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.
The report by the Ministerial Salary Review Committee is out, and there is actually quite a substantial bit of adjustments proposed. Balancing the principles and objectives of ministerial salary is not easy. The salary have to perform multiple roles that often may not necessarily be reconcilable. It first have to be high enough to attract the necessary talent; it should have a fixed component to satisfy basic needs and variable component to incentivize efforts that would translate into effective policies that improves the lives of the people; finally, it has to satisfy the scrutiny of the voters (ie. it must not be obscenely high by the judgment of the public).
Well, looking at the data on growth of GDP in Singapore, it is unlikely that the introduction of pegging ministerial pay to the private sector had any impact on performance of the economy though one could employ counterfactuals and suggest that we could have done worst without it. There comes a layer of complexity when we ask ourselves whether the motivation of these politicians/technocrats lies in serving the nation or earning a fat paycheck. There is no hard and fast rule about salary guidelines to prevent corruption of those in power though we do have management theorist who suggests that as long as we pay enough to get the issue of money off the table, workers would be able to concentrate on doing their job well. Perhaps the fact that people are in politics is supposed to shed light on alternative motivations?
A potential solution we should explore is for the ministers to bid their positions by making a wage offer to the public and providing their full personal histories and work experience details for the public to screen. The public could vote for the ministers; the top 5 voted candidates will be considered but the minister will be selected based on their salary bids. The lowest bidding candidate will be the minister, but his actual pay will be the higher of, either a 10% discount on the second lowest bid in the top 5, or his own bid. Given the intelligence of the candidates politics should draw forth, such a complex system should be able to attract only the brightest and best while allowing them to take a salary that they (and the public have 'agreed').
That is, of course, a joke. But the spirit of the mechanism is that we want the candidates to bare their motivations to the public and force them to give us a picture of what drives them. Then we'll decide if it's worth it to pay them that offer rate, based on their qualifications and the position in question. This also allows ministers taking on more difficult portfolios to receive a higher pay. Cabinet reshufflings will also be implicitly 'approved' by the public in this way. Best of all, opposition MPs are allowed to put themselves up for ministerial positions and the result would have taken into account public scrutiny of their qualifications, the salary they are going to be paid and also their personal incentives to take on the job - they gave the salary bid themselves so no reason they are going to say, now that's not enough for me.
Knowing the incentives of our political leaders are important. Soon after the news about the salary review recommendations were out, Grace Fu's facebook page status was:
"When I made the decision to join politics in 2006, pay was not a key factor. Loss of privacy, public scrutiny on myself and my family and loss of personal time were. The disruption to my career was also an important consideration. I had some ground to believe that my family would not suffer a drastic change in the standard of living even though I experienced a drop in my income. So it is with this recent pay cut. If the balance is tilted further in the future, it will make it harder for any one considering political office."
It drew forth loads of comments. It reflects how little we know about the true motivations and incentives of our politicians or how unconcerned we are. I think Grace is being really frank and objective here; we should empathize with her position. It is something very human to say and we really shouldn't think of our leaders as heroes who can make all the sacrifices in the world to lead our country. The whole pay issue is a tricky one, but we need to work towards making it less thorny.
Perhaps in a Singapore where our expectations for the future prospects of the country is not so dependent on the government; and that all the institutions are merely support and guiding structures for the private sector to take the lead, then we could relieve our leaders' workload while simultaneously relieving the taxpayers' burden of financing our leaders' salary. And perhaps we should work towards that; and for our government to prevent a crisis where we fail to balance between the 3 principles of the minister pay I've defined earlier, we probably have to transit our political system to one that takes more of a backseat in determining the future of our nation.
Dan Ariely does a quick 6 minute little presentation to deliver his message that we must all be aware of our own conflicts of interests and how our incentives can be influencing our decisions in ways which obstructs us from actually achieving what we hope to.
