Rationalising Rationality

Since the financial crisis of 2008 there have been renewed criticisms on economics. Many have expressed scepticism of the progress of this dismal science and have attacked the fundamental ideas which it is based on. Being a wannabe economics student, I have been questioned in a number of debates to try to justify the purpose and methods of the subject with many viewing it as mere financial alchemy – a pursuit of the impossible.

Opponents to the current study of economics normally take issue with its fundamental assumptions. They dispute a key basic assumption, that human beings are rational creatures, citing a plethora of evidence to show that the converse is true. It also seems that more researchers are veering away from the rational model of human beings (or perhaps such research work is just gaining less prominence) and irrationality is becoming the new trendy word. Let me clarify, I do not believe that human beings act rationally all the time but I feel rationality as a concept has been getting too much flak, which I feel is undeserved.

Part of this can be attributed to economist themselves who have mutated rational human into machines. Yet, a rational human is not an all calculating computer, capable of processing infinite amounts of information before deciding on the optimal choice. In that respect, research like the efficient market hypothesis which envision humans with full access to information and multi-tasking abilities are likening humans to omnipotent beings rather than rational ones. A rational human is one who is guided by a consistent set of values, has limited information, frequently makes mistakes but is capable to learn from them. He is able to prioritise desires and the pursuit of wealth while important is unlikely to be at the top. It should be based on the biological understanding of a human with all his evolutionary instincts and that of natural behaviour. Thus rationality should be defined as a consistency of ideas, thoughts and actions made based on reason which is affected by our circumstances, upbringing and biological makeup.

Another common mistake made when declaring humans as irrational beings is through thinking from our own narrow perspective. We assume that others should think the same way as us and do not see the possibility of different viewpoints. We see the actions of others through a glass tinted by our own experiences and culture. Hence, a terrorist willing to blow up himself or a person of differing faith, we view as irrational. However, that is not necessarily so. If we put ourselves in the circumstances of a terrorist, brought up in an environment of hostility with a divine purpose in life we might be able to see the infidels in the US and its allies as well. This would require us to see opposing views as just that – different but not wrong, owing to differing background, priorities and mind-set.

A third reason why humans may appear to be irrational is due to the limitation of social experiments. Take the centipede game where two participants are given the opportunity to win a maximum sum of money – $10. Participant A is first given $0.10 and can choose to pass or take the money. If the money is passed, the sum of money is increased by $0.10 and B is now given the chance to take or pass the sum. The game ends when either A or B takes the money. The expected outcome using backward induction is for the first participant to take the money immediately. The thinking works like this: B will definitely take the money at $10, so A will take it at $9.90 and continuing with this line of thinking A will take it at $0.10. But when this experiment is carried out, the ‘rational’ outcome seldom plays out. Of course not, for the $0.10 means so little to each participant that the chance of increased winning or just sheer enjoyment matters more to the participant. Increase the money from $0.10 to $10,000 and I think the difference would be apparent.

To conclude, rationality should not be seen only as a way of simplifying believes about human beings. It should be looked at as a proper concept, one that creates a main framework of what a human is. By basing it on the biological understanding of humans, looking at it through differing perspective and by testing it through better developed experimental procedures, rationality can be rationalised once again.

Timothy

*Written Jun/Jul 2011, edited Aug/Sep 2011

Price watch

Inflation concerns have consistently been in the headlines for the past few months. One of the main areas of worry is the increase in prices of food. In order to limit the possible increase in prices, the government has recently created a new organisation entitled the Retail Price Watch Group (RPWG). While the formation of such an organisation to limit the increase in prices of food items may seem like a good idea, the methods implemented by the RPWG will only yield futile result.

Let us examine the specific aims of the RPWG and how it plans to reduce or stabilise food inflation. Taken from its website (http://www.pricewatch.gov.sg/about.html), the RPWG was created to 1. “Keep a close watch on any excessive price increase of daily necessities” and 2. “Anti – competitive behaviour from businesses in Singapore”. It plans to do this by 1. Reducing anti competitive practices, 2. Limit profiteering, excessive price increases and 3. Providing information on “how to mitigate increases in prices of daily necessities”.

