Inequality Without Poverty

By Nov 23, 2012, 5:17 PM Author's Blog  

I recently traveled to Singapore, where I gave the keynote address at the Asian Bond Markets Summit.  (I’m told they’ll have a video up in a few weeks.)  I also had the good fortune to meet two of my most intelligent readers, who both wish to remain anonymous.  They provided me with lots of the information that I’ll use in this post—although that doesn’t mean they would agree with everything, indeed they don’t entirely agree with each other (I don’t know if they’ve ever met.)

One of them drove me around to see how average people live in Singapore.  Most live in mid-rise apartment blocks that were originally built by the government, and then partially privatized.  However the level of property rights is less than what an American would expect, as they are actually just 99 year leases, and there are some restrictions on sales and purchases.

I was sent some information suggesting that a 90 square meter unit (about 1000 square feet) would sell for about $400,000 Singapore dollars (or $320,000 US$.) The interest rates in Singapore are lower than in the US, so mortgages are relatively affordable at a given price point.  However prices tend to be on the high side relative to income, as is often the case in prosperous Asian cities, as well as in places like San Francisco.  This is especially true in the fully privatized and privately built luxury housing, which the more affluent residents tend to prefer.

Singapore is the East Asian city most similar to an American city, although it’s obviously denser than most US cities.  Per capita GDP is also similar to the US.  But it turns out that Singapore is actually very different from the US, and in some surprising ways.  Consider the following characteristics:

Free trade and investment.  Medical care provided via HSAs, with very little government spending.  No unemployment compensation.  Social security private accounts.  A 20% top income tax rate, zero percent on capital gains.  Income is slightly more unequal than in the US, which means far more unequal than the typical rich country.  Far more millionaires per capita than any other country in the world—a true “ownership society.”  Lots of immigration.  Rated second most free market economy in the world by the conservative Heritage Foundation.  (Number one if you consider Hong Kong to be part of China.)

Sounds like the sort of place a free market economist would like, doesn’t it?  But it isn’t.  My guide told me that when western academics come to Singapore, the leftists tend to love the place and the libertarians often go home in disgust.  It turns out that Singapore is a lot like that vase/face optical illusion–people see it one way or another, but rarely both at once.  I’m going to try to see both sides.

It turns out that about 80% of the population lives in those public housing projects that I mentioned.  From a purely visual perspective, they look much nicer than the ones you see in China.  The walls seem freshly painted with pastel colors, whereas in China the walls are stained with pollution, and the paint is often peeling. (Singapore has very little pollution by Asian standards.)  But I think most middle class Americans would be disappointed by the home of a typical middle class Singaporean.  It seems that Singapore is a place where the poor and rich do really well, but the middle class only so-so.  I’m told that (from the outside) the home of someone making $30,000 per year looks almost the same as that of someone making $130,000/year.  At best the richer family has a slightly bigger unit, and a nicer location.  Both of my sources indicated that it wasn’t quite accurate to say Singapore has no poverty, but when I asked if they could show me some slums, both said that there aren’t any.  I gather the situation is sort of like the Nordic countries or Switzerland; there are some poor people here and there, but no significant slums of the sort you see in America.

So why do leftists like Singapore so much?  Consider that Keynes once said that poverty is ugly.  Singapore is certainly not ugly (although it’s also not beautiful.) It has universal health care.  It has very strong environmental laws such as congestion pricing and ultra high taxes on cars.  As a result the middle class relies on the extensive system of mass transit.  That doesn’t mean everything goes smoothly.  The population has recently grown quite a bit (via immigration), putting some pressure on the housing stock and also increasing traffic.  Even so, traffic is far lighter than other Asian cities.  Things seem to work in Singapore.

Moderate leftists tend to be utilitarians.  And Singapore seems like a place run by utilitarians.  If you believe in diminishing marginal utility, then you’d be impressed by a place where almost everyone lives in the same type of place.  In America we have beautiful upper middle class towns like my own Newton, Massachusetts, and lots of ugly low income towns.  Singapore’s not like that, despite having slightly more income inequality.  My theory is that leftists don’t really mind a place where income is unequal, they don’t like places where income looks unequal.  In my town liberal millionaires typically drive Camrys.

My utilitarian theory of Singapore governance doesn’t explain why it’s such a great place for the rich.  Why a 20% top rate?  Perhaps because Singapore’s small size makes it highly susceptible to Laffer curve effects.  The country has seen massive immigration in recent years, often of very high skilled people.  How much would that decrease if the top rate were say 50%, as the US will have next year?  Even from a strictly utilitarian perspective, bringing in lots of high earners is a great deal for Singapore’s poor and lower middle class.  The rich pay lots more in taxes than they use in public services.

