Green Economics
In this July 2011 file photo, beekeeper Michael Thompson, makes his way through the secret garden of wildflowers and native grasses on top of City Hall in Chicago to check on over 100,000 bees. Chicago is one of several cities across the nation that has embraced green entrepreneurs and policies, in turn luring the highly educated. (Charles Rex Arbogast/AP)
Academic elites migrate to 'green cities' in increasing numbers
The NY Times has a nice piece that quotes Glaeser and Moretti about the recent divergence in average human capital levels across US cities. To quote the article:
"The winners are metro areas like Raleigh, N.C., San Francisco and Stamford, Conn., where more than 40 percent of the population has a college degree. The Raleigh area has a booming technology sector in the Research Triangle Park and several major research universities; San Francisco has been a magnet for college graduates for decades; and metropolitan Stamford draws highly educated workers from white-collar professions in New York like finance.
Metro areas like Bakersfield, Calif., Lakeland, Fla., and Youngstown, Ohio, where less than a fifth of the population has a college degree, are being left behind. The divide shows signs of widening as college graduates gravitate to places with a lot of other college graduates and the atmosphere that creates."
So, the authors are telling a path dependence story that college graduates want to live and work near others like them perhaps due to marriage markets and shopping and restaurant opportunities (see the work of Joel Waldfogel).
I would add that where the educated concentrate become "green" high amenity cities. Some of these places are exogenously great such as San Francisco but in other cases when the skilled concentrate in an area they vote for regulations and policies that endogenously boost the area's local public goods. Public schools in highly educated areas are likely to be of higher quality and the non-market local quality of life such as crime, pollution, green space are all likely to be nicer.
London used to be nasty before 1960 and made a transition to being a highly educated green city. Boston, NYC and Chicago have made a similar transition. Rents are higher in these cities and this pricing differential self selects people with money and or people with a taste for these amenities who are willing to sacrifice other consumption to live there.
The NY Times article does not explain why it matters if the U.S cities segregate by educational level. I would guess that the editors would claim that the social fabric of the nation would be stronger if people from different groups interacted more but is this true? Did it ever happen?
The article hints that college educated workers offer a positive spillover to those communities that attract them. Enrico Moretti's work has measured these effects in terms of how much higher are high school graduates' wages in cities with a larger % of college graduates living there. If the Mayors of Bakersfield and Lakeland know this, why don't they offer amenities and services to attract such individuals to move there?
An aerial photograph shows houses completely submerged by floodwaters from the Mississippi River in Burlington, Iowa in 2008. Flooding risks have increased in the Midwestern US over the past 50 years, and Kahn argues that residents of the region will have to adapt. (Ron Maryland/Reuters/File)
Can the Midwest adapt to increased flooding?
A new report from the Rocky Mountain Climate Organization offers some specific historical trends over the last 50 years for states such as Illinois and Ohio. Now that we have received this trend information about the increased flood risk that such states face, what do we do as Bayesian updaters? How do we adapt to this new reality? As a Climatopolis optimist, I bet that we will see individuals, firms and local governments taking pro-active steps to reduce their risk from these floods. Engineers will offer certain solutions to improve drainage and to build shielding infrastructure. Individuals will make investments (such as not keeping key stuff in their basement) to reduce their losses from flooding. Insurance companies will change their premium policies to incentivize the insured to take pro-active steps to reduce the probability that they will seek insurance after a flood event. For example, the insurance company could offer lower premiums for people who live in elevated homes or homes located outside of the new flood plains.
On page 29 and 30 of the RMCO report, the authors talk about strategies that the federal, state and local government can take to protect the midwest from flooding. But, they don't discuss individual choice by households and firms. Implicitly, these guys are embracing benevolent paternalism --- that only the government can save you from climate risk. I don't believe this. As I argue in Climatopolis, the combination of actions by individuals, firms and governments together will work towards achieving adaptation. Place based politicians such as the Mayor of Cleveland will have an incentive to make his city more resilient to flooding because he will lose his skilled people if the town's quality of life suffers.
