Charter Cities Podcast Episode 24: The Economics of Climate Change with Matthew E. Kahn
An optimistic climate conversation with Matthew E. Kahn, an Economics Professor at Johns Hopkins University.
Mark: Hello and welcome to the Charter Cities Podcast. I’m your host, Mark Lutter, the Founder and Executive Director of the Charter Cities Institute. On the Charter Cities Podcast, we illuminate the various aspects of building a charter city, from governance to urban planning, politics to finance, we hope listeners to the Charter Cities Podcast will come away with a deep understanding of charter cities, as well as the steps necessary to build them.
You can subscribe and learn more about charter cities at chartercitiesinstitute.org. Follow us on social media, @cci.city on Twitter and Charter Cities Institute on Facebook. Thank you for listening.
Kurtis: Hi. I’m Kurtis Lockhart, Head of Research at the Charter Cities Institute. Our guest today is Matthew Kahn. Matt is a professor of economics at Johns Hopkins University, where he’s the Director of the 21st Century Cities Initiative. His research is in both urban economics and climate change in environmental economics, often focusing on the consequences of climate change for urban quality of life
He’s written several books on these topics. The two most recent are Unlocking the Potential of Post-Industrial Cities and Adapting to Climate Change. Both of which were published this year and both of which, we talk about today. I hope you enjoy.
Kurtis: Hi, Matt. Thanks so much for joining us today.
Matthew: Hi, Kurtis. It’s great to be here.
Kurtis: Okay. As I mentioned, I got some questions here. Let's jump right in. In your recent book on Adapting to Climate Change, you talk about there being this window of opportunity, when crisis happens for politicians to enact pretty deep reforms. We could chat about the pandemic, but because you focus on climate change, I wanted to ask, first of all in Texas, with the current blackouts caused by the winter storm, what the hell happened there, number one? Then, how do you think Texan politicians should learn from this blackout in the state right now? How should they adapt to prevent future climate shocks from causing similar damage?
Matthew: Kurtis, I’m a micro-economist. Of course, I understand that our elected officials and public utility commissions play a big role in our lives. In my book and in my life, I'm always focused on individual actors of people, households and firms and local governments. What I think happened in Texas, and I have so many questions, just like you. Is first of all, there's a question of probability assessment. For the very cold weather that just occurred in the Texas freeze, what were folks’ subjective expectations? Apparently, nobody saw this coming.
One of the reasons that North Dakota doesn't suffer when these freezes occur is they expect there to be freezes in winter and they have adapted and they're prepared for this. In the case of Texas, this was a shocking event. Kurtis, to begin to answer your question, one of the themes in my book, Adapting to Climate Change, is for people to be more humble and acknowledge that there are known unknowns.
If the people of Texas know that they don't know what is the probability that there will be a freeze in February, they take more precautionary steps. They're more likely to install insulation in their homes. They might have backup power generators. Notice here, I'm making the private sector a key actor here. In my writing about the Texas freeze, I've asked, why didn't the Texas regulators sign up more households and other consumers of electricity for critical peak pricing? Why didn't the state come up with using incentives to identify more economic actors, who would cut back on their consumption during a time of scarce electricity?
There's a lot of talk about frozen wind turbines and supply side meltdowns during the freeze. There isn't a lot of talk about how to use economic incentives to marshal demand side forces. I'm always an economist and always thinking about supply and demand. If electricity is scarce, how do you incentivize those who have the capacity to cut back on the electricity consumption to do so?
Kurtis, to give a final example before I stop talking here. During the freeze, did any buildings in Dallas and Houston have their lights on that night? If the answer is yes, that's an example of wasted power. Why weren't those guys incentivized to turn off their lights and critical peak pricing would have done that?
Kurtis: Okay. Your climate book, just to continue in that vein, it's competing with another famous guy’s climate book at the moment, Bill Gates. Recently published, his book Avoid a Climate Disaster. I don't know if you had the chance to peruse it, but from my skimming of it and reading of yours, they seem to be broadly aligned. You focusing on the importance of human capital and him on technological innovation. Like you, he also focuses a lot on the private sector. Would you call out any areas where you differ at all between the two?
Matthew: This is a crucial question. Chapter nine of his book is the only chapter of the book on climate change adaptation. Almost all of his book is focused on shrinking our collective carbon footprint. In the first chapter, he talks about, he anticipates criticism that he has a big carbon footprint. He talks about his airplanes and talks about what actions he has taken to offset his carbon footprint. I think that's terrific.
Kurtis, he only has a very slim chapter on adapting to climate change. That's the only topic in my book. If I had the opportunity to meet Mr. Gates, what I'd like to chat with him about is this asymmetry in his thinking. There is so much optimism about human ingenuity and shrinking our carbon footprint. For example, you and I never having a hamburger again, of having some impossible burger together, of you and I driving. I just bought a Tesla. You're welcome to come for a drive with me, on how do we live a low-carbon life.
Kurtis, Bill Gates is much smarter than me, much richer than me and he has much more hair than I do. Both of our sons are at the University of Chicago. I've encouraged my son to try to meet his son, but that's a subject for another day. I don't want to push Mr. Gates, the Harvard dropout, the genius on, is why is he so optimistic about our ability to mitigate our carbon footprint, while pessimistic about our ability to adapt to climate change?
In my world, there are two legs of the same stool, that the same human capital and new markets that create the impossible burger, or the electric airplane, also give us the technologies to build better air-conditioning that can better withstand extreme heat, to come up with ways to economize on water using water pricing, to economize on living in flood zones. If we live in flood zones, to build with better materials, such that we can withstand flooding.
Kurtis, there's so much optimism in Mr. Gates’ book about carbon mitigation. Yet, I would say, yes, it's a little bit politically incorrect, but the same logic applies to our ability to adapt. Coming back to your point about the Texas freeze, when we anticipate we have a problem that actually creates a market for solutions and some next Elon Musk will step up with a solution. Because when billions of us face a challenge, as we've learned with COVID, we get these vaccines under operation warp speed. That would be my question for Mr. Gates. Why so little discussion about adaptation?
Kurtis: Why focus on them? You mentioned in your book, there two strategies to a response to climate change. One is mitigation. One is adaptation. He focuses on the former. Your book definitely, all on the ladder. That's just based on the premise that you're assuming there is going to be some impact in the upcoming decades. I think the stat you use to justify your focus on adaptation was, say fast forward a decade or two and China reaches the same car ownership as the United States, a lot of those cars likely, are going to use fossil fuels, unless Elon Musk becomes even more of a genius and figures a way to ramp up his electric vehicles even quicker.
