Thursday, March 14, 2013

Video on the Income Gap...

This video about the income gap was released late last year and has gone viral. It shows how bad the income gap is in the USA by taking the ratio of the wealth and income of the top and comparing it with the bottom.

If you find it shocking how bad the income gap in USA has become, you should be aware that there is only one developed country worse than the USA when you measure income gap as a ratio of the income of those on top vs those at the bottom. That country is Singapore.

Tuesday, March 12, 2013

Documentary : The One Per Cent...

Here's a documentary made by Jamie Johnson heir to the Johnson & Johnson pharmaceutical fortune. He explores the effect of the wealth gap on American society discovers how it leads to stratification and resentment.

IIn Singapore we often hear that that the income gap is the result of meritocracy. Nothing can be further from the truth. The wealth gap represents an unlevel field rather than the superior talents of some to contribute to society. The PAP govt exercise extreme parsimony in helping the poor, sick and disabled but gives handouts to big businesses in the form of low taxes, cheap foreign labor and pro-business policies. At the same time the govt reduced the benefits and protection of our workers and force them to struggle by importing cheaper labor to compete against them and making them endure the rising cost of living. This is how we end up with such a large income gap and an un-meritocratic system.

Meritocracy is destroyed by the advantages of wealth and an unlevel playing field. Workers at the bottom 30-40% in Singapore have the lowest wages in the developed world, live in a city that is 6th most expensive in the world, and have no independent collective power to improve their situation.  The system has so many obstacles in the way of people making their way up:

Mr Chan said the Government, however, does not have data to track relative social mobility, which is the proportion of people who have moved up or down the socio-economic scale relative to the rest of their cohort over time.

"This reflects the churn amongst income groups in our society. We do not have data on such churn as it requires longitudinal studies over a long period of time," said Mr Chan.
He added that while the Government has tried to track inter-generational movements for social mobility, it has not found any studies to be "particularly complete".  [Link]

The PAP often says that social mobility is one redeeming characteristic of its system. But when asked for data on this by an NMP, they admit that they have no data to track social mobility. They are actually in denial of the facts.
The Great Gatsby Curve is a chart[Link] plotting the (positive) relationship between inequality and inter-generational social immobility in countries around the world. It shows a strong correlation between income inequality and lower social mobility.

The PAP has tilted the playing field so much, Singapore is now a "haven for the rich" (see previous article). But we should not blame the rich for being rich and resent them for coming here -  most of us aspire to be ultra-rich too. If you are rich, you might do the same to move to a place the favors those in the richer classes over the other classes. They are only acting in their own interests and not here to disadvantage any of us - that is not their intention. However, we do expect enlightened leadership to act in a balanced manner so that the system is fair  If our income gap remains where it is, Singaporeans with lose faith in the govt and our society will become polarized as trust is eroded. That is a bigger threat to our society than the one we spend $12B to defend against.

Sunday, March 10, 2013

WSJ - Wealth Over the Edge Singapore...

"....Singapore has some of the lowest taxes in the world, including none on capital gains and most foreign dividends. But it also has relatively secretive private banking laws and zero harassment from paparazzi or protesters, whose activities are narrowly proscribed by Singaporean authorities, further creating an aura of order and stability."
- WSJ [Link]

If you're unable to play the above video click Here

"Singapore's "Gini coefficient"—the best-known economic measure of income disparity—is the second highest in the developed world. Wealth-X, a private consultancy that provides intelligence on the world's uber-rich, estimates some 1,400 ultra-high-net-worth individuals now hold more than $160 billion of wealth in Singapore. Even upper-middle-class natives find themselves unable to afford houses in some parts of the city-state, such as Sentosa Cove, where more than 60 percent of the houses are owned by foreigners. Some are put off by flashy displays of wealth, particularly when it is the wealth of foreign nationals."- WSJ [Link]

While ordinary Singaporeans find life getting tougher and tougher with every passing year, Singapore has become a favorite destination for the ultra-rich. The movement of wealth to Singapore did not benefit Singaporeans at all except for the lucky few involved in wealth management and property.  The income gap ballooned so did the cost of living causing Singaporeans to feel that the quality of life has deteriorated over the years.

