Year: 2013

It sounds like the plot-line from a crime-caper-gone-wrong movie, but Canada\’s global strategic maple syrup reserve was drained of $18 million worth of syrup last fall. robbed last fall. Jacqueline Deslauriers tells the story in \”Liquid Gold,\” in the June 2013 issue of Finance & Development. She tells the story (citations omitted for readability) :

\”Although its value to the Canadian economy may pale in comparison with, say, wheat or soybeans, maple syrup trumps the vast wheat fields of Manitoba and Saskatchewan when it comes to Canadian cultural identity. It is for good reason that the maple leaf is Canada’s best-known symbol. Canadians’ deep attachment to this exotic food shapes their attitude toward protecting the price farmers receive for producing maple syrup.­ … Maple trees, the source of maple syrup, grow naturally in eastern North America. Canada produces 80 percent of the world’s supply of maple syrup, and the province of Quebec, where the heist took place, accounts for 90 percent of Canada’s production …

\”The Federation of Quebec Maple Syrup Producers was set up in 1966 to represent and advocate for producers—most of them dairy farmers who supplemented their income by tapping maple trees. By the 1990s, maple syrup output had grown rapidly, and by 2000 the industry was producing a surplus of between 1.3 and 2 million gallons a year. Because maple syrup is so easily stored, in bumper years the 80 licensed maple syrup buyers from Canada and three U.S.-based buyers stocked up at low prices, and bought less during lean years when prices tended to be higher. By and large, farmers were at the mercy of the buyers. …

\”Things changed in 2001, when a bumper crop of almost 8.2 million gallons of maple syrup sent prices plunging. That prompted producers to change the federation from an advocacy group to a marketing board that could negotiate better prices with the buyers. … The new-look federation also began to store surplus production to keep prices from plunging.  Initially, individual farmers were free to produce as much as they wanted.  But another bumper crop in 2003 resulted in so much syrup, much of which had to be stored, that the industry decided to control production by imposing quotas on individual producers.­…  Because production has been lean in the past few years, producers currently can sell 100 percent of their quota. If there are a few bumper crop years, the cartel can reduce the amount that farmers are permitted to sell.­

Any output that cannot be sold must be transferred to the federation’s reserve. Producers do not receive payment for this excess production until the federation sells it…. Maple syrup is sold from the reserve when current production does not meet the demand from authorized buyers. In 2009, after four dismal years of production, the global maple syrup reserve ran dry. Since then production has bounced back and the reserve is overflowing.­…

The $18 million theft was from one of three warehouses the federation uses to stash excess production and was discovered in mid–2012 during an audit of the warehouse contents. The warehouse, about 60 miles southwest of provincial capital Quebec City, was lightly guarded—in retrospect, perhaps, too lightly guarded. The thieves set up shop nearby, and over the course of a year, according to police, made off with roughly 10,000 barrels of maple syrup—about 323,000 gallons, or about 10 percent of the reserve. Because one gallon of Quebec maple syrup looks like any other gallon of the product, consumers had no way of distinguishing the federation-approved product from stolen syrup. And some buyers may not have cared.­

It appears the thieves attempted to unload their booty to buyers in other Canadian provinces and the United States. Officers from the Royal Canadian Mounted Police, the Canada Border Services Agency, and U.S. Immigration and Customs Enforcement helped the Quebec provincial police with their investigation. Police arrested three suspects in December 2012 and 15 more soon thereafter. Those arrested faced charges of theft, conspiracy, fraud, and trafficking in stolen goods. Police have recovered two-thirds of the stolen syrup.­\”

Teachers of economic in search of a new and lively example might stick a fork in the maple syrup example. I\’ve poured attention on maple syrup issues in the past. Back in September 2012, I posted on \”The Great Maple Syrup Theft: A Supply and Demand Story.\”

When I was getting my feet wet in economics back in the late 1970s and early 1980s, it was conventional wisdom that the share of national income going to labor fluctuated a bit from year to year, but didn\’t display a rising or falling trend over time. But the stability of labor\’s share no longer holds true. The Internation Labour Organization discusses some of the data in Chapter 5 if its Global Wage Report 2012/13 on the theme of \”Wages and equitable growth.\” Here, I\’ll provide a few background charts, and then some thoughts. The ILO report summarizes some of the evidence this way:

