If Hong Kong’s new experiment is to work as well as the government hopes, one of Milton Friedman’s most cherished cities will have to overcome one of his most celebrated theories
This week the same city began another experiment: not merely leaving people free to pursue their own objectives, but giving them free money to pursue their own purchases. On August 1st Hong Kongers received the first instalment of the government’s consumption voucher, an effort to revive the city’s hard-hit retail industry. The amounts are generous and the distribution is slick. The money is added to a person’s Octopus card or paid into e-payment apps, such as Alipay.
So will Hong Kongers use it or lose it? Similar experiments have had mixed results. After South Korea provided perishable vouchers in May 2020, only 36% of households said they had raised their retail spending . After Taiwan distributed physical vouchers in 2009, most people spent them on things they would have bought anyway, according to Kamhon Kan of Academia Sinica in Taipei and his co-authors.
These shortcomings would not surprise proponents of the “permanent-income hypothesis”, who argue that households will try to smooth their consumption over time, spending a fraction of their estimated lifetime wealth. In these models, windfall gains are largely squirrelled away. Hong Kongers cannot set aside their voucher money without losing it.
The originator of the permanent-income hypothesis was none other than Milton Friedman. If Hong Kong’s new experiment is to work as well as the government hopes, one of his most cherished cities will have to overcome one of his most celebrated theories.
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