The RPWG, as can be seen from point 2 of its aim and point 1 of its plan is duplicating the duties of the Competition Commission of Singapore (CCS). There is no need to create a whole new entity whose duties overlap so similarly with an old established organisation. If the CCS has not been keeping close watch on the food industry, the only measure that needs to be taken is to expand its duties to include it. The only reason for the creation of the RPWG with the CCS a part of it would be if the CCS can synergise with the other members to provide information to mitigate price increase or limit profiteering by other means which I really doubt it has the expertise to do so.

The second way the RPWG aims to control food inflation, by limiting profiteering is a strange and ridiculous notion that needs to be addressed. Assuming the RPWG definition of profiteering to be charging a high price greater than the norm, I would show why limiting profiteering would be a pointless, counter intuitive measure. Here it is necessary to take a closer look at the measures the RPWG has enacted so far to limit the increase in prices. It has tried to limit the increase in basic necessities and hawker food. Both are different products and will be examined separately.

First limiting profiteering of hawker food is a flawed idea. Hawker food is easily available and differentiated with stores offering varied styles and quality of food. Earning profits either through high price lower quantity or low price higher quantity is the sole aim of any and every business, hawkers included. Ignoring the distortion in prices due to collusion between firms which if present should have be dealt with by the CCS, supernormal profits will occur in any free market in the short run. It is this profit that sends a signal on how lucrative the market and how highly demanded the product is that will lead to new players joining it, provided the market is contestable. There would be new competitors to the market if they feel they can make a greater profit by selling at a lower price. Furthermore, consumers are smart enough to buy what they value taking into account price and quality of food. Thus, the only responsibility of the RPWG in this case would be to ensure that the markets are always contestable and new stores can easily take over less competitive stores.

Should the RPWG really want to reduce prices in hawker food, it should look at controlling the practice of subletting of stores which would only push up rent. Subletting should only be allowed with even split in rents paid should its purpose be to encourage longer operating hours for stores. Store owners should not be able to earn a rent from being the owner of a store that was originally rented out at lower than commercial prices.

Basic necessities can be defined as food products which are needed for basic nutrition requirements and are commonly used in cooking, e.g. rice, vegetables, sugar. Such products can be found in many supermarkets or markets. This implies that profiteering of basic necessities will not occur as long as supply side factors remain elastic. Prices would mainly be affected by the price of imports which Singapore has limited control of. However instead of letting supermarkets compete with each other to lower prices, the RPWG has done the opposite by getting supermarkets to agree to hold price steady of basic items. It looks like the only ‘price fixing’ that is allowed is within members of the RPWG itself! Yet, price should already remain relatively constant even without any announcements as they are based on pre agreed contracts. Freezing prices as announced on Feb 2011 (http://www.channelnewsasia.com/stories/singaporelocalnews/view/1113033/1/.html) and taking into account the lower expected prices (http://www.mas.gov.sg/resource/eco_research/eco_dev_ana/inflation_monthly/2011/InflationApr11.pdf) would only lead to higher profits for supermarkets – profiteering!

The only role that the RPWG should play in controlling inflation is that of method 3 – providing information. I can see two 2 ways in which it has tried to provide more information to consumers. First, is through the labelling of hawker stores with the RPWG logo. This is completely pointless as a hawker centre with majority of the stores labelled provides little additional pricing information than one that has no labels at all. Even if hawkers agree on keeping price constant, they can still skimp on quantity provided. Second, it has tried to educate consumers in food choices, for example recommending frozen meat over fresh meat. This is a move in the right step to help households lower cost. Yet, these two measures show a one dimensional understanding of the role information can be used to combat inflation. Information can also help to lower prices by fostering more competition in markets.

