Fall 2012 Journal of Economic Perspectives

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The Fall 2012 issue of my own Journal of Economic Perspectives is now freely available on-line. Actually, all issues of JEP back to the first issue in 1987 are freely available on-line, compliments of the American Economic Association.

The issue starts with a three-paper symposium on the issue of  "contingent valuation," which is whether it makes sense to use survey techniques to estimate the costs of events like the Exxon Valdez oil spill in 1989 or the BP oil spill in 2010. The symposium has an overview paper laying out the issues, followed by pro and con viewpoints. Next comes a five-paper symposium on various aspects of China's economy: labor markets, macroeconomic imbalances, and perspectives on patterns of long-term growth. The final three papers are about the Clark medal awarded to Amy Finkelstein, about Irving Fisher's famous 1896 paper, and a "Recommendations for Further Reading" that I contribute to each issue.



Symposium on Contingent Valuation

"From Exxon to BP: Has Some Number Become Better Than NoNumber?" by Catherine L. Kling, Daniel J. Phaneuf and Jinhua Zhao

On March 23, 1989, the Exxon Valdez ran aground in Alaska'sPrince William Sound and released over 250,000 barrels of crude oil, resultingin 1300 miles of oiled shoreline. The Exxon spill ignited a debate about theappropriate compensation for damages suffered, and among economists, a debateconcerning the adequacy of methods to value public goods, particularly when thegood in question has limited direct use, such as the pristine naturalenvironment of the spill region. The efficacy of stated preference methodsgenerally, and contingent valuation in particular, is no mere academic debate.Billions of dollars are at stake. An influential symposium appearing in thisjournal in 1994 provided arguments for and against the credibility of thesemethods, and an extensive research program published in academic journals hascontinued to this day. This paper assesses what occurred in this academicliterature between the Exxon spill and the BP disaster. We will rely ontheoretical developments, neoclassical and behavioral paradigms, empirical andexperimental evidence, and a clearer elucidation of validity criteria toprovide a framework for readers to ponder the question of the validity ofcontingent valuation and, more generally, stated preference methods.
Full-Text Access | Supplementary Materials
"Contingent Valuation: A Practical Alternative WhenPrices Aren't Available," by Richard T. CarsonA person may be willing to make an economic tradeoff toassure that a wilderness area or scenic resource is protected even if neitherthat person nor (perhaps) anyone else will actually visit this area. Thistradeoff is commonly labeled "passive use value." Contingentvaluation studies ask questions that help to reveal the monetary tradeoff eachperson would make concerning the value of goods or services. Such surveys are apractical alternative approach for eliciting the value of public goods,including those with passive use considerations. First I discuss the ExxonValdez oil spill of March 1989, focusing on why it is important to measuremonetary tradeoffs for goods where passive use considerations loom large.Although discussions of contingent valuation often focus on whether the methodis sufficiently reliable for use in assessing natural resource damages inlawsuits, it is important to remember that most estimates from contingentvaluation studies are used in benefit–cost assessments, not natural resourcedamage assessments. Those working on benefit–cost analysis have long recognizedthat goods and impacts that cannot be quantified are valued, implicitly, bygiving them a limitless value when government regulations preclude certainactivities, or giving them a value of zero by leaving certain consequences outof the analysis. Contingent valuation offers a practical alternative forreducing the use of either of these extreme choices. I put forward anaffirmative case for contingent valuation and address a number of the concernsthat have arisen.Full-Text Access | Supplementary Materials
"Contingent Valuation: From Dubious to Hopeless," by Jerry HausmanApproximately 20 years ago, Peter Diamond and I wrote anarticle for this journal analyzing contingent valuation methods. At that timePeter's view was that contingent valuation was hopeless, while I was dubiousbut somewhat more optimistic. But 20 years later, after millions of dollars oflargely government-funded research, I have concluded that Peter's earlierposition was correct and that contingent valuation is hopeless. In this paper,I selectively review the contingent valuation literature, focusing on empiricalresults. I find that three long-standing problems continue to exist: 1)hypothetical response bias that leads contingent valuation to overstatements ofvalue; 2) large differences between willingness to pay and willingness toaccept; and 3) the embedding problem which encompasses scope problems. The problemsof embedding and scope are likely to be the most intractable. Indeed, I believethat respondents to contingent valuation surveys are often not responding outof stable or well-defined preferences, but are essentially inventing theiranswers on the fly, in a way which makes the resulting data useless for seriousanalysis. Finally, I offer a case study of a prominent contingent valuationstudy done by recognized experts in this approach, a study that should be onlyminimally affected by these concerns but in which the answers of respondents tothe survey are implausible and inconsistent.Full-Text Access | Supplementary Materials
Symposium on China's Economy

