The NYTimes reports on an innovation in disaster aid, drought insurance taken out by relief agencies.

In a pilot project that could someday transform the world’s
approach to disaster emergencies, the World Food Program has taken out
an insurance policy that will pay it should Ethiopia’s notoriously
fickle rains fail this year…

The policy, which costs $930,000, was devised to create
a new way of financing natural disaster aid. Instead of waiting for
drought to hit, and people to suffer, and then pursuing money from
donors to be able to respond, the World Food Program has crunched the
numbers from past droughts and taken out insurance on the income losses
that Ethiopian farmers would face should the rains fail…

….If it works, the insurance will get emergency money flowing
faster, before the haunting images of dying babies reach television
sets. It would also shift the risk from farmers to financiers.

    Insurance like this could even have benefits in the United States.  Private firms, of course, often do buy disaster insurance but the United States government might want to do the same.  Hurricane insurance, for example, bought by the US government could better spread the costs of disasters to the well-diversified.  In theory, the government could duplicate any insurance program with a tax and spending program (give Bill Gates money now and tax him when the disaster occurs) but in practice it’s going to be much easier to commit to an insurance plan than to an equivalent tax and spend plan.   

More generally, drought insurance on this scale is part of the New Financial Order.  I refer to Robert Shiller’s work on using macro-markets to
offer large-scale insurance.  A market in GDP futures, for example,
could be used to hedge against declines in GDP such as have occured in
Argentina, South Korea or the future United States (yes Tyler, it could happen!). 
Markets in the income of professions as a whole, e.g. the the income of
dentists, could be used by dentists to hedge against the possibility of
a super anti-cavity sealant.  See Entrepreneurial Economics for more on macro markets.

Thanks to Alex Wolman for the pointer and Robin Hanson for discussion.

Why do some countries keep all their people in a small number of large cities?

A good example of the relationship between climate variability and human population size is provided by Australia.  It is unique among the larger nations in consisting of either very small settlements or large cities, for the middle-sized towns that predominate elsewhere in the world are almost entirely absent.  This is a consequence of the cycle of drought and flood that has characterized the land from first settlement.

Small regional population centers have survived because they can batten down the hatches and endure drought, and large cities have also survived because they are integrated into the global economy.  The resource networks of towns, however, are smaller than the region affected by climate variability, making them vulnerable to swings in income.  Typically, what happens is that, as a drought progresses, the farm machinery dealership and and automotive dealership close down…When the drought finally breaks, these businesses do not return…instead people travel to larger centers to buy what they need, and in time end up moving there.

The Australian example shows that climate variability has in fact encouraged the formation of cities: Today it is the most urbanized nation on Earth. 

That is from Tim Flannery’s The Weather Makers: How Man is Changing the Climate and What It Means for the Earth.  A few passages make me wince, such as the romanticization of 18th century Scottish highlanders, but mostly it is the best popular science book on its topic.

My IRT ("introspective regression techniques") support Flannery’s implicit prediction.  Think about all that empty desert in Saudi Arabia, although I wonder why the rather wet Uppsala is so dull.  Opinions?  Do we see concentrated population in major cities where it is driest and where the weather is most variable?  I don’t recall that Ades and Glaeser mention this factor, but surely it deserves more study.

Via Brad deLong is Paul Krugman’s introduction to the General Theory.  Point Three in Krugman’s stripped down version is:

3. Government policies to increase demand, by contrast, can reduce unemployment quickly.

Well, that would certainly explain why unemployment recovered so quickly during the Great Depression.  Or perhaps, despite the fact that "all it took to get the economy going again was a surprisingly narrow, technical fix,"  we just weren’t trying hard enough.  See also Tyler’s comments.

Louis Kaplow is smart, here is his 119-page overview of the topic.

Jeff Miron has a new blog.  Miron is the author of Drug War Crimes: The Consequences of Prohibition, a superb economic analysis of the war on drugs (I was the editor).  He is also known for his work on seasonal business cycles (see also here for Tyler’s take).  The new blog, based in part on a course Jeff is teaching at Harvard has three themes.

The
first is that consequential libertarianism is consistent in its
approach to the issues. Modern liberalism and conservatism are not.

The
second theme is that both liberals and conservatives advocate massive
amounts of government intervention. The two perspectives disagree about
precise policy choices, but overall they are far more similar than
different. The libertarian perspective, however, is truly distinct from
either mainstream view.

The third theme is that most economic
and social problems are best addressed by eliminating the government
interventions that caused or exacerbated the problem in the first
place. Creating even more government is never a sensible approach.

Welcome to the blogosphere Jeff!

Excellent article, the focus is urban economics.  Best sentence: "…he notes that cars per capita in 1990 is among the best indicators of how well a city has fared over the past 15 years."

From the same NYT magazine issue, here is Levitt and Dubner on the poverty and decline of real estate agents.  See also Alex’s previous post, Real Estate Rent-Seeking.

Five hundred and forty-eight graduating students from 11 universities were categorised as maximisers or satisficers based on their answers to questions like “When I am in the car listening to the radio, I often check other stations to see if something better is playing, even if I am relatively satisfied with what I’m listening to”.

When questioned again the following summer, the maximisers had found jobs that paid 20 per cent more on average than the satisficers’ jobs, but they were less satisfied with the outcome of their job search, and were more pessimistic, stressed, tired, anxious, worried, overwhelmed and depressed.

“We suggest that maximisers may be less satisfied than satisficers and experience greater negative affect with the jobs they obtain because their pursuit of the elusive ‘best’ induces them to consider a large number of possibilities, thereby increasing their potential for regret or anticipated regret, engendering unrealistically high expectations”, the researchers said. Indeed, the researchers found that maximisers were more likely to report fantasising about jobs they hadn’t applied for and wishing they had pursued even more jobs than they did.

Here is the link, and by now you know the usual caveats for such research.  Number one is whether the survey evidence measures true commitment to maximization, or whether it simply picks up grumps who are fussy and determined to portray a fussy image to the world.  Number two is whether they properly adjust for IQ, which may be causing both superior results and greater returns to search behavior.