Saturday, December 31, 2005

Why Inefficiency Persists?

Arnold Kling at the EconLog wrote that, "Or consider health care. If the goal is to help people who cannot "afford" health care, then national health care is horrendously inefficient compared with a voucher system that targets the poor."

Read the whole post here.

The real puzzle is: If national health care is indeed that "inefficient" as Arnold claimed. Why is it so prevalent across the world, and why it is so difficult to get rid of?

I don't have a definite answer, but here are some possible ones:

1) National health care, though seemingly inefficient, actually is pretty good compared with the alternatives. This is the good old Chicago, "What is, is efficient" type argument;

2) The costs of reforming the national health care are high. Therefore, whatever benefits one can get from an alternative system are overwhelmed by the high reform costs. Indeed, this is only a variant of the "What is, is efficient" argument;

3) People are stupid, they do not know the national health care system is inefficient.

Inefficiency means unexploited gains from trade. Whenever inefficiency persists, like national health care, what that implies is somehow economic agents fail to realize gains from trade. And that troubles me to say the least.

Friday, December 30, 2005

Adam Smith on Dispersed Knowledge

I was having a discussion with one of my teachers Yeung Wai-hong, a card carrying member of the Hayek Fan-club, on the empricial content of Hayek's 1945 paper"The Use of Knowledge in Society" the other day.

For those of us who have read the piece, probably all will agree that this is the first work that provides a defence of the free market based upon the importance and existence of dispersed knowledge.

We are wrong!

Adam Smith had talked about this in his monumental work "The Wealth of Nations."

Here is the quote:

"What is the species of domestic industry which his
capital can employ, and of which the produce is likely to
be of the greatest value, every individual, it is evident, can
in his local situation, judge much better
than any statesman or lawgiver can do for him."

By the way, I get this quote from Jerry Muller's The Mind and the Market, an excellent work. The quote is on p.67.

Wednesday, December 28, 2005

Democracy Comes Second

"Whatever the reason for the observed positive cross-country correlation between income and democracy, it should not be confused with causality. Being democratic does not seem important in securing economic success...

This does not mean that democracy is unimportant. But the sequence of reforms is critical for successful economic development, with economic reforms coming first. When an open andwell functioning market system is in place, democracy has a much better chance to lead to lasting prosperity.

An important reason for this is that, in order to create a successful market system, the statemust respect basic individual rights: the rule of law, private property, and the enforcement ofjustice. These fundamental rights are part and parcel of democratic government. But when itcomes to economic development, these fundamental rights are more important than otherpurely political aspects of democracy, such as universal suffrage and genuine political competition.."

This is from G. Tabellini, one of the leading experts in the field of political economy, read it here. (The title of the piece is Democracy Comes Second written for Project Syndicate)

Just as Professor Steven Cheung said long ago, Tabellini's point is that democracy may be alright for a country that has achieved a certain level of economic development but not before that. In other words, democracy should come after economic development.

Monday, December 26, 2005

Can Lobbyists Perform Good Deeds?

Apparently, Washigton Post's Jeffrey H. Birnbaum thinks so, read his story here.

He cites a lot of instances where lobbyists spend time and effort for free trying to steer government expenditures on socials goals that these lobbyists consider worthwhile.

Should we cheer for these lobbyists effort, just like what Jeffrey did in the piece?

The concept of opportunity costs tells me things are not as sanguine as Jeffrey protrays them to be.

Suppose the government's expenditure is fixed a certain level, say 10 bucks, then before the lobbyists effort 5 bucks are spent on education while the rest are spent on medical uses. Now the lobbyists come in and ask for more funding in education. As a result, 8 bucks are now spent on education and the rest are spent on medical uses.

Now you can of course cheer, just like Jeffrey did in the piece, for the success of the lobbyists in helping to increase the funding for education. But the problem is we also have to consider the other side of the picture. With more funding for education, given a fixed level of government spending, that also means less resources are devoted to medical uses. Can anyone be so sure that the marginal benefits that result from additional 2 bucks spent in education are higher than than the loss in beneifts (or marginal costs) that result because 2 bucks less are now spent on medical uses?

I am not so sure for one, what about you?

