In today's NY Times, there is an article about the Obama Administration's urge to root out medical fraud and there is an article about my electric utility's (LADWP) desire to raise my electricity prices in the name of fighting global warming. In today's LA Times, there is a lead article on the decline in investment in oil refining .

A few thoughts;

1. Detecting Medical Fraud -- The article mentions the deployment of "bounty hunters" who will root out this fraud. I would assume that econometrics nerds would follow Brian Jacob and Steve Levitt's approach on detecting teacher cheating and look for suspicious data patterns. A simple approach would be to estimate a count model of the number of times each doctor applies for reimbursement as a function of his attributes and his patient mix. Controlling for such observables, identify the outliers (the positive residuals). For this subset who have submitted "too many claims", one could then turn to the dollar amount claimed. Do these "suspect doctors" always put in claims for the same amount of money? Does the timing of the date when they put in their paperwork look suspicious? For this subset of doctors, the Government should invite them in for a work out where the doctor has to prove that his work is kosher. Credible punishment of a few identified guilty fraudsters could save us billions.

2. "Now, the Los Angeles Department of Water and Power, the largest municipal utility in the United States, is poised to pass a roughly 5 percent rate increase on electricity use. The proceeds would be earmarked for renewable energy purchases and programs, including one that would repay people or businesses that use solar panels to contribute to the power grid."

As a green, I support this but as a cynic I wonder whether this is a politically correct means for this over-staffed agency to keep its budget balanced so that fat labor union contracts continue on.

I did like Severin Borenstein's quotes in the article. To see what a tough job this is, take a look at this job description for managing LADWP. To get a sense of the union who plays a big role at LADWP take a look at this . Unions offer their members benefits but social costs rise and Los Angeles does not have a nimble power provider. As the real world changes, a supplier of key services must be ready to evolve.

3. The decline of oil refining in the U.S raises interesting issues that merit real academic research. What is the medium term future for cars? We see the growth of electric car production but we know that in the short term that most cars will run on gasoline. If oil refiners start to scale back their investment in new refining capacity and if the electric car is not a mature technology yet, what happens next when inevitable shocks such as OPEC or other wacky nations have shocks. If refining capacity is low, then the supply of gasoline could tighten up and slight shifts in demand could have wild price implications. Will this anticipated volatility of gas prices accelerate our economy's transition to electric cars?

In fall 2010, Basic Books will publish my new book titled "Climatopolis". If you'd like to see a preview of some of this book's themes, then you might want to watch my presentation at the February 2010 USC Conference on Cities and Urban Growth. Believe it or not, I was sober and I was trying to be serious. I had a great time and I hope that you find it thought provoking.

When I was an undergraduate, the middle aged Professors seemed to be lecturing from "yellowing" sheets of paper that looked older than my grandfather. At the time, I thought this was curious but I didn't investigate this matter. Now that I am a "supplier" of middle aged lecturers, I have the opportunity (and the time) to reflect on this point. This issue takes on a certain urgency because UCLA actually expects me to teach starting in 2 weeks. To my surprise, 200 talented undergraduates want to hear what I have to say about environmental economics. I believe that 500 of them would have registered if UCLA would have been willing to give me more than 1 TA to help me teach this class! These are tough times.

I am not a modest man so I will talk about the history of my thinking on this topic.

1. We will discuss my past green cities work


2. "Urban Growth and Climate Change Paper" Posted Here

3. My Carbon Geography paper (joint with Cragg) Posted Here

4. My China work (joint with Zheng)

But, we will then turn to other scholar's work. In particular, we will focus on
articles published in the Review of Environmental Economics and Policy . Charlie Kolstad and Rob Stavins have put together an excellent journal that I am now helping them on.

Here are just a few of the articles that I will be teaching in Spring 2010.

1. Carson on the Environmental Kuznets Curve

2. Levinson on Trade and the Environment

3. Metcalf on Designing a Carbon Tax

4. Corporate Social Responsibility

Each of these pieces is written by a star researcher who is boiling down the key ideas of the subject to their essence. Please tell my Deans that I am trying to devote some effort to be a decent teacher. For Professors thinking about updating their materials and trying something new, REEP will not disappoint you.

All change is bad. The Smart Electricity Meter roll out offers a test of this claim. These meters provide us with real time information about our minute by minute electricity consumption. In a world where we are glued to our Iphones and Blackberries, shouldn't such information be useful and improve our quality of life? After all, these $100 meters will replace the antiquated monthly electricity bill. Like Star Trek's Captain Kirk, you will now be an informed captain of your own ship!

To paraphrase Sy Sims, an educated consumer should be a better customer. But, the NY Times is reporting that a revolt is breaking out. The first guinea pigs of the smart meter roll out are complaining that they are being price gouged. The utilities are countering that the bills are high because of weather shocks not a malfunctioning machine or a corrupt machine.

