Green Economics
Kevin Harvick does a burnout as he celebrates his win in the NASCAR Sprint Cup Series auto race at Richmond International Raceway in Richmond, Va. If NASCAR goes green, will fans follow suit? (Steve Helber/AP)
NASCAR goes green
Does Al Gore watch the Indianapolis 500 race? Millions of people do but do people in Berkeley and Santa Monica? I don't watch the race. The thought of watching other people blow out their tires as they race 500 miles doesn't interest me. But, perhaps I am wrong for being such a snob.
Today, the NY Times reports that NASCAR is going "green". Given that millions of non-greens watch, this is an interesting cultural experiment. There hasn't been convincing research studying the "contagion" effect of environmentalism. As I asked many times, "If Dick Cheney moved to Berkeley, would he become an environmentalist?" Does contact with "the other" change your views?
Nick Terlouw, owner of Greener Grass Company, sprays a dead lawn with a deep green, water-based dye at a rental property in Brentwood, California. The author argues that things like lawn maintenance are resource intensive, and therefore should be expensive. (Tony Avelar/CSM/File)
Drought in Texas: a parable
The NY Times writes an interesting article about drought in Texas but manages not to mention water prices. The article goes on and on about the death of "green lawns" but why do we have a fixation with green grass? I understand that it is fun to play sports on but many lawns are not used for sports but simply to "fit in" with the rest of the neighborhood. If you are a fan of conformity, that's okay with me but if the actions we take to "fit in" are resource intensive then we need to find new ways to signal our willingness to conform.
Texas could offer us an excellent preview concerning how climate change adaptation takes place but prices must be allowed to rise to reflect scarcity. I argue in Climatopolis that government intervention can impede adaptation if it takes well meaning actions that limit "price gouging" but price signals are exactly what we need for capitalism to help us to adapt to drought and other climate challenges. To paraphrase John Lennon, give the price system a chance!
A recycling center in Burbank, Calif. (Robert Harbison /Staff/File)
Will environmental regualtion hurt California job growth?
Joel Fox has written an interesting piece about his hope that California will roll back some environmental regulations. He quotes a piece I wrote several years ago when I was asked to give my prospective views on the likely impacts of AB32. He is correct that I assumed that while California would be an environmental leader with respect to enacting carbon dioxide mitigation legislation that I thought that the rest of the country would be ramping up its regulations.
But, now we sit in 2011 and California continues to gear up for AB32 while the rest of the nation has not stepped up. Is California putting itself at a strategic disadvantage during a time when we all want "more jobs"?
The good news here is that the California Air Resources Board understands the political realities that it faces. I would say that the ARB is being very cautious in rolling out AB32. It has delayed introducing the cap and trade piece of AB32 and it is being quite generous to industry in terms of "tip toeing" into the water. Industry will only slowly face serious carbon prices and has plenty of time to adjust.
A liberal state such as California has both environmental regulation and labor regulation. We also do not have strong public schools. A serious researcher would seek to disentangle these 3 effects in understanding why firms might leave California to go to other places. Exactly what types of "small business" jobs is California likely to lose due to AB32? What is the mechanism? How much will this well meaning regulation raise their costs of doing business? Why can't they pass these costs on to consumers? Why can't these firms adapt by changing their production processes? Why are these firms so "high carbon"? I'd like to see answers to these questions and then I would be more sympathetic to Mr. Fox's key arguments.
Trader John Yaccarine, center, works on the floor of the New York Stock Exchange. (Richard Drew/AP/File)
In defense of finanacial engineering
Financial engineering has a bad name today. In the wake of the housing market decline, lots of people say that Wall Street tricked main street with lots of "fancy mortgage products" such ARMs, negative amortization loans and others. But, we love new products (at least the ones that Apple designs).
