Macroeconomics in China and the United States
Feng Lu, CCER
Macroeconomic issues in China
The year 2010 saw a slowdown in many of China's economic indicators, including credit expansion and GDP growth. Even though China's stimulus plan remained in place, certain policies were modified significantly after the second half of 2009, signaling "exit steps with China's characteristics." These exit steps include credit tightening policies, consolidating local government financial platforms, restraining excess capacity, and resuming IPOs. "Macro-adjustment-control" (MAC) tools -- aggregate, parametric, quantitative, or administrative -- still contribute to maintaining a relatively stable macroeconomic environment. Lu suggests that in the future, China may need to effectively manage aggregate demand with more flexible exchange rates and a deregulated interest rate regime.
Simon Johnson, NBER and MIT
The Financial Oligarchy in the United States
During the last four decades, governments in wealthy countries have built up large contingent liabilities because of the implicit guarantees they have provided to their financial sectors. Politicians are motivated to create near-term growth and are reluctant to permit hardships that otherwise would arise from defaults and greater austerity. As a result, the industrialized world has experienced excessive and dangerous financial sector development. Johnson reports that, including all promises, U.S. and European taxpayers currently back over 250 percent of their GDP in implicit obligations, all of which contribute to the development of moral hazard in lending around the world. If this incentive system remains in place and these liabilities continue to grow unchecked, the eventual end of this "Doomsday Cycle" with repeated bailouts for distressed lenders will be large sovereign defaults and economic collapse. Johnson feels that the current round of regulatory reform is not sufficient to stop this trend.
Exchange Rates and Economic imbalances
Kenneth D. West, NBER and University of Wisconsin, Madison
Exchange rate Economics
West explains that one way for economists to measure their understanding of the determinants of exchange rate movements is by using economic models to predict future changes in exchange rates. Unfortunately though, a naive "random walk" forecast -- which predicts that the exchange rate will not change in any future period -- often yields better predictions of exchange rates than either simple or sophisticated economic models or certain econometric techniques. This has caused many economists to conclude that we understand even less about exchange rates than we do about most other variables. However, some recent research indicates that we economists have understated our ability to predict exchange rates. Exchange rate prediction is difficult, and imprecise, but our economic models and econometric techniques do help us to predict exchange rates.
Yang Yao, CCER
Manufacturing-Finance Comparative Advantage and China's Trade Surplus
Yao proposes a new explanation for global imbalances: comparative advantage in the financial sector. More specifically, he suggests that the countries with comparative advantage in finance facilitate capital inflows, and that the wealth effect promotes domestic consumption, which leads to current account deficits. In contrast, countries with a comparative advantage in manufacturing enjoy surpluses. Western countries, such as the United States and England, have gained more advantages in the financial sector since 1970, while developing countries like China and Russia have developed faster in manufacturing. Using data on 45 countries from 1990 to 2005, Yao demonstrates that the indicator of comparative advantage in finance exerts a significantly negative effect on current account surplus. His results imply that global imbalances are a by-product of international division of labor and that if China strengthened its financial sector it might encourage capital inflows.
Binzheng Wu, Tsinghua University
Income Inequality, Status Seeking, and Consumption
Wu attempts to explain the increasingly high savings rate in China from the aspect of income inequality. Increasing income inequality enlarges the benefits of improving social status, raises the wealth threshold for joining a higher-status club, and thus strengthens the incentives for status-seeking savings. Using urban household survey data from 9 provinces from 1997 to 2006, Wu finds that even after controlling for the marginal propensity to consume, income inequality as measured by a Gini coefficient significantly reduces family consumption. This supports the status-seeking motive. Her analyses based on sub-samples also show that the status-seeking motive is much stronger for the younger and the poorer.
Chong-En Bai, Tsinghua University
Declining Share of Household Income in China
Bai explores China's declining household consumption share of GDP, which is determined by the saving propensity and the share of household income in national income. Household disposable income as reported in China's Flow of Funds Accounts (FFA) is contaminated because of overestimation of capital income, unreliable estimates of labor compensation, and underestimation of the net production tax. Adjusted estimates of household disposable income show that its share of GDP declined by 14.6 percentage points during 1996-2007, not the 10.1 percentage points in the FFA data. Over 80 percent of that decline stems from primary distribution changes that favor the corporate and government sector. Moreover, the decreasing household income share is more important than the rising saving propensity for the decline in household consumption shares since 2000.