As for takeaways on making presentations, Dan Ariely always does a great job packaging his personal experiences into the messages he wants to bring across. This is possibly because in most of his talks, he discusses his own studies and research experiences - but he almost always successfully makes us think a great deal out of those simple experiences and reflect on their implications. That perceptiveness is probably the reason why he had managed to design such interesting experiments to draw exceptional conclusions about humans and the way we work.
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.
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.
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.
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.
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.
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.
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.
After spending 15 years in education, I spent a brief two and a half year or so working (2 years in the military and then 6 months in the private sector). I returned to education after that; almost completing my first year of education since the hiatus. So I guess I know a thing or two about studying, or at least learning. Of course, everyone have different styles of learning but from my experience with people around me (who have mostly done remarkably well in the education system back in Singapore), studying/revising for school work almost definitely involves some form of active 'doing' rather than passive stuff (like plain reading).
The trick to absorbing new materials and learning in general is to involve as many senses as possible. This is a concept I explored a while back in 'Remembering Stuff'. It is then, more sensible to draw mindmaps while reading, to do underlining, annotations, taking notes while going through materials. When I go through my Economics notes, I often have to try deriving the equations myself because if I don't walk myself through the equations using my own interpretation of the logic of the theory, I will never be able to internalize the materials. This true for all the hard sciences (granted, economics is not exactly a hard science but when it comes down to the equations and formulas, we can reasonably assume it takes on that slice of nature of hard sciences).
But what about social sciences and humanities? It helps to draw mindmaps, basically to make connections between things that are studied. And the best part about mind maps is that it allows you to make many different complex connections. Although at the end of the day you might not actually find the stuff you drew particularly useful, the mindmap is really more of a tool to pin down your thinking of the connections than a visual representation of the actual concepts (especially true when you're doing revision) so it's fine. Getting in the mode of 'doing' activates your kinesthetic self and enlist the help of your muscles to 'remember' stuff for you. It's not that the muscle cells helps you to remember stuff but that the motor neurons help to provide another channel by which the new material enters your brains.
All that busyness also keeps you engaged and focused, especially if you're like me, dozing off easily as I stare at my materials. So for those who are studying out there, preparing for examinations, plainly trying to be consistent, don't waste your time staring blankly at your notes. Take some action and learn something.
In our economics lecture on unemployment, we learnt that bidding for a lowish wage might be competitively sound but strategically foolish. From the efficiency wage perspective, the person carrying a sign saying "Will Work for Food" raises question on:
- What's his alternative option?
- What is his health condition?
- How much will he care if he lose the job since you're offering him so little?
- Will he take the next available job that offers just a tad bit higher?
And you quickly come to the conclusion that you can't hire this person. Fact: You cannot ever hire anyone for food. The wage bid won't work in the world of imperfect information because the wage bid sends out the wrong signals.
This is a worrying problem because it suggests that poor and desperate people end up without jobs and are consequently trapped in poverty while the ones who are better off easily have more opportunities and alternatives. But how common is this problem? On good days, how many unemployed on the streets are that desperate they bid to work for food? The fact is that these dynamics operates at higher levels, on more sophisticated work environments as well.
At job interviews, being too eager is off-putting; employers don't want you to be desperate for the job because it raises questions about the alternatives you have and the quality of your conditions. They want you to accept the job not because it is your last resort but because you had some choices and decided that this one is the best for you. They don't want someone with family or financial issues desperate to straighten out their lives with a job because they are worried that these personal problems would spill over into the work. There is probably no worries about efforts because the job can be well-paying; but still, being 'desperate' is not a good signal for your quality (much like in any other markets beyond the labour market).
So is this a justification for playing bluff at interviews? After all, once you land yourself in the job, the employer can see for themselves if you're truly good but you'll have to land yourself in that job first! Well, yes and no. Play bluff in terms of suppressing that nervous-ness, appearing relaxed and not so eager even when you're so desperate for the job. But never exaggerate your prospects or lie about your experiences to make yourself bigger than you truly are. You don't want to raise expectations only to send it crashing down later because you'll have to meet expectations to stay on the job anyways.
Same, for scholarship interviews.
