US economy continues to slowdown

The BEA announced that economic growth in the second quarter was 1.7% and only 1.1% in the first (revised down from 1.8%). Note the significant contraction of the government numbers, according to the Report:
Real federal government consumption expenditures and gross investment decreased 1.5 percent in the second quarter, compared with a decrease of 8.4 percent in the first. National defense decreased 0.5 percent, compared with a decrease of 11.2 percent. Nondefense decreased 3.2 percent, compared with a decrease of 3.6 percent. Real state and local government consumption expenditures and gross investment increased 0.3 percent, in contrast to a decrease of 1.3 percent.
Yes austerity does work, and it produces slower growth, and it will by Okun's Law produce higher unemployment rates. This are well established empirical regularities.

Jamie Galbraith on Europe and the United States

Yannis Varoufakis posted a translation of an interview given by Jamie Galbraith here. Among other things Jamie suggests that:
"the dominant European narrative of the United States now as then is utterly misleading. It’s the notion that we have somehow in the thirty years since Ronald Reagan transformed ourselves into a free-market, deregulated, privatized, flexible labor market, weak-welfare-state country, which, if you just cast your memory back to the 60′s and 70′s, a totally unrecognizable view of the country, a country that was built by Roosevelt and Kennedy and Johnson, especially Roosevelt and Johnson, and which had extended even into the Nixon administration, which had and has a very substantial social insurance, public investment and regulatory framework. Many things about this have been under assault, some of them have failed entirely, including the regulation of finance, but this is not a Hayekian vision that has triumphed, but rather the one I described in my book, The Predator State. The real politics of the country controls these apparatuses and how much of the benefits are diverted to cronies and oligarchs and political constituents, which captures what happened in the Clinton and the Bush years – and ongoing, of course."
This was first discussed by Jamie in his paper "What is the American Model Really About," which argues that the public sector supports more than half of the economic activity in the US, and in so doing is the main force behind the growth of the economy as a whole.

Easy Ways to Lighten a Dark Kitchen

I recently had a reader email me asking for tips on lighting up her dark kitchen.  She loves the look of white kitchens but unfortunately any major changes are not in their budget right now. 

As you can see the kitchen isn't horrible it's just really dark. The cabinets are clean and modern and the floor is at least light. 

If you don't have the means to give your kitchen a complete overhaul there are still a lot of easy changes you can do. 
1. I love the idea of using a beautiful tea towel as art. Something white with a little color will really brighten up the kitchen. 
2. If any of my clients ever have windows in the kitchen I always recommend installing a roman shade. A window treatment is a great way to add some pattern and color to the space distracting the eye from all the brown going on. Since this kitchen has all warm tones I chose a blue fabric to add a cooler feel to the space. Roman shades can be pricey so if you want to save some money you can make a faux roman shade using this tutorial
3. The easiest thing to do to lighten up the space is to add as many white accessories as possible. White will help to break up the brown. White serving pieces could also be added to top the kitchen cabinets.
4. I think adding crystal knobs to all the cabinets would be amazing.  
5. These canisters are bright and cheery and would really help bring the kitchen to life. 
6. I have patterned bowls displayed in my kitchen and I love them!
7. Because the kitchen appliances are all dark it would be great to brighten the oven up with a fun dishtowel
8. Although the client doesn't want to do any painting I'm going to strongly recommend painting the tile backsplash. I love this tutorial. I really feel like transforming the backsplash will help break up the darkness of the cabinets and countertops. 

What would you do to lighten up this dark kitchen? 

A Preview of Chapter Six of my New Book

The good news for you is that my book only has 16 chapters so pretty soon you won't be reading another preview of my Fundamentals of Environmental Economics book.  Chapter Six is a vanilla chapter with a few twists.  Given that the environment represent a set of public non-market goods, many environmental economists spend their lives devising clever ways to figure out how much do people value such goods.  We can only judge the benefits of environmental regulation if we have some idea about how much different individuals value pollution reduction.

Similar to other standard texts, I discuss hedonic real estate examples and contingent valuation.  Unlike other texts, I actually teach the reader some basic econometrics to show how estimates of a home price hedonic provide tight bounds on a household's willingness to pay for non-market public goods.

But, then the chapter gets exciting.  I introduce Harry the Hippo.

"In academic economics, a growing number of empirical papers use what is called a “field experiment” design in order to test hypotheses. In this section, I explain in detail how to conduct such a study and provide a relevant application for young environmental economists.  The point of this example is to teach students how to estimate demand curves and how to learn about people’s willingness to pay for environmental goods. 

