Monday, October 31, 2005

You Can Have the Cake and Eat it Too!

Hong Kong government has recently concluded its consultation exercise on its plan to partially privatize the airport, read the consultation paper and written submissions here.

Reading the submissions is great fun, check this out...

"In going forward with any plan to privatize AA (blogger note:AA stands for Airport Authority) , it is essential that the major aim of developing and maintaining Hong Kong International Airport (HKIA) as an international aviation centre be upheld. The process has to provide genuine benefits to the people of Hong Kong at large."

If I do not tell you the identity of the organization that sent in the submission which contains the quote above, you would probably guess it is sent by some government departments that would like to support the government's case for privatizing the airport. Afterall, who else except the government concerns about protecting "the genuine benefits of the people of HK at large?

If you venture such a guess, you are....WRONG. It is Cathay Pacific, a listed private company here in Hong Kong! Read the whole thing here. The company, by the way, does not support the government's privatization plan.

Now the question is why would a for-profit company suddenly be interested in the welfare of the "people of Hong Kong at large"? And why does the company oppose privatization?

My guess is....hmmm... Cathay Pacific fears that once the airport is privatized, fees will gp up. In other words, the airport is currently under-pricing its services, so taxpayers are in fact subsidizing Cathay Pacific.

Cathay Pacific is in effect saying that hand-out from the government is a way to "provide genuine benefits to the people of Hong Kong at large". Is this Orwellian Newspeak or what? Or is it a living proof that you can have the cake and eat it too?

Sunday, October 30, 2005

Lord Peter Bauer

"Aid is a process by which the poor in rich countries subsidise the rich in poor countries."

"Aid doesn’t go to the miserable creatures you see on your television screen, it goes to the rulers. And the rulers tend to be the most prosperous people in their countries."

Will the Jeff Sachs-type ever learn the great wisdom contained in the above quotes?

The above quotes are from Lord Peter Bauer. And he also warned us that using the word "aid" is misleading, a better description is "government-to-government" transfer. Read an excellent interview of Lord Bauer by IEA's John Blundell here.

In this interview Lord Bauer also pointed out using the Marshall Plan as an example in support of aid was bogus. "There was no comparison at all between foreign aid and the Marshall Plan. The economies of western Europe had to be restored, not developed. The economies of the so-called Third World, to use a fashionable cliché, had to be developed. With Marshall aid, West Germany and western Europe had to be restored, not developed."

BTW, Lord Bauer was awarded Cato's Milton Friedman Prize for Advancing Liberty in 2002.

Thursday, October 27, 2005

Antitrust Law is Central Planning by Another Name

In a Wall Street Journal story on the recent record of antitrust enforcement in the US, it concluded that:

"These shenanigans have little economic or legal merit,
and increasingly look to be examples of antitrust lawyers
trying to justify their employment."

Read the whole story here, subscription required.

How is antitrust law cooked up? It is basically done like this: you hire a bunch of game theorists (used to be economists who know a bit of statistical analysis, now it gets more "sophisticated") and a bunch of lawyers, gather them in a room or a cubicle depending on the size of the bureau's budget and ask them what they think a particular market should operate without even knowing tiny bits of how it actually works!

Seriously, if these guys are that good, ie that they can bring genuine improvements to market operations by perfecting them, then theoretically you can gather up a bunch of these wunderkinds and set them loose in in different markets. What will you get if this is done?

Central planning will result, my friend. Yes, you hear it right, the outcome will be the same as if the whole economy is planned!

As an aside, as the WSJ report above mentioned, it is not difficult to understand why most if not all lawyers are strong advocates of antitrust law. This applies to Hong Kong as well. Increasingly there seems to be a concensus emerging in Hong Kong that we "need" a competition law, read this Policy Address by our Chief Executive Donald Tsang. And the supporters of competition law in Hong Kong are mostly....Lawyers!

Among lawyers, Legislator Ronny Tong is the most active, and here is his report on why Hong Kong "needs" a competition law. Ronny's apparent lack of knowledge on both basic economic theory and what useful functions particular business practices serve is indeed appalling. Will you let him take charge of the competition law? Dare you trust him with our economy? You tell me.

Seriously, if other countries have already adopted some sort of competition law can be a reason why Hong Kong "needs" one, you really have to start wondering how those folks get their degree!

Tuesday, October 25, 2005

Why We Should NOT be Excited about Ben Bernanke's Nomination

It is official, Ben Bernanke (subscription required) probably will be US's next Fed-chief. Pundits from all quarters give his nomination a big thumbs up, including my teacher Tyler Cowen up at George Mason.

