Tuesday, 30 June 2015

Persistent Myths

I don't mean conspiracy theories from the fringe lunatics (although those are persistent... and also mythical... )

I mean myths or ideas promoted by the authorities, experts, and people who we expect to know better or know things based on facts.

Apparently, some of their opinions are based on what they WANT to happen, or think SHOULD happen, rather than what can realistically happen. Or perhaps even what they need to happen POLITICALLY.

What I mean about "persistent myths" are something like what were uncovered by these Unconventional Wisdom, questioning conventional wisdom. Or persistent myths masquerading as "known truths".

Delaying retirement is one such myth covered in that article on "Unconventional Wisdom".

The idea is that as we live longer and we have a longer retirement to plan for and pay for, that 65 is the new 50, we need to work longer to shorten our retirement years, and to accumulate enough to finance our retirement. The argument goes like this:
"We" are living longer. There are fewer workers to support each elderly person. Therefore "we" should work longer.
That is sort of rationalising non-retirement, rather than arguing FOR non-retirement. The "rebuttal" (from the article. Note that the argument is from a US perspective. A subtle distinction):
But in the first place, "we" are not living longer. Wealthier elderly are; the non-wealthy not so much. Raising the retirement age cuts benefits for those who can't wait to retire and who often won't live long. Meanwhile, richer people with soft jobs work on: For them, it's an easy call.
Second, many workers retire because they can't find jobs. They're unemployed -- or expect to become so. Extending the retirement age for them just means a longer job search, a futile waste of time and effort.
Third, we don't need the workers. Productivity gains and cheap imports [US perspective] mean that we can and do enjoy far more farm and factory goods than our forebears, with much less effort.  
Labour Force participation rate drops with age. Before 50, the participation rate is about 80%. After 55, there is a steep drop off to 70%, 60%, 40%, and by age 70, the participation rate is about 15%. Of course this may be due to many factors - a retirement at 60 mindset, declining health, early retirement by those who can afford it (or think they can).

The peak participation is between the ages of 25 and 34 when participation is almost 90%. Then it drops.

The Retirement Age is now 62 (since 1993 - more than 20 years now), but perhaps some older staff are on employment terms that provide for 55 as the retirement age (they were employed continuously by the same employer since before 1993)?

[Note: The 1993 Retirement Age Act provides for a retirement age not less than 60 and not more than 67 years, with the exact age to be decided by the Minister. Subsequently (in 2012), the lower age was raised to 62. But the Minister still has the discretion to set it anywhere between 62 and 67.]

LKY worked until the day before he was warded in ICU with pneumonia and subsequently passed away. For him, working without retirement was not an issue, as he worked with his mind, not his physical strength.

In Jan 2015, there was the story of the bent-over, simple-minded 70-year old who was (reportedly) cheated of $400,000 over 15 years by two elderly women, not much younger than him. This old man worked as a cleaner and a petrol pump attendant.

But really, if we were cleaners or petrol pump attendants, do we want to be working at 70? Don't we deserve to take it easy in our golden years? At 70 he can still struggle on. At 91? Of course, if you are a "knowledge worker"working behind a desk and the heaviest thing you have to lift is a hole puncher (or a red box), then sure, work until you are 85. Or 91. Or dead.

BUT... maybe it works in SG, where 67% of every cohort is now tertiary educated (Poly or University) and are aiming for PMET jobs - professionals, managers, executives, and technicians? By 2030 2/3 of the workforce will be white collar workers?


Or maybe not.

Because of another Persistent Myth - the need to ever increase productivity.

Or that productivity is the means to raise your salary and your standard of living.

I started listening to Lee Kuan Yew when I was quite young and one speech that struck fear into my heart was when he was talking about (I think) being more productive. He said that we had to improve productivity, and as he spoke, his hands (IIRC) made a spiraling gesture upwards. Making tighter and tighter spirals as he said, "we need to get better and better" and each time he said "better" the spiral would turn tighter.

I did not like what I heard. Maybe it was the truth, but it sounded impossible and terrifying. Because you can turn tighter and tighter as you spiral upwards but as you turn tighter, the turns are more difficult as is the climb.

The sad sad truth is that for many Singaporeans, and for many jobs, the improvement in productivity is not a per hour improvement, but per person increase in productivity achieved by increasing working hours. The capitalist economy system is not working for the low income worker.

For some services or jobs, there is no way to improve productivity without sacrificing core experience. How to improve the productivity of a teacher? Increase class sizes? Speed up the lessons? Give more homework and reading?

