Climate Change Adaptation: Lessons from Free To Choose

>> John Taylor: Let's get started, we're really happy to have Matt Kahn here today. I like this visiting fellow at Hoover and USC, it's terrific and a great topic. We need to have more of this, climate change adaptation, lessons from, is it Milton Friedman, okay to say that?

>> Matthew Kahn: Yes.

>> John Taylor: Lessons from freedom, and Milton was here for quite a while. Spend some good time, knows most of us. So welcome back,

>> Matthew Kahn: John, thank you. And folks, I wanna thank the organizers, it's great to be here and I'm gonna be here full time on my own time starting May 1st.

And so I'm hoping that this is not our last meeting, but you are free to choose to vote with your feet, I will stop my mixed metaphors. Folks, let's start, and John, on some level this is for you. I continue to read the New York Times and we can go around the room and see who still has a subscription, and so, fair enough.

And so three headlines that form the motivation for this brief talk. I hoping this talk comes in at about 28 minutes because I wanna learn from you, and brevity has its strengths. So can we agree that degrowth is not a promising idea? So if we need to debate that, we'll come back to it.

I wanna spend 30 seconds on the upper point, climate change is keeping therapists up at night. I'm very interested in ongoing work on youth pessimism, the causes and consequences of youth pessimism. Joel Slemrod had that great work from 40 years ago, that as the atomic clock got closer to midnight, Ken's or sick of me.

As the atomic clock got closer to midnight, of people investing less and saying if the world's gonna end, let's just party.

>> Speaker 3: It was an award winner also.

>> Matthew Kahn: But that same idea of Greta's lament, if climate change is an existential threat and if capitalism is causing this threat of both.

I'm worried about young people today, even before war broke out, and genuinely worried for all young people. And I believe that free markets and capitalism helped to improve young people's lives. But as a teacher of young people and very active in undergraduate education, I'm meeting many folks who reject Milton Friedman's ideas.

And I'm starting a book tentatively titled free to choose revisited. If Milton Friedman returned to Brooklyn, his place of birth, what would he and the hipsters agree to? And so if I'm invited back ever to the octagon, I will report back on that work. And finally, Paul Krugman on the Inflation Reduction Act.

I believe that greenhouse gas emissions are gonna continue to rise for decades. Of course we need to decarbonize cost effectively our economy. But whether subsidies not gonna be talking today about the case for subsidies. Today, what I'm gonna be talking about is reducing how an economy reorganizes to reduce the physical risks whether it's earthquake, I'm sorry hurricanes, natural disasters, flooding, extreme heat.

How do individuals and firms reoptimize when they face risks? And so folks, a chunk of this-

>> Speaker 4: By the way I'm atomic clock on climate change since there was a lot being said that if something wasn't done we'd incinerate in twelve years we ought to see it in long term bond prices and we don't.

Maybe it's cuz the youth aren't the marginal investor.

>> Speaker 6: We need a new atomic clock that right reset to 100 years.

>> Speaker 7: I think the atomic clock now includes climate change factors in its-

>> Speaker 8: I should go back to that.

>> Speaker 7: I think it was Bob, I know Bob Rosner who's one of the guys in charge of that.

I think they added that feature a few years ago.

>> Speaker 9: That's interesting.

>> Matthew Kahn: So folks, my Yale 2021 book nobody read sent Frank a free copy. If anyone wants a free copy there's no positive price such that it sells and I've learned that good news doesn't sell, that's my rationalization for why this book didn't sell.

And I've had the chance to work with Terry Anderson on a recent Hoover book and I always learned from Terry his free market environmentalism with Donald Leal played a big role. When I was young of my coming around to free market environmentalism and it was great to work with Terry on that.

So folks, a three equation model to come back to William Nordhaus very important work and of course what I'm gonna be talking about today is the third equation, the climate damage function. So, in standard and this is a simplification and there's many people in the room who are experts on these models.

So the first equation is the world's production of greenhouse gas emissions and there are environmentalists who hope for population to decline. I have met Paul Ehrlich, Ken Arrow introduced me to him 20 years ago when I was here. Some hope for degrowth which is to reduce per capita GNP.

Many economists, many MBR economists focus on carbon intensity and what rules of the game would sharply reduce our economy's carbon intensity. Gary Becker and George Shultz called for a carbon tax in a famous Wall Street Journal piece. Terry Anderson pushes back, arguing that a carbon tax would lower the purchasing power of the poor and that what we need is for the poor to grow richer in this world.

And I'm hoping we can come back to that. And public finance economists have not been able-

>> Speaker 10: To be clear, the proposal is for revenue neutral carbon tax.

>> Matthew Kahn: But Michael, an important point, Jim, Sally, in a very good NBR paper argues that you can't, that if there's with heterogeneity, you can't offset the income.

You can't have the widow, the substitution effect without the income effect, and that real incomes are gonna decline with such a tax. And around the world that we see such backlashes against carbon taxes, there continues to be questions. So this is not gonna be my topic today.

>> Speaker 11: We need less, fewer poor people to be poor.

Sorry, is that coming from other motives or because of a statement of facts about carbon intensity of different consumption?

>> Speaker 11: I don't know if you meant that facetious or that is actually something about how much carbon people, different incomes produce.

>> Matthew Kahn: So of course, so richer people drive Teslas.

So I just came out with an MBR paper this week on the flattening of the carbon curve. So for those of you who subscribes to the MBR, I released two papers on Monday to show that I'm still an active researcher. So in one of the papers that just came out, California's angle curves of carbon emissions are flattening as richer people are installing solar panels and electric vehicles.

But David is correct that richer people have always consumed more energy. And when that was fossil fuel intensive, richer people were producing more carbon dioxide. A theme in my work to cut to the chase, if you guys already sick of me, is richer people can adapt because human capital and income go hand in hand.

Richer people can adapt to all, almost all challenges we fakes, I'll be coming back to that. Of course, I understand, and this system of equation documents this That there's a feedback loop, that as we grow richer, we create more greenhouse gas emissions for a given level of carbon intensity.

Guys, to march on in my system of equations, both Weitzman and Nordhaus have their climate sensitivity equation. That is, we pick up this flow of greenhouse gas emissions, that this translates into warmer temperatures, which is the stand in for climate change. My focus today is this third equation, this economic damage, which could be deaths from natural disasters, lower farm output, it's a vector.

It could be worker productivity, it could be worker quality of life, of how that is affected by temperature. If you sit down and look at William Nordhaus Nobel Prize work, there is just a stationary quadratic function. The focus of my work over the last 15 years, so can you disagree?

I could show you the equation, it is Nobel work.

>> Speaker 12: I don't recall it being quadratic. But anyway, it's simple.

>> Matthew Kahn: So my research is to throw a punch, but then to focus on microeconomics and price theory. When I look at this equation, and I know why he did this, to make the mathematics tractable, that this is a reduced form equation that is not micro founded, and that is subject to the Lucas critique.

And it's time to take the Lucas critique seriously in environmental economics, that tends to be a data science-intensive field not connected to optimizing farms, firms and families. And that's been the tough guy theme of my work.

>> Speaker 12: His choice of the damage function had nothing to do with tractability.

He could have put in many other functions. So it has nothing to do with tractability.

>> Matthew Kahn: Okay.

>> Speaker 12: I think he justifies it on some other grounds also.

>> Matthew Kahn: So what I wanna do today, and, Ken, I wanna rush through my slides to open up this discussion. So, at my Chicago, there was often a discussion, what are the rules of the game.

Under Milton Friedman's rules, that I'm gonna sketch out through eight parables, under Milton Friedman's rules, we would observe a very different damage function. So this raises the question, what's the political economy of why we haven't adopted those rules? And that's where I wanna go. So my microeconomic perspective on adaptation, that in this cliche that I'm gonna keep chanting, that the climate damage function flattens over time, and I'm gonna show you one Greenstone paper documenting this, Joe?

 

>> Speaker 13: I just wanna fill in, you know the literature better than me. My understanding has been that this damage function, which is big literature on everything that I've seen, has been simply statistical associations between temperature and productivity in the current economy, not building up what do we think productivity has to do?

There's no microeconomics, no industrial organizations, just needles and haystack of statistical correlations of temperature and GDP.

>> Matthew Kahn: I agree, and that's one of the themes I wanna talk about today.

>> Speaker 14: Not that I'm a big fan of this literature, but they do recognize that richer countries are better capable of responding even now to temperature deviations from the north, that's a clear theme in the literature.

 

>> Matthew Kahn: Agreed, and I'm gonna be talking about myself.

>> Speaker 14: Related to adaptation.

>> Matthew Kahn: Agreed, so there's cross-sectional and there's time series, and we're gonna do all of this.