Economists are hoping that these devices will spread quickly across all households. If households had real time access to information about their consumption of electricity, then electric utilities could offer special incentive programs to such customers to shift their daily consumption. Leading economists continue to explore how households change their behavior when they face critical peak pricing . So imagine if your utility sent you a letter saying that it would send you a check for $100 each summer month but in return you must agree to face much higher prices per kWh when electricity is at peak demand. Armed with your smart meter, you would know when these "peak periods" were taking place. Such a contract would help the utility because if it signed up enough people, this would reduce the likelihood of a blackout and it might need to build less electric utility capacity to meet anticipated demand.

Now there are two research questions here; 1. selection --- who would sign up for this program? If I plan to be in Paris all summer, then I will sign up for this program and receive the $100 check but true aggregate electricity demand doesn't decline because of this program because I would have been out of the country if they had or had not given me the check. 2. Treatment --- facing the high price for electricity at peak times --- how do people change their daily routine? Do they go for a swim at an outdoor pool rather than cranking the AC while watching their plasma TV? Price signals can play a useful role in our society when we allow them to reflect scarcity!

This backlash against the smart meters is ugly. The utilities should have rolled out these devices in areas where people support conservation goals and trust the electric utilities. This group of "guinea pigs" would have offered valuable lessons on perfecting this new technology. Instead, we now have a paranoia brewing.

The Berkeley Electronic Press knows how to put together a nice special issue of a journal. The editor (Duke's Chris Timmins) did a great job nudging the authors of this economic geography special issue to work hard.

In 1976, Richard Freeman's book The Overeducated American was published. In a nutshell he argued that the returns to U.S college education were declining. Here is an old review by two prominent economists. With the benefit of hindsight, it appears that he was wrong. The returns to skill have increased over time in the U.S.

History repeats itself. Now the New York Times is arguing that the same dynamic is playing out in China in the year 2010. What is going on?

I was once a labor economist so permit me to offer some conjectures on how to reduce unemployment among the skilled;

1. More Chinese young skilled should enter self employment. We know that to
start your own firm requires capital. If skilled young people are liquidity constrained and can't post collateral then they will have trouble starting their own firms. The government could start a program to take an equity share in companies (irony of a Communist Party as Venture capitalist!)

2. Real wage inequality -- given how high home prices are in the big cities (such as Shanghai and Beijing), workers require very high nominal wages to work in those cities. Such high wages discourage employers from hiring. The government should encourage some job clusters to move to low land rent cities and this would set off an agglomeration in those cities.

3. I do not know what are the firing rules in China. Can firms fire at will or is there effective "tenure"? In a new economy where worker skills and job match quality must be discovered it makes sense to a have a labor market where firms can dismiss at will. If firms know they can fire workers, they will be more likely to hire workers to see if they are a good fit within the organization.

4. Are all college degrees valuable in China in terms of human development and problem solving? Have their graduates received a serious education that resembles a UCLA or Harvard? Or have they been memorizing a lot of stuff? Has China suffered from the brain drain and needs more of their best graduates who have gone abroad to return home? The NY Times has written about superstars returning home.

5. Don't forget the "system of cities". In the United States, if Los Angeles offers a UCLA graduate few opportunities then she can move to Dallas or Cleveland. For years, China had restricted migration. To arbitrage regional differences in job opportunities requires information. Does China have "middle men" playing an active role broadcasting where there is local job demand for the skilled? Demand tends to attract supply! Zheng, Liu and I explore these themes in this 2010 RSUE paper .

Climate change is predicted to pose some low probability but highly risky scenarios for New York City when the water rises. Rather than passively accepting this risk, New York City can choose to shed some of its "victim status" by being pro-active. A group of architects have sensed this and are seizing this niche. The New York Magazine has recently profiled their ideas .

1. Aro and Dlandstudio argue that lower manhattan could erect a defense line of giant grassy sponges that would be "fingers of wetlands". How absorptive would this pretty defense be?

2. LTL Arichitects want a Venice feel to this part of the city.

3. SCAPE pushes a vision of oyster farms. They would "Purify the harbor and soften waves." I have no idea if this is true but it would help to diversify the Manhattan economy.

4. Matthew Baird eyes the oil tanks on the New Jersey side of the river as a possible source of renewable power

5. nArchitects; wants to cut channels deep into sunset park and build watery neighborhoods (that look like Amsterdam or Venice). New apartment buildings will be needed these builds would float rather than sink.

While I am not in the business of "picking winners", do you agree that anticipated challenges generate beneficial competition?

