Tan Kin Lian's Blog: IMF experts rethink long term ideas

Tuesday, February 23, 2010

IMF experts rethink long term ideas

Read this report. The experts think that inflation at 4% is better than 2% and that capital flow should be restricted. I agree with both ideas. Higher inflation will also mean that interest rate will be higher (i.e. good for retirees and savers) and that asset bubbles will be contained (i.e. stock and property prices will not run away). This will produce a more stable economic system.

19 comments:

Tan Kin Lian said...: The additional 2% in inflation is another form of hidden taxation. It allows governments to run a deficit and finance through inflation. There is no collection cost for this "tax" and is like a "wealth tax", which is fair.

Excessive inflation is bad. But modest inflation, up to 4%, is all right.; February 23, 2010 9:01 AM
C H Yak said...: Hi Mr Tan

However, it does not work well for the average worker.

If inflation is at 2%, workers expect wage increase to exceed 2%.

If inflation is at 4%, workers expect wage increase to exceed 4%, say 6%.

At present I do not think employers are willing to consider annual wage incresae of 2%, not to say 6%.

The higher inflation weighs down on the average workers, while as you said is an indirect wealth tax.

I am not sure about other countries, but it certianly will not work well in Singapore's system without further fine-tuning the wage system.; February 23, 2010 9:22 AM
Anonymous said...: "It allows governments to run a deficit and finance through inflation."

This is temporal and cannot last indefinately. Ultimately the people at the bottom will pay the price for inflation. In doing this, we are simply diluting the other existing bubbles into the bigger currency bubble. How long can it last? Eventually we'll run out of soap.

http://globaleconomicanalysis.blogspot.com/2010/02/inflation-targeting-madness-and.html; February 23, 2010 9:50 AM
Tan Kin Lian said...: Governments run budget deficit mainly through social programs that are not covered by taxation, as the voters refuse to pay the tax.

Hence, it is necessary for the cost to be financed partly through deficit and inflation (when the deficit is paid through printing money).

Most of the social programs benefit the lower income group, e.g. pensions for elderly people, health care for all (especially the poor) and welfare benefits.

So, the lower income will be better off with such a system. For example, inflation can replace GST.; February 23, 2010 10:16 AM
C H Yak said...: Q "Governments run budget deficit mainly through social programs that are not covered by taxation, as the voters refuse to pay the tax." UQ

This means voters must exercise and vote for their rights if they refuse to pay tax. Perhaps not really work in Sgp. Unless the culture changes politically.

Q "deficit is paid through printing money" UQ.

Our MAS is too stringent to attempt this.

Q "social programs benefit the lower income group" UQ

Our Govt. is still advocating as little state welfare as possible.

Q "the lower income will be better off with such a system" UQ

Only with total restructuring of the economy, including revamp of the welfare and wage systems, if well implemented.; February 23, 2010 10:54 AM
Anonymous said...: the funding for the relatively low income group comes from the relatively high income group.

whichever you look at that, it's hard to imagine a person from the later group thinking it's fairer for him to work harder to help the other.

and we aren't even talking about rich people, just higher income.

the point ch yak made is of consideration too.; February 23, 2010 11:04 AM
Tan Kin Lian said...: People with higher income should pay more tax to fund the social services. Those at lower income are also working hard, except that they earn less due to poorer bargaining power. So, high tax rate helps to level out the inequality in society.

After paying higher tax, say 30%, there is still 70% for the tax payer to enjoy. They should not begrudge paying the tax.; February 23, 2010 12:32 PM
C H Yak said...: Q "People with higher income should pay more tax to fund the social services." UQ

Well said, I do agree, but the problem herein lies in how to define "higher income".

What is the cut-off point to be considered as high income earners? The MOH used "S$5,200.00" monthly as a cut off point to consider subsidy under "means-testing".

A check against the annual salaries of Singaporeans for 2009 means this benchmark to consider as "high income" earners by MOH refers to the top 35% of resident taxpayers.

I argue against such arbitrary consideration when "mean-testing" was implemented. Using $5,200 as a benchmark means the middke-income earners are desperately squeezed.

Link :-

http://www.moh.gov.sg/mohcorp/mediaforums.aspx?id=18670

Do we then say Singaporeans earning above $5,200 a month belong to higher income?

If not how do we define "higher income"?

In 2009, the top 20% of resident taxpayers in Singapore earns above $100,000.00 annually.; February 23, 2010 1:12 PM
Anonymous said...: A few days back an economist
Alvin Liew from Standard Chartered reportedly made a bold prediction:

“We forecast that the GST will be raised to 10 percent by 2012 as an expected increase in tourism broadens the domestic consumption base, making indirect taxes a more significant contributor to government revenue.”

If this were to come true, it will surely greatly disappoint those who advocate higher tax rates for the high income earners and the removal of GST.; February 23, 2010 1:23 PM
C H Yak said...: Knowing our Govt jolly well about its "Kia-Su" approach to taxation, we know what is implemented is hard to be removed. Hence, GST going up to a higher rate is very likely, especially if election was to be called shortly.

There was an army song we used to sing since a recruit in NS, "they gave you $100, but took back $99".