The RMCO report also doesn't devote enough time to adaptation to flooding. It returns again and again to mitigation. Of course, we would face less flooding if global GHG emissions decline but they are not going to decline. The RMCO should send a copy of their report to everyone in China and India and see if this treatment reduces the greenhouse gas emissions from the BRIC nations. Of course, it won't. That's the core free rider problem! Facing this unfortunate reality, we must prepare to adapt and we have the right incentives to do so as we learn about the "new normal" and the challenges we will face under climate change.
An employee walks on solar panels at a solar power plant in Aksu, Xinjiang Uyghur Autonomous Region May 18, 2012. The United States hit Chinese solar companies with punitive import tariffs Thursday, ruling they had dumped cut-price solar panels on the U.S. market. Kahn argues that by preventing cheap solar adoption, the anti-dumping restrictions may have adverse environmental consequences in this case. (Stringer/Reuters)
Anti-dumping policies can have environmental consequences
Maybe Adam Smith and Alfred Marshall didn't figure out all of micro theory. Consider the case of solar panel imports from China. The NY Times reports that the U.S is imposing a large tariff punishment on these imports. This will hurt Chinese exporters and U.S importers and help U.S producers of panels but it will also impose a global pollution externality. A side benefit of the U.S being able to import cheap solar panels is that this increases their adoption and this reduces global GHG emissions. In the presence of such a consumption positive externality, does this affect how we think about the economics of dumping? The irony here is that environmentalists should support Chinese dumping (i.e. China selling their green products in the U.S for a really low price).
As I understand the economics of dumping, regulators are concerned that exporter prices low now to kill off domestic competition and once the U.S firms are dead will sharply raise prices to monopoly levels and gouge the silly Americans. Most Chicago economists do not believe this logic. If China did achieve market power and tried to take advantage of it, this would trigger entry by some other developing nation who could cheaply mass produce that solar panel technology. The "pro-dumpers" implicitly assume that there is some future barrier to entry that prohibits entry into the industry. That sounds silly to me.
To repeat this blog post's key point. With most goods such as cars, when we import a car there is actually a negative pollution externality so "anti-dumping" laws protect the environment. In the case of products that offer positive externality benefits, environmentalists should be bigger fans of free trade and oppose tariffs on such products! Free trade and the environment baby! Think about it.
his 2009 file image provided by the California High Speed Rail Authority shows an artist's rendering of a high-speed train speeding along the California coast. The price tag for California's rail project is expected to hit $100 billion, raising questions about who should foot the bill. (High Speed Rail Authority/AP/File)
California rail project: Who should pay?
California's High Speed Rail will likely cost $100 billion dollars to build and operate. Who should pay for this? Given that the bulk of the benefits of this project will accrue to the people of California, it's not crazy to ask the people of California to pay for it. But, the people of California are eager to spend "other people's money" and the Obama Administration has offered a fairly large upfront investment. As reported in this blog, the Obama Team is asking some tough questions focused on whether large deficit California will ante up and put roughly $3 billion of its own $ to pay for the train. An interesting game of "Chicken" is emerging. Will the Obama Team pull their Federal $ for the train if California doesn't pay its "fair share"? During this time of national and state deficits, is this project a "good project"?
You might think that a $200,000 economic consulting study would be a valuable input in the decision process but I don't know of any consulting team with blue chip credentials who has been brought in to conduct this analysis. In my "rational" world of public policy, the benefits and costs of each option are explored and quantified and the "known unknowns" are identified BEFORE an irreversible multi-billion dollar investment is made. This is especially true in the case of rail that has a long history of not delivering the benefits its advocates promised before the project was implemented. For folks looking for objective evidence that substantiate these points; please read this Don Pickrell paper and my 2005 Brookings Institution paper with Nate Baum-Snow.