For some jobs, there is a limit to how much productivity can improve before it becomes self-defeating, a caricature of the service you should be rendering.

Say you are a barber and you can serve 4 customers in an hour. Can you do 4.5? 5? 6?

At what point do you stop being a barber and is just a hair-cutter?

Another myth or rather act of faith is that it is all going to get better. Capitalism, the economy and the free market will resume in a moment. Any day now. Very likely this year. Or the next. Five years at the outside. Maybe ten if we are unlucky. From "Unconventional Wisdom": Immanuel Wallerstein's  "THE GLOBAL ECONOMY WON'T RECOVER, NOW OR EVER":
All systems have lives. When their processes move too far from equilibrium, they fluctuate chaotically and bifurcate. Our existing system, what I call a capitalist world-economy, has been in existence for some 500 years and has for at least a century encompassed the entire globe. It has functioned remarkably well. But like all systems, it has moved steadily further and further from equilibrium. For a while now, it has moved too far from equilibrium, such that it is today in structural crisis.
Well, actually, things will get better. But the capitalist-world economy seems to have lost validity and legitimacy. So it will get better, but it won't be a capitalist world economy, not as we know it today.

There is this anecdote supposedly between Henry Ford and a Trade Unionist. As they observe an automated assembly line, Ford points to the robots and remarks to the Unionists "Those things won't be joining your union." The unionist said in reply, "Good luck trying to get those things to buy your cars."

Or maybe Capitalism will survive because it is inherently rational. BUT, we would recognise that it is inherently unsustainable in excesses, and we are at the excess of capitalism, and it would have to be restrained, constrained, shackled and bridled. And Capitalism shackled isn't capitalism anymore. Is it?

Capitalism and Communisn were the Thesis-Antithesis played out over the Cold War.

Capitalism won.

Or so it seemed.

But now Capitalism is a victim of its own success. Or rather a victim of its own excess - excessive profits. Excessive remuneration/salaries. Excessive bonuses. Excessive income inequality.

So what is the Synthesis?

A kind of Socialist-Capitalism?

Maybe. Who knows?

What we do know is that these days, all economics is unconventional. Banks in Europe are giving negative interest rates for savings. And apparently people are putting money in those banks anyway. Why? These are not stupid people. But they are doing something that seems on the face of it very stupid. Could it be that other options are even MORE stupid? How could it possibly be?

Conventional economics, that is Capitalist economics, don't make sense anymore, are not working anymore.

Is this temporary or is it the first sign of things changing permanently? That we have entered a "New Normal"?

Who knows?

But interest rates have been low and persistently low, and it has not raised investment or increase economic activity that would drive economic growth.

Maybe all the economic growth in the past has been "borrowing" consumption from the future and now there is no more consumption to "borrow", and it's time to pay the debt?

We are in uncharted waters. So we cling onto what we know and hope that it will continue to hold true and that it has not turned into a (new) persistent myth. Because unconventional economics means that we will have trouble planning for the future, and in particularly planning for our retirement.

Investment as a means of "growing your retirement nest-egg" is another persistent myth, along with the idea that you can "monetise your home". With the persistent low-interest rate environment, it is hard to grow anything financial.

If investment were so easy, all of us would invest for our retirement and none of us would have to worry about retirement.

Sure, some people are doing ok. We like to point to the GIC who invests the funds from the SSGS (which is sold ONLY to the CPF) in order for CPF to be able to pay those 4% interest. Right? So get them to invest our money!

Right. If it were so easy, the government could easily create a short list of "super-safe and sure to make money" investments for CPF members to invest in instead of leaving their money in the CPF earning a paltry 4%, right?

And 4% IS paltry... if you are as old as me and remember in the 70s when POSB gave 4% interests. And the Big Five banks (OCBC, Chartered Bank/StanChart, UOB, OUB and DBS) offered interests rates about double that.

But that was then - an era of more reasonable interest rates.

Since we are on the topic of persistent myths, here's my chance to debunk one: That the government is using our CPF money to make HUGE profits and giving CPF members paltry interests on their CPF.

First of all, in today's investment climate, 2.5% and 4% risk-free is not paltry.

