16 Aralık 2012 Pazar

China's Economic Growth: A Different Storyline

To contact us Click HERE
When I chat with people about China's economic growth, I often hear a story that goes like this: The main driver's behind China's growth is that it uses a combination of cheap labor and an undervalued exchange rate to create huge trade surpluses. The most recent issue of my own Journal of Economic Perspectives includes a five-paper symposium on China's growth, and they make a compelling case that this received wisdom about China's growth is more wrong than right.

For example, start with the claim that China's economic growth has been driven by huge trade surpluses. China's major economic reforms started around 1978, and rapid growth took off not long after that. But China's balance of trade was essentially in balance until the early 2000s, and only then did it take off. Here's a figure generated using the ever-useful FRED website from the St. Louis Fed.

How does China's pattern of trade balances line up with argument about China's undervalued exchange rate? Here's a graph showing China's exchange rate over time in yuan/dollar. Thus, an upward movement on the graph means that yuan is weaker relative to the dollar, and a downward movement means that it is stronger relative to the dollar. The yuan does indeed get weaker relative to the U.S. dollar for much of the 1980s and first half of the 1990s--but this is the time period when China's trade balance is near-zero. China's exchange rate is pretty much unchanging for the five years or so before China's trade surplus takes off. Since 2006, the yuan has indeed been strengthening. Last week the yuan hit a record high against the dollar since 1994.

What about China's purportedly cheap wages? Here's a figure from the article by Hongbin Li, Lei Li, Binzhen Wu, and Yanyan Xiong, called "The End of Cheap Chinese Labor." As the figure points out, China's wages were fairly during much of the 1980 and 1990s, which is the time when China's trade was nearly in-balance. But whether the conversion is done using yuan/dollar exchange rates or by inflation in China (measured by the producer price index), wages in China have been rising at double-digit annual rates since the late 1990s. In other words, China's big trade surpluses of the last decade have co-existed with sharply rising wages.

Clearly, China's pattern of economic growth since the start of its reforms needs a different storyline than the basic tale of low wages, a cheap currency, and big trade surpluses. After working with these authors, my own view is that it's useful to think of China's economy since about 1978 in two main stages--although there isn't a clean-and-clear break between them.

The first stage of China's growth that went through the 1980s and a bit into the early 1990s was really about rural areas.  Yasheng Huang makes this argument strongly in his JEP article "How Did China Take Off?" Huang writes: "China’s take-off in economic growth starting in the late 1970s and its poverty reduction for the next couple of decades was completely a function of its rural developments and its internal reforms in general. During the golden era of rural industry in the 1980s, China had none of what are often thought of as the requisite features of the China growth model, like massive state-controlled infrastructural investments and mercantilism." This was the time period when the agricultural sector was allowed to operate under a market framework, and as agricultural output exploded, rural workers moved to employment in the "township and village enterprises." Huang makes a strong argument that these enterprises should be thought of a privately owned firms, operating with what was in many ways a private-sector financial market.


But in the 1990s, the emphasis of China's economy began to change. New leaders favored urban development over rural development, and they cut the township and village enterprises down to size by re-nationalizing their sources of finance They began to reform the money-losing state-owned enterprises that still dominated China's urban economy as of the early 1990s. They moved China toward joining the World Trade Organization, which happened in 2001. For a sense of the transition in China's urban areas to private sector employment, here's another useful figure from Li, Li, Wu and Xiong:

But this process of change brought an unexpected macroeconomic imbalance. As Dennis Tao Yang point out in his JEP paper, "Aggregate Savings and External Imbalances in China," China's 11th Five-Year Plan for the years from 2006-2010 called for trade to be in balance overall--clearly an expectation that was not close to being met. Yang looks at a variety of reasons why savings rates took off in China: for example, after China joined the WTO in 2001, exports took off, but firms lacked useful ways in China's underdeveloped financial system to pass these savings to the household sector; as exports took off, China's government received an unexpectedly huge surplus, with budget surpluses upward of 8% of GDP; and households, concerned about retirement and health costs for themselves and their families, and with little access to loans for mortgages or consumer durables, continued to save at very high rates. Yang notes that in China, this combination of outcomes is sometimes criticized as the "Nation Rich, People Poor" policy.

