Free Market and Fairness

I don’t know what John Tsang and his staff were thinking when they produced the flagrantly inequality-promoting budget, at a time when society is already reeling from the pressure of serious inequities. Mr. Tsang has obviously omitted the most important underlying principle of fiscal management, and that is: fairness.

Just to show two examples of the gross unfairness of the budget. Do people who can afford the luxury of drinking red and white wine really deserve government subsidy in the form of duty exemption? And is it not odious favoritism to subsidize the wine business? How would a one-off grant of HK$3,000 help old people who are struggling to get by on contemptibly paltry monthly allowances for the rest of their lives? Perhaps it could help them to get drunk?

According to the SCMP, 6 percent of next year’s government spending will go to paying civil service pensions, more than on the environment and food, housing and infrastructure. This lavishing on civil servants is all the more ironical when government keeps calling attention to its slogan of “small government, big market”.

Nor does government seem to have a very clear idea of what constitutes a free market, or what does not. While government officials never fail to applaud the Heritage Foundation naming Hong Kong year after year as the freest economy in the world, they have not for once honestly admitted that Hong Kong’s land market has only one sole supplier (i.e. the government) who by manipulating supply, effectively controls the price of land, a resource on which all economic activities depend, that her property market, supermarket and utilities sectors are dominated by a few titanic conglomerates, that government is the second largest investor in the local stock market, and that government is not inclined to passing a competition law any time soon.

Even when treated with the benefit of the doubt, Hong Kong’s proclaimed free market obviously still has limitations in achieving social and economic goals, and its ineptitude in distributing wealth fairly is the most important one.

Interestingly, in Barack Obama’s hugely popular book “The Audacity of Hope”, he discusses the subject of the free market not being an effective tool for wealth distribution with the world’s richest man, Warren Buffet, who is also one of the world’s most visionary philanthropists.

Buffet was quoted as saying to Obama: “The free market’s the best mechanism ever devised to put resources to their most efficient and productive use. The government isn’t particularly good at that. But the market isn’t so good at making sure that the wealth that’s produced is being distributed fairly or wisely. Some of that wealth has to be plowed back into education, so that the next generation has a fair chance, and to maintain our infrastructure, and provide some sort of safety net for those who lose out in a market economy. And it just makes sense that those of us who’ve benefited most from the market should pay a bigger share.”

Buffet also concedes that he was lucky to be born in a time and place where society values his talent and gave him a good education to develop that talent, and set up the laws and the financial system to let him do what he loves doing – and make a lot of money doing it. Therefore he believes that the least he can do is to pay the taxes to help pay for all the public services. In his view, George W. Bush’s tax cuts that result in his paying tax at a lower effective rate than his receptionist are unconscionable.

According to Obama, Buffet also objects to Bush’s proposed elimination of the estate tax, as he believes that it would encourage an aristocracy of wealth rather than merit.

“When you get rid of the estate tax, you’re basically handing over command of the country’s resources to people who didn’t earn it,” he said.

When asked whether other billionaires share his views, Buffet replied: “Not very many.” He said that many of them have this idea that it’s their money and they deserve to keep every penny of it. What they don’t factor in is all the public investment that lets them live the way they do

John Tsang’s budget seems to have similar effect as Bush’s tax cuts, letting the more well-off earners get away with bigger tax cut benefits than the less well-off. The rich-targeting estate duty was abolished in February 2006 to ensure an aristocracy of wealth replaces meritocracy. So the sum total effect of unconscionable government action in terms of wantonly unfair fiscal and tax policy, cannot be anything but a deepening of imbalances in the economy and society. What the free market is not capable of doing, the government has also utterly failed to do.

Obama has a point when he writes: “We have a tendency to take our free-market system as a given, to assume that it flows naturally from the laws of supply and demand and Adam Smith’s invisible hand…… In our standard economics textbooks and in our modern political debates, laissez-faire is the default rule; anyone who would challenge it swims against the prevailing tide. It’s useful to remind ourselves, then, that our free-market system is the result neither of natural laws nor of divine providence. Rather, it emerged through a painful process of trial and error, a series of difficult choices between efficiency and fairness, stability and change….. We’ve depended on government action to open up opportunity, encourage competition, and make the market work better.”

There is no doubt that America has her own set of social, political and economic problems. But at least she is lucky to have conscientious, visionary and intelligent people like Buffet and Obama.