Current pricing information by retailers are often concealed or disorganised. Prices of necessities like rice cannot be easily compared between supermarkets, markets and other smaller retailers. Trying to ascertain which supermarket offer a cheaper produce within one’s vicinity is a chore as one has to go down to the individual chains to verify prices which also fluctuate with weekly discounts offered. Transparent prices of necessities that can be easily accessed by consumers and updated frequently would help consumers make an informed decision, promoting more competition between retailers.

The RPWG can help in accumulating, organising and publishing information that would be useful for the price sensitive consumer. It can do that by producing a website or an app that allows a user to search for the prices of a particular product within his location. To cater to the less internet savvy citizens, perhaps a condensed list of prices can also be published in the newspapers. While noting the variance in quality even of basic food items, this would still serve as a guide to consumers of the cheapest price available and would be useful as a reference. It would also act as an incentive for supermarkets to offer better discounts with the free publicity provided. This would be more useful to consumers than the current situation where supermarkets take out advertisements separately, for example Fairprice advertises mostly on Thursday while Cold Storage advertises on Fridays in a different section, making comparing a chore.

In conclusion, the creation of another organisation to keep watch over food prices is questionable both in objective and method. The RPWG has not sufficiently distinguished itself from the CCS, failing also to understand the role of the market and of prices as signalling instruments. Instead of focusing on further distortions to markets, it should be looking more closely at the role of information in creating more competitive markets. Meanwhile, it remains a crippled organisation with limited effectiveness.

On the influx of foreign workers

The influx of foreign workers into Singapore combined with the upcoming general election has resulted in debates over the cost and benefit of foreign workers with heightened xenophobic attitudes and viewpoints surfacing. I believe this issue is more complex than it seems and warrants further investigation.

Presently, the inflow of foreign workers is controlled by a system of taxes in the form of levies which employers have to pay for each foreign worker hired daily. The levies vary with the sector of employment, the ratio of foreign to local workers and whether the worker is ‘skilled’ or ‘unskilled’[1]. It is also regulated by a system of quotas as the number of foreign workers that is permitted in each business is controlled by the number of S Pass and Work permits issued which is based on the particular industry and the number of local workers hired[2].

There have been increased cries for making the entry of foreign workers into Singapore even stricter. The proposed policies include higher taxes, lowering of the quota and even regulating that a foreign worker can only be employed if it has been demonstrated that no Singaporean can fill the position. Supporters claim that such policies are necessary to protect Singaporeans from the increasing number of foreign workers that eat up or push down the wages of the lower income Singaporeans, most of which are unskilled or are the elderly. They also claim that higher paying executive jobs should go to Singaporeans instead of ‘foreign talent’ as they have the necessary talent and skills required. I will be arguing based on three areas to debunk these myths and show why proposals to further restrict the inflow of foreign talent either by tax or by quotas will hurt Singapore’s competitiveness, are not effective and an invasion into personal right.

1. Economic Reasons

First, let us dwell on why a foreign worker is needed to boost Singapore’s economy. One reason that they are necessary is to fill up jobs that cannot be done by a Singaporean worker. This is especially true of high skilled jobs and research work where education policies lag behind new global trends. Specialised knowledge in areas such as renewable energy and nanotechnology requires considerable years to develop and hone. While educating Singaporeans to fill this niche is desirable, it will take a long time before all its citizens are ready. In order to seize the first mover advantage and capitalise on emerging scientific trends, it is often needed to bring in skilled foreigners to spearhead the growth and development of that industry. It would also create more jobs in the future, when Singapore becomes a vibrant hub for that industry.

Most people would agree with the above paragraph, that of bringing in foreigners when no Singaporeans can fill the position. However, even if a Singaporean can perform the job it does not mean that they should be preferred as foreign workers can carry out certain jobs in a better manner. There is an increasing trend of menial labour from cleaners to construction workers being carried out by foreign workers instead of Singaporeans. One can claim that it is the foreign workers that steal the jobs that are the domain of the lower educated or elderly citizens. But, it is not so much steal as out compete. Foreign workers are more motivated, more hardworking and more willing to work in dirty environments that Singaporeans shun. Even in the industries where skilled workers are required, foreign workers can perform a better service. Foreign nurses and service crew have a reputation of being more patient, friendlier than fellow Singaporeans. Employing workers with a better attitude benefits not only the employer but consumers as well.

