A PR firm that works for The New Yorker Magazine sent me a sneak preview of this magazine's January 2013 article about how NYC will adapt to climate change. The piece is written by a fine NYU Sociologist named Eric Klinenberg. His very good book about deaths in Chicago from the 1990s heat wave has elevated him to disaster guru and I presume that this is why he was selected to write this. You can see that the great majority of his career research citations (which add up to 1,200 in total) are from that book.
His piece is filled with "human interest" subject profiles. Columbia's guru Klaus Jacob receives a long profile. Klinenberg then goes on at great length about the crucial role that social networks will play in helping us to adapt to climate change. I certainly agree that access to trusted information is a decentralized strategy for coping with new news. The most interesting part of his article relates to his claim that the cell phone network is fragile and can be knocked out in crisis. Given the key role that trusted information plays in allowing us to adapt to challenges, this is an important point. The Federal Government and FEMA should think about how to have an emergency broadcasting system so that households can be certain to be able to access key information during a crisis. In Gotham City, the Mayor knew how to contact Batman using that beam of light. Our engineers must be able to think of something similar?
To Klinenberg's credit, there is a fair bit of individual choice and behavioral change at the heart of his optimism about adaptation. As a sociologist, he focuses on social capital as the key adaptation strategy. He writes about the Chicago neighborhood that suffered less deaths in the 1995 Heat Wave than its adjacent neighborhood;
"The key difference between neighborhoods
like Auburn Gresham and others
that are demographically similar turned
out to be the sidewalks, stores, restaurants,
and community organizations that bring
people into contact with friends and
neighbors."
So, if we don't "Bowl Alone" , we can adapt to Climate Change? I would amend this statement to say that there are many strategies to adapt to climate change including migration, innovation, access to government information and social networks. This portfolio of strategies together helps us to cope with the "new normal". The key here is updating the probabilities in our heads about the new risks we face. Armed with these updated probabilities, risk averse people will seek out new coping strategies that may include talking to neighbors, putting your house on stilts, moving to higher ground that help you cope with a crisis.
Again and again in his piece, he places government as the key actor in charge of protecting us. I would guess this is because he has a Rawlsian focus and is mainly focused on how the urban poor will adapt to climate change. He knows that Don Trump will fly his helicopter to the higher ground.
Governments tend to care about physical places while people are focused on themselves. Klinenberg does not bother to discuss (perhaps because NYU is in the flood zone?) whether private sector incentives and zoning should be used to reduce the population density in areas at increasing risk due to climate change.
So, consider the Manhattan Subway. Built in the 20th century, I'm sure that the engineers would built it differently now if they could have a "do-over". Would Klinenberg support a multi-billion dollar investment in climate proofing this infrastructure? As a sociologist, how would he evaluate whether this would be a good investment of local tax payer $?
While Hurricane Sandy was quite a shock, Manhattan appears to be back on its feet just 2 months after the event. What does that say about resilience? The next shock will cause less damage because people will have learned many lessons from Sandy. To quote The Who, "We won't be fooled again".
A Coasian View of Matt Damon's Fracking Movie called "Promised Land"
An "intellectual" can write a review without having read the book or seen the movie. While I am not an intellectual, I have read this review of Matt Damon's Promised Land and I have a few thoughts to share. Now, I'm not a big city lawyer but I can tell that this Hollywood star believes that domestic drilling has significant localized environmental costs that those who are leasing their land to energy companies are ignoring.
So, let's sketch a simple rural social cost story and see if the Coase Theorem applies. Matt and Mike own adjacent properties. Matt grows cows while Mike doesn't do much with his land. A gas company offers Mike serious $ per acre for the right to drill for gas. Mike accepts. An unintended consequence of drilling for gas on Mike's property is that there is extra water pollution on Matt's land and Matt's cows get sick from this water pollution.
There is a basic property rights question here. If Matt has the property rights to healthy cattle and if it is low cost to establish that any cattle disease is traceable to Mike, then Mike will compensate Matt for any damage done to his cattle. If transaction costs and issues of accountability (perhaps there are several fracking sites within the area) make it cloudy and difficult to establish who caused Matt's cows to suffer, then Matt may be a victim of fracking. Does this mean that fracking should be banned in this town? An economist would ask;
1. what is the value of the land per year when used for fracking , call this $A
2. What is the value of the land per year when it is used for its next best alternative, call this $B
3. what is the total environmental damage caused per year to the town, call this $C
A Coasian would say that if A - B - C > 0 , then fracking should continue and Matt Damon has made a silly movie.
If A < B + C then fracking should not have been allowed in this town. If the land in the town were owned by one big "corporation" then no fracking would occur because the big capitalist would internalize the social costs caused by fracking.
The irony here is that the division of land into many smaller plots makes each small land owner have little incentive to internalize the externality. So, Matt Damon is implicitly a friend of the 1%! If there had been a single land owner and A < B+C, the frackers would never have been invited in and there would be no issue. UPDATE ---- To see this point, consider an owner of a suburban shopping mall. If Mr. Taubman believes that a new entrant (such as a dirty book store) will cause damage to the sales of other mall tenants then he won't let the entrant enter even if that book store would be profitable. The residual claimant, Mr. Taubman, internalizes the total profit effect of the entry.
Now, the dispersed small land owners could still reach the efficient allocation of resources if transaction costs are low and they can bargain with each other. If the dispersed land owners joined an association where they had to make group decisions, then this would nudge them toward the Coasian solution (i.e only invite fracking if A-B-C > 0). If they are decentralized folks who do not speak to each other, then the town's individually rational choices (i.e Mike leasing to the frackers) may lower the entire community's well being.
My office is 3 miles from Hollywood. I would be happy to meet with folks to go over the econ 101 of their plot lines before they make an irreversible investment of $25 million or more in a movie. My fee would only be 3 free tickets to a Westwood Village premier.
UPDATE: My mom has emailed me two comments about this blog post. She noted that the impact of fracking on neighbor's health and cows may be uncertain and take time to manifest itself. In this case, the "C" mentioned above becomes an expected present discounted value of social costs. If the land owners "know that they do not know" how to estimate this (because they have no previous experience with fracking) then a rational decision maker would run a field experiment and set aside perhaps 10% of the total land area and lease this to the frackers to see if fracking causes significant social damage. If the land owners do not know that they do not know the consequences of inviting the gas companies to frack, then this is the start of benevolent paternalism as we don't allow adults to make their own choices. Once we start down that path where do we stop?
Now, in this second case there is a role for well meaning, well trained environmental consultants to step in. If well meaning people foresee that the rural land owners "don't know that they don't know" the potential negative consequences of fracking then the consultants can play a positive social role as "free consultants" educating the people about the unintended health consequences before the land owners make their choices over inviting in the gas companies.
So, let's sketch a simple rural social cost story and see if the Coase Theorem applies. Matt and Mike own adjacent properties. Matt grows cows while Mike doesn't do much with his land. A gas company offers Mike serious $ per acre for the right to drill for gas. Mike accepts. An unintended consequence of drilling for gas on Mike's property is that there is extra water pollution on Matt's land and Matt's cows get sick from this water pollution.
There is a basic property rights question here. If Matt has the property rights to healthy cattle and if it is low cost to establish that any cattle disease is traceable to Mike, then Mike will compensate Matt for any damage done to his cattle. If transaction costs and issues of accountability (perhaps there are several fracking sites within the area) make it cloudy and difficult to establish who caused Matt's cows to suffer, then Matt may be a victim of fracking. Does this mean that fracking should be banned in this town? An economist would ask;
1. what is the value of the land per year when used for fracking , call this $A
2. What is the value of the land per year when it is used for its next best alternative, call this $B
3. what is the total environmental damage caused per year to the town, call this $C
A Coasian would say that if A - B - C > 0 , then fracking should continue and Matt Damon has made a silly movie.
If A < B + C then fracking should not have been allowed in this town. If the land in the town were owned by one big "corporation" then no fracking would occur because the big capitalist would internalize the social costs caused by fracking.
The irony here is that the division of land into many smaller plots makes each small land owner have little incentive to internalize the externality. So, Matt Damon is implicitly a friend of the 1%! If there had been a single land owner and A < B+C, the frackers would never have been invited in and there would be no issue. UPDATE ---- To see this point, consider an owner of a suburban shopping mall. If Mr. Taubman believes that a new entrant (such as a dirty book store) will cause damage to the sales of other mall tenants then he won't let the entrant enter even if that book store would be profitable. The residual claimant, Mr. Taubman, internalizes the total profit effect of the entry.
Now, the dispersed small land owners could still reach the efficient allocation of resources if transaction costs are low and they can bargain with each other. If the dispersed land owners joined an association where they had to make group decisions, then this would nudge them toward the Coasian solution (i.e only invite fracking if A-B-C > 0). If they are decentralized folks who do not speak to each other, then the town's individually rational choices (i.e Mike leasing to the frackers) may lower the entire community's well being.
My office is 3 miles from Hollywood. I would be happy to meet with folks to go over the econ 101 of their plot lines before they make an irreversible investment of $25 million or more in a movie. My fee would only be 3 free tickets to a Westwood Village premier.
UPDATE: My mom has emailed me two comments about this blog post. She noted that the impact of fracking on neighbor's health and cows may be uncertain and take time to manifest itself. In this case, the "C" mentioned above becomes an expected present discounted value of social costs. If the land owners "know that they do not know" how to estimate this (because they have no previous experience with fracking) then a rational decision maker would run a field experiment and set aside perhaps 10% of the total land area and lease this to the frackers to see if fracking causes significant social damage. If the land owners do not know that they do not know the consequences of inviting the gas companies to frack, then this is the start of benevolent paternalism as we don't allow adults to make their own choices. Once we start down that path where do we stop?
Now, in this second case there is a role for well meaning, well trained environmental consultants to step in. If well meaning people foresee that the rural land owners "don't know that they don't know" the potential negative consequences of fracking then the consultants can play a positive social role as "free consultants" educating the people about the unintended health consequences before the land owners make their choices over inviting in the gas companies.
Fighting Smog in New Delhi, India
The NY Times reports about extremely highly levels of ambient air pollution in the growing city of New Delhi, India. What is to be done? My co-authored ADB paper, "Green Urbanization in Asia" offers some suggestions. Here I want to list a set of possible feasible policy solutions.
1. Is transportation growth to blame for New Delhi's pollution troubles? Where are the coal fired power plants located? If they are close by, have these coal fired power plants invested in scrubbers?
2. What standards for oil refining has New Delhi introduced?
3. What share of vehicles have diesel engines? They create more particulates.
4. What is the age distribution of the vehicle fleet in New Delhi? Could there be a vehicle registration fee that is higher for older vehicles?
5. Could vehicle drivers face a different insurance cost depending on how many miles they drive each year? Those who drive less would pay less for insurance.
6. What is the gasoline tax in New Delhi?
7. How are parking prices downtown set? Could they go up?
8. How are commercial trucks regulated? In Los Angeles, they produce a lot of the particulate matter.
9. The Times article claims that much of New Delhi's pollution blows in from nearby unregulated areas. This is similar to the Hong Kong "imports" complaint. In New Delhi, is this true? Why is the Coase Theorem failing? Given the per-capita income and the total population of New Delhi, why doesn't this city pay for pollution control equipment in the "exporting nearby" cities?