I think, I remembered the fact that you used to say, guess what, if developing countries take a similar trajectory and path to developed countries and they use fossil fuels, even partly to do that, then we're going to have to adapt in some way or another. Is that a fair assessment?
Matthew: Yes. Yes, it is. Jared Diamond, in his work on collapse, actually said that developing countries could not achieve the American dream. Then we have to limit the economic growth of those countries in order not to set off a nightmare. Kurtis, I want to add a sentence there. I would love it if we sharply reduce our greenhouse gas emissions. In a world where Africa is now creating its own middle-class, India, a nation with 1.3 billion people who want to live the American dream, this is going to be fossil fuel intensive.
I don't see wind turbines and solar panels fueling electric vehicles in India. I see a continued reliance on fossil fuels. Kurtis, I would love to agree with AOC, that we will make this deep decarbonization. I think it's unrealistic in the developing world, because the people in the developing world need energy. They need more energy consumption to achieve everything we take for granted, including creating this podcast.
Thus, greenhouse gas emissions are going to continue to rise. As we just learned with the Texas freeze, we have to confront the adaptation challenge as individuals and our governments as well. I bet we'll be talking about that in a moment.
Kurtis: Yeah. I wanted to cover two of the broad themes that I saw on both of your more recent books. By the way, congratulations on publishing two books within the first two months of 2021.
Matthew: Thank you.
Kurtis: You are one of the productive ones in this pandemic. One of the themes that I took from both – I mean, your work in general and these two more recent books, is that cities with high quality of life, they attract skilled people, number one. Then number two, they attract firms that hire those people. That's the first theme. Cities want to aim for giving their citizens a high quality of life.
Then the second theme, which is the one I have some questions about here, is oftentimes urban governance is plagued by misaligned incentives. Elected officials think more short-term, especially local or city officials, because cities are often a stepping stone to higher levels of office. They want quick wins. My question is what can cities do about this fundamental incentive misalignment at the local level?
Matthew: Kurtis, a big theme in my life's work is that cities with great quality of life, the mayor can sleep well at night, because he or she knows that the tech space will remain there. The jobs and people will live there, even without generous incentives to be there, because of this chicken and egg issue. That footloose skilled workers want to be in great places, and jobs that want to hire them will co-locate there and create a domino chain. Now, more of such a city has a really good tax base. At the same time, climate change actually can mash up the quality of life rankings. For example, Manhattan faces significant sea level rise challenges that many entities are deeply concerned about. Entities like First Street Foundation are mapping these risks.
Kurtis, you raised a key question, stating that mirrors face term limits and these men and women may only be mayor for the next four or eight years. If climate change is a 20 to 50-year issue, what are their incentives to address the issue now, versus to kick the can? In my new book, I talk about the following. This is an empirical hypothesis that may be false. Kurtis, it’s been found by real estate and urban economists that home prices reflect future expectations. I'll put an example. If there's a neighborhood that is safe right now in Los Angeles, but it is expected that crime will rise, perhaps because more UCLA students will be moving there. My wife teaches at UCLA. That was a joke. I did teach at USC, at Hopkins.
If there's a neighborhood, which currently is safe, but it's expected over the next couple of years to become more dangerous for some reason, home prices will be low relative to rents they are today because the market expects the quality of life will fall in the future. Kurtis, if you give me the following assumptions, if real estate investors are forward looking, and if they bid less aggressively for properties that are going to face extreme heat in Phoenix, are going to face sea level rise in Queens, New York, then the home owners today of these assets actually have strong incentives to lobby the mayor to mitigate the urban heat island effect in Phoenix and to invest in sea level rise protection out of their own self-interest.
Kurtis, notice this isn't an AOC environmentalist issue. This is actually a free market asset protection issue that the owners of these assets would approach Bill de Blasio and Governor Cuomo and see, we need new infrastructure to protect our asset values. Because if we don't make these investments, potential buyers of our assets are going to bid less aggressively, because they expect that these assets have a challenge.
Kurtis, let me add one more point. These would not have an incentive to protect the real estate tax base today, if potential buyers are ignorant of future risks. This makes information about emerging climate risk so important, to have an efficient market.
Kurtis: Yeah. I'm going to ask you about big data. You talked about it in both of the recent books, so we'll discuss it a little later. Just another point on the short-termism of especially city politics, versus the benefits that a more long-term view would have, especially when it comes to climate change, which is a long-term issue. You mentioned you went to University of Chicago. I see Chicago is confirming this, because I think it's unique among post war era cities, in that two mayors, Richard Daley and then his son, served for I think, from last time I checked, it was over 40 years, between 1955 and 2011.
Say what you will, but for Midwestern cities in the post-war period, Chicago has done quite well. Is this just random correlation? Or do you think there's something to the story, or that there was long-termism in the case of Chicago that helped them out?
Matthew: I love your question. To indirectly answer your question, University of Chicago economists argue that company's bosses should be paid with stock options to give them an incentive to invest in the long run, fiscal health of the company. I think, Elon Musk, most of his pay is tied to Tesla shares. Kurtis, in a similar sense, I've argued that mayors should be given parcels of land in their city, and that would give them an incentive to have a long run perspective. Because they're from David Ricardo, the famous economist from a few 100 years ago, land prices reflect the present discounted value of the future dividends to a place.
If a place like Baltimore is on an upward trajectory, land prices, according to the efficient markets hypothesis, reflect that today. I love your question of how do we incentivize mayors to take a long run perspective. If these men and women are paid with land in the same place, this is one way to tie them down. Kurtis, I want to add a new point. Just as Coke and Pepsi are rivals, just as Uber and Lyft are rivals, cities like New York and Boston are rivals to attract skilled people in jobs. If one city, like the cities in Texas right now, failed to deliver quality of life, that can trigger a brain drain.
One part of my optimism, about our adapting to climate change, is this competition between mayors, that mayors will lose their tax base if they fail to protect their citizens from emerging shocks.
Kurtis: Okay. I guess, while we're on the topic of urban governance, you mentioned one of the tough realities of US cities politically, is that they're just not that competitive. You mentioned competition in your previous enter, Democratic candidates tend to win pretty heavily. Voter turnout tends to be just depressingly low at the local level. How does this political uncompetitiveness affect service delivery and public goods provision in cities? Are there any promising solutions to this?
