The March 2019 JEL has published a review of my co-authored (joint with Siqi Zheng of MIT) 2016 Princeton Press book: Blue Skies Over Beijing: Economic Growth and the Environment in China.  The book and its first chapter can be found here.

Our book asks big questions;

1.  Why did China become so polluted?

2.  Why do Chinese urbanites increasingly demand "blue skies"?

3.  In the distinctive Chinese Communist System, do local and national officials have incentives to respond to the growing desire for blue skies?

4.  How do China's different cities compete against each other for jobs and people?

5.  How does the system of cities create a menu of locational possibilities for people who cannot directly vote for their leaders?

The least innovative part of the book is our discussion of the supply of pollution.  We know that burning coal and industrialization and the usual scale effects have driven the rise of pollution.

Throughout the book, we bring together ideas from environmental and urban economics to discuss the local and global environmental costs associated with China's economic growth.

When you walk around U.S universities, you see thousands of Chinese students.  The future of China's economy is as a human capital, skills economy.  People's quality of life and productivity is directly injured by exposure to local pollution.  Even in a nation where people do not directly vote, the rising new cohorts of educated worldly people seek out higher amenities.  In the past in China, pollution was a byproduct of economic growth.  Moving forward, pollution will hinder urban economic growth because polluted cities will not attract and retain the skilled. Beijing as a capital city is special because o the monopoly power of the Central Government but even there --- there is pressure for progress.

Our book's chapters on the national and the local government's incentives to supply blue skies builds on our 2014  paper published in RSUE and my co-authored 2015 paper in AEJ.    I don't think that our reviewer did a good job discussing our contributions there.  This book is targeted for a general audience and our interviews with mayors brought out interesting nuances that reduced form research cannot reveal.

I have the sense that many Western Readers do not want to hear evidence that quality of life is improving in Communist China.  Such quality of life progress lowers the likelihood of regime change.  If life is miserable under a dictatorship, then change is more likely to take place.   Conservatives have deep military concerns with respect to China and progressives have deep civil rights concerns with China.  Good news about China doesn't sell but does that mean that the progress cannot and should be discussed?

While city quality of life has soared in recent years, everyone recognizes that traffic congestion in major cities continues to be a major problem.  While many are deeply concerned about climate change, we have not implemented a carbon tax. While many are concerned about the challenge of building new housing in productive cities, we have not changed local land use rules that create the NIMBY effect and discourage new construction.

So, in the case of traffic, pollution and housing construction --- it is clear to economists what policies ar needed to address inefficiency.  Unlike a dentist (whose advice is often listened to), the economists who advocate road pricing, carbon taxes, and eased red tape on developers all are facing the challenge of implementing their ideas.

Without road pricing, traffic congestion grows worse at  a time when our value of time continues to rise.   Without carbon pricing, the risk of extreme climate change rises.  Without encouraging developers to build, home prices rise in productive cities.  This enriches incumbents but prices out young people (especially those whose parents aren't wealthy). 

The obvious explanation for this slow pace of policy reform are income effects.  The people who will lose from these policy changes recognize that they will lose and they are using their political clout to block these changes.  A wise economist who seeks to implement these efficiency enhancing reforms needs to devise a policy to offset these income effects. In the case of the carbon tax, economists talk about tax and dividend such that people will receive a share of the tax revenue collected.  Reasonable questions can be asked concerning whether it is credible that these dividend checks will continue to be paid or will future governments keep the revenue for pet projects and to conveniently cover future deficits?   Second, the actual dividend that each household will need to offset the income effect will differ by household depending on where the family lives, the family's occupation and lifestyle.   For example, a Houston family who lives 25 miles from the city and whose portfolio is invested in fossil fuel companies will need a larger dividend check than a San Francisco Tofu eating downtown resident who codes for a living and invests in a socially responsible index fund.

The public policies listed above both seeks to change the prices people face but also to shift property rights.  The incumbent rights holders want to keep their property rights and this is what slows down the policy reform.  Who has the property rights here? 

As I think back to my economics training, we studied how markets allocate goods given that property rights are well defined. If I own a left shoe, then I must buy a right shoe.   In the real world, much of the policy debate is scrambling for who has the property rights to different scarce goods.  In the case of roads, the atmosphere and land, a tragedy of the commons is playing out.

A Tiebout optimist would say that if a city could get its rules right,  then such a city would attract workers and firms and it would grow and it would serve as a guinea pig signalling to other mayors what they could achieve if they introduced "good rules".  This was the Charter Cities logic.

An optimist would also point out that when cities face fiscal deficits that they will see out new sources of revenue and taxation of roads, pollution, and payments from developers all generate such revenue.  I am still looking for cases in which mayors implemented policy reforms that enhanced the efficiency of their city.

There is an analogue in macroeconomics.  When nations have a deficit, do they allow  inflation to take place or do they make tough budget cuts?  Different interest groups have different goals here.  When does efficiency enhancing policy emerge?