>> Speaker 15: Now, if you feed on the Nordhaus damage function, but the people at fund have done a much more serious, disaggregated approach to this, Antof and Richard Tal, who's hated by the green people.

 

>> Matthew Kahn: So Richard and I debate off and we can come back to that. No, no, this is a small world. So some themes from capitalism and freedom, and free to choose gonna be talking about market price signals, the price of insurance, price of water, competition between cities, between places, fueling experimentation and innovation.

We wanna talk about investment under uncertainty. And folks, a point, I figure that one of you is about to ask me, Matt, what's special about adapting to climate change? Every day we adapt, we showed amazing resilience adapting to COVID of how the economy reorganized. Casey Mulligan has a fantastic paper of how the private sector, as firms wanted to continue to attract customers, had to be clean, to be low risk.

Casey has a paper that it was safer to be at a store than to be in your personal home, of the efforts taken by firms as differentiated product sellers to have safe products. And that's sort of what I have on the brain of how we have adapted, whether we adapt to job loss, which Steve has done very important work on.

So we have so many lessons of how we adapt to different shocks. And some shocks, such as a health shock, are idiosyncratic. Other shocks, like a disaster, are local and correlated. If a factory closes, that's a little bit like a hurricane, and there's a question of whether it's anticipated.

And we're gonna be talking about adaptation at the extensive and intensive margin.

>> Valerie: Adaptation isn't free.

>> Matthew Kahn: Correct.

>> Valerie: It can be very, very expensive, and particularly if you're a country with bad institutions.

>> Matthew Kahn: So let's come to that, because Professor Boskin's work is gonna be at the heart of my claims that it gets cheaper and cheaper.

And I'm gonna talk about that in three slides. And Valerie, I wanna make a Lucas Romer point that as the US figures out new ways to adapt, these blueprints can diffuse widely. But then we get into a question, which developing countries will and won't adopt those plans? But please follow up in three slides.

 

>> Speaker 17: So that's a question do you want to turn down the temperature because countries are dysfunctional?

>> Speaker 18: We'll pressure them to become functional, I guess.

>> Speaker 19: Chicken and egg problem.

>> Valerie: There are all kinds of other reasons to pressure them to become functional besides climate change. We haven't been very successful.

 

>> David: Is there a fundamental difference between your examples, COVID and job loss, and I forget what else is on the list that the externalities here are huge, right? Small country reduces its carbon emissions, captures essentially zero of the game.

>> Matthew Kahn: That's not what we're talking about today. So this paper is taking-

 

>> David: Individual, right?

>> Matthew Kahn: David, hold on.

>> Speaker 21: So we gotta play the game by my rules or I leave WHO.

>> Matthew Kahn: Taking global emissions as given, how do we adapt to the punch? 99% of NBR is working on our carbon footprints. So to simplify today's talk and make it a 25 minutes talk, this is how, as I punch John, how does he adapt?

And I believe, and if you've read my published work, you'll see this, that greenhouse gas emissions are just gonna keep rising, in part because if we crank our air conditioners and rely on fossil fuels for that electricity, it exacerbates the issue. But David, the key issue in climate economics is mitigation and adaptation, today is about adaptation.

But of course you're right, but 99% of MBR is already working on that.

>> Speaker 22: A more generic point, I think it somewhat reinforces what you're generically trying to say. If you look at all If you were an economic historian and you look at all previous energy transitions, they were additive, not substitute.

Maybe there was some substitution, but basically they greatly added the availability of energy and affordable energy. There's an attempt now to cause a massive substitution. And there's a sizable fraction of the environmental community and polity that doesn't like adaptation because they think that will lacks efforts to reduce Those two points I think are important to keep.

 

>> Matthew Kahn: So Kip Viscusi had his lulling paper that parents, if they think that childproof aspirin is childproof, they keep it on a lower shelf, kids get their hands on it and take it. And so this crowding out. So you're right that I claim that my adaptation books have not sold because nobody who reads wants to hear optimism about adaptation, that we wanna have this imperative.

I view carbon mitigation and adaptation as compliments, but many intellectuals who are not economists view them as substitutes. And so that I've had trouble getting readers for my arguments because they say, Khan, you're gonna lull people into complacency.

>> Speaker 23: The problem is we haven't agreed on the question in this room.

The question is, and for what you're doing, the question is let's have the economy do as well as possible. Which means mitigating the economic damage which can come from adaptation or reducing carbon. But to many people the issue is we need to reduce carbon period. And to many people the issue is really we need to get rid of capitalism and the patriarchy and go back to the farm and set my soul free.

And this is just an excuse for that sort of thing.

>> Matthew Kahn: So I'm in a table of friends. So folks, Doo and I wrote a paper 20 years ago. So as one of Milton Friedman's themes was vouchers and an expansion of choice for poor people. We all know this, of his pushing for more freedom for poor people, of choice of occupations, choice of housing, of vouchers rather than rent control.

Schooling and freedom of choice there, that if the poor grow richer and we can discuss whether in the face of climate change, if you're a poor farmer, how do you achieve that? But if the poor grow richer, Doo and I document that as nations grow richer, their value of a statistical life rises.

And they pay with their pocketbook for greater safety, of wanting, whether it's safer cars, safer housing, safer food. And this underlines a point. So this simple paper of mine in Riestad has generated thousands of citations. Richer nations suffer fewer deaths from natural disasters. And so this is an example of my reduced form empirical work on the climate damage function.

That the same shock causes less death in a cross section of nations, rich versus poor, or the same nation over time as that nation grows richer. And it's linked to the Jones and Klenau literature, which I believe is linked to the Nordhaus and Tobin work of taking a look of the standard of living debates of how we achieve.

How we rank which nations and which cities offer the best quality of life. My teacher, Sherwin Rosen emphasized this point, and I'm gonna be coming back to this, of how areas compete to be resilient in the face of climate change. A final point on this slide, Glaser made a great point after Hurricane Katrina.

After Hurricane Katrina, Glaser, one of our top urban economists, was asked, how do we help the people of New Orleans? And he said, and he's on record, give them a bus pass to leave. And let's just say the reporter and the mayor were not ready for that. And this room is not chuckling a tough room.

So this is not a safe space for me. And so a fascinating point is to help poor people. Do we help people or place? And this is an issue as we adapt to climate change, that we're gonna need to think about that. This arises again and again. And Friedman, I believe, would have endorsed a human capital approach agenda to helping poor people and their children to flourish so that they are free to choose.

Depending on their risk aversion, their discount factor of what strategies they're gonna pursue to have healthy, comfortable children. Michael, your work is at the center. And I wanna now talk about Valerie's point about prices. So a fundamental theme through much of modern economics, which is missing in climate economics, is endogenous innovation.

There's always firms maximizing their expected profits. Musk built Tesla because he thought that there was a market there. We're about to see a huge number of baby Musks pursuing profits for adaptation strategies. So Valerie, I wanna respectfully debate you here, that in the face of global free trade, as billions of people seek solutions to all of the challenges that Mother Nature is now posing.

I think there's gonna be an enormous adaptation push, not out of do gooderism, but out of the profit motive. And I wanna give two examples here.

>> John: So there is lots of innovation, but is it going after subsidies or is it, do those expected profits come from serving consumers or serving.

I think electric vehicles seem to be headed to just one more did the bio.

>> Matthew Kahn: But I don't see the air conditioner firms lobbying for subsidies.

>> John: Exactly.

>> Matthew Kahn: So John, I'm gonna punch you now, so I really don't wanna come back. And so that was a half joke.

So folks, you all have mitigation on the brain today in the octagon we're talking about adaptation and of how the free market and Milton Friedman. There's no mention of this stuff in free to choose in capital and system and freedom. But all these ideas are relevant for how Houdini, our system is going to help to lower the cost of adaptation.

Take another step.

>> Speaker 25: John's point, there's market forces generate adaptation, useful adaptation. Political economic forces can generate maladaptation.

>> Matthew Kahn: Agreed.

>> Speaker 25: So there's kind of a struggle between the two.

>> John: This is an excellent example because of the New Orleans example, political forces are always keep the status quo, rebuild it for the 150th time even though the sea levels.

 

>> Matthew Kahn: So John, let me speak to that.

>> John: So, but you're kinda going, there's a normative aspect of what you're saying kind of recycling Friedman. But I'm trying to understand, you seem to then leap from that to the positive adaptation point that I think many of us are kind of wondering about.

 

>> Matthew Kahn: So in my book, a little bit like Yoko Ono and John Lennon, I say imagine, imagine if everyone in New Orleans was a renter, not a homeowner, would there be less lobbying for seawalls? So part of because Americans have their assets in homes, this creates place based vested interests.