Matthew: This is a very important point that I actually think we need more research on. In a paper that I co-authored in the Journal of Public Economics, we used the price of moving a bus a mile, a public sector bus a mile. It's very difficult to benchmark the competitiveness of governments. Our metric was what does it cost in dollars to move a bus a mile? A public transit bus is a simple technology. You need a bus, a driver and a gallon of gasoline. It's relatively easy to price that out. We documented that nature progressive cities, like New York City and Boston have very high cost of service delivery.
Kurtis, my question, the flip side of paying public union employees very well, cops, bus drivers, teachers, the flip side of that is that taxes are going to be high in these cities. To an urban economist, the key issue is the following; does a city like New York City have such unique amenities and quality of life, that people want to remain there, despite the high taxes. California has really high taxes; a marginal tax rate of 14%. They can get away with that, in part, before the rise of work from home, because of the great amenities that California has.
A two part-question, or two-part answer. If a city or state has fantastic, unique amenities that no other place has, it can have a relatively inefficient public sector. Kurtis, I know that you have a deep interest in charter cities. The rise of charter cities, whether in the US or around the world, poses more competition. We know from basic economics, when there's more competition that chips away at monopoly power.
If a charter city emerge with services and restaurants just as good as New York City's, but with lower taxes, then New York City – start to be a brain drain from New York City to that charter city and that would get the next Bill de Blasio’s attention and he would negotiate harder with local public sector unions when the next contracts come up, because he'd see that the tax base is walking away. Kurtis, my question for you is, I am a big believer in the benefits of competition and the inefficient places will begin to have a brain drain, and that this begins to bring about political reform. Is that a controversial idea? If there's a want to have a sizable tax base, do they eventually reform their inefficiencies if the tax base is voting with its feet to run away?
Kurtis: Yeah. I mean, this is why we probably both read Tibo and we both believe in Tibolian competition. A lot of my research focuses on political decentralization. You tend to focus on the states. My focus is on sub-Saharan Africa. It's been historically post-colonialism, post-1950s, 1960s. It's been very centralized. There have been reforms since the 80s and 90s, to decentralize political institutions. I'm trying to see how that's impacted public service provision.
From my reading of, at least the countries that I've looked into, it's had significant benefits. I like you find that sub-national competition, whether it's sub-national regions, states, provinces, etc., or municipalities competing against each other is a healthy thing and should be encouraged. Which leads me to my next question, which is, I'm not sure if you saw the governor of Nevada. He gave a, they called the state of the state address or something like that recently, and he proposed – I think he called them innovation zones in Nevada.
I think the policy at a high level would be, he would essentially allow tech companies to have all of the powers of a county, in essence, so they could have their own courts, they could have their own school districts, they could run their own, etc. Everything that the county could do, these tech companies could do. My question, I don't know if you've seen it, but what's your initial reaction to that proposal?
Matthew: So, urban economists had been very interested. This sounds a little bit like the economics of shopping malls. Donald Bren became a billionaire in Orange County, just south of Los Angeles, by building up these suburban communities that have all of these amenities bundled into it. Kurtis, what you sketched out sounds a little bit like industrial park, as a city. My two-part question there is the following, something that in my early work with Ed Glaeser, with Jordan Rappaport, we wrote a famous paper called Why Do the Poor Live in Cities?
Kurtis, my quick reaction to what you said is, if Matt is part of a poor family and if I tried to move to this area, will there be a forcefield keeping me out? What will be the opportunities for the poor who migrate to this area? Or will there intentionally be barriers to zone out in this exclusive zoning to keep out the disadvantage? Did the governor say anything mayor about this new entity?
Kurtis: Well, I think after he said it, there was a lot of blowback. I'm not sure how politically feasible it'll be. We have Jeffrey Mason, one of our researchers here at CCI, did a legal analysis of the actual piece of proposed legislation. That's on our website and we'll link to it in the show notes. I'm not sure what the steps have been, since he proposed it. Yeah.
Matthew: Let me say two things there. In the Journal of Urban Economics with my Chinese co-authors, including Siqi Zheng of MIT, we wrote a paper called The Birth of Edge Cities. China has been taking farmland and has effectively been building charter cities at the fringe of major metropolitan areas, to try to relieve some congestion in the center cities. Kurtis, a big finding that comes out from our work, and you'll find this – hopefully, you'll find this funny and interesting, is when the industrial parks feature communist state-owned enterprises, there are no positive synergies of these parts. When it's private companies, you get all of the Glaeser Meredi-Verne Henderson synergies between these firms.
The Communist Party in China is learning that you get greater productivity spillovers, when you have fewer state-owned enterprises in close physical proximity. My own work in China shows that you can get an industrial spillover. I'd like to add one point. Kurtis, a great book that didn't get enough attention is a book by Simon Johnson and by Jonathan Gruber. I'm forgetting the title of the book. In their book, they talked about one way for America to get our groove back in terms of economic growth, is to build more science parks in cities next to our great universities, like with Carnegie Mellon with robotics, the equivalent of Silicon Valley with Berkeley and Stanford.
Kurtis: Edison did with his laboratories, right? Yeah.
Matthew: You're absolutely right. University of Nevada, Las Vegas is good. It would interest me in the case you mentioned, of what is the role for the universities to get their nerds close to these new firms. The reason this matters from my books is we will need more new ideas and innovations to adapt and to get to Bill Gates’s synthetic meat and everything else we're going to need.
This question, how do we have public-private partnerships to maximize our productivity growth. America is growing too slow right now. If we have more of these new cities that we're talking about, we'll both run these experiments to see what works and we can see if we can unleash more of our productivity.
Kurtis: Yeah. You mentioned your paper on Chinese industrial parks. I'm going to ask about that, because I wanted to talk about different urban policies that you mentioned in both your books. One set of policies is place-based policies. In the US, you seem to come to the conclusion that these place-based policies work less well. I'm thinking of opportunity zones, community development block grants, empowerment zones and the others. You mentioned this paper of industrial parks in China, which is an essence of place-based policy and the positive impacts and spillovers those parks had in these Chinese cities. What's your take on why place-based policy seem to do well in China, but not so well when applied in the US?