Foreman Mark Hardison, with the Sky Renewable Energy from Phoenix, installs a 30 KW solar system at the Southern Arizona Veterans' Memorial Cemetery in Sierra Vista, Ariz in this file photo. Green energy advocates argue that alternative energy sources like wind and solar help the environment without raising energy costs, but some argue that cost effects remain to be seen. (Beatrice Richardson/AP/Sierra Vista Herald/File)
Do energy restrictions raise electricity prices?
An interesting debate is playing out. The Center for American Progress (CAP) has put out a policy brief that argues that green energy purchase mandates do not raise local electricity prices. The Renewable Portfolio Standard (RPS) requires that a state's utilities purchase a given percentage of their power from low carbon sources such as wind, solar and hydro. In California, the RPS is set to rise to 33% by the year 2020. As of 2009, 12% of California's power comes from renewables. Is the CAP correct that further ramping up of the RPS will offer environmental benefits without imposing costs on electricity consumers?
For the CAP to be correct, it must be the case that the cost of generating renewable power is falling sharply over time. There is also the issue of "insurance". Given the variability of wind and sunshine, power producers must have alternative backup generators ready to produce. Given that good batteries for storing excess power do not exist, there has to be some slack in capacity to be prepared for contingencies such as when its a cloudy day or a day when the wind isn't blowing. These "backup plans" have costs to maintain them.
It is also the case that renewable power takes a fair bit of land. Is the opportunity cost of the land that renewables are being located on being incorporated into the cost of providing renewable power?
What the CAP article does not discuss is the incidence of the RPS standards. Are the public utility commissions by shielding consumers from price hikes simply lowering the profits of the electric utilities? One way to study this would be to conduct an event study and see if publicly traded electric utilities experience a drop in their stock price when new news about a more aggressive RPS is revealed. Such a finding would indicate that the stock market believes that their profits will fall because their cost of acquiring electricity has gone up.
If introducing the RPS neither raises consumer prices nor lowers the utility's profits, then such an RPS is a free lunch! That would puzzle the typical economist!
The relevant energy policy counter-factual here is; what would the price of electricity and the profits of electric utilities have been under a less aggressive RPS? As the RPS tightens, who bears the incidence of this regulation? The CAP has argued that it is not the consumers and they may be right but if utilities earn lower profits will there be unintended consequences such as reduced investment in maintaining the capital stock and can this have long run consequences for safety?
UPDATE: One energy expert was kind enough to offer a quick answer to this blog post's core question. He argued that renewable power is so far such a small share of a state's total power that its costs are not yet seen. In addition, he pointed out that the low recent natural gas prices have shielded consumers from price hikes.
A Stanford University student walks though the halls of the Stanford University campus in Palo Alto, Calif. The school might boost its endowment by admitting more four-year students. (Paul Sakuma/AP)
Raising revenue at elite public universities
[Editor's note: This post has been changed and updated.]
As a professor at a leading public university, I have a strong stake in helping UCLA identify new sources of revenue. While we can chant "China, China, China", I believe in a diversified revenue stream. Due to political pressure, public universities will not be able to continue to sharply increase tuition. Federal grant dollars from NSF and NIH will soon start to decline. How will $ continue to flow to Universities?
Schools such as Harvard and Stanford have figured out that if you offer young people an excellent education that some of them will be successful and in later life will give back large amounts of $ because they remember the role that the university played in shaping their life. Other Alumni will give big bucks because they want their kids to have a shot at "legacy admissions". Regardless of the motivation for giving, a school's stock of past graduates represents an excellent source of donations.
Public universities such as UCLA have been slow to tap into their graduates to make "the ask". Many of these graduates took for granted that the Great California would provide them with a "free, high quality education" and they are aware that their children will not receive extra consideration for admissions even if they make a big gift.
The main point of this blog post is to ask a "what if". Could UCLA's endowment grow more quickly if we enroll more 4 year students? If I'm reading this table correctly, UCLA admits roughly 3,000 transfer students a year. Many of these students will stay at UCLA for 2 years and earn a degree and leave.