\”The OECD has observed, for example, that over the period from 1990 to 2009 the share of labour compensation in national income declined in 26 out of 30 developed economies for which data were available, and calculated that the median labour share of national income across these countries fell considerably from 66.1 per cent to 61.7 per cent … Looking beyond the advanced economies, the ILO World of Work Report 2011 found that the decline in the labour income share was even more pronounced in many emerging and developing countries, with considerable declines in Asia and North Africa and more stable but still declining wage shares in Latin America.\”

Here\’s the labor share of income in the U.S., Germany, and Japan. For example, the U.S  labor share of income (shown by the triangles) hover around 68-70% of GDP through the 1970s, and even by the mid-1980s is near the bottom end of this range, but has declined since.

Here\’s a figure showing patterns for several groups of emerging and developing economies. The longest time series, shown by the darker blue diamonds, is an average for Mexico, South Korea, and Turkey.

And what about China? Labor share is declining there, too.

One of the results of the declining labor share of the economy is that as productivity growth increases the size of economies, the amount going to labor is not keeping up. Here\’s a figure showing the divergence in output and labor income that has opened up since 1999 for developed economies. The results here are weighted by the size of the economy, so the graph largely reflects the experience of the three biggest developed economies: the U.S., Japan, and Germany.

What can be said about this pattern of a declining labor share? 
 
1) When a trend cuts across so many countries, it seems likely that the cause is something cutting across all countries, too. Looking for a \”cause\” based on some policy of Republicans or Democrats in the U.S. almost certainly misses the point. The same is true of looking for a \”cause\” based in policies more common in Europe, or in China.

2) The causes are still murky, but one possible answer can be pretty much ruled out. The declining labor share is not caused by a shift from labor-intensive to more capital-intensive industries–because the trend toward a lower labor share is happening across all industries. The difficulty is that the other possible explanations are interrelated and hard to disentangle. They include technological change, globalization, the rise of financial markets, altered labor market institutions , and a decline in the bargaining power of labor. But after all, technological changes in  information and communication technology are part of what has fed globalization, as well as part of what led to a rise of the financial sector. Globalization is part of what has reduced the bargaining power of labor.The ILO report offers some evidence that the rise of the financial sector is a substantial part of the answer. Here\’s a post from a couple of weeks ago on the growth of the U.S. financial sector.

3) The flip side of a lower share of national income going to labor is a higher share of income going to capital. The ILO report argues that in many countries, this pattern seems to involve rising dividend payments. 

4) While understanding causes is useful, policies don\’t always have to address root causes. When someone is hit by a car, you can\’t reverse the cause, but you can still address the consequences. However, it\’s worth remembering that the falling share of labor income has been happening all over the world, in countries with a very wide range of different policies and economic institutions. For example, European labor market institutions are often thought of as being more worker-friendly, but they haven\’t prevented a fall in the labor share of income.

5) It\’s important to remember that the falling share of labor income is different from a rising level of wage inequality. The share of income going to labor as a whole is falling, and also a greater share of labor income is going to those at the highest levels of income. Both trends mean that those with lower- and middle-incomes are having a tougher time.

What would it cost to take large steps to reduce the extinction risk of all globally endangered species? Donal P. McCarthy and a list of 15 other authors estimate \”Financial Costs of Meeting Global Biodiversity Conservation Targets: Current Spending and Unmet Needs\” in the November 16, 2012, issue of Science magazine (which isn\’t freely available on-line, although many academics will have access through a library subscription). Here is their summary:

\”World governments have committed to halting human-induced extinctions and safeguarding important sites for biodiversity by 2020, but the financial costs of meeting these targets are largely unknown. We estimate the cost of reducing the extinction risk of all globally threatened bird species … to be U.S. $0.875 to $1.23 billion annually over the next decade, of which 12% is currently funded. Incorporating threatened nonavian species increases this total to U.S. $3.41 to $4.76 billion annually. We estimate that protecting and effectively managing all terrestrial sites of global avian conservation significance (11,731 Important Bird Areas) would cost U.S. $65.1 billion annually. Adding sites for other taxa increases this to U.S. $76.1 billion annually. Meeting these targets will require conservation funding to increase by at least an order of magnitude.\”

I\’ll leave the details of their methodology to the article, but basically it uses a combination of expert estimates of conservation costs, and then using them as a basis for modeling that includes information on forests, breeding, and size of local economies.