            Suppose that there is a zoo in Los Angeles.  The zoo is home to a single creature called Harry the Hippo.  The zoo spends $9000 dollars a year to feed and protect Harry.  The zoo has no sources of revenue and has no benefactors or government support. If the zoo collects less than $9000 each year in tickets to see Harry then the zoo will close.   The zoo hires an economist named Kahn to help them figure out what is the demand curve for visiting Harry.   Kahn tells them that from the Law of Demand he knows that the demand curve slopes down for seeing Harry.  In English, this means that if the Zoo charges more for a ticket to see Harry that fewer people will show up.  Kahn tells the zoo that while he knows the sign of the slope of the demand function (it has a negative slope with respect to price) he does not know the demand curve’s intercept (i.e at what price per ticket would demand be zero) and he doesn’t know the slope of the demand curve.  Kahn’s ignorance annoys the zoo keeper who is about to fire Kahn, when Kahn mentions that while he doesn’t know the shape of the Los Angeles Harry the Hippo demand curve, he has an idea for how collect the data to estimate this demand curve.  The Zoo Keeper tells Kahn to go ahead and run his field experiment.   Permit me now to tell you my experimental design."

I show how to use a randomized zoo ticket price design to estimate an aggregate demand curve and then I use this demand curve to solve for the revenue maximizing ticket price. I calculate the consumer surplus zoo attendees will gain.   So, unlike most books I've seen I integrate consumer theory, environmental economics and field experiments and basic statistics into one 5 page example.    Not bad for a $2 book?

Love & Beauty Nail Polish

Hi everyone,
I picked up some new nail polish at Forever 21 so I thought I would let everyone know that some of the nail polish is on SALE for 99 cents while others are just $3.88. I did a previous post on these polishes but here are some new ones. If you would like to check it out you can CLICK HERE for more details.

And here are the colors I posted previously for those of you who missed it
These polishes are pretty good quality and a decent price.

I also picked up a beautiful red by Wet n Wild called: I read a good book. It is a a lot darker than it appears in the photo but I couldn't capture the true color with the lighting conditions. 

Amazon Fresh and the Rise of the Consumer City

I'm starting to think that Amazon's Pat Bajari (their Chief Economist and my old co-author) spends his days thinking of new ways to lure my household to spend 100% of our disposable income at Amazon.  The lucky people of Seattle and Los Angeles (who live in certain "select zip codes") now have access to Amazon Fresh.   Since we are an Amazon Prime household who lives in Los Angeles, we have been able to purchase some great food products that are delivered to our door in a funky green bag.

"Free same-day and early morning delivery on orders over $35 of more than 500,000 Amazon items, including fresh grocery and local products.

AmazonFresh is now available in the Los Angeles area in select zip codes as a free 90-day trial to Amazon Prime members. After your free 90-day trial, your membership will automatically upgrade from a Prime membership to a Prime Fresh membership and you will be charged $299 for the next year and annually after that. This includes all the benefits of Prime, plus access to AmazonFresh. Your current Prime membership will be refunded on a pro-rated basis when you upgrade to Prime Fresh." 
When Glaeser, Kolko and Saiz wrote their "consumer city" paper, did they anticipate this new product?  Note that an Internet Company (Amazon) is making living in a great city (Los Angeles) even better as its new Amazon Fresh saves us time shopping and now we have a greater access to an increased variety of products such as wild boar.  Whole Foods in Westwood hasn't offered us that!    This case of the Internet making cities even stronger is an old point that Glaeser and Gaspar made years ago.  

Palley on the next Fed chairperson

Tom Palley weighs in on Summers as a potential chairman of the Fed. He says:
"Summers’ policy inclinations remain questionable. Along with much of the economics profession, he now acknowledges the need for greater financial regulation, (although there also remains an underlying intellectual bias among economists against regulation). As for fiscal policy, he has shifted from austerity now to austerity later when economic recovery is more entrenched. Beyond that, little else has changed. In economics, it is difficult for an old dog to learn new tricks."
Read the whole piece here.

Keynes has always been more popular than Hayek

Or at least is what the Ngram Viewer suggests. Below starting in 1919, after the publication of Keynes' The Economic Consequences of the Peace.
Note that after the spikes with his books on the business cycles in the 1930s, and the slightly larger spike after the Road to Serfdom in 1944, Hayek drops to re-emerge only after the Sveriges Riksbank Prize (aka Nobel). Keynes on the other hand has a surge after the General Theory in 1936, and remains with the same level of popularity, with no decrease even in the 1970s, the period of the so-called crisis of Keynesian economics. Both seem to decrease in popularity right before the last crisis.