And so this is an idea that interests me. If we were renters instead, what would be the political economy of Congress? There'd be a question. We would rent from professional management companies. And I'm implicitly assuming they wouldn't have the same political clout. But if we

>> Speaker 26: owners of the houses, they probably have political clout.

 

>> Matthew Kahn: So Friedman wanted to starve the beast. Friedman wanted a smaller government. And with our big deficits will we start to see subsidy reductions? So folks, that's gonna be my second. To last slide if I'm allowed to get there. So Friedman, so starve. So I hear some cynicism in this room about capitalist pursuit of subsidies and what's the political economy of when we get closer to a coast theorem of phasing out such increasingly inefficient subsidies.

And I want to talk about that at the end of my talk.

>> Speaker 27: You will get to end your slides because you don't have that many. But I just want to commit this point about policy versus profit seeking adaptation, right? The profit seeking adaptation may not lower carbon intensity.

I mean subsidies can be badly chosen or they can be well chosen, right? And the subsidies could in principle be chosen to do more to lead to mitigation. Whereas the stuff that generates profits or firms may help you adapt.

>> Matthew Kahn: Agreed.

>> Speaker 27: But it may have the opposite effect.

So I think it makes it a little harder to, I mean, blanket,

>> Speaker 28: and that's because of the whole externality problem, right? That it's not clear that profit seeking,

>> John: it will work great at adaptation but not at mitigation.

>> Speaker 29: The rules of the game are what's the damage function and why is it more like that?

Right. Okay, we should let you do that.

>> Matthew Kahn: So I'm going to do the air conditioner. And folks, I don't want you walking out of here saying this dumb congeste just is thinking about USC football. So I'm about to be talking about the air conditioner. But that's a stand in for an almost infinite number of durable lumps of investments that farmers and firms can make to protect themselves.

So let's set this up in the context of the Boskin report. Whoops, I'm sorry. And in the context of Gary Becker's work. So the way Becker set up price theory when he took over from Friedman is that each of us has a goal. We want to be comfortable and we want our children to flourish.

But let's focus on comfort and we consume a composite good. Extreme temperatures, like in a phoenix, cause discomfort at the extensive margin. We can ditch Phoenix and move to Detroit or something. Or we can fight in place by investing in the air conditioner to offset the heat at the intensive margin.

So Becker would write down a utility function with a production function in the middle of this. And so Becker and Stigler in their famous 1977 paper say that the way we should play the rules of the game in thinking about willingness to pay for quality improvements is it doesn't change our utility function.

There's a Lucas critique over the comfort function, but the production of comfort changes over time. Boskin, with endogenous technological shifts, the production of comfort shifts over time, the adaptation menu grows, the real price declines, allowing poor people to purchase, purchase these products. And John, this lowers the social cost of carbon per person where what the social cost of carbon is, is the slope of an indifference curve.

One's willingness to pay to not have an extra ton of carbon dioxide out in the air. And that's that concept. I don't see slopes of indifference curves when I look at the integrated assessment models. So again, a stable preferences with a shifting technology adheres to the Becker Friedman, Becker Stigler agenda.

Slide two here. As quality adjusted prices of adaptation durables declines. And this was Grilikis's work, of Michael's work. More and more poor people can afford such products, cell phones, televisions. We've seen this before. If a Phoenix grows too hot, we're gonna talk about Sherwin Rosen's work on dynamic compensating differentials over time.

And this is what's missing in the formal modeling. And Ken, this is what I want to talk to you about, the adaptation strategy set. When you allow for an extensive margin and an intensive margin, how much you crank your air conditioner in Singapore because there's no crime, people go out at night.

So reducing crime in America cities is an adaptation strategy because we could take our leisure at night. And so when you begin to think about adaptation, the strategy set is almost infinite to start with and grows over time. And so this is a fight that I have with many analytic economists.

 

>> John: Let me ask you about that. Grows over time because there's a little bit of a puzzle here. We know the difference between hot and cold places right now is much greater than climate change will possibly be. Texas is so much more hot than New Hampshire. This is orders of magnitude more than the world as a whole is gonna get hotter now since it's been.

Texas has been hot for a long, long time. So one might say that we have, we already know, at least with current technology, how much you can adapt to being in Texas. We know what an air conditioner costs. So the question is how much will you could do which people aren't really doing a climate damage function from that observation.

Now the question is how much will adaptation get better over the next hundred years? And maybe you're saying, well that's just exogenous, well, everything gets better. But maybe you're saying a scale of the market sort of thing. As everybody gets hotter, it's worth making those fixed investments and learning how to adapt.

 

>> Matthew Kahn: So Asimoglu and Lynn. On your point

>> John: size for heat gets bigger.

>> Matthew Kahn: So, John, thank you. So, folks, no one likes to see me do economic theory. I'm looking at the Ken's eyes. So Jerome and Josh wrote a very nice paper documenting that as the baby boomers get older, drug companies are working on stuff that older baby boomers need.

So Dashwan and I jumped in. So, Ken, get ready for this.

>> Speaker 30: Wasn't that the source of the opioid problem?

>> Matthew Kahn: I will not speak about that today, but here's what I. So, John, let's see if you give this a B+. So the New York Times gets very worked up about climate deniers.

I didn't wanna put the word denier in MBR papers, so I called them skeptics. The New York Times gets very worked up saying that the problem with climate deniers is they don't vote for a carbon tax. What we argue in this paper is if there's enough people who are skeptical that the climate is changing, they won't demand innovative products and innovators won't pay the fixed cost to innovate.

So market size, it's not just how many people there are and their income. But we introduced an extra parameter in this model of folks who are not demanding these products. So, John, this was my tribute to what you just said. That market potential, that Gordon Hansen concept hinges on people knowing what they need to solve the real problems they face.

 

>> John: Climate does happen slowly. We forget how long 50 to 100 years is. You seem to be making the argument that you need to. You need to believe in climate change so that you make the investments now that people will have to adapt in the future. In fact, stuff happens so slow when the water comes sloshing up, people say, we need better seeds.

 

>> Matthew Kahn: I agree.

>> John: That's when you adapt.

>> Matthew Kahn: John, the only point I wanna push back on your Texas main example is Heckman's selection of if we differ with respect to what is our favorite niche of skiers versus surfers. If we differ in our ethnicity, of what temperatures we grew up in, someone from India versus someone who's from Norway, traditionally, we might have our niche and there might be a separating equal level,

 

>> John: just productivities. You're right. There are activities that are now spatially separated. And it might be worse if everything gets hotter. That's a good point.

>> Matthew Kahn: In my 2021 book, Fought with some guys who said, so, John, a question for you. As Canada grows warmer, there may not be winter hockey anymore.

And some people in the New York Times were saying their loss in their well-being would be huge. And I said, guys, in my book, I argued that in an overlapping generations model, yes, for middle aged guys who play hockey, they're gonna lose that, but their kids will never have experienced it and they'll have their own hobby.

And so there's a question of how each generation, with its new niche, so of what is the longest.

>> John: There's hockey rings in LA, all over the place.

>> Matthew Kahn: So I'm preaching to the converted.

>> John: Maybe in Canada I don't think does hockey outdoors anymore.

>> Matthew Kahn: So let me continue.

So Karen Clay, a Stanford graduate, Alan Joe Shapiro, Michael Greenstone had the following paper for those of you. So, guys, here's what they did in a 2016 JP paper. Back in the 1930s when we didn't have air conditioning, they correlated for the 50 states. Maybe there were 48 states then.

Summer heat and deaths, don't ask me about the units. Let's make this relative. And what you see as you go across the decades, is the correlation between extreme heat in a state year and deaths is converging to zero. And this holds true even controlling for income. So, Michael, I see a Boscan report here.

It's not that our physiology changed. It's that more and more Americans could purchase an air conditioner which were cheaper and of higher quality, and we offset the heat. This is a dynamic, flattening climate damage function. And so this is what I do for a living when I'm not giving these pretentious talks.

And so I'm working with a team of data scientists, and I'm gonna talk about the weaknesses in my work in about 15 minutes. But I did not write this paper. But this is what we are doing of trying to estimate the facts. Is the climate damage function flattening and why?

How much of this is attributable to income growth versus the expanding grilicus menu of quality of products?

>> Ken: Now, this facilitated a massive migration of people to the south.

>> Matthew Kahn: Walter Oi agrees with you. So Walter Oi, in a brush to ham volume, had air conditioning as the handmaiden of southern growth.

 

>> Ken: Yeah, yeah.

>> Matthew Kahn: And so, as an urban and environmental economist, because Ken's point is crucial, Sherwin Rosen emphasized bundling. The south, like on Mississippi, used to bundle very hot, warm winters and very hot summers. The air conditioner unbundles that, allowing you to have an air conditioned summer and a warmer winter, making an Atlantic-

 

>> Ken: And also facilitated the growth of DC bureaucracy.