Thus, although China's economy continues to grow rapidly, it is faced with many challenges. Along with the macroeconomic imbalances emphasized by Yang, Xin Meng raises another cluster of issues in her paper, "Labor Market Outcomes and Reforms in China": the extraordinary back-and-forth migration from rural to urban areas, now at well over 100 million people per year, and perhaps headed much higher; the growing inequalities in wages as labor markets move away from the administratively determined wages that were so common even just 20 years ago; the inequalities being created by the spread of education; and China's coming demographic bulge with many elderly and few young workers--a hangover of the one-child rules to limit population growth.

With little effort, one can compile quite a list of economic difficulties facing China: macroeconomic imbalances, an underdeveloped financial sector, inequalities in wages and across rural and urban areas, the demographic bulge, corruption, environmental problems, and more. Still, with all that said, it's worth remembering that China's economy still has enormous potential upside. China started from such a low per capita GDP back in 1978 that even now, productivity levels are only about 20% of the U.S. level. In yet another JEP paper, "Understanding China’s Growth: Past, Present, and Future," Xiaodong Zhu points out that when Japan and Korea and Taiwan had their rapid spurts of economic growth int he 1950s and 1960s and 1970s, they were essentially raising their productivity levels from 40-50% of the U.S. level up to 70-80% of the U.S. level. In other words, China is still far below the level that was the take-off point of rapid growth for countries like Japan, Korea and Taiwan. As Zhu points out, China is making enormous investments in education, physical capital investment, and research and development. In many ways, it is laying a framework for continued growth.

Surely, many things could go wrong for China's economy. For continued growth, it will need to transform its economy again and again. But it also seems to me that hundreds of millions of people in China have developed a sense of possibility, and of what their economic lives could hold for them. China's future growth is sure to have fits and starts, like every country, but its economy continues ot have enormous momentum toward a much higher standard of living.

Why Doesn't Someone Undercut Payday Lending?

To contact us Click HERE
A payday loan works like this: The borrower received an amount that is typically between $100 and $500. The borrower writes a post-dated check to the lender, and the lender agrees not to cash the check for, say, two weeks. No collateral is required: the borrower often needs to show an ID, a recent pay stub, and maybe a statement showing that they have a bank account. The lender charges a fee of about $15 for every $100 borrowed. Paying $15 for a two-week loan of $100 works out to an astronomical annual rate of about 390% per year. But because the payment is a "fee," not an "interest rate," it does not fall afoul of state usury laws. A number of state have passed legislation to limit payday loans, either by capping the maximum amount, capping the interest rate, or banning them outright.

But for those who think like economists, complaints about price-gouging or unfairness in the payday lending market raise an obvious question: If payday lenders are making huge profits, then shouldn't we see entry into that  market from credit unions and banks, which would drive down the prices of such loans for everyone? Victor Stango offers some argument and evidence on this point in "Are Payday Lending Markets Competitive," which appears in the Fall 2012 issue of Regulation magazine.
Stango writes:

"The most direct evidence is the most telling in this case: very few credit unions currently offer payday loans. Fewer than 6 percent of credit unions offered payday loans as of 2009, and credit unions probably comprise less than 2 percent of the national payday loan market. This “market test” shows that credit unions find entering the payday loan market unattractive. With few regulatory obstacles to offering payday loans, it seems that credit unions cannot compete with a substantively similar product at lower prices.

"Those few credit unions that do offer a payday advance product often have total fee and interest charges that are quite close to (or even higher than) standard payday loan fees. Credit union payday loans also have tighter credit requirements, which generate much  lower default rates by rationing riskier borrowers out of the market. The upshot is that risk-adjusted prices on credit union payday loans might be no lower than those on standard payday loans."
The question of whether payday lending should be restricted can make a useful topic for discussions or even short papers in an economics class. The industry is far more prevalent than many people recognize. As Stango describes:

"The scale of a payday outlet can be quite small and startup costs are minimal compared to those of a bank. ... They can locate nearly anywhere and have longer business hours than banks. ... There are currently more than 24,000 physical payday outlets; by comparison there are roughly 16,000 banks and credit unions in total (with roughly 90,000 branches). Many more lenders offer payday loans online. Estimates of market penetration vary, but industry reports suggest that 5–10 percent of the adult population in the United States has used a payday loan at least once."


Payday lending fees do look uncomfortably high, but those with low incomes are often facing hard choices. Overdrawing a bank account often has high fees, as does exceeding a credit card limit. Having your electricity or water turned off for non-payment often leads to high fees, and not getting your car repaired for a couple of weeks can cost you your job.