As I understand it, the point of new financial products is to convexify portfolio problems for consumers so that their set of feasible consumption paths over time and across states of the world increases. In English, if financial engineers can design a new product such as a mutual fund that offers you a higher rate of return for the same level of risk then you can afford a better consumption stream if you switch your $ into this new asset. Now, I agree that in a non-stationary economy past returns may not provide good estimates of future returns but if you are that cynical, you can still put your $ under your bed and earn a safe 0% interest rate.
This piece by John Bogle celebrates his role in designing the market index fund for Vanguard. Thanks to him, an investor could hold a diversified portfolio and face few transaction costs. Competition in this market means that Vanguard can't demand exorbitant fees from investors. If they tried to charge this, some competitor would offer access to a similar fund at a lower cost. Price gouging triggers entry. If such funds didn't exist, you would pay enormous broker fees trying to assemble such a portfolio on your own. Bogle in turn celebrates the role that Paul Samuelson played in nudging him to build this new product.
As an economist, I like this synergistic relationship between the great economic theorist (Samuelson) and the Wall Street innovator. This is intellectual trickle down economics! Bogle knew that there was a demand for such a product and he figured out how to supply it.
While economists have helped Wall Street to design new products, are economists smart enough to help reinvigorate the labor market?
A long run solution is to invest more in young children but this will take resources to pay for.
A short run solution is to relax labor regulations and barriers limiting the hiring and firing of workers.
You can "create jobs" by making workers more productive or by lowering real wages. The first one is politically correct but hard to do in the short run. The opposite is true for the 2nd one.
Ford Motor Company's shuttered 320-acre Wixom Assembly Plant in Wixom, Mich. To increase the number of U.S. manufacturing jobs, the author argues, labor laws must be relaxed and electricity prices must be lowered. (Paul Sancya/AP/File)
A recipe for increasing domestic manufacturing jobs
Alan Krueger is a great choice to lead the CEA but is it his job to figure out how to "create jobs" for the U.S economy? I don't think so. The NY Times wants us to have more manufacturing jobs and it has vehicle batteries on the the brain. Such Michigan investments may help but the jury is still out on whether industrial policy is a wise investment. Can you pick winners? At the horse track maybe, but in a multi-trillion dollar economy?
Fortunately for the world, Erin Mansur and I have written an applied paper investigating where U.S manufacturing agglomerates. If you want more manufacturing jobs, then you need to vote for; 1. low industrial electricity prices, 2. lighter labor regulations, 3. careful enforcement of the Clean Air Act.
To be a little bit more precise, industries that are energy intensive avoid high electricity price areas. Industries that are labor intensive avoid union states and industries that are pollution intensive avoid areas that are not in compliance with the Clean Air Act.
A cleaner test of our findings would be if counties in the United States could be randomly assigned their bundle of industrial electricity prices, labor regulations and Clean Air Act regulations. Suppose that the random assignment would last for a fixed amount of time such as five years. Firms would recognize this policy commitment and would choose their profit maximizing locational choice and the number of jobs they would want to create. From observing where firms locate and their job creation as a function of randomly assigned policies, we would have air tight evidence on the role that these 3 factors play in determining the geography of jobs. Will Alan Krueger endorse this experiment?
So, under random assignment; some U.S counties would have low energy prices, low labor regulation and low environmental regulation while others would feature the opposite If we make this discrete, counties would be randomly assigned to 8 mutually exclusive and exhaustive categories (high or low prices, high or low labor regulation, high or low environmental regulation).
I am taking the field experiments literature quite seriously but I'm applying it to "macro policy".
A worker installs rooftop solar water heater panels at a Kodiak Island Housing Authority complex at Port Lions, Alaska. "Green" buildings may cost more, but they may be worth it in areas with high electricity prices. (Scott's Plumbing and Heating via Kodiak Daily Mirror/AP/File)
Do 'green buildings' come with a higher price tag?
Do "green buildings" sell and rent for a price premium? This LA Times article discusses some recent research on this topic including my solar paper (joint with Costa, Dastrup and Graff-Zivin). Using hedonic pricing techniques and data from Sacramento County and San Diego County in California, we find that solar panels increase a home's resale price by roughly 3.5%. John Quigley and co-authors such as Nils Kok have written several papers documenting that commercial real estate that is certified as "green" either by LEED or Energy Star sells and rents for a price premium.
