Morality & Incentives
By Kevin
Yellowing soon?
The Economist points out another flaw in the 'morality' argument with regards to the salary. The implication of justifying high salary for the ministers with the point about attracting top talents and preventing corruption is that it seem to suggest that anything less would mean less able and virtuous state leaders, which obviously isn't the case.
My take on the whole issue has little to say about whether the adjustments are fair or if prevailing salaries are acceptable. And the point of bringing up the article from the Economist is to demonstrate the problem of the argument used.
So if white shirts turns yellow when you buy the cheaper ones, why don't we get other colours instead? Perhaps some day, people would find out that they can do fine with inexpensive light blue tee and just abandon the white ones.
From Sarcasm to Absurdum
By Kevin
Outwitting Censorship
While Yee Jun Xian's original letter to Today newspaper was a nice work of sarcasm, it was interesting how the newspaper has decided to edit out the sarcastic portions, unintentionally making the letter an awesome work of reductio ad absurdum.
It does put Jun Xian in a less-than-positive light since the edited letter portrayed him as a narrow-minded, dogmatic individual, probably guilty of the God-complex.
But I think Jun Xian has achieved his more than just original objective through the publication of the letter. The almost nut-case, redneck sort of argument 'Writers write. Teachers teach. Opposition MPs oppose. The logic is simple and irrefutable.' drives home the absurdity of People's Association's argument as well as the fundamental paradigm about the role of our opposition that has been perpetuated by the ruling party all these while.
To a large extent, Today editors probably did a good thing. It's just up to readers' intelligence to read between the lines and take in the message.
Educating about Transport
By Kevin
Colourful Choices
As we all move forward in our personal development, we realise that including the citizens in policy decisions and complex issues that involves their personal welfare is important. I was really heartened to see Lui Tuck Yew takes his time to write Facebook notes that intelligently engages the public - the ones explaining the formula PTC used for manage the fares and also the issue on quality of service. It is important to show that while there may be some problems with the system, it can never be perfect and that we need to get together and work on it. Suggestions should come forth, without fear of being shot down even if they may be truly dull (I personally don't agree with public transport nationalization).
As Tim Harford said, we should acknowledge the complexity of the world and stop suffering from the God Complex - leaders who have the courage to say, "I've no idea if this works but information I gathered point this way; there's a chance we may fail but let's work together to try something else if that really happens."
Using moralistic arguments or trying too hard to stand by an action that have been taken usually produce flawed arguments that reduces a leader's credibility. Bear in mind that there's no end to issues of 'fairness'. Lim Boon Heng's statements cited in this article is such a grave disappointment. It's amazing how the reporter arranged the quotes to stay perfectly objective while surfacing the flaws of the argument made. Given the education levels of Singaporeans today, it seemed somewhat embarrassing that our leaders are trying to bullshit us this way:
"You know raising bus fares is unpopular," he said. "But if we cannot raise bus fares, how will that impact your fellow workers? I am sure you will understand that it is not fair if they cannot get wage increases."
"But their wage increase will be funded by fare increases, which adversely impact the public."
[...]
"But from the worker's perspective, when there are millions in profits, they want the employer to pay them better wages," Lim added.
"To them, millions of dollars in profits is a lot of money, and the commuting public feels fare increases are not justified."
SMRT posted net earnings of S$161.1 million for the financial year that ended this March, while SBS Transit had a net profit ofS$54.3 million for last year.
And what's wrong? There's no way to argue that fare hikes are for the transport workers. We all know that financial accounting puts down wages and salaries of workers of the firm as expenses in the income statement. Millions of dollars of profits are basically fares/revenues that did not go to the transport workers. Of course, they went to the people who contributed the capital and own the firm. Who is to guarantee that a fare hike would mean money is directed to the workers? If we want the wages of the workers to rise, why can't we reduce the profits of the owners instead? The last thing we need is the nationalization of public transport; what we need is perhaps better regulation. Perhaps PTC and NWC can work together, and negotiate both the fares and the wages?
Extra platform should be at Clementi and not Jurong East...
