(This essay was published in Hong Kong Economic Journal on 30 January 2013)

 

Perceptions of rising poverty and a growing wealth gap have shifted public opinion in Hong Kong towards expanding the public provision of subsidized housing and enhancing social welfare programs. The scale and scope of public housing is enormous. Less well known is the scale of social welfare support. My colleague at the University of Hong Kong told me he recently counted 221 government programs in Hong Kong providing benefits to those presumably in need of assistance.

 

The role of government in housing and welfare in Hong Kong is massive. Yet there are surprisingly few critical studies of their impact on the family institution. A large body of social science research in the US and UK have testified to the detrimental impact of housing and welfare programs on the family, with devastating long-term consequences on economic vitality. The family plays an incredibly large role in economic life that is not sufficiently appreciated. In this essay I give an economic analysis of how the family institution has been impacted by government intervention? and how this affects economic performance.

 

Children as Consumption

 

In economics, children are viewed as both investment and consumption goods. Many people would instinctively object to treating children as goods, and calling them investment goods and consumption goods is certainly a terrible idea. But I ask the reader not to judge too quickly. These terms simply describe commonly observed behavior that we see every day in every society.

 

Calling children consumption and investment goods helps us focus on the relationships between different types of behavior. Investment requires saving and saving in turn requires forgoing current consumption. When things are put in this perspective one can easily see why government-provided housing and pensions can have an enormous impact on families and the choices they make.

 

Love of children is a consumption service parents derive from having children and raising them. Other individuals like grandparents also derive satisfaction or utility from having grandchildren. Good children presumably give rise to higher consumption value, but parents often derive satisfaction and utility even from children that are not good. In pre-industrial times, children were raised as laborers to help on the family farm or as apprentices in a family trade and for economic support in old age. Families then were predominantly engaged in agricultural production and children formed an important part of their long-term investment.

 

High infant and child mortality rates made investment in children a risky enterprise. The health hazards associated with childbirth were non-trivial for women and sometimes fatal. Women typically spent most of their adult lives giving birth to children and caring for them. Life expectancy then seldom exceeded forty years, but most women had over ten childbirths. Still, the human population in most pre-industrial societies did not grow very much century after century and some societies even became extinct – human survival could not be taken for granted. The family was without doubt the key institution humankind relied upon for sustaining its very existence.

 

Investment and the Rising Value of Children

 

The emergence of industrial society began to create many more opportunities for women in the market. As women joined the labor force, their incentive to invest in schooling and on-the-job training increased. The value of their time increased with higher market wage rates. Raising children and giving birth are very time-intensive activities, especially for women.

 

Families began to economize on this time by having fewer children and instead investing in the quality of children. The services that children provide to their parents could be thought of as possessing two dimensions – a quantity dimension and a quality dimension. Quantity is the number of children while quality has many dimensions, including cognitive ability, health, beauty, piety, moral character, fun, and other attributes. As women’s time became more expensive, the quantity dimension declined, however, the quality dimension increased sufficiently so that the reward provided by children for parental consumption actually increased.

 

 

Advances in medicine played an important indirect role in encouraging the emphasis on quality over quantity and supporting the economic expansions of the industrial era. Breakthrough discoveries in medicine resulted in dramatic reductions in infant and child mortality rates. This allowed families to reduce the number of childbirths necessary for attaining the desired number of surviving children, making it possible for women to enter the labor force and join the market economy.

 

Medical discoveries also led to better daily health and life expectancy. It became more profitable for people to invest in themselves and in their children because the acquired human capital could be more intensively utilized. People could work for longer hours in any given period with less sick time and over a longer work horizon. For example, the rate of return for schooling investments becomes higher if we live healthier and longer lives. This accounts for why, in growing economies, people spend an increasing number of years in schooling. Education and health are highly complementary activities.

 

In advanced industrial countries, the investment role of having children has declined over time relative to its role as consumption for parents. In the past the investment role primarily took two forms. First, children followed their parents’ career (mostly as farmers). Second, they were their parents’ investment for old age protection.