Moreover, such loans are risky to make. Stango cites data that credit unions steer away from making payday loans because of their riskiness, and instead offer only only much safer loans that have lower costs to the borrower, but also have many more restrictions, like credit checks, or a longer application period, or a requirement that some of the "loan" be immediately placed into a savings account. Credit unions may also charge an "annual" fee for such a loan--but for someone taking out a short-term loan only once or twice in a year, whether the fee is labelled as "annual" or not doesn't affect what they pay. Indeed, Stango cites a July 2009 report from the National Consumer Law Center that criticized credit unions for offering "false payday loan `alternatives'" that actually cost about as much as a typical payday loan.

Stango also cites evidence form his own small survey of payday loan borrowers in Sacramento, California, that many of them prefer the higher fees and looser restrictions on payday loans to the lower fees and tighter restrictions common on similar loans from credit unions. Those interested in a bit more background might begin with my post from July 2011, "Could Restrictions on Payday Lending Hurt Consumers?" and the links included there.



The BP Spill: What's the Monetary Cost of Environmental Damage?

To contact us Click HERE
 In April 2010, the BP Deepwater Horizon oil drilling rig suffered an explosion followed by an enormous oil spill. Here, I'll first lay out the question of much BP is likely to end up paying as a result of the spill, a number which is gradually being clarified by the passage of time and evolution of lawsuits. But beyond the question of what is going to happen, economists face a controversy about how best to place a dollar value on these kinds of environmental damages--and the most recent issue of my own Journal of Economic Perspectives has a three-paper symposium on the "contingent valuation" method.
A couple of weeks ago, Attorney General Eric Holder announced at a press conference in New Orleans: "BP has agreed to plead guilty to all 14 criminal charges – admitting responsibility for the deaths of 11 people and the events that led to an unprecedented environmental catastrophe.  The company also has agreed to pay $4 billion in fines and penalties. This marks both the single largest criminal fine – more than $1.25 billion – and the single largest total criminal resolution – $4 billion – in the history of the United States."
But as Nathan Richardson of Resources for the Future points out, the criminal penalty is a small slice of what BP will end up paying: "But remember that this criminal settlement is only a small part of BP’s liability. Earlier this year, BP reached a preliminary $7.8b class settlement with a large number of private plaintiffs (fishermen, property owners, etc.) harmed by the spill. That agreement is currently under review by a federal district court judge. This is in addition to $8b in payments made to private parties who agreed not to litigate (from BP’s oil spill “fund”). Future payments to private parties are likely as claims on the fund are resolved or as those who were not part of the class settlement pursue separate claims. BP also claims to have paid out $14b in cleanup costs.
But that’s not all. BP still must face civil suit from the federal government (and states) over natural resources damages. ... BP also faces civil penalties under the Clean Water Act, which would quadruple from $5.5b to $21b if gross negligence is found. In other words, BP will pay out the largest criminal settlement in U.S. history and it will be only a small share of its total liability."

I don't have anything new to say about the parade of events leading up to the spill, nor about the halting efforts to stop the flow and start a clean-up. For details on what happened, a useful starting point is the report from the National Commission on the BP Deepwater Horizon  Oil Spill and Offshore Drilling  that was released in January 2011. From the Foreword of that report: "The explosion that tore through the Deepwater Horizon drilling rig last April 20 [2010], as the rig’s
crew completed drilling the exploratory Macondo well deep under the waters of the Gulf of
Mexico, began a human, economic, and environmental disaster. Eleven crew members died, and others were seriously injured, as fire engulfed and ultimately destroyed the rig. And, although the nation would not know the full scope of the disaster for weeks, the first of more than four million barrels of oil began gushing uncontrolled into the Gulf—threatening livelihoods, precious habitats, and even a unique way of life. ... There are recurring themes of missed warning signals, failure to share information, and a general lack of appreciation for the risks involved.... But that complacency affected government as well as industry. The Commission has documented the weaknesses and the inadequacies of the federal regulation and oversight, and made important recommendations for changes in legal authority, regulations, investments in expertise, and management."

