A month or so ago, the media showed US Federal Reserve chair Janet Yellen posing in front of beautiful mountain scenery. That was the Economic Policy Symposium in Jackson Hole, Wyoming – a gathering of international central bankers.
The chief executive of the Hong Kong Monetary Authority, Norman Chan Tak-lam, was there. He gave a presentation on “Globalization, Technological Innovation, Monetary Policy and Inequality”, which you can read at the HKMA website.
Political events like Brexit and the election of Donald Trump have raised concerns that the world’s economic structure has led to dangerous social divisions. Economists like Thomas Piketty have gained attention with ideas of what is happening and why.
For us in Hong Kong, it is a vital issue. We clearly have serious inequality creating social and political problems that we cannot ignore. (According to Oxfam, the top 10 percent of our population now earn 29 times what the bottom 10 percent earns, and nearly 19 percent of people are in poverty.)
Many academics broadly agree that inequality is linked with globalization and technological change, and more recently with loose monetary policy.
Hong Kong has been especially exposed to these trends.
We were among the first to take advantage of globalization – notably lower trade barriers – by moving our manufacturing to the Pearl River Delta starting in the 1980s. That process transformed Hong Kong into a major services hub, and it significantly increased local wealth.
Nearly all economists agree that freer flows of trade and capital boost wealth. From a worldwide perspective, the whole human race has become more prosperous than ever since that change in global economic trends.
In developed economies, average per-person purchasing power has tripled since 1980. In the emerging economies as a whole, average real incomes rose sixfold (anyone who can remember mainland China 30 years ago will have seen this change take place). Worldwide, the gap between rich and poor has narrowed.
The relocation of manufacturing boosted incomes in developing economies but reduced opportunities for certain workers in industrialized countries. Technology probably also played a big part in depressing income growth among less-skilled workers in mature economies. Automation reduced demand for labor, and the internet cut out intermediary roles in activities like retailing.
For the better-off, it was a very different story. Developed economies saw a growing concentration of wealth at the very top of the socio-economic scale. In the US, the top 10 percent, the top 1 percent and the top 0.1 percent all accumulated higher and higher shares of total wealth.
This seems to reflect rising incomes from capital – like stocks and property. The rich already own these, so they get richer even while many other people’s incomes from labor have weakened.
This is partly because the success of globalization boosted companies listed on stock markets and encouraged the rise in property values in major world cities as highly skilled people clustered in them.
All this sounds familiar to us in Hong Kong, where a generation of middle class people saw their stock portfolios and apartments multiply in value since the 1980s, and the tycoons have been like the 0.1 percent in the US.
But the next part will sound even more familiar – the role played by monetary policy, and specifically very low interest rates. Thanks to our peg to the US dollar, Hong Kong has followed the very loose monetary policy Janet Yellen and her colleagues have implemented to stimulate the US economy in recent years.
The central bankers at Jackson Hole did not openly say much on this subject – they tend to be very cautious in their comments. But basic economics suggests that the very low interest rates in the world today have fed into asset valuations like stock markets and property.
This would mean two things.
First, low interest rates are at least partly the cause of today’s inequality. That would mean that populism and anger are not just reactions against “globalization” but against the way the rewards all seem to flow to the very richest who own capital assets.
Second, it implies that these assets are overvalued. Low interest rates mean more liquidity trying to find higher returns, so money rushes into particular areas and possibly produces bubbles – some analysts would say this about tech stocks.
In the Hong Kong context, this suggests that people are right to see a link between (say) discounted young people and spiraling housing prices. It also suggests that current affordability levels for mass-market apartments are artificially inflated and unsustainable.
Hong Kong officials lack monetary tools to manage this situation. But they need to bear in mind that inequality is perhaps not just a long-term structural issue but partly due to imbalances that could change quickly when interest rates start to rise.
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