 

Few children today enter a family business; most join the labor market to work for strangers. The role of children in providing old age support for parents is also much weaker today in rich societies. State social security schemes provide full or partial support for old age protection. In urban societies there is a huge interest in homeownership, with home equity seen as an important source of savings protection for old age. The governments in many rich countries have supported this through subsidies on mortgages, preferential tax treatments, and public provision of private homes.

 

Parents continue to have children for consumption reasons. Children are an important reason why families are formed and stay together despite disagreement among members. Separation and divorce rates typically exhibit a twin peak phenomenon, rising first within a few years after marriage before children are born, but dropping off once children appear. Then rising again when the children have grown up and are less dependent upon parental care.

 

Political Economy of the Demise of the Family

 

Why has the family institution changed or declined? There are both economic and political reasons.

 

The economic reason is the less important one. In the pre-industrial era the typical economic unit was the family farm of limited scale. Most children followed their parents’ career and stayed in their employment to eventually take over their work. The great challenge for society then was to manage the continuing sub-division of limited land resources that threatened economic sustainability. Primogeniture, selective exiling of some siblings, wars, natural disasters, and diseases all contributed to the social and natural adjustment process to sustain economic viability.

 

In the industrial economy large companies have replaced family farms even in agriculture. Working for strangers has become the industry standard. Today children have more choices to realize their own interests and competencies by working for more successfully managed businesses. When the family business ceases to be the primary future employer of children, the family bonding among members is necessarily weakened.

 

Piety as an Economic Virtue

 

Parents can restore such bonding by strengthening cultural and moral institutions to encourage children to take care of them in old age. In societies where this is the accepted norm, parents would willingly invest in their children. Piety is an economic virtue that promotes and sustains economic growth by encouraging each generation to invest in the next one. By endowing every generation with more human capital, economic growth is sustained.

 

A society where children cease to take care of their parents encourages parents to save for themselves and underinvest in their children. Such a society has a lower degree of economic sustainability because the intergenerational compact is weaker. 

 

This is the case in most industrial societies where the modern state has adopted policies and legislations that have negatively impacted the family institution in many different ways. The details often vary from nation to nation. The most direct impact is family law, which mandates the ease and difficulty of becoming married, divorced and separated, what protection women and children obtain in case of divorce and separation, how family assets are divided upon death, divorce and separation, whether bequests and gifts are taxed, and so on.

 

Moreover, the government competes with the family in supplying a growing variety of services that used to be produced in the family. The state’s expansion into education, housing, social pensions and other services has significantly reduced the role of parents and other family members in providing for children. The most significant effect is that the state’s role affects a family’s savings and investment decisions, including parental investment in children. 

 

The public housing program in Hong Kong provides accommodation and shelter for more than a third of the population, but it fails to provide these families with an opportunity to build up home equity. This literally deprives them of the best available investment returns available in Hong Kong. Families who started out being slightly ahead of those living in the public housing estates and who purchased private property have enjoyed huge capital gains without much trying.

 

The wealth gap in Hong Kong has grown over time as a result of the appreciation of asset values after China’s opening. Many are worried that it will lead to permanent disparities in wealth from generation to generation in what used to be an upwardly mobile society. 

 

The middle class families who got lucky from the capital gains do not deserve these gains any more than the public housing estate families who missed out on these gains. The latter group are unfortunate victims of bad public housing policies. In the absence of greater imagination to reform these horrible policies, the fate of these families will be permanently sealed generation after generation.

 

Having been deprived of the opportunity to achieve capital gains for so long, it is not surprising some quarters in society want a redistributive old age pay-as-you-go social security scheme. This appeals to low-income families whose ranks have been swelled by former middle-income families who missed out on previous opportunities to acquire private homes. Their demand is becoming more vocal by the day as the lack of competition among fund managers of the Mandatory Provident Fund leads to continuing underperformance.

 

But how will a pay-as-you-go social security scheme impact family savings and child demand decisions? It will of course strengthen the incentives of children to stop caring for their parents in old age. Parents will in turn have more incentives to have fewer children and to underinvest in the next generation, and this will worsen prospects for upward social mobility among the low-income classes. 