I beg to differ, and here is why.

Inflation is always and everywhere a monetary M Friedman told us long ago. In modern day monetary arrangements, that means bad monetary policies originated from central banks are to blame whenever inflation occurs. Because of this, who is calling the shot at the Fed's helm matters a great deal. That explains the intense interest people have, especially those who work in the financial sector, on who is going to succeed Mr. Greenspan.

Things do not have to be this way. We free market believers do not trust government intervention, period. So to be consistent, we should not trust central banking as well. And we do know that a better monetary arrangement exists. That is free banking. With free banking, we can do away with central banking completely and we have no need to sweat over who is going to succeed Mr. or Mrs XXX as the next Fed chief.

Free banking will set market forces free, and instill monetary stability. For a short overview on what free banking is, read this note by Professor George Selgin at U of Georgia. George is an expert in free banking, both in terms of its theoretical underpinnings and its history. One of his historical pieces investigated "Free Banking in Foochow" during the Ching Dynasty (1644-1911). (I was his research assistant for the paper)

For a more in depth look on the relative merits of free banking vs central banking, read this book by Vera Smith here. Vera Smith was Hayek's student when Hayek was teaching at LSE. The book set out to examine: "the relative merits of a centralized monopolistic banking system and a system of competitive banks all possessing equal rights to trade" (p. 3).

Sunday, October 23, 2005

Hong Kong's Democrats Suck, Big Time!

Hong Kong government has just released its democratic blueprint for this former British colony, read it here. Bottom line is Hong Kong is not going to have universal sufferage anytime soon.

Insistence on having univeral sufferage, the democrats are of course furious.

The SAD facts about Hong Kong's democrats are these:

1) They hate most of the government's policies not because these policies will bring about BIGGER GOVERMENT. They do so because they are not the ones who propose them in the first place.

2) They support competition law, minimum wage, and more government spending on welfare. And they are COMPLETELY ignorant about how real markets work and what they are advocating will mess up the smooth functioning of the markets.

3) Who gets to vote IS THE ONLY thing that democrats care about as if democracy means nothing other than everyone should get to vote. There is no mentioning of how the government's hands should be tied, there is no mentioning of how to reduce government expenditure, there is no mentioning of how to reduce red tapes so that the market can work better, there is no mentioning of how property rights should be further strengthened...and so on.

Add 1 to 3 together, seriously, I just cannot image what kind of damage this crowd will do to Hong Kong's economy if they are in the driver's seat. That's why I think Hong Kong's democrats SUCK, BIG TIME!


Friday, October 21, 2005

Economic Growth is Good for Morals

I recently got hold of a book by Benjamin Friedman, yes the lefty and Keynesian economist Benjamin Friedman up at Harvard.

Why?

One rarely sees 2000 Nobel Prize (economics) winner Jim Heckman writes advance praises for other economists. So when he wrote one for Ben Friedman's new book, I took notice.

This is what he wrote for Friedman's new book:

"Friedman demonstrates how economic growth promotes the social, political and economic well-being of a citiznery, and he refutes popular myth that economic growth is inconsistent with the development of human liberty and dignity. Fascinating and well documented."

The book's title is "The Moral Consequences of Economic Growth." Joe Stiglitz has a book review in the latest issue of Foreign Affairs, read it here.

Does Economic Growth Foster Democracy?

China has just released its very first White Paper on democracy last week. Bottom line is we are not going to see China adopts Western style democratic system anytime soon.

According to the theory propounded by political scientist Seymour Martin Lipset, with average annual GDP growth rate over 9 % since 1980, one would expect economic prosperty should help bring about some sort of democractic reform in China by now. Professor Lipset, now the Hazel Professor of Public Policy at George Mason University, in his classic 1959 article "Some Social Requisites of Democracy: EconomicDevelopment and Political Legitimacy" in American Political Science Review argued that economic growth fosters democracy.

His idea, in simple terms, is that income growth will eventually create a middle class that will demand for a open democratic form of government. Apparently with more than two decades of breakneck growth, China's example seems to contradict Lipset's theory. And the question is why?

In a recent article in Foreign Affairs entitled "Development and Democracy", two political science professors from New York University Bruce Bueno de Mesquita and George Down provide an answer to the question.

Their argument in a nutshell is this: To stay in power, modern autocrats have to do two things. On the one hand, they have to promote economic growth in order to make people happy. On the other hand, economic growth will make it easier for people to organize thus posing a threat to the autocrats. The autocrats then face a dilemma. They need to promote economic growth for survival but do not like the threat posed by the lowered costs of organizing for opposition that comes as a byproduct of that growth.