I haven’t seen snow for three years and had forgotten what 35 degree weather is like. Over the last 4 days, I ate at three different Legal Seafoods in Boston and lost 10 pounds. While the last statement is false, I did have a great time in Boston. The Cambridge area is a serious cluster of economic talent and it was great to see my old friends and co-authors (5 of them) who all attended the National Bureau of Economic Research's environmental economics meetings. These meetings were bundled with a 1.5 day session on agricultural economics. UC Berkeley's Agricultural and Resource Economics was well represented at this conference. I had never talked research with David Zilberman before and had a great time learning agricultural economics from him. Everyone knows that I love to talk and over these four days, I sat down and talked and talked to over 30 star economists who ranged in age from 25to 75. I’m willing to talk to anybody who will teach me about economics and answer my strange questions!

What research did I see? The future of agricultural economics and environmental economics is bright but let me just talk about one paper by two young Columbia stars. Now, I had thought that when I left Columbia in 2000 that no more research would emerge from that liberal arts school but I was wrong. Here is a salient counter-example offered by Reed Walker and Wolfram Schlenker .

What are the health impacts from exposure to air pollution? This is a deceptively hard causal question. In a world without human subject’s protection, I would take my current Ph.D. students and randomly choose a subset (Neil?) to be exposed to some air pollution and then track his later health outcomes. Assuming that my graduate students are randomly sampled from the greater population (and this may be true), this experimental design (while nasty) would help to answer the question of how the average person’s health is affected by short term exposure to air pollution. Given that I can’t run such an experiment, how do we go about measuring the causal impact of pollution on health? We can wait for volcanoes to explode or the 4 year Olympic cycle which stops traffic and shuts down dirty factories near the athletic Olympic Village, but Reed and Wolfram have a better design.

Here is their logic; Step #1: Airports are major urban polluters, 2. Airports produce more emissions when plans “taxi” for long periods of time; just running their engines getting from the gate and stop and go before getting to the runway. 3. The taxi period is longer when there is bad weather and delays on the east coast. 4. So, random delays on the East Coast raise taxi times at California Air ports which yields exogenous air pollution variation within a 5 mile radius around the airports, 5. This increase at random times in nox and carbon monoxide yields variation for testing the health impacts. To measure health impacts, they examine hospital admissions for people over age 65 on Medicare. They observe Emergency Room admissions per 100,000 by zipcode/year. While this work is still in a preliminary stage, the current results indicate that unexpected carbon monoxide blasts do cause health impacts. Since the exposed population cannot anticipate these elevated levels, they cannot take defensive actions to self protect. So, this study is a very nice contribution to the public health literature.

Another economist at Columbia named Matt Neidell has devoted effort to documenting that when people are given information about elevated pollution levels (Smog Alerts) that they do preempt and take costly self protection actions (such as not going to the Zoo) that reduces their ambient pollution exposure.

The Village People made good music and distinctive music videos. I'm having trouble getting their sound out of my head as I read this new paper by Golan, Greene and Perloff . I'm reading that paper because I'll be at the NBER for the next 3 days attending this conference and I wanted to see what recent research the conference organizer (Jeffrey Perloff) has been up to. I apologize (this is what nerds do with their finite time).

Now, please recall that in 2009 that I published a prominent book on the U.S military . So, my opinions count!

Here is the abstract for this new Perloff paper:

"The Navy’s promotion-retention process involves two successive decisions: The Navy decides whether an individual is selected for promotion, and then, conditional on the Navy’s decision, the sailor decides whether to reenlist or leave the Navy. Rates of promotion and retention depend on individuals’ demographic and other characteristics, wars and economic conditions and factors that the Navy policy makers can control. Using estimates of these decision-making processes, we examine two important public policy questions: Do Navy promotion and retention rates differ across race and sex? Can the Navy alter its promotion and other policies to better retain sailors, or do war and civilian labor market conditions determine retention?"

Here is the cool part:
"To estimate the model, we use data on virtually all Navy enlisted personnel from January 1997 through May 2008."

The interesting piece to the econometrics here is that a Navy person's probability of remaining in the Navy is a function of whether the Navy promotes him (not kicked out) and whether he chooses to stay. A labor economist would say that this probability will be higher if the officer is happy and productive in the Navy and if his next best "outside opportunities" (i.e teaching at UCLA) are not so hot.

Controlling for a large number of observable characteristics such as aptitude scores on standardized tests, age, education, sex, Macro trends such as whether the attacks of 9/11/2001 had recently taken place, Perloff and co-authors show that blacks are less likely to be promoted and less likely to be retained than whites.

How large are these effects? To judge this they conduct the following thought experiment, "If the Average black male soldier had the average white male's observable characteristics, his probability of being promoted would be 35% while the average white male soldier with the average white male's observable characteristics is predicted to have a 37.6% chance of being promoted. Now, the average Hispanic given the average white's characteristics only has a 26.6% chance of being promoted. That's a huge difference in this "apples to apples" comparison.