Government Failure, A Real World Example

When I was in graduate school teaching a course on socialism, I liked to tell my students that if they wanted to understand better how a state-owned enteprise worked, went to over to the library and you would see how it operated. At one time, I even organized a field trip for my studnets to check out our library actually worked. That was fun.

In the Christmas edition of the New York Times, there is another story that is illustrative of just how inefficient government enterprises operate.

In the aftermath of Harricanes Katrina and Rita, a lot of clean-up work has to be done. For those juridictions that rely on private contractors, the clean-up effort has progressed much further than those that get help from the Army Corps.

The story cites several reasons for the difference in performance, and they are all interesting ones:

"One is the complexity of the contract the Corps of Engineers has with Ashbritt, a Pompano Beach, Fla., company that is overseeing the debris collection in Mississippi and parts of Louisiana. Its 192 pages include sections on the type of office paper the company uses and a ban on releasing information to the news media without the written permission of the Army Corps.(Ashbritt officials declined to comment for this article.)

Simply getting an agreement from the Army Corps on the exact wording for the legal release document that residents must sign to authorize contractors to clear their homes took several weeks, officials said.

Then the Army Corps and its federal partners repeatedly gave new demands, such as satellite-based measurements on the location of each house, before large-scale clearing could start, county officials said."

Bottom Line: Do you think the government officials will behave differently if they are spending their own money?

Wednesday, December 21, 2005

Why Politicians Can't Do Math?

A week ago most of the businesses in Wanchai and Causeway, an area close to the venue where the WTO Ministerial Conference was held, were adversely affected because of the conference. Politicians in Hong Kong have come up with a "way" to help these businesses. Read the details here.

Bottom line: the government will adopt a host of measures to encourage more people to visit and spend money in those two places. The government hopes that businesses in Wanchai and Causewaybay will be appropriately compensated by doing so.

Will the policies be effective in boosting businesses in those two places? Certainly. But this misses the point.

Suppose, if not for the WTO, shops located in the Wanchai and Causeway would have sales that amounted to HK$ 1 million. Now with the WTO, consumers made their purchases elsewhere. In other words, total spending in Hong Kong did not decrease because of the WTO. The only difference the hosting of the WTO made was that the geographical distribuiton of sales shifted from one place to another. The losses in sales for businesses in the Wanchai and Causewaybay area was completely offset by sales increase of the same amount elsewhere.

Now with the policies proposed by the government, the opposite will happen. Businesses in Wanchai and Causewaybay area will benefit at the expense of businesses elswhere. In other words, the proposed government policies are pure tranfers, they will not bring along any net benefits to the Hong Kong society. Such transfer policies, like any other transfer policies, will also need to consume some resources for their implmentation. So on net, the benefits from those policies are likely to be negative from the society viewpoint!

Now who said politicians are out there to look after the society's interest eh?

Sunday, December 18, 2005

Hong Kong's Shame

Today's edition of South China Morning Post (19 December) has a story on Hong Kongers' sympathy and support to the Korean farmers.

It writes, "Korean protestors may have put Wan Chai under siege on Saturday night, but yesterday many Hong Kong people told of how they had won their hearts during their controversial week-long visit.
They turned out in their hundreds to catch a glimpse of their last day in town, many offering food, drinks and scarves against the cold weather." Read the full story here.

Koreans farmers are asking for protectionist policies. Do the cheerleaders from Hong Kong really mean to endorse their cause?

Undercover Economist

Tim Harford, who writes the Dear Economist column for Financial Times, has a new book out called "The Undercover Economist." Here is the latest review of his book in New York Times.

The Triumph of Free Trade!

After the setback in Seattle and Cancun, the WTO's plan to phase out trade barriers and subisidies in agricultural trade has achieved a breakthrough tonight (Hong Kong time). Read the WTO's Draft Ministerial Declaration here and a WSJ report here.

Long before WTO MC 6, free trade guru Jagdish Bhagwati has argued that it is too soon to call the Doha round a failure. He is right. Read his article here.

May be the fact that breakthrough in negotiations over worldwide trade liberalization happens in Hong Kong but not in Doha or Seattle should not come as a surprise...Nothing can convince the skeptics of free trade better than for them to see first hand what miracle free trade can bring.