The way to resolve that dilemma, the professors argue, is for the autocrats to be picky on what kind of public goods they offer. The autocrats should continue to provide the kind of public goods that are conducive to economic growth but with minimal political consequences. Examples are roads and bridges. The autocrats should avoid supplying the kind of public goods that will enable the people to organize at low costs. Examples are higher education and press freedom. The two professor call the latter kind of public good "coordination goods." Through careful manipulation of the composition of the supply of public goods, the authors argue, modern autocrats can ensure the longevity of their rule.

What about Hong Kong? It has high income per capita (about US $ 24,000) yet democratic political system is apparently missing there. And insufficient supply of coordination goods should not be a reason as we enjoy a relatively high degree of press freedom, human rights are decently protected and most Hong Kong do receive a decent amount of education. What prevents Hong Kong from having a democratic political system then? I have no clue. Comments are open though.

Thursday, October 20, 2005

Planning or Pure Luck?

To prevent overheating, China has initiated a macro retrenchment programme since early last year. What sets this latest retrenchment programme apart from those which came before is that the economy does not come to a grinding halt as a result. In the first 9 months of this year, the economy grew by 9.4%.

Goldman Sachs economist Hong Liang told Wall Street Journal reporter (subscription required) the success can be attributed to two factors:

(1) a fresh group of savvy technocrats with access to better-quality data that have enabled them to fine-tune economic management;
(2) good luck

For reason 1, you can almost picture a bunch of rocket scientists gathering in a small room endlessly shifting the IS-LM curves around in order to figure out the best monetary-fiscal policy mix for China's economy. How can that be?

As private sector grows in importance in the Chinese economy, it should be MORE, not less, difficult for these rocket scientists to do good to the economy. This should be so in spite of the improving quality of the data mentioned by Liang.

Bottom line: Given the two reasons provided by Liang, I would bet money on luck to be THE ONLY reason that explains why China can avoid overheating without slowing the economy.

Tuesday, October 18, 2005

I Scratch Your Back and You Scratch Mine

In the US, the Department of Housing and Urban Development concluded following a yearlong review that Fannie Mae used its regional partnership offices to "engage in activities that were primarily designed to obtain access to or influence members of Congress."

The Wall Street Journal reported earlier that "Fannie used its partnership offices largely through its American Communities Fund, an affordable-housing program, to finance a disproportionate amount of projects in certain congressional districts. About half the ACF projects reviewed by the Journal were in the home districts of House and Senate lawmakers who sat on the banking committees that directly oversee Fannie, or the appropriations housing subcommittees that fund its federal regulator." Read the whole thing here, subscription required.

Have you ever wondered why your tax bill is increasing most if not all of the time, but you do not seem to get any benefits from those hard-earned dollars. The story above should explain why. Tax-payers' money is not being channelled to whereever there is a greater demand for affordable housing. Rather, taxpayers' money is being directed to areas where the popularity of those in Congress who have the mandate to oversee Fannie will receive a big boost because of increased spending.

And if the story cannot convince you tax is theft, I don't know what can.

Monday, October 17, 2005

20% of GDP = Small Government?

Chief Executive Donald Tsang, in response to a question asked at a luncheon, claimed that the size of Hong Kong's government is small with a roughly 20% share in GDP.

For a place like Hong Kong, where no military expenditure is required, a government that has a 20% share in GDP is definitely too much.

And if you wonder what makes Hong Kong's government so expensive, check out this guy, who is supposedly the "central banker" for the territory. He earns many, many, many times more than that of other central bankers around the globe, and yes including Alan Greenspan. And he is not even a central banker in the real sense!

Sunday, October 16, 2005

Strong Governance = Good Governance?

Hong Kong's new Chief Executive just delivered his maiden Policy Address a couple days ago, you can read the whole thing here.

It is not the content of the Policy Address that has caught my eye though, rather it is the title of the Policy Address, "Strong Governance for the People", that gets me thinking:

Now for those of us who are being governed, all we care about is whether the government has good or bad governance.

Who cares whether governance is strong or weak, as long as it is good? May be it's just me, but I simply cannot see any logical relationship between strong and good governance.

If strong governance means the government is vested with more power to carry out its functions, and few limitations are imposed on that power(which is the case in Hong Kong), then common sense would suggest bad governance is far more likely to be the outcome.

God bless Hong Kong!

Friday, October 14, 2005

Watershed in China's Economic Reform

You know China has come a long way in establishing a free market economy when it gives up the practice of having a five-year plan, read it here. (From the Economist, subscription required). What do they call it now? A five-year programme!

