A rising tide lifts all boats?

The PM recently rubbished income inequality as being of little importance.

There is an excellent book for those who wonder why people like myself are deeply concerned with income inequality and why it matters to modern society - Falling Behind: How Income Inequality Harms the Middle Class, by Robert H. Frank.

Very briefly, Frank argues that there are two kinds of goods, positional, and non-positional, and rising inequality forces people to devote more resources to purchasing positional goods, neglecting the non-positional, and leading to a loss of social welfare across the whole of society.

What are positional goods? They are goods for which the relative rank of what the consumer consumes has importance.

There are lots of good examples in Singapore. Education for instance. A university degree is practically a requirement now for a person to make a decent living. 30 years ago, it wasn't. The reference point for education has shifted upwards so that most people view a university degree as a necessity. Hence the deep unhappiness whenever tutition costs are raised. Housing is another. Oh, we're not talking about luxurious condos or bungalows. But consider this, it is common wisdom in Singapore that because of the 1 km proximity rule, housing that is nearby to "good" schools is considerably more expensive than comparable housing located elsewhere. Clearly, not all HDB flats are built equal. And getting, or rather, not getting, the "best" HDB flats could literally seal the fate of your kids.

And for a more pan-national perspective, we can consider defense spending as the ultimate positional good. To illustrate this, let's rework what the mainstream media article wrote:  "Worried about low defense spending? What's important is not the absolute gap between Singapore and Malaysia/Indonesia, but whether Singapore's defense spending is moving up."

Does that statement sound absurd? Of course it does. What matters is how much more we are spending than our neighbors, not how much we are spending in aggregate.

Positional goods are real; concern with the positional nature of goods should not be dismissed or belittled or deemed irrational. Context matters. And it isn't simply just a matter of keeping up with the Joneses or about the politics of envy. It's just that rising inequality raises community standards of what is deemed normative in the community.

So how does rising inequality hurt Singaporeans? 

Singaporeans today are spending more on a whole range of positional goods, to their own detriment. It is akin to a positional goods arms race: We are spending more on housing (got to be close to those good schools!), on raising children (think tuition, enrichment classes, childcare), on education (both for our kids and ourselves - retraining, reskilling, postgraduate degrees), and even, basely, on consumer goods.

Think of it this way, at a job interview, who gets hired? The best candidate of course. But all candidates being equal, would you rather hire the guy dressed in the sharp Zegna suit or the typical guy in shirt and slacks? Never mind that the Zegna guy is a trust fund baby and can well afford his threads. The next job interview, everyone shows up in a Zegna suit. Problem is, every other candidate put the suit on their credit card, resulting in four-figure debt.

That's how income inequality hurts the middle class. Rising income inequality stretches the boundaries of what are considered normative, because the rich invariably purchase the things that give them a leg up in whatever they're doing. This isn't about envy, it's about how people try to keep up in order to achieve things that are really important. Jobs, schools, kids' futures, a better quality of life for the family.

In Falling Behind, which speaks specifically to an American audience, Frank lists the ways middle class folks use to "afford" to keep up. The list isn't pretty. They are: working longer hours (to which I would add increasing prevalence of dual income households), reduced savings (that certainly sounds familiar: CPF accounts emptied by housing anyone?), increased indebtedness (ditto), longer commutes (yes, yes, yes), growing sleep deprivation (maybe, maybe not) and public service cutbacks (not so much here).

I would add another way that is more uniquely Singaporean. Fewer kids. Rising income inequality means fewer kids, as Singaporeans marshall their resources to pin their hopes on just one or two offspring.  The last I checked, encouraging Singaporeans to have more kids was a government priority. Income inequality isn't important...really?