The Pressures of Excessive Do-Goodness

Even though this year's budget contains many giveaways, there are the predictable complaints that it has not done enough - not enough for the poor, not enough for the middle class, not enough for businesses. The responses from some office holders are also quite predictable. Singapore Angle has two rather good discussions about the budget debate (here and here).

There are always some good causes that the government should spend money on, but has not. There are always some arguments for the government to intervene in the market. There is always pressure for the government to do more. But let me pick on one specific episode in this post. The background to this post is as follows.

Hospital for the Rich

Parkway won the tender to build a hospital at a Novena site. Anyone who has been to the site will know that it is a rather small and narrow site. Parkway bid more than a billion dollars for the land and its share price actually dipped since analysts felt that the company has overpaid. The company later revealed that it had put in a high bid because it had wanted to build a A-class only private hospital. On the face of it, it was a fairly straightforward tendering process, but it prompted Dr Huang's criticism of Parkway's business plans and the tendering process (here).

I believe Dr Huang had written the letter with good intentions. However, good intention itself is hardly a sufficient condition for good public policies, or indeed, raison d'etre for government intervention. Before a policy-maker decides to intervene in the market, this is the number one question he has to answer: where is the market failure?*

Why the Government should not Intervene

A a healthcare provider in the marketplace, Parkway is in a better position than any bureaucrat to understand where the demand is. There is really no compelling reason for the government to dictate to a private company how many class-A or class-B wards it should have. Where does the state end and the market begins? Should the government ban luxury apartments since they are large and ostentatious? Should the government ban first-class air travel because only the rich can afford it? Enough of poor analogies already, I am sure you catch my drift.

Secondly, Novena area is beginning to feel like a prime location - the surrounding condominiums are easily trading above $1000 psf. To have class-C wards there is insane from the opportunity cost perspective**. Good healthcare can be provided to the lower-income group irrespective of location. There is really no need to build a class-C hospital smack in the middle of downtown to show that we are taking care of our poor. It is far better to locate class-C wards on cheaper sites in the heartlands, and also where the need is.

Thirdly, the use of the land is not free - Parkway is not pocketing private profits at the expense of the public. A billion dollars flow into state coffer as a result, money that can be transferred to the poor. If the land had come with strings to build a certain number of lower-class wards, Parkway would obviously have bid a lot less for the land. What is the outcome then? The consumer surplus at the high end market is not captured, and there can be no transfers to the lower-income group as a result. From this perspective, the restrictions proposed by Dr Huang - well intentioned as they are - would in fact be detrimental to the interest of the public.

Common Misery

I could go on and on to rebut the letter from Dr Huang but that is really not the intention of this post. We live in a market economy - despite its many shortcomings, the market economy has proven over the past two centuries to be able to generate the most amount of wealth for the greatest number of people. As Churchill once said, "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries". We must not let our good intentions create policy misery for every one.

* Even if the government can pin down the source of market failure, it is still not a sufficient basis for intervention. The government must ensure that its actions do remedy the failure without imposing even more cost the society!

** TTSH and the CDC were built there before that area became expensive.

Is the Budget Inflationary?

Even before the budget was announced last Friday, it was widely anticipated to deal with the thorny issue of inflation. Inflation in Singapore has reached multi-year highs. One of the contributing factors has been the rise in food prices. The price hikes of food and commodities could certainly have caused hardship for some Singaporean families, and also increased economic anxiety for all.

The highlight of the budget however is the return of much of the $6.4 billion surplus in the form of various rebates. For example, individuals are given growth dividends and also a one off 20 per cent rebate on their income taxes (capped at $2000). Furthermore, there are various handouts - particularly to poorer families - which all in all erased much of the budget surpluses.

Aggregate Demand

To fight inflation, policy makers should be crimping aggregate demand through tighter monetary conditions, tighter fiscal policies, or a combination of both. However, instead of reducing aggregate demand through higher tax collections, the government is in fact increasing the purchasing power of tax payers through the various forms of rebates.

The increase in disposable incomes through the rebates and handouts is expansionary since it will lead to increase in aggregate demand. Seen from a demand-supply perspective, this might even translate to higher inflation. The budget can therefore even be construed as inflationary, which means that it could be doing the economy more harm than good.

Inflation in a Small Open Economy

To truly understand the impact of the budget on inflation, one must first appreciate that Singapore is a small and highly open economy. Added to this is a highly flexible workforce, including the use of foreign workers and talent.

The first implication is that much of Singapore's inflation is imported. For example, oil and commodity prices - which have risen a lot over the past few years - are also not within Singapore's control. Since we are a small economy, our demand will have a negligible impact on world prices. The second implication is that the aggregate supply of Singapore is in principle is highly elastic. Flexibility in the labour market lessens the impact of wage-driven inflation. The conjecture here is that price-wage inflation spiral is less likely to take hold in Singapore.

The overall implication is that the budget - even though it is expansionary - will probably not give rise to too much inflationary pressures because we are a small, open and highly flexible economy. From this perspective, the objective of the budget is to help Singaporeans cope with the effects of inflation rather than fight it.

Talking a Policy to Death

An Australian friend of mine once remarked - if the Singapore government wanted to do something, it would just announce the policy and get on with it. As Singaporeans would attest to, there is veracity in that statement. At its best, our government is often bold and decisive in implementing policies. The flipside of this boldness and decisiveness is that it will often be criticised for being authoritarian. But we should pause for a moment and reflect on the following question: if boldness and decisiveness are indeed virtues, where does it leave consultation and compromise?

The Importance of Consultation and Debate

Having lived in the UK for seven years, I fully understand the important role public consultation, discussion and debate play in a properly functioning democracy. If a policy affects the livelihoods or the fundamental rights of citizens, it is only right that its rationale be publicly aired and properly debated. There is no running away from the fact that public debate is the hallmark of an open and transparent government.

But as Master Ringisei wryly noted in his recent post, there is a difference between an "open" and "gaping" government. During my years in the UK, I also witnessed first hand how an open-ended discussion could also give exactly the wrong image of the government: one that lacked direction; unsure, dithering and equivocating; losing political capital without making any real policy progress. The end result can be depressing. When the debate is finally over, good policies become watered down and compromised to a point of doing more harm than good.

Compulsory Annuity

I have never made a secret of my enthusiasm for the compulsory annuity scheme (here and here). The economics are compelling: to have citizens pool risks into a national scheme that pays out a small but potentially crucial stipend to the advanced aged. The committee's recommendation is therefore a source of bafflement and disappointment. "Flexibility" and "Compulsory" are not exactly easy bed-fellows.

Emotionally, it does make a lot of sense to return the unconsumed part of the annuity. But it would mean two things. First, the insurance element across citizens would be eliminated, or at least greatly reduced. Second, it will mean that premiums will have to be considerably higher since the national fund would still have to pay out to the families. If everyone can collect (whether dead or alive) whatever he pays in, how does the fund reach a sustainable level of coverage against advanced old age without premiums being bitingly high? There is no escaping from the actuarial reality.

But of course I understand the difficulties faced by the committee - it must surely have tried hard to produce a formula that works while being palatable to citizens. But in trying to make the policy acceptable to everyone, we could well have reduced its effectiveness. After months of deliberation, we are back full circle. Either we make a hard choice or live with an inefficient compromise. It seems like in some cases at least, boldness and decisiveness do have a place above consultation and compromise.