People who oppose the inflow of foreign workers often cite them as unfair competition whose wage demands are much lower owing to the lower cost of living in their home country. They claim that employers can save from CPF contribution as well. While both points are true, they are not unfair competition as factoring the cost of levies would show the cost of hiring both workers to be similar for low wage unskilled industries. A survey done by the Singapore Chinese Chamber of Commerce & Industry (SCCCI) showed that the top reason cited for hiring foreign workers was due to the unwillingness of local workers to work in labour intensive jobs (63.7%)[3]. Of course, employers might be bias, so let us take a look at the figures taken from a paper written for the International Labour Organisation by George Ofori. While dated, the figures show that an employer has to pay a Singaporean 2 – 2.5 times the wage of a foreign worker for his services[4]. Assuming similar ratios and including an arbitrary 10SGD per day in cost for foreigners under the work permit scheme that requires companies to cover health care, housing, transport, upkeep and eventual repatriation cost, here is a table to illustrate what Singaporeans and foreign workers can earn keeping cost to employ a worker constant.

	Cost to employ a foreign worker	Cost to employ a Singaporean
Taking a foreign worker wage as 400. Construction industry with a levy of 470 for unskilled worker. Employer can pay 1160 for a Singaporean	=400+470+300 = 1170	=1000 *1.16 = 1160
Taking a skilled foreign worker wage as 1000. Manufacturing sector with a levy of 210 assuming tier 2. Employer can pay 1300 for a Singaporean	=1000+210+300 = 1510	=1300 *1.16 = 1508

This shows that in the low paying unskilled construction industry, employers can offer 2.5 times the salary to a local at the same cost. Yet, 68.7% of those employed in the construction industry are PR or non-residents[5]. This shows a very inelastic supply of local labour indicating an unwillingness to work in the industry. Contrary to common perception, current levy rates, strongly favour Singaporeans in the low paid sector while it is the middle income skilled workers that face more ‘threat’ from foreign labour.

Of course, there are many foreign workers that are not as good as their Singaporean counterparts. Yet, they are willing to work at a much lower wage than Singaporeans would. This has a positive effect of controlling inflation, the other bane of Singaporeans. Assuming that Singaporeans are hired preferentially over foreign workers at double the cost of a foreign construction worker, the price to construct a HDB will rise by an estimate of $5000. The calculations can be seen below.

Take the cost of constructing a HDB unit at $139,000[6]
Removing estimated profit of $39,000 = $100,000
Labour cost (labour cost + subcontract work) = 47.6% of real estate industry[7] = $47,600
Labour cost contributed by foreign workers + PR = $47,600 *0.68 = $32,368
Assuming wage makes 1/3 of cost = $10,681.44
Doubling cost and assuming elastic supply[8], price of a HDB unit would rise by at least $5000.

Similar calculations can be done for the manufacturing sector to show the possible increase in prices. There has to be a trade of, either the increase in prices or the allowance of more foreign workers into Singapore.

Next there is a false mentality that the issue of foreign workers is a zero sum game, where foreigners gain and Singaporeans lose. This is not true, both can benefit. As mentioned above, Singaporean owned companies can benefit from the cost savings gained by employing cheaper workers and make their produce more competitive on the international market. Jobs can also be created when foreign companies set up their businesses here, attracted by the cheap foreign labour and good quality Singaporean managers. Even if both unskilled and skilled foreign workers take up jobs that could potentially be filled by a Singaporean, they would still be contributing to the Singapore economy. They would help boost consumption in hawker centers and restaurants, benefit bus companies and create more demand for transport services not to mention the increase revenue through the levies and GST.