In editing the Fall 2012 issue of my own Journal of Economic Perspectives, I found myself focused on a narrower issue: How does one put a meaningful economic number on widespread environmental damage. The issue has three papers focused on a method called "contingent valuation," which involves using survey results to estimate damages. Catherine L. Kling, Daniel J. Phaneuf and Jinhua Zhao offer an overview of the disputes and issues surrounding this method. Then, Richard Carson makes the case that contingent valuation methods have developed sufficiently to be an accurate  estimating technique, while Jerry Hausman offers a skeptical view that contingent valuation surveys are so fundamentally flawed that their results should be completely disregarded. As usual, all JEP articles from the most recent back to the first issue in 1987 are freely available on-line, compliments of the American Economic Association.

From an economic perspective, the fundamental difficulty here is that not all the environmental damages affect economic output. A major oil spill, for example, affects production directly in industries like fishing and tourism and other industries directly, but it also affects birds and fish and beaches in ways that don't show up as a drop in economic output. In the economics literature, these losses are sometimes know as "passive use value." The notion is that even if I never visit the Gulf Coast around Louisiana and Mississippi, nor eat fish caught there, my utility can be affected by the environmental destruction that occurred. Thus, the argument goes that economic theory should take this "passive use" into account--roughly, the value that people place on the environmental damage that occurred--in thinking about lawsuits and policy choices.

The immediate objections to contingent value methods of setting such values are obvious: If people are just asked to place a value on environment damage, isn't it plausible that their answers will be untethered by reality? Richard Carson, a strong advocate of these methods, faces such skepticism head-on. He writes: "Economists are naturally skeptical of data generated from responses to survey questions—and they should be! Many surveys, including contingent valuation surveys, are inadequate." He also argues, "The best contingent valuation surveys are among the best survey instruments currently being administered while the worst are among the worst."

Carson emphasizes that a high-quality contingent valuation survey takes considerable care to provide what can be several dozen pages of focus-group-tested information to consider, and emphasizes to the responders that the results of the survey are likely to help guide policy outcomes. In such a setting, he argues that people have the information and incentives to answer truthfully. Hausman responds that such surveys are plagued by difficulties: for example, the "hypothetical bias" that people tend to overstate their value when they aren't actually paying; or that valuations can vary according to how questions are phrases, like whether the question asks about willingness-to-pay to avoid environmental damage or willingness-to-accept that the same amount of environmental damage will be done; or that when people value, say, three projects separately or the combination of those three projects, their answers often don't add up. Carson discusses how those who carry out such surveys seek to deal with these issues and others. Hausman says that legislatures, regulatory agencies, and courts, relying on expert opinion, are by far a preferable way to take passive use value into account. Kling, Phaneuf and Zhao point out that over 7,000 of these contingent valuation studies have been done in the last two decades, provide a background and framework for thinking about all of these issues. Of course, those who want all the ins and outs and gory details are encouraged to check out the articles themselves. 



To my knowledge, no contingent valuation surveys of the costs of the BP oil spill have yet been published. But it is interesting that after the Exxon Valdez spill, the eventual settlement roughly matched the estimates of the contingent valuation study. As Richard Carson notes: "Soon after the Exxon Valdez spill in March 1989, the state of Alaska funded a contingent valuation study, contained in Carson, Mitchell, Hanemann, Kopp, Presser, and Ruud (1992), which estimated the American public’s willingness to pay to avoid an oil spill similar to the Exxon Valdez at about $3 billion. The results of the study were shared with Exxon and a settlement for approximately $3 billion was reached, thus avoiding a long court case." As contingent valuation studies of the BP spill are published, it will be interesting to compare them with the amounts that BP is paying in the aftermath of the Deepwater Horizon spill.

Supplemental Security Income: Where the Program Stands

To contact us Click HERE
I have sometimes said that Supplemental Security Income, or SSI, is the federal program to those who are both old and low-income. But while that was an OK if inaccurate shorthand a few decades ago, its no longer appropriate. SSI does cover the low-income elderly, but it also covers those who are low-income from ages 18-64 with disabilities, and also disabled children under the age of 18 in low-income household. Back in 1980, about half of those receiving benefits were in the over-65 low-income. But at present, only 25 percent of the people covered by SSI are elderly, and they receive only 19 percent of the payments from this program. The Congressional Budget Office offers this and other facts about the program in its just-released report: "Supplemental Security Income: An Overview."

Here a figure from CBO showing the three main groups in the SSI program, and how their numbers have evolved over time.


