[Outlook]Humane economics

These days, many people maintain that President Lee Myung-bak must change his methods of governing the country. They say the president must stop being self-righteous and arrogant, hire talented people from a variety of fields for the government, become more patient, listen to the people and present a new vision. These are all good points, but I’d like to add one more ?? he should also change his policy of shrinking social welfare to one that pursues economic growth and social welfare at the same time.

In economics, the so-called trickle-down effect has the lower class eventually becoming better off as the rich increase employment and consumption. This theory was used to deny the necessity of fair distribution of wealth. In underdeveloped countries, the trickle-down effect has been emphasized by those who maintain that economic growth should be pursued before fair distribution of wealth.

Proponents of Reaganomics, the policies of former U.S. President Ronald Reagan in the 1980s, also underscore the effects of the trickle-down theory. Reaganomics emphasized cutting taxes and curbing expenditure on social welfare in an attempt to nurture economic growth.

Adam Smith is the originator of the trickle-down effect. He used the term “the invisible hand” twice in his books. In “The Wealth Nations,” he wrote that when individuals invest in their own interest, the wealth of society as a whole increases thanks to the invisible hand. In “The Theory of Moral Sentiments,” as rich people hire workers and purchase luxury goods, the poor also profit thanks to the invisible hand. This argument is the same as the trickle-down theory.

The invisible hand that Smith mentioned was God’s hand, or more concretely, the power of the marketplace. According to trickle-down theory, development of a market economy resolves poverty. For the past 200 years, most people in advanced countries have escaped poverty and enjoyed wealth thanks to the development of capitalism. However, many people, although they are proportionally a minority, have still been unable to escape from poverty. This is why the public welfare system was introduced.

The incumbent administration’s attempts to go back to the growth-first policy of the past and to curtail expenditure on social welfare. The president pledged to accomplish 7 percent economic growth, achieve a national per-capita income of $40,000 and to make Korea one of the world’s top seven economies. These targets show the growth-first policy very clearly. The pledge is only about economic growth in terms of quantity, and doesn’t cover employment or fair distribution of wealth.

Conglomerates will likely increase investment thanks to the government’s tax cuts, eased regulations, support for technology development, and efforts to successfully ratify a Korea-U.S. free trade agreement. However, it is still doubtful whether they will increase employment. Even if national per-capita income increases from the current $20,000 to $40,000, most people’s standard of living is not likely to improve if social polarization persists.

The guidelines for the 2009 budget, released by the Ministry of Strategy and Finance in late April, state that the drastic increases in social welfare spending of the past decade had resulted in ineffectiveness. The guidelines go on to say that the rise in social welfare expenditures must be constrained so as to use the state budget for economic growth. The government also announced that it would freeze the level of subsidies for living and medical services for the poor and the number of people eligible to receive them.

Korea is a semi-developed country with a national per-capita income of $20,000. But the ratio of social spending to gross national product was 7.8 percent in 2007, only a third of the average figure of Organization for Economic Cooperation and Development member countries, which was 21 percent. The average figure for advanced countries is 18 percent for every $10,000 in national per-capita income.

As the president says, creating employment is the best social welfare policy. But even if the country continues to develop, the marketplace doesn’t hire every citizen and not all jobs pay sufficiently. The social welfare system is thus absolutely necessary. However, Korea’s system is still at the level of an underdeveloped country. Countless children, elderly citizens and disabled and unemployed people are left to suffer in poverty.

The president’s MB-nomics, based on the trickle-down effect, is a Korean version of Reaganomics. Creation of new jobs must be left to the market and the government must take care of public social welfare. As John Stuart Mill said, it is wrong to abandon innocent people to die when prisoners are provided with places to live, food and clothes. It is irrational and inhumane to believe too much in the trickle-down effect. Economic growth and social welfare must go hand in hand.

*The writer is a professor of economics at the University of Seoul and a co-representative of the Citizens’ Coalition for Economic Justice. Translation by JoongAng Daily staff.

by Lee Keun-sik