The WSJ has published a great piece highlighting the wonders of free markets.  In the recent past, U.S manufacturers and consumers sent their waste to China.  China took this combination of useful elements and garbage and extracted some reusable materials such as steel.  Recently, China has announced that it will no longer accept such U.S exports of toxic materials.  Why?  Siqi Zheng and I provide an answer in this 2017 JEP paper.   

From the basic laws of supply and demand, given that China no longer demands these materials;  the equilibrium price of these used materials has fallen.  The WSJ discusses how this is creating a boom in the U.S for businesses that can think about to use this "waste".  A key idea in ecological economics is how to transform one sector's output into a productive input.  So, if a restaurant creates used cooking oil from frying food and this cooking oil can be used by a car to power it , then this is a closed loop ecological cycle. 

The article in the WSJ goes on to discuss the capital investments that the new U.S firms will need to make to effectively use the cheap recycled material as inputs in their production process. I view this piece to be highly optimistic about the nimbleness of the U.S economy in the face of changing market conditions. 

Science Magazine has published an interesting blurb about a Demography piece that claims that China's One Child Policy reduced this nation's total population by a billion people.   How?  The piece claims that by the year 2060 that there would have been an extra billion people in China in the absence of the policy!   We all agree that it is crucial to measure the causal effects of this policy but how does one do this?

There is a fundamental missing data problem.  For every woman in China during the years when the policy was in place, how many children would she have had in the absence of this constraint?  If she would have had the same number of children then the policy wasn't binding!

By estimating a structural econometrics model, one can conduct such a policy counter-factual.  Hilary Clinton only had one child.  My wife only has one child.  Some women choose to have only 1 child (even without a government restriction).

Facts:

1.  women's wages rise with education and among the highly educated,  people with STEM and quantitative degrees earn more
2.  A child's quality is an increasing function of the time that parents spend with the child.  This time effect is diluted if the parent has multiple children.
3. urbanites urban higher wages than rural people
4.  Chinese apartments in cities are highly expensive and an extra bedroom is extremely costly.

These 4 facts yield several predictions;

For the most educated urban women in China, the government's policy is less likely to bind.  For those who value child quality (having the next Einstein), the government's policy is less likely to bind.  So, this policy was really binding for farmers.  Middle class people who are urbanized are unlikely to be able to afford to have a second child.  Why?  The woman would sacrifice too much urban labor income and their rent for the two bedroom apartment would be too high.

As China's urbanization and educational attainment accelerated, the one child policy becomes less and less binding as more women aspire to be the Chinese version of Hilary Clinton.

A structural model would take a formal stand on a woman's utility function (defined over private consumption, quantity of children and quality of children) and would take an explicit stand on the production function of child quality as a function of market inputs and parental time.   By living in a city, the same person has a higher wage (and thus a higher opportunity cost of having a child) and will face higher rents for an extra bedroom.  The researcher would solve for the optimal fertility with and without the one child policy constraint. This constraint states that the family cannot have more than 1 child but if the optimal fertility is 1 child then the policy isn't binding.

My claim is that education and urbanization rise in China, this is not a binding constraint. There would not be an extra billion people in China without this policy.

For some formal academic research on fertility read these.

I am very pleased to welcome Amazon's recruiters to USC Economics.  Our talented graduate students are eager to speak to this amazing firm.   I just bought a book by Eli Broad on Amazon last night.  Our department's effort to raise the quality of our program is paying off!

The NY Times has published an excellent piece on the unintended consequences of pay for performance incentives introduced at Chinese universities.  This type of "Freakonomics" highlights several issues in modern economics.   Back in 2000, Ed Lazear wrote a clean AER paper  where he studies how productivity changes at a windshield replacement firm when it switches over to "pay for performance".  He finds that workers work harder when their compensation is tied to "output" rather than to how many hours have passed (i.e a fixed wage per hour).

In the case of research, what is "output"?  As the NY Times article highlights, China's universities have introduced a $ pay bonus system such that publications in top tier journals (think of Nature or Science) yield huge % increases in pay.  This bonus system leads young scientists to devote more effort but the Times article focuses on a second dimension of effort.  The Times argues that this incentive system contributes to cheating through faking data.

The Times article goes on to say that another problem in the Chinese system is that the universities do not have Deans who can judge excellent work. In this case, the journal editors are the judges and the journal editors can be tricked by forged data.  This issue arises in academic economics.  The senior faculty determine who is promoted in a department. If the senior faculty can "read the papers", then the journal names where the papers are published matters less because the senior faculty has the confidence to make up their own minds about the quality of the work. In contrast, if the senior faculty are insecure and don't know a field of scholarship then they will simply "count papers" weighted by the prestige of the journals where they are published.

Everyone knows that it is easier to count output than to judge its quality. In the case of Lazear's windshields, the variation in quality is small because a machine makes the windshields and then duded glue them in to the car. In the case of academia, the variance of output quality is huge. 

Competition across universities in terms of seeking to rise in the national rankings will reward those schools who show "good judgment".