Matthew: This is a fantastic question. Ed Glaeser and I were classmates at the University of Chicago. Back then 30 years ago, when I look more human, was younger, the Chicago economists tended to assume that migration costs were zero. If you're not doing well in Baltimore, you just zip off to Shanghai, or to Las Vegas, wherever there's a job. Kurtis, in a way where migration costs are low, the key to helping the poor is to invest in people, to invest in Jim Heckman’s agenda of making families stronger and raising human capital. Once people have those skills, they’ll move to where they want to go. A surfer will go to Venice Beach in Los Angeles. You'll go to that good niche for you.
Kurtis, what's changed in urban economics is a growing appreciation that people face significant migration costs, social capital and ties to place. I really admit, several people in the city of Baltimore, who are tied to the place, they love the place, this is what they know, they were born there, their family is there. They don't want to leave Baltimore, even though there currently aren't great economic opportunities.
Kurtis, to begin to answer your question, when there are important demographic groups who have strong social ties to where they are, whether it's New Orleans, or whether it's Baltimore, it becomes imperative to think about two levels of place-based policies. Place-based policies that make the place more resilient to climate change shocks and place-based policies that accelerate economic growth. Because if there's more economic growth, that that creates more opportunities for these people who have chosen to be stuck there.
Let me give an example. At Johns Hopkins, President Ron Daniels is working – Johns Hopkins is famous for its biomedical research. I wanted to be famous for its urban economics research, but it’s even more famous for its biomedical research.
Kurtis: Dr. House went to Johns Hopkins on the TV show House. There you go. Hugh Laurie is a Hopkinsite.
Matthew: I did not know that. Analogous to Silicon Valley with Stanford and Berkeley, Johns Hopkins and now is to Carnegie Mellon with robotics, Hopkins wants to build a biotech cluster in Baltimore. Kurtis, when Hopkins succeeds, a very reasonable question is, how will this help black residents of the city, who may only have a high school degree? Enrico Moretti, in his famous book, The New Geography of Jobs, argues that every time a city has a well-paid high skilled worker, that creates a multiplier effect, that it creates five local jobs that cannot be offshored to China.
As I speak to people in Baltimore about my book, Unlocking the Potential of Post-Industrial Cities, I talked about if cities like Baltimore, Cleveland and Detroit can become skilled hubs, this has a spillover effect of creating a more vibrant service economy. Let me let you in there. That's the beginnings of the multiplier effect of helping these cities. Notice, this is not asking for a handout from Joe Biden. This is about unplaced-based interventions. In this case, place-based interventions can be better public transit in the city. Another example could be lower crime, and civil rights friendly policies to reduce crime in the cities. These are examples of interventions that can begin to make these cities more attractive for skilled people to move to them.
Kurtis: Yeah. I mean, just talk about spillovers that you mentioned from some of these place-based policies, this is exactly what you found in the case of these Chinese industrial parks, right? Because you had, once these clusters were established and up and running, then you had these spillover effects in that retailers and other consumption-based businesses would pop up, beside these industrial parks.
Matthew: I'm impressed with you. You remember my paper better than I do. To repeat your point, for those productive hubs, we didn't have the communist state-owned enterprises. Kurtis, to repeat your point about my work, that I'm grateful. When you have a productive hub, we did observe higher quality stores and higher quality real estate being built close by. It's a little bit like in a solar system, that you're creating a new planet with new means around it. Yes.
Kurtis, it's very interesting that you raised that point, because if I can tell you a quick story. Eight years ago, I was approached by The Economist Magazine. They said to me, “Matt, we heard you're the climate change adaptation optimist.” They said, “Can we ask a few questions?” I said, “Go ahead.” They said, “Matt, is Wall Street productive?” I said, “Yes, it is.” They said, “Matt, could Wall Street flood?” I said, “Yes, it can.” They said, “Matt, by the trains in the property, doesn't that mean that climate change is going to destroy Wall Street?” I said, “Guys, there's the place Wall Street. If that physical place is at risk, and if Goldman Sachs and these firms anticipate this, they will reconstitute on higher ground in a new edge city.”
Kurtis, it was the same logic that the current Wall Street solves a coordination problem. Skilled people want to live and work in close proximity. Currently, we do that in southern Manhattan. Southern Manhattan does not have a monopoly on productivity. If it becomes under siege, it can move.
Kurtis: I mean, this ties in really well with this next question I want to ask, which is about the Moving to Opportunity Program, which you discuss in, I think, both of your books. I found that part very interesting. Just to quickly summarize that Moving to Opportunity Program, it's just giving low-income families in public housing a voucher to move to low poverty neighborhoods, or suburbs. The program founder and RCT of the program, I think it was by Raj Chetty and co-authors, they found that families that moved, they were just significantly better off across a lot of margins. Most importantly, I think, earnings and then childhood – the outcomes of children, of the families that move it.
In particular, what I found interesting was the finding that those families visited by housing navigators were much more likely to actually move, which points to you call it high information barriers to moving to these low-poverty neighborhoods. Playing devil's advocate on this Moving to Opportunity Program, doesn't the success of the program mean that low-income families are better off, or might be better off just to get a voucher and leave the six cities you discussed in Unlocking the Potential of Post-Industrial Cities, in your book?
Matthew: You raise several important questions. In my colleague at Hopkins, Stephanie DeLuca, from the sociology department, has been working with Raj Chetty on that Seattle project that you mentioned. Let's unpack this a little bit. Suppose that we are a poor family, if we don't get a voucher, we face a binding budget constraint that we can only live in communities where we can afford to rent housing, or we live in public housing that is incredibly cheap.
Because of hyper segregation of the poor there, our children suffer there. They don't make middle class people – many people aren't working in the public sector housing. What I very much like about your point, and this speaks to my libertarian instincts. I think you're right, that both in the case of unlocking post-industrial cities and in adapting to climate change, the key issue is the quality of life of the poor. The poor face the greatest challenges in adapting to climate change.
I know Jeff Bezos is going to have a very good next 50 years. Elon Musk is already planning his escape to Mars. He has a much bigger adaptation set than I do. It is the poor that face the violence in cities like Baltimore, because they live in the tougher parts of town, and that they face the greatest challenges in adapting to the harder punches that Mother Nature throws. They live in the toughest parts of cities and have access to less good healthcare. By being poor, they don't have the resources that we do to afford products that can help.