Second of all, the GIC don't need your money. Here's the explanation:
Say you are GIC and have $400b to invest. You have a team of analysts scouring the world's economies and businesses to find the best investments. (Meanwhile other Sovereign Wealth Funds are doing the same. Some with a bigger budget than you.) So you team finds a $50b investment with a projected return of 16%. Pretty good. You get it. Another analysts finds a $70b investment with 14%. You get it too. And so on until you spend the last $50b on an investment with a projected return of 9%. Great. That's $400b invested. Good job!
But wait! The government just dumped $250b on your lap from the CPF and tells you - Invest this! You already got all the great deals from 16% to 9%. Any new investments is going to have lower returns. 
Alternatively, you (GIC) have $650b investment (including CPF money) invested in a variety of investments with varying returns from 6% to 16%. Averaging 11%. Roy "Surname sounds like he's squeezing out a brick" manages by some miracle to convince the govt to shut down the CPF scheme and to return all the money.
GIC immediately liquidates $250b of their investments and reshuffle their investment portfolio. One year later, their trimmer portfolio of just $400b is getting returns from 9% to 16%, or averaging 13%. Meanwhile ex-CPF members are getting less than 1% interest in Fixed Deposits.
[Note that the above is a simplified example to show that additional funds are not always a blessing. Of course up to a point, more funds are better, giving you more options and flexibility. The point is, for those who say that the govt is exploiting the "cheap" CPF money, simply by pointing out that there is CPF money (but not explaining how it is cheap), are simply stupid, uninformed, financially illiterate, or disingenuous and dishonest and probably has a hidden agenda. CPF money at 2.5% is NOT cheap money. Won't stop the conspiracy theorists from clinging to debunked ideas though.]

The current low interest rate regime is unnatural. Interest rates CANNOT be lower than inflation persistently. Or rather, it should not. The fact that it is, indicates that something unusual is going on. Which relates to the previous point about the impending "Death" of the global economy (that is so melodramatic).

You see, the reason people invest (in a business) is because they have an idea to sell something to make money. However, if everyone is not buying things because, well, they are retired or are retiring and they have no income, so all they have are their savings, so they are not going to be spending on things they don't need, especially if they are going to be living far longer than they expect, then it doesn't matter what you are planning to make and sell. No one (or not enough people) will be buying your new product.

What seems to be clearly suggesting itself is that "normal" economics are about over. Instead, new ways for the world to work are emerging - the Sharing Economy, Couch-surfing, AirBnB, Uber, Wiki, creative commons, shareware, all suggest a new "hippie" movement. Or a "Star Trek" society.

If people are not buying, the economy is not going to grow, there is little need for investment, and the few contrarian fools who are investing may actually make a lot. Or lose a lot.

Thirdly, just because the GIC can invest in some ventures doesn't mean private investors can. Say GIC has $100b to invest and an opportunity opens up - $70b investment with 17% returns. GIC takes the investment. There is nothing left for the private investor to take. GIC also takes a long view of their investment. That $70b investment will only pay off over 12 years. Many private investors are not willing to hold for that long.

A related myth is that one can monetise one's home. If you have a multi-million dollar home, sure. But I suspect that if you have a multi-million dollar home, financing your retirement, may not be a problem for you. For the rest of us with just the ceiling overhead and the floor beneath our feet, there really aren't many options. You can sell your flat, but you will need to buy a replacement. If you sold high, you will probably buy high. If you wait for prices to fall before you buy, then likely you will get a low price for your flat as well.

Reverse mortgages and renting out a room can provide a steady income. Reverse mortgage is actually drawing down on savings. Live long enough and it will run out. Renting is more flexible. But there are lots of hidden psychic "costs" - loss of privacy, etc. May work if you are a people-person. Not so much if you value your privacy.

And this is also related to the belief (if not myth) that investment in property is a no-lose investment. Maybe in the past. Times, they are a-changing.

If you are buying a property for "investment", you could be planning to rent out the property, until such times that the property value has appreciated enough for you to sell the property and make a decent profit.

Good luck with that.

Sure that worked in the past. Because there were many foreigners coming to Singapore to work, and they needed long term accommodation. But they weren't going to buy property (too much commitment). So they rented.

And owners made big bucks. Or at least enough bucks to service their mortgage. The plan is buy the property, take a loan on low interest rates, rent out the unit, use the rental income to service the mortgage, so the property practically pays for itself. Then at an opportune time (when the market is hot), sell the property for a big return.