When they are in Hong Kong and see for themselves how free trade has transformed Hong Kong from an island barely noticeable on the map to become one of the most advanced economies in the world, how can they possibly deny the existence of great benefits from free trade any more?

Friday, December 16, 2005

Media Bias

As I am typing this post, WTO MC 6 is still going on here in Hong Kong, you can get the most up to date information here.

One thing I notice since the conference started a few days ago is that most media reports, especially the local ones, tend to focus on the Korean farmers. I doubt how much the local reporters truly understand the issues involved. However, by having their focus mainly on the Korean farmers, the reporters and their reports are inadvertently making a case for the Korean farmers. As a consequence, on TV and in news stories, we see a lot of Hong Kong people who are sympathetic to these Korean farmers.

What about the tens of thousands of poor Korean consumers who have to pay high prices for the agricultural products they consume everyday because of high tariffs and other non-tariff barriers that help to protect the Korean farmers? What about the tens of thousands or even millions of poor developing countries farmers who are actually far more efficient in producing agricultural products than their Korean counterparts, but thanks to the barriers of trade imposed by Korea, their products are pretty much barred from entering the Korean market.

Aren't these people hurt by the very policies that the Korean farmers are trying to protect?

Who speaks for these Korean consumers and farmers from the developing countries? Who speaks for the free market? Who speaks for free trade? It is indeed sad to see a place like Hong Kong, a beneficiary of open trade, to fail to produce even one paper, one paper that has the decency and the wisdom to promote the cause of free trade.

That is sad indeed and this is much more disturbing to me than if Hong Kong can only have democracy in 3067!

Wednesday, December 14, 2005

"By Far the Best Economic System in Human History"

WSJ reported that China, after finishing a national census on its economic activities, has discovered that "its service sector, including businesses like restaurants, banks and shops, is a far more sizable part of the economy than previously understood."

Quoting a local paper, the South China Morning which broke the news a day before, the story said that as China plans to annouce revised GDP figures next week, " the planned revision could show services as a portion of GDP were underreported last year by as much as $300 billion, or nearly 20% of last year's total economic output." Read the story here.

Only a few weeks ago, Professor Steven N.S. Cheung in a conference in his honor, said:
"China has the Best Economic System I know in Human History." Yes, No, comments are open though.

By the way, and to his credit, Professor Cheung has mentioned in his Chinese writings a few years back that China's GDP is seriously underestimated. And he suggested back then that the amount of waste a country produces is a better barometer of an economy's vitality than GDP figures.

And finally, this is one of the latest academic papers on China's GDP figures.

Tuesday, December 13, 2005

Common Agricultural Policy in a Nutshell

In the eyes of Sir Charles Crawford, the British ambassador to Warsaw, EU's common agricultural policy is "the most stupid, immoral state-subsidized policy in human history, give or take communism...It's a program which uses inefficient transfers of taxpayers' money to bloat French landowners and so pump up food prices in Europe, thereby creating poverty in Africa, which we then fail to solve through inefficient but expensive aid programs."

The above is from a story in WSJ, read it here.

Sunday, December 11, 2005

Tick, Tick, Tick... know Hong Kong is quick transformig itself into a paternalistic state when the government has made an annoucement on its website telling you folks how not to overeat during Christmas! Read the government press release here and it's title is funny as well, it is called "Safety Tips for Enjoying Christmas Buffet."

Also, dear readers, as I type there is a conference going here in Hong Kong on why Hong Kong needs a competition law.....

Hong Kong's days as a last bastion of free market are numbered, I can just hear the clock clicking follks.....Tick, tick, tick, tick....

Friday, December 09, 2005

How the West Grew Rich?

Monetary theorist Meir Kohn at Dartmouth has a new interest. He has written a new economic history book entitled," The Origins of Western Economic Success:Commerce, Finance, and Government in Pre-Industrial Europe."

It is not published yet. Don't sweat, you can read the whole book manuscript here.

Also, don't miss his excellent paper "Value and Exchange" which you can also find on his website. You can also read it at Cato Journal here.

The Economics of the C rate

The Hong Kong Monetary Authority has just launched a new lending benchmark rate, called the C-rate, in a bid to boost market transparency and help consumers understand how their loans are priced. That is from a story in South China Morning Post, read it here.

