In recent years, the number of Mainland Chinese students studying in Hong Kong has sky-rocketed, especially in business-related disciplines. At a guess, about 30% of the undergraduate students taking my Introductory Macroeconomics class are from the mainland, while the numbers in my Master of Economics and MBA classes are a little lower.
Why do Mainland students choose to study in Hong Kong? Ultimately this should be an economic decision, trading off the benefits of a relatively expensive Hong Kong education against an education elsewhere. Accordingly, I can think of a number of possible explanations for students choosing to study here:
1) They want to work in Hong Kong after they graduate. This might seem an attractive possibility, given that wages are still higher in Hong Kong than the Mainland in most fields (although the cost of living is also much higher here). In a small survey by the Hong Kong Association of Mainland Graduates reported in the SCMP today, 92% of Mainland students said they wished to stay following graduation.
However, if this survey is accurate, many Mainland students must leave disappointed. According to figures in the same SCMP article, there were 4,112 Mainland students studying in Hong Kong in 2005, but only 236 remained after the completion of their studies. The SCMP also discusses other evidence that is more optimistic, especially for undergraduate students, suggesting that as many as 50% may be successful in landing a job here.
2) Related to 1), some students may come to Hong Kong as students as a way to obtain a visa and have little intention of actually studying, but instead intend to work or search for a job here.
3) Students may expect to gain a “better” education in Hong Kong, along at least some dimension. This is not necessarily a criticism of the Mainland universities, but there are some important historical differences between Hong Kong and the Mainland which continue to influence their universities today. Hong Kong has been a free market, capitalist economy for many years, while the Mainland only began opening up economically starting in 1978. This is reflected in the way in which some business oriented disciplines are taught at university. For example, in many Mainland universities, Economics is more of a descriptive subject, with elements of Maxist ideology included. In contrast, an economics degree in Hong Kong will be similar in content to one from North America or Europe. (Note that this difference is diminishing: the top Mainland universities increasingly hire Western trained PhDs, and offer a product that looks increasingly like the one we offer at HKU).
If this argument is true, then we would expect to find more Mainland students studying disciplines where the product differences are largest. Indeed, this is what we find. From memory, the majority of undergraduate Mainland students studying at HKU study in the Faculty of Business and Economics, and many of you take my class!
4) Related to 3), some of our PhD students successfully obtain jobs teaching at Mainland universities following their studies. The market may place a higher value on a HKU PhD than on one from most Mainland universities.
If you are a student from the Mainland, which of the above is most accurate in your case? Have I missed other explanations? And do you feel that your education is meeting your expectations?
Monday, April 30, 2007
Fairness, Dilbert-style....
Scott Adams, creater of the Dilbert cartoon and blogger extraordinaire, understands marginal utility. See his discussion of fairness.
Globalisation and lower prices
Does globalisation lead to lower prices? Probably not, at least in the long run, as Dani Rodrick argues. Ultimately the price level is determined by the rate of growth in the money supply. So monetary policy determines the average level of prices, independent of globalisation.
So what are the benefits to globalisation, if it doesn't result in cheaper prices? Marginal Revolution argues that globalisation should lead to increased levels of world output. Overall prices may not change, but relative prices will. Cheap imports from Mainland China make all other goods relatively more expensive. Rational consumers respond by cutting back on the relatively expensive goods, and consuming more of the cheap imports. This is the price mechanism at work. Under standard assumptions of consumer behaviour and rationality, they end up consuming more and enjoying higher levels of utility as a result.
Where does this increased output come from? In a market economy, relative prices reflect the relative resource cost of production. Cheaper goods from Mainland China are less costly to produce, and use fewer resources, than more expensive goods from elsewhere. Thus the changed consumption patterns result in more efficient resource usage, allowing total global GDP to rise.
This argument assumes that prices reflect resource costs. If prices were regulated by the government, rather than being set by the market, this mechanism may fail. And to the extent that resources are not correctly priced (do Mainland firms pay for the environmental costs that result from their production?), the result may be increased global GDP, but little increase in real global welfare.
So what are the benefits to globalisation, if it doesn't result in cheaper prices? Marginal Revolution argues that globalisation should lead to increased levels of world output. Overall prices may not change, but relative prices will. Cheap imports from Mainland China make all other goods relatively more expensive. Rational consumers respond by cutting back on the relatively expensive goods, and consuming more of the cheap imports. This is the price mechanism at work. Under standard assumptions of consumer behaviour and rationality, they end up consuming more and enjoying higher levels of utility as a result.
Where does this increased output come from? In a market economy, relative prices reflect the relative resource cost of production. Cheaper goods from Mainland China are less costly to produce, and use fewer resources, than more expensive goods from elsewhere. Thus the changed consumption patterns result in more efficient resource usage, allowing total global GDP to rise.
This argument assumes that prices reflect resource costs. If prices were regulated by the government, rather than being set by the market, this mechanism may fail. And to the extent that resources are not correctly priced (do Mainland firms pay for the environmental costs that result from their production?), the result may be increased global GDP, but little increase in real global welfare.
When is the economy in recession?
Here's an excellent post by James Hamilton demonstrating the difficulties in determining whether the economy is in recession or not (http://www.econbrowser.com/archives/2007/04/recession_proba_1.html).
Even if GDP falls from one quarter to the next, there's a strong chance that the economy is not in recession as usually defined. Hamilton constructs his own "probability of recession" index for the US, based on many macroeconomic indicators, complete with its own emoticon ( http://www.econbrowser.com/archives/2007/03/new_feature_eco.html).
Even if GDP falls from one quarter to the next, there's a strong chance that the economy is not in recession as usually defined. Hamilton constructs his own "probability of recession" index for the US, based on many macroeconomic indicators, complete with its own emoticon ( http://www.econbrowser.com/archives/2007/03/new_feature_eco.html).
Saturday, April 28, 2007
Economic Relevance
Many people think of economics as a dry and boring discipline, fixated on mathematical models used to describe matters of limited interest to the general public. However, in recent decades economists have broken free of that mold, and used the tools of their discipline to address issues that are anything but dry and boring.
One of the first to do so was Gary Becker (http://home.uchicago.edu/~gbecker/), winner of the Nobel Prize in 1992, who used economics to explain the behaviour of families, among a vast range of different topics. (Although he’s now 77 years old, Gary remains very productive, and writes an indepth blog each week on a current policy issue, at http://www.becker-posner-blog.com/).
Some have complained that this is a bad development: economics is better off as a dry and boring discipline, rather than one that addresses every-day issues that non-economists can relate to. Steven Levitt of “Freakonomics” fame has come in for special criticism (http://www.freakonomics.com/blog/2007/04/25/am-i-ruining-economics-or-not/).
I’ll give my two cents here. Just last week, I attended a seminar presented by Marciano Siniscalchi of Northwestern that used a structural economic model to explain lots of curious results about the differences between identical and non-identical twins that are puzzles given the standard models used in behavioural genetics (the paper is here: http://www.faculty.econ.northwestern.edu/faculty/siniscalchi/parenting-113006.pdf). It certainly wasn’t traditional economics, but it was informative and, to an academic economist as least, entertaining. Further, thinking of agents as maximizing, rational actors in a structural way provided insights into an aspect of human reality that we otherwise might not understand so well. We may be treading on the turf of the biologists in this case, but the world knows more as a result.