I could do a deeper analysis of SMRT and SBS Transit's patterns of cost and revenue and we could see profit margins have been constant or steadily increasing over the years. If it's been increasing, we can conclude that either the owners have exercised good cost control but refused to share some of the profit gains with the workers, or that hikes in fare so far have mainly been used to raise profit margins rather than to defray costs.
Let's use SMRT's figures as a demonstration: In 2007, fares rose 1.1%, FY2007 profit margins was 10.5%; in 2008, fares rose 0.7%, FY2008 profit margins was 13.5%; in 2009, fares fell by 4.6%, profit margins soared to 18.5% and then finally in 2010, fares were raised 0.5% and profit margins dipped a little to 18.2%. I'm not sure if my simplistic comparison of the time series of these figures distorts reality but I leave intelligent readers to arrive at their own conclusions. But I do want to remind readers that it is possible for fare reduction to invite more commuters, improve the green-ness of our economy, while providing that very profit boost that can be poured into investing for more capacity to reduce the overcrowding - perhaps already demonstrated by some figures I've presented.
Savings Glut or Investment Spree?
By Kevin
Are we doing it right?
As I previously mentioned, I'm working on a piece on global imbalances once again (fact is that I feel like I've done countless stuff on this but then it is always just some other topic that obliquely references to it somehow). I guess I'm a little behind times on reading about this issue but the more I looked into Bernanke's earlier arguments about the 'Global Savings Glut (GSG)' and his subsequent 'revisions', the more I find it difficult to swallow the notion that 'it's not just the US who is at fault'. Of course, he has softened his stand from a while back in 2005, when he actually believes that the current account deficits were hardly within the control of US and if you need someone to blame, you got to blame the rest of the world. There are many flaws in the speeches he delivered in 2005 (here and here), especially with the benefit of hindsight and additional data. Hence, I would not be launching an attack on those ideas.
In any case, as John Taylor suggested to anyone who would care to scrutinize the statistics (I actually bothered; macroeconomic data on the World Bank Database is particularly handy for looking up stuff that are two years old or earlier), there was no significant rise in world savings (in the recent years). World savings fell from 22.25% of world GDP in 2000 to 20.88% of world GDP in 2003. In that sense, there wasn't really a savings 'glut' to push down interest rates at least during that time (I refer to the beginning of 2005 when the speeches were made). In fact, during that period US investments fell from 20.58% to 18.35% of GDP - a great chance for correcting the current account deficit. But no, the chance was wasted because savings in the US declined even more, from 16.72% to 13.80% of GDP, thus increasing their current account deficit from approximately 3.8% to 4.5% of GDP. Granted, I'm looking at a selective time period and being a bully but that is just a distraction from my main point that if the 'GSG' idea continues, US will forever think they are simply a victim of circumstances when they are clearly not.
Daniel Gross characterized the idea of a 'savings glut' as a meme on Slate when it was first introduced. And I think he can't be more right. It is a matter of perspective but there is this notion of sacrificing current consumption when it comes to the idea of 'savings' but reality is that these 'saving glut' countries were pushed to purchase 'safe' investment products by none other than the deep, sophisticated financial system of the United States. In what WSJ terms as an expansion on his 'saving glut' research, Bernanke supposedly places the blame on US' mismanagement of the capital inflow but, I quote the Luca from WSJ:
The paper’s main focus, however, is on the intense foreign investor demand for what seemed at the time like safe U.S. assets in the years before the crisis.
The paper appears to be suggesting that US is merely giving investors what appears to be products they wanted - the mortgage-backed securities (MBS), safe from the rating perspective, backed by the government somewhat, and also offering the returns. In fact, it goes on further to imply that financial engineers were being efficiently responding to market demands with innovations that would generate the supply to quell this demand. I quote from various segments of the paper:
"...we verify that the “GSG countries”—that is, emerging Asia and Middle Eastern exporters—did indeed evince a strong preference for the safest U.S. assets. On the margin, this preference most likely helped push down yields on MBS relative to other assets, as most MBS were either guaranteed by the Agencies or sold as tranches carrying AAA credit ratings."