Why are the authors "standardizing" by observable attributes. The ideal experiment here is to compare an identical soldier who happens to be black, Hispanic, white , male, female and test for differential outcomes. Statistical techniques allow you to do this based on "observables" such as education, age, AFQT test scores.

Is this evidence of discrimination?

"The annual probabilities of promotion and retention could differ across racial and sex for three reasons. First, demographic groups could be treated differently by the Navy in the sense that people with the same characteristics but who differ in terms of race or sex have different probabilities (that is, the coefficients on individuals’ characteristics are the same across demographic groups). Second, these groups could have different mixes of observed characteristics such as education and experience. Third, there could be differences in unobserved characteristics across the demographic groups.

Differences in coefficients (the first hypothesis) play roughly twice as large a role as the difference in observed characteristics (the second hypothesis) in explaining the overall difference in promotion probabilities between Whites and other races. The difference in coefficients is most pronounced for Hispanics. We cannot explicitly examine the third hypothesis. However, because our bivariate probit analysis includes an objective ability measure, the AFQT score, as well as a large number of other observed characteristics, it is relatively unlikely that racial and sex differences in promotion rates reflect unmeasured ability differences across demographic groups."

My father offers some sound advice to President Obama today in this NY Times article . He still hopes that I will quit economics and go to medical school. It is true that UCLA's faculty salary cuts are lowering the price of making such a career transition.

"Doctors see a rise in cholesterol like Mr. Obama’s occasionally, said Dr. Martin L. Kahn, a professor of cardiology at New York University who is not connected with Mr. Obama’s case. “Usually that is a lever for the doctor to recommend more aggressive dietary changes and cigarette cessation to warn a patient, ‘Look what you are doing to yourself’,’ “ Dr. Kahn said in an interview.

“Nutritionists tell us that a very little extra food each day adds up to a measurable amount at the end of a year,” Dr. Kahn said.

Dr. Kahn said he might recommend an exercise stress test “as a baseline” for the future but would not do further procedures “unless he had a calamitous stress test.”

Mr. Obama showed no evidence of heart disease from an electrocardiogram and a test known as an electron beam CT scan that looks for calcified areas in coronary arteries that may be evidence of coronary artery disease.

“The CT heart scan findings are somewhat reassuring” because if it were positive, “it would be a worry,” Dr. Kahn said."

NOW --- permit me to boast. How many parents and their kids have been quoted in the New York Times in the same year in independent articles unrelated to crime or spatial shocks such as a Katrina event? Here is one of my quotes in that fancy newspaper. I'm still waiting for the NY Post to call me.

The New York Times wants the United States to have clean water . But, does Justice Scalia want you to have such an amenity? The original Clean Water Act has a sloppy definition of its geographical scope. To remind you young environmental lawyers out there ; the core issue is a clear, consistent definition of "navigable waters". I have no idea what these words mean but English is not my first language.

"the Clean Water Act that limited it to “the discharge of pollutants into the navigable waters” of the United States. For decades, “navigable waters” was broadly interpreted by regulators to include many large wetlands and streams that connected to major rivers."

The economics of this ambiguity issue are fascinating;

1. There are geographical areas where it is not uncertain whether the Clean Water Act is enforceable.

2. How do polluting firms respond to the possibility of these new "domestic pollution havens"?

3. Will dirty firms move to such areas because they believe that they can pollute with delight and not face costly regulation? As President Obama seeks to create new jobs, will he support this? Will the pursuit of local dirty job growth be an economic development strategy during these tough days?

4. Will incumbent firms who are already located in the "ambiguous regulation" zone start to pollute more? The New York Times says yes but an excellent economist named Tom Lyon would push back and say that firms are strategic and will think through whether there are benefits of "flying under the radar screen" and not polluting to avoid the wraith of the regulator.

5. There is an element of investment under uncertainty here. Right now, there is uncertainty about whether the regulatory rules apply in these cases;

"But the two decisions suggested that waterways that are entirely within one state, creeks that sometimes go dry, and lakes unconnected to larger water systems may not be “navigable waters” and are therefore not covered by the act — even though pollution from such waterways can make its way into sources of drinking water."

Firms may start to purchase land near such areas and take a bet that the Republican dominated Supreme Court will rule that the Clean Water Act does not apply there. This would give such firms an "option" to build a factory later if the area is indeed not forced to comply with Clean Water Act regulation standards.

For those of you who are academic economists, there has been a long literature -- that Vern Henderson and I started (see my 1997 RSUE paper) on the consequences of differential Clean Air Act regulation (i.e that footloose dirty manufacturing moves to areas where the Clean Air Act is not enforced (attainment counties). This case represents the same logic but the Clean Water Act would now be "spatially delineated".