In standard Principal/agent models, the agent chooses her "effort" level and effort is costly but you can imagine models that distinguish between productive effort (learning new math techniques) versus socially unproductive effort (i.e cheating).  How does the principal design a contract to encourage the former and to discourage the latter?

The Holmstrom and Milgrom (1991) model is relevant here.

Michael Bloomberg understands the Coase Theorem.  He has proposed to buy and then shut down some coal fired power plants.   Read Haarstad's 2012 JPE paper on this general topic of environmentalists purchasing coal and leaving it in the ground.  Note that this approach isn't a takings. The coal interests have the property right to use their coal but choose to sell this right. 

But, what about the coal miners and their communities?  Who is compensating them for giving up their life and traditions?  Can they easily transition and become "green jobs" workers?  Unfortunately, I do not think so.  Eyer and I discuss these points in this 2017 paper.  Such a "takings" from these workers is one cause of the Trump coalition. 

I have now completed my first two months as the Chair of USC Economics.   It is my impression that the University of Southern California fascinates outsiders.  People know that Los Angeles is a wonderful sunny city. People know that USC is a private university raising a large amount of money.  People know that there are very few strong private universities west of the Mississippi.    USC is catching up with its main rival (UCLA) and seeks to be "Stanford South".  The Football team is ranked #14 and the Economics Department is ranked #20 on Repec.

Given these points, what do I do?   I read and respond to a lot of email and I attend many meetings.  USC Economics is the largest major on campus.  I am working hard to improve our major. Some of our majors love economics while others like economics. I want to have a flexible (and challenging) major that pushes our most ambitious students while still delivering for the median student.  We are developing our network with our alumni to help place our students in great internships and jobs.   We are fleshing out offerings in computer science, economics writing, public speaking and applied econometrics to help push our students where they want to go while providing them with the rigorous tools that economics can deliver.   

Our MA program is large and we are investing to upgrade it.  A leading econometrician from Netflix will be teaching a class for us in the Spring. We are inviting in leading experts to present public lectures.

Our PHD program has traditionally been strong in econometrics, development and experimental economics.  We seek to build on this strength by broadening into environmental economics, macro/finance and political economy.   A serious PHD program both trains students well and helps them to land high quality jobs.   We will attract better students if we can deliver on this front.   We are restructuring our PHD program to improve the mentoring and the students' transition to doing independent research.

The Chairman not only works to improve the educational mission but also engages in fundraising and faculty recruiting.  As Los Angeles and USC both become increasingly desirable areas to live and work, more prominent economists are hinting to me that they want to join us in the sun.   While I would love to grow our faculty from the current size of 28 to 82, the Deans place some limits on our growth. I spend a fair bit of time talking to our Deans about our growth plan and how we will finance this growth.    We will be hiring 3 new professors this year. Our department is growing and this improves morale. 

One worry of mine is our physical location.   To maximize the intellectual synergies between the various economics units on campus, we seek to co-locate with the Marshall School in the middle of campus. For historical reasons, the Economics Department has been banished to the periphery of campus (close to a Taco Bell).   For us to maximize our potential and to build up Economics at USC to the level it has achieved at Stanford and UChicago, we need to move to the middle of campus.

I spend my time building up the internal quality of our department and engaging in outreach with successful friends of my department and by connecting with other units on campus.  There are many meetings because we have so much potential. 

I now see that the challenge a department chair faces is "toggling" back and forth between administrative functions and returning to my "real job" of writing academic papers and creating new ideas. 

I moved to USC from a nearby school because I saw its great potential.  During my two years as Chair, I want to create a momentum such that the next Chair will have the resources and the power to make the Big Push such that the department cracks into the "top 15".

Could a silver lining of the damage caused by Hurricane Maria be that migration from Puerto Rico to more productive places in the continental U.S accelerates?   While the popular media is discussing the challenge caused by "climate refugees", I have argued in the past that migrants are self interested and will look to market signals of real wages to identify which areas will value attracting them.   Here is a piece I wrote about "climate refugees" in May 2016.  Here is another one I wrote in 2014.  As migrants move to more productive places, their families will benefit and they will enrich the areas they move to by increasing the demand for local housing and by giving local employers more workers to choose among.  Yes, incumbents will face more competition for rents and wages but these general equilibrium effects are unlikely to be large.

For those who prefer to read peer reviewed economics articles (rather than blog posts), I recommend Harold Uhlig's 2011 piece about East Germany. He writes   "In this paper, I have documented the ongoing exodus from rural East Germany, especially among the young population. I have documented that wages there remain low and unemployment high, despite levels of education and training that are on par with Western Germany. To understand these facts, one must seek a model which allows agents to improve their situation by migration while at the same time keeping unemployment higher in the sending region."

In the case of Puerto Rico, social networks have anchored many people to remain in this area but these individuals are likely to have a brighter economic future if they migrate to the continental U.S.  While this transition will impose costs, it will improve their children's education and opportunities.  Many parts of the continental U.S feature low home prices and need young people to move there. There would appear to be gains to trade in the local labor markets. So, I do not foresee a "refugee crisis"?  Instead, I see a silver lining from a very painful shock.