For those who haven't already know, London embarked on this ambitious public cycle sharing project last year (July 2010) - The Barclays Cycle Hire. It has not been such an amazing scheme though it was launched with great fanfare. A friend of mine who came down from Cambridge (land of bicycles) recently was using it and to his horror, the pricing system used charges users at an increasing cost for each additional 30 minutes of use (or part-thereof) - because he got ripped off (about £6 I reckon) just by turning in the bike a couple of minutes late. This doesn't seem to match economics theory about demand, and does that also mean that they'll be losing money for not adhering to the law of economics?
Demand for goods are supposed to be inversely related to the marginal cost of consuming an additional unit of good. If you look at the pricing carefully, you would realise the following pattern:
1st 30mins - Free
2nd 30mins - £1
3rd 30mins - £3
4th 30mins - £2
5th 30mins - £4
6th 30mins -£5
next 180mins - £20
The marginal cost is increasing (barring the 3rd & 4th 30min, which probably is just an attempt at tricking customers or a pricing glitch). The point is that this scheme is not about profit maximizing but simply to break even. The main purpose is for the city to be 'greener' and to create a critical mass of cyclist in the city so that motorist will start being more careful on the roads. At the same time, the pricing is a means of discouraging long journeys or long usage so that the turnover of bikes are fast and more people gets to use it. My friend from Cambridge ought to realise that hiring a bike in the city is different from owning one in Cambridge. And he needs to recognize the incentives of those who set up the scheme, not just his own interests.
Yet they are currently not making enough money to break even. My suggestion; to raise the access fee to £2 and to provide free usage up to 1 hour, then charge £1 on usage up to 1.5 hours. And increase the marginal cost of each 30mins usage by 50p. For an operation that seeks to break even but fail to do even so, you need to expand the usage base and that is through making the initial couple of hours cheaper. Nothing goes cheaper than being free (unless you want to pay people to use it) so let the free minutes run longer, compensate that with a top up of access fee. Then reduce the rate of increase in marginal cost but let it run further and longer. This would increase usage and though I'm unsure if the capacity of the system (I know the full scale system would have 6000 bikes) would allow it to cope.
My musings about price controls lately is entirely a consequence of an article I'm working on. And it has led to surprisingly interesting ideas and analogies about how to present the issue. The market serves as a way to allocate resources; as an analogy, exams are, to a certain extent, means of assessing talents and thus allocating human resource.
Now, ignoring the details, we can think of price floors and price ceilings as teacher's biasness. Imagine, if you are aware that a particular teacher is nice and he never gives you less than 45% as long as you write something related to the question in an essay, then you will not have much incentives to study. Likewise, if there is some unwritten rule amongst the teachers that no students can be given more than 79% for essays, then students will slowly discover this and simply work hard enough to get scores close to that and then stop trying.
Then comes the other side of the market; the parents and employers looking at the results of the students; they will respond incorrectly to the signals. They might think their kid scoring 75% is doing just fine but not terribly excellent and employers might think the guy who passed with 50% score is more or less the average (when he is likely to be at the bottom pile). And they will make the wrong hiring/spanking decisions!
Prices works the same way, they provide incentives and gives a signal; give producers a price ceiling or price floor and they have no incentives to provide goods above a certain quality. Worst still, too many consumers would want to get the good with a price ceiling below market price and too few consumers would emerge to get the goods with a price floor above market price. Government institute price controls because they think certain pricing are not justified or that they harm certain groups of people; if the market is competitive, however, the controls only distorts the signals and screws up the entire resource allocation process.
If the school wants their examinations to work, they have to mark the papers properly without such constraints on the marks of the students or it simply distorts the system - exams then fail to achieve their purpose. If examination scores are a source of misery for students because it either hurts their feelings or pride, teachers should be providing support in other means and not through fixing the scores to make students feel better (or less bad about themselves). They could provide counseling, learning support, supplementary/remedial. Likewise, if the government wants to help the poor, they need to provide income transfers that do not mess up the prices in the market. Allow exams to serve their purpose, then manage the outcome - don't try to hinder with the processes of the market to produce a different outcome. Exam results and prices reveals truths and truths may sometimes upset people - we simply need the correct support structures to help these people who are upset rather than try to make them not-upset in the first place.