Given this shift in SSI toward those who are disabled, an obvious question is how SSI relates to the other other main federal program for those with disabilities, the Social Security Disability Insurance program. For a quick overview of that program with some suggestions for reform, see this post from August 2011 on "Disability Insurance: One More Trust Fund Going Broke." The CBO report explains the practical differences in this way:

"Social Security Disability Insurance (DI), the other major federal program that provides cash benefits to people with disabilities, uses the same disability standard for working-age adults that applies in SSI, but it differs from SSI in several respects. For example, DI is available only to adults (and their dependents) who have a sufficient record of work, but past work is not a requirement for SSI eligibility. DI also places no limits on beneficiaries’ income or assets, but SSI recipients must have low income and few assets. In addition, DI is funded primarily by means of a dedicated payroll tax, but SSI is funded out of general revenue."

 Here's a quick overview of eligibility rules for the three main groups in the SSI program. For those in the single largest category of age 18-64, low-income, and disabled, the rules look like this:

"To qualify for SSI, those recipients must demonstrate that their disability prevents them from participating in “substantial gainful activity,” which in 2012 is considered to mean work that would produce earnings of more than $1,010 a month. (That amount is adjusted annually for average wage growth.) Older adults are more likely than younger adults are to receive payments: Fewer than 2 percent of people between the ages of 18 and 29 receive payments; slightly more than 3 percent of people between the ages of 50 and 64 do. Especially among younger adults, eligibility for the program is determined most commonly on the basis of mental disability: Three-quarters of participants ages 18 to 39 were awarded payments primarily because of a mental disorder. That share declines with age, as conditions such as spinal  disorders and heart disease become more prevalent. Among SSI recipients between the ages of 60 and 64, for example, one-third receive payments because of mental disorders, one-quarter receive payments because of musculoskeletal disorders, and one-tenth receive payments because of circulatory disorders ... The share of adults ages 18 to 64 receiving SSI payments has increased over time, rising from slightly more than 1 percent of the population 30 years ago to more than 2 percent today."

For children to qualify for SSI, here are the standards:

"Children who qualify for SSI must be disabled and, in most cases, must live in a household with low income and few assets. To be considered disabled, a child must have a physical or mental impairment that results in marked and severe functional limitations and that is either expected to last for at least 12 consecutive months or to result in death. Most child recipients—three-quarters of recipients
between the ages of 5 and 17 and one-third of those under the age of 5—qualify because of a mental disorder.

And for the elderly, the rules for SSI are based on low income. The low-income elderly rely less  on SSI than they used to in part because of broader participation in Social Security -- for example, more women with an earnings history that brings non-negligible amount of Social Security payments--and also because of how Social Security benefits have been indexed to rise with inflation over time.

"People age 65 or older can qualify for SSI on the basis of low income and assets alone; they need not be disabled. As a result, people in that age group are more likely than younger people are to qualify for the program; about 2.1 million, or 5 percent of the elderly population, do. (About half of those recipients qualified as disabled recipients before they turned 65.)

"The share of the aged population that receives payments has fallen by more than half since 1974 because of the increase in the share of that population eligible for Social Security and because of the real (inflation-adjusted) increase in the average Social Security benefit. Many more women now have had sufficient earnings to qualify for Social Security benefits based on their own work. In addition, the Social Security benefits that each new group of beneficiaries receives are linked to average wages in the economy, which generally increase faster than SSI benefits, which are linked to prices. As more people qualified for Social Security benefits and as the benefit amounts rose, fewer people met SSI’s income standard."


The SSI program will cost about $53 billion this year. Over the last 20 years or so, spending on the program expressed as a share of GDP is fairly flat.

As with any program oriented to those with disabilities or with low incomes, I'm sure there should be a continual process of re-considering just how "disability" is defined and what incentives to work at least part time are being provided by the benefit structure. But this program isn't one where I would expect even a fairly rabid budget-cutter to find substantial spending cuts.


Why Lobbyists Get Paid

To contact us Click HERE
One theory of why lobbyists get paid, the one often proffered by the lobbyists, is that the legislative arena is a complex place, and having someone who knows the ins and outs is useful. An alternative theory, often proffered by critics, is that lobbyists are paid because they deliver access to top politicians--in other words, it's not what they do, but who they know.  Both theories doubtless hold some truth, but in the December 2012 issue of the American Economic Review, Jordi Blanes i Vidal, Mirko Draca, and Christian Fons-Rosen offer some fuel for the critics in their paper "Revolving Door Lobbyists" (102:7, pp. 3731-48). The AER isn't freely available on-line, but many academics will have access through a library subscription.