"In fact, the strong preference of the GSG countries for Treasuries and Agencies appears to have pushed Europeans and other advanced-economy investors, including U.S. investors, into apparently safe “private-label” MBS."
"Finally, the demand for safe assets by investors, both domestic and foreign, appears to have engendered a strong supply response from U.S. financial firms. In particular, even though a large share of new U.S. mortgages during this period were of lower credit quality, such as subprime loans, Agency guarantees and financial engineering in the private financial services industry resulted in the overwhelming share of mortgage-related securities being rated AAA."
I'm going to use a rather extreme analogy here and say that this is really no different from a doctor saying, "Wow, so many patients only trust me and they would only take medication I prescribe to them, so never mind if the drug is effective, I'll prescribe as long as I get paid really good commission from the drug firms. In fact, let me just prescribe these pills I just found in the cabinet here though I don't even know what they are." Granted, the financial engineers probably really believe that they have managed to tuck risks away and that the instruments were really safe, how about those pushing NINJAs to take up loans they can ill-afford? John Cassidy's How Market Fails is a collection of such stories. There appears to be a culture of absolute irresponsibility - the financial institutions couldn't care less about the fate of clients on both sides (people who took out mortgages and investors who bought MBS).
I guess the 'GSG countries' are just too eager to save they didn't practice their due diligence just like many of their counterparts in US and the finance system only mean all good and no harm. Maybe. But maybe, if the financial system was more responsible, if the culture was not all that screwed up and money was rejected on the basis that there was no more good quality investment opportunities in US and savings were allowed to 'go home' to these 'GSG countries', then things won't be so bad. For goodness sake, if investment opportunities are dried up, then curb excesses. Leave the punchbowl and you get a bust. There you had it.
Right Interventions
By Kevin
Derailing in progress...
While researching for an article I'm working on about the global imbalances (yes, I'm writing on this topic again), I chanced upon John B Taylor's Getting Off Track, which is a really short read for someone who wants to know more about the government intervention aspect of the financial crisis in United States. John does pretty data-oriented research and no doubt emphasize on the importance of empirics when it comes to studying the macroeconomy.
Too often in Economics, we seem to be too quick to classify stances at debates into a 'more government' or 'less government' issue as if the government always has only one course of action. As John pointed out in his book, the US government may have worsen the financial crisis and prolonged as a result of their erroneous diagnosis of the crisis as one of liquidity rather than counter-party risks. The fact is that the government has several course of actions when they are required to 'do something' and this thing they eventually decide to do may not always be effective or good. The question (at that time at least) was whether the contracting liquidity experienced at that time is a symptom or in itself the source of the problem. Of course, with the benefit of hindsight, John confidently concludes that he has been right pretty early on that counter-party risk was the root of the problem.
Now, we turn back to the general question of government intervention. While we always ask ourselves if we should always trust the government to do the right thing, I think the more important point is that we all should be helping to the government arrive at the right course of action. It calls for a greater academic participation in governance and social policies. This, I believe, is something particularly important that Singapore should learn. I pointed out earlier that we need to make better use of data, and academic tools at our disposal. If you peer into the work of John through his book, you'd realise that is exactly the sort of thing our academia should be doing for the government. And this, will also require that the government be more open-minded to external ideas and tap on expertise beyond their numbers. That's what I mean by pluralism in ideas for governance of a country.
Nudging with Statistics
By Kevin
Beyond the standard formulas...
I was looking through some of the rally speeches for the Singapore General Elections 2011 and listening to the criticisms of the current ruling party in Singapore. The opposition have clearly grown stronger in terms of their position to criticize the ruling party. As an economist, I tend to think of this strength as not derived from politics (the opposition parties in Singapore honestly have no political power to speak of) but from economics and development. I have little interest in engaging in speculation about the General Elections results but I like to talk about some policy inspirations I got from listening to these speeches. Other inspirations for this piece comes from the concept of 'nudging' popularized by Richard Thaler, and Hans Rosling (see 'Washing Machine' & 'Joy of Stats'), who have been thinking about how to change the world with statistics.
