climate change now but that Rural Republicans are not playing ball.   Does this pursuit of "ideology" over "self interest" surprise my fellow Chicago economists trained in the Becker,Stigler, Peltzman tradition?

Thursday, December 11, 2014

Does Gov. Jerry Brown Believe that Carbon Mitigation offers a "Free Lunch" for California?

Read Gov. Jerry Brown's piece in today's LA Times.  He is an optimist about the role that carbon regulation plays in stimulating an economy.  I believe that the WSJ would disagree with the following direct quote from his piece.

"Last year, our four governments — the states of California, Oregon and Washington and the Province of British Columbia — reached a landmark agreement to align climate and energy strategies for 54 million Americans and Canadians.

The Pacific Coast represents the world's fifth-largest economy, with a GDP of $2.8 trillion. By working together we are transforming our economies and influencing world markets for the better. Our regional model shows that it is possible to take serious action on climate change and simultaneously expand an economy with well-paying jobs."

Note the last sentence where the Governor and his co-authors discuss "our regional model".  I have a feeling that he is talking about a computable general equilibrium (CGE) model for predicting how the California economy will evolve as AB32's measures are phased in.

After the Great Recession, does the governor still have such confidence that economists can predict the future with such accuracy?  If he were to add footnotes to his OP-ED, he would need to name the actual model that he is talking about and the dozens of behavioral elasticities embedded in that model.

While I hope he is right, he is showing great faith in an untested (and unestimated calibration model).  While I recognize why he likes the idea that carbon pricing and AB32's other measures could offer a free lunch for California, I have trouble believing that the measures embodied in AB32 (and I am a supporter of AB32) will deliver the economic gains that he names in this piece.

As an economist, I would like to see a more nuanced policy position that this regulation will be costly but that its benefits as a demonstration project exceed its costs.    In contrast, the Governor is selling this regulation as having "negative costs".  Yet, across the country as the price of gasoline declines middle class households are celebrating the rise in their purchasing power.  Doesn't this suggest that there is a contradiction here?   AB32 will raise gas prices in California. It will raise electricity prices in California. A key question is; "by how much?"  How easy will it be for consumers of electricity and gasoline to substitute away to more efficient products in the short term and medium term?  Does the regional model that the Governor mentions have predictions on these microeconomic effects? I believe that the answer is no.

Congressman Kevin Cramer Asks the Right Questions on the Real Cost of Embracing "Green Energy"

In today's WSJ,  Congressman Kevin Cramer (R, Norh Dakota) asks the following questions;  1.  how costly will it be for the stability of the U.S electricity grid to swap out low cost, dirty and reliable coal for more expensive, clean, and intermittent renewables such as wind and solar?  2.  How much will residential and industrial and commercial electricity prices rise by because of this power composition shift?  3.  Could the EPA's estimate of an annual energy efficiency gain of 1.5% be achievable or does this over-state the efficiency gains?  These are fair questions that serious economists should be factoring in as we try to conduct prospective cost/benefit studies of shifting towards "green power".

For details on the President's Clean Power Plan read this.

Peng Liu, Nils Kok and I will soon release a paper where we study energy efficiency trends for hotels that are part of the same chain.  Our results both provide some support for the President's optimism and other of our results support Mr. Cramer's more pessimistic view.  Why are hotels interesting?  they allow us to conduct a "apples to apples" comparison of similar pieces of the capital stock and observing their trends in energy efficiency over time.

Note the technological optimism implicit in the President's plan.  The impact on U.S firms who require 24 hour a day consistent access to power hinges on the rise of affordable battery technology to store power generated by intermittent wind and solar.  

Wednesday, December 10, 2014

Climate Adaptation and the Movies

The NY Times published an OP-Ed by Jason Mark that reviews recent Hollywood movies (think of Interstellar, Elsyium, Waterworld!) about the end of the world.

A direct quote:

"Perhaps the best of this bunch is “Snowpiercer,” the Korean director Bong Joon-ho’s fable about social injustice and environmental hubris. Released earlier this year, “Snowpiercer” imagines that civilization — in a botched attempt to reverse the effects of global warming via atmospheric geoengineering — has turned Earth into something like the ice world of Hoth from “Star Wars.”

The survivors are stuck on a train that rattles in an endless circle around the planet. The folks in first class get spa treatments and dance parties, while the proletariat in the caboose have to choke down protein bars made of ground-up bugs. Inevitably, the underclass revolts."

Is this your children's future?

I don't think so.  On Planet Earth, there is competition; between individuals, between firms and between cities.  This competition takes place through markets (not the battlefield) and the net effect is a type of safety net for all.  I am especially confident about this prediction for urbanites in nations with many cities to choose from.  The system of cities is both a simple idea and a powerful idea (although it doesn't have the potential to lead to a good movie).   In my humble opinion, my "Climate Change Adaptation: Lessons from Urban Economics" offers a clearer vision of our medium term future.