Blanes i Vidal, Draca, and Fons-Rosen point out that many lobbyists went through the "revolving door," meaning that they used to work for the federal government before becoming lobbyists. "
"One important characteristic of the US lobbying industry is the extent to which it is dominated by the “revolving door” phenomenon—i.e., the movement of federal public employees into the lobbying industry. For example, 56 percent of the revenue generated by private lobbying firms between 1998 and 2008 can be attributed to individuals with some type of federal government experience. ... Reflecting this, a recent ranking of the 50 top Washington lobbyists identified 34 as having federal
government experience ..."

The authors di\ide  nto those who formerly worked directly with a member of Congress, and those who didn't. In addition, for lobbyists who worked with a member of Congress, they can look at how the revenue generated by that lobbyis changes when the member of Congress with whom they are personally connected leaves office.  They write:

"Our main finding is that lobbyists connected to US senators suffer an average 24 percent drop in generated revenue when their previous employer leaves the Senate. The decrease in revenue is out of line with preexisting trends, it is discontinuous around the period in which the connected senator exits Congress, and it persists in the long term. Measured in terms of median revenue per staffer-turned-lobbyist, this estimate indicates that the exit of a senator leads to approximately a $182,000 per year fall in revenues for each affiliated lobbyist. We also find evidence that ex-staffers are less likely to work in the lobbying industry after their connected senators exit Congress. We regard the above findings as evidence that connections to powerful, serving politicians are key determinants of the revenue that lobbyists generate."

Along the way, they point out: "The average weighted revenue per lobbyist/year ranges around $349,000 for the subgroup of congressional staffers we consider. This figure is closely in line with
the reported salaries of lobbyists in this group. For example, the Washington Post reported in 2005 that “[s]tarting salaries have risen to about $300,000 a year for the best-connected aides eager to ‘move downtown from Capitol Hill’ ” .... Obviously, our estimates are not easily extrapolated to lobbyists with no government experience, although they help to explain the fact that these lobbyists generate substantially less revenue and are known to command lower salaries."

A policy implication here is that "cooling off" periods, in which people who leave government employment are banned for a time from becoming lobbyists, might diminish this business of trading on personal access. They write: "One common instrument to regulate the revolving door phenomenon is to impose “cooling off ” periods to officials leaving public office (Ethics Reform Act of 1989; Honest Leadership and Open Government Act of 2007; for a review, see Maskell 2010). The perishable nature of ex-staffers’ assets suggests that such restrictions could in fact be quite useful to
a legislator interested in significantly decreasing the attractiveness of a lobbying career for ex–government officials."

 Back in September, I posted on "Campaign Contributions vs. Lobbying Expenses." Basically, my theme was that we would be wise to worry more about lobbyists than about campaign contributions. Year in, year out, more money is spent on lobbying than on campaign contributions, and just what happens with lobbyists behind the scenes is far more focused and secretive than what happens with contributions to a candidate or a party. 

12 Aralık 2012 Çarşamba

China's Economic Growth: A Different Storyline

To contact us Click HERE
When I chat with people about China's economic growth, I often hear a story that goes like this: The main driver's behind China's growth is that it uses a combination of cheap labor and an undervalued exchange rate to create huge trade surpluses. The most recent issue of my own Journal of Economic Perspectives includes a five-paper symposium on China's growth, and they make a compelling case that this received wisdom about China's growth is more wrong than right.

For example, start with the claim that China's economic growth has been driven by huge trade surpluses. China's major economic reforms started around 1978, and rapid growth took off not long after that. But China's balance of trade was essentially in balance until the early 2000s, and only then did it take off. Here's a figure generated using the ever-useful FRED website from the St. Louis Fed.

How does China's pattern of trade balances line up with argument about China's undervalued exchange rate? Here's a graph showing China's exchange rate over time in yuan/dollar. Thus, an upward movement on the graph means that yuan is weaker relative to the dollar, and a downward movement means that it is stronger relative to the dollar. The yuan does indeed get weaker relative to the U.S. dollar for much of the 1980s and first half of the 1990s--but this is the time period when China's trade balance is near-zero. China's exchange rate is pretty much unchanging for the five years or so before China's trade surplus takes off. Since 2006, the yuan has indeed been strengthening. Last week the yuan hit a record high against the dollar since 1994.