Meta-problems
I like to think of economists as 'meta-problem-solvers'; economist don't think of solutions to specific problems - they engage in thinking out of specific problems and into what kind of system of incentives should be in place so that the problem would right itself or give rise to solutions. As I was telling a friend studying Physics at King's College, after attending a talk on 'Fuels of the Future', "economists would tell you that fossil fuel would never run out". The fact is that when you have too little supply of fossil fuels, their price simply skyrocket to a level that would make alternative energy sources much more attractive. And investment would be poured into these sectors rather than into more drilling or mining for fuels, and some day, fossil fuels would be history. Of course, the scientists are the ones who come up with ways to exploit the alternative energy sources. But the 'meta-problem', the question of 'how will the problem be solved' is answered by the market.
Nudging
And because meta-problems are usually about trying to alter behaviours (eg. switching from fossil fuels to renewables, focusing research efforts on diseases that plague developing instead of developed countries, encouraging poor families to send their kids to school, etc), there is the concept of 'nudge'. Traditional economics often consider only monetary incentives or implicit costs as carrot and sticks for behaviours. Nudging involves even the most subtle things that would alter behaviour such as manipulation of arrangements, structuring of an application form, design of a process, or posing of questions. It almost always suggests some sort of paternalism where there is an intellectual authority trying to guide actions.
Is development always about riches?
Economic Development
When I was in the military, the captain in charge of our company told us, "When doing anything, ask yourself: Are you doing the right thing? If yes, ask, Are you doing it the right way? If the answer is yes to both questions, proceed. If not, go and think about it again." In the beginning of Singapore's economic development, there was little dispute about what is the right thing to do; we just had to follow the path taken by the developed countries and stick to the fundamentals they have adhered to. Governance of the economy thus boils down to whether we are doing things the right way. In this matter, Dr Goh Keng Swee has steered economic policy pretty much in the right direction, thinking hard about the key characteristics of our economy, our idiosyncrasies and how ideas of the west can be adapted successfully. It has always been a combination of trial and error, but the design of incentives been good for bringing the economy in the direction of the shortest path to growth and development. The society was a diverse group of people but everyone starts from more or less the same point, at similar levels of income. Free market economy and market incentives operate brilliantly under such circumstances; and often, the right thing to do for the entire economy serves everyone well (the rising tide lifts all boats analogy).
Today, the tasks of governing Singapore's economy no longer rest solely on the second question, we need to think hard about whether the policies we implement are truly the 'right things'. As I mentioned quite a while back from watching Michael Sander's lectures, inequality poses a problem for free market allocation of resources. That means that policies no longer serve the needs of the entire society evenly. In the past, targeting GDP growth may be a simple useful guideline to improve the standards of living for the people. Now, we don't need the rich to grow as fast as (or even faster than) the rest of the society - we might want to target economic growth of just the bottom half, or even bottom 20% of the economy. This is in line of the tradition of our nation's governance not to be a welfare state. Essentially, targeting growth of this tier of the society is different from giving handouts or tax breaks. It is about providing the necessary community support, the right design of education infrastructure that provides them with the same opportunity for social mobility as the rest of the society.
Incentives for Governance
It has been mentioned that GDP of Singapore is used as a key performance indicator for the government. And so the salary of the cabinet are partly related to that. Given how their salaries have become a pretty controversial issue, the government cannot pretend that the big paychecks is not a problem anymore. Some people think it is a problem because it simply attracts 'talents' who are just keen about making money out of their work and perhaps not so concerned with the welfare of the typical man on the street. As an economist, I must say that I usually doubt anyone can be more interested in the welfare of others than that of his own. I'm not saying that utility cannot be intertwined, but it is rare to find such people. And while generally interested in the welfare and future of the typical man, leaders are usually a tad bit more concerned about their kids and their finances than your kids and your finances.
It would be wise, I believe, to structure incentives to socio-economic goals of the day and if it is to lift the people in the lower strata of the society, let the leader's incentives be connected to that, perhaps to the income growth of the bottom 10% of society. And it should be gross income, lest reducing tax burden of the bottom 10% could easily help to boost their key performance indicator. Sure enough, the goals will always change as with that of any entity in a dynamic environment; in order for the decisions made to be relevant for achieving the goals, the incentives should be changed accordingly.