Furthermore, shielding Singaporeans from competition within Singapore is a short sighted approach as it overlooks the fact that there is greater competition outside of Singapore. Companies who find Singapore no longer competitive can easily opt to and operate in another country instead. When that happens, workers will not even get a job opening, let alone a chance to compete.

Opponents to foreign workers often cite that allowing such low skilled workers to come in results in businesses opting to lower cost through employing cheaper workers rather than through improvements in productivity. This choice between foreign workers or improvement in productivity is a false dichotomy. The aim of a business is to maximise profit. This includes lowering the cost through any method possible. The reason why many companies are relying on foreign workers to lower cost is because it is the more straightforward method. Productivity gains involve risk from research & development and the difficulty in changing the mindset of current workers and management to adopt new procedures. Thus, it is not the fault of businesses or foreign workers that ways to improve productivity have not been explored. It is the fault of the government for not doing enough to encourage upgrading and risk taking, and of the people for being inflexible to change.

2. Social Reasons

It is time to move on to the social aspect of bringing in foreign workers. In this aspect it can be said that foreign workers are affecting the society in a negative way. This can be attributed to two reasons. First the huge inflow of workers is taxing our public services. There have been numerous complaints of foreign workers flooding the MRT and buses. Results from the 2009 Public Transport Customer Satisfaction Survey shows that only 44.5% of commuters were satisfied with passenger crowdedness[9]. While foreign workers might contribute to the problem, it does not mean that we should restrict their inflow to solve it. This problem points to a lack of good and advance planning to accommodate the increase in workers needed to power our industries. It is a reminder of the need for economic and social planning to be well coordinated and executed.

Second, the attitude and behaviour of foreign workers especially the unskilled ones have enraged many Singaporeans. Foreigners have clashed with Singaporeans due to differences in social and cultural norms. Common Singaporean grouses include Indian workers aggressively squeezing and pushing his way into the MRT desperate for a seat or a space to lean on. PRCs who talk loudly, make a ruckus and dirty void decks draw the ire of many as well.

The physical damage as well as the friction between Singaporeans and foreign workers can be said to be the negative externality of the influx of foreigners. However, as argued by Ronald Coase in ‘The Problem of Social Cost’, externalities are more often than not a result of decisions by two parties.  While foreign workers might be ‘polluting’ our environment, it is also our refusal to understand their social and cultural norms that causes us to see their actions as ‘pollution’. If we become more understanding, more accepting, the negative externality would also be lowered[10].

3. Moral Reasons

The issue of controlling the inflow of foreign workers is a moral one as well. One ponders whether such taxes and quotas are fair and equitable policies. I would be questioning whether such measures are truly fair to all Singaporeans, before looking at it with a broader perspective.

The economics of restricting foreign workers would unfairly penalise businesses relative to the rest of the society. One must question whether it is fair to take away the income of Singaporean businesses to increase the welfare of the Singaporean workers? This issue has been tackled by many great liberal economist and I could explain it no better than quoting Adam Smith who noted in his dissection of the mercantile system that “To hurt in any degree the interest of any one order of citizens, for no other purpose but to promote that of some other, is evidently contrary to that justice and equality of treatment which the sovereign owes to all the different orders of his subject.” Even, if you feel that such ‘taxation’ is necessary; it is surely unreasonable that the burden of it falls only to the entrepreneur and not to any other Singaporeans.

Next, while we might be compassionate and express concern for our fellow Singaporeans who have to support their families on a low wage, should we not show similar concern for foreign workers who have to leave their families behind and work here for a brighter prospect? If we as a society believe in the right for humans to pursue their self-interest, then we should provide equal opportunity to foreign workers. It is odd that few take issue with the migration of the rich and talented but many with that of the poor. Has freedom of movement been restricted to only that of the rich?

Singaporeans are often portrayed as global citizens, concerned and willing to tackle global issues like poverty. We donate generously when the Tahiti earthquake struck, participate in overseas community involvement programmes and hand out aid to the poorest countries on earth. But, it is hypocrisy when we donate vast funds to 3^rd world countries yet do not allow these foreign workers to our shore, denying them a chance to earn a decent wage and improve their standard of living. Are Singaporeans superior to other humans?