The economics of this energy capitalization is pretty straightforward. Some predictions;
1. If the price of electricity is higher in a local area, then the energy efficiency price premium will be larger.
2. If environmentalists live in such an area (i.e Berkeley), there will be more "green buildings" built. Whether the price premium will be larger hinges on the shape of the supply curve. If there are many green architects working in liberal/green areas, then the higher demand in such areas may not translate into a price premium (hint: think of a flat supply curve).
3. Many energy efficiency strategies are hard for a potential buyer to detect. A potential buyer of a home is unlikely to ask the previous resident for his typical electricity bill. Even if such a nerd requests such a document, family j may learn little about what its energy bills will be from seeing family m living in the same house. In the absence of "energy labels" for homes that certify its energy efficiency, residential energy efficiency is unlikely to be capitalized into resale values. Holland and Singapore have introduced such ratings systems and Nils Kok and John Quigley have evaluated these.
4. If the price of electricity is high, then new construction will be more energy efficient. See Costa and Kahn 2011.
Job seekers line up to register as they arrive at the Career job fair in Arlington, Va., early this month. Counties with high unemployment rates could be the perfect test areas for experiments that would reveal underlying causes of the weak economy. (Jose Luis Magana / AP / File )
County-level experiments could reveal what's wrong with US economy
Have you noticed that economists do not agree about what are the causes and cures for our current malaise? Right now we seek to reduce the budget deficit and to reduce unemployment. If more people worked and paid taxes, then unemployment insurance claims would be lower and the IRS would collect more tax revenue, so it appears that job growth would address both of these issues.
Firms hire workers when the marginal value product is greater than the wage they must pay. During this time of macroeconomic uncertainty and uncertainty among academic economists concerning what is the disease and what is the correct medicine to order, I suggest that it is time to experiment and follow the advice of Banerjee and Duflo.
To quote these authors; "Perhaps even more importantly, they are often in a position to midwife the process of policy discovery, based on the interplay of theory and experimental research. It is this process of “creative experimentation”, where policymakers and researchers work together to think out of the box and learn from successes and failures, that is the most valuable contribution of the recent surge in experimental work in economics."
So, permit me to propose some randomized experiments;
Experiment #1; Take the counties in the United States where unemployment is over 11% right now and randomly assign them to treatment and control. In the treatment counties, allow any employer in these counties to be exempt from minimum wage laws and from unionization rules for 24 months. In this experiment, the job creation in these counties will be compared to the control counties in a simple "before/after" comparison. In the control counties, make no changes to existing labor regulations.
Experiment #2; For the same subset of high unemployment counties, randomly assign counties to "health insurance" categories. For firms that locate in counties assigned to the "treatment group", these firms will have to pay for no health care insurance for workers they hire. Instead, the government will provide health care offering Medicare coverage for the hired workers.
These experiments will help to settle the issue of whether labor market compensation is reducing job creation. If firms in the treated counties under experiment #1 and #2 continue to refuse to hire workers, then this is strong evidence that U.S workers lack the skills to be competitive in this global economy and we face a long run problem.
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From left, Navy Admiral Michael G. Mullen, Chairman of the Joint Chiefs of Staff, Army General Raymond T. Odierno and Sgt. Maj. Bryan B. Battaglia, United State Marine Corps and the U.S. Joint Forces Command, Command Sgt. Maj. during the parading of the colors at the beginning of the United States Joint Forces Command Disestablishment Ceremony, Aug. 4, 2011 in Suffolk,Va. The Defense Department formally disbanded one of its military headquarters on Thursday in an effort to eliminate bureaucracy and cut costs. (Bill Tiernan / The Virginian-Pilot / AP )
The economics of military budget cuts
Many young economics students have taken a quick nap as their professor mumbled about the production possibilities frontier. While my colleagues would talk about "guns versus butter", I was cool and would talk about the "guns versus roses" tradeoff (get it?). Now the NY Times tells us that the tradeoffs are real and that our national security is under threat. Here is a quote from the article.
