January 28, 2004
I've said previously that China and Hong Kong are in the middle of a mini stock market bubble. All things China are considered sure things. The story is so easy - big population, rapid economic growth, booming middle class. Of course, the facts don't chime with that. For example, China's "middle class" is a little less middle than you think. Plus the main Chinese banks have huge bad loans weighing them down, requiring bail-outs.
But the main sign of a bubble is when insiders start getting out. From the HK Standard:
Bank of New York has joined the latest wave of companies tapping Hong Kong's surging equity market by selling a 5 per cent stake in Wing Hang Bank for HK$731 million...The Hong Kong stock market, which has risen 36 per cent over the past six months, has tempted firms from banks to property developers to cash in their holdings, with three more developers - Sino Land, New World Development and Kerry Properties - tipped to join the trend soon.It's not to say the market will not keep rising for some time; but the last people in are the retail (i.e. you and me) and they are usually the ones left carrying the can. When you see the insiders getting off the merry-go-round, get off with them.
While on things economic, Hong Kong has a problem. The Government is running a massive deficit, forecast at HK$54 billion (US$6.9bn), down from an original forecast HK$78bn. One of the biggest problems is the HK Government has a narrow tax base. Of a working population of 3.2 million people, only 1.24 million pay tax. That's right, almost 2 million working Hong Kongers pay no tax at all. The Government used to be able to finance this through it's rigged market for land. It would auction off leaseholds on land to developers for astronomical sums and everyone was happy. Until the bottom fell out of the property market. Prices are still about 1/3 of their peak before the Asia crisis of 1997. The solutions are easy: broaden the tax base either via expanding the remit of income tax or introducing a broadly based sales tax. Sales taxes tend to be regressive (i.e. they hit the poor the hardest), whereas an income tax scheme can be made progressive, albeit at some cost in complexity. But either way, Hong Kong is going to have to learn to get by without a rigged property market and the Government is going to eventually have to bite the bullet and do one of these two things. The very worst thing that could happen is the economy recovers enough to solve the deficit problem for them - it simply pushes the problems out to the future.posted by Simon on 01.28.04 at 10:39 AM in the
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Carnival of the Capitalists
Excerpt: Welcome to this weeks Carnival of the Capitalists. Below are 28 posts on economics, business, marketing, and more. Next weeks
Weblog: Deinonychus antirrhopus
Tracked: February 2, 2004 01:37 PM
Excerpt: The powers that be at the HK Securities Commission are starting to get worried about the China stockmarket bubble that is spilling over into Hong Kong. The Standard reportsThe Securities and Futures Commission is warning that the recent frenzied spate ...
Weblog: Simon World
Tracked: February 26, 2004 08:30 AM
Don't liberals ever get tired of soaking people out of their hard earned money? Everytime there is a shortfall due to the largess of government, the old redistributors of wealth come out of the woodwork to pass around the hat for the poor old government. As if everyone is entitled to the fruits of one's hard work and efforts. Try setting off fewer fireworks. Pathetic...posted by: blue on 01.28.04 at 04:06 PM [permalink]
The only observation worth making is that it is quiet obvious that when governments are faced with a surplus, they are almost always enticed to expand goverment through new social programs. One can debate whether Arthur Laffer's curve is correct until the cows come home. However, the basis for sound policy must not just involve theoretical economic analysis but practical, realities of the world in which we live (See Psychology class 101).
The author raises a valid point about taxes in that he states that many in Hong Kong do not pay them. The real debate that we ought to have is whether the relatively poor people are better off with the money or whether the Hong Kong government can service their essential needs in a more efficient way.
I suspect that imposibg a tax on poor people would do much more harm than good.
What Hong Kong possesses is a major maldistribution of wealth. I would not ask the poor to pay down the deficit and I suspect that the 15% tax burden on the remaining population would stifle economic growth and severely limit the the benefit of the revenues that would only theoretically appear in the coffers. And I am not talking about supply side economics here my friend. There is sufficient demand in this economy and a sufficient number of people looking for work.posted by: Bulldog on 01.28.04 at 05:35 PM [permalink]
If I'm catching your drift your arguement is it is not OK to increase the number of people paying income tax, but nor is it OK to raise the tax rate on those already paying tax. In that case the only course of action is HK Government must cut it's spending until it can live within its means.
The CIA factbook says HK Government total spending is about 11.5% of GDP. The USA Federal Government spends about 19%. That doesn't include the States and Counties wihch I don't have figures for but imagine add up to at least half as much again. A total of about 30% of GDP. Even allowing for the PRC's assumption of defence for HK it's clear that HK has an extremely low Government sector compared to the USA.
