Saturday, May 10, 2008
Life gets really interesting when the price of rice rises 50% in 2 months. Inflation has now spread to food and the rise is astronomical. If you're a rice farmer in Thailand life is sweet, but if you're a construction worker in Philippines with 5 kids to feed, you'll be on the streets demanding Arroyo's resignation. It is estimated that oil producing countries will make US$1 trillion due to higher oil prices this year, they make money just by pumping this black liquid out of the ground while the rest of us have to work in factories and offices to survive. I know many of you "tak buleh tahan" the price increases. Unfortunately it is here to stay.....many of you would like to give all the credit to our great govt for all this, but I think they are only partially responsible. If you want to understand inflation and why you're so unhappy today....read on!
In the past, economists used to think that inflation is correlated with employment. Employers who were able to raise prices are more willing to hire workers. It was Friedman who warned that this correlation might not hold and something known as stagflation (inflation + recession) can take hold and one can have both inflation & recession at the same time. Friedman argued that workers are not dumb, they will figure out prices are on the rise and demand higher wages thus discouraging employers from hiring more workers. Friedman was vindicated in the 70s when stagflation occurred and a recession occurred at the same time of great inflation. What occurred at that time was the wage/price spiral as workers demand higher pay to protect real incomes, that in turn leads to more inflation and the economy enters a vicious cycle. The back of inflation was broken when the US Fed under Paul Volcker broke the back of inflation by hiking interest rates to astronomical levels - my late grand mother used to tell me stories about how she got more than 10% interest on her savings account those days vs 1% today. ...while Volcker managed to kill off inflation, he caused a deep recession that saw unemployment rising to levels not seen since the Great Depression. At the same time, Ronald Regean became US President and introduced "Regeanomics" which was a policy of lower taxation, supply-side economics and a laissez-faire philosophy. One aspect of Regeanomics was to help employers to stand up against unions which were seen as a socialist corruption of capitalism - over time the power of the unions were broken....the same thing happened in UK under Magaret Thatcher. At the time people could see the problems caused by unions and their demands. The elimination of labor unions also broke the wage/inflation spiral....prices can rise but don't spiral out of control. The 80s/90s saw the triumph of capitalism over socialism,.....governments delivered high growth rates, low unemployment and low rates of inflation. The formula worked .....
Over time without strong unions, the rights of workers started to erode. By the time we got to 2008, a record number of workers are on contract terms, companies have a hire/fire policy, pension schemes were a thing of the past, working hours increased, minimal retrenchment benefits etc. Singapore to attract investments had to follow the global trends otherwise companies will just move to cheaper places. What we see today is corporate profits is now at a historic highas a % of GDP (the implications I'll explain later). Our govt can claim the credit for happily embracing global trends. Isn't low wages, high profits great for businesses? ....Great if it is sustainable - remember workers are also the end consumers. Bear with me for a few more paragraphs and the big picture will be formed.
Today we see in the US Presidential elections is a strong demand for change by Americans. Americans see themselves "short-changed" by "new" economy. Ordinary Americans now live from paycheck to paycheck. ...my point is this, the trouble we are seeing today is not just happening in Singapore but in all over the world. However, the income inequality in America is nowhere near what we are seeing in Singapore.
The thing about unfettered capitalism is pressures tend to build up over time. Suppose you play poker with players slightly better than yourself every weekend. Sometimes you win and sometimes you lose but in the long term your losses start to mount because the others are better than you. You stop playing when you run out of money. To keep you in the game, the other players give you some of their money out of pity and because it wouldn't be fun to play without you or they offer to change the rules so that you won't be so disadvantaged.. ...however if they refuse to do that, the players will start dropping out of the system until there is no one left to play. Successful societies learn over time that it is destabilizing to run the system without some kind of social safety net or they empower the weakest members so that they have a voice because the longer you run the system the fewer winners you get. The whole idea behind the one man one vote system is to put in place a govt that runs the place to benefit as many people as possible.
Here in Singapore, since welfare is a dirty word...what do you think people get when they go and see the MP? Maybe the MPs can provide some words of comfort. But seriously speaking, if you're qualified, the MP will refer you to the CDC to get some help or give you a few utilities vouchers so that you can keep your lights on for a few months and have water to bathe. The idea is to give you just enough to ease your pain so that you will not to join some guy who set up shop in Toa Payoh to criticise the govt. With inflation an increasing number of people are pushed towards poverty and they find themselves getting poorer working as if not harder than they did last year.
But what would the MP tell the person if he believes his plight is due to the govt policy of allow hundreds of thousands of imported workers? If he believes the system is unjust because he works full time and cannot afford to feed his family? Or if he believes the PAP govt formulates unbalanced economic policies that favors its numerous GLCs which are run by the power elites?
For you to remain happy, you have to believe these answers:
1. Foreign workers create jobs for you. Without them, you won't even have a job so the FT policy is a good one. Why no other countries import as many foreign workers as Singapore per capita? That is because their govts are no good, they are not as interested as the PAP in creating jobs for the people.
2. The reason why many Singaporeans cannot afford to feed their families even when they work full time is because they have not upgraded their skills sufficiently to meet the needs of the economy. After a decade of skills upgrading, the number of workers who can't feed their families has increased significantly, so what is going on? Well, the needs of this economy appear to be changing faster than the workers can upgrade their skills.
3. The GLCs (like SMRT, SingPower) need to increase their fees although they are making record profits and Singaporeans are feeling the pinch from inflation because they need higher profits to maintain their service quality. Incidentally the profits is so high for some of the GLCs which are monopolies like SingPower, they are able to takeover the Australian company Alinta for $7.4B....so some Singaporeans cannot afford to pay for their electricity but SingPower is able to make billion$ acquisitions overseas. This is something we can all be proud of because we have all struggled to contribute to the wealth of GLCs
We have the highest income inequality among developed East Asian economies and the highest rate of inflation in 25 years. This combination means our MPs have longer queues than before during their "meet the MP" sessions. They can write letters for you and say a few words of comfort.
Posting Time 7:52 AM
Posted by Lucky Tan