The double whammy will still hit citizens (high and low incomes), no escape and trade-off at the end.; February 23, 2010 1:56 PM
wjsim said...: I am trying hard to contain my shock. Yes, inflation is a hidden tax, but I prefer upfront tax hikes if government has to cover deficit. If the government has to resort to fleecing savers under stealth to pay for the budget, what else can it do without the citizens knowing?

The only people who will be happy with inflation are those in debt. Singaporeans have the virtue of being prudent savers, I believe most would realise that we don't want our money losing value.

I have no idea how the IMF come up with those numbers. My money says that any inflation is bad. I tend to agree. Inflation hits hardest on those who are relying on their savings without any income, i.e. retirees and the unemployed. It doesn't make sense to run social programs to help these group of people if you have to create inflation in order to generate the money to do so. A whole lot of bureaucracy solving nothing.

Again, I find the contradiction confusing. First, Asset Enhancement is bad, now inflation is good? 4% inflation? 2% inflation? To me, pregnant is pregnant, there's no half pregnant. A hole is a hole, half a hole is still a hole.

In my opinion, the ideal situation is for money wages (nominal wages) to remain stagnant. Real wages will naturally increase due to lower cost of production and technological advances over time. However, this scenario, like communism, is too idealistic and will never play out as individuals are only motivated by increasing numbers on their paychecks and not decreasing numbers on price tags.

Another rhetoric. As an individual, would you want to spend twice the amount due to inflation you're already spending on housing? on healthcare? on education? Should your family do so? Now, why should a collection of individuals and family now labeled a "state" do so? If it doesn't make sense to one person, why should it make sense to 10? to 4.8million?

Governments (USA and PIIGS for example) still run programs that voters are unwilling to pay for as politics is all about getting votes, not balancing the bottomline. Singapore is unique in that the latter is the priority.; February 23, 2010 8:43 PM
Anonymous said...: Dear Mr Tan,
Judging from the comments, it looks like Singaporeans remain brain-washed with the monetarist economic ideas of Milton Friedman.

I don't think I will dignify the thesis "inflation is always bad" with a response. Such folks have not studied economic history and how the world finally got out of the 1929 Depression.

For those interested, here is the hyperlink to arguably one of the greatest economists of all time, John Maynard Keynes.

http://en.wikipedia.org/wiki/John_Maynard_Keynes; February 23, 2010 9:46 PM
Anonymous said...: Inflation creates an illusion that you are earning more money which is helpful for the society. It keeps the peasant working; February 23, 2010 9:52 PM
Anonymous said...: I agree high income should me those making more than a million should be tax 50% else the middle class will always be squeezed; February 23, 2010 11:20 PM
Anonymous said...: Hi Anon at February 23, 2010 9:46 PM.
Currently Friedman-esque economic thinking dominates the cabinet of LHL and his scholar buddy ministers. It is no surprise as all of them are schooled abroad during an era when US politics went the Republican party's way and turned radically right wing.

The PAP ministers are no thinkers, merely followers and bureacrats.; February 24, 2010 10:48 AM
Anonymous said...: I think the government can work more productively and efficiently, thereby reducing their cost.

This will benefit everyone by taxing less. However I do not think it is going to happen.; February 24, 2010 1:46 PM
C H Yak said...: I do agree with Anon. 1:46.

I think the Govt can work more productively, and not just efficiently, but also effectively.

The way is to cut down unnecessary reporting and do away with bureaucratic and obsolete rules and regulations...or what is called "business process re-engineering" in private sector. The US Govt also do this.

I still believe that prodctivity for S'pore as a whole is pulled down by the productivity in the public sector due to "red-tape". As result the Govt. always claim productivity is low and shout for higher productivity, because they are using their "own" benchmark to "measure" the private sector and the economy as a whole.

Now you commonly have to wait for one month for a reply from any Authorities or even longer. No rules mean no actions at the working level, and nobody dare to offer a "creative" solution but leave it for the bigger "boss", and hence the big boss right on top deserves and can justify his high salary in the public sector.; February 24, 2010 4:34 PM
Anonymous said...: Marxism and Keynesianism bear a resemblance to disease. If Bubonic plague is carried by flea-infested rats, Marxism and Keynesianism are carried by intellectuals. Intellect is not wisdom. Wisdom is the ability to combine intellect, knowledge, experience and judgement in a way to produce coherent understanding. Wisdom requires self-discipline and self-limitation. Totalitarian ideologies, embraced by ego-aggrandized intellectuals today, are self-indulgent and self-expansive.; February 24, 2010 5:05 PM
Anonymous said...: In that case, the failed intellects of the Right would be outright cancer.

Quite clearly Friedman economics, as embraced by Movement Conservatives, culminated in the two biggest economic crashes in modern history. It is Roosevelt's New Deal, which the Right deplored as Marxist or Socialist, that made USA the most prosperous nation on earth by taxing the rich and building the middle class. But once Reagan took over, the assault on the middle class began and much of New Deal's initiatives were rolled back.

Wisdom counts for naught if the Right continues to engage in fear mongering and refuses to look into the mirror.; February 24, 2010 8:41 PM