The same justification may be used for addressing many issues. So are there any topics that should be off-limits to the tools of economics? I would argue no. But just because economics may provide insights into many interesting issues, that does not mean that it has any monopoly on understanding reality. To take an example from my own subfield, empirical evidence shows that the level of inflation influences how often firms change their prices, which in turn influences the business cycle. But there are many other far more important drivers of the frequency of price change for any individual firm that I as a macroeconomist know little about.
I believe that this general principle applies more generally to whole disciplines. Economists can provide insights in many different areas that other disciplines cannot, but we should be humble in doing so, as there is much that we don’t know.
As a very practical application of this, consider families: we may be able to understand some general principles about the formation of families and their structure using economics, and even be able to find strong empirical evidence that our theories are correct. But for any particular family, economics is likely to play only a minor role in determining their behaviour. Thus our understanding, however “correct,” may be of little use in helping families in improving their relationships. For that, we’re probably better off going to a psychologist.
Not all economists appear to go along with this. Tim Harford is a very well known who writes a “Dear Economist” column for the financial times. Reading his recommendations for various relationship dilemmas based on economic theory is very entertaining, but it would be highly unwise to follow much of his advice! (You can find his letters at http://www.timharford.com/writing/labels/Dear%20Economist.html. Extracts of his answers are included towards the bottom of the column without having to register at ft.com). But to be fair, Tim’s column is intended primarily to entertain rather than to offer serious relationship advice.
So let’s keep economics interesting, and be willing to tread on other disciplines domain as we see fit. Hopefully they’ll return the honour, and maybe even find interesting insights in areas that we have come to consider dry and boring in Economics!
One of the first to do so was Gary Becker (http://home.uchicago.edu/~gbecker/), winner of the Nobel Prize in 1992, who used economics to explain the behaviour of families, among a vast range of different topics. (Although he’s now 77 years old, Gary remains very productive, and writes an indepth blog each week on a current policy issue, at http://www.becker-posner-blog.com/).
Some have complained that this is a bad development: economics is better off as a dry and boring discipline, rather than one that addresses every-day issues that non-economists can relate to. Steven Levitt of “Freakonomics” fame has come in for special criticism (http://www.freakonomics.com/blog/2007/04/25/am-i-ruining-economics-or-not/).
I’ll give my two cents here. Just last week, I attended a seminar presented by Marciano Siniscalchi of Northwestern that used a structural economic model to explain lots of curious results about the differences between identical and non-identical twins that are puzzles given the standard models used in behavioural genetics (the paper is here: http://www.faculty.econ.northwestern.edu/faculty/siniscalchi/parenting-113006.pdf). It certainly wasn’t traditional economics, but it was informative and, to an academic economist as least, entertaining. Further, thinking of agents as maximizing, rational actors in a structural way provided insights into an aspect of human reality that we otherwise might not understand so well. We may be treading on the turf of the biologists in this case, but the world knows more as a result.
The same justification may be used for addressing many issues. So are there any topics that should be off-limits to the tools of economics? I would argue no. But just because economics may provide insights into many interesting issues, that does not mean that it has any monopoly on understanding reality. To take an example from my own subfield, empirical evidence shows that the level of inflation influences how often firms change their prices, which in turn influences the business cycle. But there are many other far more important drivers of the frequency of price change for any individual firm that I as a macroeconomist know little about.
I believe that this general principle applies more generally to whole disciplines. Economists can provide insights in many different areas that other disciplines cannot, but we should be humble in doing so, as there is much that we don’t know.
As a very practical application of this, consider families: we may be able to understand some general principles about the formation of families and their structure using economics, and even be able to find strong empirical evidence that our theories are correct. But for any particular family, economics is likely to play only a minor role in determining their behaviour. Thus our understanding, however “correct,” may be of little use in helping families in improving their relationships. For that, we’re probably better off going to a psychologist.
Not all economists appear to go along with this. Tim Harford is a very well known who writes a “Dear Economist” column for the financial times. Reading his recommendations for various relationship dilemmas based on economic theory is very entertaining, but it would be highly unwise to follow much of his advice! (You can find his letters at http://www.timharford.com/writing/labels/Dear%20Economist.html. Extracts of his answers are included towards the bottom of the column without having to register at ft.com). But to be fair, Tim’s column is intended primarily to entertain rather than to offer serious relationship advice.
So let’s keep economics interesting, and be willing to tread on other disciplines domain as we see fit. Hopefully they’ll return the honour, and maybe even find interesting insights in areas that we have come to consider dry and boring in Economics!
Thursday, April 26, 2007
The Effects of Economic Growth....
Back in 1900, the Ladies Home Journal, a US publication, asked society leaders what they expected the US to look like in the year 2000. The results are very amusing, and insightful into just how far the world economy has developed in the last century.
Take, for example, Prediction #2: The American will..... live fifty years instead of thirty-five as at present.
Wow! If I was born just a century earlier, I'd probably be dead already! But more importantly, just imagine how a life expectancy of 35 years would influence human capital. One of the crucial differences between human capital and other inputs into the production process is that when you die, your human capital dies with you.
If you expect to live to only 35, you're unlikely to stay at university until you're in your early 20's, let alone stay until you're almost 30 to get a PhD.... there are just not enough years left after that to recoup the opportunity cost that a university education represents. In such a world, a university education could best be thought of as a luxury consumption good accessible only to the rich, rather than an investment. Maybe that's why many of the traditional disciplines of the university seem to have little useful purpose in the marketplace (latin? history?), since market relevence was not what the students demanded. That may also explain why some of those same disciplines struggle to attract large numbers of students today.
So increased life expectancy has changed the University from being a playground of the rich to a source of human capital for a wide spectrum of society. But more importantly, increased life expectancy has increased average levels of human capital. This growth of human capital is the most important input into economic growth: worker productivity increases both as a direct result of increased human capital, and indirectly as well, via improved technology developed by a more highly skilled workforce. Thus understanding increased life expectancy is crucial to understanding economic development.
Thanks to Marginal Revolution for the pointer; the original list is here.
Take, for example, Prediction #2: The American will..... live fifty years instead of thirty-five as at present.
Wow! If I was born just a century earlier, I'd probably be dead already! But more importantly, just imagine how a life expectancy of 35 years would influence human capital. One of the crucial differences between human capital and other inputs into the production process is that when you die, your human capital dies with you.
If you expect to live to only 35, you're unlikely to stay at university until you're in your early 20's, let alone stay until you're almost 30 to get a PhD.... there are just not enough years left after that to recoup the opportunity cost that a university education represents. In such a world, a university education could best be thought of as a luxury consumption good accessible only to the rich, rather than an investment. Maybe that's why many of the traditional disciplines of the university seem to have little useful purpose in the marketplace (latin? history?), since market relevence was not what the students demanded. That may also explain why some of those same disciplines struggle to attract large numbers of students today.