Suppose that these same students spend all 4 undergraduate years in Westwood enrolled at UCLA. I think that future donations to UCLA would be much higher. Loyalty takes time to build. If you spend 4 years in wonderful Westwood, learning and being part of the social network -- you will have stronger roots to the community. Given the strength of UCLA's education, the same students would also learn more at UCLA than if they spend 2 years at one college and then transfer here. I realize that there are always exceptions to the rule.
I also recognize that UCLA has had terrific transfer students and will continue to have excellent transfer students. The economic decision here is what is the "optimal number" of transfer students?
I have received some angry emails from students concerning my original posting. I would like to apologize to them. It was not my intent to be offensive or rude. My goal was to stimulate a debate.
But, returning to fund raising consider the following facts; In 2011, UCLA's endowment stands at 1.3 billion dollars or at 2.6 billion depending on how you count. USC charges a higher tuition and has an endowment of roughly 3.5 billion but is in the middle of an ambitious capital campaign that will increase its endowment to roughly 7 to 8 billion dollars. For those who are members of the UCLA Bruin community, what is your solution for how to maintain and produce excellence?
UPDATE: I was not aware that the California Master Plan requires that the UCs reserve a significant number of places for Community College students. This Master Plan has costs and benefits and it should be debated.
The official Twitter page of France's President Nicolas Sarkozy is seen on a computer screen in Paris in this file photo. IBM is introducing a new social network and news aggregate for city leaders, but Kahn argues that with some tweaking, Twitter could easily fill that role. (Mal Langsdon/Reuters/File)
City 'command centers': Better than Twitter?
The NY Times has a long piece about IBM's new business as it supplies "Command Centers" for mayors of cities around the world. The article suggests that each Mayor seeks to be a benevolent leader (think of Ike during WW II) but that due to transaction costs was unable to know in real time how a particular crisis was playing out across the city's geography. By providing real time information to the "leader", IBM is helping cities to cope with new news and shocks.
I agree with all of this but the reporter downplays the main benefit of providing high quality information in cities. Individuals (not mayors) now make better choices and in aggregate the city is healthier and more robust in the face of shocks. You don't have to be Hayek to believe that the real payoff of the IBM technology is to allow the government to play the role of impartial data provider and then allow individuals to make their own best choices of how they want to adapt and cope with new news. If crime is rising in a certain slum in Rio, rental prices will adjust --- people will no longer move there and will choose to locate in a different part of the city.
As economists have shown in many cases such as Smog Alerts and restaurant public health ratings, individuals change their behavior as they are provided with new information and they change their behavior so that to reduce their exposure to risk and disamenities.
It is of course the case that a Mayor who has real time information about a crisis may allocate resources more effectively but I do not believe in a Superman theory of history. The reporter appears to believe that Mayors are benevolent paternalists who seek to protect their citizens but lack information about the real time challenges they face. I wish we lived in that world.
In truth, decentralized twitter updates are likely to provide pretty close to the same services (for free!) that IBM is supplying at a price of billion of dollars. People such as Guru Banavar at IBM should explain under what conditions would his "smart grid" for the Mayor outperform twitter?
For decentralized twitter to be equally effective as IBM, all Twitter would need is an aggregator that allows you search tweets based on subject and date such as "storm, Rio, March 22nd 2012" .
In this file photo, a Los Angeles subway user goes over a Metro Red Line map while others gather on the platform and wait for the train in Los Angeles. Kahn argues that Los Angeles' lack of investment in the public transit infrastructure is casing the city to lose money. (Ric Francis/AP/File)
How many Los Angeleans are stealing subway fare?
Forget the 1% and OWS. The new key number in life for the people of Los Angeles is 3%. In Los Angeles, it is easy to evade paying for riding the subway. Turnstiles are unlocked, security is lax and commuters often hop over or pass through undetected (source). Why has the LA Metro chosen not to invest in the basic public transit infrastructure (such as monitoring turnstiles) that New Yorkers take for granted? The answer is, as reported by the LA Times, that the Metro Authority assumes that only 3% of riders are evading fares! Talk about the honor code! Gary Becker wouldn't be surprised to find that there is more crime where there is less punishment. The honor code is honorable but unreasonable.