"In a letter to Defense Department personnel posted Wednesday morning on the Pentagon’s Web site, Mr. Panetta warned that if a Congressional panel could not reach agreement on cuts to the nation’s deficit, “it could trigger a round of dangerous across-the-board defense cuts that would do real damage to our security, our troops and their families, and our ability to protect the nation.”
Is this true?
The citizen inside me is worried. The economist in me wonders whether the military has solved a cost minimization problem subject to quality constraints. I don't believe that the military has had sufficient incentives to solve this problem and in this age of budget cuts this is a serious problem!
Permit me to provide some details.
1. What share of military employees and military subcontractors are members of unions? Has anyone conducted an audit concerning whether workers are being efficiently employed across different tasks within the military? Could innovations in information technology replace some workers? Does the military have any incentives to search for such cost savings? Or because the Federal Government has been a generous "sugar daddy", there has been no incentive to encourage efficiency and substitute capital for labor in "back office" stateside operations?
More generally, I would ask the Department of Defense to review its manpower policies. For the "modern military", how many soldiers does it need? How many stateside employees does it need? Why can't it "outsource" most of this activity to the private sector? If issues of national security arise, I understand why that must be done "in house" but I doubt that is the case for issues of hospital care, xeroxing and many other typical market transactions.
2. How does the military choose what pieces of "hardware" are needed? Can it explain to the American people how our safety against potential enemies is enhanced from purchasing each new helicopter, aircraft carrier?
3. Once the Pentagon has prioritized a specific piece of military equipment, can it do a better job getting military hardware producers to compete to lower the resulting price per unit quality? Permit me to make a suggestion. We should allow Chinese firms to bid on these contracts! The price per unit quality would fall.
While my jokes here are not funny, my point is a serious one. How do we know that we are getting our tax dollars worth from the Military? What incentives do they have? What accountability do the face to provide low cost, high quality service? Unlike other sectors, they face no competition. We can't hire the Libyan army and fire them. That causes some bad incentives.
This case study highlights that a silver lining of scarcity is to encourage a new look at encouraging efficiency. Is Leon P. up to the job?
4. How we choose which foreign nations to send our top notch military into.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Visitors look at Toyota Prius hybrid vehicles on display at Toyota Motor Corp.'s showroom in Tokyo Tuesday, July 6, 2010. Toyota's Prius ranked as Japan's top-selling car in June. Is the Japanese culture more nurturing of conservation than the US culture? (Itsuo Inouye / AP )
Are the Japanese more willing to sacrifice for conservation?
In Japan today, there an increasingly urgent effort to conserve on electricity consumption. While most economists would suggest that the price mechanism could be used to discourage use (see Frank Wolak's study), an alternative strategy is peer pressure, "shame and ostracism" and relying on guilt. UCLA scholars have been studying how UCLA students respond to information about their relative electricity consumption to see if our impressive students can be nudged to change their behavior.
But, back to Japan. Here is an impressive quote from the NY Times article;
"In the Tokyo area, the government is pushing to cut electricity use by 15 percent between 9 a.m. and 8 p.m. on weekdays to prevent blackouts — and on Thursday, for example, that target was met compared with last year.
Japanese are bringing to the conservation drive a characteristic combination of national fervor, endurance, sloganeering, technology and social coercion.
A “Super Cool Biz” campaign, which builds on the option of no-tie summer business attire begun in 2005, now encourages salarymen to dress down even further by wearing polo shirts or the traditional aloha-style shirts worn on the Japanese tropical islands of Okinawa.
To back up the call to conserve, electricity reports that forecast the day’s power supply and track demand in real time have become as much a part of this summer as the scorching sun and humid air. They are delivered along with the weather on the morning news and announced along with the next stop aboard some trains.