Once New Delhi makes some pollution progress, I will be happy to come visit and lecture about the joys of pollution progress. If you are looking for a serious paper about environmental regulation in India, then read Greenstone and Hanna's paper.
1. Is transportation growth to blame for New Delhi's pollution troubles? Where are the coal fired power plants located? If they are close by, have these coal fired power plants invested in scrubbers?
2. What standards for oil refining has New Delhi introduced?
3. What share of vehicles have diesel engines? They create more particulates.
4. What is the age distribution of the vehicle fleet in New Delhi? Could there be a vehicle registration fee that is higher for older vehicles?
5. Could vehicle drivers face a different insurance cost depending on how many miles they drive each year? Those who drive less would pay less for insurance.
6. What is the gasoline tax in New Delhi?
7. How are parking prices downtown set? Could they go up?
8. How are commercial trucks regulated? In Los Angeles, they produce a lot of the particulate matter.
9. The Times article claims that much of New Delhi's pollution blows in from nearby unregulated areas. This is similar to the Hong Kong "imports" complaint. In New Delhi, is this true? Why is the Coase Theorem failing? Given the per-capita income and the total population of New Delhi, why doesn't this city pay for pollution control equipment in the "exporting nearby" cities?
Once New Delhi makes some pollution progress, I will be happy to come visit and lecture about the joys of pollution progress. If you are looking for a serious paper about environmental regulation in India, then read Greenstone and Hanna's paper.
2012 Year In Review
As 2012 comes to an end, it's time to look back over what I accomplished in the year with regards to my real estate investments.
I made a total of 5 hard money loans over the course of the year. Four of those are still active. None were delinquent and none defaulted. The investment in the apartment complex gave me a bit of worry for a couple months, but in the end, it appears to have regained its footing. I did not invest any more money when management made the cash call in February. On the other hand, the property has not been generating any income for me either. Things appear to be heading in the right direction now, after hitting a bottom around mid-year. Right now, I'm getting close to $1,000 a month in passive income. This is purely from my hard money loans. If the apartment complex was paying interest as planned, I'd be well over that figure. When I started this blog seven and a half years ago, getting $1,000 a month in passive income was a goal. I didn't get there as soon or in the way I thought I would. It took longer and I ended up going into hard money investing rather than buying and renting properties, but the end result is the same.
Next year, I plan to continue with the hard money lending. I'll probably increase the funds I am using for that slightly, although I have several personal plans that might eat up my funds instead. The plan for the apartment is to continue to let it run and start looking at selling it towards the end of 2013, so any sale probably won't happen until 2014.
I made a total of 5 hard money loans over the course of the year. Four of those are still active. None were delinquent and none defaulted. The investment in the apartment complex gave me a bit of worry for a couple months, but in the end, it appears to have regained its footing. I did not invest any more money when management made the cash call in February. On the other hand, the property has not been generating any income for me either. Things appear to be heading in the right direction now, after hitting a bottom around mid-year. Right now, I'm getting close to $1,000 a month in passive income. This is purely from my hard money loans. If the apartment complex was paying interest as planned, I'd be well over that figure. When I started this blog seven and a half years ago, getting $1,000 a month in passive income was a goal. I didn't get there as soon or in the way I thought I would. It took longer and I ended up going into hard money investing rather than buying and renting properties, but the end result is the same.
Next year, I plan to continue with the hard money lending. I'll probably increase the funds I am using for that slightly, although I have several personal plans that might eat up my funds instead. The plan for the apartment is to continue to let it run and start looking at selling it towards the end of 2013, so any sale probably won't happen until 2014.
Measuring Impact in 2012: Paul Krugman vs. James Bond
According to Google Trends, 007 defeats the man from Princeton (at least measured in Google Units).
In a competition between Dr. Krugman and Larry Summers and Jeff Sachs, Paul Krugman wins.
What does this all mean? I have no idea.
In a competition between Dr. Krugman and Larry Summers and Jeff Sachs, Paul Krugman wins.
What does this all mean? I have no idea.
Bagel Quality in Berkeley and the Rise of Consumer Cities
As more New Yorkers move to California, this shifts who is the "median consumer" and provides incentives for stores and restaurants to raise their game in terms of variety and quality. If you don't believe me, then read this case study of bagels in Berkeley. Joel Waldfogel wrote an important paper about the median consumer and this should be required reading for everyone who cares about cities. The future of cities is as "consumer cities" as places where people want to live and have a high quality of life. Access to a variety of products is a large piece of quality of life and Amazon can't ship you fresh bagels (even on Amazon Prime!).
This "cute" bagel example highlights a deeper point. In this age of same day delivery, what parts of Manhattan's quality of life can't be cloned and transplanted elsewhere? If it all can be cloned and transplanted then will the real estate price premium in Manhattan vanish as you can now enjoy similar amenities in other cities with warmer winters? What is the scarce input that makes Manhattan great?
Las Vegas has shown that you can clone the Status of Liberty! Tacky? Maybe but does the marginal resident care?
This "cute" bagel example highlights a deeper point. In this age of same day delivery, what parts of Manhattan's quality of life can't be cloned and transplanted elsewhere? If it all can be cloned and transplanted then will the real estate price premium in Manhattan vanish as you can now enjoy similar amenities in other cities with warmer winters? What is the scarce input that makes Manhattan great?
Las Vegas has shown that you can clone the Status of Liberty! Tacky? Maybe but does the marginal resident care?
Chicken Coops as "Unsanitary Cities"
The NY Times reports that innovative chicken raisers such as Scott Sechler are experimenting with mixing oregano oil into chicken feed in order to grow healthy chickens. This "organic" substitute for antibiotics may reduce bacterial disease in the chickens. Is this "treatment" effective? This is why we have clinical trials to test this hypothesis. While I am not trained as a Vet, I can imagine that when chickens live in extremely high population density that infectious disease is rampant. Treating chickens with antibiotics helps to reduce this infectious disease risk but introduces other risks for the final consumers.
Take a look at this picture. It looks like a Freshman dorm. The fascinating thing about "density" is that we are like Goldilocks. We want high density because it conserves on transportation costs and wasted resources but we worry about the congestion and infection cost of density. Vertical cities such as Singapore have shown that quality of life can be high in a dense city. Extremely high real estate prices in Manhattan reveal that the rich are willing to live like chickens if the coop is nice.
The case or Mr. Sechler highlights an optimistic view of evolutionary capitalism. His firm is aware that consumers are increasingly sophisticated about what chemicals are used to grow their food. In a type of product differentiation, he has identified a new way to make an old product (the chicken) that minimizes the use of the antibiotics. If organic chickens are labeled and if "organic chickens" sell for a price premium, then he will be rewarded for his efforts. As the Chicken consumers become more educated about the consequences of consuming foods without antibiotics, there may be a growth in such demand and the entire industry's overall sustainability may become greener because of a demand side push. This is a testable hypothesis. The same logic holds in the case of California's Green Chemistry Initiative. Competition and experimentation lowers the costs of achieving environmental objectives. This is what I meant in my quote in the NY Times yesterday regarding AB32.
Take a look at this picture. It looks like a Freshman dorm. The fascinating thing about "density" is that we are like Goldilocks. We want high density because it conserves on transportation costs and wasted resources but we worry about the congestion and infection cost of density. Vertical cities such as Singapore have shown that quality of life can be high in a dense city. Extremely high real estate prices in Manhattan reveal that the rich are willing to live like chickens if the coop is nice.
The case or Mr. Sechler highlights an optimistic view of evolutionary capitalism. His firm is aware that consumers are increasingly sophisticated about what chemicals are used to grow their food. In a type of product differentiation, he has identified a new way to make an old product (the chicken) that minimizes the use of the antibiotics. If organic chickens are labeled and if "organic chickens" sell for a price premium, then he will be rewarded for his efforts. As the Chicken consumers become more educated about the consequences of consuming foods without antibiotics, there may be a growth in such demand and the entire industry's overall sustainability may become greener because of a demand side push. This is a testable hypothesis. The same logic holds in the case of California's Green Chemistry Initiative. Competition and experimentation lowers the costs of achieving environmental objectives. This is what I meant in my quote in the NY Times yesterday regarding AB32.
A Research Agenda for Studying Climate Change Adaptation
In this post, I will pose some questions that I know that I don't know the answers to. If you can answer these questions, then you will become an important environmental economist. I want more nerds to devote their scarce time to studying the micro economics of climate change adaptation so permit me to point you in some productive directions. This is my holiday gift for all of my friends and readers and you can't regift it on Ebay!
1. What new capitalist innovations will be most useful in helping us to adapt to climate change? Is it the old reliable of the air conditioner? Or will it be innovations that increase our water supply such as desalinization? How do we conduct event studies to quantify the adaptation benefits of such new products? One possible answer is that we will return to Simon vs. Ehrlich in tracking using market prices whether we are facing increased "scarcity" as the world's footprint continues to grow.
2. If information technology ranging from Tsunami Alerts to text messages to Smart Meters, provides us with real time information about new shocks, price spikes, and environmental alerts, will all of the population gain from such info or are there stubborn people who even when nudged do not respond? Do you treat those people as adults or do the benevolent paternalists step in and make decisions for this group?
3. Does competition in the insurance industry lead insurers to engage in "rational expectations" and updating their insurance premium policies to reflect evolving actuarial risk in flood zones and other places that climate change is shocking in new ways?
4. Across countries in the developing world, do farmers have rational expectations over climate conditions or do many of them have cobweb expectations such that they expect climate conditions tomorrow to be like yesterday? For those farmers with the skills to adapt to the new conditions, will their governments allow them to grow and capture the market? Is there any reason to believe that superior information will allow the "knowing farmers" to grow rich and thus have strong incentives to weed out the Homer Simpsons?
5. If international trade liberalization continues in food products, financial markets and labor migration, how much will such "free trade" help to reduce the social costs of climate shocks to any one region?
6. If housing supply regulation could be limited, where are the best places in the U.S to be investing in real estate in terms of climate amenities in the year 2075 and the low probability nasty fat tail shocks? By this I mean, in terms of relative risk --- which geographic areas are relatively safe? Where is the higher ground? When will real estate developers identify these areas?
7. Will activist federal government policy (think of New Orleans' new sea walls) slow down climate change adaptation by luring the public into remaining in risky areas? How important is "moral hazard"? How large are the implicit spatial subsidies built into the federal government transfer system and FEMA? Should national tax revenue be used to protect specific cities? Why shouldn't local tax revenue be used for this purpose?
8. How will Midwest farmers cope with climate change? What inputs can they introduce to offset Mother Nature? What adaptations can they engage in to reduce their exposure to climate risk? If they can hedge through futures contracts, how does this affect their risk?
9. From nations such as Holland that already experience flood risk, what can U.S coastal areas learn? How quickly will designs from such nations be imported and used in U.S architecture?