"The End of Cheap Chinese Labor," by Hongbin Li, Lei Li, Binzhen Wu and Yanyan XiongIn recent decades, cheap labor has played a central role inthe Chinese model, which has relied on expanded participation in world trade asa main driver of growth. At the beginning of China's economic reforms in 1978,the annual wage of a Chinese urban worker was only $1,004 in U.S. dollars. TheChinese wage was only 3 percent of the average U.S. wage at that time, and itwas also significantly lower than the wages in neighboring Asian countries suchas the Philippines and Thailand. The Chinese wage was also low relative to productivity.However, wages are now rising in China. In 2010, the annual wage of a Chineseurban worker reached $5,487 in U.S. dollars, which is similar to wages earnedby workers in the Philippines and Thailand and significantly higher than thoseearned by workers in India and Indonesia. China's wages also increased fasterthan productivity since the late 1990s, suggesting that Chinese labor isbecoming more expensive in this sense as well. The increase in China's wages isnot confined to any sector, as wages have increased for both skilled andunskilled workers, for both coastal and inland areas, and for both exportingand nonexporting firms. We benchmark wage growth to productivity growth usingboth national- and industry-level data, showing that Chinese labor was keptcheap until the late 1990s but the relative cost of labor has increased sincethen. Finally, we discuss the main forces that are pushing wages up.Full-Text Access | Supplementary Materials
"Labor Market Outcomes and Reforms in China," by Xin MengOver the past few decades of economic reform, China's labormarkets have been transformed to an increasingly market-driven system. Chinahas two segregated economies: the rural and urban. Understanding the shiftingnature of this divide is probably the key to understanding the most importantlabor market reform issues of the last decades and the decades ahead. From1949, the Chinese economy allowed virtually no labor mobility between the ruraland urban sectors. Rural-urban segregation was enforced by a householdregistration system called "hukou." Individuals born in rural areasreceive "agriculture hukou" while those born in cities are designatedas "nonagricultural hukou." In the countryside, employment and incomewere linked to the commune-based production system. Collectively owned communesprovided very basic coverage for health, education, and pensions. In cities,state-assigned life-time employment, centrally determined wages, and acradle-to-grave social welfare system were implemented. In the late 1970s,China's economic reforms began, but the timing and pattern of the changes werequite different across rural and urban labor markets. This paper focuses onemployment and wages in the urban labor markets, the interaction between theurban and rural labor markets through migration, and future labor marketchallenges. Despite the remarkable changes that have occurred, inheritedinstitutional impediments still play an important role in the allocation oflabor; the hukou system remains in place, and 72 percent of China's populationis still identified as rural hukou holders. China must continue to ease itsrestrictions on rural–urban migration, and must adopt policies to close thewidening rural-urban gap in education, or it risks suffering both a shortage ofworkers in the growing urban areas and a deepening urban-rural economic divide.Full-Text Access | Supplementary Materials
"Understanding China's Growth: Past, Present, and Future," by Xiaodong ZhuThe pace and scale of China's economic transformation haveno historical precedent. In 1978, China was one of the poorest countries in theworld. The real per capita GDP in China was only one-fortieth of the U.S. leveland one-tenth the Brazilian level. Since then, China's real per capita GDP hasgrown at an average rate exceeding 8 percent per year. As a result, China'sreal per capita GDP is now almost one-fifth the U.S. level and at the samelevel as Brazil. This rapid and sustained improvement in average livingstandard has occurred in a country with more than 20 percent of the world’spopulation so that China is now the second-largest economy in the world. I willbegin by discussing briefly China's historical growth performance from 1800 to1950. I then present growth accounting results for the period from 1952 to 1978and the period since 1978, decomposing the sources of growth into capitaldeepening, labor deepening, and productivity growth. But the main focus of thispaper will be to examine the sources of growth since 1978, the year when Chinastarted economic reform. Perhaps surprisingly, given China's well-documentedsky-high rates of saving and investment, I will argue that China’s rapid growthover the last three decades has been driven by productivity growth rather thanby capital investment. I also examine the contributions of sector-levelproductivity growth, and of resource reallocation across sectors and acrossfirms within a sector, to aggregate productivity growth. Overall, gradual andpersistent institutional change and policy reforms that have reduceddistortions and improved economic incentives are the main reasons for theproductivity growth.Full-Text Access | Supplementary Materials
"Aggregate Savings and External Imbalances in China," by Dennis Tao Yang
Over the last decade, the internal and externalmacroeconomic imbalances in China have risen to unprecedented levels. In 2008,China's national savings rate soared to over 53 percent of its GDP, whereas itscurrent account surplus exceeded 9 percent of GDP. This paper presents aunified framework for understanding the structural causes of these imbalances.I argue that the imbalances are attributable to a set of policies andinstitutions embedded in the economy. I propose a unified framework forunderstanding the joint causes of the high savings rate and external imbalancesin China. My explanations first focus on an array of factors that encouragedsaving across the corporate, government, and household sectors, such aspolicies that affected sectoral income distribution, along with factors likeincomplete social welfare reforms, and population control policies. I then turnto policies that limited investment in China, thus preventing the high savingsfrom being used domestically. Finally, I will examine how trade policies, suchas export tax rebates, special economic zones, and exchange rate policies,strongly promote exports. Moreover, the accession of China to the World TradeOrganization has dramatically amplified the effects of these structuraldistortions. In conclusion, I recommend some policy reforms for rebalancing theChinese economy.Full-Text Access | Supplementary Materials
"How Did China Take Off?" by Yasheng Huang
There are two prevailing perspectives on how China took off.One emphasizes the role of globalization—foreign trade and investments andspecial economic zones; the other emphasizes the role of internal reforms,especially rural reforms. Detailed documentary and quantitative evidenceprovides strong support for the second hypothesis. To understand how China'seconomy took off requires an accurate and detailed understanding of its ruraldevelopment, especially rural industry spearheaded by the rise of township andvillage enterprises. Many China scholars believe that township and villageenterprises have a distinct ownership structure—that they are owned andoperated by local governments rather than by private entrepreneurs. I will showthat township and village enterprises from the inception have been private andthat China undertook significant and meaningful financial liberalization at thevery start of reforms. Rural private entrepreneurship and financial reformscorrelate strongly with some of China's best-known achievements—povertyreduction, fast GDP growth driven by personal consumption (rather than bycorporate investments and government spending), and an initial decline ofincome inequality. The conventional view of China scholars is right about onepoint—that today's Chinese financial sector is completely state-controlled. Thisis because China reversed almost all of its financial liberalization sometimearound the early to mid 1990s. This financial reversal, despite its monumentaleffect on the welfare of hundreds of millions of rural Chinese, is almostcompletely unknown in the West.Full-Text Access | Supplementary Materials