The horrible destruction that has taken place in Chile and Haiti offers a fascinating contrast. Haiti was hit with a 7.0 richter scale earthquake and roughly 230,000 people died in January 2010. Chile was hit with a 8.8 richter scale earthquake and as of now roughly 1000 people are reported dead. The richter scale is a base 10 log scale --- so the shaking amplitude of the Chile quake was almost 100 times larger than the Haiti quake.

How could a much worse quake cause much less death? One answer is simply luck that the Hatian quake struck a major population center. But, we know that Chile's city of Concepcion was close to the epi-center.

My favorite explanation is discussed in My 2005 paper on deaths from disasters . Using data for nations all over the world, I documented the benefits of economic development. Richer nations suffer fewer deaths from the "same quality" shock.

Now, the open question is "why"?

Explanation #1: The Quality of Government

Richer governments can enforce building codes and quality building codes protect the public.


Explanation #2: Richer people

Richer people live in newer, higher quality structures and this protects them. The structures are built of higher quality (no collapsing cement).

Richer people often live at lower density (outside of a Manhattan or a Tokyo) and this reduces risk.

There is a synergy between #1 and #2. Richer nations tend to have a more educated populace. The educated are better able to monitor their politicians and this provides an incentive for self interested politicians to actually act in the public's interest. The role of the media in "policing" politicians remains an active question in modern economics. Researchers at the London School of Economics have done some of the best research on this topic.

This piece about China's demand for natural resources got me thinking again about the broad topic of "limits to growth". As world population and per-capita incomes rise, and given our global desire to achieve the "American Dream", could we exhaust our finite stocks of non-renewable resources? In Collapse, Jared Diamond argues that there are many historical case studies that suggest that the answer is "yes".

In a 2007 Wall Street Journal Debate, I offered this "witty" reply.

"Matthew Kahn writes: Imagine a world where everyone in China and India achieves our living standards. In this world, with 7 billion people, if each drives a Hummer 10,000 miles per year, then the world would need 7 trillion gallons of gasoline to meet this aggregate demand. Now, that's an ecological footprint!

Now, the New York Times recently reported that the Sun will only shine for another 7.59 billion years. Even so, if the rest of the world achieves the "American Dream" and attempts to drive their Hummers until the sun finally flickers and dims, we are clearly going to need a lot of gas.

Still, it's important to note that expectations of such future scarcity create incentives to innovate. Implicit in the work of authors such as Jared Diamond is a type of mass-behavioral-economics myopia where he and a few other "wise men" are the only ones aware of the coming day of scarcity. I am more democratic and optimistic that, if there is a future arbitrage opportunity, a few ambitious young capitalists will seek out a profit and be ready with the next "Toyota Prius" to help mitigate future scarcity challenges."

Re-reading this quote, I'm now worried that this was my best writing and now its all downhill.

I was trying to emphasize a counter-intuitive point. Economists always question the "conventional wisdom" because this wisdom tends to downplay the power of incentives. Under "business as usual", of course it is the case that rising demand will exhaust a finite supply. But, the whole field of "rational expectations" in modern economics is based on the idea that self interested households and firms plan ahead and use all available current information to plan for future scenarios. The innovation sector is a crucial part of modern capitalism.

China and India's ongoing growth is a credible signal that resource demand will rise --- if this is predicted to lead to rising resources prices over time then this creates sharp innovation incentives to devise substitutes for the increasingly scarce natural resources. The net result of this innovation activity, caused by the need to find substitutes for increasingly scarce fossil fuels, will be a "green economy". Thus, we owe China. Its anticipated appetite for energy will green the world!

Detecting cheating is difficult. You can't ask a sumo wrestler whether the non-linear payoff system he faces induced him to throw a match. He might eat you. But, shrewd economists figured out how to detect cheating in that important sector. Teachers cheating on standardized tests in order to receive promotions is an ugly problem but skilled economists figured out how to identify the Chicago cheating teachers.

The members of the U.S Congress, perhaps having read Freakonomics, are now ready to unite across party lines to catch Doctors, who are cheating Medicare through fraud, in the act.

"They could potentially devise further changes to the bill, adding Republican ideas even without Republican cooperation. One area of common ground to emerge at the forum was an idea put forward by Senator Tom Coburn, Republican of Oklahoma, to use undercover regulators posing as patients to root out fraud by doctors and hospitals. “That’s something that I’d be very interested in exploring,” Mr. Obama said. Senator Charles E. Schumer, Democrat of New York, called it “a great idea.”" source NY Times article

So, how would this work? Would the new "Fraud Cops" randomly choose which hospitals and doctors to test for Fraud? Or would they engage in a type of "profiling" such that they would focus on hospitals and doctors who bill out unusually high Medicare and Medicaid rates? Would the "fake patients" pretend to have medical conditions that give the unsuspecting doctors plenty of leeway in prescribing a treatment?

In an economics field experiment, some incentive would be randomized. Would the "undercover regulators" randomly choose to offer different doctors different opportunities to cheat and see whether doctors are more likely to cheat when they can steal more money (i.e whiplash versus a toe nail infection).