I think that many people who protest against the hike in domestic worker levy are now supporting the increase in foreign worker levy. When the government introduced and increase maid levy there were many complaints about the high cost. Yet, the reasoning behind both levies are the same. If we follow the same line of thought, reducing maid levy can also ‘create’ more jobs for Singaporeans from food delivery services to part time cleaning services and babysitters. A higher wage mandated by a minimum wage law like Hong Kong and Dubai can result in less but better quality maids. Why the double standards?

By examining this issue based on economic, social and moral reasoning, I hope a  clearer, more balanced picture of the impact to restrict the entry of foreign workers has surfaced.

The question at hand is, does the economic benefit outweigh the social tradeoffs? Personally I believe it does, when an ‘open border’ coupled with limited taxation to offset the course is implemented, with proceeds to fund upgrading and improvement classes for Singaporeans and lessons to educate foreigners about local norms.

It is much harder to give a correct price that should be set. This is especially so when part of the negative social externality is due to the mindsets of Singaporeans themselves. When you decide that they are worth the cost, you will be more accepting of them and a part of this externality is removed. Factor in the morale reasoning, and it becomes even more apparent for a friendlier and open attitude towards the inflow of foreigners.

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[1] http://www.mom.gov.sg/foreign-manpower/foreign-worker-levies/Pages/levies-quotas-for-hiring-foreign-workers.aspx

Do note that the government is planning to raise the levy by $60 for the Manufacturing sector, $180 for the Services sector and $200 for the Construction sector as detailed in the 2011 budget.

[2] http://www.mom.gov.sg/foreign-manpower/foreign-worker-levies/Pages/calculation-of-foreign-worker-quotas.aspx

[3] http://english.sccci.org.sg/index.cfm?GPID=1170 pg 7 fig 1

[4] http://www.ilo.org/public/english/dialogue/sector/papers/construction/wp106.pdf pg 15, table 8

[5] http://www.mom.gov.sg/Publications/mrsd_employment_SC_PR_foreigners_1997-2006.pdf pg 6, table 2

[6] The Straits Times 26 Apr 2011. Can be seen at the following link: http://www.aboutsingaporeproperty.com/hdb-land-cost-issue-still-vexes/

[7] http://app.mti.gov.sg/data/article/17562/doc/AES_2008_Box3.1.pdf Exhibit 2 & 3

[8] Due to competition from tender system. Assuming relatively inelastic demand for HDB, the calculation is a quite generously on the low side.

[9] http://www.lta.gov.sg/images/PTCSS%202009_Annex-A.pdf pg 6 table 5
Interestingly commuters were no longer polled on satisfaction with passenger crowdedness in the 2010 survey.

[10] Please see http://www.daviddfriedman.com/Academic/Coase_World.html for a more thorough explanation on Coase’s work

A Brief History of Economics

A brief story
Of moments in time
Of economic history
Compressed, made concise
And with a little bit of rhyme

Parts made separate
Cost savings gained
Specialisation, pins obtained
No longer working alone in vain

A gloomy prediction
Of future ahead
Limited food, exponential growth
Starvation, famine all would be dead

Diminishing returns
With Smithonian thought
Labourers work, just wage paid
But landlords rest and profit ought

Ought? Not!
Humankind not to fail
Fairness, liberty to prevail
Do not underestimate the human will

Profits squeeze
And factories tall
Protest, revolts only more
Workers to rise and society’s fall

Two lines intersect
Thus price is born
One demand, the other supply
Both written in algebraic form

Government intervention
Now a necessity
Consumption, spending required
To solve the great depression monstrosity

Monstrosity? Catastrophe!
Worsen it will be
Less controls, regulations please
Back to lassie faire, let the markets be free

Free? Tragedy!
Heed we must Keynesian philosophy
Philosophy? What Heresy!
Heading towards Hayekian prophecy
Creating only more misery
O, we seriously need a remedy
Ah, what divine comedy

On the 21^st century shall I end
But should I continue, what will I next append?