Kevin Gallagher on China and financial deregulation

Kevin Gallagher explains why financial deregulation in China would be a huge mistake. In his words:
"Rumor has it that China is set to accelerate the de-regulation of its financial system.
For years, China has restricted the ability of its residents and foreign investors to pull and push their money in and out of the country.
While that may be illiberal, there was a sound reason for this restriction: Every emerging market that has scrapped these regulations has had a major financial crisis and subsequent trouble with growth."
Read the rest here.

Putting the solution cart before the innovation horse

So, here it comes again.  Another blog post using an old standby as a way to make a point.  Today's old standby is the adage about placing the cart before the horse.  In the fast paced world in which we live, there is great pressure to skip ahead to activities or actions that seem to provide value, or to assume we know enough information to skip over the humble act of understanding what people want and need.  To that end I see far too many clients putting solutions and technologies ahead of innovation.

What's worse, they are calling the selection of a new technology or solution "innovation" before they've done any customer insight work or research, or worse, in lieu of doing any trend spotting or customer insight work.  Many clients are simply declaring a solution or technology and then using "innovation" as a way to validate their selections.  This is problematic on a number of levels.

Reversing the order

The first problem is in reversing the order of the process.  While everyone likes closure, the selection of a tool, technology or solution before investigation of the underlying problem doesn't guarantee you've got the right solution.  The solution chosen may be the right one, but if so don't dress up the presentation in "innovation" clothes.  You've simply made a management decision to select and implement a tool or technology based on gut feeling, pressure from a manager, customer or vendor, or some other reason.  Choosing a new technology without understanding customer needs may lead to the right outcome, but it's not innovation.  Innovation starts by understanding evolving trends and unmet customer needs, acts of discovery, then defines potential solutions and identifies the best one based on gathered insights.  This places discovery before selection, not in service of the act of validating the selection.

Innovation as a cover for decisions rather than a basis

Innovation should help create insights that lead to informed decisions, not provide a cover for decisions you planned to take anyway.  There is already far too much cynicism and fear associated with implementing anything new or different.  Innovation faces far too much cultural and change resistance, why create new reasons to doubt innovation and its potential outcomes?  Everyone recognizes that true innovation outcomes (growth, differentiation) are important.  Why water down the innovation possibilities through defining a selection of a solution or technology as innovation, rather than doing the work that's necessary to discover whether or not the solution is the right one?

Short cuts often lead to poor outcomes

Ultimately, teams or managers that select technologies or solutions and implement them under the cover of "innovation" are taking short cuts.  They are skipping over important and necessary discovery work, which speeds up the decision process and moves to implementation.  But the cost of the short cut is that often a solution or technology chosen in this manner doesn't provide the benefits customers want, and fails to deliver the benefits the firm wants.  Short cuts almost always lead to solutions that are less than what was possible or achievable.  Often the work of discovery isn't expensive or time consuming.  That work is rejected because of a rush to get to an answer - any answer, rather than admit that we don't know or can't be bothered to learn.  If you are clairvoyant and know the answer in advance, you belong in Vegas.  Can you and your team be humble enough to work with customers to discover needs, rather than triumphant enough to select based on your own intuition or preference?

Begin with the end in mind

Stephen Covey often talks about his seven habits, one of which is "begin with the end in mind".  What is the "end" you want?  Fast completion of an activity based on the selection of a tool or technology that may or may not meet customer needs?  Is the "end" implementing solutions that meet or exceed customer expectations?  What are you willing to commit to achieve those benefits?  Are you willing to put the act of discovery in front of the selection of a tool or technology, even if the act of discovery exposes your lack of knowledge about customer needs?  Can you partake in discovery without demanding a specific tool or technology be defined as the logical outcome?

More on Summers, Yellen and the next Fed chairperson

The NYTimes has a debate on who should be the next Fed chairperson. Predictably Brad DeLong prefers Summers over Yellen, which is almost unique given the backlash that the floating of Summers name caused (see Krugman on that here). Brad's preference is based on the fact that:
"Larry Summers has an edge as the most creative thinker likely to successfully think outside the box should outside-the-box thinking be called for, and least likely to bind himself to an institutional consensus past its sell-by date. If times are placid, the stakes are small. If times are turbulent, outside-the-box thinking has its place. Therefore I have a slight preference for Summers."
While it is arguable if Summers is more creative than Yellen and other possible candidates, I wouldn't disagree that thinking outside the box is an advantage. That's why an heterodox economist would be even better, without false preoccupations about inflation. But in all fairness the best alternative, and one that would be more likely from a political point of view, would be to appoint a politician, rather than an academic economist, someone like Elizabeth Warren, with no knowledge of the natural rate of unemployment and that does not "fear high inflation as they fear a tornado."

Living Room under $500

I am really excited to be introducing a new contributor to the blog today! Kimberly Moore is a fabulous former intern of mine and she is now running a design business of her own. Her blog is one of my favorites and I love the post she's put together for us today! 