Kurtis, to answer your question, I am very comfortable with giving the poor, as the Biden administration focuses on progressive policies, like Milton Friedman, I support giving the poor the basic resources, so that they can vote with their feet. Because rents are so low in Baltimore, Cleveland and Detroit, the poor concentrate there. The poor children, they did not choose their parents. Part of Jim Heckman's agenda is how do we invest more in young children, so that they can achieve their full potential? If the parents have access to housing vouchers, I think that that's a great way to expand their opportunities.
Kurtis, an awkward Tibo issue arises with vouchers. Raj Chetty often gets asked this question at academic conferences. People say, “Raj, you are terrific,” and he is terrific. “Raj, as the New York Times talks about your work, and if we skill up, moved opportunities, such that we get vouchers to all poor people. If these individuals get a large enough voucher and move to middle-class communities, will the middle-class communities’ quality of life decline?” Kurtis, there is an awkward politically incorrect debate in urban economics about the Goldilocks effect.
Kurtis: The same debate that goes on in immigration debates. Yeah.
Matthew: To repeated it, because you have a sophisticated show here. This is not the Howard Stern Show. I meant that as a compliment. Raj face question of Raj, we see the children of the poor who get a voucher, good things happen for them, the more they live in a good neighborhood. What's your definition of a good neighborhood? Will the neighborhood be less good if many poor people move in? To an economist, these are called general equilibrium effects. We actually don't know enough here.
We've seen in America's past, there was opposition to busing in the past. There is often a middle-class concern, whether justified or not, with welcoming different people to the area. I wish we live in a world where diversity is welcomed, but this is still a work in progress. I also believe that every child has the right to achieve their full potential. I think, you've put your finger on a key issue.
The one win here would be – let me say something, a point that I haven't made. In the recent Syrian refugee crisis, something that interested me was the following. Why didn't we use mechanism design based on Al Roth, the Nobel laureate? Why hasn't there been more discussion of having nations revealed which nations would welcome immigrants? How can we direct more immigrants to those places who would welcome them? My grandfather showed up from Poland in 1920 in America. Why don't we use economic mechanisms to figure out where immigrants would be welcomed?
In fact, Brandon Fuller and I, wrote a piece eight years ago on the role charter cities can play in helping to mitigate the climate change challenge, if we could direct climate refugees to places that actually welcome them. Because the reason I raised this is two minutes ago, I was saying, with a scale up of moved opportunity, will middle-class communities oppose these vouchers? We actually want to identify middle-class communities who will welcome these individuals, and perhaps, offer them an incentive to welcome these individuals.
Kurtis: Yeah. It's the same Nimbyism, versus Yimbi debate. Instead of for housing, it's for people, which seems just horrible and amoral, but here we are. I guess, we could talk about this for a while, but there's a bunch of other urban policies I want to get to. One of them is urban zoning. Urban zoning and land use regulation. I want to ask you about Baltimore in particular. You write that Baltimore conducted its first comprehensive rewrite of its zoning code in 40 years in, I think, 2017. Meaning, the last rewrite was in I think, 1971, you said. That's just, first of all, absolutely insane to me, especially given the dynamics of the different economic sectors in Baltimore. They've completely transformed over that time. First, how do such antiquated zoning laws hamstring, ailing and shrinking cities and prevent urban renewal?
Matthew: The key counterfactual here is for parcels of land. What would they be re-dedicated to? For example, in the last year in Baltimore, I lived in harbor East, that used to be a super fun site. Kurtis, I live in a very fancy building, called the Liberty Harbor East, which used to be a super fun site. That's an example of manufacturing land that eventually, was repositioned its residential housing. I do not eat the dirt. I don't know what's in the dirt.
Kurtis, what's really hard with your question is when you don’t rezone, we saw this in New York City, where there were these industrial lofts in the 1970s and 80s. People were illegally living in them, but it was funky housing near New York University, because there was no longer manufacturing there. I love your question, and maybe we should write a paper on this. To know what we lose from not updating zoning, we need to know what we would do if there weren't these regulations.
I’ll give an example. There are two train stations in West Baltimore. I want to sit down with you and look at what land is in walking distance to the mark train stations. If that is zoned for industrial, but if it's a vacant site, that's an example of inefficiency, because that land, if it can be made safe and remove the industrial waste, can be turned into walking new urban housing to walk to the train station, to get on a train to DC.
Kurtis: I guess, maybe a better question then is because you're right, you need a counterfactual in order to give a good answer to that one, is maybe using examples from the six cities in your unlocking, what are the biggest hiccups when it comes to up zoning, or transitioning from industrial use, no longer needed and a lot of the places in these cities, to new commercial, or residential use?
Matthew: I think, it sometimes can be a coordination failure. I mentioned Donald Bren before, that he took a whole parcel of agricultural land in Orange County, and built on new suburb. Kurtis, suppose that you're a young developer and you see a parcel of land in Baltimore close to a train station, that you could purchase and reposition. If it's next to a dirty bookstore, or if there's a gas station, that it has polluted the ground nearby, you might not be able to unlock the full potential of your parcel, because it's adjacent to these other parcels.
What we talk about in the book is the coordination problem. If Jeff Bezos purchased all of these parcels, like what Dan Gilbert did in Detroit, he could unlock the full potential. If a young entrepreneur like you just purchased two adjacent properties, the next six properties are disgusting. If there's drug dealing in a nearby park, do you see how that slows you down from making the most of your investment?
My friend, David , co-authored a great paper, where he said that being next to a public park can either be good or bad. If the park is clean and safe, then if you own the adjacent parcel, you'll invest in it, because of the synergies. The reverse is also true. If there's drug dealing at that park, you might choose to let your property degrade, because it's a dangerous place. To an economist, we call that a multiple equilibria game. That's an example of the challenge our cities face, that this is called a coordination failure. That if we could clean up the park in terms of litter in crime, Kurtis might be more willing to invest in upgrading that property.
Kurtis: I guess, before we move on from Baltimore, I need to ask. If you've seen the TV show, The Wire, I'm going to ask, it’s set in Baltimore. What did The Wire Get right about the city and what did it get wrong?
Matthew: I want to answer that question indirectly. Because of season one, with the emphasis on drug dealing and the grid of crime, I think that many people not in Baltimore, Cleveland and Detroit, have a tough view of these cities. Kurtis, Baltimore has shrunk over the last 50 years, from 900,000 to 600,000 people. That means to me that residents are leaving. Most people in America don't live in Baltimore and they're not moving to Baltimore. For people in Baltimore, either love or hate The Wire, and I'll come back to why they love it in a moment. Some people don't like David Simon's creation, because of its long-run marketing effect, of this having constant treatment effect.