One argument against my hypothesis is that housing for Singapore’s rich is very expensive, and that’s partly because of the government’s extremely restrictive land use policies.  The sort of mansion that would cost $800,000 in Texas would cost $15,000,000 in Singapore.  Residential-zoned land costs $800 a square foot.   But one also needs to remember that Singapore is a very small place, and the rich have very big appetites.  Consider some advantages of Singapore for the ultra-rich:

1.  Who needs a McMansion when you have a small but ultra-chic condo in Singapore?  If you want a mansion, buy it as a second home in Australia or Florida or Vancouver or Phuket.

2.  Starting next year Texans will only be able to keep 56% of their income, and 76% of cap gains.  Singaporeans will keep 80% 0f income and 100% 0f cap gains.  You can buy a lot more jewelry when you travel.  Or second homes.

3.  The average airport in Singapore is as good as the best airport in the world (that’s sort of a joke, but true.)  And the rich fly a lot.  After my plane landed in Singapore I was in my hotel within 40 minutes.  When I returned to Boston I was still in the immigration line after 40 minutes.

4.  There’s not much traffic because only the wealthier Singaporeans can afford cars.  The service on airlines serving Singapore is excellent, as is the service in hotels.  In America . . . not so much.  There’s a new casino, and lots of great restaurants.  The only downside is high-end culture—you still need to go to NYC or London of Paris, but the Asian nouveau riche is less interested in avant garde theatre than the western “old rich.”

Overall a great place to be rich or poor, and an OK place to be middle class.  It’s still way too paternalistic for my taste, and the government does waste a lot of Singaporean savings on questionable projects like water desalination, but there are many worse places in the world from a utilitarian perspective.

A few other random notes:

1.  They raised the fine for littering from $300 to $500 when I was here.  But my source told me that the famous draconian legal penalties are something of a myth.  It seems the government will crack down on something like people using cell phones in cars (with a 3 month jail sentence), but then let up after a few months.  They’ve made their point, and the people become so well behaved that the laws hardly need to be enforced.  There are very few police on the streets, but nonetheless very low crime rates.

2.  The upper middle class is called the “sandwich class”.  Not rich enough to enjoy the good life and living in the same sort of places as the lower middle class.

3.  When my source was describing Singapore I must have interjected “that reminds me of China” a dozen times.  Actually the two places are quite different.  But I think there are many deep similarities as well.  He told me migrants from China often adjust better than migrants from Hong Kong, as they are more used to the controlled Singapore system, whereas Hong Kong is more laissez-faire.  It seems to me that Singapore is a sort of model for the Chinese government. Will China get stuck in the middle income trap?  I doubt it.  If it does, the key difference will probably be the much higher level of corruption in China than Singapore.  Singapore is one possible future for China, but not the only one.  With all of Singapore’s flaws (and there are many) most of China’s alternative futures are far worse.

4.  Most Singaporeans are not particularly bothered by the soft authoritarianism of the Singapore government.  That may be because in the past the government was more overtly oppressive (another thing that reminds me of China.)

5.  Chinese Singaporeans (3/4 of the total) look down on Malay Singaporeans.  But isn’t that always true when there are large income differentials?  The high immigration policy has been unpopular, perhaps because of increased crowding and soaring property prices.  The Chinese have a very low birth rate, and the immigration policy may be aimed at “re-stocking” that ethnic group.  There are also some Indians and a few Westerners.  The official language is English.

PS.  Keynes didn’t actually say poverty was “ugly,” rather he said the following:

The decadent international but individualistic capitalism, in the hands of which we found ourselves after the war, is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous–and it doesn’t deliver the goods. In short, we dislike it, and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed. . . .

There is one more explanation, I think, of the re-orientation of our minds. The nineteenth century carried to extravagant lengths the criterion of what one can call for short “the financial results,” as a test of the advisability of any course of action sponsored by private or by collective action. The whole conduct of life was made into a sort of parody of an accountant’s nightmare. Instead of using their vastly increased material and technical resources to build a wonder city, the men of the nineteenth century built slums; and they thought it right and advisable to build slums because slums, on the test of private enterprise, “paid,” whereas the wonder city would, they thought, have been an act of foolish extravagance, which would, in the imbecile idiom of the financial fashion, have “mortgaged the future”–though how the construction to-day of great and glorious works can impoverish the future, no man can see until his mind is beset by false analogies from an irrelevant accountancy.

PPS.  GDP per capita is about the same in nominal terms, but Singapore is about 20% higher in PPP terms.  Indeed it’s the richest “real country” of more than a million people, in three of four surveys.  However one of my sources says that the cost of living is not lower than in America, as the expensive real estate and cars offset the cheaper services.  And a much smaller share of Singapore’s GDP shows up in the form of disposable income than in the US, for various reasons.

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