You may think it must be the case that Hong Kong's banking industry is so uncompetitive that banking firms have no incentives to fulfill customers' needs. Hence, to "protect the consumers' interests", HKMA has to stepped in to take care of customers' interests.

But this is simply not true...the story above quoted Joseph Yam, chief executive of HKMA as saying that "[s]even years of deregulating interest rate charges by banks had produced a competitive market."

In a competitive market, if customers find that the lending rate charged by a bank is unreasonable high and the basis upon which the rate is determined opaque, then the customers can always punish the bank in question by moving their businesses elsewhere. In other words, competition will ensure that customers' interest be taken care of. Why the HKMA needs to launch a new benmark rate then?

Several possible answers:

1) HKMA wants to transform itself from a currency board into a full blown central bank;
2) Guys at HKMA are stupid;
3) HKMA wants to justify its value of existence.

Any one of these answers is bad for the Hong Kong people. Now who says public officials are out there looking after the "public interests"?

Thursday, December 08, 2005

Ben Bernanke & Milton Friedman

In a conference honoring Milton Friedman's 90th Birthday held in 2002. Ben Bernanke, already one of the Fed's seven governors, told Milton Friedman, "Regarding the Great Depression, you are right, we did it. We are very sorry. But thanks to you, we won't do it again."

That is from an excellent piece done by Grep Ip in Wall Street Journal on the developments of Ben's views on monetary policy, read it here.

Here is another related piece by Ben praising Milton Friedman's work on monetary policy.

Monday, December 05, 2005

Sam Peltzman on Aaron Director

"This shifting of weight from monopoly to efficiency explanations as the primary motive for a business practice has, I think, been permanent among economists and policy makers. This broader change in the framework of our analysis owes much to Aaron Director. It may be his most important intellectual legacy."

That's Sam Peltzman on Aaron Director in the latest issue of Journal of Law and Economics.

Also in the same issue, there is another piece on Aaron by Stephen Stigler, the son of George Stigler.

Buchanan on Constitutional Amendments

James Buchanan proposes the following 3 constitutional amendments for the US:

1) Balanced Budget Amendment;
2) Nondiscriminatory Politics Amendment;
3) Natural Liberty Amendment.

Read the whole thing here.

In the essay, there is a quote of Hayek's which is worth repeating here:

"In the 1978 video-taped interview, F.A. Hayek stated to me that a constitutional amendment should read:

"Congress shall make no law authorizing government
to take any discriminatory measures of coercion".

He went on to add that, with such an amendment, all of the other rights would be unnecessary." (my emphasis)

Hmm..Just wonder how many of our "fighters for democracy" here in Hong Kong get what Hayek and Jim Buchanan are trying to say here.

Serious Flaw In Hong Kong's Struggle for Democray

Don't get me wrong, I am all in support of democracy. The problem with HK's democratic movement is that the leaders of the movement are single-mindedly concerned with universal suffrage but nothing else. This is dangerous.

No one, absolutely no one, among the democratic movement's leaders have mentioned anything about how once democracy is installed, how the government's hand should be tied. You say, wait a minute, it is already such a tough job for us to ask for universal suffrage, can't the discussion regarding how the government's power should be restrained wait until after we have universal suffrage. That is indeed a bogus argument.

Look, be realistic, the so called democrats in HK are bascially a bunch of socialists in disguise, or at least in terms of their beliefs in economic matters. They believe in more welfare spending, more government spending on health care, minimum wage, competition law, maximum work hours, fair trade....Do you really expect these folks willingly have their hands tied once they have their hands on the government money? NO, no, NO, no, NO! They Will Not! Period!

And that is the reason why I think that the direction HK's debate on democracy is heading is wrong-headed. Let's first talk about how government's power can be and will be restrained before universal suffrage is introduced.

Think about this. In the status quo, we have economic liberties but no limited political liberties. With the direction democracy movement is heading, on the day universal suffrage is introduced, I expect that our economic liberties will be severly curtailed because those democrats believe not just in big but huge, giant, super government. In other words, we will have wider political liberties but less economic liberties compared with what we have right now.

Which state I prefer, I will definitely choose the former rather than the latter.