From a Law and Economics perspective, what I find interesting here are the following questions;

1. How much fraud is there in our current health system as medical care is billed for in cases when the patient didn't really need it?

2. If this new set of "Doctor ABSCAM patrol" raises the probability that a cheating doctor gets caught by 1% and if the cheating doctor is imprisoned for 3 years, how much of a deterrence effect will this have? Will this credible threat lead to a 30% reduction in medical fraud? Now my old graduate school teachers would say, "just shoot one cheating doctor" and fraud will plummet. But, we know that such draconian punishment (of having one salient punishment case) is not credible.

But, the Congress has spoken; "waste is bad" --- but the devil is in the details -- how do you detect it? How do you punish the "wasters"?

We know that the Olympics has a "causal" impact. It helped to beautify Seoul in 1988 and cleaned up Atlanta's air in 1992 and Beijing's in 2008. One fascinating economics study (available here ) documents the "coincidence" that when international natural disasters occur at the same time that the Olympics are taking that the U.S AID is more stingy in terms of offering disaster relief. The only plausible explanation for this fact is that the Olympics displaces interest in the rest of the world and what is going on elsewhere because we are glued to our TV or Internet feed watching Michael Phelps belly flop or watching that red haired dude (Shawn White?) do his wild hip flips on that ski thing.

But, what happens to the cities that host the Olympics. This NY Times article is worried that Vancouver is going to suffer quite a hangover. The article foreshadows doom and gloom from raised expectations that the Olympics would offer a spotlight on this great city but that ex-post that it would only leave a $1 billion dollar debt.

I like this quote;

"Kennedy Stewart, a professor of public policy at Simon Fraser University in suburban Vancouver who has written extensively about the city’s politics, remains unconvinced that showing potential investors a good time during the Olympics will resolve Vancouver’s long-term economic issues. The forestry industry, once the mainstay of its economy, has been devastated by a beetle infestation, the collapse of the housing market in the United States and competition from South America. While motion picture production companies and software developers have set up shop here in recent years, they lack the same economic impact.

“What’s the substantive thing Vancouver has to offer other than its nice mountains and vastly overpriced real estate?” Professor Stewart asked. “The forestry industries have collapsed, so where is the money going to come from other than marijuana grow-ops?”"


Now, some of you may have forgotten that I offered my opinions on the bright
future for Vancover 3 years ago. Here I repeat my "green cities vision";


Get ready for a new-look downtown
Sauder Business School arranges 'Condos versus offices' debate

Frances Bula
Vancouver Sun


Tuesday, June 19, 2007


Vancouver's 19th-century downtown is on the way out.

Instead, the city's 21st-century downtown is very likely to be a mix of residences for highly skilled local professionals and second homes for rich people from elsewhere, along with a tight core of office space for high-end dealmakers and a scattering of services for all those groups of people.

That's the provocative future UCLA economist Matthew Kahn is going to discuss this week in a debate the University of B.C.'s Sauder School of Business has put together on the controversial question of "condos versus offices" in downtown Vancouver.

"There's certainly a possibility that there's been a resortification in Vancouver," said Kahn, in an interview from San Francisco. "But why is that bad?"

The city currently has a moratorium on residential development in part of the downtown next to the central business district that was put in place after rising concern from business groups and commercial brokers that office space was under threat.

But Kahn said Vancouver could be evolving into what San Francisco already is -- an attractive downtown that is largely a home to the upper middle class.

"In San Francisco, no one is worried about its health."

He also pointed out that Vancouver is experiencing the same trends that have been documented in other North American cities. As the price of land goes up, firms leave their deal-makers downtown but move the bulk of their back-office work out to the suburbs.

Some cities, like San Francisco or New York or Vancouver, are then able to attract people to live in their "consumer downtowns."

And there's nothing wrong with that, says Kahn.

From an urban economist's point of view, it's an advantage to be able to attract skilled professional people to your downtown. Those people will then either accept slightly lower wages in order to work close to where they live, and firms that can save money on wages will be willing to spend it on the cost of space downtown. Or they will reverse commute to the suburbs.

From a public-finance economist's point of view, having about 15 per cent of residential space downtown taken up by second homes for wealthy people from elsewhere is also a benefit.

"It's a free lunch, with these people moving in, paying taxes, and demanding no services at all."

The businesses that remain downtown will be those that can survive with a minimum of space or the ones that keep their high-ranking people downtown while the rest of the work moves out to the suburbs.

"There's still a demand to be downtown for the power lunch," says Kahn. As well, there will be many jobs in the arts, culture and retail sectors that serve that downtown community.

Along with Kahn, others debating the future of Vancouver's downtown will be UBC professor Robert Helsley and Vancouver's planning director, Brent Toderian. It will be held Wednesday at UBC's Robson Square campus from 5 p.m to 7:30 p.m.