10. For existing coastal cities, how costly is it to retrofit infrastructure? Will officials use expected benefits and expected costs as their framework for deciding what are cost-effective investments?
11. How responsive is U.S R&D to anticipated future risks? Why did Mark Zuckerberg focus his efforts on Social Networks? Will future young nerds focus on climate adaptation solutions? How large a market is there for such solutions? Do we take the endogenous innovation hypothesis seriously or not?
12. In a nation with hundreds of cities, can shocks to any subset of cities significantly lower the nation's overall economic growth rate? For nations that are less diversified in terms of not having an open system of cities, what investments can they take to increase diversification? Will we see smaller adjacent nations merge into a larger geographic entity increasing migration opportunities?
13. Given that adaptation solutions often require new purchases, will the world's poor have the purchasing power to purchase them? What share of the world's population does not have the purchasing power to enable adaptation?
14. Does the invisible hand hold for climate change adaptation? Do we need activist government policy to accelerate adaptation or do we merely need a commitment to free markets and industry competition?
For young scholars who choose to work on these questions, I will help you to make progress here.
Who Can Take a Punch?
This NY Fed piece provides several case studies of employment dynamics in areas that experienced significant natural disaster shocks (h/t to Mark Thoma). Based on these cases, the economists are optimistic about the NY Region's post-Sandy employment dynamics. The event studies they present resemble the Blanchard and Katz state/year employment dynamics in their seminal Regional Evolutions work. Within a system of cities, we have many choices over where we live our lives and invest. This menu of choices provides us with implicit insurance against shocks and incentivizes geographical areas such as coastal cities to think about investing in resiliency so that brain drain through out migration does not take place. This is "small ball adaptation" through competitive markets rather than through a federal government Manhattan Project. In my ongoing migration work with Boustan and Rhode, we are exploring how migrants respond to disaster shocks.
Switching subjects, I was working at Stanford Univ. yesterday. It is paradise.
Switching subjects, I was working at Stanford Univ. yesterday. It is paradise.
Matt Ridley vs. Marty Weitzman
In today's WSJ, Matt Ridley has an optimistic climate change piece. Unlike my work on climate change adaptation, he ignores how capitalist cities, individuals and firms respond to an anticipated challenge. Instead, Ripley focuses on what we know about the function mapping aggregate global concentrations of CO2 increases into average temperature increases. Here is a quote:
"Given what we know now, there is almost no way that the feared large temperature rise is going to happen. Mr. Lewis comments: "Taking the IPCC scenario that assumes a doubling of CO2, plus the equivalent of another 30% rise from other greenhouse gases by 2100, we are likely to experience a further rise of no more than 1°C."
A cumulative change of less than 2°C by the end of this century will do no net harm. It will actually do net good—that much the IPCC scientists have already agreed upon in the last IPCC report. Rainfall will increase slightly, growing seasons will lengthen, Greenland's ice cap will melt only very slowly, and so on.
Some of the best recent observationally based research also points to climate sensitivity being about 1.6°C for a doubling of CO2."
Ripley does not bother to engage with Marty Weitzman's work on fat tails (see any of his post 2008 papers posted here). Weitzman's starting point is that we don't know the mapping from CO2 to temperature increases and that there are "fat probabilities" of truly horrible scenarios. A risk averse individual or nation might seek the insurance of carbon mitigation.
Ripley's certainty about a random variable strikes me to be quite strange and unlikely to encourage robustness and resilience. How does he "know that he knows" that function? I know that I don't know that function and I'm planning my life and investments accordingly.
Estimating Consumption Functions: The Case of Ohio State University Athletes
As an undergraduate at Hamilton and during my first two years of graduate school, I was quite interested in the "consumption function". I dreamed of the permanent income hypothesis, the life cycle hypothesis and contrasted these models with the simple Keynesian marginal propensity to consume (which I would call the "Monkey Model" when I taught at Columbia) out of current income. If you hand a Monkey a banana, the Monkey eats the banana so if we fit the consumption model C = a + b*Banana + U for a large sample of Monkeys then a=0 and b=1 and we are done with consumption theory.
As I read the sports section of today's NY Times, this article about Ohio State University's athletes made me flashback to my roots from 25 years ago. This OSU setting offers an opportunity to test various consumption theories. If an OSU Econ Prof could access the data being collected at OSU, then this economist could write an AER quality paper. Permit me to explain.
As I understand it, for every athlete at OSU, the University can monitor inflows of cash into the checking account and outflows of checks for specific expenditures such as books, meals and tattoos. When players receive an inflow of $, do they immediately spend it and do they spend it on luxury items? The OSU prof can also study social networks, as one focal player (such as the captain of the football team) makes such a purchase do other players on the team follow him? In consumption theory, the unit of analysis is usually a household but at a University the right "unit of analysis" should be the social network. A OSU researcher who could access Facebook could see whether the player's network is tied to his friends or his team. The influx of cash on a specific date could be used as an exogenous event and allow for tests of hyperbolic discounting. For an example of such a study see Jesse Shapiro's 2005 paper. Unlike Shapiro's data, this OSU data would allow the researcher to study durables demand and to document "flashy" bling durables (see the work of Charles, Hurst et. al. in the QJE).
How many bloggers give out free AER papers? This blog has some value added?
Hedge Fund Managers as Public Intellectuals
Today's WSJ has an opinion piece by a prominent University of Chicago graduate. Cliff Asness argues that taxes affect investment behavior. As Washington prepares to make large changes to the tax code, Cliff argues that we need to anticipate the consequences of these tax changes. Many Keynesians implicitly assume that there is no behavioral response to changes in tax incentives and Dr. Asness disagrees. Here is a quote:
"The bond market offers particularly compelling evidence that people focus on after-tax cash flows when making investments and that they will, contrary to Mr. Buffett's assertion, alter their investment behavior based on tax rates. The yield on tax-free municipal bonds is almost always considerably lower than the before-tax yield on taxable corporate bonds of similar risk. Despite his claim that taxes don't matter, we can be sure that Mr. Buffett would not hold corporate bonds in his taxable portfolio if, before taxes, they yielded only the rate on otherwise similar tax-free munis.
This sort of investment decision is just one example of how taxes affect our actions. Consider that George Lucas sold Lucasfilm Ltd., including the Star Wars franchise, toDisney DIS +1.00% this year at least partially to avoid a likely coming hike in the capital-gains tax. While Mr. Buffett is telling us taxes don't matter, here's proof that taxes are stronger than The Force."
Cliff may not remember but he took an econometrics class with me at the University of Chicago in the late 1980s. I remember that he was a tough guy with a real cocky attitude. I thought he was really smart. His performance at AQR shows that I was right. Cliff isn't the only hedge fund titan I know. Eric Mindich and I used to hang out in a quiet town called Scarsdale.
Are Cliff's views "self serving"? Yes --- of course but the shape of the equity/efficiency tradeoff frontier needs to be understood.
Green Cities Revisited: The Case of Sao Paulo Brazil's Tiete and Pinheiros Rivers
Today, the NY Times provides a geography lesson for its U.S readers as it takes us to Sao Paulo, Brazil and introduces us to Jose Leonidio Rosendo dos Santos (JLRDS). JLRDS has the nasty habit of diving into the polluted Tiete and Pinheiros Rivers to look for stuff and thus is an expert on river water quality dynamics. An interested Environmental Kuznets Curve arises. As Sao Paulo's population grew and as slums emerged, people and factories directly deposited their waste in the rivers. For years, the city didn't bother to have a sanitation system and that meant that a lot of poop was directly placed in the river. All of this yields bad smells and what the rockband Cream would call "Strange Brew".
But, the story may have a happy ending! As shown in dozens of U.S cities ranging from Manhattan to Boston to Chicago, people like a high amenity city next to pretty (unsmelly) water. Using funds provided by the IADB, a cleanup effort is underway. I'd like to see some objective evidence of the water quality progress but tourist boats are now taking people on rides on the river. If Sao Paulo follows the U.S trajectory, restaurants, walking and shops will locate along the river's banks. A basic public finance issue arises. If Sao Paulo is a great mega city, why can't it afford to finance basic sanitation for the whole city? Is this an issue of finances or about denying slum areas access to slow down their growth? The Times names one area within Sao Paulo called Guarulhos as the epi-center of not having sanitation access. I see that the airport is there so this must be at the outskirts of the metropolitan area and the infrastructure is only slowly being built relative to the growth of the population. The Times makes an interesting point that the hilly topography of the area raises costs of providing services.
For my Brazilian friends, I have one question. As Sao Paulo becomes richer and more educated, will there be an urban middle class interest group pushing for "green cities" and the cleanup of the poop? Will politicians respond to such demand? Or, do the factories have the upper-hand in blocking regulation? In many other major mega-cities, dirty industry moves away from the big cities as transportation networks improve and center city land prices rise.
For teachers incorporating videos in your courses, I have recorded a youtube video on this case.
But, the story may have a happy ending! As shown in dozens of U.S cities ranging from Manhattan to Boston to Chicago, people like a high amenity city next to pretty (unsmelly) water. Using funds provided by the IADB, a cleanup effort is underway. I'd like to see some objective evidence of the water quality progress but tourist boats are now taking people on rides on the river. If Sao Paulo follows the U.S trajectory, restaurants, walking and shops will locate along the river's banks. A basic public finance issue arises. If Sao Paulo is a great mega city, why can't it afford to finance basic sanitation for the whole city? Is this an issue of finances or about denying slum areas access to slow down their growth? The Times names one area within Sao Paulo called Guarulhos as the epi-center of not having sanitation access. I see that the airport is there so this must be at the outskirts of the metropolitan area and the infrastructure is only slowly being built relative to the growth of the population. The Times makes an interesting point that the hilly topography of the area raises costs of providing services.
For my Brazilian friends, I have one question. As Sao Paulo becomes richer and more educated, will there be an urban middle class interest group pushing for "green cities" and the cleanup of the poop? Will politicians respond to such demand? Or, do the factories have the upper-hand in blocking regulation? In many other major mega-cities, dirty industry moves away from the big cities as transportation networks improve and center city land prices rise.
For teachers incorporating videos in your courses, I have recorded a youtube video on this case.
A Crisis in Higher Education?
Labor economists have routinely documented the high economic returns to holding a college degree. The U.S has the world's best universities, so what is the issue? Apparently in a diverse society, there are heterogeneous rates of return to attending university and even those who attend the same university achieve different outcomes as they choose different majors and many allocate their time to consumption (i.e beer drinking) rather than heading to the library. Two recent news stories about Higher Ed caught my eye.
1. The fight at NYU over vertical expansion.
2. Universities borrowing lots of money to build new buildings.
Story #1 raises a series of issues related to the Coase Theorem and the Arrow Impossibility Theorem. Given my position as a Visiting Scholar at NYU's Stern School, and having been a faculty member for 20 years at random places, I can provide some wisdom here. Ask yourself the following questions, who runs the University and what is the goal of the University? Two seconds of thought will convince you that universities are funky, they have a complex objective function with multiple stakeholders ranging from alumni, faculty, staff, prospective students, trustees and the administration. If important decisions must be made, who decides? Is majority rule the right way to make these decisions? Economists question voting because voting doesn't reflect the intensity of your preferences. Most University Administrations seek to pursue their own agenda while appearing to listen to "stakeholders". This takes a lot of meetings and there is a lot of eye contact as sincere leaders signal that they are listening, but are they? Did they take the job to listen to you? I don't think so.