During this time of public sector budget deficits, this "free pass" adds up to a fair bit of redistribution to those who evade. Who chooses to jump the turnstile? This would be a good study that an economist and sociologist could write together. I'm guessing that those who evade are more likely to be poor and young but I apologize for my profiling. In LA, the base fare is $1.5 so if you evade twice a day and work 200 days a year, that's $600 that you have chosen not to give the city of LA as you enjoy its services for free.
For those economists who measure the CPI, I think that this price of transportation should be factored in. If the poor are more likely to evade, then they face lower transportation prices than people who drive. There is an old literature in economics studying whether there is less consumption inequality than there is income inequality. This could happen if the poor face lower prices for goods. Here is a paper by Cutler and Katz that rejects the claim that consumption inequality is lower than income inequality.
file photo provided by the Mesa County, Colo., Sheriff's Department, a small Draganflyer X6 drone makes a test flight in Mesa County, Colo. with a Forward Looking Infrared payload. In addition to serving security purposes drones can help at home by spotting environmental threats like leaky irrigation on farms, Kahn argues. (Mesa County Sheriff's Unmanned Operations Team/AP/File)
Social networking and drones can save the earth
The rise of micro blogs in China helps to educate the public about product issues such as the bullet train accident or the milk safety scandal and this reduces the likelihood that the State can suppress information. Such "sunshine" increases political accountability and thus improves the quality of governance. The rise of twitter and other websites provide real time information so that the canonical case of the Simpsons and Blinkie the 3 eyed fish will be quickly discovered and the guilty party will be discovered.
In addition to these examples, we now have the case of the drones. Such drones not only attack our enemies but when used on domestic missions can provide crucial information. Here is a quote from the article;
"For Patrick Egan, who represents small businesses and others in his work for the Remote Control Aerial Photography Association in Sacramento, the new law also can’t come fast enough. Until 2007, when the federal agency began warning against nonrecreational use of drones, he made up to $2,000 an hour using a drone to photograph crops for farmers, helping them spot irrigation leaks. “I’ve got organic farmers screaming for me to come out,” he said."
So, the drones are flying around and they can cheaply spot wasted water . Once farmers are alerted of this, they go to the broken hose and repair it and this helps to reduce overall water consumption and this increases environmental sustainability. Human ingenuity substitutes for natural capital. This is a key theme!
In this file photo, a dark cloud over the Chesapeake Bay dwarfs a cargo ship as it passes the coastline of Virginia Beach, Va. Kahn argues that federal disaster relief efforts can have unintended consequences, including sticking taxpayers with a huge relief burdens. (David B. Hollingswoth/AP/The Virginian-Pilot/File)
Rising sea levels and the case against federal disaster relief
Who knew that Grist has a free markets libertarian streak? This piece by Tom Horton makes a lot of sense. He argues that sea level rise along the Virginia coastline should nudge an organized retreat and the growth of wetlands. But, he notes that government disaster relief efforts offer insurance and will have perverse effects as we adapt to climate change. Here is a quote from the end of his piece.
"The only way many wetlands could adapt would be if adjacent uplands are left undeveloped to give the marshes a chance to migrate inland as the Bay rises, Stiles says. That’s a good reason to leave places like Bluff Point in conservation zones.
Ultimately the taxpayers will pick up the bills, bailing out places like Bluff Point as flooding escalates. Taxpayer-supported federal flood insurance programs, beach replenishment programs, and the Federal Emergency Management Agency are all seeing costs soar as coastal flooding escalates. Private insurers have already pulled back from many coastal areas."As you know, I discuss this exact point at length in my "Climatopolis." We need to harness market forces to help us to adapt to climate change. Well meaning government actions often have nasty unintended consequences and this is a classic example.
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