Baltimore thesis competition, you can move to Washington DC. You can move to Philadelphia. If Baltimore is viewed as high-crime and too funky pick and footloose people will be less likely to move there. Johns Hopkins, as it competes for Ivy League admits with these other Ivy League schools, wrestles with this issue. Baltimore objectively needs to improve its quality of life and needs to improve its marketing of the city.
Kurtis, what I like about The Wire, as a friend and fan of Baltimore, is it highlights the diversity of Baltimore and that it's not just a little New York City. There are charms to its neighborhoods and there are proud people and there's great beauty to the city. Notice how they’re built at night in season two. I often to that walk, there is great beauty on the water. There is urban poverty in each of these six cities, and we can't run away from that.
Kurtis, what I've tried to achieve in both of my books, in the Unlocking the Potential of Post-Industrial Cities, how do we help the children of the urban poor achieve their goals? How do we do better? It can't just be about good intentions. It really has to be about unleashing economic growth in the cities. In my book, Adapting to Climate Change, Elon Musk and Bezos are going to adapt to climate change. How do we make it easier for the urban poor in New Orleans, or in Baltimore, wherein the developing world to adapt to this challenge? I'm a consistent thinker across all these books.
Kurtis: In part of your book, you bring up how zoning can hamper climate adaptation, because single-family zoning, it often prices poor households out of the prime, or safe neighborhoods. By safe, you include climate safe. Meaning higher elevations. I was thinking as I was reading through this, because I just read about Rio and its favelas. I'm curious, what's your model for what would happen to Rio's favelas, essentially poor slums, high up on a mountainside, safer from climate-related disaster? What happens when the richer beachfront properties start to get hit by the impacts of climate change? Should these favelas get displaced, taken over? Do the rich just move a little inland and still get their beach land a little safer, like a Florida situation? How do you model that?
Matthew: This is a great question. In the developing world, where we have urban slums, there's an interesting property rights issue, coming back to Hernan de Soto. If we say that slum residents have property rights to the land they sit on, one could imagine that this land, coming back to our move to opportunity discussion, if the slum land that the poor are on now beat since it's on higher ground has no value to the rich, in my libertarian fantasy, this land would be auctioned off, and each of the poor would get an equal share of that money, giving them a move to opportunity voucher. Because we all know that the rich under capitalism always get the best resources.
Elon Musk lives better than I do. I live pretty well. It should not be the case that the poor are displaced from where they currently live, because that asset is now valuable to the rich. There's a very interesting issue of takings of the slums. I think it comes back to your point of move to opportunity. Kurtis, to say something new, you have correctly read my book, that I believe that in the big data revolution, we're going to identify where higher ground is, and more middle-class and poor people can live there if we up-zone there.
That will mean, less single-family housing. When I drive in a Tesla around Los Angeles, most of it is zoned for single-family housing. We're going to be better able to adapt to climate change, if we up-zone and live at higher density, and set more of our land aside as wetlands, to provide urban heat island effects and to drain flood water. Again, what I love about your point is, in a Rio, do any politicians have an incentive to protect the poor? Or are they on their own?
You're an expert on urban governance. I think a key question is, is in nations where the poor vote, do the poor vote? Do they know which politicians are pro-poor? Are any politicians who are pro poor, embracing a climate resilience strategy? Because the poor have the least ability to protect themselves? They need the state to step up. Does the state have an incentive to protect them? Are there politicians like AOC in the developing world?
Kurtis: Yeah. I mean, my general reaction to your question, like do the poor vote and under what circumstances? Do they vote for the pro-poor candidate? This comes back to your emphasis on the need for information and accurate information and timely information. Because there's been several studies by both economists and political scientists in Brazil. They've got really good municipal data. They've shown that publishing to the public audit reports on Brazilian municipalities and showing the performance of local mayors has an impact on voter’s choice. The mayor got a good –
Matthew: I love it.
Kurtis: They take that into consideration when they go to the ballot box. Yes. This leads to my next question, which is also related to the emphasis on information. It's a common theme throughout both of your books that just came out and as well as your work in general, is the use of big data to inform effective policies. You have a lot of examples of these. I'm just curious to hear, first, what's the most effective use of big data you've seen? if you want to relate it to climate change, great. If you want to do it in another direction, that's fine too. Then second, what's the most creative, or ingenious use of big data? I want the most effective one, but I also want the weirdest oddball, bizarro idea.
Matthew: This is key. In this age of big data, where electric utilities, no more electricity consumption every 15 minutes. Where Twitter has all of my tweets. I think, I tweeted out eight times. today. Kurtis, what I'm excited about what the big data revolution is, we increasingly know what we don't know. For example, when those fires occurred in the American West just a few months ago, of just the immediately, the information we had on PM 2.5 and mowing the fire routes and how this fuel’s adaptation.
Something I'm very excited about in environmental economics right now is the increase in the supply of climate big data. In the recent past, recent standard and poor were in charge of credit ratings for companies like Pepsi, or Exxon. What we're now seeing with companies like Jupiter for street foundation and 427, is these companies are using satellite data to map out natural disaster risks, sea level rise risk and wildfire risk. This information is getting capitalized into home prices. It's getting capitalized into zoning plans. This information is helping.
Kurtis, one more point before I talk about what's funky. I am a fan of competition. A problem in the Soviet Union back in the 1950s, is there was a monopoly for information. There was that Pravda. A plane would crash, the CIA would know that an airplane had crashed. Pravda would say, “No airplane has crashed.” Even Milton Friedman could not rationally act, if he doesn't know what's going on, if the local newspaper is not telling the truth.
Kurtis, a key issue in all of my life's work is if quality of life degrades in an area, whether it's crime or wildfire risk, that this quickly becomes public knowledge. If this information can be suppressed, like in Watergate, then a PT Barnum can sucker some naive buyer to purchase an asset there. Something that I am a believer, that when people make a costly decision, like where to live their life, what house to buy, they're going to do their due diligence and seek the best information. If they know that they don't know how risky it is, they're going to purchase. They're going to buy an option to just rent for a year and move to that place and see if it's a good place.