However what is there needs paying for. "Growing" out of problems works to solve the immediate problem but still leaves the underlying structural problem, which will happen again when the economy next hits a bumpy patch.
HK's problem is only 1/3 of wage earners pay any tax at all, and there is no general sales tax. The money's got to come from somewhere. Spending the Exchange Reserves just to cover current expenditure is not prudent, as your Economics 101 would tell you.
"Supply side" economics worked well for Ronny Reagan, it just left a hell of a mess for George Bush Snr to sort out. And how did he do it..."Read my lips..."posted by: Simon on 01.28.04 at 06:20 PM [permalink]
I believe that the best way to bring more HK wage earners into the tax base is to grow the private sector economy through innovation and ideas. The rich make that happen by starting companies and hiring people.
As for the comment about GDP, comparing the United States--which protects a great deal of the free world with military forces in about 100 counties--is a bit foolhearty. A good deal of American GDP is attributed to it's military.
And, I am surely not defending American spending and American deficits while articlating that HK ought to live without them. In fact, I view America's overall deficit and current spending spree as a throught to the economic future of the country. The U.S. ought to reduce spending, and reduce the tax burden in order to stimulate further "real" growth--growth.
Ronald Reagan ended the cold war and brought America out of one of the worst economic periords since the great depression. He stimulated the economy and promoted pro-growth initiatives. His initiatives freed the American people from the shackles of high taxation and high interest rates and freed the people of Eastern Europe. Let us not forget the service that he displayed the the U.S. and to the world.posted by: Bulldog on 01.28.04 at 06:31 PM [permalink]
This higher average unemployment rate has hit the least able of our population to cope: the poor.
In the mist of these occurrences the richest 1% of the population have been increasing their proportion of the income pie at the further expense of the 90% of the working masses. The result has been increased levels of poverty and decay of the poor and their environment. The middle class is evaporating into the poor income stratum: the direct result of the 1% of the rich sucking what’s left out of a feeble economy into their realm.
As a proportion of new jobs created, the service sector saw an increase in employment of 5.8% while the manufacturing sector experienced a drop in employment of 5.9% for the period from 1979-1989 [Mishel and Frankel, page 104, 1991]. The share employed in the service sector relative to the manufacturing sector also increased with former middle class manufacturing employees (predominantly male) obtaining employment (after being laid off in the manufacturing sector) in expanding (low paying) service sector occupations.
While the proportion of U.S. workers employed in the service sector expands, the product differentiation that is characteristic of the manufacturing sector (innovative new products, improved designs, and quality) does not exist in the service sector. It is no longer the products that are the differentiating driving force (as exists in manufacturing) that results in a competitive advantage but the quality of a firm's management professionals. The best skilled managers and professionals are acquired at any cost since their managerial or professional talent could determine the future course of the firm.
The unskilled laborer is only one of many vying for the limited positions within the unskilled labor market: they are not in demand by the service sector firms. So in effect, demand for these workers is ‘anemic’ and the supply of these unskilled ‘modestly’ educated workers greatly exceeds the numbers that are demanded by firms.
Since the vast majority of base service sector firms (those that don’t employ professionals) don’t require skilled laborers or machinists in the production of a product (were the products quality is a function of the ability and care that the laborers or machinists take in the production process) managements decision to pay it’s unskilled ‘lower tier’ workforce subsistence wages is based on the belief that these particular workers have a minimal impact on the firm’s success. Therefore the savings obtained from the marginal remuneration of their unskilled ‘lower tier’ workforce is used to remunerate their managerial and professional ‘higher tier’ workforce at a substantially higher level than the wages paid their ‘lower tier’ workforce. The enhanced demand in the managerial and/or professional labor market places the firm under constant pressure to continue paying these skilled workers a wage that remains competitive with other firms. This demand for skilled labor has accelerated with the unrelenting competition that U.S. companies face from an array of firms in the new international markets. Recently this pressure of locating a professional labor pool that can be exploited through paying substantially less than is typical has been eased through the introduction of H1B visa ‘labor immigration’.