Other Articles

"Amy Finkelstein: 2012 John Bates Clark Medalist," by Jonathan Levin and James Poterba
Amy Finkelstein is the 2012 recipient of the John BatesClark Medal from the American Economic Association. The core concerns of Amy'sresearch program have been insurance markets and health care. She has addressedwhether asymmetric information leads to inefficiencies in insurance markets,how large social insurance programs affect healthcare markets, and thedeterminants of innovation incentives in health care. We describe a number ofAmy's key research contributions, with particular emphasis on those identifiedby the Honors and Awards Committee of the American Economic Association in herClark Medal citation, as well as her broader contributions to the field ofeconomics.Full-Text Access | Supplementary Materials
"Retrospectives: Irving Fisher's Appreciation andInterest (1896) and the Fisher Relation," by Robert W. Dimand and Rebeca Gomez BetancourtIrving Fisher's monograph Appreciation and Interest (1896)proposed his famous equation showing expected inflation as the differencebetween nominal interest and real interest rates. In addition, he drew attentionto insightful remarks and numerical examples scattered through the earlierliterature, and he derived results ranging from the uncovered interestarbitrage parity condition between currencies to the expectations theory of theterm structure of interest rates. As J. Bradford DeLong wrote in this journal(Winter 2000), "The story of 20th century macroeconomics begins withIrving Fisher" and specifically with Appreciation and Interest because"the transformation of the quantity theory of money into a tool for makingquantitative analyses and predictions of the price level, inflation, andinterest rates was the creation of Irving Fisher." I discuss the messageof Appreciation and Interest, and assess how original he was.Full-Text Access | Supplementary Materials
"Recommendations for Further Reading," by Timothy TaylorFull-Text Access | Supplementary Materials