Shang-Jin Wei, Columbia University and NBER
Global Imbalances and 'Undervalued' Currency
Deviations from purchasing power parity (adjusted for the Balassa-Samuelson effect) and large current account surpluses often are taken as evidence of an under-valued currency. Wei argues that they are not reliable criteria. A shock that raises a country's savings rate could simultaneously generate a reduction in the real exchange rate and a rise in the current account surplus. In several East Asian economies, a rise in the sex ratio in the pre-marital age cohort after 2002 produced a strong reaction in savings rates, current accounts, and real exchange rates. A preliminary analysis of the data suggests that such an effect is economically significant.
Binkai Chen, CUFE
The Cursed Virtue -- Infrastructural Investment and Household Consumption in China
Chen explores how infrastructure investment influences household consumption in China and why. Based on provincial data from 1978 to 2008, and after controlling for other covariates and possible endogeneity, he finds that government investment in infrastructure significantly reduces the household consumption share of GDP. Structural models further show that infrastructure investment stimulates the corporate sector to invest in secondary industry and lowers the share of labor income in GDP. On the other hand, it also magnifies the capital intensity of the corporate sector. These results imply that government expenditure might be more useful in consumption-enhancing areas, such as education, medical care, and social security.
Entrepreneurship and Capital Allocation
Erik Hurst, NBER and University of Chicago
Ping He, Tsinghua University
Capital Allocation and Operation Efficiency in China
He explores how financial market development promotes economic growth. Financial development, specifically improved pricing efficiency, may give a controlling shareholder more of an incentive to shape corporate governance, and thus to improve the firm's operating efficiency. In an IPO model with a controlling shareholder and outside investors, improved market efficiency through regulatory changes or increasing sophistication of investors will stimulate the entrepreneur to choose a more effective governance structure, and thus to improve operating efficiency. Taking advantage of several exogenous regulatory changes in Chinese IPO pricing mechanisms, He's empirical tests also verify this hypothesis. In sum, financial development improves capital allocation efficiency and firm operating efficiency, thus stimulating economic growth.
Banking and Consumer Finance
Peter Tufano, NBER and Harvard University
While the household sector is an important part of the global economy, there has been relatively little teaching and research on household finance issues in economics departments and business schools. An increased emphasis on household finance is warranted because in many countries, including the United States, households are not in strong financial shape. For example, nearly half of Americans claim not to be able to raise $2000 in thirty days using a combination of savings, social networks, credit, and increased work effort. The lack of confidence in dealing with everyday emergencies is correlated with individuals' reluctance to make certain life choices, including marriage. Tufano discusses a variety of interventions aimed at supporting household savings, including such research-driven innovations as tax-time refund-based savings and prize-linked savings, which have been brought into practice through changes in laws and business practices.
Yan Shen, CCER
Financial Sector Efficiency and Lending Behavior in China
China's economic structure is dominated by small and medium enterprises (SMEs), while its financial system is composed mainly of formal institutions. Indirect financing through financial intermediaries dominates direct financing. How has the financial sector supported economic growth? Shen's 2005 study demonstrated that real total loans Granger-cause GDP, but not vice versa. Her 2008 study showed that when the financial market has a lower concentration ratio, financial institutions are more efficient and perform better. Hence, lowering entry barriers to promote competition in the financial market is beneficial. Finally, if banks at a higher hierarchical level are defined as big, and RCCs as small, the empirical evidence supports smaller banks lending more to SMEs. More loan approvals, greater competition, and linking the loan manager's wage to loan quality also will induce higher lending to SMEs.
Consumer Credit and Regional Governments
Jonathan D. Levin, NBER and Stanford University
Recent Research on Consumer Credit Markets
During the last decade there was a marked acceleration of U.S. household borrowing and in-household debt-to-income ratios. The expansion of consumer credit was particularly dramatic in "subprime" markets for mortgage, auto, and unsecured loans. Both supply and demand factors may have contributed to this expansion. Levin describes recent research documenting how relaxed down payment or loan-to-value requirements might trigger substantial expansion of consumer credit demand. He then discusses the use of securitization to transform risky consumer loans into seemingly safe assets for investors, and the interaction of mortgage credit and housing prices. The discussion that followed focused on the difficult questions for regulatory policy raised by the experience of the last decade.
Li-An Zhou, GSM
Incentives of Chinese Local Officials
China has witnessed an economic miracle in the past three decades, but it lags behind in the development of economic and political institutions. These two seemingly contradictory observations may be explained by the positive role of local governments in promoting the regional economy. Strong incentives for local officials stem partly from political competition that centers on economic performance. Using information on China's Five-Year Plans and provincial leaders' characteristics, Zhou demonstrates that provincial leaders like to set GDP growth targets higher than the national benchmark, probably because of political competition. The empirical results further suggest that the Chinese central government uses the political tournament embedded in China's political system to induce strong effort by setting high growth targets and thus promoting economic growth.