The estimate surprised me a bit, because it\’s more-or-less one-tenth of 1% of the global economy–a very large amount, but not an unthinkably large amount. However, my guess is that the practical issues of protecting and managing biodiversity-protection areas may be much larger than the straight monetary cost implies.

For those who want some additional discussion of biodiversity issues, the journal Wildlife Research has a recent issue with eight articles on \”Prioritisation and Evaluation of Biodiversity Projects\” that seek in various ways to tackle the \”Noah\’s Ark\” problem–that is, if the world isn\’t going to do all of what it could to conserve biodiversity, how should priorities be set?  And here\’s are some summary statistics from  the IUCN [International Union for the Conservation of Nature] Red List of Endangered Species.

From an American perspective,  a legal right to paid vacation sounds like a peculiar and impractical hypothetical. For other high-income countries in the world, it\’s the law. Rebecca Ray, Milla Sanes, and John Schmitt lay out the facts in \”No-Vacation Nation Revisited,\” written for the Center for Economic and Policy Research.

The dark-blue columns show the statutory minimum number of paid vacation days. The light-blue lines show national paid holidays. The zero at the far-right-side for either one is the United States.

Here is  table showing the numbers behind the figure.

Ray, Sanes, and Schmitt sum it up this way:

 \”The United States is the only advanced economy in the world that does not guarantee its workers paid vacation. European countries establish legal rights to at least 20 days of paid vacation per year, with legal requirements of 25 and even 30 or more days in some countries. Australia and New Zealand both require employers to grant at least 20 vacation days per year; Canada and Japan mandate at least 10 paid days off. The gap between paid time off in the United States and the rest of the world is even larger if we include legally mandated paid holidays, where the United States offers none, but most of the rest of the world\’s rich countries offer at least six paid holidays per year.\”

\”In the absence of government standards, almost one in four Americans has no paid vacation (23 percent) and no paid holidays (23 percent). According to government survey data, the average worker in the private sector in the United States receives only about ten days of paid vacation and about six paid holidays per year: less than the minimum legal standard set in the rest of world\’s rich economies excluding Japan (which guarantees only 10 paid vacation days and requires no paid holidays). The paid vacation and paid holidays that employers do make available are distributed unequally. According to the same government survey data, only half of low-wage workers (bottom fourth of earners) have any paid vacation (49 percent), compared to 90 percent of high-wage workers (top fourth of earners).\”

In my Principles of Economics textbook, I include a little table comparing average annual hours worked across countries, based on OECD data. Here\’s the figure with 2011 data (with thanks to Dianna Amasino):

Of course, more vacation time is not a free lunch. One reason why per capita GDP is lower in these other high income countries than in the United States is the average U.S. worker spends more hours on the job. There are political economy issues, too: it makes my economist\’s skin crawl to imagine Congress and a president happily handing out paid vacation days to all, with little concern for the tradeoffs. But on the other side, it\’s also true that many of the rules that govern employment, and vacation time, are based in tradition and an implicit agreement about what a \”job\” will mean, not the result of a free-form multidimensional negotiation between employers and potential employees. It can be quite difficult for an individual, especially one seeking a low-skilled job, to negotiate even for flexible hours, much less for paid vacation or company-paid health insurance.

As an American, the idea of a legal right to paid vacation is gap in hours worked is outside my personal experience. I am honestly not sure that I would be emotionally comfortable cutting my workload by, say, six or seven weeks per year. It feels to me as if such a change would reshape my personal relationship to work in ways that I cannot really anticipate. But I wouldn\’t mind seeing the federal government add a few more national holidays. Most employers would treat them as vacation, and accommodate without much trouble. School districts would do the same, allowing families to plan some time together. And many workers who don\’t get the day off would at least get a pay boost if they end up working on a federal holiday.

\”[L]et me wrap up economics while I\’m at it. Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much. However, careful economic analysis does have one important benefit, which is that it can help kill ideas that are completely logically inconsistent or wildly at variance with the data. This insight covers at least 90 percent of proposed economic policies.\”

So says Ben Bernanke in his recent commencement address at Princeton University. Sure, his advice is a little tongue-in-cheek, but there\’s a serious edge to it.