In the past we attracted entrepreneurs who came to start businesses that created jobs for Singaporeans. These days Singapore has become a playground for the rich...the rich that are here because they see Singapore as a haven that protects their wealth from taxes and protects them from scrutiny. The excessive conspicuous consumption in the form of Ferraris, nightclubs with thousand dollar cocktails, and the expensive brands dominating shops along Orchard Road have become painful reminders of the large polarising income gap in our society, The PAP has pursued policies that turned Singapore into a magnet for the rich. Policies often have to favor one section of the society over another ...and Singapore becoming a haven for the rich shows which segment of society PAP policies have leaned towards and all this is the outcome of the choices the PAP govt has made.

"Public expressions of anger or dissatisfaction with Singapore's transformations are limited, since protests for the most part are prohibited. Yet signs of unhappiness are multiplying. The city-state's ruling party retained power with its lowest percentage of votes in Singaporean history in 2011, and a thriving blog culture is prodding officials to consider some changes to the country's economic model, including the creation of a bigger social safety net for the poor, which likely would require higher taxes."- WSJ [Link]

As Singapore becomes a favored playground for the rich, life here has become a much harder struggle for the middle class and below.

Thursday, March 07, 2013

Free public transport and other public transport ideas....

If you go to Melbourne, there is a "circle tram" that goes round the perimeter of the heart of the city. Rides on the tram is free[Link].  If you were a tourist, you save a few Aussie dollars out of the thousands you spent there but you leave the city with such a great memory of going to so many places taking free rides on this circle tram, you go home and tell your friends what a great city Melbourne is. This free public transport service adds to the charm of this city which is voted the most livable city in the world and it does the equivalent of millions of dollars spent on advertising to promote tourism.   Giving something free can result in plenty of indirect payback for a country or city. However, to do this, you have to break this principle of no freebies, no "cross subsidy"  and think of system and nation level benefits.
The PAP govt has always had a problem with giving out something for free because they imagine that people will abuse it so it is refreshing to hear one of the PAP MPs suggesting:

"On Tuesday, MP for Pasir Ris-Punggol GRC Dr Janil Puthucheary suggested free travel on public transport before peak hours to ease peak-hour congestion and change commuter travel patterns." - [Link   

A few days ago MP Puthucheary suggested making public transport free just before peok hours to reduce rush hour load on our trains.

 Today's public transport problems cannot be fixed quickly by spending of billions of dollars on transport infrastructure because it will take years to build the new infrastructure. The PAP is opposed to freezing the number of foreigners here so the pressure on our current infrastructure will keep rising. If nothing is done, there quality of service will remain right about where it is or gets worse while we wait for new infrastructure to become operational. Last year Minister Liu requested for a billion to be spent to help bus operators because they won't improve unless this money is there. Minister Liu hinted last year that fares would have to increase for operators to improve their service. This is an unpopular move among Singaporeans who are struggling with rising cost of living and several MPs have suggested that fares should be increased only after the quality of service has been improved.

What we need is to get out of all these constrained arguments and look for breakout ideas. Making public transport free for the period before peak and after evening peak hour is an example of breakout idea that should be examined more closely. The govt is ready to spend billions on new infrastructure and this idea looks a lot cheaper to implement and will yield faster results. The scheme can be ended once new infrastructure become active. We should change our mindset and look at overall savings and benefits instead of money spent giving something away for free.  By shifting a a significant number of commuters that contribute to the rush hour crowd, our transport infrastructure has to cater to a small peak for rush hour. The idea may result in overall cost savings....and better overall allocation of resources to meet the needs of the people - those who need to save money get up earlier and those who want to save time pay for it. We should view these free rides as incentive given to people who help to reduce strain on our infrastructure ..and the need to keep adding infrastructure.

