Half Full or Half Empty?

Andrew Work (SCMP, 2 June 2007)
Cheers!  Pint glasses were raised and champagne sparkled in celebration of the tax cut on beer and wine.  A new era of lower prices was to be delivered courtesy of Mr. Tang’s generous March budget.  However, three months on, it seems that things have not played out as intended.



There was a deal done.  Industry groups representing beer and wine importers promised to cut prices to reflect tax decreases.  The champagne and wine people have played their part and prices have come down on a range of products.  The major beer importers have not brought their prices down and in some cases have raised prices.

Hong Kong consumers aren’t alone.  Germany is suffering a mini-crisis as beer prices have skyrocketed.  The price of barley, a principal ingredient in beer, has doubled over the last two years.  The culprit?  Bad crops in exporting countries and the environmental movement.  As governments in Germany and elsewhere subsidise the planting of bio-fuel crops like canola and corn, less barley is planted, restricting supply.

On the wine front, price drops in Hong Kong have been the most consistent on wines from Australia.  The tax cut helps.  So does the fact that Australia is awash in surplus wine  It is being fed to elite cows and much of it is going down the drain.
 
I am sure that everyone had the best of intentions in this case.  The pressure brought to bear on politicians to secure price cuts in return for their tax cuts is immense.  Mr. Tang, a well-known wine lover, deserves credit for his caution and subsequent bravery.  After Lexusgate, it was going to be a calculated political risk to make a cut if perceived to cater to wealthy wine drinkers and business people.  It needed to clearly benefit a broad cross-section of society from drinkers of $3 Skol beer to the Chateau Lafitte quaffing connoisseurs.
 
However, the need for political caution is a symptom of rising populism combined with a broad misunderstanding of market economics.  Consumers complaining that beer distributors were ‘greedy’ and ‘lining their pockets’ display thinking that leads to pressure to impose price controls and interfere with markets.  This thinking will destroy Hong Kong’s miraculous economy through demands for government activism.

‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.’  Adam Smith knew the monks of Lantau didn’t put that beer in the supermarket.  Small importers and global brewing multinationals did.  Of course it is in their interest to keep prices as high as possible to gain as much profit as they can.  That self-interest is what makes the beer, and indeed, every consumer good we have, exist.
 
In opposition to their self-interest is our own – and that of their employees, consumers, retail owners and their suppliers.  Once a tax cut is announced, we expect lower prices.  However, employees of these firms expect a raise.  Suppliers of marketing materials and packaging choose that moment to try and raise their prices.  Shareholders and parent companies expect increased profits.  Every player in the market dance works to extract as much value out of their transaction as possible.  That is how competition works its magic.
 
All this occurs in a phenomenally complex world where the costs of inputs like labour, transportation, raw materials, marketing, packaging, legal and administrative costs, and many more change daily.  People’s preferences change from moment to moment. Their perception of their financial situation and willingness to pay is a moving target.

Nobel laureate Friedrich Hayek understood very well the information problem. The Soviets didn’t.  At one point, the Soviet Union was trying to coordinate 17 million prices a day. It didn’t work.  Hayek showed why dispersed knowledge, communicated as price signals are the only rational means of allocating resources in society. When we – legislators, the business community and the public – forget that, we are headed for trouble.
 
The politicians and business community, due to the power of our rising class of populist and economically illiterate politicians, find it hard to make the right arguments:  Reducing taxes will, in time, lead to more business and wealth in society and competitive forces will result in appropriate pricing for goods.  That means more jobs and less poverty.

There are strong arguments that eliminating the beer and wine tax will promote Hong Kong business and bring visitors to our shores.  However, this should not be accompanied by promises of price cuts.  Consumers should exercise their power standing in the supermarket choosing the beer that best suits their tastes at a price they can barely tolerate.  Hopefully we won’t support politicians who see economics through beer goggles.

Aussie Wine Surplus

http://washingtontimes.com/business/20060827-100240-7225r.htm

Cows drinking wine

http://men.style.com/gq/blogs/gqeditors/2006/11/man_did_i_get_m.html

Beer prices in Germany

http://www.thestandard.com.hk/news_detail.asp?we_cat=9&art_id=45494&sid=13812728&con_type=1&d_str=20070529