>> Speaker 32: And the Pentagon in particular.

>> Matthew Kahn: Did you see that work that climate change is helping free markets by shutting down Washington cuz it gets too hot in DC? So we can come back to that in a few minutes.

So we already did this slide. I wanted to punch my brothers. So something that disappoints me in environmental economics right now is this fundamental asymmetry. There's great optimism in part because there's great optimism about endogenous innovation in decarbonization, but there's none of this. It's just politically incorrect stuff of basically more adaptation.

Endogenous innovation examples, better seeds in agriculture that can withstand heavy rain and extreme heat. Architectural designs that can withstand flooding. So again, this is not about the air conditioner. The air conditioner is a stand in for all these lumpy durables. And of course, bigger, more productive firms and richer people will be more likely to adopt these products.

And so I'm very interested in the economic incidents of climate change. It makes it even more imperative to help the poor with Friedman's agenda, because the poor and poor firms do bear the greatest cost of climate change. Because of lumpy durables and lack of access to financing, they have the least capacity to purchase these goods.

 

>> John: I wanna suggest a reason for that. In the climate area, I do not see an agreement that the economic damage function is the reason we care about the climate. They want the climate to be whatever it is for other reasons. And if you say-

>> Speaker 33: Some have other reasons, but if you focus on the problem as formulated by Nordhaus and others, then it is on that damage function.

 

>> Speaker 34: There are these other people that have all sorts of other agendas.

>> John: The problem with that is that the damage function is tiny. 5% of GDP in 100 years is not worth getting out of bed about. And so once you say it's 5% or 10% of GDP in 100 years, it's just over as far as a policy discussion.

 

>> Matthew Kahn: So now I have a problem. So John just said that I'm studying optimistic about a third order problem.

>> John: I'm trying to explain why it is that so many people are uninterested in what you have to say about the damage function at all. We don't even do cost benefit analyses.

California, we're gonna have zero all-electric cars in 2030. Yay, all-electric cars. Does anybody say how many tons of carbon does that save? What's it worth? No, this is what we're gonna say.

>> Speaker 35: That criticism is not applicable to Nordhaus dice.

>> John: No.

>> Speaker 35: He doesn't have any of this hugging polar bears business in there.

I mean, and the thing is that his results are policy relevant. They do suggest a substantial cost, an optimal tax. So it's not total. So you have this 5% in the long run, 2,100 reduction, but you still have, even with that, substantial policy implications, even in models as simple as dice.

 

>> Michael: I wanna raise a couple of other perspectives here that I think are one way to think about it, and it reflects a lot of the discussion. So, first of all, the law of diminishing returns, as we keep moving up the date at which we're gonna decarbonize and electrify the cost, the marginal costs rise steeply and the marginal benefits shrink rapidly.

That's number one. Number two, as was said earlier, it seems like every, especially left leaning politician has to run for office saying they're gonna be more aggressive than the person before. So we get this nonsense piled on top of nonsense, and that's something that seems to not get much, but working in the other direction, there has to be some kind of principle of insurance going on here that doesn't get much attention, that we can learn as we go along.

And maybe some policy experimentation isn't all that bad, etc.

>> Matthew Kahn: So, Michael, let me tackle the bottom one. So, another theory paper that I wrote. So this is the only paper I ever wrote where the editor just said, we're gonna publish it, so I should just send all my stuff to Journal of Housing Economics.

We solved a series of dynamic problems of what's the optimal durability of the capital stock. Because in a dixit Pindyck, real options sense, if you build a less durable building, you hold a real option. As we learn and we talk about the economics of Lego. So Lego, as you might remember, is something that is modular, that you can disassemble at a cost, and you can, in fact, extract capital from land and turn climate change into a pecuniary externality.

So John, this paper was smart, and so taking Michael's point very seriously, when you face a known unknown, that real options become more valuable. So why are we building these 70 Year buildings? And are there materials and modular materials to use going forward, such to retain option value when you face known unknowns about place based risk?

I absolutely agree with you. Folks what I wanted to say about sure. So, I now wanna pivot away from heat, to flood risk and wildfire risk and tell you a little bit about my new actual work.

>> Speaker 37: Before you go there. Okay so, nearly 50 years ago, we were in the debate between Paul Ehrlich and Julian Simons, bet.

Okay. And so basically, what did we learn from that? Some of the walkaways were anecdotal evidence, and extrapolating the most recent observations worked. And supply responses and adaptive responses, didn't carry water in the public's eye. And so, let me, and you may be repeating that now. So, based on that history, I would say odds are, you're gonna be right on every issue, but you're gonna lose on every issue.

So here's the question. What are you gonna do, to increase your probability of winning? What's your strategy? So, I'm agreeing with you, but what's your strategy for winning the day in the public policy arena?

>> Matthew Kahn: So, on the back end, so we can jump a couple of slides.

Milton Friedman emphasized decentralization of spatial competition a la tiboo, and in a Paul Romer sense, so I was with Paul when he was at NYU, not here. And almost back to charter cities of. So let's set this up, in case I lose you guys. Home prices are gonna adjust.

If a phoenix fails to adapt to 130 degree heat. Home prices will plummet there as people will vote with their feet. Sherwin Rosen's work on compensating differentials. Local property owners are an adaptation interest group. You guys have pushed back. I have been optimistic here that they will seek private solutions of using urban planning and private markets to protect their asset.

Some of you have pushed back saying they're gonna seek federal subsidies to pay for geoengineering or this or that. Similar to the debate about work from home. Steve and I had a great discussion in Boston about these issues where work from home is creating this urban doom loop narrative.

I have debated Stin and Arprit on the following point. I have argued that if cities like Minneapolis profiled in the Wall Street Journal as having low commercial occupancy. If they face this urban doom loop, they have an incentive to improve schools, to improve policing. If you face a tax space that's increasingly mobile that might move away, you have incentives to upgrade the city to better compete for footloose people and jobs.

Unless, you're intentionally setting yourself up as a victim as you wait for a federal bailout from a reelected President Biden. And so, you were supposed to find that interesting. And so I'm very interesting. When you have a local crisis, do you step up on your own the cliches of Horatio Alger and doing what you have to do, to improve yourself as a city.

If you face a climate change challenge, if you face an urban doom loop from work from home? Or do you position yourself as vulnerable hoping, because that helps you to get a larger federal transfer?

>> Speaker 38: One is you just bumble and fumble until it's too late to do anything constructive.

 

>> Valerie: Like San Francisco.

>> Speaker 38: You can get divergence, you can get the good outcome in the bad house.

>> Matthew Kahn: I agree, so Steve and I debated multiple equilibria, but now let me bring in Paul Romer, of if there was a city, that introduced road pricing. So folks what road pricing does, is if Goldman Sachs in downtown Manhattan faces flood risk.

But if you can work because of road pricing, if you can live in a 30 miles radius, risk averse people can live much further from Goldman. With work from home, you don't have to go in if there's been a hurricane in the last week. And so there's all sorts of permutations to have a productive firm, because of the combination of road pricing and work from home.

If we up zone, if a new city up zoned on higher ground, many more middle class and poor people could live. We wouldn't have this climate gentrification issue that the New York Times often talks about. That in a world of single family homes, that only rich people will live on higher ground in sort of a mad max move.

 

>> John: I'm hoping we're gonna get to some quantification. And my frustration here is that sea level rise, the units are millimeters per year. We talk about, Miami is gonna be underwater. Amsterdam is farther underwater now than Miami will ever be, by the year 2200. Cities decay and they get replaced every 50 years.

No American city was even there 100 years ago. So, in 100 years you got plenty of time to build stuff. Is any of this you look at the IPCC reports on what we actually know about more extreme weather, you might get one more hurricane every ten years or so.

 

>> Matthew Kahn: So, John, I love your point. This is what Bjorn Lomborg does. So Bjorn, so.

>> John: He reads the actual science.

>> Matthew Kahn: So, Bjorn, to his credit, once a month in the Wall Street Journal, writes a piece like this. So, we're on Zoom, but I don't see him there, so I'm gonna tell a story.

Bjorn and I were on a debate team together that we could adapt to climate change, and he said that we lost the debate cuz I stunk. I said.

>> Matthew Kahn: Thank you, Bjorn. And so.

>> Ken: We're good.

>> Matthew Kahn: Ken, you now know that I'm bad. So, it's,

>> Ken: I know he's good,

 

>> Matthew Kahn: but you can advise. But, John, that's Lomborg's bailiwick, if that's a word, and I don't have an edge there, and I respect what he does.

>> John: We're getting towards what's the damage function and what's your damage function, right, at some point.

>> Matthew Kahn: So, to some degree, that's the weakness of this work, that this is prospective, that almost like a mediocre Hayek of saying that, how does the system go towards a solution?