So increased life expectancy has changed the University from being a playground of the rich to a source of human capital for a wide spectrum of society. But more importantly, increased life expectancy has increased average levels of human capital. This growth of human capital is the most important input into economic growth: worker productivity increases both as a direct result of increased human capital, and indirectly as well, via improved technology developed by a more highly skilled workforce. Thus understanding increased life expectancy is crucial to understanding economic development.
Thanks to Marginal Revolution for the pointer; the original list is here.
Tuesday, April 24, 2007
Hong Kong Education Reform
Even policy changes which do not seem to be closely related with economics may have significant economic effects. Hong Kong is moving to a new structure for secondary and higher education- from "5+2+3" (five years junior secondary, two years senior secondary, three years university) to "3+3+4." How will this effect Hong Kong's economic development?
This is an excellent question that is worth writing a whole book on! But let me make some brief comments here anyway.
The biggest change in the proposed education system in Hong Kong is that students will loose one year of high school education, which will be replaced by one additional year of university education. I know little about high school education in Hong Kong, but I presume that part of this change is driven by a perception that the marginal value of the final year of high school is relatively low relative to the potential marginal value of an additional year of university. As a university teacher, I am not in a position to give an unbiased response to this presumption (“Of course it’s true! Otherwise I would have been a high school teacher!” … or something like that.)
The increase in length of university studies may be used for one of two purposes:
1) to increase the depth with which students understand their chosen field of study, or
2) to increase the breadth of their education.
It is possible to make a strong case for either of these. My understanding is that HKU is focusing more on 2) than 1), with additional broadening courses and students being encouraged to take additional majors, instead of focusing on as narrow a field of study as is often the case today.
What are the macroeconomic consequences of this change? Assuming that the benefits outweigh the costs, the workforce in Hong Kong should possess higher human capital. This implies increased productivity, and higher GDP, income, and taxes in the future. This final element is important, as universities are expensive to run; I haven’t seen any financial break-down, but I would be very surprised if the savings from decreasing the time students spend in high school will cover the increased costs to tax payers of an extra year at university!
From the student’s point of view, I think the change is good. At higher levels of education, students are likely to receive nearly all the benefits from any increase in human capital via increased wages. Any positive externalities to the rest of society (over and above the wages received by our graduates) are likely to be small.
All the above arguments assume that education truly is useful, and that increased university education makes students more productive when they obtain work.
But there is an alternative model of education, based on “signaling theory.” That’s the idea that education itself is of little use, but serves as a signal that you’re smart. In that case, increasing the length of a university education, or increasing investment in university education more generally, is socially wasteful. The smartest students will still end up with the highest grades, and therefore receive the strongest “signal,” which should translate into the highest wages among students entering the labour market.
The coming change in the education suggests a simple test of this theory. If signaling theory explains the wages of university graduates, then the wage distribution (and wage growth trajectory) should be similar for students under both the old system and the new system, once we take into account their relative grades. In contrast, if the new system produces more productive workers, a competitive labour market (like Hong Kong) should ensure that this is reflected in higher wage levels and/or faster wage growth for students graduating under the new system.
Another less important effect of this change is that it brings us more into line with Mainland Chinese universities, as well as those in Canada and the United States, although I don’t think this factor has much effect on economic growth.
This is an excellent question that is worth writing a whole book on! But let me make some brief comments here anyway.
The biggest change in the proposed education system in Hong Kong is that students will loose one year of high school education, which will be replaced by one additional year of university education. I know little about high school education in Hong Kong, but I presume that part of this change is driven by a perception that the marginal value of the final year of high school is relatively low relative to the potential marginal value of an additional year of university. As a university teacher, I am not in a position to give an unbiased response to this presumption (“Of course it’s true! Otherwise I would have been a high school teacher!” … or something like that.)
The increase in length of university studies may be used for one of two purposes:
1) to increase the depth with which students understand their chosen field of study, or
2) to increase the breadth of their education.
It is possible to make a strong case for either of these. My understanding is that HKU is focusing more on 2) than 1), with additional broadening courses and students being encouraged to take additional majors, instead of focusing on as narrow a field of study as is often the case today.
What are the macroeconomic consequences of this change? Assuming that the benefits outweigh the costs, the workforce in Hong Kong should possess higher human capital. This implies increased productivity, and higher GDP, income, and taxes in the future. This final element is important, as universities are expensive to run; I haven’t seen any financial break-down, but I would be very surprised if the savings from decreasing the time students spend in high school will cover the increased costs to tax payers of an extra year at university!
From the student’s point of view, I think the change is good. At higher levels of education, students are likely to receive nearly all the benefits from any increase in human capital via increased wages. Any positive externalities to the rest of society (over and above the wages received by our graduates) are likely to be small.
All the above arguments assume that education truly is useful, and that increased university education makes students more productive when they obtain work.
But there is an alternative model of education, based on “signaling theory.” That’s the idea that education itself is of little use, but serves as a signal that you’re smart. In that case, increasing the length of a university education, or increasing investment in university education more generally, is socially wasteful. The smartest students will still end up with the highest grades, and therefore receive the strongest “signal,” which should translate into the highest wages among students entering the labour market.
The coming change in the education suggests a simple test of this theory. If signaling theory explains the wages of university graduates, then the wage distribution (and wage growth trajectory) should be similar for students under both the old system and the new system, once we take into account their relative grades. In contrast, if the new system produces more productive workers, a competitive labour market (like Hong Kong) should ensure that this is reflected in higher wage levels and/or faster wage growth for students graduating under the new system.
Another less important effect of this change is that it brings us more into line with Mainland Chinese universities, as well as those in Canada and the United States, although I don’t think this factor has much effect on economic growth.
The value of the US dollar
There are few less understood phenomena in macroeconomics than the behaviour of exchange rates. Of all the theories we have about this most basic of variables, none do very well at explaining day-to-day fluctuations in the currency. But that doesn't stop economists from trying.
Take, for example, this recent discussion by Menzie Chin (http://www.econbrowser.com/archives/2007/04/a_new_era_for_t.html), arguing that the value of the US dollar will continue to fall. It sounds plausible, and I cannot, to be honest, fault the logic. But for every economist who agrees with this argument, there is likely to be another who disagrees. And there is close to a 50% chance that this view will turn out to be wrong, and the USD will appreciate rather than fall, especially in the short run. In general, the most robust empirical model we have of the value of currencies (in the short run at least) is that they will follow a random walk. That is, the best prediuction of the future value of the currency is its value today. It might go up; it might go down. We just don't know.
My preferred explanation for our inability to predict the movement of exchange rates is the ease with which people can speculate on currencies (again, in the short run). If we truly believed that the US dollar will depreciate, then we should take short positions in the US dollar and long positions in other currencies and profit from the depreciation. But it's very easy (and cheap) to take such positions, and the act of taking them causes the USD to depreciate today, implying that it should depreciate less in the future, all other things equal. If many traders follow such a strategy until they no longer expect to gain from a depreciation, then the actual value of the exchange rate today ends up being approximately equal to the expected value of the future exchange rate. And if their expectations are rational, the exchange rate rate will look like a random walk.