There have been several great recent papers on big data. One set of guys in a paper called Heat and Learning, got every American’s SAT score over the last five or 10 years. They merged this to data on how hot it was in your local city over the previous 18 months. They documented, if you attend a school that doesn't have air-conditioning, you actually scored lower on your SATs if you had been in a hot place, relative to similar kids who had taken the SATs during a cooler time.
I'm glossing over some of the details, but I thought that that was a very funky example of big data. I skipped one point. They were able to document which high schools do and don't have air-conditioning. The negative correlation between those high schools where it was very hot in the city, but where there was air-conditioning, these kids scored just as well on their SATs as other kids who were in cities where it was cool. It was the air-conditioning causing this damage.
Kurtis: I'm assuming it was the poor schools that didn't have the air-conditioning that scored –
Matthew: You work good, man. This study has contributed to Baltimore's recent investment in installing air-conditioning in its poor community schools, to offset this. Kurtis, that’s a key theme in my work. The big data nerds, write their correlation studies that in the past, in schools where we don't have air-conditioning, kids learn less when it's hot. The optimistic adaptation strategies, if we can pay for air-conditioning, that correlation can go to zero. That's an example.
Another funky example is the follower. Some guys in Europe, who I don't know, but they sent me the paper, they had data on the quality of chess moves made by the world's best chess players. They merged in PM 2.5, an indicator of air pollution outdoors. Kurtis, we both know you play chess inside. This research team documented that world-class chess players make crappier moves when it's more polluted outside. This was their evidence that pollution is affecting cognitive ability for inside workers.
Kurtis: Yeah. There's similar papers. The weird one that I saw was that they looked at the verbal complexity of politician speeches when they're delivered outside. Sure enough, that on days where there were high levels of PM 2.5, the politicians use less complex verbal language in their speeches than in days when there were lower levels of PM 2.5. Yeah, I’m –
Matthew: I've got one more for you. A friend of mine in China sent me the following paper, women playing two out of three sets, not three out of five in professional tennis. What these guys noticed was the following pattern. On very polluted days in China, they'll play the first set very intensely and the woman who wins, wins the next set secure. This is an adaptation strategy to get out of the pollution. They play competitively for one set, then that's it.
Kurtis: Yeah, that's interesting. I guess, on this topic of big data, so I'm going to push back a bit and see how you respond. Big Data requires technical expertise. It requires technocrats. My main concern about this today is today, it seems that the dividing line is less about left wing, right wing, split. It's more about a technocrat versus populist divide. The rise of populism leads to the downfall of experts, in some sense. Do you think, in this world that increasingly questions facts and science, that big data, or the policy experimentation that you call for, can effectively sway political leaders and mayors, like maybe it used to? Or do you need a weirdo mayor, like maybe an Andrew Yang in New York in order to engage in local level experimentation these days?
Matthew: I love this question. Let me answer it indirectly. In my book, Adapting to Climate Change, I talk about Yelp ratings, or Netflix ratings. Signaling to private consumers, what's a good product for you, given what you've purchased in the past and what other people like you have said about this product? Kurtis, in that sense, beat data helps you to make better choices, and it chips away at the pessimism of behavioral economics.
There's this theme in Richard Thaler behavioral economics, to caricature that we're fools. Big data, if we're aware of our behavioral biases, big data helps us to make better choices by affecting choice architecture. I'm grateful to Amazon's algorithms for understanding me. My wife’s a little concerned, because I eat too much chocolate that they recommend for me. They understand my preferences and I’m a little thicker because of it.
I'm going to pivot now to your point, because what I was just saying was not a non-sequitur, I was talking about how big data helps us to make better private choices in purchasing real estate, in going for a jog, if it's going to be polluted, or hot later. How does big data help our democracy? A few moments ago, you were talking about Apogee, Banerjee is working in India and Fred Finance work in Brazil, about report cards on politicians. Kurtis, a fantasy and I'm older than you, so this may strike you as not a great fantasy. In my fantasy world, big data will be used. Now, you might say, “Well, who's going to be the Santa Claus? Who's this trusted authority?”
Why don't we trust Yelp and Netflix and Amazon? It’s because they've given us good advice in the past. Could we have analogous big data sellers in political markets to help us better understand what politicians are confronting us with? Kurtis, when you made your correct point about report cards in India, Brazil, I didn't push you on who's supplying them and why do populace trust them. Now, I can make my point.
If in political markets, we can achieve, because of competition, Netflix, Yelp and Amazon have strong incentives to make us good recommendations. Do we have sufficient competition in politics to get good recommendations from those who are rating the candidates? Why is Andrew Yang so funky? We rarely have Asian candidates for president. He voiced support for the – for basic income.
Kurtis: He likes math. He likes math.
Matthew: Do we have a system from – Do we have a trusted authority? In 2021, who is a trusted authority? Who is our Santa Claus for ranking politicians? We used to write products. Politicians are products. John F. Kennedy figured that out early. That's one of the reasons he became our president.
Kurtis: Are you getting to political betting markets? Is that what you're driving towards?
Matthew: Our democracy will function better, if voters actually vote to not engage in rational ignorance and are aware of the characteristics bundled into each of the choices. I'm confident that Airbnb gives us correct information for each choice we're thinking of in renting a place. Do we have equally good information when we think about electing our next president? Did we know what we were getting before we elected President Trump?
Kurtis: Okay. Yeah, this is an interesting job. We could talk about a lot. I have a couple more questions and then I’ll let you go. Just on the topic of technology and interesting solutions, 3D printing and pre-fabricated housing construction, you mentioned that Berkeley built a four-storey building in only four days. I think, it was using prefabricated materials. My question is, given rapid urbanization rates across the global south, which is something my institute cares a lot about, there will be a need for a surge of housing building to accommodate these new urban residents. Do you see 3D printing in pre-fabricated housing playing a big part in this? Or will these technologies remain a high-income country thing for the time being, at least?
Matthew: I don't know enough about learning by doing effects. When Bill McKibben reviewed Bill Gates’s book in the New York Times, Bill McKibben asserted that there are huge learning by doing effects. Of course, what learning by doing is, is that the average cost of producing a good, like modular housing is decreasing in our cumulative experience. If there's huge learning by doing effects in solar panels, or in modulated housing, then you're right. There could be a huge expansion of modular housing in the developing world.
Kurtis, in my book, Adapting to Climate Change, the reason I celebrate modular housing is it gives us a more elastic housing supply curve. Why does it take a year and a half to build a building? There's this great video on YouTube, where the Chinese built a 15-storey hotel in 38 hours. My wife doesn't want me to stay there.