 

Rebuilding the Family

 

The family plays a central role in transmitting intergenerational resources and investments. Undercutting parents’ role in caring for their children is cultivating a disaster for generations to come. Such is the plight of the advanced industrial societies that have made this choice. The public debts that have exploded in the US, UK, Europe and Japan today are the manifestation of a broken intergenerational compact. Professor Niall Ferguson of Harvard makes a penetrating analysis of the degeneration of Western societies due to the effects of redistributive pay-as-you-go social security schemes.

 

The abuse of the family institution is also a major reason why China’s economic development model has become so unbalanced. The one-child policy was introduced in 1972. Research by Professors Banerjee, Meng and Qian found that depriving families of the choice to protect themselves in old age through having more children has meant these families have had to increase their savings rate by approximately 10%.

 

The findings imply that up to one-third of the phenomenal increase in savings rates in China in the past three decades (the household savings ratio increased from 5% in 1978 to 34% in 1994) can potentially be explained by the reduction in fertility induced by family-planning policies. China claims that it wants a policy to rebalance its economic development strategy away from investment and more towards consumption, but this is not likely to make much headway if the one-child policy continues.

 

Families in China have an obsessive desire to acquire their own home before they get married. It is not difficult to understand why. China has one of the most repressed financial systems among major economies in the world. Interests rates offered on household savings are too low to be attractive to families. These interest rates would certainly not match the high growth rates of per capita income experienced in the last 30 years. That means the value of their savings would become increasingly inadequate to support them in retirement. Families have tried to make up for the low yields by saving an increasingly large proportion of their income. Savings rates have shot up and Chinese families refuse to consume.

 

In a repressed financial market, individuals are correct to have little confidence in social security schemes, which are not a trustworthy solution in providing for old age retirement. The situation is especially bad for families who are desperately trying to save. The Chinese economy has been growing very rapidly at more than 8% per annum so wage rates have continued to increase rapidly. Unfortunately investing in children is constrained by the one-child policy. Faced with an unfriendly state and a hostile market, families in China literally have no other option but to invest in property for old age protection. Property is the only asset whose appreciation potential is at least expected to match the rise of the economy.

 

Families have turned inward for support, but this has not always been easy. Parents may try to help their child (usually the son) to get married by contributing to the down payment for the new couple’s home purchase. For parents this represents a dual solution for old age support for themselves and for helping the next generation to set up a family. But until recently, if the young couple divorced, the other spouse could walk away with a half-share of the housing unit, wrecking their carefully laid plans. It is not surprising that China’s Supreme People’s Court decided in 2011 to issue a new judicial interpretation regarding asset sharing rules following marriage dissolution. It states that “Whoever paid the down payment is whoever the house should belong to following a divorce” and “The other party shall have no right to divide up a house purchased and given by one’s parents following marriage”. [最高人民法院關於婚姻法的最新司法解釋 “誰首付,離婚後房子歸誰”、“婚後父母給買的房子,另一方無權分割”] Such a ruling effectively helps parents to enforce their claim to the marital property and keeps families tied together in the absence of children and with easy divorce practices.

 

Enhancing and protecting family investments in children is central to China’s long-term economic vitality and growth, and to rebalancing its economy away from investment and towards consumption. Important steps in that direction may include reforming divorce laws, repealing the one-child policy, liberalizing banking and financial markets, and supplying more low cost housing using the Singapore approach (not the Hong Kong approach).

 

In Hong Kong and on the mainland, state intervention through marriage laws, government housing programs, financial sector regulations and old age retirement schemes have had an incredibly large detrimental impact on how families save, have children and invest in them. Is it surprising that the family is in demise? Fortunately the family is fighting to survive for there is no other alternative. The experiences of the Western industrialized economies offer lessons on what to avoid, not embrace as many in Hong Kong think.

 

References:

 

Gary S Becker, A Treatise on the Family, Harvard University Press, 1981.

 

Abhijit Banerjee, Xin Meng, and Nancy Qian, “Fertility and Savings: Micro-Evidence for the Life-Cycle Hypothesis from Family Planning in China”, Working Paper, Yale University, 2010

 

Niall Ferguson, The Great Degeneration: How Institutions Decay and Economies Die, Allen Lane, 2012.



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