But I don't know what that solution is. So, that's a good segue into this.

>> John: Hayek would tell you that the attempt to do a damage function for 100 years from now is completely insane.

>> Matthew Kahn: But that's my point.

>> Matthew Kahn: So I'm calling you and said, and so, Judd, I was trying to be polite, but that's my point.

In mathematical economics, when are we humble? Versus what inferences have we come up with of the way we do science?

>> David: It seems like there's opportunities out there. The back to your example, like Amsterdam adapted a long time ago. I don't know when they built their dikes and their seawalls, right?

But we must have tons of examples, of things pre climate change and where we have adapted and where we haven't.

>> Matthew Kahn: No, I agree. So that's what I meant by blueprint.

>> David: I mean, you showed us one damage function for mortality and air conditioning, right? But are there other studies like that for other things?

 

>> Matthew Kahn: Yes.

>> David: Have you been less successful on some more successful on others?

>> Matthew Kahn: So that's a great question. So, let's do one more there, because in case you guys just think, I just talked.

>> John: Flood damage, flood death and damage is just going.

>> Matthew Kahn: So that's correct.

So, guys, in a recent NBR paper. So, in a recent MBR paper, adapting to flood risk evidence from a panel of global cities. So, John, our unit of analysis. Was a city year for basically all the cities in the world from 2010 to the present, using lights at night.

So how much do lights at night dim, and how quickly do they recover after a shock? One unhoover result is that in dictatorships, the lights recover faster. But we can come back to that. My World Bank coauthor did not love that finding. But in terms of economic development, poor cities suffered a larger reduction in lights at night with the shock and recovered more slowly than richer cities.

And so, David, this is how I'm trying to adhere to your empirical agenda. And another example, there was a paper in the American Economic Journal called Heat and Learning that maybe Rick knows. Public school students in poor cities in America don't have air conditioning and their SAT scores are lower.

All else equal, their SAT scores are lower in areas where it's been hotter. But if their school has air conditioning, and let's pretend that that is randomly assigned, you don't see that heat, the negative effects on learning from heat. And so this is a flavor of what more and more empirical climate damage function people are doing.

Coming back to Valerie's point, the air conditioners were not free. There's a question of which public schools have these. Maybe we should celebrate the Biden administration's investment in infrastructure. Why haven't these school districts invested in air conditioning? Would be an interesting field experiment. And what subsidy would a mayor like Brandon Scott of Baltimore invest in air conditioning?

You really have to make the product free for his schools to adopt this.

>> Valerie: I mean, one thing getting into adaptation. I mean, the hot days in New York City are probably not that frequent, even with, I grew up in Panama Canal zone, we did not have air conditioning until 6th grade.

But all the buildings were done with really high ceilings and there were fans at the top. And my parents survived there well before air conditioning, even in the house because it was always hot. And therefore they did the infrastructure, whereas a lot of these places like New York, it's only hot, hot in the summer, so they may not do as much adaptation.

 

>> Speaker 39: That's your durable capital point.

>> Matthew Kahn: That's correct. So let's do this slide now cuz it picks up on Valerie's point, the central role of expectations. So, John, I took two PhD classes with John as a younger man, and the permanent income hypothesis was. So Friedman's work on the permanent income hypothesis highlighted how one's consumption varies as a function of expected future income.

I'll come back to Becker and Mulligan in a second. I don't think we can adapt to unknown unknowns. I'm very interested in for different people, liberal, conservative, highly educated, less educated from different regions of the country. What are their expectations of weather patterns related to what Valerie was saying and what John was saying?

Hanson and Sargent have their recent work on robust decision making. If you know that you don't know probability distributions and you wanna do the best you can, do you play it very safe. And so Chuck Mansky has had his work on subjective probabilities, and I've talked to him and he's doing some work on climate change.

You're gonna see more survey research and you get into question whether this is cheap talk, how you make this incentive compatible to reveal people's subjective expectations. So, like in Ricksfield, researchers like Rob Jensen have done work that one reason poor kids may not acquire more education is they've never had role models to know the right tale of the returns to education distribution.

Of what distributions to returns do people have in their heads when they make investment decisions? So I've had a debate with other libertarians about the work of David Wallace Wells. Has anyone read his work in the New York Times? So he is a disaster person. And he continues the uninhabitable earth.

I recommend that you take a look at this, and I've argued that a benefit of such. I'm on Zoom, so I won't say what I'm thinking. There's not enough work in economics on imagination that we're better able to adapt to scenarios. Arrow Debreu assumed that we just complete that we knew every state of the world like in Isaac Asimov's foundations.

In reality, it's very hard. We often lack imagination, and alarmists like David Wallace Wells help us if it comes into our consciousness of challenges we face, that we're better able to adapt when we're aware of ugly scenarios.

>> Speaker 41: Arrow Debreu assumed that everybody had a probability on every future state.

There is nothing in Arrow Debreu that says that they knew that it was true. Arrow–Debreu theory is how to get a set of prices conditional on the beliefs and the probability beliefs of the agents. There's nothing in there that says that everybody, that anybody's right.

>> Elena: There's a constant.

 

>> John: Sorry, there's a constant drumbeat of the little hoipe loi. They don't know how dangerous this will be, we have to educate them. But actually, as I look around, climate catastrophism is kind of the constant media. And if you're gonna look at expectations, there would seem to be a good case that we are over adapting.

I know, for example, the Palo Alto airport is currently rebuilding its seawall against the bay there. They're building it 2 meters high because they know that climate catastrophes are on their way right now. So vast over expensive money and adaptation because we won't get to 2 meters for hundreds of years.

 

>> John Taylor: The question right behind you too.

>> Elena: Hi Matthew, this is Elena here from Hoover. And they can apply, but the question is, why is the debate framed in terms of cost. Damage cost, cost for the patient, regardless of what's optimal, the level and the type, and not as an intertemporal standard investing problems that we face cost today.

And we know, we know decision making under ambiguity, under uncertainty, and we know how to assess probabilistic returns tomorrow. And the example of the air conditioning is that you have to, and I had this conversation with the climate group at Yale Brazil and Tony Smith and others have worked in this.

And they would tell you to take into account all of the costs of the input output matrix. For instance, you need to generate electricity to support air conditioning. But then once you factor in the productivity growth of the expansion of the cells, then it's not obvious what's the balance of it all.

So why there's a lot of even econometric emphasis on current cost rather than an economic emphasis on cost today versus benefits tomorrow.

>> Matthew Kahn: I like your point very much.

>> Elena: As economists we know how to do it.

>> Matthew Kahn: So in my very last slide, in my caveat slide, I'm gonna confess that I didn't solve a Pareto planner's problem here.

And I like the way that you set this up as a Pareto planners problem.

>> Elena: There's a Ramsey, one that takes into account the price effect of reactions, but as a more of an equilibrium temporal approach, more than a local partial equilibrium.

>> Matthew Kahn: So you have a terrific colleague here at Stanford, thank you.

You have a terrific colleague, Marshall Burke, who's one of the leading experts and is in the New York Times very often and is a good friend of mine. It is in the news very often for his work on wildfires increasing PM 2.5, and PM 2 0.5 causing a variety of damage, mathematicians unable to solve problems, chess players not able to find a checkmate of just that our brain doesn't work well when exposed to pm 2.5.

You might think that I've been blasted with 2.5 after hearing this talk. And my discussion with Marshall is I say Marshall, you're like Paul Revere. Now that you have alerted us to this sort of freakonomics climate fact, capitalism gets to work. And so I went to Amazon's webpage, so John, I actually did some empirical work.

I went to Amazon's webpage and folks, a little bit like agrillicus, it's very hard to scrape Amazon. So it's easy to scrape Amazon now. I asked my RA can you go back in time to 2010 Amazon and get me all the air filters and their prices? And let's run agrillicus hedonic price regression.

Just as computers have gotten cheaper and cheaper, quality adjusted of just what Breschn and Agrillicus were doing, what Barry and Pecos were doing, do the same thing for adaptation goods. And my guy Robert Wong, who's applying to Stanford, is much smarter than me, he got me this one data point.

So you're supposed to look at this R2D2 for $69, I think that that's affordable. And there's a question of how effective is this product in flattening the climate damage function? But if it's not effective, then it won't have a market share. And so my debate with Marshall is short-run effects versus medium-term effects of this climate damage function.

So again, my optimism here is the dance is climate change is increasing heat and drought and that's increasing wildfires, increasing pm 2.5 in the American West. And currently with our current windows, our current housing and our current filtration system that is causing damage. But capitalism gets to work and there's a growing number of free market firms selling products and selling them at affordable prices, and we're gonna see a flattening of the damage function.