In the case of the "vertical expansion" if NYU, some interesting overlapping generations issues arise. Consider a 50 year old member of the Economics Department faculty. He will say to himself; "I love the current funky NYU scene. This plan to create a "New NYU" will take 20 years to complete. Yes, it will look great and urban universities face severe land constraints that going vertical will solve but by the time NYU is done, I will be done. I have no stake in this plan. This plan confronts me with medium term pain and I won't be around in the long term". So, the problem is that the key stakeholders have a medium term perspective while the trustees and the legacy seeking President have a long term perspective. The Coase Theorem would suggest that if the professor have the property rights and can block this "progress", then the President must buy them out. But, what can he offer them?
Economists have not devoted enough attention to bargaining games with a nasty "time to build" component. China can get big projects done in ways that NYU may not be able to. How costly are such democracy impediments to our long run productivity? I don't believe that Manhattan has used its scarce land efficiently and NYU is an excellent test case of the interaction between land use controls and maximizing intellectual spillovers to achieve continued productivity gains. We want 4% GNP growth. How do we achieve that? In part by allowing NYU to go vertical.
Story #2; University borrowing. The NY Times forgets that interest rates are really low right now. It isn't crazy to borrow. I liked that Ohio State is issuing 100 year bonds. These universities are over investing in buildings rather than faculty. I would like to see a major university announce that it is borrowing $500 million dollars to fund 100 endowed faculty chairs. That university would rise in the rankings. Universities have forgotten what the words "comparative advantage" mean. Schools, including my own, need to get the Eye of the Tiger back and return to the core mission of teaching undergraduates and creating new research.
UPDATE: After watching this UCLA video, I'm now wondering if there is a crisis. Our priorities seem a little skewed here. I didn't see a library or a nerd in this video.
1. The fight at NYU over vertical expansion.
2. Universities borrowing lots of money to build new buildings.
Story #1 raises a series of issues related to the Coase Theorem and the Arrow Impossibility Theorem. Given my position as a Visiting Scholar at NYU's Stern School, and having been a faculty member for 20 years at random places, I can provide some wisdom here. Ask yourself the following questions, who runs the University and what is the goal of the University? Two seconds of thought will convince you that universities are funky, they have a complex objective function with multiple stakeholders ranging from alumni, faculty, staff, prospective students, trustees and the administration. If important decisions must be made, who decides? Is majority rule the right way to make these decisions? Economists question voting because voting doesn't reflect the intensity of your preferences. Most University Administrations seek to pursue their own agenda while appearing to listen to "stakeholders". This takes a lot of meetings and there is a lot of eye contact as sincere leaders signal that they are listening, but are they? Did they take the job to listen to you? I don't think so.
In the case of the "vertical expansion" if NYU, some interesting overlapping generations issues arise. Consider a 50 year old member of the Economics Department faculty. He will say to himself; "I love the current funky NYU scene. This plan to create a "New NYU" will take 20 years to complete. Yes, it will look great and urban universities face severe land constraints that going vertical will solve but by the time NYU is done, I will be done. I have no stake in this plan. This plan confronts me with medium term pain and I won't be around in the long term". So, the problem is that the key stakeholders have a medium term perspective while the trustees and the legacy seeking President have a long term perspective. The Coase Theorem would suggest that if the professor have the property rights and can block this "progress", then the President must buy them out. But, what can he offer them?
Economists have not devoted enough attention to bargaining games with a nasty "time to build" component. China can get big projects done in ways that NYU may not be able to. How costly are such democracy impediments to our long run productivity? I don't believe that Manhattan has used its scarce land efficiently and NYU is an excellent test case of the interaction between land use controls and maximizing intellectual spillovers to achieve continued productivity gains. We want 4% GNP growth. How do we achieve that? In part by allowing NYU to go vertical.
Story #2; University borrowing. The NY Times forgets that interest rates are really low right now. It isn't crazy to borrow. I liked that Ohio State is issuing 100 year bonds. These universities are over investing in buildings rather than faculty. I would like to see a major university announce that it is borrowing $500 million dollars to fund 100 endowed faculty chairs. That university would rise in the rankings. Universities have forgotten what the words "comparative advantage" mean. Schools, including my own, need to get the Eye of the Tiger back and return to the core mission of teaching undergraduates and creating new research.
UPDATE: After watching this UCLA video, I'm now wondering if there is a crisis. Our priorities seem a little skewed here. I didn't see a library or a nerd in this video.
Skiing and Climate Change Adaptation
The NY Times reports that existing ski resorts are suffering because climate change has reduced the number of winter days below 32 degrees and the snow isn't sticking around. The tone of the article is that this is a disaster. A couple of obvious points:
1. Leisure activity is a zero sum game. If people in Boston stop going for leisure to a Vermont Ski Lodge then maybe they will substitute and travel to Mexico for a Winter Vacation. The money that was spent in Vermont doesn't vanish it would go to Mexican hotels and tourist spots. This helps Mexico to develop and offers global benefits in terms of reducing world income inequality and creating global stability. It is possible that these ski resort visitors will substitute a domestic vacation to Miami. The NY Times devoted no attention to "who wins" when climate change takes place. The Times doesn't have an economic model of what is the next favorite alternative for people who go to local Southern Ski resorts. Will these people go to Canada to Ski? Will they go to Mexico? Their $ doesn't vanish it just gets pocketed by somebody else. While ski resorts with no snow will be vacated, there are other ski resorts that will attract more business and their hotel rates will rise.
2. At the end of the article, the NY Times points out that profit seeking ski resorts are adapting by creating their own snow so this raises the question of why the Times even wrote this article? Does the Times have an investment in Ski Lodges near Boston?
3. As transportation costs fall for short flights, people can access a variety of destinations even if they are further from where people live. So, the people of Boston won't go for a 150 mile icy drive to access the Mountains in Vermont.
Of course there are incumbent losers from climate change . Ellen Hanak and co-authors have already documented this in this paper. Her paper's abstract:
"We use a hedonic framework to estimate and simulate the impact of global warming on real estate prices at North American ski resorts. To do so, we combine data on resort-area housing prices from two sources--data on average prices for U.S. Census tracts across a broad swath of the western U.S. and data on individual home sales for four markets in the western U.S. and Canada, each available over multiple decades--with detailed weather data and characteristics of ski resorts in those areas. Our OLS and fixed-effects models of changes in house prices with respect to medium-run changes in the share of snowfall in winter precipitation yield precise and consistent estimates of positive snowfall effects on housing values in both data sources. We use our estimates to simulate the impact of likely climate shifts on house prices in coming decades and find substantial variation across resort areas based on climatic characteristics such as longitude, elevation, and proximity to the Pacific Ocean. Resorts that are unfavorably located face likely large negative effects on home prices due to warming, unless adaptive measures are able to compensate for the deterioration of conditions in the ski industry."
My point is that we always have alternatives. You can take another job, another spouse, move to another city, eat at a different restaurant. If Mother Nature changes your choice set by removing certain alternatives, are you really made worse off? The answer is "no" if your favorite alternative is a close substitute for your favorite choice. If I wasn't teaching at UCLA, where would I be teaching?
1. Leisure activity is a zero sum game. If people in Boston stop going for leisure to a Vermont Ski Lodge then maybe they will substitute and travel to Mexico for a Winter Vacation. The money that was spent in Vermont doesn't vanish it would go to Mexican hotels and tourist spots. This helps Mexico to develop and offers global benefits in terms of reducing world income inequality and creating global stability. It is possible that these ski resort visitors will substitute a domestic vacation to Miami. The NY Times devoted no attention to "who wins" when climate change takes place. The Times doesn't have an economic model of what is the next favorite alternative for people who go to local Southern Ski resorts. Will these people go to Canada to Ski? Will they go to Mexico? Their $ doesn't vanish it just gets pocketed by somebody else. While ski resorts with no snow will be vacated, there are other ski resorts that will attract more business and their hotel rates will rise.
2. At the end of the article, the NY Times points out that profit seeking ski resorts are adapting by creating their own snow so this raises the question of why the Times even wrote this article? Does the Times have an investment in Ski Lodges near Boston?
3. As transportation costs fall for short flights, people can access a variety of destinations even if they are further from where people live. So, the people of Boston won't go for a 150 mile icy drive to access the Mountains in Vermont.
Of course there are incumbent losers from climate change . Ellen Hanak and co-authors have already documented this in this paper. Her paper's abstract:
"We use a hedonic framework to estimate and simulate the impact of global warming on real estate prices at North American ski resorts. To do so, we combine data on resort-area housing prices from two sources--data on average prices for U.S. Census tracts across a broad swath of the western U.S. and data on individual home sales for four markets in the western U.S. and Canada, each available over multiple decades--with detailed weather data and characteristics of ski resorts in those areas. Our OLS and fixed-effects models of changes in house prices with respect to medium-run changes in the share of snowfall in winter precipitation yield precise and consistent estimates of positive snowfall effects on housing values in both data sources. We use our estimates to simulate the impact of likely climate shifts on house prices in coming decades and find substantial variation across resort areas based on climatic characteristics such as longitude, elevation, and proximity to the Pacific Ocean. Resorts that are unfavorably located face likely large negative effects on home prices due to warming, unless adaptive measures are able to compensate for the deterioration of conditions in the ski industry."
My point is that we always have alternatives. You can take another job, another spouse, move to another city, eat at a different restaurant. If Mother Nature changes your choice set by removing certain alternatives, are you really made worse off? The answer is "no" if your favorite alternative is a close substitute for your favorite choice. If I wasn't teaching at UCLA, where would I be teaching?
The Rise of the Low Carbon Consumer City
In a couple of weeks, Matthew Holian and I will release a new NBER Working Paper titled; "The Rise of the Low Carbon Consumer City". An article in today's NY Times manages to summarize the key ideas in our empirical paper. Here is a quote from the Times' piece;
"Along with these real estate projects, Midtown Detroit is also helping to attract or develop the amenities that city dwellers want around their apartments, like bike paths, parks where residents can walk their dogs, and places to eat and shop. A Whole Foods is to open in midtown next year, and a light rail project is in the planning stages."
So, note that "consumer city" causes low carbon city! That's the whole idea of our project. Here is our paper's abstract:
Urban density both facilitates consumption opportunities and encourages individuals to drive less and walk and use public transit more. This paper melds insights from both the “consumer city” literature and the “low carbon city” literature. Using several data sets, we present evidence supporting the hypothesis that global urban sustainability is enhanced by downtown improvements in quality of life. We discuss possible causal channels for this association.
"Along with these real estate projects, Midtown Detroit is also helping to attract or develop the amenities that city dwellers want around their apartments, like bike paths, parks where residents can walk their dogs, and places to eat and shop. A Whole Foods is to open in midtown next year, and a light rail project is in the planning stages."