What about China's purportedly cheap wages? Here's a figure from the article by Hongbin Li, Lei Li, Binzhen Wu, and Yanyan Xiong, called "The End of Cheap Chinese Labor." As the figure points out, China's wages were fairly during much of the 1980 and 1990s, which is the time when China's trade was nearly in-balance. But whether the conversion is done using yuan/dollar exchange rates or by inflation in China (measured by the producer price index), wages in China have been rising at double-digit annual rates since the late 1990s. In other words, China's big trade surpluses of the last decade have co-existed with sharply rising wages.

Clearly, China's pattern of economic growth since the start of its reforms needs a different storyline than the basic tale of low wages, a cheap currency, and big trade surpluses. After working with these authors, my own view is that it's useful to think of China's economy since about 1978 in two main stages--although there isn't a clean-and-clear break between them.

The first stage of China's growth that went through the 1980s and a bit into the early 1990s was really about rural areas.  Yasheng Huang makes this argument strongly in his JEP article "How Did China Take Off?" Huang writes: "China’s take-off in economic growth starting in the late 1970s and its poverty reduction for the next couple of decades was completely a function of its rural developments and its internal reforms in general. During the golden era of rural industry in the 1980s, China had none of what are often thought of as the requisite features of the China growth model, like massive state-controlled infrastructural investments and mercantilism." This was the time period when the agricultural sector was allowed to operate under a market framework, and as agricultural output exploded, rural workers moved to employment in the "township and village enterprises." Huang makes a strong argument that these enterprises should be thought of a privately owned firms, operating with what was in many ways a private-sector financial market.


But in the 1990s, the emphasis of China's economy began to change. New leaders favored urban development over rural development, and they cut the township and village enterprises down to size by re-nationalizing their sources of finance They began to reform the money-losing state-owned enterprises that still dominated China's urban economy as of the early 1990s. They moved China toward joining the World Trade Organization, which happened in 2001. For a sense of the transition in China's urban areas to private sector employment, here's another useful figure from Li, Li, Wu and Xiong:

But this process of change brought an unexpected macroeconomic imbalance. As Dennis Tao Yang point out in his JEP paper, "Aggregate Savings and External Imbalances in China," China's 11th Five-Year Plan for the years from 2006-2010 called for trade to be in balance overall--clearly an expectation that was not close to being met. Yang looks at a variety of reasons why savings rates took off in China: for example, after China joined the WTO in 2001, exports took off, but firms lacked useful ways in China's underdeveloped financial system to pass these savings to the household sector; as exports took off, China's government received an unexpectedly huge surplus, with budget surpluses upward of 8% of GDP; and households, concerned about retirement and health costs for themselves and their families, and with little access to loans for mortgages or consumer durables, continued to save at very high rates. Yang notes that in China, this combination of outcomes is sometimes criticized as the "Nation Rich, People Poor" policy.

Thus, although China's economy continues to grow rapidly, it is faced with many challenges. Along with the macroeconomic imbalances emphasized by Yang, Xin Meng raises another cluster of issues in her paper, "Labor Market Outcomes and Reforms in China": the extraordinary back-and-forth migration from rural to urban areas, now at well over 100 million people per year, and perhaps headed much higher; the growing inequalities in wages as labor markets move away from the administratively determined wages that were so common even just 20 years ago; the inequalities being created by the spread of education; and China's coming demographic bulge with many elderly and few young workers--a hangover of the one-child rules to limit population growth.

With little effort, one can compile quite a list of economic difficulties facing China: macroeconomic imbalances, an underdeveloped financial sector, inequalities in wages and across rural and urban areas, the demographic bulge, corruption, environmental problems, and more. Still, with all that said, it's worth remembering that China's economy still has enormous potential upside. China started from such a low per capita GDP back in 1978 that even now, productivity levels are only about 20% of the U.S. level. In yet another JEP paper, "Understanding China’s Growth: Past, Present, and Future," Xiaodong Zhu points out that when Japan and Korea and Taiwan had their rapid spurts of economic growth int he 1950s and 1960s and 1970s, they were essentially raising their productivity levels from 40-50% of the U.S. level up to 70-80% of the U.S. level. In other words, China is still far below the level that was the take-off point of rapid growth for countries like Japan, Korea and Taiwan. As Zhu points out, China is making enormous investments in education, physical capital investment, and research and development. In many ways, it is laying a framework for continued growth.