A far more radical idea I have in mind for sometime is to use the full amount collected in COE to fund public transport infrastructure and fares. When the COE scheme was started, the PAP govt told us that was not intended to be a revenue raising scheme i.e. we should not expect COE revenue to cover any part of govt expenditure....if necessary, the govt should fund any increase in expenditure by raise taxes preferably progressive taxes on high income earners and corporations. If you think about it, COE goes up when people find public transport inadequate ...creating an aspiration for car ownership. There are places in the world like Geneva and Munich where the public transport is so good, it makes little sense to use your car for most purposes - hence it is often said that a true 1st world country is one where even the rich happily take the public transport with everyone else in the society. We are not there yet and we are not on the path to get there. High COE prices represent a hindrance in the path to the middle class only because we view public transport as "peasant transport" due to the poor quality of service. We find the solution by using high COE prices to reverse the situation and make public transport more desirable reducing the demand for cars bring about a virtuous cycle of net happiness for our society ...instead of the vicious cycle of overcrowded strained public transport and never-ending rise in COE prices.

Another idea I have in mind is to emulate the mini-bus system in Hong Kong. These small buses that complements to the govt operated buses and trains to provide a convenient alternative for commuters. Everyone has a seat on the mini-bus that can stop for a passenger to get down at any point along a route not just at the bus-stops. The govt can help make such a complementary mini-bus system viable by giving tax incentives, take out requirements for COE but control them with licenses as they help to relieve the present bottlenecks in the system. Such buses deployed along the most heavy routes for public transport can quickly relieve our existing problems.

Whether we re-nationalize the public transport, pump in money or try some other ideas, something has to be done to break out of the current vicious cycle of over crowded public transport feeding the demand for cars causing a rise in the COE. In the end nobody's happy due to unmet needs and the high cost of cars. Recent moves to limit financing for cars can force down the price of cars but it also forces many who were willing to over-leverage just to avoid taking public transport back onto crowded trains and buses they really do not forces people to be prudent but in the end creates no "net happiness"...because their needs are not met.  

Friday, March 01, 2013

Budget with changes in the right direction.....several years late!

"In a nearly two-hour speech, he detailed plans to make the tax system more progressive and further increase subsidies for lower-income and elderly workers in order to help improve social mobility.

He also disclosed measures to mitigate the country's reliance on foreign labour and to improve productivity.

He acknowledged that society is facing widening income disparity. "We must take further steps to temper inequality," he said.

Our strategy for achieving higher quality of growth and an inclusive society are bound together, he stressed.
While fixing these problems, Singapore has to shift gears for an economy and society in transition, he pointed out" - Yahoo Report on DPM Tharman 's Speech