And so that's the free market environmentalism at work. We've done this, now this, folks here's something that I'm working on now that some of you have seen. First street foundation, yes-

>> John: It's a little bit of a bad example because I can channel environmentalists who say a horrible picture is it looks like Beijing outside all the time, but we have masks and air conditioning.

In fact, what wildfire, which in fact is going down. But what it ought to spur is why don't we stop our well-known horrible forest management product? But those are public policies, those aren't really free markets. You have to get governments to say, okay, you're allowed to cut down trees, God forbid.

 

>> Matthew Kahn: So this is a very important point. I've conducted this exercise up to now, playing a Nash game, taking government for whatever reason, it does things as given, what are private people's best response? I haven't studied this chess game of the-, we're about to talk about the interplay of the public sector.

 

>> John: Voters might say, okay, enough of this, allow them to cut some trees down, and let's get rid of the wildfires, there's a better idea.

>> Speaker 44: Smoke problems in the Northeast this last summer was from Canadian fires. Now, what Canadian government policies led to-

>> Matthew Kahn: So I wrote a piece on the coast theorem, why haven't we paid them to address these issues if they implicitly have the proper.

 

>> Speaker 44: I was just wondering what Canadian policies are behind those fires?

>> Matthew Kahn: Thinning the trees. I mean, there's a lot of trees.

>> Valerie: Canadians aren't either. Had they done it before?

>> Speaker 45: Where do you thin them?

>> Valerie: Had they thinned trees before?

>> Speaker 46: What's going on with Canadian?

 

>> Speaker 47: I think they're basically wild forests that are just left to nature to do its job.

>> Matthew Kahn: Folks, that speaks to this slide and Gary Becker's work. So there's a number of policy reforms, one of which John just named, and I'm gonna name several others, of why can't alfalfa farmers in Arizona sell their water to Phoenix?

There's a whole bunch of policies that we can think of that are currently on the books, that the deadweight loss from these policies rises as drought increases and as fire increases. Gary Becker in the 1980s wrote a series of picosian papers where he argued that as the deadweight loss of stupid policies go up.

And maybe I should drop the word stupid, as the deadweight loss of inefficient policies rises, that acoustian argument that reform takes place. And I've debated many economists, whether about Argentine inflation. So I keep asking economists, it's amazing how little we know about political economy. So I keep asking smart economists, people much smarter than me, when does political reform occur?

And they say it takes a disaster, after a disaster, we get reform. And I've written-

>> Speaker 48: You were in California in the early 90s, right?

>> Matthew Kahn: No.

>> Speaker 48: No, you weren't, okay.

>> Matthew Kahn: I was in New York City.

>> Speaker 48: Okay, well, then, okay, in the early 90s, we had an extended drought here in California, and it finally broke, but I was hoping that it would have go one more year.

Because there were changes in and discussions of changes, and there were changes in policies along these lines, and maybe one more year could have cracked it. But no, there it was putting pressure on things. In particular in California, the issue is take a little water from the farmers and give it to the cities and we have no problem.

And because the enormous fraction of the water that goes to the farmers, but that's because of the federal mandates and the state and all that. But no, look at the political policy discussions in California in the 90s during that, you'll see something cracking. That was-

>> Speaker 49: I actually know a lot about that cuz I was involved in setting up a market for the water when I was CA chairman during that drought.

 

>> Speaker 48: Okay.

>> Speaker 49: Problem was, as the drought ended, the price should have just gone down, that would have continued, but they didn't wanna hear that.

>> Speaker 48: One more year-

>> Speaker 49: Basically, the history of riparian water rights is very hard to overcome legally and that became-

>> Matthew Kahn: Of Hoover and UC Santa Barbara has done such exciting work there.

So my understanding of his Owens Valley book, a Hoover book, well, there's at least two points in that book. One is he claims that the Owens Valley sales of water to urban people in LA, the farmers, didn't get 50% of the surplus. So there's a claim of persistence here, that the city slickers trick these, please put these words in quotes of less sophisticated sellers.

And those old terms of trade, have affected how farmers have looked at water trades today. He makes the second point of unbundling water rights. And, Michael, a question, as I understand it, as Gary taught me, water rights are sort of use it or lose it. And that under a different set of rules, to say to some alfalfa guy, this is your water, you are free to choose to use it for alfalfa, to grow potential or to sell it to Phoenix.

And so Gary's work has influenced my thinking there. So Milton Friedman, of course, talked about regulatory barriers, his work on entering the medical field, his work on housing. I wanna make a point from Enrico Moretti, I wanna make a California point. So Abe Glaser has done a series of papers that cities don't build housing.

Berkeley builds very little housing, Palo Alto builds very little housing, Boston builds very little housing. It tends to be progressive cities that don't build housing, and I published that in the In the Journal of Urban Economics a decade ago, Maridi argues that fires in California are causing more damage.

John, get ready. If you don't build housing in the cities, middle class people get deflected out into the fire zone, and then there's more of them exposed when the fires occur. So it's this interplay of greater fire risk and of center city zoning putting more people at risk.

That is a nice segue to talk about one last topic, Peltzman effects. So I am part of a research agenda that's going on when government invests, whether it's seawalls in New Orleans, whether it's the Army Corps of Engineers building levees of. More generally, the Peltzmann effect from his famous safety, that when drivers felt more safe that they drove faster.

And an unintended consequence was they killed more pedestrians driving. And so unopened question in adaptation economics is when does government investment crowd out self protection? And Friedman jumps into this not only as a teacher of Paltzman, but his work on other people's money, that many federal projects are deeply subsidized.

And interesting questions of what projects would be built if they were funded locally. And so, and in my own work on urban transit, urban light rail systems are subsidized with a 75% subsidy. And so these cities like Los Angeles build these trains, build high speed rail. But, John, when will high speed rail be completed?

So that was $100 billion project, and California might have 15 billion in that.

>> John: There's a private one going in from Las Vegas to Burbank.

>> Matthew Kahn: So we may be moving to Nevada. That would lower our state of gas.

>> Speaker 50: Florida beautifully yeah.

>> Matthew Kahn: And so what Amin and I are doing in a new project is we are studying.

So let me set this up because I think this is worth spending three minutes on. In 1936, the US passed this flood control act in the aftermath of a major Mississippi flood. And an interesting point, folks I had thought that as cities like St. Louis built their levees, that they protect rich white areas.

But when we looked at the microcensus data, the marginal land, poor black people were living in these areas just in a TBR sorting model if there's high quality land and low quality land. Coming back to my points about risk and sorting from 40 minutes ago, poor blacks were, on average, were living in the risky areas.

And then as you build the levees, the areas gentrify. And so this is our new Peltzman paper. And this was subsidized by the federal government. There's a question of whether the congressman anticipated these effects. But I'm trying to alert everyone that an exciting research agenda in climate adaptation is how to align if we want more adaptation.

Do you achieve that goal with more or less government investment?

>> Michael: I'm gonna raise a couple of related points that have been risen that I think did get enough attention. One is the growing size, influence and entrenchment of special interests, rent seeking as the government does more and more to deal with these issues.

I think we've seen a lot of that, and that's why we got a lot more subsidies and regulation, the Inflation Reduction Act, than anything sensible. And the second point is we see a lot of places where large improvements could be made in the private sector, in the Internet section of private sector.

But it takes a long time for it to happen. So how does that fit? I mean, for example, there are some hospitals that are very good at treating things and others that spend way too much on bad stuff. And there's a lot of policy reasons for this, but we don't really see a very rapid convergence toward the efficient frontier.

For example, I can go over dozens of examples of that sort, both in policy and in private and public life. And then the last point is that I think we all recognize there are likely non trivial externalities from greenhouse gas emissions. We can argue about the size and their evolution and what to do about them, but it seems to me a big tendency is that the level of nuance in the debate has just totally disappeared.

And it's just, if there's a problem, we'll just throw lots of stuff at it. We'll keep throwing lots of stuff at it. And there's no notion that we can overdo it, that an optimal carbon tax could also be overdone and cause lots of damage, etc. Or there, if you wanna translate all the regulation into their price equivalents, etc.

And so how does that mix, that timing mix and the entrenchment, etc. How does that play out in the world? You're thinking about how effective adaptation can be.

>> Matthew Kahn: So I've never thought about for profit adaptation. So thank you. And I don't have this in my slides. There was a 2015 paper by Wolfram Schenkler studying why agriculture has been slow to adapt to climate change.

So folks, there are all these NBR papers. I'm going to a conference next month on agriculture and climate change. I'll invite John, and paper after paper is gonna show slow adaptation by farmers. Folks, this is not a law of physics Wolfram showed that those farmers who receive larger subsidies are adapting slower.