In the longer run, however, it is difficult to speculate on currency since futures markets thin out, and are virtually non-existent at horizons of more than one year. Thus at longer horizons, it should be possible to predict the direction of exchange rates. So while I'm unwilling to make a firm prediction of which way currencies will move in the short run, I think that the USD will have appreciated relative to the Euro and depreciated relative to the Yen by at least 20% within 5 years. You'll need to come back in April 2012 and see if I'm right!
Take, for example, this recent discussion by Menzie Chin (http://www.econbrowser.com/archives/2007/04/a_new_era_for_t.html), arguing that the value of the US dollar will continue to fall. It sounds plausible, and I cannot, to be honest, fault the logic. But for every economist who agrees with this argument, there is likely to be another who disagrees. And there is close to a 50% chance that this view will turn out to be wrong, and the USD will appreciate rather than fall, especially in the short run. In general, the most robust empirical model we have of the value of currencies (in the short run at least) is that they will follow a random walk. That is, the best prediuction of the future value of the currency is its value today. It might go up; it might go down. We just don't know.
My preferred explanation for our inability to predict the movement of exchange rates is the ease with which people can speculate on currencies (again, in the short run). If we truly believed that the US dollar will depreciate, then we should take short positions in the US dollar and long positions in other currencies and profit from the depreciation. But it's very easy (and cheap) to take such positions, and the act of taking them causes the USD to depreciate today, implying that it should depreciate less in the future, all other things equal. If many traders follow such a strategy until they no longer expect to gain from a depreciation, then the actual value of the exchange rate today ends up being approximately equal to the expected value of the future exchange rate. And if their expectations are rational, the exchange rate rate will look like a random walk.
In the longer run, however, it is difficult to speculate on currency since futures markets thin out, and are virtually non-existent at horizons of more than one year. Thus at longer horizons, it should be possible to predict the direction of exchange rates. So while I'm unwilling to make a firm prediction of which way currencies will move in the short run, I think that the USD will have appreciated relative to the Euro and depreciated relative to the Yen by at least 20% within 5 years. You'll need to come back in April 2012 and see if I'm right!
More on Gun Control....
In an earlier post (http://hongkongmacro.blogspot.com/2007/04/economics-of-massacres.html), I discussed the economics of massacres.
On a related note, the US has one of the highest murder rates in the world. When I discuss this matter with pro-gun American's, I generally offer them two possible explanations:
1) readily available guns (as per my earlier post) or
2) Americans are murderous
These are not the only possible explanations, nor are they mutually exclusive, but they seemed the most likely possibilities to me. I also believed that 1) was probably true while 2) was probably not true, and that most American's would prefer it that way. The alternative is that American's are a murderous lot.
It turns out that I might well be wrong: even once all murders involving guns are removed from the statistics, "the non-gun homicide rate in this country [the US] is three times higher than the non-gun homicide rate in England."
(see http://newmarksdoor.typepad.com/mainblog/2007/04/the_virginia_te.html for more)
On a related note, the US has one of the highest murder rates in the world. When I discuss this matter with pro-gun American's, I generally offer them two possible explanations:
1) readily available guns (as per my earlier post) or
2) Americans are murderous
These are not the only possible explanations, nor are they mutually exclusive, but they seemed the most likely possibilities to me. I also believed that 1) was probably true while 2) was probably not true, and that most American's would prefer it that way. The alternative is that American's are a murderous lot.
It turns out that I might well be wrong: even once all murders involving guns are removed from the statistics, "the non-gun homicide rate in this country [the US] is three times higher than the non-gun homicide rate in England."
(see http://newmarksdoor.typepad.com/mainblog/2007/04/the_virginia_te.html for more)
Monday, April 23, 2007
Globalisation in the short run....
Globalisation may be good in the long run, but what about the short run? What measures should be taken to compensate local firms whose products cannot compete with developed economies?
In relation to the firm, absolutely nothing! For four good reasons.
1) Firms face all sorts of uncertainties. They may become uncompetitive because of
- Failure to adapt to changing tastes
- Failure to adopt new technology
- Increased domestic competition
- Increased foreign competition
- etc
Facing these risks and trying to remain profitable despite them is what being in business is all about. What is so special about the risk of foreign competition? If we’re going to help out firms by erecting trade barriers when they cannot compete, why not ban new technology to protect firms that fail to adopt that? In both cases, protection is costly for society.
2) “Moral Hazard.” If you have insurance against a fire, you’re less likely to take measures to prevent fires. In the case of fire insurance, such moral hazard is unavoidable. In our context, we can think of governments protecting firms as a form of insurance. If firms believe that the government will protect them, they have less incentive to adapt to changing tastes, adopt new technology, stay competitive, etc. As a result, they’re more likely to need the insurance! But ultimately their failure to try to minimize risks is inefficient.
3) Hysteresis. This term is usually used in economics in relation to unemployment: if the unemployment rate increases, then it may become very difficult to reduce it in future. The same idea applies here. Once a Government has taken steps to protect firms that ‘might’ have gone bankrupt without protection, in future the firm will come to depend on that protection. The firm most likely ‘will’ go bankrupt if that protection is ever removed! So once protection is put in place, it is very difficult to ever remove it. Given that you already agree that globalization is good in the long run, you must agree that protection is bad in the long run….. with hysteresis, it will also be bad in the short run!
4) Creative Destruction. As callous as it sounds, it is good for the economy if firms that cannot make a profit go bankrupt. A firm that cannot return a profit is actually destroying economic wealth by staying in operation. The total value of the inputs they use in production exceed the total value the market places on their output. Society is worse off the longer a wealth-destroying firm stays in operation! This argument applies to both the short and the long run.
Firms should be away of all the risks that they take, and take steps themselves to mitigate them- for example, by diversifying and adapting rapidly to the changing market place. This is efficient. But if the Government really wants to get involved, it should encourage such adjustment- by ensuring a flexible labour market, and maybe providing support for workers who find their skills no longer demanded by an evolving market place to retrain.
Imagine if the Hong Kong Government had decided to try to protect local manufacturers of mass produced goods from competition in Guangdong…..
In relation to the firm, absolutely nothing! For four good reasons.
1) Firms face all sorts of uncertainties. They may become uncompetitive because of
- Failure to adapt to changing tastes
- Failure to adopt new technology
- Increased domestic competition
- Increased foreign competition
- etc
Facing these risks and trying to remain profitable despite them is what being in business is all about. What is so special about the risk of foreign competition? If we’re going to help out firms by erecting trade barriers when they cannot compete, why not ban new technology to protect firms that fail to adopt that? In both cases, protection is costly for society.
2) “Moral Hazard.” If you have insurance against a fire, you’re less likely to take measures to prevent fires. In the case of fire insurance, such moral hazard is unavoidable. In our context, we can think of governments protecting firms as a form of insurance. If firms believe that the government will protect them, they have less incentive to adapt to changing tastes, adopt new technology, stay competitive, etc. As a result, they’re more likely to need the insurance! But ultimately their failure to try to minimize risks is inefficient.