Minister Tharman started his budget speech by acknowledging the problems faced by our society.  Here is a summary of measures taken by the govt in this year's budget:
  • Dependency ratio ceilings in the services sector will be cut. The overal DRC will come down from 45 per cent to 40 per cent, and the S Pass sub-DRC will go down from 20 per cent to 15 per cent.
  • Government will also introduce a tiered salary system based on age and qualifications of the applicant to level the playing field for local workers in the same jobs.
  • Health subsidies to be boosted. Medifund will be increased by $1 billion to $4 billion and Eldercare to go up by a quarter million to $3 billion.
  • It will also provide subsidies of up to 80 per cent of lower-income elderly's consumables.
  • To help older Singaporeans with their healthcare expenses, there will be a $200 top-up to the CPF Medisave Accounts of all Singaporeans aged 45 and above.
  • Government will more than double spending in pre-school sector to over S$3 billion over the next five years. It will expand capacity so pre-schools are closer to homes and bring more operators to the anchor operator scheme. Salary grants will be given to the AOPs so that all their pre-school teachers will be graduates or diploma holders, up from 80 per cent today
  • An additional $72 million will be put into Opportunity Fund for students from less advantaged backgrounds and will be extended to polytechnics. $300 million top-up to Edusave fund.
  • Tharman also unveiled enhancements to Workfare Income Supplement (WIS) starting from January this year. Coverage will be broadened to those earning a monthly wage of up to $1,900 per month, up from $1,700. 
  • He bared  a three-year co-funding package under a new Wage Credit Scheme. The government will co-fund 40 per cent of wage increases to Singaporeans with gross monthly wage up to S$4,000.
    WCS payouts will be paid out to employers automatically and annually over three years. No application needed. The scheme will cost government $3.6bn over 3 years.
  • The concessionary foreign domestic worker levy will be reduced from $170 to $120 per month. This will mean that a family will save an additional $600 a year'
  • Businesses that invest a minimum of $5,000 per year of assessment in the productivity and innovation credit (PIC) qualifying expenditure will receive a dollar-for-dollar matching cash bonus.
Before I go into  various interesting aspects of the budget, I will give a general comment.

If this was the 2004 or 2005 budget, I would have applauded the govt for anticipating the problems we were facing in years ahead and doing something about them before the problems became too numerous and too big. Unfortunately, this is the 2013, our income inequality has grown, our dependence on foreign labor has worsened, our productivity has fallen over the last decade, and the cost of living has escalated to a point that we see middle income families facing enormous strains and poorer families struggling. The budget speech by Tharman started off by correctly identifying the major problems that plague our society and economy and the measures taken in the budget are steps in the right direction but this is a budget almost a decade too late and we are now dealing with huge gaps not fine cracks in the system. While fundamental changes such as revamping our healthcare system does not come from the measures in the budget, the 2013 budget tells us about some of the tweaks the govt has in mind for the problems we face.

One of the most talk,(. about move is the decision by MAS to restrict the car loans:

Beginning on February 26, the central bank said consumers will be limited to borrowing 60 per cent of the purchase price of a motor vehicle when the open market value (OMV) is S$20,000 or less.

A tighter limit of 50 per cent will be imposed when the OMV is more than S$20,000.

The MAS is also capping the tenure of a motor vehicle loan at five years.

While some people wanting to buy cars are unhappy that their ability to borrow as much as they want is curtailed,  I think the move by MAS is a good one. However, it is also an example of a measure that has to be drastic because the MAS allowed easy credit for car loans and unsecured loans to go on for too long. There is now a consumer credit bubble and such measures are necessary to bring down the level of debt. Some people are unhappy because they believe the rich will now have an advantage over the "poorer" people who need to borrow to buy cars. The rich will always have an advantage as they don't need to borrow.  By pushing out people who are going to get heavy debt just to own a car, you bring down the COE and Singaporeans pay less for the same thing so there is overall benefit - unfortunately some people who need it badly now have to accumulate savings for the down payment but overall the measure will encourage people to be more prudent with their money. The intention of the govt cannot be questioned here because the move is likely to reduce their revenue from COE. The problem with these measures is there are loopholes like the availability of unsecured loans from banks and money lenders that allow people to circumvent these measures, The other possible problem is the rise in COE is largely caused by the rich who are not affected by these measures - if this the case, these measures will not bring down prices to benefit the middle class families. The MAS has probably done the modeling from the income distribution of car buyers when it came up with these measures and the success can be measured by how much the COE falls.

I will end up paying more in property tax with the introduction of progressive property taxes. This is another move in the right direction to tax Singaporeans who are wealthier to fund social spending. Many Singaporeans, like myself, benefited from the rise in housing values seeing our wealth in the form of property double in the last few years. The problem with this measure is there are many retirees and older folks living with zero or low income in old private housing who will be affected - they have no intention of selling their property and have nothing to gain from the rise of their assets because they have not intention of monetizing it. Given their age, they may want to stay in their present homes for various reasons. For younger working people, the rise in property tax is probably manageable so long as they did not over leverage.