* * * * * * * * * * * * * * * * * * * * * * * * * * * *

It can be difficult to stay within a small budget when decorating, but it's certainly not impossible! I've put together this living room inspiration board that came in right at $498.48 Not only is this room affordable, it is pretty to look at! 

Keeping a list of a few basic resources will help when beginning the design process. Don't forget to include these on the list >>>

Sofa: $230 // Target 5'x7' Rug: $80 // Target
Coffee Table: $20 // Ikea Lamp: $45.48 // Target
Pink Dot Pillow: $20 // Society 6 Floral Pillow: $20 // Society 6
Yellow Scallops Pillow: $23 // Society 6 3 Mirrors: $60 // Target

Kimberly Moore here >>> My favorite color is mint, I have bangs, and love a good pair of glasses! There are few things that make me happier than designing a gorgeous room, creating art, or throwing a smashing party. My blog, Third Floor Design Studio, has become a place to learn, shop, and be inspired. On any given day you'll find great sources for decor, simple DIY projects, or party planning essentials. So be sure to stop by my blog and say hello! 

I do not post on Econ Job Rumors

By the way, it was brought to my attention that someone using my name has posted on this website called Econ Job Rumors, were anonymity leads insecure and, I assume, mostly young economists to write vicious things about each other. Just to make it clear, I have not and have no intention of posting anything there.

The increasing share of developing countries in world GDP

In a previous post I noted the rise in the share of South-South trade. Below is the expansion of developing countries' share in total world GDP (source here).
The expansion reflects to a great extent the rising share of China. At PPP the share of developing countries is now at around 50%.

Say's Law Keynesians

In the 1990s Fernando Henrique Cardoso, the one time sociologist and dependency theory author, turned politician and president of Brazil said that people should forget about what he had written in the past (on dependency theory). Something similar could be said about the economists at Catholic University in Rio de Janeiro, who were the main economic advisors to Cardoso during his presidency.* They seem to have forgotten what they wrote in the past.

An interesting case of the switcheroo from heterodox to mainstream is Edward Amadeo (Labor Minister during the Cardoso administration, even though he had connections to the Worker's Party up to the early 1990s), author of a very good book on Keynes (Keynes' Principle of Effective Demand), based on his dissertation at Harvard supervised by Murray Milgate and co-supervised by Lance Taylor (who was at MIT at that time), with a preface by Vicky Chick. The book is still the best interpretation of Keynes' General Theory, and its relation with the Treatise on Money.

Among other things Amadeo shows that the conventional view which assumes that Keynes moved from an interpretation of the system with flexible prices and fixed quantities in the Treatise to one of fixed prices and flexible quantities in The General Theory (GT), as interpreted by Leijonhufvud for example (see his classic On Keynesian Economics and the Economics of Keynes), is incompatible with a careful reading of chapter 19 of the GT (Amadeo, 1989, p. 4).

Further, Amadeo correctly points out that the transition from the Treatise to the GT involves a change from a dynamic theory of the trade cycle in historical time to an equilibrium theory of the level of output, one in which the flexibility of prices does not guarantee full employment. And obviously the level of activity is determined by demand. Amadeo also wrote a few papers on what we would now call the Kaleckian models of growth (see here; subscription required).

That is why is interesting to read a recent paper by Amadeo (in Portuguese here; originally published in O Globo). He says that Cardoso's agenda, which would have been carried by Serra (defeated presidential candidate in 2002), would have:
"redoubled the emphasis on education, promoted savings, done the labor reform, flattened the tax structure, promoted global integration, invested in infrastructure and modernized the public administration."
Note that the emphasis is on supply-side policies (with the exception of investment in infrastructure, which was actually accelerated during the Lula administration so-called PAC). And yes he suggests that savings would have lead presumably to investment and growth in a typical Solow model result, meaning Say's Law.

One could go on and discuss the other incompatibilities with almost all his previous work (not sure if he wrote something theoretical in a neoclassical perspective), for example the defense of labor reform (meaning lower wages) to promote growth and employment (the opposite of what the GT says). Or the silliness of suggesting at this point that more liberalization (global integration) along the lines of the Washington Consensus would really work. Or the fact, that he seems to believe that fiscal adjustment is necessary now in Brazil and that this would be compatible with higher growth (contractionary expansions).

But the remarkable thing is at the end of the day the complete 180 degree change in theoretical perspective, with no justification of what made him change his mind. I assume that in his case we can paraphrase Keynes and suggest that when proven correct, he changes his mind.

