On the Sai Kung Peninsula

in Hong Kong’s New

Territories things are

looking up for the pet accessory stores. Dogs are strutting along the sidewalks

dressed in sweaters, trousers and the occasional tutu. Their owners are parting

with cash for a variety of fashions, accessories and tidbits, all the way down

to sweets. One enterprising proprietor, clearly thinking of both pet and owner,

has even combined a wine shop with doggy haute couture. This might seem frivolous,

but it’s common in Hong Kong. More than HK$250

million of pet food and supplies are imported every year. That’s serious

business, and it says something a little surprising about Hong

Kong’s economy.

Of the more than 90,000 Hong Kong

households with dogs, a majority are young dual income couples with no children.

Young Hong Kongers tend not to have children, or at least delay having them,

because they can do without the expense. Many give money to their parents every

month, and the savings rate is high – anything up to a quarter of monthly

income, and sometimes more. Given these circumstances it might well be cost

effective to own a dog instead of raising a child, but it would be even more

economical to forgo both.

Dog clothes would seem like a remote possibility.

What we have to ask then is how the purchase of a doggie outfit,

or thousands of them, is anomalous in an economy with a relatively low inflation

rate of 2%, stable wage levels and strong but not spectacular growth. The

immediate reaction would be that with 6.8% real GDP growth last year and a low

unemployment rate of 4.4%, things are looking very good indeed. That’s the

opinion of Hong Kong’s Financial Secretary

Henry Tang, who delivered an upbeat 2007-2008 budget speech recently. Consumer

spending is up because the economy is flying. But that’s not quite right.

The notion of marginal utility, an economist’s staple, can

show why dog clothes indicate that average wage levels are not yet sufficiently

high in Hong Kong. Marginal utility, roughly

described, is the additional satisfaction gained from the purchase of one more

good or service than you already have. Unless you are a truly compulsive

shopper, marginal utility declines as you buy more of the same stuff. You reach

a satisfaction threshold after which the item never really seems the same. The

classic example is chocolate. The first chocolate bar you buy might seem

delicious, the next not so much and the third not at all. For most people

anyway.

There is an element of uselessness here – marginal utility

shows that goods, in particular, don’t necessarily maintain their value to a

consumer across purchases. Near the end of the First World War, Irving Fischer

noted that economists used ‘utility’ to measure desirability, but the general

public took the word to mean ‘usefulness’. A better approach would be to

describe how ‘wantable’ things were. Economists largely ignored him, but his

point is clear – we don’t really have much use for many of the things we want,

but we buy them anyway.

People in Hong Kong are

buying dog clothes whether or not they or their dogs really need them. Why? The

climate is barely subtropical (though it is, in fact, within the tropics) and

dogs have fur anyway. Even skinny little dogs that look forever undernourished.

The answer lies in the relation between marginal utility, or the wantability of

each extra purchase, and total utility, or the overall level of satisfaction

that someone can gain from a set income or wage.

A major way that people increase their satisfaction on a set

income is to maximize the amount of desirable goods they buy. Instead of buying

from an upmarket mall they can scour street vendors for lower quality but still

desirable goods. Another way is to spread purchases across a spectrum of goods.

In other words, if you can’t really

afford a set of designer clothes, spread your money around on things that

otherwise satisfy you. Hell, you can even buy your Chihuahua a tutu.

But remember that marginal utility should decrease with

repeated purchases of the same item. This probably holds true of individual pet

owners in Hong Kong – after all, even the most

pampered dogs won’t be wearing all that many clothes. Yet in a broader

socio-economic sense it appears that the desirability of dog clothes is yet to

diminish. They are still part of the bundle of lesser goods that Hong Kongers

are purchasing to satisfy themselves when their wages are relatively stable at

levels that are, well, not very satisfying.

Remember Henry Tang, the optimistic Financial Secretary? He

proposed a one-time capped 50% tax rebate on personal income this year. That

seems more like an emergency political measure than a fit of economic generosity.

It’s just the ticket for disaffected young dual-income, childless families with

no other tax kick-backs. You know the type – they don’t have enough disposable

income and gain satisfaction through buying clothes for their dogs.

The price levels of specific goods have long been used as

economic indicators – gold and oil prices are notable examples. The Economist Big Mac Index indicates price

parity across otherwise disparate economies to show overvaluation in currency

exchange rates. But using the purchase of dog clothes alone, regardless of

price, as an indicator of satisfaction with domestic wage levels is unlikely to

become commonplace. Yet it should make you stop and think about the importance

of frivolity.

In real terms, after adjustment for inflation, wages are

expected to climb by only 1.5% in Hong Kong

this year. Would you be happy with that? Probably not, even with the tax break.

But your pet might be. So when you want the word on the Hong

Kong economy, don’t check the financial pages. You can get it in

Sai Kung, straight from the dog’s mouth.