The WIS (Wage Income Supplement) to subsidize the wage increase of Singaporean workers for 3 years looks like a derivative of  Workfare - instead of subsidizing wages, they subsidize wage increments. Like I have said in the past, Workfare & WIS are non-ideal solutions to very bad problems....they involve subsidizing businesses who do not pay workers well. They do provide some help for workers in the short term using tax dollars, but the root cause of low wages remains.

 I generally welcome govt moves to restrict foreign workers despite the outcry from the business community. There is a issue now to be resolved - which category of workers to restrict? Construction workers who don't compete with Singaporeans or PMETs that have more value add to our economy but compete with Singaporeans for jobs. Businesses have persistently claimed  that they need foreigners to fill positions because they cannot find Singaporeans. If what businesses say is true, then it is inconsistent with data we have showing structural unemployment and the feedback from ordinary Singaporeans who say they experience intense competition from imported labour. There is support now for a market test - businesses need to show that they are unable to recruit Singaporeans - for businesses that want to hire foreign workers. Since businesses claim they have tried and are unable to find Singaporeans for the jobs, they should be able to furnish proof to support their claims. The problem is businesses are so used to easy access to foreign labor, they find any form restrictions tough:

“Increasing productivity is good, but we’re a labour-intensive market, We will always need people to man the store, so what can done to reduce our reliance on manpower? Also, space constraints make it difficult for us to deploy automation equipment like dishwashers.” -  Mr Darren Lee, owner of Wafflicious Cafe[Link]

With foreign labor businesses could expand easily, say, in the F&B sector. But the expansion is not without casualties. The demand for space by mid-size businesses and use of cheap foreign labor to compete makes it hard for smaller family run units to survive. The hiring of foreigners creates a chain effect. One business using foreigners to compete causes its competitors has to do the same. When foreign workers come for jobs in our restaurants, they need housing, medical care and various services. The rise in demand leads to more demand for foreigners and the cycle never stops unless disruptive measures are taken. Businesses will always want more foreigner workers and many are unable to expand with restrictions. Unfortunately, it is something that has to be done and because the govt has allowed this to go on for so long without doing anything. If nothing is done now, the dependence will worsen and it will be even harder to act.

The measures to improve pre-school education are important. The variance in quality of pre-school and lack of pre-school education has disadvantaged many Singaporean children at the start of their education. These problems have been discussed for more than 5 years and finding solutions here shouldn't be too difficult as social mobility and access to good education is the cornerstone of the PAP system. While the rest of us also believe in social mobility and access to good education, the difference is the PAP believes that having social mobility addresses the problem of a large income gap and social inequality and we still have a healthy meritocracy. The 2 problems are interlinked and a healthy meritocracy cannot exists when we have such a large income gap - the power and advantage of wealth in an unequal society inhibits social mobility and cripples our meritocracy.

With every passing year, with every budget, we see more  problem emerging as we start to solve the older ones. The leadership never gets ahead of the curve and problems deepen over time. This budget clearly recognize the problems Singaporeans face with the income gap, low wages, foreign influx and rising cost of living but these problems have been with us for more almost a decade and have deepened over the years. This budget is a step in the right direction but much more needs to be done. After tracking all these problems for 7 years on my blog, I believe that despite the measures in the budget, most of our problems will continue to deepen because there is a lack of will to pursue fundamental changes in the system. This 2013 Budget should have been the 2004 Budget or the 2005 Budget...a budget that fixes problems quickly as they emerge rather than one that tries to fix old problems than have turned serious over time. The success of this budget and the actions of our govt today will be measured by improvement in the quality of life a year or two from now. Ordinary Singaporeans who have shown so much patience in the past, today find themselves overwhelmed by a multitude of problems causing a sense of insecurity about their future and a fear of displacement in their own country.