Wednesday, October 12, 2005

The Perils of an Orderly Response

Here in the United States, the bird flu is a new concept to far too many citizens. The resulting near-panic it is causing is no surprise, consequently. In the October 12th Wall Street Journal, (www.wsj.com for subscribers) Holman Jenkins provides rare perspective on this “inevitable pandemic”.

Jenkins observes the response of the Bush Administration and leaders of Congress to the “inevitable pandemic”. They offer the illusion that U.S. political leaders are gaining control of the situation, in vain hopes of erasing the impression that they lacked control in response to Hurricane Katrina. However, control is neither necessary nor desired. This is the kick from a spontaneous order perspective – Jenkins illustrate that nature (and mankind) both succeeds and thrives because of the random nature of its selective process. It is a terrific application of the principles behind the efficiencies of spontaneous orders well worth the read.

Tuesday, October 11, 2005

Tom Schelling

Tom Schelling up at U. of Maryland gets the Nobel prize this year. He really deserves it. I first came to know about his work while I was a graduate student at George Mason University, taking a course in Industrial Organization taught by Tyler Cowen. And one of the required texts of that course was Tom's Strategy of Conflict. Incidentally, Tom was one of Tyler's thesis advisers before Tom left Harvard. Read Tyler's posts on his mentor's contributions to economics here.

On an overview of Tom's work, read his interview here. Still curious about how important Tom's work is? Take a look at my mentor Dick Wagner's syllabus for his graduate macroeconomics course last fall. There were only 3 required texts for the course and one of them is Tom's Micromotives and Macrobehavior!

Monday, October 10, 2005

Mickey Loses its Magic?

September 16 marked the officially opening of the very first STATE-OWNED Disneyland in Hong Kong. Why state-owned? Well, the Hong Kong government turns out is the major shareholder of the theme park with a 57% share.

When the plan for building a Disneyland in Hong Kong was still on the drawing board, hopes were high that it will be a boon for local tourism. It was expected that tourists, espeically those from the mainland, would flock to the former British Colony because of Mickey.

"The government emphasizes that the project's spillover effects on the economy as a whole can outweigh the low financial returns from the project itself. The official assessment of the project's contribution to gross domestic product is a maximum of HK$148 billion in 40 years." Read more here and here as well.

Well, sad to say, the government is....WRONG and DEAD WRONG on that. This just in, read this and this as well.

But should we be surprised at the result? Yeung W Hong up at Next Magazine and myself months ago have predicted that HK Disneyland is doomed to be a failure. (Sorry, no links are available as our writings are in Chinese only)

Thursday, October 06, 2005

Democracy = Voting?

Hong Kong government is soon to release its latest consultation paper on political reform. The sad thing about the democratic camp is that to members of this camp, democracy means one and one thing only: right to vote. Read some of their thoughts here. Sad.

"Not the right to be free from arbitrary arrest and to the writ of habeas corpus; not the right to acquire, use, transfer, and be secure in the possession of property; not freedom of speech; not the right to a trial by jury – no. The right to vote. The right to yank a lever in a booth on intermittent occasions, along with thousands or millions of other people, the collective outcome of which is the election of a handful of power-mad, glib dissemblers who specialize in picking each of our pockets, transferring the booty to special-interest groups, and persuading us that we are strengthened, enriched, and raised to glory by it all."

That is from Don Boudreaux, a professor of economics from my alma mater George Mason University, read the whole post here.

Corporate Social (Ir)responsibility?

For those unfamiliar with the modern Corporate Social Responsibility (CSR) movement, this initial piece is designed to introduce the movement. Those of us that believe society is best when people and markets are free, ignore this movement to the peril of the freedom we hold dear. This growing movement threatens the very foundations of a free society.

Consider that currently 1 out of 7 dollars invested in the U.S. is somehow linked to a “CSR-type” fund. Furthermore a practical “Who’s Who” list of companies has begun to kowtow to the CSR movement including Citigroup, JP Morgan as well as GE. As of October 6th, yet another corporate powerhouse has been scoped by these activists: Wells Fargo. According to www.csrwatch.com, “The Global Finance Campaign today announced that organizers would begin activating its grassroots network to prepare for a sustained campaign to reform Wells Fargo. Over one hundred environmental and social justice activists launched the effort by marching backwards at noon through San Francisco’s financial district to the bank’s landmark Montgomery Street branch and unfurling a giant third story-banner reading “Wells Fargo: Lootin’ and Pollutin’ since 1852” to draw attention to the out-dated practices of “America’s most backwards bank.”

