Economic Issues - PIH and LCH
I’ve finally got some inspiration for an economic issue, and this time its going to be different as am I going to introduce some economic ideas to you through some real life issue that all NSFs are actually talking about.
Yes, there is a rumour that there will be a $150 rise in allowance for all NSF. Now, initially when I heard about it, I thought it was total crap. I mean, lets face it, for the amount of work effort that we are putting in (or that I am putting in), it does not justify a pay rise of that amount. This is especially so since the SAF has recently upped NSF allowance (roughly 5-6 years back) to the extremely decent amount that we are enjoying now. Furthermore, shouldn’t the government be focusing on reducing spending, so as to cut down on the budget? I personally estimated that the pay rise will cost the SAF around $72 million a year, and that is very significant especially if you put that money into use in healthcare or upgrading of human capital.
However, I’ve just vaguely remembered about two concepts which I came across – permanent income hypothesis (PIH) and the life-cycle income hypothesis (LCH). I’m personally very proud of this 2 ideas as I’ve used them in my wonderful Cambridge entrance exams that actually secured my place.
The idea of PIH came from Milton Friedman, and it suggests that consumers consume a constant fraction of their expected income, or permanent income. Permanent income refers to income which is long run, hence it means people adjust their spending behaviour on what they expect to earn over a certain period of time, and not just when there are sudden short-run changes in actual income. Hence, this splurging by the government could be there to encourage spending by NSFs on products (especially in the entertainment and teen industries), which will then further bolster growth and boost AD.
Now, the LCH is an idea that I find more pertinent. Basically Modigliani, who suggests that people try their best to stabilise consumption over a lifetime, proposed it. I mean this is true because people do save for their retirement so that they can consume later then. Again, this means people will base their lifetime spending (as well as spending at a particular period of time) on how much they are earning. So, the reduction in NS could have caused some to expect their lifetime income to decline (close to $6000 for officers), and hence the pay rise is just to compensate and even things out so that people’s consumption patterns will not be affected.
Now, again I suspect the idea of the allowance rise reinforces the idea of PIH more than LCH (which I think will be quite insignificant). But again, I think that the money will be better spent on other areas. Worse still, the government justified the half-year reduction in NS by saying that they are expecting more enlistees a year for the next decade (around 3000 more), meaning that instead of just re-transferring cash, they will be spending more!
Anyway, I think there will be a bigger budget deficit, but if the SAF wants to scrimp there are 1001 ways in which it can save. So lets not care about it especially since as an individual I will love it if I gain more cash!
Anyway, I've just briefly touched on PIH and LCH. For a more detailed account and better understanding, read up on any standard year 1 macroeconomics book. Hope I've dint misinterpret the ideas. =)
Yes, there is a rumour that there will be a $150 rise in allowance for all NSF. Now, initially when I heard about it, I thought it was total crap. I mean, lets face it, for the amount of work effort that we are putting in (or that I am putting in), it does not justify a pay rise of that amount. This is especially so since the SAF has recently upped NSF allowance (roughly 5-6 years back) to the extremely decent amount that we are enjoying now. Furthermore, shouldn’t the government be focusing on reducing spending, so as to cut down on the budget? I personally estimated that the pay rise will cost the SAF around $72 million a year, and that is very significant especially if you put that money into use in healthcare or upgrading of human capital.
However, I’ve just vaguely remembered about two concepts which I came across – permanent income hypothesis (PIH) and the life-cycle income hypothesis (LCH). I’m personally very proud of this 2 ideas as I’ve used them in my wonderful Cambridge entrance exams that actually secured my place.
The idea of PIH came from Milton Friedman, and it suggests that consumers consume a constant fraction of their expected income, or permanent income. Permanent income refers to income which is long run, hence it means people adjust their spending behaviour on what they expect to earn over a certain period of time, and not just when there are sudden short-run changes in actual income. Hence, this splurging by the government could be there to encourage spending by NSFs on products (especially in the entertainment and teen industries), which will then further bolster growth and boost AD.
Now, the LCH is an idea that I find more pertinent. Basically Modigliani, who suggests that people try their best to stabilise consumption over a lifetime, proposed it. I mean this is true because people do save for their retirement so that they can consume later then. Again, this means people will base their lifetime spending (as well as spending at a particular period of time) on how much they are earning. So, the reduction in NS could have caused some to expect their lifetime income to decline (close to $6000 for officers), and hence the pay rise is just to compensate and even things out so that people’s consumption patterns will not be affected.
Now, again I suspect the idea of the allowance rise reinforces the idea of PIH more than LCH (which I think will be quite insignificant). But again, I think that the money will be better spent on other areas. Worse still, the government justified the half-year reduction in NS by saying that they are expecting more enlistees a year for the next decade (around 3000 more), meaning that instead of just re-transferring cash, they will be spending more!
Anyway, I think there will be a bigger budget deficit, but if the SAF wants to scrimp there are 1001 ways in which it can save. So lets not care about it especially since as an individual I will love it if I gain more cash!
Anyway, I've just briefly touched on PIH and LCH. For a more detailed account and better understanding, read up on any standard year 1 macroeconomics book. Hope I've dint misinterpret the ideas. =)
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