31 Mar Wealth Inequality: The Unmeasured Social Evil
Most people will be familiar with the high income inequality in Singapore as well as the argument made with the announcement of each year’s Budget that government transfers significantly dampen the inequality. This has in fact been the case recently, with the Gini coefficient falling to 0.375 in 2020 after government transfers, as compared to a natural rate of 0.452.
While we do measure income inequality, what is not measured is wealth inequality. Singapore, with its low income taxes, absence of capital gains tax and estate duty, as well as its position as a strong financial hub with enduring political stability, has become a magnet for the global rich. One proxy for gauging the success in attracting wealth is the size of assets under management (AUM) by the private wealth banking sector.
DBS’s private wealth management arm alone has SG$250 billion AUM. In total, the Singapore private wealth management AUM has surpassed SG$4 trillion, with a compounded annual growth rate (CAGR) of approximately 11 percent. This is as compared with just SG$50 billion in 2000. This rate and scale of growth cannot conceivably be driven purely by domestic wealth creation; the greater proportion is driven by capital inflows.
The government actively encourages this inflow of wealth as it ideologically holds fast to the concept of ‘trickle-down’ economics. However, it has not produced any evidence that trickle-down economics actually works, save by exception of a few conspicuous cases such as with industrialist James Dyson and venture capitalist Eduardo Saverin.
Some would have heard of or read Thomas Picketty’s book Capital, which identified the economic distortion that occurs when return on capital from capital action exceeds that of return on capital from sticky and productive investments. But there is an economist from an earlier age whose work is increasingly pertinent as wealth inequality increases – Thorstein Veblen, whose books The Theory of the Leisure Class and The Theory of Business Enterprise, published at the turn of the 20th century, underscore how the ultra-rich are not sources of economic productivity, but instead inspire economic parasitic behaviour.
More recently, the economist Hyman Minsky has written extensively on the condition where capital is attracted to short term speculation and luxury products rather than productive infrastructure. It is arguable that, given the anaemic growth globally – including in pre-Covid-19 Singapore – over the past decade, that we are operating under a combination of these economic postulations and that they are positively correlated with the growth of private wealth AUM.
The upshot is that there is no evidence for trickle-down economics – otherwise, that SG$4 trillion would have supercharged Singapore’s economy. Wealth inequality is pernicious and, without estate duty, will prove persistent and intergenerational. Thus, the rich become more rich and their elite socioeconomic status ever more entrenched with each passing generation. By contrast, the middle class and lower income bracket – which are salaried, squeezed by crisis, technological change and the rising cost of living – become chronically dependent on government transfers to make ends meet. This is hardly a recipe for a cohesive society. It also represents a brewing political problem that will eventually be tested as asset inflation in all classes, most particularly in housing, becomes more exaggerated.
The solution is politically unpalatable – which is to tax the wealthy by reintroducing estate duty, reintroducing minimal capital gains, and levying a tax on luxury goods. Even this would not be enough, but it would be a good start towards closing the wealth inequality gap.
– Devadas Krishnadas