Michael, there's an interesting question of moral hazard here. As economic actors, do you adapt by private expenditure, the air conditioner, or do you adapt by lobbying your congressperson? And there has not been a great paper on optimal adaptation through rent seeking versus through free markets. And I love your point there, and I haven't thought enough about that until today.

If there's been much more, think of Solyndra. Think of Elon Musk and the subsidies that launched Tesla. There's been much more. So, Michael, to expand on your point, a firm trying to get rich off adaptation might want subsidies such that every poor person can buy their product. And they might say, hey, in the mitigation side, we've gotten all these subsidies.

But, Michael, you're right. There has not been a great piece of economics research on the political economy of lobbying for subsidies for adaptation products, with the exception of farmers lobbying for subsidies.

>> Michael: That's gone on since the beginning of time.

>> Speaker 51: So I have a question which is always, like I explained your work to my San Francisco friends who are near and dear to me, but not economists.

And I always point out that economic is the only field about which other people have very strong opinions. My brother's a chemistry professor. You got it wrong, Dan.

>> Speaker 52: You don't understand the way the world screwed up the periodic table.

>> Speaker 51: In this particular case, what I wrestle with, and I respect to John's quantification is adaptation a little thing around the edge that makes it not as bad as we think it's gonna be?

Or is it much closer to not a solution in and of itself, but is it a big deal? And failing to account for it makes us likely to be dramatically off.

>> Michael: That's fair. That's fair.

>> Matthew Kahn: It's a fair question. And I think that this is why I.

So Valerie was talking about her work when we met before at the micro macro bridge. And I think it's that kind of aggregation that we need. So you have the microeconomists estimating our free economics facts. There's a question, what you do from these slopes, we estimate of when it's hot in Baltimore, how much lower do kids score on the SATSD, but of how you aggregate this.

So I think that there has not been this aggregation from the micro econometrics into the macro that Valerie was telling me about in her work on the marginal propensity to consume. So I think that's where this field has to go, folks. I want to do two more things.

So another.

>> John: In English, what you just said, I think was very interesting, which is there's all this climate justice stuff, but what you just said is if we build a levy on a poor neighborhood in the interest of climate justice, it's going to raise the price. They're all going to leave, and it's, you're not going to do any good there, that's a deep point.

 

>> Matthew Kahn: So I will.

>> Michael: How you are going to do good you raise the value of that land.

>> Matthew Kahn: So, and it's simple

>> John: from a lefty point of view.

>> Matthew Kahn: So, John, let me expand on that,

>> John: I'm addressing a left wing.

>> Matthew Kahn: In the slums in South America, Leo Bernstein told me a story that there are leaders of Brazil, cities who see that informal housing is on very valuable land close to the city center, and you can't send in the tanks to clear people out.

So instead they have a beautification project saying that this is ugly. And if we have go to green this city, we read Kahn's first book, green cities. And according to this book, we need some green cities. And so we are going to send in the tanks of, to evict these individuals and to build parks.

And so we see this in many settings of the environment. The general equilibrium effects of beautification projects are often they're capitalized into land prices and benefit those who own the land. So again, this comes back, how do you help poor people? Back to the first things we were saying on Friedman's agenda on human capital and health capital.

 

>> John: Well, maybe help poor people by helping them stop being so poor as opposed to do their climate problems, which they rank about number 52 in the.

>> Matthew Kahn: But notice that you're solving a Pareto problem, which I'm not brave enough to solve, but I hear you, folks. My last paper that I want to tell you is there has been a growth demand creates supply similar to Moody's and standard and poor.

I apologize. Similar to Moody's and standard and poor, there's the growth of the climate risk rating industry. So we can look, look around the room if you think Moody's and standard and poor can judge the quality of assets they're taking climate science models. There are nonprofits like first street foundation and for profits like Jupiter.

And the climate scientists here at Stanford are creating their own geographically refined models for every house in the US, including, hypothetically, where Dora lives at 6515 Warner Avenue. They are giving a score from one to ten on flood risk, fire risk, and heat risk. So a nine, just like the movie spinal tap, nine is bad.

That's a high flood factor. So our home faces high flood risk. Dora doesn't believe this. Low fire risk and moderate heat risk. These report cards are coming out for every parcel. So what we did in a paper that we presented for the first time this summer is we partnered with Redfin.

Redfin is a Zillow competitor, and for registered users of their platform, we observed people's home searches before and after Redfin provided First Street Foundation scores. So if Ken was looking at homes in a risky part of Mississippi, and he already knew that it was a flood risky part of Mississippi, and now First Street Foundation, says, Ken, this is risky, we would not see a treatment effect on camp.

 

>> Speaker 53: Mississippi.

>> Matthew Kahn: All right. What we find in our study is when First Street foundation starts to provide these risk scores, those who had been searching in the most risky areas substitute to safer homes, are less likely to bid for the homes, make less aggressive offers for these homes.

And we find this in republican and democratic areas.

>> David: And the risky homes.

>> Matthew Kahn: So they substitute to safer homes. I'm sorry, David. Thank you. And, folks, a point that I've made is that many Republicans, it's not that they're climate deniers, it's that they don't believe that the government can effectively address these issues.

And through private markets, they try to make their family safer. But so one is not a hypocrite, is a claim if one does not support carbon taxes, but one responds to these nudges and responds to safety investments. Coming back to the Becker household production function model is a theme in my work and where I debate many young people.

 

>> Michael: A big problem is that governments prevent the private market from adapting. For example, California notoriously won't let insurance companies raise prices, and there's a massive exodus of homeowners insurance from California.

>> Valerie: Actually, can I follow up on that? Individuals don't go look up at this information when they're about to buy one of those houses in Florida that has been in the news, and they see a $30,000 a year home insurance policy, they're going to think twice.

 

>> Matthew Kahn: I agree. So, folks, notice Valerie's point is related to Grossman and Stiglitz from a price, how you invert a probability. And so basic ideas from economics have not popped up in climate economics. And so that was my point here, insurance risk pricing to reflect the risk.

>> Valerie: The insurance company does it for you.

 

>> Matthew Kahn: Yes

>> Matthew Kahn: And let's take this a step further. So I had reporters from the New York Times call me and they then didn't publish my quotes. They said, Matt isn't a catastrophe if the insurance industry walks away from California. I said, let's be careful. What will happen is perhaps private equity will buy these properties because they can self insure through holding their diversified assets across locations.

And I said, private equity, unlike amateur homeowners, would have the right incentives to research this. And in a Grossman Hart sense of residual control, would have, at times of turbulence, you want the right property owner owning an asset. And so I said, it's actually a good thing to have insurance walk away.

We'd be better able to adapt to shocks if private equity and the big boys own more assets. And the reporter hung up on me. And so there's a question, what? We're optimizing

>> Bob: less regulated insurance. To your point, Michael, do the same?

>> Valerie: Yeah, I mean, I think less regulated.

Otherwise, a lot of people have to sell their houses. And, I mean, there's a lot of disruption.

>> Matthew Kahn: But private equity could turn around and rent it back to you. So I don't.

>> Speaker 55: It's a huge agency problem.

>> Valerie: Yeah,

>> Matthew Kahn: no, it's.

>> Valerie: Yes.

>> Matthew Kahn: So, no, Joe Tracy and Andrew Kaplan have their work on housing partnerships.

Private equity could own half your home. So, Bob, that you could fly a drone over the home to see what the agent is doing with.

>> John: Rentals are better maintained than owner occupied homes. This is a myth that we passed.

>> Bob: So do you agree with me or Joshua investments in drones?

 

>> Matthew Kahn: So, Bob, of course you were right, but technology has affected that. So that's a big debate in real estate finance. But I understand the principal age of this.

>> John: There's at least a mitigating possibility.

>> Speaker 56: Fundamental question for this whole pricing debate, is how much climate change there's going to be, which is to say, which emission scenario are we in?

And it seems to me the IPCC clouds this debate by insisting on this artificial agnosticism as to what emission scenario we're actually in. Whereas we know there's one that's unrealistically pessimistic, which has been called the business as usual scenario,-

>> Matthew Kahn: 8.5.

>> Speaker 56: That 8.5, another that is unrealistically optimistic and one of the ones in the middle that we're probably on.

So my question is, what role do institutions, including potentially the government, have in communicating to the public? This is what our best guess is for the distribution of possible emission scenarios.

>> Matthew Kahn: I love your point, and I skipped over it in this equation. I had written into my notes before the talk that I should have had in this equation, comma, expected future temperatures, because in an investment.

 

>> Speaker 56: Where?

>> Matthew Kahn: In the damage function of, if you expect the temperature is gonna rise under investment, under uncertainty, you would have taken more precautionary steps such that the punch causes less damage. To say this again, the typical climate damage function is regressing economic damage now on did a hurricane occur, was there extreme heat?