3) Hysteresis. This term is usually used in economics in relation to unemployment: if the unemployment rate increases, then it may become very difficult to reduce it in future. The same idea applies here. Once a Government has taken steps to protect firms that ‘might’ have gone bankrupt without protection, in future the firm will come to depend on that protection. The firm most likely ‘will’ go bankrupt if that protection is ever removed! So once protection is put in place, it is very difficult to ever remove it. Given that you already agree that globalization is good in the long run, you must agree that protection is bad in the long run….. with hysteresis, it will also be bad in the short run!
4) Creative Destruction. As callous as it sounds, it is good for the economy if firms that cannot make a profit go bankrupt. A firm that cannot return a profit is actually destroying economic wealth by staying in operation. The total value of the inputs they use in production exceed the total value the market places on their output. Society is worse off the longer a wealth-destroying firm stays in operation! This argument applies to both the short and the long run.
Firms should be away of all the risks that they take, and take steps themselves to mitigate them- for example, by diversifying and adapting rapidly to the changing market place. This is efficient. But if the Government really wants to get involved, it should encourage such adjustment- by ensuring a flexible labour market, and maybe providing support for workers who find their skills no longer demanded by an evolving market place to retrain.
Imagine if the Hong Kong Government had decided to try to protect local manufacturers of mass produced goods from competition in Guangdong…..
Friday, April 20, 2007
Handicapped Minimum Wages Laws
Today's SCMP reported that the Labour Departmentis considering a minimum wage "for the less capable and the handicapped," according to Permanent Secretary for Economic Development and Labour, Paul Tang Kwok-wai.
Consider the economics of minimum wages, using the most basic of economics tools: supply and demand analysis. There is an equilibrium wage for handicapped workers which, left to its own devices, the market will gravitate towards. Now the Labour Department steps in and sets a minimum wage. If that minimum wage is below the equilibrium wage, it will have no effect: firms will continue to pay the minimum wage in order to attract workers.
The more interesting case (included in the above diagram) is when the minimum wage is above equilibrium wage. At this new wage, the supply of labour will exceed the demand for labour; unemployment will increase by the amount of the difference. Thus when the government sets the wage, they also implicitly determine the level of unemployment that handicapped workers face.
The article suggests that the minimum wage backers may understand the limits in the ability of the government to dictate the wages of the handicapped. Handicapped people may have varying degrees of ability to carry out jobs, and so command different wages. Philip Yuen Chi-hoi, secretary general of the joint Council for People with Disabilities, suggested that there should be 3 different minimum wages for handicapped workers, depending on the degree of the handicap, which would be assessed by someone or other not yet specified.
I have a simpler suggestion, which avoids all the red tape implied by the proposed system. Why not have a continuum of wages, which vary with the ability of the handicapped person? And who better to judge the appropriate minimum wage of an individual than the handicapped person themselves and their employer? So why not leave it to them to determine what the appropriate wage should be? Oh wait... that's effectively the system we already have!
If we want to encourage employers to hire handicapped workers, then we should do so directly, by subsidising the wages of handicapped workers. If we want to increase the salaries of handicapped workers above their market level, then we should do so directly, via those same subsidies. And if we want to increase the unemployment rate of handicapped people, we should do just as the Labour Department has proposed.
The more important question I have is: why doesn't the Labour Department understand basic Economics?
Consider the economics of minimum wages, using the most basic of economics tools: supply and demand analysis. There is an equilibrium wage for handicapped workers which, left to its own devices, the market will gravitate towards. Now the Labour Department steps in and sets a minimum wage. If that minimum wage is below the equilibrium wage, it will have no effect: firms will continue to pay the minimum wage in order to attract workers.
The more interesting case (included in the above diagram) is when the minimum wage is above equilibrium wage. At this new wage, the supply of labour will exceed the demand for labour; unemployment will increase by the amount of the difference. Thus when the government sets the wage, they also implicitly determine the level of unemployment that handicapped workers face.
The article suggests that the minimum wage backers may understand the limits in the ability of the government to dictate the wages of the handicapped. Handicapped people may have varying degrees of ability to carry out jobs, and so command different wages. Philip Yuen Chi-hoi, secretary general of the joint Council for People with Disabilities, suggested that there should be 3 different minimum wages for handicapped workers, depending on the degree of the handicap, which would be assessed by someone or other not yet specified.
I have a simpler suggestion, which avoids all the red tape implied by the proposed system. Why not have a continuum of wages, which vary with the ability of the handicapped person? And who better to judge the appropriate minimum wage of an individual than the handicapped person themselves and their employer? So why not leave it to them to determine what the appropriate wage should be? Oh wait... that's effectively the system we already have!
If we want to encourage employers to hire handicapped workers, then we should do so directly, by subsidising the wages of handicapped workers. If we want to increase the salaries of handicapped workers above their market level, then we should do so directly, via those same subsidies. And if we want to increase the unemployment rate of handicapped people, we should do just as the Labour Department has proposed.
The more important question I have is: why doesn't the Labour Department understand basic Economics?
The Economics of..... massacres
I am deeply saddened by the recent mass-murder at Virginia Tech. One common feature of mass-murders of this nature is the use of guns. But why are guns the weapon of choice of mass murderers? Let's apply a little economics terminology to common sense, and see if we can figure it out.
The foundation of eonomics is rational behaviour. Given an objective function, economic agents do the best that they can, subject to the constraints that they face. Generally in economics we don't question where that objective function comes from. In this case, I'm glad.... I can't for a second imagine why some individual would want to kill as many people as possible (you might be glad to know!). But let's take that objective function as given, and move on....
Given the objective function, the constraints faced by the potential killer will determine how they carry out their plans. Clearly getting caught before carrying out your plan defeats the purpose. Therefore you need to choose a method that does not draw attention to your plans. In the United States, obtaining a gun by legal means is relatively easy, and as a result, there is also a large secondary market in handguns. Notice that in the latest tradgedy, the killer simply walked into a gun store and asked to buy a handgun. This was perfectly legal, and drew no attention from law enforcement. (Compare that to Hong Kong: if you wanted to obtain a handgun here, it would be very difficult, given the very low number of guns in circulation, and it is possible that you would end up getting arrested in the process).
Another constraint for the person intent on mass-murder is minimizing the marginal cost of additional deaths. With a gun, the marginal cost is a few cents for a bullet and a quick pull on a trigger. It's hard to imagine how the marginal cost of death could be lower! Again, a comparison with Hong Kong is informative. Here criminals generally "chop" their victims (with a meat cleaver) rather than shoot them. Without dwelling on the details, I think it would take a superb athlete to swing a meat cleaver with sufficient ferocity to kill 30 victims without them either running away or turning on him and disarming him. In short, the marginal cost of death is higher, and so the incidence of massacre is lower.
There are other costs too. A recent news story reported on a criminal who had hidden a 'chopper' in his trousers and had tripped over. He severed an artery, and bled to death. I suspect guns are less likely to inadvertedly turn on their ownes like that!
One response to such a massacre in the US which is a puzzle to most non-American is the response of the pro-gun lobb. They argue that the reason for the massacre is not that there are too many guns, but rather that there are too few! I am as puzzled as the next person by this strange idea, but since it is sometimes made by otherwise intelligent, educated, thoughtful individuals, what could they mean?
