Thursday, May 26, 2011

A Novel Solution to the Problem of Ministerial and Parliamentary Wages

In Singapore, ministers are paid considerably more than any of their global counterparts; wages for even a junior cabinet position work out to at least a million Singapore dollars. Now, that sum is a considerable premium over the median wages of Singaporeans, and therefore the policy of benchmarking ministers' pay to top earners invites much criticism and causes much dissatisfaction.

This is not to say that the policy is ill-founded even in principle. I think that it is preferable for a nation to be governed by the competent, and if the competent are discouraged by the low wages of serving office, then the disincentives ought to be removed and office holders compensated.

Yet the devil is always in the details. How much compensation is sufficient? Clearly no compensation is madness, unless one is a supporter of plutocracy. Conversely, paying too much is distasteful to public sentiment and may divert public funds from other useful ventures. Some middle ground is the best solution, but deciding this proper price point is difficult.

I am quite a believer in the free market, and I think that free market principles can be exploited to solve this difficult problem. The general principle is the same- you get what you are willing to pay for. If you don't think that something is not worth it, then don't buy! This basic idea is elegant.

My idea is this: Each candidate for a position (be it parliamentary or cabinet) sets a price at which he would work for. This price must be publicized openly; if and when he wins office, his wages are fixed at that level throughout his current term of service (with perhaps an increment corresponding to inflation). For the voters, everything remains the same- they vote for the candidate they deem most suitable for office. Implicitly, though, the decision criteria has changed; instead of selecting the best candidate, it has shifted to selecting the candidate that provides the best bang for the buck.

What do you think of my idea?

Thursday, May 05, 2011

On the WP's Proposal to Peg Prices of New Flats

I disagree with the Workers' Party's (WP) proposal to peg the prices of new HDB flats to the median income of Singaporeans. I will argue that such a policy is ineffective in moderating housing prices, and that simpler alternatives are avaiable for controlling the price of housing.

The high cost of public housing may be viewed in simple economic terms, that of supply and demand. High housing prices is a natural outcome when demand for housing far surpasses the available supply. Both the supply and demand for housing can be further differentiated into two categories; the resale market and new flats from HDB. Such a differentiation is important.

For the purposes of simpler analysis I will assume that demand for public housing is inelastic; that is, the number of people seeking homes remains relatively constant regardless of housing prices. I also assume that buyers have no particular preference between a new flat and one on the resale market, given that both are priced similarly.

When a potential buyer seeks to buy a flat, there are two alternatives, a new flat from the HDB or a resale flat from the resale market. In general, the new HDB flat is cheaper than the resale flat due to a discount/subsidy, but the tradeoff is a waiting period for queuing, construction, etc (colloquially, waiting for keys). Thus, buying a flat from the resale market is naturally more expensive; this may be viewed as an "Impatience Premium" on those who have a more immediate need for housing. Demand for flats distributes itself naturally between the two sources of supply, subject to various influences. For instance, if housing subsidies are increased, a buyer may consider it worth waiting out for a new HDB flat, whereas if the waiting period for new HDB flats were to be increased, a buyer may find resale flats more attractive.

The WP proposes to peg the prices of new HDB flats to the median income of Singaporeans. The likely outcome of this policy is to reduce the price of new HDB flats, relative to existing prices. In the absence of other factors, this artificial price ceiling will have a modest cooling effect on housing prices, due to the reduction in the demand for resale flats. There is less demand for resale flats because more buyers will be persuaded by lower prices to wait in line for new HDB flats. Demand will thus be shifted from the resale market.

The chief effect of the WP's policy is to shift demand by manipulating prices. However, some undesirable outcomes result, namely increased waiting times for flats due to the greater number of people waiting for new HDB flats.

One objection to my arguments is that it is possible to avoid long waiting times by simply increasing the build rate of new flats. I agree with such astute observations. Increasing the supply of flats indeed alleviates the long waiting periods for new housing. But such an observation also highlights one important fact.

The problem with public housing is primarily one of mismatched supply and demand. High prices are but a symptom of this mismatch. Therefore, approaches that do not directly deal with either housing supply or housing demand are likely to be ineffective.

I believe that the housing problem is most effectively dealt with by scaling up the supply of new flats. This solution has a direct impact on housing prices, because if demand for housing is satiated by new flats, then demand on the resale market is correspondingly reduced, therefore reducing housing prices. In economic terms, by increasing supply, with demand constant, prices fall. With suitable management of supply, it is possible to control the cost of housing.

Let's revisit the WP's proposal. The plan to peg prices of new flats would result in prolonged waiting times for new flats, unless more new flats are built in response to demand. However, as I have argued, by simply ramping up supply of new flats, a moderating effect on housing prices is achieved. Hence, by Occam's Razor I would question the necessity of the price pegging policy. Let's only manage one variable, the supply of new houses to build, rather than also managing the selling price of HDB flats at the same time.

There are merits to the WP's intentions, though. While I disagree with their price pegging policy, I am swayed by the policy's objective of matching housing prices to the median income. My objection is merely that I do not believe price pegging is the best way to achieve that policy objective.