Timothy

A Puzzling Debate

The Singapore government budget 2011 has generated quite a lot of debate between PAP members, the opposition party and the general public. One area of hot contention is that of inflation where the consumer price index grew by 5.5% over the past year according to MAS data. With unrest in the Middle East along with other natural disasters threatening to spike up prices of daily necessities from oil to food, it is understandable that this issue is getting much attention. Both domestic and external factors are expected to contribute to an approximate 3-4% increase in inflation this year.

Debate over the causes and measures to resolve inflation is fine and should be encouraged. However the arguments given in parliament are lacklustre, demonstrating ignorance over basic economic knowledge. It started when the opposition argued that the budget handouts are only a short term measure and that price controls should be introduced on basic essentials such as food, transport, education and health care. The debate later degenerated into whether the GST should be cut. For this article I plan to analyse the arguments and point out the flaws made by both parties during the debate.

MP Low was right that the budget handouts are only a short term measure but was wrong to support price controls. Price controls affect the economy in three negative ways. First, it is a long term measure. Once enacted it is hard to withdraw without much public disapproval. One just needs to look at the uproars of neighbouring Malaysia and Indonesia when price subsidies for oil and other goods are being withdrawn to prove my point. Second, because it is a long term measure that is hard to withdraw, it continually contributes to government debt. Hence, handouts are better suited to combat inflation because they are short term solution to a short term problem. Price controls also result in increase inefficiency in the market. Controlling only the prices of certain goods deemed a necessity will distort prices of goods relative to one another. Cash handouts are a better alternative as consumers can choose what they want to buy taking into account the increase in prices of the goods.

In evaluating the suggestion by the Workers’ Party chief to cut the GST form 7% to 5%, many PAP members have the erroneous view that cutting the GST would benefit the rich as opposed to the poor. High income owners might consume more and pay higher GST but the percentage of GST to income paid is definitely lower than that of the poor. From MOF estimates published in 3 March 2011 The Straits Times, it is shown that GST paid by the bottom 10-20% of households amount to an average of $1100 per year. This is in contrast to $3000 paid by the top 20-30% of households per year. Using household income figures of $2681 per month for the bottom 10-20% households and $10,000 per month for 70-80% households from SIngstats Key Household Income Trends 2010 it can be calculated that GST takes up 3.4% of income for the bottom 10-20% and 2.5% for the 70-80% households. This clearly shows that the GST will harm lower income households more than higher income households, even if higher income households might contribute to a greater percentage of GST collected each year.

Instead of trying to prove why a 7% of GST is needed to fund whatever social and economic programmes for the lower income, the PAP MPs have went down the wrong route by trying to defend GST as a tax that benefits the poor more than the rich. Maybe only the finance minister got it partially right noting that the GST is not a progressive tax and by trying to suggest that the GST funds Workfare, subsidies and other grants.

While there are numerous other economic fallacies surrounding the inflation debate that I wish to debunk, I shall stop at two. It is quite disheartening and tiresome to see such errors and misconceptions being paraded as the truth over and over again. For more figures on inflation, household consumption please view the two links below:

http://www.singstat.gov.sg/pubn/papers/people/pp-s17.pdf

http://www.mas.gov.sg/resource/eco_research/eco_dev_ana/Recent_Economic_Developments.pdf

Timothy

Channeling Friedman

Milton Friedman arguably one of the most prominent economists of the 20^th century is known to be well ahead of his time. He argued for cap and trade policies well before they were enacted, a floating exchange rate system before Singapore was independent, and limited government intervention in markets. While much of his thinking has been accepted into mainstream economics and public policy, many of his ideas are still thought of as radical such as the use of controls and licensing.

