Learning from Hong Kong

This is from The Economist:

Over time Hong Kong has adapted to some of the peg’s constraints. Its exchange rate may be rigid, but its other prices and wages are remarkably flexible. During the financial crisis, even senior civil servants took a pay cut. This flexibility allows the economy to adjust quickly to cyclical ups and downs without the help of an independent monetary policy.

Prices, particularly for property, do sometimes take on a life of their own. But a more flexible exchange rate is not enough by itself to prevent asset-price booms: Singapore’s house prices have also soared despite its strengthening currency.

Can we learn anything from these examples?  I’d say nothing definitive, but they do add a couple data points to several interesting questions:

1.  Are the New Keynesians right that wage flexibility makes depressions worse?

2.  Are the Austrians right that easy money leads to asset prices bubbles.

My view before reading the article was no and no.  After reading the article I hold the same view, but with an epsilon more confidence.

PS.   Strictly speaking the NK wage flexibility thesis requires an unanchored price level, and HK has a dollar peg.  I’d respond that all price levels are anchored in some way.



15 Responses to “Learning from Hong Kong”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. October 2013 at 07:14

    Off topic.
    John Aziz has a post at Not Quite Noahpinion where he has the usual RGDP graph for the US, the eurozone, Japan and the UK. (Why do all modern Keynesians seemingly measure AD with real output? Keynes probably would have been horrified.) He also says the following:


    “Governments particularly in Britain and the Eurozone have attempted to fight depressed growth using austerity policies (in the context of expansionary monetary policy). The proponents of austerity theorise that by promising to bring down taxes and spending, they will unleash private sector spending by reducing future expectations of taxes. To me, this has always seemed like a boneheaded and Rube Goldberg-style approach. Simply, the issue of depressed private economic activity is far more complex than future taxation expectations. And aggressive monetary policy has not succeeded in reversing the depression(even if it has probably made the depression less severe). So it has been entirely unsurprising to me to see this approach largely failing.”

    I left my usual stock response on this subject.

  2. Gravatar of ssumner ssumner
    26. October 2013 at 08:17

    Thanks Mark, It’s pretty disappointing how far into the bubble most Keynesians are.

  3. Gravatar of Dustin Dustin
    26. October 2013 at 09:06

    As far as I know, there is no thriving (if any) currency black market in HK. Why would that be, given the peg? Is the peg close to reality? Some other reason?

  4. Gravatar of Dustin Dustin
    26. October 2013 at 09:11

    ^ Nm, it seems that with the aid of Google I have answered my question. Though the process is simple, I guess I never really understood the mechanics of a currency peg.

  5. Gravatar of W. Peden W. Peden
    26. October 2013 at 09:27

    I don’t see evidence in that section regarding-

    “Are the Austrians right that easy money leads to asset prices bubbles?”

    – since Austrians could reasonably say that easy money is a sufficient but not a necessary condition for asset price bubbles, so you can still get non-easy money regimes with bubbles.

  6. Gravatar of ssumner ssumner
    26. October 2013 at 10:02

    W. Peden, The difference between evidence and definitive evidence.

  7. Gravatar of Geoff Geoff
    26. October 2013 at 10:13

    “Over time Hong Kong has adapted to some of the peg’s constraints. Its exchange rate may be rigid, but its other prices and wages are remarkably flexible.”

    I have argued repeatedly that the extent of wage flexibility and inflexibility is strongly influenced by monetary conditions. Too many times I have seen people, particularly on this blog, assert that monetary policy must be this or that in response to the extent of wage flexibility and inflexibility, as if wage flexibility and inflexibility are what they are, as we see it, independently of monetary policy. This of course overlooks the effects of monetary policy on wage flexibility and inflexibility.

    I have also argued that wages become more rigid the more inflation is persistent and relentless, such as we have experienced for a long time.

    If we had a free market in money, where the total money supply and hence total spending would likely be even more rigid than they are as compared to a fixed peg government monopolized money economy such as Hong Kong, then wages rates and prices would likely be even more flexible.

    A maximally flexible wage and price system would be a maximally inflexible money economy.

    One of the greatest lessons of political economy is that macro concept X, where X can be money, employment, or production, among others, always turn out better when no one individual or small group of individuals are trying to control it on behalf of everyone else through coercion.

    If you want aggregate money to be as optimal as it can, then it is best accomplished through money decentralization.

  8. Gravatar of Geoff Geoff
    26. October 2013 at 10:19

    If you want to find source material for the merits of Austrian business cycle theory, you are not going to find it in The Economist.

    PS Easy money does indeed lead to asset bubbles.

  9. Gravatar of Gordon Gordon
    26. October 2013 at 10:42

    Scott, the following line from the article made me think of your post a few days ago that generated a considerable amount of discussion:

    “Singapore’s house prices have also soared despite its strengthening currency.”

    It would be interesting if a researcher were to survey the residents of Singapore about this. It might confirm the hypothesis from that post.

  10. Gravatar of benjamin cole benjamin cole
    26. October 2013 at 12:09

    Something about house prices, especially in”desirable” markets in nations with increasing disposable income…they explode…NYC, London, L.A., even Perth…monetary policy does not explain this entirely…

  11. Gravatar of ssumner ssumner
    26. October 2013 at 12:57

    Gordon and Ben, Yes, I agree. Singapore is increasingly seen as a highly desirable place to live.

  12. Gravatar of errorr errorr
    26. October 2013 at 21:01

    To me the whole wage flexibility thing is kinda besides the point. I forget who made the case (interfluidity?) that even if the wage stickiness isn’t true ther does exist some stickiness in the economy that can be observed through its effects. It is like macro-economic dark matter.

  13. Gravatar of Ravi Ravi
    27. October 2013 at 01:20

    It’s not just that they’re seen as desirable places to live. I can’t tell you the number of times I’ve heard that property in Singapore, Manhattan, central London etc. will always “hold their value”. I think the boom in property prices in some places is linked to the safe asset problem. Even the Norwegian SWF is getting in on the act these days.

  14. Gravatar of davidpaff82 davidpaff82
    27. October 2013 at 19:40

    so the Economist is ok with allowing NGDP to collapse in order to promote “quick adjustment”? gah, 30s-style liquidationism run rampant.

    HK’s price and wage deflation from 1998 to 2004 did not allow it to “adjust quickly” – it got a six year bull market in unemployment. HK unemployment only went down after a succession of economic problems disappeared – AFCrisis, post-dot-com bubble, etc. (lowered wages had nothing to do with the bounceback surely).

    so HK bounces back when world demand bounces back. nothing to be learned from HK in that respect. if the entire world has wage cuts when economy is bad, pretty hard to induce demand quickly.

    of course, proper NGDP targeting would have prevented the deflation from happening in the first place.

  15. Gravatar of ssumner ssumner
    28. October 2013 at 05:37

    David, HK fits the Phillips curve model better than any other country, partly because unemployment tends to adjust more quickly there than in the US.

    I don’t see any evidence The Economist is OK with allowing NGDP to collapse. Where did they say that?

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