So, note that "consumer city" causes low carbon city! That's the whole idea of our project. Here is our paper's abstract:
Urban density both facilitates consumption opportunities and encourages individuals to drive less and walk and use public transit more. This paper melds insights from both the “consumer city” literature and the “low carbon city” literature. Using several data sets, we present evidence supporting the hypothesis that global urban sustainability is enhanced by downtown improvements in quality of life. We discuss possible causal channels for this association.
International Trade in Lamb Facilitates Adapting to Domestic Drought
In this piece, the NY Times tries to count sheep in the U.S West and to blame drought (and hence climate change) for the challenges this industry faces. But, the article highlights the solution to this challenge. While the U.S West may be suffering from drought and this has hurt domestic sheep farms, international sheep farms such as those in New Zealand are doing fine and are happy to export lamb to the U.S at a low price. The net result is that U.S consumers can enjoy this tasty dish even though the drought continues. International trade insulates consumers from idiosyncratic weather shocks. Thus, in this climate change era we need more free trade! I discuss this at length in Climatopolis. Free market environmentalism will become a dominant theme in the decades moving forward! Do I feel sorry for the domestic producers? No, sink or swim! Competition makes us stronger.
Returning the sheep article, the NY Times points out an interesting piece of industrial organization. It hints that the processors of sheep have some monopoly power. What is the barrier to entry?
"But some ranchers and officials in Washington believe that the deck was stacked against the sheep ranchers by the small and powerful number of feed lots that buy lambs, slaughter them and sell them to grocery stores and restaurants. Even as prices farmers received fell to 85 cents a pound, consumers at supermarkets were paying $7 or more a pound for the same meat. "
I would suggest that more structural IO economists should start to work on agricultural economics issues. There are gains to trade within the profession! For those of you who need a picture to stimulate your brains, the NY Times supplies this:
Returning the sheep article, the NY Times points out an interesting piece of industrial organization. It hints that the processors of sheep have some monopoly power. What is the barrier to entry?
"But some ranchers and officials in Washington believe that the deck was stacked against the sheep ranchers by the small and powerful number of feed lots that buy lambs, slaughter them and sell them to grocery stores and restaurants. Even as prices farmers received fell to 85 cents a pound, consumers at supermarkets were paying $7 or more a pound for the same meat. "
I would suggest that more structural IO economists should start to work on agricultural economics issues. There are gains to trade within the profession! For those of you who need a picture to stimulate your brains, the NY Times supplies this:
From Neighborhoods to Nations by Yannis M. Ioannides
When I taught at Tufts University, Yannis Ioannides was one of my favorite colleagues. One of the world's top urban economists, he has a broad knowledge of both theory and applied economics. The depth and breadth of his knowledge is on display in his new Princeton University Press book titled From Neighborhoods to Nations: The Economics of Social Interactions. This rigorous 521 page book will nudge any Ph.D economist to the frontier of spatial economics. I believe that graduate students and faculty who work in industrial organization and international trade will greatly benefit from reading this excellent book. In this age of blogging and consulting, there aren't enough major economists writing a full length "treatise". Just because the median Internet reader has ADD doesn't mean that we suppliers should simply serve up bite sized pieces of ideas! I applaud that Yannis respects his readers enough to supply a very serious piece of work. We can all learn from his example!
The Silver Lining of Rust Belt Decline: The Case of Taranto, Italy
Until I read this NY Times article about Taranto, Italy , I wasn't aware that manufacturing activity still took place there. Long time readers of this blog know that I'm a fan of the manufacturing to services transition. As I argued in my 1999 JUE paper titled "The Silver Lining of Rust Belt Manufacturing Decline", Pittsburgh is a better city today because the steel jobs left. Environmental problems have vanished in this "green city". Pittsburgh wasn't green at all in 1960 at the peak of steel. I understand that manufacturing pays higher wages than service sector jobs but there is a pollution externality associated with manufacturing that the service sector does not create.
Suppose that everyone is willing to pay $10 per day to not be exposed to the air and water pollution from steel production. Since Europe's population density is higher than other places, the same steel factory causes greater social damage located there than if it locates somewhere more remotely. I have never visited Taranto , Italy . There are always short run dislocation costs from shutting a factory. Such adjustments are borne by middle aged workers who have invested their human capital and social capital in that firm and town. Keynes said that in the long run we are all dead. An ongoing debate in economics focuses on how short is the medium term? Neo-classical economics makes optimistic predictions about how long it would take Taranto, Italy to recover. Blanchard and Katz's regional evolutions work would say 7 years.
Suppose that everyone is willing to pay $10 per day to not be exposed to the air and water pollution from steel production. Since Europe's population density is higher than other places, the same steel factory causes greater social damage located there than if it locates somewhere more remotely. I have never visited Taranto , Italy . There are always short run dislocation costs from shutting a factory. Such adjustments are borne by middle aged workers who have invested their human capital and social capital in that firm and town. Keynes said that in the long run we are all dead. An ongoing debate in economics focuses on how short is the medium term? Neo-classical economics makes optimistic predictions about how long it would take Taranto, Italy to recover. Blanchard and Katz's regional evolutions work would say 7 years.
Do You Want to Win a Nobel Prize in Environmental Economics?
I've met some ambitious economists. A subset of these folks are looking for good questions to work on. In this video, I pose a puzzle that I don't know the answer to. I'm trying to answer it. A serious answer to this question would unify several branches of the social sciences (econ, political science, psychology and sociology) and would merit a free trip to Stockholm.
1.5 Days at NBER
December in Cambridge may be rainy and cold but I'm glad I'm here. Here are all of the economic history papers I listened to over the last 1.5 days at the Goldin Conference. Roughly 100 researchers attended. Having married a leading econ historian, and co-authoring an economic history book and several other economic history pieces, I have some credibility with this crew. Can you identify the dinner time speaker in the photo below? Perhaps I am not Andy Warhol? Despite my bad photography, I hope you can see Gary Becker. He gave a great talk about Claudia Goldin's contributions to economics.
During the conference paper presentations, I sat between Stan Engerman and Gary and we had ample time to talk about many economic issues. There were dozens of economists attending the meetings whom I deeply respect and I just kept talking and debating with new and old friends.
The endless talk about economics (which is distinct from gossiping about the profession of economics --- gossip no longer interests me so much) doesn't take place anywhere but Chicago and Cambridge. In limited doses, this is quite invigorating. After commenting on Ed Glaeser's paper on beliefs, we came up with a game plan for how to write a paper on environmental beliefs that builds on his work. Tonight, Paul Rhode and I head out for dinner to discuss our disasters research. On Friday night, I went to dinner with my co-author Danglun Luo and we discussed the two papers we are writing on environmental performance in China. Tomorrow, I will return to the sunshine of LA and try to make more progress.
For those who want to see what I had to say about the Glaeser and Ma paper, here are my slides. In 15 minutes, I tried to share my beliefs about beliefs. The more I think about this I actually believe this is a central issue in environmental economics. Given that I don't work on gender issues, I will leave it to the pros to decide how relevant beliefs are for the study of male/female choices and outcomes.
During the conference paper presentations, I sat between Stan Engerman and Gary and we had ample time to talk about many economic issues. There were dozens of economists attending the meetings whom I deeply respect and I just kept talking and debating with new and old friends.
The endless talk about economics (which is distinct from gossiping about the profession of economics --- gossip no longer interests me so much) doesn't take place anywhere but Chicago and Cambridge. In limited doses, this is quite invigorating. After commenting on Ed Glaeser's paper on beliefs, we came up with a game plan for how to write a paper on environmental beliefs that builds on his work. Tonight, Paul Rhode and I head out for dinner to discuss our disasters research. On Friday night, I went to dinner with my co-author Danglun Luo and we discussed the two papers we are writing on environmental performance in China. Tomorrow, I will return to the sunshine of LA and try to make more progress.
For those who want to see what I had to say about the Glaeser and Ma paper, here are my slides. In 15 minutes, I tried to share my beliefs about beliefs. The more I think about this I actually believe this is a central issue in environmental economics. Given that I don't work on gender issues, I will leave it to the pros to decide how relevant beliefs are for the study of male/female choices and outcomes.
The Economist Magazine Discusses Climate Change Adaptation
Here is a new piece in the December 8th 2012 issue of the Economist. Here is their 2010 review of my Climatopolis. As the main ideas of my book begin to be debated (after a two year lag!), I'm going to be a little bit more aggressive pushing my optimistic vision.
Good Papers in Real Estate and Housing Economics
I'm not sure if any Econ Ph.D. students or faculty read anything but to help reduce the search costs for identifying good real estate and housing economics papers, here is a list of papers that I like. This isn't an exhaustive list. These are the papers that popped into my head within a few seconds of deep thought. If I have omitted your paper, I apologize. This list will expand over time so I encourage you to keep writing.
A Counter Example to the "Tragedy of the Commons"
To my deep shock, I learned something today by reading the NY Times. This OP-ED by Andrew Kahrl is actually quite interesting. NY Times monopolists such as Gail Collins (with her fixation for Mitt Romney's dog) and righteous Nick Kristof could learn from Professor Kahrl how to use scarce resources efficiently. After reading Professor Kahrl's piece, I'm thinking of moving to Marquette University. That's a place with serious scholars.
For at least 20 years, I have lectured on the "tragedy of the commons" that takes place both in cities and in the oceans. Consider a smoker in a city, he gains $10 from smoking a cigar and he bears private costs of $2 from smoking because the cigar costs $1.8 and he recognizes that smoking causes him 20 cents of future health damage. He will smoke. If his smoking degrades the common air in the city such that 10000 people each suffer 1 cent of second hand smoke damage then his privately optimal choice causes a net society loss of surplus = 10 - 1.8 - 2 - 10000*.01 = -93.8 . This is a simple example of the tragedy of the commons --- this smoker unintentionally degraded the commons as he pursued his privately optimal action. The same logic applies to over-fishing in common oceans. One "solution" to this property rights issue is to privatize the commons and the owner would charge a price to allow the smoker to smoke and the smoker would only smoke if he is willing to pay this fee.
We can now evaluate Professor Kahrl's claims. He argues that the privatization of beaches in the Northeast is the reason that Hurricane Sandy caused so much damage.
He writes; "By increasing the value of shoreline property and encouraging rampant development, the trend toward privatizing formerly public space has contributed in no small measure to the damage storms like Hurricane Sandy inflict. Tidal lands that soaked up floodwaters were drained and developed. Jetties, bulkheads and sea walls were erected, hastening erosion. And sand dunes — which block rising waters but also profitable ocean views — were bulldozed."
So Joni Mitchell said that we paved over paradise to put up a parking lot. As a first cousin of this claim, Kahrl is saying that capitalism and the pursuit of aesthetic beauty nudged us to drop our guard and destroy Mother Nature's coastal defense system. Such a defense system would have lived on had the area remained public property. For this claim to be true, he must assume that the tragedy of the commons would not have degraded such natural capital. This may be true.