I\’ve sometimes tried to make a similar point, in a less elegant way: For any public policy problem, one can usually list a few dozen possible courses of action, ranging from passive inactivity to revolutionary change, with 50 shades of gray in between. Arguing over which choice is the \”best\” is often not all that productive, because our analytical tools often aren\’t sharp enough to be fully persuasive that, say, the #2 option is definitively better than the #4 option. But if our political system could reliably choose from, say, the top half-dozen options on the list, while avoiding the worst options in the bottom half of the list, it would be a genuine step forward for public policy.

Here are the three ages of financial globalization, according to the Global Development Horizons report from the World Bank on the theme \”Capital for the Future: Saving and Investment in an Interdependent World\”  (as usual, citations and footnotes are omitted for readability). 

 \”During the First Age of Financial Globalization, starting in the second half of the 19th century, large amounts of capital were directed from European countries to the New World, mostly for investment in railways, real estate, and large-scale agricultural projects. By the start of World War I in 1914, more than one-quarter of British wealth was invested outside of Great Britain, mainly in foreign government securities and railroads. In 1913, almost half of Argentine and one-fifth of Australian capital stock was owned by foreign investors in Europe. This age wound down as European countries dramatically reversed their nondefense capital outflows during World War I …

\”Progress toward full capital market liberalization among developed countries took a large step forward in the post–Bretton Woods period, which may be regarded as the Second Age of Financial Globalization. Obligations under the Organisation for Economic Co-operation and Development’s Code of Liberalization were broadened to include virtually all capital movements, including short-term transactions by enterprises and individuals. Rapid globalization in the financial industry in the 1990s and 2000s brought even more dramatic change to the landscape of the global financial system, not only encouraging steep increases in cross-border capital fl ows as money market instruments, forwards, swaps, and other derivatives were created, but also allowing developing countries to be integrated into the global financial system in earnest.

At present, the world appears to be in a transition into a Third Age of Financial Globalization. The beginnings of this shift would likely have occurred in the early 2000s as developing countries became more integrated into the global fi nancial system and capital inflows to them became significant in absolute terms for the first time. The trend became more noticeable during the global financial crisis, when gross inflows of capital to developing countries declined much less than inflows to advanced countries … [D]eveloping countries will likely account for a steadily increasing share of inflows in the future—a continuation of the trend that began in the precrisis years.\”

Here are some graphs to illustrate this Third Age of Financial Globalization. Let\’s start by looking at investment. The first graph shows total gross investment: the amount done in developing countries has almost already caught up with that done in high-income countries. The second graph shows the same information as a share of global investment: developing countries hovered at about 20% of total global investment from the 1960s up through about 2000, but now are close to half of total investment. The third graph shows the annual investment rate. While the investment rate in  developing countries has been higher since about 1980, the lines for developing and high-income economies really start diverging around 2000. 

Now switch over to the savings side. The top graph shows that world saving as a share of global income hasn\’t changed much since 1980, but the share of that saving coming from developing countries has risen dramatically.

Sure, a substantial share of this change is the savings and investment patterns in China, but it shouldn\’t be dismissed on those grounds. First, saying that anything is \”just about China\” is a peculiar way of talking about what is headed toward being the world\’s largest economy. Second, the trend toward more saving and investment is also happening across the rest of the developing countries, although the trend isn\’t as pronounced. The first graph shows the share of investment relative to total global output for developing countries, and then for developing countries without China and India. The second graph shows savings rates for developing countries as a whole, and then without China and without the other BRIICs (that is, Brazil, Russia, India, Indonesia, and China).

A few decades ago, it was common to be taught that low-income countries were trapped by their low rates of saving and investment, and their inability to attract foreign capital. Maybe the trap was real a few decades ago, but it\’s a trap that is being shattered in this Third Age of Financial Globalization.

