Lessons from Singapore

Bryan Caplan has evidently been reading up on Singaporean government policies. He has two posts in favor of two Singaporean policies: health care and unemployment. First, health care:

If the following is true, all the comparisons showing that the U.S. greatly outspends Europe without getting better health are beside the point, because Singapore makes Europe look like the U.S.:

The Singapore government spent only 1.3 percent of GDP on healthcare in 2002, whereas the combined public and private expenditure on healthcare amounted to a low 4.3 percent of GDP. By contrast, the United States spent 14.6 percent of its GDP on healthcare that year, up from 7 percent in 1970... Yet, indicators such as infant mortality rates or years of average healthy life expectancy are slightly more favorable in Singapore than in the United States... It is true that such indicators are also related to the overall living environment and not only to healthcare spending. Nonetheless, international experts rank Singapore's healthcare system among the most successful in the world in terms of cost-effectiveness and community health results.

How does Singapore do it? ...

More details on how Singapore's system works:

• There are mandatory health savings accounts: "Individuals pre-save for medical expenses through mandatory deductions from their paychecks and employer contributions... Only approved categories of medical treatment can be paid for by deducting one's Medisave account, for oneself, grandparents, parents, spouse or children: consultations with private practitioners for minor ailments must be paid from out-of-pocket cash..."
  
• "The private healthcare system competes with the public healthcare, which helps contain prices in both directions. Private medical insurance is also available."
  
• Private healthcare providers are required to publish price lists to encourage comparison shopping.
  
• The government pays for "basic healthcare services... subject to tight expenditure control." Bottom line: The government pays 80% of "basic public healthcare services."
  
• Government plays a big role with contagious disease, and adds some paternalism on top: "Preventing diseases such as HIV/AIDS, malaria, and tobacco-related illnesses by ensuring good health conditions takes a high priority."
  
• The government provides optional low-cost catatrophic health insurance, plus a safety net "subject to stringent means-testing."

This doesn't sound too far off from the "Jane Galt" health care plan, which I generally support, although Singapore's plan is more detailed. But Caplan also likes Singapore's mechanism for fighting unemployment:

Imagine my surprise, then, when I discovered that Singapore has figured out a stunningly clever way to use tax cuts to reduce unemployment. Instead of focusing on stimulating demand, Singaporean tax policy hits the margin that matters: labor costs. When there is a surplus of labor, they cut employers' share of the payroll tax (known in Singapore as the CPF). Details appear in Henri Ghesquirre, Singapore's Success:

The government directly intervened to temporarily lower the cost of business in Singapore through... its power to lower the CPF contribution rate of employers...

Elsewhere, substantial nominal currency devaluation is often the last and only resort in the face of downwardly sticky nominal wages, often with higher inflation as an undesirable side effect. In contrast, Singapore uses the direct intervention methods at its disposal. In addition, there is built-in wage flexibility, because an important portion of workers' remuneration is automatically lowered if GDP falls short of target.

With flexible wages, of course, it doesn't matter who legally pays the a tax. But the whole problem with recessions is that wages are somewhat sticky - you can have surplus labor for years before wages fall enough to restore full employment. By cutting employers' share of the tax, the Singaporeans greatly speed up the wage adjustment process.

Caplan asks whether such a system for correcting unemployment would be successful in the United States. I don't think it would be, for the simple reason that our government is much more democratic that Singapore's. In the U.S., populists would likely oppose lower corporate taxes in lean periods even if the positive effects were strongly felt by workers. Economic conservatives would oppose raising corporate tax rates in boom periods. The advantage of this plan is its flexibility, which can be taken advantage of by an authoritarian government but not by a democratic one. The proper policies would likely not be enacted at the appropriate times, so the system would break down.

This is a shame.