Here is why it may not work for you.

a) There are too many new homes being built.
b) There are a lot of rental vacancies on the market. And rising. It is a Renter's market. This means that there will be pressure for rent to go down.
c) Interest rates for mortgages is likely to be going up soon. It has been near-zero for some time, but this cannot continue. So servicing your mortgage may costs more. Even as the rent you hope to be getting to service your loan is falling.
d) There are fewer foreigners coming to work in Singapore. This means the rental market is not likely to improve.
e) There may be fewer buyers because of new rules or market cooling measures like the ABSD, and the TDSR, which raise the costs for buyers. So if you want to sell... you may not be able to find a buyer. Too many sellers looking for too few buyers, means it is a buyers' market.

Meritocracy is less a persistent myth, and more of an"enshrined ideology" that needs re-examination. I am not saying Meritocracy is now invalid. But I am prepared to listen to arguments that it is.

What I am saying is that all systems (and ideologies) attempt to perpetuate the status quo. Or if not ideologies, people who are advantaged by a certain system invariably learn to game the system. Or any system that has existed long enough will be gamed.

Casinos change their chips every now and again. This is to prevent forgeries or counterfeiting. China started their imperial examination system as a meritocratic way of recruiting mandarins and civil servants. But over time, the system was "gamed". People learned loopholes and back doors, and rich people could buy their way for their sons to get government posts.

In other words, corruption set in.

Singapore has been wary of this and our system has been scrupulously clean and kept clean.

And yet...

When rich families can Montessori their kids, or give them head start programmes, or they are alumni of prestigious schools or can afford to make donations to "cut queue" in registering their kids for some prestigious or desirable school, the integrity of meritocracy starts to crack.

When social mobility starts to slow down, or become immobile, it is a concern. There is a parable - in  the "Old Country" (meaning Europe/UK), the people look up to the mansion on the hill where the Rich People live and they say, "some day, we will get them!" In the US, the poor people look up to the mansion on the hill, and say, "some day, we will get there."

America is the land of hopes and ambition and seen (historically) as a very socially mobile society, and so there is less envy, because there is no envy if what you might be envious of may one day be yours. But in the old country with hereditary status and classes, there was less social mobility and more social or class envy.

Social mobility renders inequality more bearable, because inequality is only temporary. But without social mobility, then inequality becomes more permanent, less mutable, less changeable. Less acceptable.

Meritocracy is supposed to keep members of society, mobile. There will be rich and poor, but in the next generation, the sons and daughters of poor parents can move upwards. Well, some of them.

But there is also another force at work, perhaps - social inertia. And if you are a rich parent (and yes most of you are rich), it is understandable that you would want to have the most advantages for your children, to give them as much head start as possible.

Has Meritocracy become a Caste System?

I think that is a bit of a hyperbole, but there are definitely signs that people are gaming the system. The point is, Meritocracy has worked to bring us to where we are today. Is it still working? That is one question. What can replace it? That is the more important question. It may well be that Meritocracy is the worst way to improve social mobility... except for all the other ways we have tried throughout history.

And then there is the fuzzy, woolly, soft-and-fluffy "compassionate meritocracy". I have yet to hear a sound definition of it.
Meritocracy is the selection of candidates for a job or a position based solely on merit - the candidate's ability, skills, demonstrated expertise, and overall suitability for the job. In other words, you earn your place by merit. So what's "compassionate meritocracy" then? Selection of candidates by merit, with a "sob story" as a tie breaker?
Meritocracy promises that "anyone can be rich if they try hard". Unfortunately, the corollary to that is "if you are not rich you didn't try hard".
I would proposed that Compassionate Meritocracy is the de-linking of Meritocracy and the Just World Belief.
That is, believing that "If you work hard and try hard, you will get the job" but holding back on believing the corollary, "that if you did not get the job, you didn't try hard enough or work hard enough".
Compassionate Meritocracy is the more realistic perspective that Success is one percent inspiration, 90 percent perspiration, and 9 percent luck, or some combination of skill and luck.
Compassionate Meritocracy is the belief that "if you work hard, and you are a little bit lucky, you can be rich", or "With a bit of luck, everyone can be rich if they try hard", and "If you're not rich, you might have had some bad luck".
That is compassionate meritocracy.
The reason for pointing out all these persistent myths and "sacred cows" is that as long as we subscribe to these persistent myths and sacred cows, we never question them, and the problems they create will not get solved. Or we solve the symptoms, but do not question the true cause of the problem.

Some of the persistent myths may actually be intended to SOLVE problems (e.g. meritocracy), but unintentionally created other problems. Or have become problems themselves.

What other persistent myths can you think of?

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