Do Residential Solar Power Subsidies Mainly Benefit the 1%?

The NY Times tells a story  about a “green death spiral” for the subset of electric utilities who pay solar households retail rates per unit of power the solar households sell back to the grid.    The utilities are concerned that as more households sign up for solar panels and generate their own power and then sell their surplus power back to the grid at retail prices that  there are fewer non-solar households who will pay for the fixed cost of the the grid and basic transmission infrastructure and for the total cost of the solar subsidies.  This means that the non-solar households will be charged more for power (average fixed cost rises). So, solar power offers social benefits of 0 GHG emissions but it is also transferring money from households who live in multifamily buildings (i.e renters) to home owners who opt to have solar panels installed.

Who are the solar households who have taken advantage of government incentives to “go green”?    In my 2012 paper using data from the City of San Diego,  we documented that more educated households were more likely to have residential solar panels.  We also document political differences between who installs solar panels.  Can you guess which political party member has a higher probability of installing them?    It would interest me if in other states such as Arizona whether this finding also holds.  Are there other sunny places where a more representative slice of America installs the panels?  As the upfront costs of installing panels declines thanks to market competition, and new financing models such as leasing the panels, hopefully this will be the case but this is an empirical question.  Right now, this policy appears to be reducing our GHG emissions and raising energy prices for the poor and middle class.

Optimism from Bangladesh

In the comments section two weeks ago, we had a discussion about the future of Bangladesh in the face of climate change induced natural disasters.  Today, the NY Times offers an optimistic assessment about some positive trends taking place there.   Economic development will only further this effort.

For those inclined to read about free market environmentalism, I have published my $2 book on Amazon. I promise this is the last time I will plug: Fundamentals of Environmental Economics.  I’ve sold 49 copies so I’ve just about broken even here!


Prepare for Inflation

Paul Krugman provides Dr. Janet Yellen with an endorsement to be our next head of the Federal Reserve.   If selected and confirmed, I predict that she will attempt to introduce 4% annual inflation as a “Goldilocks” means of reducing our deficit while seeking to reduce stubborn unemployment.    For the empiricists who read the RBC, keep an eye on the price of gold and on TIPS bonds.  These market prices will provide clues about fears concerning anticipated future U.S inflation.  It is true that international investors have to “pick their poison” concerning their asset allocation.  U.S Treasury Bills may continue to be a more attractive investment than international alternatives.

Who loses from 4% inflation?  Cash holders, U.S bond holders,  and anyone else (including UC faculty!) whose nominal salary (or pension payments) isn’t indexed to the CPI!  The senior faculty at public research universities will be incentivized to seek out outside offers to keep their real income constant!   Our private sector peers regularly receive cost of living adjustments.

Krugman on China

Paul Krugman is pessimistic about China’s growth path.   He is certainly correct that China has focused on building up its export industries and has invested a fortune in urban infrastructure.  Following a Keynesian model, it has invested in public works projects in hundreds of big and small cities as it anticipates the urbanization of 300 million more people over the next 30 years.   China’s leaders must be aware that its exports are unlikely to grow by 8% per year.  Instead, the future growth model must be based on the following;  1.  improving the quality of Chinese products (food, goods, apartment buildings) so that producers can sell them for a higher price to domestic consumers.  2. selling stuff such as cars to their emerging middle class, 3. selling basic durables (fridge, AC) to the new urbanites from the countryside, 4. investing in their military.    Krugman ignores the quality side of capitalism.  As China grows richer, its urban middle class will seek to buy better stuff and this will create huge demand and growth opportunities.  China’s domestic car industry is booming.

Dr. Krugman is correct that the local governments in China have made Zillions $ of loans in investments that may have a negative rate of return.  But, this is “too big to fail” lurking again.  I have asked my co-authors in China about implicit loan guarantees and they agree that the Central Government is highly likely to bail out cities for “bad loans”. Moral hazard always lurks and China will offer a nasty test of this hypothesis.

The Concierge Textbook?

Some time next month, I will publish on Amazon Books my new book titled Fundamentals of Environmental Economics: Solving Urban Pollution Problems.    I will set the sales price at $2 per book.  This is a “real” 300 page book filled with bad jokes, and good economic logic.   My goal is for this book to interest readers and for it to pose some stiff competition for environmental economics books that are often priced at $96 or more.      As you might have guessed, my book embraces free market environmentalism and focuses on how a “card carrying” Chicago economist thinks about how to solve a broad variety of environmental externalities.

I have discussed my project with academic friends and shared the entire manuscript with several people.  Many academic economists have said the same thing to me;  “Matt, your book is much more likely to be adopted by teachers if you provide problem sets and exams, provide power point lecture notes, and provide data sets for empirical exercises and bundle all of these additional materials in your book.”    Full service is expected and I’m only offering 1/2 a loaf.