* Other economists close to Cardoso, like Serra from the more radical Unicamp, also moved to the right, favoring privatization and fiscal adjustment, but arguably abandoned academic economics long ago, being like Cardoso politicians. Finally, some economists from the Fundação Getúlio Vargas from São Paulo, like Bresser Pereira, remained more heterodox, and defend now something called New Devlopmenatlism. I'll leave comments on that for another post.

Last Week's Links

Last week was amazing! The highlight of the week was a giant slip n' slide that we went to in our neighborhood. I felt like a kid again! I feel like I'm soaking up every moment of this summer that I possibly can. 

You can keep up with all my latest happenings on instagram (@kirstenkrason)

1 || Snakes as art? I never thought I would love it so much! 
2 || I love this roundup of "non-hideous" ceiling fans. 
3 || This is the coolest website! You can use your favorite quote to create a totally "pin-worthy" image. 
4 || So excited to have discovered this amazing artist
5 || Right now Banana Republic is offering an additional 35% off everything with code BRSPLASH!

6 || I am super excited about the new Maxi - Cosi AP car-seat that's launching today! It will be available in 14 color combos and only weighs 8.6 lbs!  I've been eyeing it for awhile now.

8 || This tutorial on how to arrange grocery store flowers is going to change my life! 
9 || I get weepy every time I read an article like this
10 || This post on what not to do as a blogger was really interesting. 
11 || I LOVE this little gold table

top image - I Suwannee // bottom image - Third Floor Design Studio

disclosure: affiliate links used

When did the term macroeconomics become dominant?

I discussed before the origin of the term macroeconomics (here). The term was introduced most likely by Ragnar Frisch, and become associated with the Keynesian Revolution. Before the rise of the macro/micro divide economics was divided between monetary theory (which roughly corresponded to the macro part) and theory of value and distribution (the micro one). Using my new toy in Google Books we can see when the new terms became dominant.
Note the term macroeconomics takes a very long time to become part of the vocabulary of economists. If Ngram Viewer is to be trusted, only in the 1970s the term macroeconomics became more relevant than monetary theory (which now would be more a sub-field of macro).

The Weekend

This weekend was very relaxing. I had a girls night and we decided to go to a beautiful restaurant on the lake called Snug Harbour. Snug Harbour is located on 14 Stavebank Rd S in Mississauga and boasts panoramic views of the marina from the outdoor patio. It was raining and cloudy on Saturday but that did not stop us from sitting outside on the covered patio.
photo from:
This is a great place to go for a nice romantic dinner, or in my case a great evening out with friends. The restaurant is a grill, sea food and oyster bar but considering that I don't like sea food there were still many options for me to chose from.

The sangria at Snug Harbour was the best I have ever had! There was citrus, cherry and champagne flavors with frozen fruit.

I ordered the pasta which had a wine cream sauce with roasted garlic, mushroom and chicken. It was delicious!
And for dessert I had chocolate. This wasn't at the restaurant but I had a moment of weakness and bought this bad boy filled with almonds.

After dinner we went back to my friends house and watched a bunch of movies on Netflix, some of which we have never heard of. It's so great to hang out with the girls, catch up, talk until we can't talk anymore and just pig out. Sometimes you just need days like those.

And now for some more makeup!
The e.l.f. Beauty Book was on sale for $5 it makes creating sultry smokey looks very simple because it actually comes with instructions!
Although the colors are nice the palette only comes with one small sponge applicator. It also includes the e.l.f. eye shadow primer (which I don't like) and a black pencil eye liner.


On Sunday I went to the Farmer's Market in Mississauga mainly to get that organic popcorn I am addicted to and to poke around the fruit and veggie stalls.
Overall the weekend was great. Leave a comment below and let me know what you did this weekend.

A Preview of Chapter Five of Fundamentals of Environmental Economics

Chapter Five of my new Fundamentals book  is titled; "Where Do People Choose to Live Across and Within Cities?".  The chapter begins by introducing the key concept of revealed preference.  Intuitively, economists learn about your desires and priorities from the costly choices that you make.

The joint decision over what city and neighborhood to live in plays a key role in determining your household’s exposure to a variety of environmental indicators ranging from climate, to access to the coast, to water and air pollution.  Unfortunately, there is no "free lunch". If you seek to live in a city that scores high on all set of "green city" criteria such as clean air, clean water and access to green space, you are going to pay high rents (think of San Francisco).  

The chapter then turns to locational choice within a specific city.  So consider San Francisco.  Within San Francisco, which neighborhood do you choose to live in?  The typical person will know her budget constraint and where she will be working.  This information allows her to calculate her commute time from each possible neighborhood to her job.  This person will recognize that each community has strengths and weaknesses and she will seek out that community that is both affordable and best meets her priorities.  

