September 24, 2002

UCLA Anderson Forecast Explains That California's Infrastructure Needs An "Intensive Margin"

Forecast Director Ed Leamer discusses the Extensive Margin and the Intensive Margin as Critical Components to Understanding California's Infrastructure

Los Angeles — Dr. Edward E. Leamer, director of UCLA Anderson Forecast, is scheduled to discuss the importance of the Extensive Margin and the Intensive Margin, key economic components in the future of California infrastructure, at the next UCLA Anderson Forecast Conference. The conference, titled "California Infrastructure: Are We Ready to Grow?" is scheduled for Wednesday, Sept. 25, 2002. This daylong event will highlight the crucial issues facing California's infrastructure.

Dr. Leamer illustrates his economic projection in his paper, "The Extensive Margin and the Intensive Margin," by suggesting that California needs to understand the difference between Extensive and Intensive Margins, in order to understand the need for higher prices for infrastructure.

"If we can get our elected officials from the governor on down to understand these words, California will be a better place to live. More importantly, we need an informed and sophisticated electorate, able to understand the message if not the jargon: California's historical growth and prosperity came at the extensive margin. If California grows in the future, it will come at the intensive margin," said Leamer.

He argues that as Californians, "We are completely focused on the extensive margin. We think the solution is to build more — more generating capacity, more roads, more airports. We need to grow up. We need to realize that generating capacity, roads and airports are not a gift from Mom and Dad in Sacramento. We pay for them ourselves … We need to demand higher prices for infrastructure use."

Leamer offers a solution to the problem of scarcity — the free market price system. "If the California success story of the 20th century is to be repeated in the 21st, we will need to require users to pay the full cost of land, and water and electricity and roads and airports," said Leamer.
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Highlights of Dr. Leamer's discussion include three lessons to better understand the future of California's infrastructure:
At early stages of development, growth comes at the extensive margin (more roads, more generating capacity, more runways and more aqueducts), but inevitably, scarcity becomes a problem and the locus of growth shifts from the extensive margin to the intensive margin. (using what we have more efficiently).
The switch from the extensive margin to the intensive margin is driven by the rising price of the resource. Absent a rising price of the resource, there is no economic incentive to use the scarce resource efficiently, and we squander our electricity, our roads, our water and our runways.
These higher prices may seem a little scary in prospect, but in reality, the conservation opportunities that spring from ingenious American minds are virtually unlimited.

Dr. Leamer and his colleagues at UCLA Anderson Forecast will present more of their findings about California infrastructure at their conference, "California Infrastructure: Are We Ready to Grow?" which will be held tomorrow, Wednesday, Sept. 25, 2002, at the Westin Bonaventure Hotel in downtown Los Angeles. The conference will be presented in conjunction with the Los Angeles Area Chamber of Commerce. Sponsors of the conference are as follows: Sempra Energy, Washington Mutual, MWH Americas Inc., Automobile Club of Southern California (AAA), Kline Hawkes & Co., United California Bank and Los Angeles Business Journal.

For more information on UCLA Anderson Forecast reports or the quarterly conference, please call (310) 206-7707 or visit http://forecast.anderson.ucla.edu.

About UCLA Anderson Forecast

UCLA Anderson Forecast is the most widely-followed and often-cited forecast for the state of California, and was unique in predicting the seriousness of the early-1990s downturn in California, and the strength of the economy's rebound since 1993. December 2000 marked the Forecast's first recession call since 1991.

UCLA Anderson Forecast is one of the Centers of Influence at UCLA Anderson which is perennially ranked among the top-tier business schools in the world. Award-winning faculty renowned for their research and teaching, highly selective students, successful alumni and world-class facilities combine to provide an extraordinary learning opportunity. Established in 1935, the school provides management education to more than 1,300 students enrolled in full-time, part-time and executive MBA programs and academic master's and Ph.D. programs.

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