Adapting to Flood Risk in Iowa: Federal Rebuilding Funds and Moral Hazard

The NY Times reports that the people of Cedar Rapids Iowa have not learned their lesson from the last big flood of 2008.

“The city has bought and demolished about 1,400 homes since the flood. But the city and private developers are spending more than a combined $200 million to build 1,311 new housing units. City officials have spent $307 million in federal, state and local money to redevelop flood-affected public facilities. In the last fiscal year, the city spent more than $150 million on capital projects related to the flood and it has allotted another $136 million for such projects in the current budget.”

Do you smell moral hazard?  Do you smell “too big to fail”?    Here is an excellent research paper that explores this broad issue.   These scholars argue that the Federal government will invest in playing defense against Mother Nature in areas where it believes people will move to but people want to move to areas where the Federal Government will invest in paying for defense. So, this is a multiple equilibrium game!   If the federal government could commit to not pay for defense, then people will be less likely to live in a risky place.

In my own research, I have documented using cross-country data that fewer people die when natural disasters strike richer nations but such nations often introduce perverse spatial subsidies that encourage people to live in risky place.  In Climatopolis, I argue that this encumbers adaptation.

Climate Change Adaptation: The Case of Our Electricity Grid’s Reliability

In the NY Times, John Broder has written a good piece  where he notes that climate stress could lead to both supply and demand shocks for electricity that threaten the reliability of the grid.     For a full copy of the DOE report click here.  We need consistent access to electricity so how do we adapt?   I predict that the following trends will emerge because we know that we face a future challenge if we don’t make investments now.

  1. We will see more distributed generation to reduce the risk of catastrophic electric utility failure.   In-basin solar generation is one policy being discussed in Los Angeles. Read my colleague J.R DeShazo’s work.
  2. Electric utilities will work harder to get more commercial electricity consumers to sign up for demand response incentives such that the utility can reduce such consumers’ electricity consumption on high net demand days.
  3. The wide diffusion of Smart Meters being installed in people’s homes and businesses will allow people to have real time access to the price of electricity.  Households and firms will opt in to face dynamic pricing and will be incentivized to do so.   When the price per kwh jumps, such households won’t run their dishwasher at peak price hours.  This is the small ball of adaptation.
  4. Improvements in battery technology will allow us to store electricity that we can use during a crisis to live our daily live.
  5. Those cities that do not offer reliable power to households and firms will lose the footloose who will move to cities offering higher quality of life and service reliability.  “Voting with your feet” is a powerful force for motivating a monopolist electric utility as the mayor yells at its leaders to step up.  Cities and states are always trying to attract new businesses.  Reliable power will be a key determinant (just like local wages) of whether businesses view a location as “business friendly”.
  6. Electric utilities will invest more in backup power generation.  The utilities know what Broder knows.  As risk goes up, they will introduce contingency plans that help to mitigate risk.  Perhaps more transmission capacity will be built so that cities have more alternatives from where they can import power.

This is the flavor of my Climatopolis logic.  I’m now selling the paperback version!   Items #1 to #6 represent small ball changes to our society.  None of them alone “saves us” but together they lead to a more robust system that allows us to continue to thrive.


An Interesting Debate?

Greg Mankiw and Paul Krugman are having an important debate about the transmission of income inequality across generations.  Here is a quote from Dr. Mankiw.

“A book I probably should have cited in my article is Judith Harris’s The Nurture Assumption.  The main thesis of this great book is that, beyond genes, parents matter far less than most people think.  Raising three children has made me appreciate Harris’s conclusion.  It is frustrating how little influence we parents have.”

I believe that Jim Heckman would disagree with Dr. Mankiw.  Here is a good quote from a PBS Newshour Segment where Heckman was interviewed.

“You’re a University of Chicago economist, which suggests a certain conservatism with regard to economics, right?

James Heckman: Yes, but what I take from Chicago is not some hard line about minimum wages or anything of the sort, but understanding that incentives really matter. Alfred Marshall is one of the inspiring forces of the Chicago tradition.

And Marshall, in his book, “Principles of Economics,” made this remark:

“The greatest capital that you can invest in is human capital, and, of that, the most important component is the mother.”

So he was talking about early motherhood, maternal interventions, the importance of the family. We know there are a lot of differences genetically; there are a lot of differences that emerge. But what we also know is that we can work with those differences and so we recognize individuality, we supplement individuality and when, in some cases, the individuality looks like it’s heading in a bad direction, we can do something about it.”

For those RBC readers eager to see some advanced material, read through Heckman’s research program.