Next Magazine (2014.11.27, A002, Second Opinion, Bill Stacey)

A popular explanation for discontent manifested in protests for democracy is that it results from a wealth gap and rising inequality in Hong Kong. It is argued that bad policy is dictated by plutocrats that have extra votes and the government in their pockets.

Even though Hong Kong has resolutely been pursuing less market- oriented policies in recent years, opinion is shifting against the pro-market foundations of our economic success. This is despite the most widely used measure of income inequality, the Gini coefficient, being flat for a decade when adjusted for the effects of aging and public services like housing.The biggest threat facing Hong Kong is not inequality, but entering an “ideas trap” of bad policy responses to misunderstood problems. George Mason University Professor Bryan Caplan describes an ideas trap as a state “where bad ideas lead to bad policy, bad policy leads to bad growth, and bad growth cements bad ideas”. His modelling shows that when bad ideas drive policy, they are very hard to reverse. This theory explains why Argentina does not seem able to reverse direction, despite decades of failing policy.Caplan noticed in his data that “income growth seems to increase economic literacy, even though income level does not.” The more that government intervention leads to slower growth, the more likely it is that bad ideas focused on redistribution will gain currency and slow growth further. Ironically this will further entrench vested interests that would be challenged by new competitors if there was more growth. Hong Kong has a problem. Although incomes are high by historic standards and continue to edge up, slowing growth is likely to hinder economic common sense.There is a common thread to the bad policies promoted by some within the Hong Kong government, academics and indeed many of the government’s loudest critics. Their policy passions require taxpayer’s money, restrict commercial freedoms and often protect the vested interests of suppliers of services that they favor. Higher minimum wages do not in fact raise incomes for people on lower incomes, only better productivity does. Standard working hours would not increase leisure time, but could cost jobs. Universal pension schemes would be much worse for retirees in need than targeted schemes and neither is likely as effective as market driven private provision for retirement. Competition law offers new angles to undermine competitors with legal process, and it usually tackles competition issues years after markets have innovated away the problem.Public housing reduces the supply of units more at the lower end of the market than the premium end, raising market prices. Public health care is most successful where private doctors and hospitals have a large presence and healthcare markets are very open. Stopping cross border trade in baby milk formula helps suppliers keep prices elevated rather than guaranteeing supply for mothers. Licensing professionals has not protected consumers, but reduced the supply of doctors and lawyers and increased prices. These bad, but widely held policy ideas seem ever more entrenched. It is ironic that critics of the system are not challenging these orthodoxies, but buying into them. If these bad ideas are not dispatched, they will inevitably lead to more bad ideas, like increasing taxes to pay for them. This is not to say that the government should do nothing. Growth has slowed because of global factors, bad policy and the absence of reforms. Selling the public housing stock to occupants would be a good place to start reforms. Opening immigration to well-trained doctors from around the world would enrich healthcare. Property titles could be reformed to reduce transaction costs in property and to finally resolve the small house policy issues. Planning processes and home improvements are lengthy and opaque. Government remains owner of too many businesses. If the same energy and innovation applied to financial links with China was applied to other areas, we would soon restore growth and exit our idea trap.

Bill Stacey is in his 10th year as a resident of Hong Kong and is Chairman of the Lion Rock Institute.We are now on Facebook http://www.facebook.com/Next2ndOpinion