Mother Nature is now engaging in a takings as she tries to seize coastal property from incumbent owners. I say let her win. These place based stakeholders want to use your tax dollars as funds to build a wall around them. A compromise would be for the state government to buy these properties and knock them down and revitalize the natural capital adaptation strategies that the author lists. The property owners would take a haircut but the more inland coastal areas would be protected. Federal dollars are not needed for this adaptation strategy.
For at least 20 years, I have lectured on the "tragedy of the commons" that takes place both in cities and in the oceans. Consider a smoker in a city, he gains $10 from smoking a cigar and he bears private costs of $2 from smoking because the cigar costs $1.8 and he recognizes that smoking causes him 20 cents of future health damage. He will smoke. If his smoking degrades the common air in the city such that 10000 people each suffer 1 cent of second hand smoke damage then his privately optimal choice causes a net society loss of surplus = 10 - 1.8 - 2 - 10000*.01 = -93.8 . This is a simple example of the tragedy of the commons --- this smoker unintentionally degraded the commons as he pursued his privately optimal action. The same logic applies to over-fishing in common oceans. One "solution" to this property rights issue is to privatize the commons and the owner would charge a price to allow the smoker to smoke and the smoker would only smoke if he is willing to pay this fee.
We can now evaluate Professor Kahrl's claims. He argues that the privatization of beaches in the Northeast is the reason that Hurricane Sandy caused so much damage.
He writes; "By increasing the value of shoreline property and encouraging rampant development, the trend toward privatizing formerly public space has contributed in no small measure to the damage storms like Hurricane Sandy inflict. Tidal lands that soaked up floodwaters were drained and developed. Jetties, bulkheads and sea walls were erected, hastening erosion. And sand dunes — which block rising waters but also profitable ocean views — were bulldozed."
So Joni Mitchell said that we paved over paradise to put up a parking lot. As a first cousin of this claim, Kahrl is saying that capitalism and the pursuit of aesthetic beauty nudged us to drop our guard and destroy Mother Nature's coastal defense system. Such a defense system would have lived on had the area remained public property. For this claim to be true, he must assume that the tragedy of the commons would not have degraded such natural capital. This may be true.
Mother Nature is now engaging in a takings as she tries to seize coastal property from incumbent owners. I say let her win. These place based stakeholders want to use your tax dollars as funds to build a wall around them. A compromise would be for the state government to buy these properties and knock them down and revitalize the natural capital adaptation strategies that the author lists. The property owners would take a haircut but the more inland coastal areas would be protected. Federal dollars are not needed for this adaptation strategy.
Counting Endowed Chairs
UC Berkeley has an excellent Economics Department faculty. From their faculty list, I count sixteen endowed chair professorships (and I'm not counting folks whose primary appointment is in the Haas Business School). In contrast, UCLA Econ has four endowed chairs. I believe that two are unfilled. I would suggest that as UCLA enters a period of serious private fund raising that endowed faculty chairs should be the main priority. UCLA has an excellent economics department but this resource differential between two comparable UC campuses says something. For those who are upset about inequality, focus your efforts on addressing this gap!
November Update
I've got two updates today. First, the sale of HML #22 has fallen through. Our borrower is looking for a new buyer. I don't have any info as to why the deal didn't happen.
I also received the October update for the Houston apartment complex. Things have gone wee bit south since the last yearly conference call several weeks ago, although some offsetting factors have prevented that from being reflected in the bottom line. Occupancy decreased to 89%. Management says this is due to a combination of factors, including some crime issues that have affected not just our property, but other apartment complexes in the area as well. In addition, we have seen some increased competition from nearby properties in the form of increased rent concessions. There was also some management turnover in the front office and the interim property manager was not up to the task of running the property. Management has addressed these issues by bringing in a more experienced manager from another property to run ours. Perhaps a more seasoned manager would not have allowed the competitor's rent concessions to have had such an impact on our occupancy.
Management says they have also worked with the Houston police department to increase patrols at our property. I'm not sure how effective this will be. If crime is an issue at other properties as well, I imagine the police may be stretched a bit thin trying to increase patrols at all properties. We may end up seeing a return to the use of a private security company for patrols.
Expenses declined due to seasonal decreases in utility usage, as well as the previously mentioned staffing decreases. Overall, we saw a reduction of $10,000 in expenses for October, bring our net operating income to a positive $4,200, the second highest monthly total of the year. Given that this increase is based mostly on one-time events, I would not expect this type of performance to continue.
Or should I? We also received the 2012 real estate tax bill, which features the new property assessment value. As a result of the lower assessment, the amount our lender is collecting for the property tax escrow account is decreasing by about $8,300 per month, beginning in December. That is a huge savings that will go straight to the bottom line.
I also received the October update for the Houston apartment complex. Things have gone wee bit south since the last yearly conference call several weeks ago, although some offsetting factors have prevented that from being reflected in the bottom line. Occupancy decreased to 89%. Management says this is due to a combination of factors, including some crime issues that have affected not just our property, but other apartment complexes in the area as well. In addition, we have seen some increased competition from nearby properties in the form of increased rent concessions. There was also some management turnover in the front office and the interim property manager was not up to the task of running the property. Management has addressed these issues by bringing in a more experienced manager from another property to run ours. Perhaps a more seasoned manager would not have allowed the competitor's rent concessions to have had such an impact on our occupancy.
Management says they have also worked with the Houston police department to increase patrols at our property. I'm not sure how effective this will be. If crime is an issue at other properties as well, I imagine the police may be stretched a bit thin trying to increase patrols at all properties. We may end up seeing a return to the use of a private security company for patrols.
Expenses declined due to seasonal decreases in utility usage, as well as the previously mentioned staffing decreases. Overall, we saw a reduction of $10,000 in expenses for October, bring our net operating income to a positive $4,200, the second highest monthly total of the year. Given that this increase is based mostly on one-time events, I would not expect this type of performance to continue.
Or should I? We also received the 2012 real estate tax bill, which features the new property assessment value. As a result of the lower assessment, the amount our lender is collecting for the property tax escrow account is decreasing by about $8,300 per month, beginning in December. That is a huge savings that will go straight to the bottom line.
Flying from LA to Boston in Early December
Soon I will make a short trip to Cambridge, MA to celebrate a certain economic historian's contributions. The thought of flying from sunny 65 degree LA to cold and dreary Boston in December fills me with bad memories of bad weather. But, life is about tradeoffs. I'm looking forward to the conference and I expect that I will learn quite a few new things. This trip's miles will also qualify me as a United Premier Gold Member. As I get older, I like that stuff.
Academics and "Crossover Appeal"
For all you middle aged academics, who are thinking about your time allocation and how much of your effort to devote to being a public intellectual versus staying firmly in the academic game, read this about Columbia's Professor Sudhir Venkatesh.
Must Environmental Economics Be "Humancentric"?
I will be teaching undergraduate environmental economics at UCLA this Winter. In my humble opinion it will be a very good course. For the first time in 7 years, I've actually made some major modifications to the class. Given that my primary appointment is at the UCLA Institute of the Environment, there are always many students who have never taken an economics course before. This subset of students are environmental science majors. While they are quite talented, they are often quite offended by the economist's worldview featuring human's dominance over nature. These students are often surprised that economists do not get philosophical over how humans seized the property rights over nature. We merrily embrace that natural resources belong to us as we decide how to best use this scarce resource. With this in mind, I present you with a "bird's view". Last week the NY Times had a long piece about smelly birds degrading La Jolla, California (home to UCSD) and a beautiful part of the world. Today, there is a letter in the NY Times that I link to above. The author seeks to remind the world that it is tough to be a bird these days. Birds face a variety of challenges that we have unintentionally created for them. The author wants us to have a more inclusive social welfare function defined over all of the world's creatures. I will remember that the next time I see a slug in my driveway.
Switching subjects, did I mention that I have discovered the Fountain of Youth? For those of you who still like to rock out, join me on YouTube and listen to the full length Stones Album "Their Satanic Majesties Request". After not listening to this album for almost 30 years, I am back and have listened to it 5 times today (as I worked!).
Switching subjects, did I mention that I have discovered the Fountain of Youth? For those of you who still like to rock out, join me on YouTube and listen to the full length Stones Album "Their Satanic Majesties Request". After not listening to this album for almost 30 years, I am back and have listened to it 5 times today (as I worked!).
Deceived in Dallas, Hoodwinked in Houston and Ambushed in Atlanta
In this new 8 minute YouTube video, I talk through one of the most important insights in modern transportation economics. John Kain and Don Pickrell and Peter Gordon consistently pointed out the bad incentives that urban politicians face for "just saying no" to irreversible, highly costly infrastructure projects. For those who wonder what is the source of my ideas, let me tell you a secret. Listen to this 2005 live Cream concert and your mind will just flow.
Two Interesting Pieces About Real Estate Economics
The WSJ reports that Chinese investors are building residential housing in New York City targeted to Chinese mainland buyers. This doesn't appear to be ethnic favoritism. Instead, the developers want less risk where the risk is that they will build a building that will remain vacant and commitment by Chinese buyers to purchase units both reduces risk for the developer and creates a Chinese community in the new building. This is an example of endogenous attributes in differentiated products. Consider the case of Mercedes cars. If this luxury car was only purchased by losers, would Mercedes be a "great brand"? IO economists are still wrestling with how to model the demand for differentiated products in cases in which the average characteristics of the buyers of a product becomes another attribute of the product. Multiple equilibria can arise in this case. Pat Bayer and Chris Timmins of Duke have studied this problem. See their Economic Journal paper. The Chinese investors have figured out how to exploit this to their advantage.
There is also a piece about Los Angeles real estate focused on Playa Vista. When you land at LAX, you see a huge vacant space with no economic activity. I have often wondered why it didn't fill in with development. This piece focuses on this dynamic. In the past, you could have argued that the airport is noisy and this is a major disamenity. Dan McMillen has documented that new generations of airplanes are much quieter. Quality can offset quality of life challenges in cities! For an example, here is my paper on California air pollution trends.
UPDATE: My short YouTube videos on key ideas in environmental and urban economics are posted here.
There is also a piece about Los Angeles real estate focused on Playa Vista. When you land at LAX, you see a huge vacant space with no economic activity. I have often wondered why it didn't fill in with development. This piece focuses on this dynamic. In the past, you could have argued that the airport is noisy and this is a major disamenity. Dan McMillen has documented that new generations of airplanes are much quieter. Quality can offset quality of life challenges in cities! For an example, here is my paper on California air pollution trends.
UPDATE: My short YouTube videos on key ideas in environmental and urban economics are posted here.
Could Higher Taxes on the 1% Stimulate More Academic Economic Research?
Academic economists are well paid by their universities but many superstar academics do additional consulting. If President Obama raises the marginal tax rate on the high earning economists, some of these economists will act like economists and will substitute away from discretionary consulting as the after tax wage from consulting declines. Assuming the substitution effect dominates the income effect (i.e that labor supply slopes up), these academic stars may actually do MORE academic research. I recognize that they could simply take more leisure but for most academics leisure and academic research are perfect substitutes. If these superstar economists return "to the game" and get the "eye of the tiger" back (think of Rocky III) , economic research progress will accelerate and there will be a positive externality for the academy and for society as a whole. Junior faculty will learn more from their newly engaged senior colleagues and graduate students will learn from the Jedi Masters. The stars had no incentive to internalize this Lucas/Romer externality but the rise in the marginal tax rate helps to correct this market failure.