Based on this logic, I discuss how differential pollution levels across different communities within the same city affects who chooses to live there.  By the "no free lunch" argument, rents will be lower in the areas where pollution is worse.  In the simple economy I present,  there are two types of people who seek apartments. One type is called "Superman".  Superman suffers no health problems when exposed to pollution.  The other type of people are called "Average Joes".    The Joes do suffer when they are exposed to pollution and they know this.  I show that in this case, the Supermen will choose to live in the cheap polluted part of the city. Why?   The rent is low and they like that and the pollution doesn't bug them (they are superman!).  The Average Joes will choose to live in a clean and expensive community.  

Now the interesting point here is that a public health researcher who ignores this residential sorting based on one's type (this essential heterogeneity) would conclude that exposure to air pollution is good for you!  Why?  The supermen never get sick and live in the high pollution area while the Joes do get sick and live in the low pollution area.  A statistical researcher who naively calculates the correlation of pollution and sick days would find a negative correlation and jump to the causal claim that pollution is good for you!  The mistake here is that we never observe the counter-factual of how much sicker the Average Joes would have been had they lived in the high pollution area.  This example highlights how my book teaches readers about environmental economics and econometrics at the same time!

The Chapter goes on to teach readers the famous Tiebout Sorting of how a diverse population self segregates into more homogeneous communities.  

I then teach the readers about how to conduct an environmental justice analysis and the use of GIS data.  I base this on my 2001 paper. 

The chapter ends by discussing in this age of the 1% and the 99% the differential in access to excellent urban environmental amenities between the rich and the poor. This issue arises in California where the rich own the homes near the beach and they try to privatize the beach sand as an extension of their property while this land is supposed to be in the public domain.

A major theme of my book is the exploration of economic incidence.  As America's cities grow "greener", does everyone benefit from this quality of life progress or do the rich disproportionately gain because they own more of the land that is more valuable because the objective quality of life has improved?

Some Bad Economics About The Future of Miami

This will be a blog post about durable capital, expected present discounted value calculations and endogenous depreciation and the efficient markets hypothesis.  My point is that only real nerds will want to read this.  But, I will be talking about $60 Trillion Dollars.  This article  offers the following "teachable moment".  Here is a quote:

"And what of Miami? It contributed $263 billion to gross domestic product in 2010, according to the Bureau of Economic Advisors. Caught between rising seas to the east and the Everglades to the west, the city is doomed to drown.
Abandoning Miami means not only moving or abandoning the businesses who create its gross domestic product, but walking away from its pricey real estate, its roads, hospitals, schools and infrastructure. The cost of relocating its people needs to be calculated both in dollars and in heartbreak. But if you ask people to estimate the cost of abandoning Miami, you get blank stares. It’s as if the language to ask the question hasn’t been invented yet.
“It is not difficult to envision much larger costs, [i.e. $60 trillion] given the potential larger and more abrupt warming [the more abrupt the warming, the more costly it is to try to adapt] that the authors calculate,” says Mann. And it’s not difficult to imagine that there are costs we haven’t even begun to imagine. And when you multiply those costs, city after city after city, suddenly $60 trillion becomes a very realistic and frightening number." 
A recent "big think" paper in Science posited that when the Arctic Icecap melt that this will cost us at least $60 trillion in damage.   To make this salient, climate activists such as Mann are saying that we will lose Miami and this will have horrible impacts on our economy.   This makes no sense.  The economic activity that currently locates in Miami will move to higher ground.  Nobody claims that Miami is an inherently productive place so that the $263 billion dollars in economic activity could only be generated there.  Miami will reform in another piece of the U.S.

You don't have to be Acemoglu to ask the following questions;

1.  what is the probability that Miami vanishes within the next 75 years?  The smaller this number is the lower is the expected PDV of damage.
2.  How many years into the future is this event likely to take place?  We discount future benefits and costs using the real market rate of interest.  The further in the future this damage is likely to take place then the lower are the costs.
3.  Isn't all urban capital infrastructure depreciating over time?  Our buildings, roads, hospitals --- -everything in cities doesn't last forever.  The usual life of a building is 60 years. If we anticipate that Miami is going to flood in the year 2060, then in the year 2025 we stop maintaining Miami buildings and we don't build new buildings and other placed based infrastructure.  Instead, we build new infrastructure on higher ground and the firms and people in Miami engage in an organized retreat.  This rebuilding activity stimulates the economy (think of Europe rebuilding after World War II).
4.  Who loses from the retreat from Miami?  The land owners who owned the land just as the "new news" that Miami will be doomed in the year 2060 was announced and digested.  These land owners "overpaid" for the Miami land because the price when they paid reflected the present discounted value of the rental stream they would earn out into the infinite future but if Miami will be flooded after the year 2060 then there is no such rental stream and home prices today will reflect this expectation and will drop as the new news is incorporated into current asset prices (this is the efficient market hypothesis under rational expectations).  As home prices drop, poor people would move in.  Note that the poor who move in gain from access to cheap short run land.  