The Spring 2013 issue of  Future of Children is a symposium on \”Postsecondary Education in the United States.\” There are thoughtful articles on costs, returns, student support, for-profit education, financial aid, and other issues. My eye was particularly caught by \”E-learning in Postsecondary Education,\” by Bradford S. Bell and Jessica E. Federman. \”During the fall 2010 term 31 percent of U.S. college students took at least one online course,\” report Bell and Federman. The percentage is surely rising. At this point, stripping away the hype about what might be possible someday, what do we know about the effectiveness of e-learning and the likely challenges it faces?

What is the evidence on effectiveness of e-learning?

The evidence on e-learning as compared to conventional teaching is a mess to interpret. In some studies, students are not randomly assigned to either the e-learning or conventional alternative, and so the quality of students may differ. In other cases, comparing an e-learning class that, say, requires a quiz every week to a conventional class with a midterm and a final may tell you more about the value of weekly quizzes than about e-learning itself. Thus, Bell and Federman turn to \”meta-analyses,\” which is the term for studies that look at the results of dozens or hundreds of different studies, and thus can make statistical adjustments for what kind of e-learning is being done, how it is being evaluated, characteristics of students and teachers,and so on. The overall theme is that e-learning often does just as well as conventional learning. Here are summary statements about a few of the meta-analyses: I\’ll first give the citation for the study, and then use Bell and Federman\’s words to summarize the findings. 

Robert M. Bernard and others, “How Does Distance Education Compare with Classroom Instruction?
A Meta-Analysis of the Empirical Literature,” Review of Educational Research 74 (2004): 379–80.

Bell and Federman: \”In summary, the meta-analysis revealed no significant overall difference between e-learning and traditional instruction in terms of overall achievement, but more negative student attitudes toward synchronous e-learning and higher dropout rates in asynchronous e-learning.\” This study considers both  \”asynchronous (mostly correspondence and online courses, in which students participate at different times) and synchronous (mostly teleconferencing and
satellite-based delivery, in which all students participate simultaneously).\”

Traci Sitzmann and others, “The Comparative Effectiveness of Web-Based and Classroom Instruction: A Meta-Analysis,” Personnel Psychology 59 (2006): 623–64.

Bell and Federman: \”[W]eb-based instruction was 6 percent more effective than traditional classroom
instruction for teaching declarative knowledge (facts and principles), but not procedural knowledge (rules and procedures) or student reactions. Used as a supplement to classroom instruction (blended learning), web-based instruction was 13 percent more effective than classroom instruction for declarative knowledge and 20 percent more effective for procedural knowledge. … Indeed, the authors found web-based and classroom instruction equally effective for teaching declarative knowledge when the instructional methods used in both were equivalent. They attribute the small overall advantage of web-based instruction to its use of more (and more effective) instructional
methods, rather than to the delivery media per se.\”

Barbara Means and others, Evaluation of Evidence-Based Practices in Online Learning: A Meta-Analysis and Review of Online Learning Studies, report prepared for the U.S. Department of Education, Office of Planning, Evaluation, and Policy Development (Washington: U.S. Department of Education, September 2010).

Bell and Federman: \”[Students who took a course online did not perform significantly differently than those taking the same course through traditional face-to-face instruction. Students in courses that combined online and face-to-face instruction (blended learning) had stronger learning outcomes than
did those in face-to-face instruction alone. Both instructor-directed and collaborative and interactive online instruction (both fully online and blended) led to stronger outcomes than classroom instruction, but outcomes in independent online learning and face-to-face instruction had no significant difference.\”

Traci Sitzmann, “A Meta-Analytic Examination of the Instructional Effectiveness of Computer-Based
Simulation Games,” Personnel Psychology 64 (2011): 489–528.

Bell and Federman: \”Simulation games were more effective than lectures, assignments, and readings, but less effective than computerized tutorials. Trainees learned more from simulation games when they had unlimited access to the games (presumably leading to more time spent learning) and when
the games were embedded in a program of instruction (blended learning). In fact, when simulation games were the sole instructional method, trainees in the comparison group learned more than those in the simulation game group. Finally, in studies that matched the simulation and comparison groups in terms of the activity level of instruction, learning was similar across conditions. Once again, this finding suggests that the learners in the simulation games condition may have been advantaged not because of the delivery media per se, but rather because they often received more active instruction than those in the comparison group.\”