But if you expect that in the future there's gonna be extreme heat, do you take more precautionary steps now such that the shock now causes less damage?

>> John: If you over expect that because you're listening to doom and gloom, spend way too much money and you.

>> Matthew Kahn: So I like your point very much, in the microeconomics, in an optimized.

If we wrote this down as a calculus problem, your point boils down to what are farms, firms and households expectations of the profile we're going to face? And you're more likely to invest in lumpy durables if you think the future is even gonna get worse. But that may be an overprediction of what's gonna happen now.

 

>> Michael: In the IWG 2010 report, then they calculated their version of dice with the optimal cost of social cost of carbon. They actually assumed that CO2 10 years from now actually contributed to damages now. That's in the equations that used to derive those numbers, that future CO2 kind of travels backwards in time and damages things down.

That's in that report.

>> Speaker 57: Don't want to go that far.

>> Michael: No, no, no, it's not for any sensible reason other than-

>> Speaker 58: psychological stuff.

>> Michael: It was there because the person doing the computing didn't know how to do optimal control okay, that's what it is on to me.

 

>> Matthew Kahn: So I think I'd retreat and say expectations are very important here. So if I scare the hell out of you and you then build a fortress around your house, the next tornado doesn't hurt your house on some level. That's all I'm saying. Folks, two more slides and we're done.

Wanna come back to Valerie's point, because on some level, am I talking about the marginal damage of shocks? She's absolutely right of this importance of tracking. So when I presented this work at Stanford, Rebecca Diamond turned to me and said, Matt, what are we spending on adaptation? What are the facts?

And here's the challenge. A cell phone, I'm sorry. An air conditioner is an easy adaptation expenditure. But your cell phone, think of your annual bill, I'm getting like a bill for $200 a month. I don't know, why do we attribute all of that to adaptation of. So how do we write out in the consumer expenditure survey, how would a firm, in the census of manufacturers, if Davis and Haldewanger were to study this, and I've talked to Randy Becker about this, of how much firms.

So it's easy to measure how much are firms paying to mitigate their carbon footprint, but how much are they paying to make their firms facing less physical risk? If you move your plant to another part of Florida, how much of that do you attribute to adaptation expenditure?

>> Speaker 59: Let's not confuse climate and weather.

How much of that is adaptation to climate change? And how much is just when you go to New York, you bring a big coat.

>> Matthew Kahn: So that would suggest that we already have the menu of strategies to offset the challenges we face.

>> Speaker 59: We spend a huge amount on adaptation to weather.

In California, you don't have big coats in New York, you have big coats, in Tahoe you better have some chains on your car.

>> Matthew Kahn: The people of Maine can see what their future expenditures will be by visiting Arizona and collecting some bills on what these guys spend money on.

 

>> Speaker 59: No, they've been visiting Southern Maine.

>> Speaker 59: Because climate change is nowhere near.

>> Matthew Kahn: Folks, two last slides. And what I meant by the Baby Boskin here is that, again coming back to the Greenstone Karen clay paper, there's a whole group of young scholars who I'm in touch with who are engaging in many different benchmarks.

I just had a paper on how often do electric utilities have blackouts? And we related this to natural disasters, and over the last decade, when natural disasters occur, theres less of a marginal blackout. And so thats an ex, I am not telling you how much PGE invested to put their lines underground.

But thats another example of how I am always thinking about this flattening climate damage function. So to come back to your point, I'm not brave enough to solve a Pareto Planners Problem on how much we should be investing now in carbon mitigation or geoengineering. During, I do think that the Inflation Reduction Act, so we didn't spend much time on this today.

I think the justification for the Inflation Reduction Act hinges on there being huge learning by doing effects. I think that a point that has not been made of and that John and I have spoken about, the green economy requires land and it requires rare earths. The Wall Street Journal just had a piece that we're gonna make China rich as they basically have a monopoly on rare earths.

And so very interesting issues of the income effects of our decarbonization. And I have work that when you factor in the land that's needed for the green economy, it's no accident that Texas is one of our green power producers. And in a developing world where we don't have good land markets, where is this green power gonna be sized?

 

>> Speaker 60: It's not just rare earths, you're gonna need Cobalt from Congo, you're gonna need Nickel and Copper, etc. And huge amounts, Lithium and Lithium especially, and it takes ten years to get a permit to open a mine.

>> Matthew Kahn: So folks, this has been a Chicago talk. I wanna show you Gary Becker at the plate.

This is 1991, that was, the ball is above the ground. Townsend Hansen and Stokie are impressed, and I'm in my grandma's sweater. No, this was a good swing.

>> John: So speaking of Chicago, what are the lessons from for your cheers?

>> Matthew Kahn: So again and so John, thank you.

And so what I hope I brought across, and I know we jumped across the slides, is this focus on reducing poverty through increasing individuals of freedom over where they live. So Ross Chetty in his move to opportunity work makes a very big deal of moving to better zip.

Zip codes, you could factor in climate risk into that and link housing vouchers. If we build more housing at safer places, and if poor people have larger housing vouchers to move to them, they are free to choose to move their families there. Rick's agenda on education, on private schools, plays into poor people's flourishing, reducing occupational licensing to allow individuals to pursue their passions.

Friedman railed against zoning of limiting the opportunity of real estate developers to build. And so the Friedman agenda was that people are adults and expanding their menu of opportunities within the Becker framework of people wanting to be comfortable, healthy, and having flourishing children. And so, John, I would say it's a question of what set of policies helps poor people to achieve their goals.

And this is why Terry Anderson opposes the carbon tax, because I think he thinks that this lowers their real incomes in the short run.

>> Michael: So I have a couple of quick points that I think are worth mentioning as I. It's very provocative, I really appreciate it. Two points from Danny Kahneman's research and other psychologists.

Kahneman in particular was very big on repetition being mistaken for truth, and that people have a hard time distinguishing truth from falsehood. And we certainly have seen an echo chamber of repetition, of calamity, and so on. The second point is that psychologists have long understood that people react much more strongly to negative shocks than positive ones.

And that's a very corrosive mix in trying to untangle sensible reactions, including doing nothing or doing this or that, whatever mix of things there are. I think that's worth spending some time thinking about how you. If you're trying to actually do something besides just write papers, but actually trying to mobilize toward getting more sensible policies, those are pretty important things to have to overcome.

 

>> Speaker 61: Matt, are you at all focused on moves towards increased nuclear energy? It seems to me that the terms of the debate are changing, but in terms of the sort of outright opposition probably driven by huge negative shocks, unlike.

>> Matthew Kahn: So I can give a proof to your point.

I started to write the following paper, but David Pop told me I couldn't pull it off, that the real cost of Chernobyl and three Mile island is that America's PhD programs in nuclear physics, in nuclear engineering, came to an end, making nuclear power riskier. So I had wanted to write a paper on the human capital.

 

>> Speaker 62: Great point.

>> Matthew Kahn: I need you back at the JP. No, no, so I would have a thousand JP, If you were-.

>> Speaker 62: Now three Mile island, there was no harm to anybody.

>> John: What is this psychological harm?

>> Speaker 63: It brings up Chernobyl.

>> John: Nuclear is one option, which of course we can now I think in public say doesn't emit carbon.

The other troublesome one is geoengineering, if million dollars worth of sulfur dioxide in the upper atmosphere cures global warming tomorrow.

>> Matthew Kahn: So Scott Barrett.

>> John: You're not allowed to actually research.

>> Speaker 62: You're a lot more comfortable with that than I am. Just imagine who's doing the geoengineering and how many things the governments screw up.

 

>> John: Not allowed now to even research the question.

>> Speaker 62: No, no, I agree with the research. I'm just saying that I'd be a little nervous about public program to shoot stuff in the atmosphere having unintended consequences.

>> Matthew Kahn: And he sets it up like Mike as a Nash game, so that there's not a coast theorem here of that any one country can pursue this, ignoring the externality imposed on everyone else.

 

>> John: As the technocratic thing we're talking about, while we're spending trillions of dollars a year, the fact that this problem could actually be solved, if you really believe climate is an existential crisis that is affecting things today, the fact is that we could change this for couch change overnight, really upsets a lot of common narratives.

 

>> Elena: I just wanna end on a little note to Gary Beckhorn, Kevin Murphy, spice theory that could be intertemporal. You give me more credit for your first point. I mean, even before pareto prom, I like to see intertemporal assessment of benefits as well as cost. Very much thought about, and there is variants and perhaps there are non concavity locally.

And so innovation takes a long time, but over long horizons there are benefits to incentive to improve on existing technologies. And I see a lot of emphasis on the cost and not enough benefits included micro horizon costs perhaps are easier to measure. That's all.

>> Matthew Kahn: Thank you.

>> Speaker 64: Since we already lost John Taylor.

Thank you.