Daniel Kessler, NBER and Stanford University
Kessler explained how current research in health economics contributes to three policy debates: the costs and benefits of increasing health insurance coverage; whether insurance and medical care should be supplied by private markets or governments; and the extent to which insurance should provide incentives for efficient treatment decisions versus protection from risk. He argued that the third debate is the most important one facing the United States and other high-income countries today. He concluded that research on the effects of tax policy, the use of higher-powered payment in public insurance programs, and the impact of comparative effectiveness studies all have great potential to inform this debate.
Ling Li, CCER
Healthcare in China
Li notes that between1950 and 1978, China created a low-cost and wide-coverage primary health care system and saw rapid reductions in mortality rates. However, since 1979, the health care system has deteriorated in many aspects, such as escalating medical costs and a worsening relationship between patients and doctors. Therefore, the State Council issued a health care reform plan on April 6, 2009, which promised to spend 850 billion yuan by 2011 to provide universal primary medical service for the whole country. The universal health care system would also include an essential drug system, a primary health service network, and equal access to public health care for urban and rural residents. The reform has faced many challenges, including information asymmetry and a lack of efficient measures for reforming public hospitals.
Amanda Kowalski, NBER and Yale University and Jonathan T. Kolstad, The Wharton School, University of Pennsylvania
Assessing the Impact of Health Care Mandates (Presentation based on "The Impact of an Individual Health Insurance Mandate on Hospital and Preventive Care: Evidence from Massachusetts," Jonathan T. Kolstad and Amanda E. Kowalski, NBER Working Paper No. 16012.)
In April 2006, Massachusetts passed legislation aimed at achieving near universal health insurance coverage. A key provision of this legislation, and of the national legislation passed in March 2010, is an individual mandate to obtain health insurance. Kolstad and Kowalski use hospital data to examine the impact of this legislation on insurance coverage, utilization patterns, and patient outcomes in Massachusetts. They use a difference-in-difference strategy that compares outcomes in Massachusetts after the reform to outcomes in Massachusetts before the reform, and to outcomes in other states. They embed this strategy in an instrumental variable framework to examine the effect of insurance coverage on outcomes. Among the population discharged from hospitals in Massachusetts, the reform decreased un-insurance by 28 percent relative to its initial level. Increased coverage affected utilization patterns by decreasing the length of stay and the number of inpatient admissions originating from the emergency room. They also find that outpatient care reduced hospitalizations for preventable conditions. At the same time, there is no evidence that the cost of hospital care increased. The reform affected nearly all age, gender, income, and race categories. They identify some populations for which insurance had the greatest direct impact on outcomes and others for which the impact on outcomes appears to have occurred through spillovers.
Labor and Productivity
Richard B. Freeman, NBER and Harvard University
Topics in Labor Economics
The 2008-9 banking and finance crisis and ensuing recession highlighted weaknesses in economies and in economic analysis. Prior to the disaster, many believed that labor market institutions and social protections were the weak spot of capitalism; that huge inequality was a necessary incentive for sustainable economic growth; and that finance was the crown jewel of capitalism, operating as close to an ideal market as possible. After the implosion, even the OECD recognized that increased labor flexibility did little to prevent the banking crisis from harming the real economy. Analysts of incentive pay noted that huge inequalities induced some of the excessive risk-taking and "caveat emptor" dishonesty that contributed to the disaster. Some economists identified the danger to market capitalism in the tendency for a small number of powerful institutions to dominate public policy to protect their interests -- crony capitalism. According to Freeman, the implosion and recession will cost advanced countries a decade or more of real labor problems joblessness, increased inequality, delayed careers and lower lifetime incomes, higher taxes to pay for the bank bailout and stimulus packages, and more -- and will raise the issue of whether market economies need countervailing power on the part of labor to limit the dangers of crony capitalism.
Miaojie Yu, CCER
Processing Trade, Productivity, and Firm Scope
Yu explores how processing trade, together with tariff reduction, can improve a firm's productivity. Tariff reductions generate productivity gains via competition, whereas processing exports does so via technological spillovers. Using mostly disaggregated Chinese product-level trade data and firm-level production data from 2000-2006, and after constructing firm-level tariffs based on product information and controlling for possible endogeneity, Yu finds that a 10 percent tariff decrease generates a 12 percent increase in a firm's productivity gains. In addition, processing firms enjoy significant productivity gains via spillovers, with heterogeneity across firms divided by ownership. These results imply that developing countries might retain an export-oriented development strategy in line with their comparative advantage, and that further trade liberalization might be beneficial for both producers and consumers.