The arguments seems to be that if the students cowering under their desks had a handgun in their bag, they might have been able to return fire and take out the gunman. Under normal circumstances, the possibility that your victims might be armed might also reduce the prospect of such crime in the first place. There may be some merit to these arguments. If there is, it suggests two equilibria in the marketplace for gun ownership:
1) most people have guns; murder rates are low, because criminals are scared of being shot by their intended victims
2) there are few or no guns; murder rates are low because criminals lack a low-lost, low-risk means to kill
If we were to buy this dichotomy, then the US is in the unfortunate position of being somewhere between 1) and 2); maybe either more or less guns would be an improvement on their current state of affairs. To maintain the current non-equilibrium, expect more calls for increased campus security, and maybe even metal detectors at university campuses to try to stop guns from getting in, as is now the case at many high schools in the US.
However, even if equilibrium 1) really exists, I'd far rather live in equilibrium 2), as we do here in Hong Kong. It's easier to run from a meat-cleaver than a bullet!
The foundation of eonomics is rational behaviour. Given an objective function, economic agents do the best that they can, subject to the constraints that they face. Generally in economics we don't question where that objective function comes from. In this case, I'm glad.... I can't for a second imagine why some individual would want to kill as many people as possible (you might be glad to know!). But let's take that objective function as given, and move on....
Given the objective function, the constraints faced by the potential killer will determine how they carry out their plans. Clearly getting caught before carrying out your plan defeats the purpose. Therefore you need to choose a method that does not draw attention to your plans. In the United States, obtaining a gun by legal means is relatively easy, and as a result, there is also a large secondary market in handguns. Notice that in the latest tradgedy, the killer simply walked into a gun store and asked to buy a handgun. This was perfectly legal, and drew no attention from law enforcement. (Compare that to Hong Kong: if you wanted to obtain a handgun here, it would be very difficult, given the very low number of guns in circulation, and it is possible that you would end up getting arrested in the process).
Another constraint for the person intent on mass-murder is minimizing the marginal cost of additional deaths. With a gun, the marginal cost is a few cents for a bullet and a quick pull on a trigger. It's hard to imagine how the marginal cost of death could be lower! Again, a comparison with Hong Kong is informative. Here criminals generally "chop" their victims (with a meat cleaver) rather than shoot them. Without dwelling on the details, I think it would take a superb athlete to swing a meat cleaver with sufficient ferocity to kill 30 victims without them either running away or turning on him and disarming him. In short, the marginal cost of death is higher, and so the incidence of massacre is lower.
There are other costs too. A recent news story reported on a criminal who had hidden a 'chopper' in his trousers and had tripped over. He severed an artery, and bled to death. I suspect guns are less likely to inadvertedly turn on their ownes like that!
One response to such a massacre in the US which is a puzzle to most non-American is the response of the pro-gun lobb. They argue that the reason for the massacre is not that there are too many guns, but rather that there are too few! I am as puzzled as the next person by this strange idea, but since it is sometimes made by otherwise intelligent, educated, thoughtful individuals, what could they mean?
The arguments seems to be that if the students cowering under their desks had a handgun in their bag, they might have been able to return fire and take out the gunman. Under normal circumstances, the possibility that your victims might be armed might also reduce the prospect of such crime in the first place. There may be some merit to these arguments. If there is, it suggests two equilibria in the marketplace for gun ownership:
1) most people have guns; murder rates are low, because criminals are scared of being shot by their intended victims
2) there are few or no guns; murder rates are low because criminals lack a low-lost, low-risk means to kill
If we were to buy this dichotomy, then the US is in the unfortunate position of being somewhere between 1) and 2); maybe either more or less guns would be an improvement on their current state of affairs. To maintain the current non-equilibrium, expect more calls for increased campus security, and maybe even metal detectors at university campuses to try to stop guns from getting in, as is now the case at many high schools in the US.
However, even if equilibrium 1) really exists, I'd far rather live in equilibrium 2), as we do here in Hong Kong. It's easier to run from a meat-cleaver than a bullet!
Thursday, April 19, 2007
US Recession.... part II
The following story by Gene Sperling fits neatly with my earlier post on the potential link between falling house prices and a future recession in the US..... a large part of the recent growth of consumption was due to increased house prices, a process which is now moving into reverse!
http://www.bloomberg.com/apps/news?pid=20601039&sid=a.mcWxg9aJ_E&refer=home
http://www.bloomberg.com/apps/news?pid=20601039&sid=a.mcWxg9aJ_E&refer=home
Google Ads
You may have noticed that I have added some "Ads by Google" to the site. This is an experiment: Given the traffic on this blog, I don't expect to make any money from it-Google only send me a cheque if the fractions of pennies per click add up to more than $100USD; in the likely event that the balance never gets that high (it's zero cents now), I'll never receive anything. I guess I am effectively providing free advertising- and subsidizing Google at the same time!
I'm curious about the business model of pay-per-click, so what better way to find about about it than with a real-world experiment!
By the way, I have no control over the ads that get posted. I can block individual ads that seem unsuitable, but I have better things to spend my time on.... like research and preparing lectures!
I'm curious about the business model of pay-per-click, so what better way to find about about it than with a real-world experiment!
By the way, I have no control over the ads that get posted. I can block individual ads that seem unsuitable, but I have better things to spend my time on.... like research and preparing lectures!
Wednesday, April 18, 2007
US Recession?
I believe that the US economy is soon to enter a recession, for the reasons I outline below. As with all macroeconomics, not all economists agree with my conclusion here, so you're welcome to disagree! Ultimately only time will tell, and even if I am right (or wrong for that matter), it may be for the wrong reason! The economy is always subject to shocks; regardless of the path of the economy right now, a large enough positive or negative shock would be enough to override the path I believe the US economy is on now. Here, in brief, is my "forecast" of the US business cycle.....
1) The US economy has enjoyed rapid growth in recent years. The main driver of this growth has been increased consumption, which makes up about 70% of GDP. But the increase in consumption has been much faster than the increase in income. This has been possible because household assets- in particular houses- have been appreciating rapidly. Many households have taken advantage of the appreciation by re-financing their home (that is, increasing the size of their mortgage), using some of the increased loan to increase consumption. Overall, this effect is large: average household savings in the US is now NEGATIVE.
2) BUT the increased value of homes in the US has not been sustainable. There is some evidence that a portion of the increase in house prices was due to speculative behaviour, and as speculation has dried up, house prices have started falling in many parts of the US. (Just search "subprime mortgage" on news.google.com to find evidence of where some of this speculation has come from: mortgage lenders offering generous terms to people with poor credit and low incomes has increased the demand for homes substantially, pushing up prices).
3) If the increase in house prices has driven increased consumption in the past, and consumption is now above sustainable levels (as evidenced by negative household savings), then it is highly likely that the same process will occur in reverse as house prices fall.
4) In recent months, the growth rate of the US economy has already fallen (from 3.5% to about 2%), largely due to decreased investment. But to date, consumption has remained stable. When consumption starts to fall (as I believe it must), this will cause a further reduction in growth, most likely driving a fall in the level of GDP- i.e. a recession.