I was randomly visiting those blogs of authors, journalists, economists ERPZ link to. It is a good way to find inspiration for things to write about or to hunt for stuff to read. I stumbled upon Harford's column article on Financial Times a week back. He discusses briefly on the importance of feedbacks and how they mess things up sometimes.
From Harford's blog, I also learnt about this new book, Scroogenomics by Joel Waldfogel. It looks like a pretty interesting short read but I probably would be spending on it and I'm not too confident that it'll be available in Singapore. Harford presented a short take on the concept that Professor Waldfogel conceived in 2005.
Professor Waldfogel believes that:
We make less-informed choices [when we buy gifts], max out on credit to buy gifts worth less than the money spent, and leave recipients less than satisfied, creating [... a] "deadweight loss" [much like when there is an externality present in the market].
In some way, when we perceive the giver and receiver as a single entity (the consumer) and the seller of the gift as the producer and explore this consumer-producer relationship, the deadweight loss is quite evident. It is like having a weird syndrome where you confuse your preferences and lose the ability to put a value on the goods you purchase. That would mean you might be willing to pay $30 for a Large Fries at MacDonalds and try to haggle for a bed at IKEA for $6 - both of which results in losses if the transactions succeed (you lose in the first case and IKEA loses in the second).
Tyler Cowen's Discover Your Inner Economist, however, argues that gifts are signaling tools for the giver to create certain impression in the receiver of himself/herself. That suggests that the losses are probably compensated in the market through the creation of this impression, through any changes in the chemistry of the relationship between the receiver and the giver of the gift. Perhaps given that the consumer from this perspective is just the giver, as long as the receiver gives him/her enough face by feigning joy (when there isn't any) upon receiving the gift, there'll be no deadweight loss. Actually there is, borne by the receiver for the effort.
I have seen this book around for a while but didn't bother to pick it up to read since it didn't quite seem to be as interesting as the other popular economics books that was published during those times. I decided to borrow it from the library having discovered that I've more or less finished the other the popular economics books (though the most recent SuperFreakonomics is out of my reach at the moment). Interestingly, I didn't realise "Discover Your Inner Economist" is written by Tyler Cowen until I got home and took a good look at the cover page. It was definitely a familiar name since I visited Marginal Revolution before and seen the name lingering around the title of almost all the entries there.
I didn't jump right into reading the book this time; instead, I went on to read a book review of "Discover Your Inner Economist" before heading to reading. I've become more conscious about devoting my time to reading books that wouldn't contribute much to my intellectual development. In addition, I was exploring exactly how professionals write book reviews (something I've been doing and very keen on improving). And to my surprise, Tyler Cowen was trying to make recommendations for people to do efficient reading (or rather maximize gains from reading):
The best sections of the book concern tactics for maximizing one’s cultural consumption, or what amounts to imitating Cowen. He lists eight strategies for taking control of one’s reading, which include ruthless skipping around, following one character while ignoring others, and even going directly to the last chapter. Your eighth-grade English teacher would faint.
Not that I've tried that on Tyler Cowen's book. His book focuses on stuff that makes your life better that have little to do with money or material gains for that matter. Tyler writes as if he is speaking and Inner Economist have been an easy read for me although I have to admit Tyler strays into topics so far from traditional economics that I get lost in his narration about appreciation of culture and the human psyche. It makes me wonder if I might have enjoyed the book better with the rampant skipping about chapters and reading just here and there as he advised since I'd be equally lost anyways.
Did I mention that his last strategy for maximizing cultural consumption is to "Give Up"? I did consider that at some point of time but since I had more time and attention to spare than Professor Tyler I decided not to. Discover Your Inner Economist is very much more about looking at reality from the lens of an inner self who have better grasp of reality and more objectivity than the 'you' who participates in this reality. So if you've time to spare, do give Tyler a chance.