In Hong Kong today life expectancy is 79 for men and 85 for women. The public must think twice about now allowing our politicians to follow in their footsteps. Hong Kong may need an affordable poverty support scheme, especially for the elderly, and it should naturally be means tested. But this is very far from a universal social pension scheme which Hong Kong cannot afford to have.

Public health care services have declined . . . . If Hong Kong fails to increase the supply of doctors and nurses then the cost of attracting and retaining them into the public sector will certainly rise, and this will add further burden to the already growing total public health care expenditures.

The “dual integration” has created deep contradictions in how Hong Kong. Given the enormous size of China’s economy, adjustment in Hong Kong means primarily accommodating China’s market demands and supporting her continued integration into the world economy. This requires an unending process of institutional innovation to manage and regulate market imbalances in all spheres of life. This is a new experience and challenge for Hong Kong.

The diagnosis that Hong Kong has deep contradictions that need to be addressed was first put forward by Premier Wen Jiabao . . . . These five elaborations are in actuality prescribed solutions for Hong Kong’s deep contradictions. They are things to do. . . . . In my essays this week and next, I attempt to construct a conceptual framework of these deep contradictions based on a broad analysis of their manifestations using specific examples.

On both normative grounds and to reduce political divisiveness, there is a strong case to be made for arresting growing income inequality and alleviating poverty. But what is sorely missing in policy discussions is the crucial positive analysis to tackle the deep causes of this rising inequality that is best described as a race between technology and education. Investing in education is not only essential for reducing income inequality, it is also crucial for promoting economic growth.

At the end of the day politics is mostly about narrow interests. Unfortunately economics teaches us that this is not just a petty nuisance to be dismissed. It is the stuff that can bring down civilizations.

An approach worth exploring is to grant each qualified resident in Hong Kong two votes. One vote would be cast through geographic constituencies and the other through functional constituencies. . . . . this could be a highly sensible, forward looking dual scheme suitable in this modern industrial era.

Given the important role of intermediate services in the promoting productivity and international competitiveness, and its diversified and dispersed nature in the economy, the economic role of the government should only be to provide infrastructure for innovation, invest in human capital formation, maintain a stable and transparent business environment, deregulate professions and occupations to lower the barriers of entry, and to open up markets outside Hong Kong.

Hong Kong’s long-term economic growth depends critically on the creativity and innovation of its people. A deep and difficult economic problem is how to configure our institutions so that we are able to discover better “ideas” by setting a high price to encourage research, and at the same time provide appropriate incentives to transform these “ideas” into “things”, i.e. setting a low price to encourage use of the “ideas”.

. . . . new Town Planning Ordinance increased the regulation tax permanently. Land value at the “intensive margin” continued to rise as supply failed to catch up because of various planning and control rigidities. The concentration of the property development market is also the result of these rigidities rather than its cause. Addressing these issues entail tackling bureaucratic inertia, divided interests, and opposing views in society over development.

The linked exchange rate regime tied Hong Kong to the international economy and provided an important anchor that keeps the community’s faith in the currency and maintains trust in the government’s management of monetary policy. However, these benefits come at a price. Under the linked exchange rate system, adjusting the value of the exchange rate ceases to be a policy option. Hong Kong must therefore rely entirely on changing its domestic prices to make all the necessary adjustments to accommodate any external shocks. . . . . The impact of China’s opening from 1979 on Hong Kong was inflationary; the Asian Financial Crisis in 1997 was deflationary; and the Global Financial Tsunami in 2008 was also inflationary.

. . . . the major concern is over the protection of generous benefits to local residents . . . . China’s history tells us that its opening should be embraced, not avoided. Hong Kong need not feel under siege if it can manage the permeability of its border more creatively and effectively. This will inevitably entail a reexamination of our social welfare system.

From this limited record of Hong Kong’s early history we can appreciate that the area’s fortunes rose and fell with its changing relationship with the Chinese mainland over almost two millennia. . . . . the territory thrived . . . . when the government in China pursued an open-door policy, and it declined . . . . when policies became inward looking.

A new TV series from PBS will be celebrating Milton Friedman. Have a look at the trailer. I am surely looking forward to this!

http://freetochoose.net/media/broadcast/testing_milton_friedman/preview.php

Younger Chicago economists are now quite apolitical. . . . . Present day Chicagoans are now a long way from Henry Simons who held that it was “immoral to accept as inevitable what is itself immoral”.