So what is CSR and what do its adherents want? CSR activists make two basic claims: corporations are responsible to a broader audience than their shareholders (they must do more) and CSR leads to enhanced profits. These claims should supposedly compel corporate management to embrace the complexity and bureaucracy that is CSR. This piece will introduce the first claim. Later pieces will expand on these fallacies as well as debunk the growing consensus the modern managers must embrace the CSR concept in order to more effectively grow their business (enhance profits).

Looking at the first issue, what does CSR mean that corporations are responsible to a broader audience than its shareholders? In short, even though a corporation is the wholly-owned property of its shareholders, it must serve “the greater good of society” not just the interests of its owners. But, how do you define “society’s” greater good? No worries. CSR activists have a definition ready – their definition. Societies greater good is wonderful sounding rhetoric such as a clean environment or fair labor standards; and who could be against such wonderful sounding ideals? Several problems with this perspective are readily apparent to anyone willing to put just a little bit of thought into this.

First, managing through CSR principles inevitably leads companies to self-impose government-type regulations on its activities. Regulations do not come without a cost, however. Typically, the cost is diminished economic growth that may very well limit the ability of billions of people across the developing world to lift themselves out of poverty. For instance, Citigroup recently bowed to pressure from the Rain Forest Action Network (RAN). The company will now review all lending policies in Latin America to ensure that Citigroup funds no project that does not fit RAN’s definition of an environmentally sound project. Denying needed credit to Latin America is not a sound economic development strategy for the region. It may not be good environmental stewardship either.

There is also little evidence that RAN’s environmental policies are actually correct, leading us to the second problem. Environmental policy, like any regulatory policy, is a public issue. It is the domain of the political process to implement the policy that best reflects the views and concerns of a country’s citizens. It is also the medium where the scientific evidence can best be debated and a consensus reached. Private businesses may know how to make and sell their product, but they are not capable of performing this function. Nor do they have the right to make such decisions – especially with other people’s money (i.e. the shareholders). By hoisting such decisions on companies, CSR activists are doing an “end-run” around the political process that can best address these concerns.

As Milton Friedman famously noted, businesspeople have neither the knowledge nor the right to answer such important societal issues. CSR activists attempt to bypass this critique by claiming they have already answered these questions. Their answers should strike fear in the hearts of people that cherish a free society, the sanctity of private property, or the importance of institutions playing their proper role in society.

Wednesday, October 05, 2005

Political Economy Book of the Year

The book "Economic Origins of Dictatorship and Democracy" by Daron Acemoglu at MIT and James Robinson at Harvard is slated to be one of the most important books in the field of political economy for years to come.

Daron incidentally just got the J.B.Clark award this year. The award is given every two years to an American economist under the age of 40 for making a significant contribution to economic thought and knowledge.

Can't wait for the book to come out later this year. You can download the manuscript here and read for yourself how good it really is.

More Healthy Older People + Democracy = More Redistribution

"The benefits of (for example) medical technology accrue mainly to the elderly, and by extending the life of the elderly advances in that technology increase their political heft, resulting in still more redistribution from young to old."

That is Richard Posner discussing the pros and cons of population growth, together with Gary Becker, read here.

Tuesday, October 04, 2005

Why Can't Legislators Be More Intelligent?

As Hong Kong's economy continues to grow, rents go up as well. That is simple economics. Apparently this is not so to our elected legislators.

Emily Lau, one of the legislators here, has recently received a lot of complaints from restaurants and retailers that the high rents are killing them. That they cannot afford the high rents. She is urging the government to allocate more space for the use of these two businesses, read on.

Rental space is scarce. The fact that retailers and restaurants can no longer afford high rents means the valuable and limited rental space can be put to higher valued uses in other businesses.

Why? It is because other businesses are willing to pay higher rent than the restaurant and retail outlet owners, and that is why the rent is being bid up in the first place. The underlying issue is scarcity and there is nothing the government can do about it except by messing things up!

Another point made by her is also wrong.

She said that "high rents in the retail and restaurant trade may force employers to cut salaries of employees." Can that happen?

Suppose a restaurant pays an employee $100 a month and the labor market is competitive. Then the rent gets higher, and the restaurant boss tells her employee that with the higher rent she can only afford to pay $ 50. Will the employee say yes to the pay cut? Of course NOT. In a competitive labor market, the employee will be better off seeking alternative employment where the pay is still $100. And if the restaurant owner continues to offer $50 for the post, she will end up having no one working for her. Soon she will have to offer a bit more, say $75 but still no one applies, then a bit more say $ 95 but still no one applies, the process continues until she has to raise the pay until it is back to where it begins ie. $ 100.