Kurtis: Hospitals. When COVID just broke out, they built these mega hospitals within days as well. Yeah.
Matthew: A point that Ed Glaeser mixed, is how much of our vertical supply curve is due to government red tape regulations, unions, but also using earlier ideas, not modern ideas for more quickly getting out the product. Because I know that I don't know the answer to your question. I want us to run this experiment, because I do believe that learning by doing effects exist, but I don't know how much they are.
Kurtis: Just a couple more questions. One is on another adaptation policy. This one is essentially universally loved by economists and it's the carbon tax. I agree, a carbon tax, it makes sense for high and middle-income countries. I'm not sure it does in lower-income countries and I want to see if you agree with my rationale.
I'm from British Columbia, Canada. BC enacted a carbon tax. It was, I think, $10 per ton of CO2 back in 2008. It's since been raised to, I think, $40, maybe a little above that last time I checked per ton of CO2 now. I'm thinking about the global self now, even a tax at $10 per ton, which is what we had back in 2008, in low-income countries, I get the sense this would be a pretty severe impediment for businesses. There’s up and coming businesses that already have enough to contend with in these places.
Then if we say, all right, well, we'll set the carbon tax at an affordable level, more affordable than $10. Well then, you're not really setting it at the social cost of carbon that they do, says it should be at. Do you agree, disagree? Does a carbon tax still make sense for low-income countries?
Matthew: One of the reasons I focus on adaptation is exactly this issue. I think that carbon emissions in the developing world are going to soar, because of exactly what you were saying. Coming back to our earlier discussion about when we talk about the American dream in India, in Africa, a point that makes in the developing world, is the time consistency issue. Kurtis, imagine a world where the leaders in Brazil, or in Egypt could say, business people will have a low carbon tax now, but it's going to grow by 7% a year starting eight years from now. If he could critically commit to that, University of Chicago Economics predicts we'd see a much greener profile. You'd see fewer coal fired power plants, you’d see less use of fossil fuel, because of the expectation of the ramp up.
Kurtis, that's not credible. That guy's not going to be in power eight years from now, unless this is a non-democracy. The guy did not stick to that plan. I'm very sympathetic to your point, that to rephrase your point, and I think you're right about this. The presence of poor people in poor nations makes it very difficult for the environmentalist in those countries to push for sharp decarbonization. This is why these countries and scholars like Jeff Sachs talks about large fiscal transfers to these countries to implicitly purchase their veto, to not veto the carbon tax.
Then, of course, the American taxpayer says, “What? We're going to raise taxes on ourselves and we're going to transfer a huge amount of money to these guys, for them to adopt roughly the same policy?”
Kurtis: Yeah. Then I guess, there's a similar question around congestion pricing, which is another urban policy that you discuss for effective adaptation. As you know, the only major cities last time I checked, that have implemented congestion pricing are Singapore, London and Stockholm. Now, Singapore was by far the first. I think, it implemented it in 1975. I checked and its income per capita was around $2,500. In US dollars, I think it was 2010 levels in 1975. Is there a reason we don't see other lower-middle, or middle-income countries enacting this like Singapore did? Or is this just a Lee Kuan Yew effect of technocratic governance? What's your take on that?
Matthew: Actor of my Adapting to Climate Change, I talk about imagination. John Lennon had that song, Imagine. Maybe you and I could do a duet with me as Yoko and you as John. In the song Imagine, John Lennon talks about – well, he doesn't talk about climate change, but he talks about a bunch of stuff.
Kurtis, I don't think that we have sufficient imagination of how much better our life would be under roof pricing. In the new book, I'm writing on work from home, I say that we were forced, because of COVID to run this work from home experiment, and has forced us to experience work from home. We never could have imagined what life would be like when you don't have to commute every day to work. My short answer to why Stockholm and Singapore have not set off a chain reaction in New York, in Los Angeles, despite all the traffic, is that we lack imagination of what life would be like. It's seeming that we'd have to pay this tool, but we don't appreciate what it would be like to cruise around the city at 45 miles per hour and never see traffic congested again. When I'm in Singapore, I'm amazed of what it's like to cruise around at any hour at 45 miles per hour.
Kurtis: Yeah. I guess, that it's exactly that failure of imagination, where policy experimentation and having this demonstration effect that allows you to imagine –
Matthew: You've got it.
Kurtis: Helps out.
Matthew: You’ve got it. That's actually a key theme, if I can jump in. One of the reasons I'm a fan of decentralization is to run more experiments and hope that the New York Times writes about them, so that the word spreads. Because if we always have to learn our lessons the hard way, then adaptation is much harder. If we can learn from other’s experiences and had better imagination, the adaptation process is easier for the reasons you just said.
Kurtis: Last question. I wanted you to talk a bit about, in addition to being a professor at USC and Johns Hopkins, you also have a consulting firm, Climate Economics. I like this. I find it too rare in academia, where academics stay in the ivory tower a little too much and don't get out. In the real world. I think it's very healthy and helpful that they apply their ideas to the real world. Do you want to talk a bit about your consulting firm and what you do and projects you've worked on?
Matthew: Kurtis, in the past, I've worked with electric utilities, who have enormous databases, but we're lacking the freakonomics of what do we do with these data to learn from it? I think, one of my edges is thinking creatively about how to use the big data sets that municipalities and business interests have. In this age of flu experiments, there's also this potential of teaming up with economists to think about randomizations.
For example, when you talk about those politician report cards, those guys in Brazil and India, took a random set of voters and randomly assigned who would get a report card on how politicians are doing, versus which ones didn't. Then subsequently test, are those in the treatment group more likely to vote? In the case of my firm, Climate Economics, have tried to think about strategies at the firm level and the local government level to shrink carbon footprints, and to increase climate resilience.
Kurtis: Great. Well, that's all the questions I had for today. Matthew Kahn, thanks so much again for taking the time and thanks for the great discussion.
Matthew: This was a lot of fun.
Mark: Thank you for listening to The Charter Cities Podcast. For more information about this episode and our guest, to subscribe to the show, or to connect with the Charter Cities Institute, please visit chartercitiesinstitute.org. Follow us on social media, @cci.city on Twitter and Charter Cities Institute on Facebook. I’m your host, Mark Lutter and thank you for listening to The Charter Cities Podcast.