Government alerts are also sent to subscribers’ cellphones if overall demand nears capacity, prodding households to turn down the air-conditioner or, better yet, turn it off altogether. "
This adherence to "good behavior" impresses my inner-Chicago economist. Why aren't these individuals free riding? The economics of identity literature would say that sacrifice for a worthy cause provides direct pleasure and that during a time of crisis that individuals are willing to sacrifice such as volunteering for the army rather than draft dodging.
It has been pointed out that in the United States that few people pay more to the government than what they owe on their taxes. Do Americans do fewer "good deeds" than other people? What is it about Japanese culture that they may reach conservation goals without explicit pricing incentives?
This article highlights that conservation has real costs! "Offices here, already balmy by American standards, have been directed to set the room temperature to 82.4 degrees Fahrenheit, though the real temperature, especially on hot days, has climbed above 86 degrees in many offices." Would Al Gore and Joe Romm put up with that?
Economists have not done a great job investigating the willingness to sacrifice to achieve social goals. Right now in the midst of our budget debate, it appears that everyone wants a free lunch and nobody wants to sacrifice for the common good. Are the Japanese better people than we are?
I recall that Casey Mulligan has published a JPE paper arguing that during World War II that Americans were willing to accept lower wages to work and lower interest rates to hold U.S Treasury Bills as these costly actions helped the War effort. This is an example of sacrifice during a time of crisis.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
The Statue of Liberty and the New York City skyline are seen in this photograph taken from a tour boat in New York Harbor, June 30, 2008. What would it take to turn the city into a center for innovation? (Mike Segar / Reuters / File )
Will NYC's bet on innovation pay off?
Is New York City the right place to build the "next Silicon Valley"? The Mayor appears to believe so and he is prepared to use a fair bit of $ to try to achieve this goal.
"The RFP is the next step in the initiative – unveiled in December 2010 – that seeks a university, institution or consortium to develop and operate a new or expanded campus in the City in exchange for access to City-owned land – at the Navy Hospital Campus at the Brooklyn Navy Yard, the Goldwater Hospital Campus on Roosevelt Island, or on Governors Island – and the full support and partnership of the Bloomberg Administration. The City is also prepared to make a significant investment in site infrastructure, offering up to $100 million in a competitive process designed to select the proposal that yields the most benefit to the City for the lowest commitment of City resources. The City expects that any public contribution will be matched several times over by resources raised by the winner or winners themselves."
Will excellent students and professors and new firms want to locate in these areas? I realize they need to be gentrified but will these "desirable engineers" want to live and work in these locations? If they do want to live and work in these locations, is it obvious that there will be a significant "spillover" effect that benefits incumbent New Yorkers such as my parents? Will the imported engineering nerds really make a discovery that they would not have discovered had they not been in NYC? It is true that access to Wall Street may offer some synergies as engineers seeking venture capital for their own version of Facebook will have an easy time getting to Wall Street to make a presentation but should city money be used to subsidize such activities?
How will the people of NYC gain from being an engineering mecca? I lived for years near MIT while my wife worked there. I deeply respected the people at MIT and met many very successful people but I can't claim to have seen any "multiplier effects" for the local economy. Perhaps a booming business at Legal Seafoods was a side benefit of a booming MIT.
I can't tell if the Mayor's team seeks to gentrify a couple of neighborhoods or if they are serious about diversifying NYC's economy. Given Columbia's major investment in engineering, why hasn't this been sufficient to trigger a NYC version of Silicon Valley? How will this new school nudge NYC to the top?
Rather than simply betting all of this land on an abstract idea that "applied science" is the best bet, why not run a field experiment in which some of the land will be given to different types of activities and see which ones prosper and which ones are attractive to incumbents who already live and vote in the City? As learning takes place, the rest of the land can be allocated to the pursuit that offers the highest expected value. The leaders in NYC should be honest that they do not know what will be NYC's next golden goose. A flexible approach would allow them to re-optimize as they learn.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
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