So, the point of this blog post is that an unintended consequence of raising taxes on the rich will be an acceleration of progress in academic economics. This excites me!
Permit me to make a bad analogy: Abortion is to Consulting as Crime is to Economic Research.
Huh?
Donohue and Levitt famously argued that legalized abortion reduced crime. They argued that a small set of criminals create a large share of crimes. If these folks aren't born then less crime takes place. In the case of academic economics, a small set of economists produce most of the research. If these men and women are diverted into consulting then total research declines sharply. A tax increase has the reverse effect as the stars are nudged back into the game.
UPDATE: I should have noted an implicit economic incidence assumption that I'm making here. In the discussion above, I assumed that the superstar consultants bear the full incidence of the marginal tax increase. I recognize that if their skills are inelastically demanded by law firms and by other firms who employ consultants then these firms will bear the incidence and the superstar consultants will experience no reduction in real wages when the marginal tax increases. If both the superstars and the employers each bear part of the incidence then the academic research community will gain if the superstars have a large elasticity of labor consulting supply as a function of the real after tax consulting wage.
So, the point of this blog post is that an unintended consequence of raising taxes on the rich will be an acceleration of progress in academic economics. This excites me!
Permit me to make a bad analogy: Abortion is to Consulting as Crime is to Economic Research.
Huh?
Donohue and Levitt famously argued that legalized abortion reduced crime. They argued that a small set of criminals create a large share of crimes. If these folks aren't born then less crime takes place. In the case of academic economics, a small set of economists produce most of the research. If these men and women are diverted into consulting then total research declines sharply. A tax increase has the reverse effect as the stars are nudged back into the game.
UPDATE: I should have noted an implicit economic incidence assumption that I'm making here. In the discussion above, I assumed that the superstar consultants bear the full incidence of the marginal tax increase. I recognize that if their skills are inelastically demanded by law firms and by other firms who employ consultants then these firms will bear the incidence and the superstar consultants will experience no reduction in real wages when the marginal tax increases. If both the superstars and the employers each bear part of the incidence then the academic research community will gain if the superstars have a large elasticity of labor consulting supply as a function of the real after tax consulting wage.
Climate Change Adaptation and Shipping Goods on Receding Rivers
The NY Times reports that the great drought is causing the Mississippi River to retreat and this means that big boats can't use it to ship goods because they will hit the ground on the bottom of the river. As the self appointed world's leading optimist about how capitalism evolves to help us cope with climate change's consequences, permit me to offer a few thoughts.
First, let's not forget increasing returns to scale. The shippers of fertilizer and other products are attracted to shipping products to final consumers using this river because the transport cost per $ of sales is low. If the option of shipping by boat vanishes, and no rail road tracks are around, how will fertilizer sellers adjust? Truckers and smaller boats will fill the void and the profits of fertilizer sellers will fall and the price per pound of fertilizer will rise. Who bears the incidence of this shock depends on the elasticity of these supply and demand curves.
Let me point out a silver lining from this climate change induced effect. I predict that farmers will use less fertilizer in the Midwest as the price rises and the nitrogen cycle problems and the Dead Zone in the Gulf of Mexico will be partially mitigated. Farmers will figure out how to grow output with less fertilizer. For environmentalists who haven't studied general equilibrium theory, this is an obvious prediction from standard supply and demand models.
History doesn't have to repeat itself. Just because farmers are used to buying their fertilizer from some guy who shipped it on this River doesn't mean that in the future this pattern must persist. Perhaps this shock will give a boost to organic farmers who don't use synthetic fertilizers.
For you environmental economists, note that I'm making a Porter Hypothesis style point. In the Porter Hypothesis, regulation nudges profit maximizers to take a fresh look at their business choices and some of them discover new approaches that lower their cost of production. In a similar spirit, I'm arguing here that climate shocks shake up the status quo and force firms within the farming industry to re-optimize. In a diverse world, some will be more nimble than others but I don't care about such distributional effects. The winner of this adaptation competition will have good produce for us and we will eat it.
First, let's not forget increasing returns to scale. The shippers of fertilizer and other products are attracted to shipping products to final consumers using this river because the transport cost per $ of sales is low. If the option of shipping by boat vanishes, and no rail road tracks are around, how will fertilizer sellers adjust? Truckers and smaller boats will fill the void and the profits of fertilizer sellers will fall and the price per pound of fertilizer will rise. Who bears the incidence of this shock depends on the elasticity of these supply and demand curves.
Let me point out a silver lining from this climate change induced effect. I predict that farmers will use less fertilizer in the Midwest as the price rises and the nitrogen cycle problems and the Dead Zone in the Gulf of Mexico will be partially mitigated. Farmers will figure out how to grow output with less fertilizer. For environmentalists who haven't studied general equilibrium theory, this is an obvious prediction from standard supply and demand models.
History doesn't have to repeat itself. Just because farmers are used to buying their fertilizer from some guy who shipped it on this River doesn't mean that in the future this pattern must persist. Perhaps this shock will give a boost to organic farmers who don't use synthetic fertilizers.
For you environmental economists, note that I'm making a Porter Hypothesis style point. In the Porter Hypothesis, regulation nudges profit maximizers to take a fresh look at their business choices and some of them discover new approaches that lower their cost of production. In a similar spirit, I'm arguing here that climate shocks shake up the status quo and force firms within the farming industry to re-optimize. In a diverse world, some will be more nimble than others but I don't care about such distributional effects. The winner of this adaptation competition will have good produce for us and we will eat it.
Benevolent Paternalists vs. Tough Love: The Case of Climate Change Adaptation
This is a blog post about climate adaptation and a spatial separating equilibrium played out in a sequential game. In this game, government must make a choice to either embrace benevolent paternalism or engage in tough love. There are two types of people. One type is called "Mr. Spock" and the other is called "Homer Simpson". After government has chosen its actions and after each type has chosen its action, Mother Nature then makes a move (a Hurricane Sandy or no Sandy) and payoffs are observed.
To keep this non-peer reviewed blog post short, I assume that a person's type is exogenously determined and that 50% of the population are Spock and 50% of the population are Homer. The Mr. Spocks are 'University of Chicago" rational expectations men and women who form actuarial probabilities over random variables. The Homer Simpsons are UC Berkeley behavioral economics people who are naive and do not update their probabilities of disaster as new information about climate change arrives.
The Chronology of this game is the following;
1. Government chooses to defend the coast or not.
2. People choose whether to live on the coast or not
3. Mother Nature chooses to inflict a "Hurricane Sandy" on the coast.
Case #1: A Low Cost Adaptation Equilibrium:
Government chooses to not defend the coast.
The Spocks are risk averse and aware of the risks that the coastal city faces and they move to the "Higher Ground" safe city. (We could make this model fancier if we allowed the Spocks and Homers to differ with respect to their love of living near the coast. In this case, the subset of Spocks who love coastal living might live there even as the climate risk increases).
The Homers are naive but they know that the Spocks are smart and they engage in Banjeree herding and follow Spocks to Higher Ground.
In this case, regardless of whether Mother Nature inflicts a Sandy, no real damage is caused because
of the private self protection of migrating to the safe city. The losers in this case are the land owners in the coastal city who will suffer a loss in asset value as aggregate demand falls.
Case #2: The Darwin Equilibrium (the spatial separating equilibrium)
Government chooses to not defend the coast.
The Spocks are risk averse and they move to the "Higher Ground" safe city.
The Homers drink their beer and ignore the pending danger and remain in the pretty coastal city.
In this case, if Mother Nature doesn't inflict pain, the Homers laugh at the Al Goreish Spocks for being Chicken Littles. If a nasty Sandy Storm does take place, the Homers suffer and the Spocks repopulate the planet.
Fear of Equilibrium #2 nudges the benevolent paternalists to invest national $ to protect the coastal areas in step #1. This nudges some Spocks to remain in the coastal area and this is the moral hazard margin.
Case #3: Climatopolis Logic
Critics of my Climatopolis book have argued that I believe in "every man for himself" in a sort of law of the jungle. This is false. I want men and women to use decentralized free markets (where people do interact) to work to help folks to adapt.
If the Spocks anticipate that the Homers have placed themselves at risk by ignoring the increased risk of a major Sandy Storm, then out of entrepreneurial self interest, they have strong incentives to develop products to help the Homers live on in their risky coastal area. Depending on the timing of how the shocks arrive, these Homers will have the time and motivation to purchase such products. This is endogenous innovation at work as an adaptation tool. Researchers and environmentalists have not explored this channel.
If the "Homers" are too silly to recognize that they have made a risky choice that is growing riskier over time, then the Red Cross and other volunteer groups can work to help to protect this group. The key issue here is whose $ is used to protect this group? I do support benevolent paternalism in terms of using the zoning code to discourage individuals from living in the riskiest areas. We are about to face a very interesting case of "buyer beware". Do you view adults to be adults and thus responsible for their decisions?
In the second economy I presented above the Homers who live in the coastal city have their lifestyle subsidized by the Spocks who live in the safe city and pay national taxes. The government Sea Walls are funded with national (not local) tax dollars. When people go bungee jumping, do they expect a similar subsidy? What is the difference between these different risk categories?
To keep this non-peer reviewed blog post short, I assume that a person's type is exogenously determined and that 50% of the population are Spock and 50% of the population are Homer. The Mr. Spocks are 'University of Chicago" rational expectations men and women who form actuarial probabilities over random variables. The Homer Simpsons are UC Berkeley behavioral economics people who are naive and do not update their probabilities of disaster as new information about climate change arrives.
The Chronology of this game is the following;
1. Government chooses to defend the coast or not.
2. People choose whether to live on the coast or not
3. Mother Nature chooses to inflict a "Hurricane Sandy" on the coast.
Case #1: A Low Cost Adaptation Equilibrium:
Government chooses to not defend the coast.
The Spocks are risk averse and aware of the risks that the coastal city faces and they move to the "Higher Ground" safe city. (We could make this model fancier if we allowed the Spocks and Homers to differ with respect to their love of living near the coast. In this case, the subset of Spocks who love coastal living might live there even as the climate risk increases).
The Homers are naive but they know that the Spocks are smart and they engage in Banjeree herding and follow Spocks to Higher Ground.
In this case, regardless of whether Mother Nature inflicts a Sandy, no real damage is caused because
of the private self protection of migrating to the safe city. The losers in this case are the land owners in the coastal city who will suffer a loss in asset value as aggregate demand falls.
Case #2: The Darwin Equilibrium (the spatial separating equilibrium)
Government chooses to not defend the coast.
The Spocks are risk averse and they move to the "Higher Ground" safe city.
The Homers drink their beer and ignore the pending danger and remain in the pretty coastal city.
In this case, if Mother Nature doesn't inflict pain, the Homers laugh at the Al Goreish Spocks for being Chicken Littles. If a nasty Sandy Storm does take place, the Homers suffer and the Spocks repopulate the planet.