Assets such as the Miami Dolphins will move to another city.  The University of Miami will let its campus go and find a new place in Florida to do business.  This is adaptation.  Those geographic areas that have a competitive advantage in the face of climate change (i.e they are on higher ground) will command a price premium and land prices and economic activity will rise there as a new Miami will take root.

So, the doom and gloomers would only be correct if the capital stock lives forever. In this case, valuable assets that will always be valuable would have been built in the wrong place (Miami) and cannot be dragged to higher ground. In the real world, all assets fall apart over time (look at the senior faculty at many econ departments for evidence!).  As Miami's assets depreciate, rational investors will not invest in improving them because they will recognize the short investment horizon.

With all of this said, is Miami doomed in the face of climate change?  I would say no.  The engineers and urban planners and land owners in the city need to take a sober look at identifying which parts of their city are the most likely to be resilient in the face of climate shocks.  The city should encourage densification there.  The insurance industry should price future premium to encourage economic activity to relocate there.  If the people of Miami choose not to retreat, then the housing stock and electricity grid and storm sewers will need to be upgraded to make it more resilient in the face of shocks.

Economics vs Political Economy

Google Books has an interesting feature that allows to search words or combinations of them in its huge database. Below the use of Political Economy and Economics from 1776 to 2008 (last possible year in the database).
Note that there is no surprise. Political Economy dominated up to the Marginalist Revolution, with a lag for Economics to take over. Note the spike in Economics around 1890, which probably reflects references to Marshall's Principles of Economics, which marks the begging of the transition. Since the 2000s, there has been a decline in Economics, and mild increase in Political Economy. But I wouldn't be very optimistic about it. Political Economy now comes in a marginalist flavor too.

A Preview of Chapter Four of My New Amazon Kindle Book

Whether the price of my book is $0 or $2 tomorrow, you will still gain some consumer surplus if you buy my new "classic" Fundamentals of Environmental Economics.   In this post, I will talk about the book's chapter four titled; "Where Do Dirty Factories Locate"?

Erin Mansur and I recently published a paper on this topic in the Journal of Public Economics.  

My starting point is that many urban pollution externalities exist because dirty industrial activity takes place in a geographic location filled with people.   Why are the people living there? Why did the firm choose this location and why does it continue to produce there?   Unlike many undergraduate texts, I introduce the reader to a discrete choice problem namely does a polluting firm locate in Boston, San Francisco or Dallas?  This cost minimizing firm recognizes that these three possible locations differ with respect to local wages, local real estate prices, distance to final consumers and they differ with respect to their pollution regulation.  A firm will know its production needs. For example, a firm that needs a lot of land to produce may choose to avoid the place where land is expensive.  Alternatively, a firm that pollutes a lot may avoid the high regulation area.  I teach the reader how to calculate the total cost of production for a given firm in each possible location and we spot the cost minimizing choice.

I then walk the reader through  the "reverse engineering" problem of "given that a firm has chosen a specific location to produce, what must be its priorities for how it tradeoff various attributes of a city (i.e how important are low wages versus low  energy prices in determining whether the factory moves to a given city).  Why does this model matter? In this day and age when everyone is asking why Detroit is dying, why don't firms moves there?  A good model of firm locational choice is relevant for predicting which cities will grow and which cities will experience an influx of pollution from pollution intensive industries.  In joint work with my co-authors in China right now, we are using these same models to explore the migration of industrial activity from coastal cities to poorer western cities.

Returning to chapter 4 of my book, once I finish the domestic locational choice example --- I then turn to the threat of offshoring.  If the U.S EPA introduces stringent environmental regulation, what types of firms can credibly threaten to move abroad to a "pollution haven"?     So, U.S regulation can reduce U.S pollution by reducing pollution per unit of industrial activity (a technique effect) or by unintentionally displacing production to other nations.  The "Goldilocks" goal is to make regulation tight enough to achieve the former goal while not making too tight so that "we lose jobs".   How the U.S regulators navigate this potential mine field requires an ability to engage in fine tuning and to assess which jobs are the most "footloose".

At the end of the Chapter, I return to one of my favorite themes.  Deindustrialization in the U.S Rust Belt, in Eastern Europe and now in China's major coastal cities has dramatically improved local environmental quality.

The Chapter ends with a small model that Gary Becker would like.  It builds on his work with Ehrlich on Self Protection.