Surely, many things could go wrong for China's economy. For continued growth, it will need to transform its economy again and again. But it also seems to me that hundreds of millions of people in China have developed a sense of possibility, and of what their economic lives could hold for them. China's future growth is sure to have fits and starts, like every country, but its economy continues ot have enormous momentum toward a much higher standard of living.

Why Doesn't Someone Undercut Payday Lending?

To contact us Click HERE
A payday loan works like this: The borrower received an amount that is typically between $100 and $500. The borrower writes a post-dated check to the lender, and the lender agrees not to cash the check for, say, two weeks. No collateral is required: the borrower often needs to show an ID, a recent pay stub, and maybe a statement showing that they have a bank account. The lender charges a fee of about $15 for every $100 borrowed. Paying $15 for a two-week loan of $100 works out to an astronomical annual rate of about 390% per year. But because the payment is a "fee," not an "interest rate," it does not fall afoul of state usury laws. A number of state have passed legislation to limit payday loans, either by capping the maximum amount, capping the interest rate, or banning them outright.

But for those who think like economists, complaints about price-gouging or unfairness in the payday lending market raise an obvious question: If payday lenders are making huge profits, then shouldn't we see entry into that  market from credit unions and banks, which would drive down the prices of such loans for everyone? Victor Stango offers some argument and evidence on this point in "Are Payday Lending Markets Competitive," which appears in the Fall 2012 issue of Regulation magazine.
Stango writes:

"The most direct evidence is the most telling in this case: very few credit unions currently offer payday loans. Fewer than 6 percent of credit unions offered payday loans as of 2009, and credit unions probably comprise less than 2 percent of the national payday loan market. This “market test” shows that credit unions find entering the payday loan market unattractive. With few regulatory obstacles to offering payday loans, it seems that credit unions cannot compete with a substantively similar product at lower prices.

"Those few credit unions that do offer a payday advance product often have total fee and interest charges that are quite close to (or even higher than) standard payday loan fees. Credit union payday loans also have tighter credit requirements, which generate much  lower default rates by rationing riskier borrowers out of the market. The upshot is that risk-adjusted prices on credit union payday loans might be no lower than those on standard payday loans."
The question of whether payday lending should be restricted can make a useful topic for discussions or even short papers in an economics class. The industry is far more prevalent than many people recognize. As Stango describes:

"The scale of a payday outlet can be quite small and startup costs are minimal compared to those of a bank. ... They can locate nearly anywhere and have longer business hours than banks. ... There are currently more than 24,000 physical payday outlets; by comparison there are roughly 16,000 banks and credit unions in total (with roughly 90,000 branches). Many more lenders offer payday loans online. Estimates of market penetration vary, but industry reports suggest that 5–10 percent of the adult population in the United States has used a payday loan at least once."


Payday lending fees do look uncomfortably high, but those with low incomes are often facing hard choices. Overdrawing a bank account often has high fees, as does exceeding a credit card limit. Having your electricity or water turned off for non-payment often leads to high fees, and not getting your car repaired for a couple of weeks can cost you your job.

Moreover, such loans are risky to make. Stango cites data that credit unions steer away from making payday loans because of their riskiness, and instead offer only only much safer loans that have lower costs to the borrower, but also have many more restrictions, like credit checks, or a longer application period, or a requirement that some of the "loan" be immediately placed into a savings account. Credit unions may also charge an "annual" fee for such a loan--but for someone taking out a short-term loan only once or twice in a year, whether the fee is labelled as "annual" or not doesn't affect what they pay. Indeed, Stango cites a July 2009 report from the National Consumer Law Center that criticized credit unions for offering "false payday loan `alternatives'" that actually cost about as much as a typical payday loan.

Stango also cites evidence form his own small survey of payday loan borrowers in Sacramento, California, that many of them prefer the higher fees and looser restrictions on payday loans to the lower fees and tighter restrictions common on similar loans from credit unions. Those interested in a bit more background might begin with my post from July 2011, "Could Restrictions on Payday Lending Hurt Consumers?" and the links included there.