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.

1 comment:

I C Zhang said...

When politicians want to secure the hearts of their voters, they will neglect a simple rule of economics -- the market clears when the demand equals the supply. The legislator's request for the government's intervention in the market will certainly do harm rather than good to the free market. Thanks for you simple arguments to refute their misleading reasons for asking for the government's involvement in the market.