5) Once US growth falls substantially, inflation will also fall. That will allow the Federal Reserve to ease monetary policy, by lowering interest rates. However, I expect that their change in policy will be too little, and too late to stop a recession.
It is very difficult to predict the timing of changes in the business cycle. Most likely, I expect the US will be in recession before the end of the year, and the Fed will cut interest rates by at least 1.5% by May 2008.
As I mentioned above, this is a forecast; I could be wrong for many reasons. Your comments are welcome.
1) The US economy has enjoyed rapid growth in recent years. The main driver of this growth has been increased consumption, which makes up about 70% of GDP. But the increase in consumption has been much faster than the increase in income. This has been possible because household assets- in particular houses- have been appreciating rapidly. Many households have taken advantage of the appreciation by re-financing their home (that is, increasing the size of their mortgage), using some of the increased loan to increase consumption. Overall, this effect is large: average household savings in the US is now NEGATIVE.
2) BUT the increased value of homes in the US has not been sustainable. There is some evidence that a portion of the increase in house prices was due to speculative behaviour, and as speculation has dried up, house prices have started falling in many parts of the US. (Just search "subprime mortgage" on news.google.com to find evidence of where some of this speculation has come from: mortgage lenders offering generous terms to people with poor credit and low incomes has increased the demand for homes substantially, pushing up prices).
3) If the increase in house prices has driven increased consumption in the past, and consumption is now above sustainable levels (as evidenced by negative household savings), then it is highly likely that the same process will occur in reverse as house prices fall.
4) In recent months, the growth rate of the US economy has already fallen (from 3.5% to about 2%), largely due to decreased investment. But to date, consumption has remained stable. When consumption starts to fall (as I believe it must), this will cause a further reduction in growth, most likely driving a fall in the level of GDP- i.e. a recession.
5) Once US growth falls substantially, inflation will also fall. That will allow the Federal Reserve to ease monetary policy, by lowering interest rates. However, I expect that their change in policy will be too little, and too late to stop a recession.
It is very difficult to predict the timing of changes in the business cycle. Most likely, I expect the US will be in recession before the end of the year, and the Fed will cut interest rates by at least 1.5% by May 2008.
As I mentioned above, this is a forecast; I could be wrong for many reasons. Your comments are welcome.
Tuesday, April 17, 2007
Hong Kong Macro Forecast
The APEC Study Centre here at HKU has just released its macroeconomic forecast for Hong Kong. See the following for details.....
http://www.hku.hk/press/news_detail_5544.html
http://www.hku.hk/press/news_detail_5544.html
Monday, April 16, 2007
Hong Kong vs. Singapore
Singapore and Hong Kong are similar in many respects. Both experienced rapid development starting around 1970 and are wealthy, first-world economies today. Both are highly open economies, with trade exceeding total GDP due to re-exports. Both have a reputation for competent Government, and low levels of corruption.
But there are important differences. The Chief Executive of Hong Kong receives an annual salary of $376,248 USD. The President and Prime Minister of Singapore each receive more than $2 million USD! Bearing in mind that Hong Kong is approximately twice the size of Singapore (in terms of population, GDP, and land area), what justifies this huge salary discrepancy? This seems like a worthy topic for discussion.
The opposition "Democratic Party" planned just such a forum, to discuss the pay of Government officials, and invited a number of prominent outsiders including members of the European Parliament to attend. However, the Immigration and Checkpoints Authority rejected the visa applications of the intended guests. The website of the Ministry of Home Affairs provided the reason:
"Singapore's politics are reserved for Singaporeans. As visitors to our country, foreigners should not abuse their privilege by interfering in our domestic policies. Foreigners who abuse the privileges that Singapore accords to guests and visitors, and meddle in Singapore's domestic politics, are not welcome here."
Hong Kong is different. As a "foreigner" in Hong Kong for almost 6 years, I am free to "meddle." Non-locals play roles in local policy think-tanks, which by their very nature tend to "meddle" in local politics. Personally I have taught Macroeconomics to more than 2,000 students in my time here, and there have been plenty of opportunities to illustrate my classes with examples of Government mistakes around the world- including those made locally. It would be unwise to use local examples if I were teaching in Singapore.
Unfortunately, that's not even the end of the story. In addition, the police have barred the forum from even taking place. Again, this would not have happened in Hong Kong. For all its imperfections, Hong Kong's "One Country, Two Systems" position in China preserves freedom of expression. In this case, the likely furor that Singapore-type salaries would generate would prevent a wise Government from introducing them in the first place.
And that's the important economic point here. As Lord Acton said in 1887, "Power tends to corrupt, and absolute power corrupts absolutely." Freedom of expression can serve as an important check on the ability of those in power to act in their own best interests, instead of the interests of the populace. It serves Hong Kong well.
links: http://edition.cnn.com/2007/WORLD/asiapcf/04/13/singapore.speakers.reut/index.html
http://www.iht.com/articles/ap/2007/04/13/asia/AS-POL-Singapore-Salary-Debate.php
But there are important differences. The Chief Executive of Hong Kong receives an annual salary of $376,248 USD. The President and Prime Minister of Singapore each receive more than $2 million USD! Bearing in mind that Hong Kong is approximately twice the size of Singapore (in terms of population, GDP, and land area), what justifies this huge salary discrepancy? This seems like a worthy topic for discussion.
The opposition "Democratic Party" planned just such a forum, to discuss the pay of Government officials, and invited a number of prominent outsiders including members of the European Parliament to attend. However, the Immigration and Checkpoints Authority rejected the visa applications of the intended guests. The website of the Ministry of Home Affairs provided the reason:
"Singapore's politics are reserved for Singaporeans. As visitors to our country, foreigners should not abuse their privilege by interfering in our domestic policies. Foreigners who abuse the privileges that Singapore accords to guests and visitors, and meddle in Singapore's domestic politics, are not welcome here."
Hong Kong is different. As a "foreigner" in Hong Kong for almost 6 years, I am free to "meddle." Non-locals play roles in local policy think-tanks, which by their very nature tend to "meddle" in local politics. Personally I have taught Macroeconomics to more than 2,000 students in my time here, and there have been plenty of opportunities to illustrate my classes with examples of Government mistakes around the world- including those made locally. It would be unwise to use local examples if I were teaching in Singapore.
Unfortunately, that's not even the end of the story. In addition, the police have barred the forum from even taking place. Again, this would not have happened in Hong Kong. For all its imperfections, Hong Kong's "One Country, Two Systems" position in China preserves freedom of expression. In this case, the likely furor that Singapore-type salaries would generate would prevent a wise Government from introducing them in the first place.
And that's the important economic point here. As Lord Acton said in 1887, "Power tends to corrupt, and absolute power corrupts absolutely." Freedom of expression can serve as an important check on the ability of those in power to act in their own best interests, instead of the interests of the populace. It serves Hong Kong well.
links: http://edition.cnn.com/2007/WORLD/asiapcf/04/13/singapore.speakers.reut/index.html
http://www.iht.com/articles/ap/2007/04/13/asia/AS-POL-Singapore-Salary-Debate.php
The Power of Government.....