Fear of Equilibrium #2 nudges the benevolent paternalists to invest national $ to protect the coastal areas in step #1. This nudges some Spocks to remain in the coastal area and this is the moral hazard margin.
Case #3: Climatopolis Logic
Critics of my Climatopolis book have argued that I believe in "every man for himself" in a sort of law of the jungle. This is false. I want men and women to use decentralized free markets (where people do interact) to work to help folks to adapt.
If the Spocks anticipate that the Homers have placed themselves at risk by ignoring the increased risk of a major Sandy Storm, then out of entrepreneurial self interest, they have strong incentives to develop products to help the Homers live on in their risky coastal area. Depending on the timing of how the shocks arrive, these Homers will have the time and motivation to purchase such products. This is endogenous innovation at work as an adaptation tool. Researchers and environmentalists have not explored this channel.
If the "Homers" are too silly to recognize that they have made a risky choice that is growing riskier over time, then the Red Cross and other volunteer groups can work to help to protect this group. The key issue here is whose $ is used to protect this group? I do support benevolent paternalism in terms of using the zoning code to discourage individuals from living in the riskiest areas. We are about to face a very interesting case of "buyer beware". Do you view adults to be adults and thus responsible for their decisions?
In the second economy I presented above the Homers who live in the coastal city have their lifestyle subsidized by the Spocks who live in the safe city and pay national taxes. The government Sea Walls are funded with national (not local) tax dollars. When people go bungee jumping, do they expect a similar subsidy? What is the difference between these different risk categories?
The Environmental Consequences of Urban Growth in Brazil's Amazon
Academic geographers use remote sensing techniques to measure the "footprint" of growing cities. From outer space, you can identify how much land area a metropolitan area such as Cairo or Boston takes up and how this changes over time. Researchers such as Yale's Karen Seto track these footprints.
Today's NY Times has an article focused on urban growth in the Amazon Brazil's new cities. In this case, there is a significant global environmental externality associated with urban growth. Why? Don't forget the concept of opportunity cost. The land that is urbanized used to be tropical forests and these forests sequester significant amounts of carbon dioxide and this reduces global GHG emissions. As these cities grow, a type of increasing returns to scale takes place and such growth may stimulate even more growth. This is likely if the growing cities have increased political clout and can attract national subsidies for new infrastructure such as roads.
Given that there is a global negative externality associated with Amazon urban growth, what is good public policy? Should the United Nations collect global funds and pay the Brazilian government to encourage urbanization away from the Amazon? Should the UN help the Amazon cities to grow vertically so that their land footprint doesn't grow? Cities such as Singapore and Hong Kong have shown how millions can be stacked in relatively small land areas. Have urban planners in LDC nations been thinking about how to build vertical cities so that the city can achieve the win-win of urban growth without embodying a large land footprint?
The incentive problem here is the property rights and protection for the Amazon's forests. These are global public goods. If these were private property, the owner would internalize the $ benefits the world enjoys from carbon sequestration and he would be paid for these benefits. Right now, the world is free riding on Brazil and the self interested urbanites in these growing cities have no incentive to internalize the externality their urban growth causes. Public property gets trampled. Even hippies now understand why we need fences.
Today's NY Times has an article focused on urban growth in the Amazon Brazil's new cities. In this case, there is a significant global environmental externality associated with urban growth. Why? Don't forget the concept of opportunity cost. The land that is urbanized used to be tropical forests and these forests sequester significant amounts of carbon dioxide and this reduces global GHG emissions. As these cities grow, a type of increasing returns to scale takes place and such growth may stimulate even more growth. This is likely if the growing cities have increased political clout and can attract national subsidies for new infrastructure such as roads.
Given that there is a global negative externality associated with Amazon urban growth, what is good public policy? Should the United Nations collect global funds and pay the Brazilian government to encourage urbanization away from the Amazon? Should the UN help the Amazon cities to grow vertically so that their land footprint doesn't grow? Cities such as Singapore and Hong Kong have shown how millions can be stacked in relatively small land areas. Have urban planners in LDC nations been thinking about how to build vertical cities so that the city can achieve the win-win of urban growth without embodying a large land footprint?
The incentive problem here is the property rights and protection for the Amazon's forests. These are global public goods. If these were private property, the owner would internalize the $ benefits the world enjoys from carbon sequestration and he would be paid for these benefits. Right now, the world is free riding on Brazil and the self interested urbanites in these growing cities have no incentive to internalize the externality their urban growth causes. Public property gets trampled. Even hippies now understand why we need fences.
Rational Expectations and Low Probability Events
Self interested people have an incentive to form their best guesses about the probabilities and impacts of different future scenarios. Climate change poses some trouble here because it creates a "non-stationarity" in the sense that the random variables (the impacts of climate change) have means and standard deviations that change over time. Intuitively, how do you plan to hit a moving target? If the bullseye target never moves, where your darts land is still a random variable but you know how to practice. How do we adapt as the target moves? Professor Rumsfeld has taught us that when you "know that you don't know" what to expect, the prudent person builds some slack into their decision so that they don't regret their choice some time in the future.
With this background, let's consider two pieces in today's NY Times. First, we hear from the President of Tulane University. Universities are place based and his University is in New Orleans. He has strong incentives to argue that his University (which was horribly injured by Katrina) is back and is robust in the face of the next storm.
Source:
In my Climatopolis, I argue that it is fine for New Orleans to rebuild if the investors there use their own $. President Cowen forgets that billions of federal tax payer dollars were used to rebuild his University's city. That's bad incentives.
Note that at the end of his letter he engages in some public relations to signal to outsiders that New Orleans is now safe. I hope he is right.
A more salient and optimistic example of rational expectations is provided in this piece . The boss of this firm was prudent enough to build his key floors 4 feet higher to reduce flood risk. Here is a quote that highlights how we will adapt to climate change:
This case study highlights the key adaptation recipe. Note that if we are "behavioral agents" who do not engage in forward planning then we have a problem. Such individuals will not have taken the precautions that Sims Metal Management took. This point has not been discussed by academic economists but in my Climatopolis I argued that climate change planning poses the ultimate test for distinguishing whether neo-classical economists or behavioral economists have the right model of predicting human behavior. The "doom and gloomers" embrace both a behavioral economics view of individual rationality and a benevolent paternalistic view of government. That's quite a statement.
UPDATE: Contrast the company I discussed above, with the New Jersey Transit Authority. Here is my source and here is a quote:
"Less than a month after Hurricane Sandy damaged nearly a quarter of its rail cars and locomotives, New Jersey Transit is facing withering criticism this week for keeping much of its equipment in low-lying yards during the storm, despite forecasts of potential flooding."
Do you have to be a genius to think about choosing another site for the rail cars? A cynic might ask if the NJT would have been more likely to have figured this out ex-ante if it had been using its own $ rather than tax payer $. Moral hazard lurks and the absence of moral hazard (i.e using your own $) tends to focus the mind!!
You don't have to be Darwin to see that forward looking companies and decision makers will be rewarded by Mother Nature for being smart. This is evolutionary capitalism at work. Sink or swim sounds rough but such "tough love" creates strong incentives to change your game and adapt.
With this background, let's consider two pieces in today's NY Times. First, we hear from the President of Tulane University. Universities are place based and his University is in New Orleans. He has strong incentives to argue that his University (which was horribly injured by Katrina) is back and is robust in the face of the next storm.
Source:
To the Editor:
Orrin H. Pilkey (“We Need to Retreat From the Beach,” Op-Ed, Nov. 15) makes what appears to be a reasonable argument against rebuilding shorelines or homes near the beach destroyed by Hurricane Sandy. Unfortunately, this is reminiscent of what New Orleanians heard after Hurricane Katrina: Why rebuild New Orleans, because it will always be prone to flooding?
Since when did our country develop a standard that we abandon places prone to repeat disasters? People live in danger zones knowing that danger may strike again: San Francisco sits on a fault line, much of New Orleans is built below sea level, and the Eastern seaboard is a flood zone.
In every case, community feeling and the attachment to home has trumped scientific facts and urban planning.
The “resilient development” Mr. Pilkey refers to as a less good alternative to “retreat” can work. New Orleans and neighborhoods like the Lower Ninth Ward exist today because of significant improvements in their flood protection system, proving that the art of the possible can work.
SCOTT COWEN
President, Tulane University
New Orleans, Nov. 19, 2012
President, Tulane University
New Orleans, Nov. 19, 2012
In my Climatopolis, I argue that it is fine for New Orleans to rebuild if the investors there use their own $. President Cowen forgets that billions of federal tax payer dollars were used to rebuild his University's city. That's bad incentives.
Note that at the end of his letter he engages in some public relations to signal to outsiders that New Orleans is now safe. I hope he is right.
A more salient and optimistic example of rational expectations is provided in this piece . The boss of this firm was prudent enough to build his key floors 4 feet higher to reduce flood risk. Here is a quote that highlights how we will adapt to climate change:
"But the real storm preparations had been accomplished six years earlier, when Sims Metal Management approved a design for a state-of-the-art city recycling plant that is rising at the South Brooklyn Marine Terminal.
Reviewing projections for local sea-level rise, the company and its architects decided to elevate portions of the site to heights exceeding city requirements by four feet. Using recycled glass and crushed rock discarded from projects like the Second Avenue subway line, they raised the foundation for the plant’s four buildings and a dock.
The fill added $550,000 to the plant’s costs of around $100 million, said Thomas Outerbridge, Sims Metal’s general manager.
But it proved more than worth it. When a 12-foot storm surge swept through nearby streets and parking lots on Oct. 29, the plant’s dock and partly completed buildings did not flood.
“It paid for itself long before we expected it,” Mr. Outerbridge said. “It was built with the idea that, over the next 40 years, this would prove a prudent thing — and the proof came during construction.”
This case study highlights the key adaptation recipe. Note that if we are "behavioral agents" who do not engage in forward planning then we have a problem. Such individuals will not have taken the precautions that Sims Metal Management took. This point has not been discussed by academic economists but in my Climatopolis I argued that climate change planning poses the ultimate test for distinguishing whether neo-classical economists or behavioral economists have the right model of predicting human behavior. The "doom and gloomers" embrace both a behavioral economics view of individual rationality and a benevolent paternalistic view of government. That's quite a statement.
UPDATE: Contrast the company I discussed above, with the New Jersey Transit Authority. Here is my source and here is a quote:
"Less than a month after Hurricane Sandy damaged nearly a quarter of its rail cars and locomotives, New Jersey Transit is facing withering criticism this week for keeping much of its equipment in low-lying yards during the storm, despite forecasts of potential flooding."
Do you have to be a genius to think about choosing another site for the rail cars? A cynic might ask if the NJT would have been more likely to have figured this out ex-ante if it had been using its own $ rather than tax payer $. Moral hazard lurks and the absence of moral hazard (i.e using your own $) tends to focus the mind!!
You don't have to be Darwin to see that forward looking companies and decision makers will be rewarded by Mother Nature for being smart. This is evolutionary capitalism at work. Sink or swim sounds rough but such "tough love" creates strong incentives to change your game and adapt.
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