Industrial Environmental Negligence and Endogenous Effort by Firms

Consider an oil company that can take costly precautions that will reduce the probability of an oil spill. Such oil spills (when they occur) cause significant environmental damage.  I study how the expectation of a large monetary fine for an oil spill incentivizes the for profit company to take more ex-ante precaution (i.e invest more to minimize the probability of a spill).  So, credible punishment leads to good behavior!  All parents know this and I show how in a simple calculus example to solve for the optimal effort by the firm and how this effort is an increasing function of the ex-post expected fine that the company would have to pay if there is a spill.  

So, this chapter highlights several ways to reduce industrial pollution externalities using an economics approach.  Again, while this book is a textbook it also isn't a textbook --- anyone can read it and it will make you think! If you disagree, I will give you your $2 back!

Yes to Tomatoes Clear Skin Facial Products Review

Hello everyone, today my sister Amanda has done a guest post on the Yes to Tomatoes skin care line. She is also very interested in the beauty industry and has tried numerous skin care products. I hope you enjoy this post and find it helpful.

The Yes to Tomatoes line contains products that are clinically proven to help treat acne-prone or combination skin. I have tested these four products over an eight month period and I find that they do an excellent job of cleansing my skin, fighting acne and controlling breakouts. I love that they are mostly natural, which is hard to find in most acne treatment products. There are also other products available in this line. Below is my detailed review of each of the specific products, followed by some general information. 

Daily Pore Scrub

What It Has: Bisabolol, Ginger Lycopene and Salicylic Acid (97% Ntaural; Petroleum, SLS & Paraben free; Certified Oragnic)
What It Does: Exfoliates using mango and bamboo. Also contains Salicylic Acid to fight Acne and unclog pores.
Pros: Works great to help control breakouts and to brighten skin. Would be best suited for people with sensitive skin.
Cons: I would like to see more grit in the product as an exfoliant and I did not care too much for the smell.

Acne Control Gel Cleanser
What It Has: Lycopene and Salicylic Acid (95% Natural; Phthalaes a& SLS free; Certified Organic)
What It Does: Cleanses dirt and makeup from skin while fighting acne and blemishes.
Pros: Does a great job of cleansing my face and preventing my skin from becoming oily during the day
Cons: It can feel like there are remnants of the product left behind on your face - you only need to use a little bit.

Repairing Acne Lotion
What It Has: Salicyclic Acid and Lycopene (97% Ntaural; Petroleum, SLS & Paraben free)
What It Does: Clears up blemishes and minimizes pores by applying the lotion all over your face.
Pros: This is by far my favorite product in this line. Every time I see it I always see a noticeable difference in the morning. It really does clear up you skin and it works quickly! It is also oil free.
Cons: It is more of a serum than a lotion and a tad too thin and sticky. 

Roller Ball Spot Stick 
What It Has: Bisabolol, Ginger Lycopene and Salicylic Acid (97% Ntaural; Petroleum, SLS & Paraben free; Certified Organic)
What It Does: Allows you to spot treat breakouts by dabbing the product directly onto problem areas. 
Pros: Does a good job of soothing skin and combating inflammation due to the Ginger and Bisabolol. I usually notice that redness is reduced in the morning after applying this before I go to bed and that zits are reduced.
Cons: I find that it is very difficult to get the roller ball to work properly and to get enough product onto my skin. I would prefer if this product came in a different form of application. 

Written by: Amanda Anne Ali

Feature Friday: The Nesting Game

Today I am featuring the home of Molly from the blog The Nesting Game. Her home is full of great DIY projects and fantastic style. Here is what she says she loves most her home.

"Our home is a mix of old and new, high(ish) and low, inherited and thrifted, color and calm. Just like life! I love the challenge of pulling together a space and hunting for just the right elements to finish a room---even if it takes years. Most of all, I love that our home is a place our family and friends like to hang out in."


vignette with bust botanical photobooth

l i v i n g   r o o m 

LR Sofa and End Tables

LR Iron end tables

LR antiqued mirror tabletop

LR wide shot_sisal rug

LR sheepskin vignette

LR corner white table

LR china cabinet

Read more about this room here

k i t c h en

Read more about this room here.

d i n i n g   r o o m

Read more about this room here

g u e s t   r o o m   /   n u r s e r y


Full Room

Navy Nursery Rocker Crib

Santa Maria Desert Pillow

Bed and sconces

Side table Full

Red Side Table

Dresser and Mirror

Bookshelf McDowell Print

Rocker and ottoman
Crib and Skirt

Read more about this room here

b o y ' s   r o o m 

Read more about this room here

Thanks so much to Molly for letting me feature her home. Check out her blog here

Go here to check out past Feature Fridays.