Of course, that's just one way of thinking about ministerial compensation; there are many other ways to arrange it; you could benchmark it to the proportion of population living below certain income level, or tie it to some measure of social mobility. It is not about siding with specific segments of the economy or the electorate; it's about incentivizing policy makers to provide equal opportunities for all the the economy. At the most basic level, it is important that we start focusing on GNP, Gross National Product rather than GDP because our GDP figures includes the income accrued by foreign capital that is going to end up in foreign hands anyways.
Do some heavy lifting...
Using Statistics
In a complex, multi-tiered economy like the one Singapore have today, statisticians need to work harder to slice and dice their data into more categories and segments so that the performance of the different sectors of the economy can be evaluated carefully and the government can tackle problems at the roots when they start budding and not when they have grown into a tree. Presenting the data in different ways allows us to look at the various social problems we face in different ways. The government will have to make use of that a lot in the future of governance; there is going to be a need to scrutinize ourselves rather than look abroad for ideas.
There can be surveys done on sentiments about migration and personal prospects for the future, putting up a time series that contrasts cost of living and real income of the bottom 20% of society. Singapore Statistics needs to start being creative about the data they collect and put them together in new, imaginative way that gives us an accurate picture of the different segments of the economy. It is currently way too boring (see this). There is endless ways of doing that so it will be good to open up the data to the public for people to start toying with them. And consequently, find out what are the 'right things' to do from the statistics.
Pluralism
Even from statistics, there might not be a 'right thing' but 'right things'; when a single party crowds the parliament, there is no meaningful debate on what 'right thing' is selected as priority. This is a time when pluralism is necessary; where more approaches considered, more voices heard. Statistics is 'never wrong' (note that it is 'never right' either) because it it tries to account for pluralism. Nobody knows what's best for everyone and no one should pretend he or she can be that way. Pluralism nudges us in the way evolution selects the fit traits to propagate. The robustness of democracy comes from pluralism and it is perhaps time to try and exploit a bit of that in our country.
A Conclusion
What I have outlined in this entry is just a really random cluster of ideas I have about the meta-problem of governance in Singapore and the future direction the management of the economy can take. It is a collection of seeds ready to be sown; and it has to be done quickly because these are abstract ideas that suggests nothing particularly concrete that can be done immediately to the existing structure. They are concepts that takes time to seep in and eventually make a difference. And that, to me, is what nudging is usually about.
Economics of Disasters
By Kevin
I haven't exactly been following up with the disaster on Japan but then I recently stumbled upon Professor Hunter's video on the LSE Youtube Channel and I thought was really a wealth of insights she shared about Japan and the way disasters were handled by the society.
And while TEPCO fumbles along and more problems arises in the aftermath of the quakes. There was an acknowledgement of deep-seated governance problems in the country. And although the Economist appear skeptical about the impact of this disaster, I do think that this is an opportunity for the Japanese to correct any fundamental problems and be motivated to move on with greater zeal.
Singapore’s Governance
By Kevin
Probably the last of many copied...
Thomas Friedman told America to get serious with learning from Singapore. Wei Seng asked for opposition and he got it. It was argued by Alastair on the Harvard Political Review that America can't follow Singapore and that it shouldn't. It was a strong cultural-political perspective but tend to treat the world as a little too static. Perhaps the key here is that people were getting somewhat too ideological about this 'learning from a model' thing.
As I finished my LSE100 Essay, I find myself more sensitive to our common tendencies to generalize from narrow cases or try to squeeze generalizations to fit individual cases just because of a couple of hints of a reasonable fit. We need to be eclectic about using models especially when it comes down to governance. It is not easy to point out key factors driving a performance or phenomena and often, obvious causes for one thing might be present in another situation where outcomes diverges. And that is where I find Alastair's piece a little flawed in its fundamental claim:
In order to properly understand Singapore’s government, you just can’t disentangle its “less-than-free politics” from its “attitude” and treat them as independent from each other, since it is Singapore’s political institutions that drive its government’s success.