Tsur Somerville, the UBC professor who organized the panel, said he decided to tackle the topic because "people are concerned about what the downtown is going to look like." However, at the moment, the debate has been limited mostly to business groups arguing for more office space and residential developers arguing for more room to build condos.

"Urban economics tend to have a long view and a different perspective."

fbula@png.canwest.com

All major universities have student newspapers. After serving for 17 years as a faculty member at a number of excellent schools, I'm always amazed at the insipid content of these newspapers. Usually, you wouldn't know that the University has a research faculty. The typical articles focus on romance, frats, sports, and tuition hikes. But, today's Columbia Spectator offers a great counter-example. This article makes me proud to be an emeritus Associate Professor of that esteemed university.

Columbia’s Engineering School has one solution for making buildings greener—hybrid solar cells that produce heat and electricity simultaneously.

Huiming Yin, assistant professor of civil engineering and engineering mechanics and creator of the panels, said that the purpose of the project was to create more efficient solar cells.

“We want to increase the efficiency of solar cells in our experimentation so that the solar cells don’t waste so much energy when they absorb sunlight,” Yin said.

This sounds like a great opportunity for graduate students to work on a cutting edge project. Columbia University must smell some intellectual property royalties based on the patents that this research will generate.

The nerds who write for Wikipedia have a strong understanding of the innovation issues revolving around solar cells.

"High-efficiency solar cells are a class of solar cell that can generate more electricity per incident solar power unit (watt/watt). Much of the industry is focused on the most cost efficient technologies in terms of cost per generated power. The two main strategies to bring down the cost of photovoltaic electricity are increasing the efficiency of the cells and decreasing their cost per unit area. However, increasing the efficiency of a solar cell without decreasing the total cost per kilowatt-hour is not more economical, since sunlight is free. (An analogy is that a pound of lead weighs the same as a pound of feathers.) Thus, whether or not "efficiency" matters depends on whether "cost" is defined as cost per unit of sunlight falling on the cell, per unit area, per unit weight of the cell, or per unit energy produced by the cell. In situations where much of the cost of a solar system scales with its area (so that one is effectively "paying" for sunlight), the challenge of increasing the photovoltaic efficiency is thus of great interest, both from the academic and economic points of view. Many groups have published papers claiming possibility of high efficiencies after conducting optical measurements under many hypothetical conditions. The efficiency should be measured under real conditions and the basic parameters that need to be evaluated are the short circuit current, open circuit voltage."

So, in English ---- Al Gore would be happier if more of our electricity supply was generated by renewables. Even Dick Cheney would consider installing solar panels if the price of installation is low, if the panels generate a lot of electricity and if he can sell back his surplus electricity (production - consumption) back to the grid at a good price. Any innovation that makes panels per square foot more "absorbing" or cheaper to install makes the "green Al Gore" scenario more likely.

In academic economics, there continues to be an active research agenda of examining the current economics of solar panels. Here is Severin Borenstein's study.

California is a hotbed of solar innovation. One prominent example is SPG Solar

Phil Jackson has won 10 NBA coaching titles. Now, my mom could coach MJ, Kobe and Shack to a title or 8 but let's abstract from the quality of his inputs in production of victory. In today's print version of the NY Times, Jackson admits his secret for success borrowed from the late great Red Holzman. "Jackson also adopted Holzman's system of fines for minor infractions. "what you basically call a silly fine," Jackson said. For instance a player might be assessed a $10 or $20 fine for arriving more than five minutes late to a game. To players making millions, that might seem trivial. But, Jackson has found that players are more grudging about having to pull cash out of their own pocket on the spot, than having a larger fine deducted from a paycheck, as is the usual practice. The fines also serve a team building purpose. Players can win back the money in shooting games." NY Times article

So, Richard Thaler should quit Booth's GSB and go down to the United Center and earn some real $ nudging the players to greatness. Now that Dora Costa and I are working on "the nudge", I have a great appreciation for Thaler and Sunstein's work on this topic.

The New Yorker Magazine routinely rejects my cartoon caption suggestions (for their weekly contest) and now it has selected to profile Paul Krugman rather than me. These slights help me to keep working on academic stuff as I seek to rise in the REPEC rankings of economists. Over the next ten years, will Kahn or Krugman write better academic stuff? As you can see, Paul knows that his opportunity cost of another QJE is high.