I was a little surprised at the findings of these meta-analyses, given that they are looking at studies of e-learning as it existed several years ago. I suspected that e-learning would catch up with classroom learning at some point, but it may already have done so. I\’m probably not alone in being surprised: \”A survey of the general public conducted by the Pew Research Center using a nationally representative sample of 2,142 adults found that only 29 percent believe online courses are as valuable educationally as courses taken in the classroom.\”

Given the tone of these  study results, Bell and Federman argue that the issue is no longer whether e-learning can be effective. Clearly, it can be. The issue is now one of instructional design: that is, what characteristics of a particular course are especially important. They write:

\”[S]tudies designed to evaluate the effectiveness of a particular e-learning technology are of limited value. Indeed, any form of instruction can be effective if it is able to create the conditions necessary for students to learn specific content. … Empirical research is also shifting away from evaluating whether e-learning works and toward examining the instructional features that influence its effectiveness. Rather than comparing different forms of delivery such as e-learning versus classroom, studies are beginning to compare e-learning programs that differ on important instructional dimensions, including interactivity, engagement and activity, and feedback.\” 

Along with this focus on specific instructional features, what are some of the other main questions facing e-learning at the college level? Here are three that I took away from the essay.

How to deal with cheating? In a pure online course, how do you know who is at the other end of the screen answering questions? One can imagine various security measures, like having a camera snap a series of photos at random times during an exam (but what if someone is whispering answers from off-camera), or having student take their exams in a campus testing center.

What about students who are uncomfortable or unprepared for e-learning? Students learn in all kinds of ways, some by reading, some by listening, some by talking in study groups, some by writing out answers by hand, and so on. Some students won\’t do well with e-learning, either because it\’s just not their thing, or because they don\’t yet have a high comfort level with computers in general. Some students will learn the material quickly in any format. But figuring out how to make e-learning work for as broad an audience as possible, and thinking about alternative versions of e-learning for different audiences, is a big task.

Does e-learning  save money? A lot of the hope of e-learning is that it will provide education less expensively, but at least so far, that doesn\’t seem to be true. Bell and Federman: \”[F]ew institutions believe e-learning reduces their costs, and, in fact, most believe that online courses are at least as expensive to provide as traditional courses. This perspective is based largely on the significant start-up costs of e-learning, including investments in technology, course design, and the training of instructors, but also on recurring costs, such as those that result from increased coordination demands and technical support.\”

Maybe the high costs of e-learning are mainly start-up costs? Maybe as technology improves, the costs will come down and the effectiveness will go up? Maybe some kinds of e-learning courses, after they are developed, can then be scaled up to very large numbers of students ? On the other side, e-learning is going to keep offering new capabilities, which are sure to be expensive to develop, and likely to be costly to maintain. If e-learning is to have the desired qualities and outcomes, it won\’t come cheap.

ADDED: For answers to the three questions above from Daniel Lemire, a computer science professor with considerable experience in on-line teaching, see here. 

The Global Wage Report 2012/13 from the International Labour Organization has this useful figure comparing minimum wages across high-income countries.

The horizontal axis shows the minimum wage as a percentage of the median wage for the country. By this measure, the U.S. minimum wage ranks among the lowest in the world at less than 40% of the median wage, although comparable to Japan and Spain. France and New Zealand have a minimum wage that is about 60% of the median wage.

The vertical axis shows the minimum wage converted to dollars (using the purchasing power parity exchange rate). By this measure, the U.S. minimum wage is middle-of-the-pack, above Japan and similar to Canada, although well below the United Kingdom, France, Australia, and Netherlands.

For a post on how the minimum wage affects employment and prices, see my February 2013 post on \”Minimum Wage and the Law of Many Margins.\”  For a post on proposals to raise the minimum wage, see my November 2012 post on \”Minimum Wage to $9.50? $9.80? $10?\”

The original Kuznets curve posited, back in 1955, that inequality of incomes would follow an inverted-U pattern as a nation\’s economy developed, first rising, and then declining. In 1955, this looked reasonable! The \”environmental Kuznets curve\” suggests that pollution may follow an inverted-U pattern as a nation\’s economy develops. Pollution first rises as a low income nation industrializes with few limitations on pollution. But then the nation becomes better-off and more able and willing to pay the costs of limiting pollution, and the nation\’s economy shifts from industry to services, and pollution levels fall. For a useful overview article, Susmita Dasgupta, Benoit Laplante, Hua Wang, and David Wheeler wrote on \”Confronting the Environmental Kuznets Curve\” in the Winter 2002 issue of the Journal of Economic Perspectives. (Like all articles in JEP, it is freely available online compliments of the American Economic Association. Full disclosure: I\’ve been the Managing Editor of JEP for the last 26 years.)