All of the above mentioned factors have helped lead to the currently expanding occupational bifurcation occurring within the United States (for that matter globally). Ryscavage and Henle concluded in their 1990 study conducted for the Department of Labor that occupational bifurcation is in fact occurring at an alarming rate in the U.S. economy:
It is clear from data that the higher paying white collar occupations recorded greater percentage increases in earnings over this 14-year period [1975-1989] than did the lesser paying blue collar occupations. This differential developed during the 1980-89 period. For the first 5 years following 1975, the lesser paying occupations did better, on the whole, than the higher paying occupations. For the entire period, the highest paying group (professional, specialty, and technical occupations) recorded the greatest increase. The effect of the differential, of course, is to push the upper part of the distribution even higher, while holding back the lower portion…the higher the level of pay and responsibility, the greater was the pay increase over the 28-year period [1960-1988].
The increase in the percentage of families that have fallen below the poverty line is more attributed to the loss of good paying (blue collar) manufacturing jobs (predominantly striking male household heads) [Bradbury, 1990].
In some cases the manufacturing concerns have moved whole production operations overseas in an effort to reduce labor costs with the effect that entire communities dependent upon a primary manufacturing employer are thus decimated, further increasing the rural pockets of poverty.
U.S. Under Capitalization
The high return to capital [MPK-δ > n + g; where MPK- δ = 0.08 and n + g = 0.03] implies that the capital stock in the U.S. economy is well below the Golden Rule level. This finding suggests that policymakers should want to increase the rate of savings and investment [N. Gregory Mankiw, 1992].
The above area will be dealt with in more detail in further revisions of this thesis draft.
U.S. Declining Savings Rates
In = interest rate
THE FIRST LEVEL UMBRELLA MODEL:
↑-r(↓-m) = ↓s(↓wr)[↓-MPC[↓Y(↓C)]]
↓Y = ↓C(↓MPC) + ↓I(-r) + Gn – NX Gn = Gs – T,
The Sub-Level Model of the Poverty Level Under The First Level Umbrella Model:
Factual Data Supporting Variables
The stagnation of real earnings and increased inequality of earnings is bifurcating the U.S. labor market, with an upper tier of high wage skilled workers and an increasing “underclass” of low paid labor…A healthy society cannot long continue along the path the U.S. is moving with rising bifurcation of the labor market [Commission On The Future of Worker Management Relations, pages 19 & 26, May 1994].
Real earnings among our poorer members of society, relative to real earnings of the bottom decile in other industrialized nations are more reflective of a peasantry to noble relationship of divergence in societal economic terms than should correspond to a mature industrialized nation. In 1993 real earnings for U.S. male workers in the bottom decile were only 38% of median earnings while their counterpart in the industrialized countries of Europe were earning 68% of the median earnings [Commission On The Future of Worker Management Relations, May 1994]. While compensation for the less well off of our society was abhorrently low when compared to other industrialized nations the U.S. ‘upper tier’ workforce (workers in the top decile) received compensation that was 2.14 times the median earnings, with their counterpart in the industrialized countries of Europe earning 1.4 to 1.7 times the median [Commission On The Future of Worker Management Relations, May 1994].
Mankiw, Gregory N. 1992. Macroeconomics. New York: Worth Publishers.
Ryscavage, Paul and Peter Henle. 1990. Earnings inequality accelerates in the 1980’s. Monthly Labor Review December: 3-16.
Mishel, Lawrence and David M. Frankel. 1991. The State of Working America, 1990-91. Armonk: M.E. Sharpe, Inc.
President’s Commission on the Future of Worker-Management Relations. 1994. Washington, D.C.: GPO
Gardner, Jennifer M. and Diane E. Herz. 1992. Working and poor in 1990. Monthly Labor Review December: 20-28.
Mellor, E. F. 1987. Workers at the Minimum Wage or Less: Who They Are and the Jobs They Hold. Monthly Labor Review July: 34-38.
1993. Rich man, poor man. The Economist July 24th: 71.
Danziger, Sheldon and Peter Gottschalk. 1986. Work, poverty, and the working poor: a multifaceted problem. Monthly Labor Review September: 17-21.
Williams, Donald R. 1991. Structural Change and the Aggregate Poverty Rate. Demography vol. 28 no. 2: 323-332.
Horvath, Francis W. 1987. The pulse of economic change: displaced workers of 1981-85. Monthly Labor Review June: 3-13.
Murphy, Kevin M. and Finis Welch. 1993. Lessons from empirical labor economics: 1972-1992. Inequality and Relative Wages. AEA Papers and Proceedings May: 104-110.
McConnell, Campbell R. 1992. Contemporary Labor Economics. 3rd ed. New York: McGraw-Hill, Inc.
Bradbury, Katharine L. 1990. The Changing Fortunes of American Families in the 1980’s. New England Economic Review July/August 25-39.posted by: Raymond Pairan Jr on 03.14.04 at 09:00 PM [permalink]