"But it’s been a long time—years now—since he did any serious research. Could he, still? “I’d like to get back to it,” he says. “I’m craving the chance to do some deep thinking, and I haven’t been doing a lot of that. I guess doing the really creative academic work does require a state of mind that’s hard to maintain throughout your whole life. Even Paul Samuelson—the bulk of the stuff you read from him is before he was fifty. There was an intensity of focus that I had when I was twenty-six that I won’t be able to recapture at fifty-six. You develop your habits of mind, and to a point that’s a good thing, because you learn ways to work, but it does mean that you’re less likely to come up with something really innovative. Even if I weren’t doing all this other stuff, I don’t think I’d be producing a lot of breakthrough papers. There’s crude stuff: if I do have some brilliant academic insight, what are they going to do, give me a Nobel Prize? . . . When I was younger, when I figured something out there was this sense of the heavens parting and the choirs singing that I don’t get now. And that’s life.”"

Now, in general I agree with his life-cycle view of economic research but I can name 4 Nobel Prize winning counter-examples to Krugman's point here. Think of Becker, Heckman, Stigler, and Schultz. Each of these impressive guys did big big work after the age of 60. Krugman is still a kid and has no excuses about easing off the gas pedal.

During the academic 2010-2011 year, UCLA will charge undergraduates $10,000 tuition per year. Our Ivy League Peers charge roughly $40,000 per year. Consider this modest new funding model for UCLA:

1. 60% of UCLA's class will be in state students (I would want to see a residency requirement such that all 4 years of high school were spent in California). Each of these students will face a price of $9,000 a year (before financial aid).

2. 40% of the entering class will be from out of state. They will pay The Average Ivy League Tuition - 20%. (before financial aid).

According to my math; the annual revenue stream per student/year in thousands of $ = .4*32 + .6*9 = roughly 20. Note that 20 is much greater than $10 (the status quo revenue pre-financial aid ) and this is the key to fiscal solvency.

This infusion of cash would allow for better financial aid deals for deserving students and a preservation of excellence on campus. Quality is costly.

Now, I recognize that the University would be trading off more suburban out of state kids (think of New York State's Scarsdale High School --- they are under-represented on this campus) and having fewer good California students in the classroom.

From a teaching perspective, average class quality would be likely to improve as these "ivy league" imports would make the classroom a more competitive setting.

I recognize that this proposal reduces the probability of access to UCLA for some students but note that 60% of students would still be in state.

The State of California's economy would be helped because New York kids who get a taste of Los Angeles are likely to remain here rather than going back home after graduation.

There are no free lunches here. The extra financial aid will guarantee diversity and excellence on this campus.

Economists love to talk about time consistency and the dynamics of tax rates. The public does not share this love. Consider the case of Wyoming . Like all states, it is seeking out new sources of revenue. Returning to basic ideas from the economics of taxes, a State can tax (and raise revenue) from activities that cannot respond and "walk away". You can tax land because it can't migrate to Nevada. If Wyoming tries to tax high income earners, it will quickly lose these high flyers as they migrate elsewhere. If you tax the "golden goose" you risk losing your goose!

Now, given this background, let's turn to wind turbines and solar panels. Right now a heck of lot of investment is taking place in this sector --- investors are choosing where to site their irreversible sunk investment. After all, once you've built a billion dollar wind turbine farm --- you can't pick it up and carry it across state borders to another location. A good business person will ask herself; "I know the upfront costs of installing this system but what is the flow of revenue from setting this up? The answer depends on how much power the wind turbines will generate on average each year and at what price (net of taxes) that the wind turbine output can be sold at. Today's NY Times says that Wyoming is considering a $1 per MwH tax on wind output. This lowers the marginal revenue that wind turbine companies will earn. In truth, this is not a large tax but if it hints that the tax will go up even higher in the future --- then forward looking entrepreneurs in the green renewables game should think twice about going to Wyoming. Note that this is a dynamic Laffer Curve; by keeping taxes low and credibly committing to keep them low --- Wyoming will attract more "green investment". The golden goose will thrive.
With a new technology where there is little installed capacity but a lot of capacity will soon be installed, locations that can credibly say "our taxes will remain low" -- will be rewarded. This same issue arises over and over again in the capital gains tax literature.


From an Al Gore's point of view does any of this boring discussion matter? Suppose that a physical scientist who knows no economics declares that North Dakota and Wyoming are the objective best places to have wind turbines and are much better than Idaho or California. In this case, Wyoming's myopic strategy of taxing now will be socially costly because it will displace green investment to areas (the lower tax ones) where the same wind turbine will generate less output.

So , assuming equal cost of installation of the turbine;

profit in Wyoming = Price_mWh*(Generation_wyoming)*(1- Tax_wyoming)

profit in Idaho = Price_mWh*(Generation_idaho)*(1-Tax_Idaho)

A benevolent planner would send the turbine to Wyoming if

Generation_wyoming > Generation_idaho --- while the for profit firm will choose
the location with the higher after tax profit. The presence of the tax in wyoming
could lead the self interested firms to go to the "wrong" location.

In this algebra --- Generation_wyoming represents the power generation by the same wind turbine if it locates in wyoming.