....to destroy wealth. An excellent article about Zimbabwe in Time magazine. http://www.time.com/time/magazine/article/0,9171,1609808,00.html?xid=site-cnn-partner
Wednesday, April 11, 2007
US tariffs: what's at stake.
Recently, the US has been making headlines over the introduction of new tariffs on the importation of coated paper from Mainland China. While coated paper constitutes just a tiny fraction of Chinese-US trade, many economists view this as part of a trend of increased protectionism by the United States, and worry about its long run consequences.
Free trade has been a major source of world growth in recent decades. China, in particular, has been a major beneficiary of free trade, with exports to the United States and elsewhere serving as a major driver of Chinas economic development, as the following figures demonstrate.
Free trade has been a major source of world growth in recent decades. China, in particular, has been a major beneficiary of free trade, with exports to the United States and elsewhere serving as a major driver of Chinas economic development, as the following figures demonstrate.
Trade, and the trade balance, have grown over time in their contribution to GDP.
In the long run, the world economy benefits from free trade. It allows for increased specialization, as countries focus on producing the goods and services for which they have a comparative advantage, freeing up resources that would otherwise be used inefficiently in producing other goods or services. But in the short run, not everyone benefits. And in democracies, the short-term loosers from free trade can form powerful groups to lobby the Government to protect their particular industry. Unfortunately, the US version of democracy appears particularly prone to this form of "rent seeking" behaviour, even though in the long run, giving in to the lobbiests is not even in America's best interests.
The recent elections in the US, won convincingly by the Democrats, likely spell more trouble for free trade in the future; Democrats historically are more likely to favour protectionist policies, and Republicans free trade- although there are clear exceptions (Bill Clinton, a Democrat president, oversaw more free-trade legislation than George Bush, a Republican).
The long-term effects of these changes are likely to lower the growth rate of the world economy, with developing countries that are heavily dependent on trade for their growth like Mainland China suffering the largest fall in growth.
More cheerful outcomes are possible, however. It is possible that the share of consumption in GDP may grow in future, potentially helping to make up for the lack of foreign demand. Given that consumption constituted only about 38% of GDP in Mainland China in 2005 (compared with 70% for most developed economies), there's a lot of scope for consumption demand to grow in importance in the future.
Tuesday, April 10, 2007
The Real Reason you can't use your cell phone when you fly.....
It all comes down to economics... and the ability of the Government and airlines to ensure they can profit from cell phone use as much as possible. See http://www.marginalrevolution.com/marginalrevolution/2007/04/why_wont_they_a.html and the link there....
Wednesday, April 4, 2007
Cyber Money
Money is anything that is generally accepted in exchange for goods and services. One type of "money" that has been growing rapidly in Mainland China recently is "QQ coins"- see the following story: http://online.wsj.com/public/article/SB117519670114653518-FR_svDHxRtxkvNmGwwpouq_hl2g_20080329.html.
Is this really money or not? One could view virtual money as the same as real money, since it is exchangeable; an alternative viewpoint is that when you pay real money for virtual money, you're buying a service- the service being access to additional purchases in the virtual world.
Note, however, that until financial intermediaries spring up accepting deposits and issuing loans of QQ coins, there is no multiplier on the size of the QQ money supply.
Thanks to Edward Li for the pointer.
Is this really money or not? One could view virtual money as the same as real money, since it is exchangeable; an alternative viewpoint is that when you pay real money for virtual money, you're buying a service- the service being access to additional purchases in the virtual world.
Note, however, that until financial intermediaries spring up accepting deposits and issuing loans of QQ coins, there is no multiplier on the size of the QQ money supply.
Thanks to Edward Li for the pointer.
Tuesday, April 3, 2007
Macau's Growth
According to the most recent data, Macau is now officially richer than Hong Kong! In real terms, GDP in Macau grew at 16.6% in 2006, taking per capita GDP to the equivalent of $222,000HKD, compared with $214,700 in Hong Kong.
But are they really better off? The main source of Macau's growth is the burgeoning gambling sector in Macau, an increasing portion of which is foreign-owned. The profits generated from foreign-owned firms accrue to their foreign owners, not Macau's residents. Given recent reports on the profitability of these new gambling establishments (see, for example, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTWqxxBfz_B8), how much benefit to the Macanese see from this rapid growth?
One simple way to test this is to compare GDP with GNP. To the extend that Wynns Resorts, a US-owned entity, is earning profits from their casinos, these contribute to Macau's GDP but not GNP. Unfortunately, GNP data does not appear on the Macau government statistics website (http://www.dsec.gov.mo/).
An alternative is to look to labour market data: if the unemployment rate is falling, and labour earnings are rising in real terms, then it is safe to conclude that Macau residents are benefitting from their massive growth. That is clearly the case, as the following charts show. In the second chart, Hong Kong is included as a comparison, with both real wages normalised to 100 in 2001 Q1.
What about the future? Clearly the current growth rates are unsustainable. A large part of this growth is due to real estate investment, as new casinos and hotels are build; this should slow to more sustainable levels in future. A good scenario would be a gradual slowing of the growth rate to the 5-10% range in the coming few years.
One possibility is that the new-found wealth in Macau could fuel a broad real estate bubble, where property prices move far above equilibrium levels due to speculation, resulting in more real estate investment than is really warranted by underlying market demand. If that is the case, Macau may continue to grow in the near term at break-neck speeds, but this will be followed by a crash in property values, a fall in perceived wealth, and a slump in the local economy. The longer the high growth rates remain, the more likely this scenario is to play out.
But are they really better off? The main source of Macau's growth is the burgeoning gambling sector in Macau, an increasing portion of which is foreign-owned. The profits generated from foreign-owned firms accrue to their foreign owners, not Macau's residents. Given recent reports on the profitability of these new gambling establishments (see, for example, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTWqxxBfz_B8), how much benefit to the Macanese see from this rapid growth?
One simple way to test this is to compare GDP with GNP. To the extend that Wynns Resorts, a US-owned entity, is earning profits from their casinos, these contribute to Macau's GDP but not GNP. Unfortunately, GNP data does not appear on the Macau government statistics website (http://www.dsec.gov.mo/).
An alternative is to look to labour market data: if the unemployment rate is falling, and labour earnings are rising in real terms, then it is safe to conclude that Macau residents are benefitting from their massive growth. That is clearly the case, as the following charts show. In the second chart, Hong Kong is included as a comparison, with both real wages normalised to 100 in 2001 Q1.
What about the future? Clearly the current growth rates are unsustainable. A large part of this growth is due to real estate investment, as new casinos and hotels are build; this should slow to more sustainable levels in future. A good scenario would be a gradual slowing of the growth rate to the 5-10% range in the coming few years.One possibility is that the new-found wealth in Macau could fuel a broad real estate bubble, where property prices move far above equilibrium levels due to speculation, resulting in more real estate investment than is really warranted by underlying market demand. If that is the case, Macau may continue to grow in the near term at break-neck speeds, but this will be followed by a crash in property values, a fall in perceived wealth, and a slump in the local economy. The longer the high growth rates remain, the more likely this scenario is to play out.
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