Of course, the environmental Kuznets curve is a theory that needs to be supported or refuted with evidence, not a law of nature like the boiling point of water, and it\’s a theory that is under ongoing discussion and debate. And the experience of China, with its burgeoning economy and extraordinary environmental issues, is at the center of the debate. Dasgupta, Laplante, Wang, and Wheeler offer a summary of some possible outcomes in this diagram.

The conventional environmental Kuznets is that emissions of pollutants rise up until some level between about $5000 and $8000 in per capita income, and then fall after that point. There is some historical evidence to support this claim. However, skeptics suggest that even if some pollutants are reduced, new toxic materials are often created that continue to increase. Or perhaps a \”race to the bottom\” will occur, in which pollution levels first rise, but then society becomes unwilling to act to reduce pollution, for fear that economic activity will decline or depart, and so pollution doesn\’t fall.

On the other side, optimists point out that countries which are currently industrializing can draw on the anti-pollution technology and legislative experience of other countries, and thus may be able to find ways to increase pollution by less than historical experience, and have the peak of the environmental Kuznets curve at a lower level of per capita income.

According to the World Bank, China\’s per capita GDP was $5,445 in 2011, so it is just reaching the levels where its pollution should first start to level off, and then to decline. Sam Hill has published a report called \”Reforms for a Cleaner, Healthier Environment in China\” as a working paper for the OECD economics department. It can be read for free on-line via a clunky browser here.

China\’s environmental problems have enormous costs. Hill writes (citations omitted): \”Combined health costs from PM [particulate matter] and water pollution reached nearly 4% of GNI by the late 2000s. The cost of CO2 emissions … together with material damage from air pollution and soil nutrient depletion, adds some 2.5% of GNI. Incorporating additional costs associated with energy and mineral depletion brings the total costs of environmental degradation to around 9% of GNI.\” With costs this high, even cold-blooded analysis by those who do not hug trees in their spare time will justify a greater degree of environmental protection.

Interestingly, there are signs that for some pollutants, the level of pollution is no longer rising with the growth of China\’s economy. For example, here\’s a figure about air pollution. The top line shows the growth of GDP. Emissions of  sulfur dioxides and soot have not been rising with GDP, and even emissions of carbon dioxide have been lagging behind the rise in GDP in the last few years.

Here\’s a similar figure for water pollution. Chemical oxygen demand (COD) measures the level of organic pollutants in water. Both that measure and wastewater are at least not rising at the same pace as GDP.

It remains true that China\’s amount of pollution relative to its economic output is high by the standards of high income countries. Here\’s a graph showing measured for sulfur dioxide and nitrogen oxides. The following graphs show a measure for carbon dioxide. China\’s pollutants relative to its level of GDP remain high in part because its economy is just starting a transition from manufacturing to services, and in part because environmental rule and regulations in China are looser and more lightly enforced.

The policy prescription for reducing pollution in China is clear enough: close down older facilities, and make sure their replacements have up-to-date anti-pollution equipment; keep building sewage treatment facilities; put a price on polluting activities to encourage conservation; and so on. Sam Hill\’s paper has details.

But ultimately, China\’s path along the environmental Kuznets curve will be determined by politics and public pressure, and public pressure in China does seem to be building for stronger environmental protection.  The (wonderfully named) Elizabeth C. Economy at the Council of Foreign Relations recently wrote a brief piece on \”China’s Environmental Politics: A Game of Crisis Management,\” which notes the growing number of environmental public protests in China. In a society under such a high degree of government control, environmental protests can become a place where those discontented with government have a semi-safe space for  dissent.