I'm not sure if Alastair's definition of 'government's success' is the same as that of Friedman's because in Singapore, we tend to think of the government and the ruling party as synonymous. But I take it to mean that they are taking 'success' to be the 'governance of the country'. Undoubtedly, there is a lot of economics involved in the governance of Singapore and Alastair risk treating the governance as being about politicking, or even vile manipulation (which explains why he might think 'it’s also something that Americans will find morally abhorrent'). Economic incentives can be designed and put in place even in America's political structure and even if it does affect the Gini coefficient, I don't understand why that is that much of a cause for concern in the short term - to adopt the Singapore government's argument, you want to expend efforts to expand the pie, not waste efforts trying to divide it equally. More often than not, when the pie is not expanding, it's shrinking and that ones with small share of it simply gets even smaller shares. Thinking 'we're just different' doesn't help us learn from others, not to mention that America's liberal tradition doesn't appear to help with Gini Coefficient much either.
In the special report on the future of the state in the recent Economist, Singapore was praised once again and hailed as a model that the west should follow. The Economist provided a more pragmatic and balanced view of the issue, identifying exactly the many features that the west could follow. And perhaps more importantly, it urges Singapore to think also about relaxing its grip. It highlighted the progress made in thinking about its elitist education system (It's The End to something more positive and better; though some Singaporeans might disagree) and the investment made in people. The equation of success is always changing, the Singapore government do not always 'knows best'. We are already at the edge of development where there's no longer models or formulas we can follow and at this point of time, if granted people greater liberty is vital for success, I believe the government will move ahead with that.
It is pragmatism that drives the politics and economics in Singapore and the entire system is actually more laissez-faire, on a grander scale than most would have noticed.
Policy Technicalities
By Kevin
Regulate?
When I first learnt about policy instruments for managing economic problems, I find it confusing that so many different schemes are discovered to achieve efficiency in the market. It seems strange to me that one could tax, subsidize, regulate, take over production (nationalize) in order to manage market failure or market dominance. The problem with policy choices is that we once again fall into the Perfect Choice Fallacy sometimes.
Unfortunately, the urge and will to get things right is much stronger in this case because lives and welfare of many people will be implicated. I once spoke to this civil servant who worked with a certain Ministry of Health, doing policy proposing related work. He studied Economics in Princeton and as an economist, he was not only influencing the economic lives of consumers in the economy; he was, in effect, deciding who gets to pay more/less to save their own lives. If we believe there is definitely a perfect/best choice out of the all the available options, we should try our best to work it out.
There exists trade-offs within policies and when you achieve a particular objective, it can be at the expense of another or it can create a problem that ought to be addressed using another policy. This creates endless chains of problems. It appears that each of those policies, taxation, regulation has these sort of trade-offs, taxing different stakeholders in the whole affair creates different outcomes that may not necessarily be very desirable. Something has to be done anyways; we try our best to create a more desirable society, or at least we think so, but we are absolutely clueless how exactly we can do that.
The Bad Side?
By Kevin
Democracy Working
After all the 'hype' about the resilience of the emerging economies, The Economist seem to have featured some of our South East Asian countries is rather bad light in one of the recent issues. While talking about Philippines' recent elections, they hinted at the economy's untapped potential and the lack of political will to do something about it. And then they presented a skeptical tone towards the current Thailand government's ability to garner the support of the country.
Finally, the drama in Malaysia drew some criticism and sarcasm once again. In many sense, these articles have a 'When will they grow up?' attitude, suggesting that the events in each of the countries are all too familiar. Indeed, in some cases it is difficult to be hopeful that things would change. When it comes to politics, the region is still immature in the conduct of democracy and economic development may have increased but the fruits of prosperity not as well distributed as one would like.
Catching up on economic growth is an extremely important step towards altering the politics although it is not always a guarantee that this would occur. Yet we should not think of any particular political system as an ultimate destination. Our experience with evolution is that several models of existence would sustain; the changing circumstance will continue to push these models and systems to evolve.