Why we should resist welfare

The following article is contributed by Henry Chew Zi Cun. Henry is the founder of The Philosophy of Life organisation, a group which aims to introduce philosophy and economics to Singaporeans thru practical, fun and simple ways.

In our recent parliamentary debate, Workers’ Party (WP) Chief Pritam Singh proposed to extend our existing support schemes beyond the COVID-19 crisis into a “New Deal” styled welfare system – a matter that should raise our alarms.

We cannot have our cake and eat it too. Mr. Singh himself correctly said that we might need to adopt belt-tightening austerity measures to balance the budget later.

Amidst the sweet-sounding appeals for more welfare dole through bigger government deficits, we must remind ourselves that there are only three ways of financing a public deficit (1) taxation, (2) public borrowing or debt issue, and (3) money printing. Since Singapore does not engage in active money printing, we shall leave (3) out of the discussion.

My article would highlight the dangers of public deficit in both our political arena and business environment.

Is a Public Debt Nobody’s Debt?
Incurring public deficit and public debt are serious matters, because it creates perverse incentives unlike private debts. Nobel Prize laureate in Economics James M. Buchanan, through his prestigious academic work on Public Choice Theory, explained that individuals behave differently in the context of public and private debt.
In private debt situation, there is a mortgage on the borrower’s asset. If the borrower failed to amortize his debt, then there is a claim on his estate. As the result of such constraints, the private borrower would be careful in his borrowings, and would only embark on positive investments that would help him alleviate the debt.
However, in a public debt situation, since politicians and voters are “all in this together” no one is really responsible for the debt. Since there is no asset under mortgage, only a promise of future payments that can be serviceable by more tax and more debt.

Thus, voters would be undeterred in endorsing generous government programs which incur debts. Under such circumstances, voters only speak about receiving “fair share” of handouts, and ironically never discussed about their “fair share” of liability.

An elderly man is crying outside a national bank branch as pensioners queue to get their pensions, with a limit of 120 euros, in Thessaloniki on 3 July, 2015. (Photo credit should read SAKIS MITROLIDIS/AFP/Getty Images)

Likewise, politicians would promise exorbitant spending programs to stay in power for such debt can always be put off to later generations and it would be increasingly tougher to cast blame on any one politician.

All in all, perverse incentives would lead to preserve outcomes, as both voters and politicians forgo rational fiscal prudence for runway profligacy. This is a dangerous slippery slope in the political arena that we must avoid at all cost.

An ancient “new deal” is no way to boost the economy
A Roosevelt styled “new deal” would mean huge government programs to subsidies struggling businesses and unemployed workers, much like all of our COVID19 support packages till date, but bigger. And Mr. Singh proposed to prolong such programs.

Despite its noble intentions on the surface, huge government programs crowd out good business behaviors. The proper function of a business is to (re) allocate talents and resources efficiently, in order to keep innovating in the face of new challenges. If a company failed to adapt, then its resources should be taken over companies who can innovate and adapt, as this the most efficient way to prosper.

Embarking on a new business venture or even managing an established company is never easy as it demands grit to confront risks and fierce competition – and that’s a good thing. Society thrives on businesses perpetually evolving to bring the most innovative and affordable goods for all consumers, especially the middle class.
However, when there are many SME aid schemes available, then companies would find it easier to channel their creative energies to qualify for these schemes. This is because it is easier to qualify for subsidies than to face real business challenges.

Certainly not all companies will gear towards seeking aid once aid is made available, but the temptation is high. At this point, we must realize that such aids are afforded by tax-paying companies and individuals who are successful in serving consumers well.

By saturating our business environment with subsidies, it distorts the incentive for business to stand on their own through increased productivity and innovation. A consistent policy that artificially propped up unproductive companies, which are disproportionally funded by successful companies is neither fair nor sensible.

Government aid programs for businesses are always means-tested. Whoever writes the cheque, writes the rules. Therefore, instead of having a healthy marketplace of competitive ideas will be replaces by companies adjusting their business model to fit the criteria of the subsidies.

Before the COVID19 crisis, there are already too many aid programs made available to SMEs. Nowhere in the world are small businesses flushed with such numerous schemes by the government. Furthermore, when we look honestly at history, no Multi-national corporations (MNCs) had ever grown out of generous government subsidies.

Lastly, Singapore has been strategic in tying various workers’ aid programs to skill-upgrades and avoid giving direct handouts. We should stay on track with this principle, because like the SME case above, generous worker subsidies will have a perverse incentive of prolonging unemployment, since one is easily tempted to qualify of aid than to engage in gainful employment.

Consequently, both business and worker subsidies schemes created a whole new set of perverse incentives and perverse outcomes in our economy.

Keep Singapore Great
One of the features that made Singapore exceptional for 50 over years is the legacy of budget surpluses. We are consistently fortunate to have politicians that do not engage in overspending, so far. We can only hope that our new leaders, whoever they are, would remain prudent in our public financing.

It is certainly understandable that under extreme circumstances, the government can adopt extraordinary measures, but it would be a folly to extend beyond such circumstances to fight misdiagnosed problems.

Share your thoughts!

Zeen is a next generation WordPress theme. It’s powerful, beautifully designed and comes with everything you need to engage your visitors and increase conversions.