Friedman in Capitalism & Freedom noted that there are 3 main categories of methods that governments use to control businesses. They are from bad to worst registration, certification and licensing. While registration might be justified to pursue other aims, for taxation and protection of consumers, certification cannot be justified as it can be handled by the private sector itself. Licensing just results in less choice and reduces quality of services provided as what it aims to achieve can be satisfied by certification. He cites the example of licensing doctors and claims that it results in anti-competitive behavior that would limit the entry of other doctors that could provide better services at a better rate.

While I have yet to be convinced by the idea of allowing doctors to practice without licensure, I think his claim of too much government control is applicable to certain markets in Singapore. Take for example, the market of driving instructors. There are two ways to achieve a driving license in Singapore, through a school or through certified private instructors. It is commonly known that private instructors offer a more competitive rate compared to school lessons at the expense of a less thorough syllabus. There are a few problems with the current state of affairs. First, the high cost of school lessons where you are forced to attend a minimum of 20+ lessons. Second, quality of instructors leaves much to be desired. No new instructors can apply to be a private instructor and can only join the school system with a fix pay. This is probably the most protected industry in Singapore. If you are already a private instructor there is no possible competition, no incentive to improve and no incentive to charge cheaper. In time, all who want a license have to go through the ‘schools’ and pay a hefty fee whether they require more lessons or not. So schools and current private instructors benefit while consumers are at the losing end.

There are two possible concerns that could arise with liberalizing this market, higher cost and lower quality. Arguing for controls based on cost is invalid as the current situation has already proven that private instructors are charging at a lower price than schools. Removing barriers to entry would result in a more competitive market that would lower rather than increase price of both private and school instructors. The top concern would then be issues over the quality of teaching. But that is what exactly a driving test is for: to ensure that the students have a basic skill level and is not a road hazard. Regulating the supply and source of driving instructors would not solve the problem but compound it. Good instructors who would command a higher fee would not join the industry as the schools pay too little as compared to what they would earn doing private teaching. The driving test a slightly different form of certification than Friedman has in mind (Friedman discusses about certification for the one who provides the service while this is for the one who consumes the service) is all that is needed to regulate the industry.

Timothy

In an Orange

Pondering whether the orange at my desk is sweet led to me wondering what oranges have in common with economics. After some thinking I dare say there are much similarities. There have been countless arguments on whether capitalism is good, globalization beneficial to third world countries, fiscal versus monetary policies etc. Much journals and reports have been obsessed in finding evidence that can finally settle one of these claims. And yet the question is still debated over and over again but will never be resolved. Why? Because like a question, ‘Are oranges sweet?’ there are three problems facing economics which will be elaborated below.

The divergence in opinion on whether oranges are sweet is firstly due to the difference in the type of oranges. Different varieties of oranges have their own unique taste. Some might be sweet, others bitter or sour. People tasting different varieties of oranges would not be able to come to a consensus on whether oranges are sweet. Similarly economic questions are too vague and general. Terms such as capitalism and globalization have a different meaning to everybody and must be defined and agreed to before any arguments can be made. Likewise, monetary policy is too broad and should be narrowed down to a particular aspect of it.

Second, whether a specific orange taste sweet or sour depends on the person tasting it. One might find it sweet but another bitter. In economics, arguments are often affected by a person’s background and experiences. While this is unavoidable, one needs to let go of past misconceptions and should try to be objective relying on empirical data and logic to prove a point.

An orange also taste sweet or sour depending on what was eaten beforehand. After eating a lemon, an orange would taste sweet but if one had a spoonful of honey he would probably find the orange to be sour rather than sweet. Likewise, economists are often swayed by current trends regardless of what the truth might be. It is easy to follow public sentiments than to go against it. Adopting protectionist measures will garner much more support even if increasing worker skills to compete in an open market would be the true remedy. Yet, it is this ability to go against conventions to follow the truth that yields the most fruitful of knowledge or outcome.

Thus, in an orange is my wish for economics. In order for it to advance it must be specific, unbiased, grounded on facts, logic and delivered truthfully. Meanwhile what will yield beneath its glossy but bitter skin can only be known once it is peeled into.

Timothy