The Richmond Fed publishes an insightful \”Interview\” with Christopher Carroll in its magazine Econ Focus for the First Quarter of 2013. Here are a few highlights:

Why the national savings rate matters

\”What the saving rate is ultimately about is the aggregate capital stock and aggregate national wealth. You’re not going to put much of a dent in that with two or three years of a low saving rate. But if a country’s saving rate is low for 20 or 30 years, then you end up a lot poorer. I do think that before the crisis our saving rate was lower than is wise or sustainable. … One way of saying a little bit more about that is to look at a longer history for countries that have been in a reasonably stable developed equilibrium for a long time. Most such countries tend to have personal saving rates somewhere
in the 5 percent to 8 percent range. I think when our saving rate gets below that range for a sustained period of time, that’s something that one ought to worry about.\”

Why don\’t fast-growing countries borrow instead of save?

\”The theory in every textbook says that if you know you’re going to be richer in the future because you’re a fast-growing country, why in the world would you save now, when you’re poor, making your future rich self better off? It makes much more sense to borrow now since it’ll be easy for you to pay off that debt in the future when you’re richer. The latest example that’s on everybody’s minds is, of course, China, a country that has grown very fast for the last 20 years and has had a saving rate that just seems to get higher every year. …  But what China is doing right now actually looks virtually identical to Japan 30 years ago. Japan didn’t have a particularly high saving rate in the 1950s, and by the 1970s it had the highest saving rate in the world, and that was a period of high growth in Japan. It’s also true in South Korea. It grew at a very rapid rate starting from the early 1960s, and its saving rate went up and up. We also see this in Taiwan, Singapore, and Hong Kong. And it’s not just East Asian countries; the same is true of Botswana and Mauritius. It’s also true in the opposite direction for European countries, which were growing pretty fast after World War II. …  So it seems to be a pretty pervasive, large effect that is really very much the opposite of what you’d expect from the standard off-the-shelf models. … In fact, what I really think is the right story is one that combines habit formation and a precautionary motive, such that they intensify each other. If I have these habits, then a good reason to resist spending when my income goes up is uncertainty over whether the factory that I’m working for will close down and I’ll have to go back to my rural peasant roots.\”

Why people let their employer choose their retirement savings rate

\”There’s an impressive body of new research that finds that people’s retirement saving decisions are very much influenced by the default choices in their retirement saving plan. … [In a recent paper, the] authors had data that basically covered the entire population of Denmark; 45 million data points, and they could see people for 15 years. They found that if an employer has a default 401(k) contribution rate of 6 percent, 85 percent of people will just go with 6 percent, rather than changing the contribution rate or opting out. If the default is 10 percent, then 85 percent of people will go with 10 percent. I think the evidence for default contributions is just overwhelmingly persuasive. That is a really big challenge to the economists’ standard modeling approach, which is to say that people rationally figure out how much they need to have when they retire and they figure out a rational plan to get there. …

\”The explanation I proposed at the conference was to say that, within some range, people trust that their employer has figured this out for them. The job of the human resources department is to figure out what my default contribution ought to be, and it would be too hard to solve this problem myself, so I’m just going to trust that somebody else has done it. It’s not different from when you take an airplane and you trust that the FAA has made sure that it’s safe, or when you go to the doctor and you trust that the advice makes sense and is not going to poison you. Maybe people trust that the default option is going to be a reasonable choice for them. … If people are going to trust the employer to make a good decision, we ought to make some effort to give the employer the incentives to actually make that good decision.\”

Carroll was a senior economist at the Council of Economic Advisers in 2008-09. Why doesn\’t the president offer the best possible economic arguments in his speeches?

\”The CEA tends to vet speeches that the president and sometimes other officials are going to make, and to help set the priorities for what’s going to be in the speeches. A number of times we would help to reshape the speech to make sure that key points were highlighted, and the arguments that we thought were the soundest economic arguments were made. And then the president would go out and give the speech, and I would later hear from economist friends, who would write to me complaining, “Why didn’t the president say this obvious point in the speech that he just made?” And that obvious point was the thing that the CEA had deliberately made sure was actually a highlight of the speech! But, of course, what your friend actually sees is the 15 seconds that gets excerpted on the news or some blogger’s two-paragraph reaction to the president’s speech. … The president has a greater ability to express his point of view and get it heard than any other single person. But I think the extent to which even the president can’t penetrate through the fog of information and the vast number of sources of data that people pay attention to is underappreciated.\”