George said, “Milton, you’re such a preacher! . . . . . ” Milton replied, “But people are misled. I want to teach them.”

until this gap is bridged the alms receiver will continue to seek a higher moral reason for their existence. And the alms giver will continue to blunder and dismiss the alms receiver as ungrateful victims of colonial legacy stubbornly chanting empty slogans about “core values”.

Chicago innovations in economic theory are “paradigm preserving” or “paradigm extending”. They extend the theory of markets to behavior previously considered intractable to economic analysis.

A biologist could propose to construct a mathematical model of a tree which has an objective to maximize exposure to sunlight for the purpose of photosynthesis. . . . . . if the model succeeded in predicting the arrangement of the branches and leaves of trees, we would consider this to be a good scientific model of tree “behavior” and would not be troubled by the idea that the biologist had made an “implausible” assumption about tree behavior. . . . . . actual trees do not “reason” and is capable of solving the biologist’s mathematical model.

Knight had many admirers among the Chicago graduate student body, but only a few students. Fortunately, some of these were extremely able; notably, Friedman, Stigler, Allen Wallis and James Buchanan. It was mainly through his personal impact on a few influential students that Knight affected the subsequent course of Chicago economics.

. . . . . preferences cannot be aggregated into a consistent ranking. Pretending that there is a “general will” is not only misleading, but would lead to the wrong belief that manipulated political outcomes represent elevated moral and righteous outcomes. It would lead to the type of politics that is ultimately totally oppressive.

. . . . . in Hong Kong in which politicians use regulation to advance the interests that support them or that they represent. Hong Kong’s Basic Law does not permit legislators to propose bills that would have budgetary consequences. But since regulatory interventions do not have direct budgetary consequences, they provide an alternative means for politicians to gain votes to maintain their political power and office. . . . . . Such a situation makes it logical for politicians to target their regulations at “big” corporations. . . . . . Politically it is often necessary to first demonize the corporations as a prelude to redistributing their surpluses.

The French Enlightenment philosopher Voltaire mocked the Holy Roman Empire as neither holy, nor Roman, nor an Empire. Yet its survival is somewhat magical, carrying a name and an idea that embodied all three core elements that define Europe. Its belief system was Christian, it laws were Roman, and it was an empire in a non-oppressive Germanic way.

. . . . . it places responsibility for saving the Euro squarely in Germany’s hands. The only way to save the Euro (and incidentally to prevent Germany’s banks from being forced to absorb huge losses on peripheral European debt) is for Germany to spur consumption and investment enough to reverse the current account surplus. This would require the European Central Bank to embark on an expansionary monetary policy. Only this will allow peripheral Europe to grow and to earn the euros needed to repay the debt.

In the case of Europe, although money is global and politics is local, there is an imbalance in international trade in manufactured goods that is very much regional; and this is the crux of Europe’s problems today. . . . . . At present, their structural external deficits are too large to be financed voluntarily.

“In a world of imperfect foresight, the existence of speculators enables the system to behave with more foresight than the average individual in the system possesses.”

Twenty years ago, I wrote . . . . . to explain to the public why it was not a good idea for the Government to intervene in the pre-sale market for housing units. What was clear to me then, as it is now, was that there was no compelling reason to believe the market was failing or that Government intervention to curb speculation was warranted. . . . . . So long as banks remain prudent in making mortgage loans, there is hardly any rationale for regulating a purely voluntary exchange arrangement. When the threat of systemic banking risks is absent, the case for market failure arising from speculation in asset markets cannot really exist.

Friedman in the same article lamented that, “After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”

A society with 84% homeownership has to be the best defense for the golden straitjacket of deep economic integration.

1965 to 2010 . . . . . real per capita GDP . . . . . Singapore grew faster than Hong Kong at an average annual rate of approximately 1.35%. As a consequence, a Singaporean who started with $100 in 1965 was making $1,167 in 2010, but their Hong Kong counterpart was making only $655. The Singaporean had 78% more. . . . . . Singapore allows for an active market in public housing units. This means it does not suffer the kind of deadweight social welfare losses that are present in Hong Kong in both public rental housing and Homeownership Scheme (HOS) units. This factor alone could easily account for most, if not all, of the differences in per capita real GDP growth between Singapore and Hong Kong.