Experimenting weirdlyWho is actually behind the economic policy of the administration of President Moon Jae-in? Is it Kim Dong-yeon, the deputy prime minister for the economy, or Jang Ha-sung, the presidential policy chief? Or could it be professors Cho Yoon-je or Kim Kwang-doo, who advised Moon on the economy during his campaign?
Some point to Hong Jang-pyo, the senior presidential secretary on economic affairs. Jang often takes a stroll around the Blue House garden with Hong to hear his theory of economic growth led by increased demand resulting from higher incomes. Moon has been unequivocal in basing his economic policy on an increase in aggregate demand with comments like, “We must build an environment that rightly appreciates the value of labor” or “Tax is most well-spent when it is spent to increase jobs for the people.”
The policies introduced by Moon — such as upgrading the non-salaried workers to the permanent payroll, raising the minimum wage, cutting phone bills, expanding public health coverage, and increasing basic allowances for low-income seniors, to name a few — are ideas proposed by Hong, who was a professor of economics at Pukyong National University, in a forum held on May 22, 2015.
Hong pitched the higher income-led growth concept as a solution for an economy mired in slow growth and structural setbacks. Moon, who was head of the main opposition Democratic Party, adopted the idea as the party’s economic platform.
The theory has begun to be tested now that Moon is the president. As he proposed to use tax funds to increase wages and the number of government employees, he would likely mount pressure on large companies to join his campaign to hire, pay and contribute more. Under Hong’s guidelines, the tax rate for top-income-bracket companies would go up to 25 percent from the current 22 percent. A similar rise would be felt by Korea’s richest individuals. Large companies will be required to share their profits with smaller partners and suppliers, be more wage-friendly in negotiations with unions and increase their social responsibilities.
Income-led growth in Korea would translate to wage-led growth. The Moon government chose “income” over “wage” so as not to offend our self-employed businesses, whose footprint in our economy is unusually large. The income-centric theory is basically built on the works of economists like John Maynard Keynes, who championed fiscal and monetary levers to stimulate aggregate demand. At first glance, the theory looks like an economic model proposing to stimulate consumption through redistribution to the low-income class. But the post-Keynesian theory falls in the classification of non-mainstream — or maverick — school of economics.
The mainstream schools of neo-classical and Keynesian theories fundamentally respect the free market. The so-called “engaging” growth is designed to supplement the failures of neo-liberalism. But the post-Keynesian theory distrusts the market and its invisible hand. It believes the government and regulation must constantly interfere to correct the market because they believe the market is doomed to fail. In traditional economic theory, wages should be decided by the labor market, or between employers and employees. But the income-led regime thinks it is better that wages are guided by public policy or social consensus.
The inversion point lies in the investment allocation under the post-Keynesian growth model. It argues that when incomes or wages grow, consumption would increase, thus expanding demand and investment to stimulate growth. However, mainstream economies that seek growth led by the supply-side regard incomes as the fruit of growth, not its driver.
The income-led growth model in Korea is mostly followed by dissident economists. They were pupils of Marxist scholars such as Kim Soo-haeng and Bung Hyung-yoon at Seoul National University. They have built their theories entirely at home and did not study abroad.
In fact, the home-grown income-led growth theory has not been scientifically and practically tested. Wages for households is income, but are a cost for enterprises. When production costs go up, businesses cut back on hiring and investment, which would reduce jobs. Also, an income-led growth model is applicable in a closed economy. In an open economy, higher wages translate into higher product prices or increased imports. Manufacturers would take their base elsewhere to save production costs. This is exactly why no advanced economies adopt the growth model.
When a theory becomes a policy, there is no turning back. Once wages go up, they won’t come down. Companies will become reluctant to invest and the economy would lose competitiveness and vitality. Public finance also will be wrecked. A slowdown or recession could become a fixture.
The global economy is finally shaking off a decade-long slump following the global financial meltdown. The U.S. and Japanese economies are in recovery. The fourth industrial revolution is in progress. Korea alone is attempting to test a highly-risky economic experiment at a crucial point.
Because of the administration’s infatuation with its bold experiment, much-needed labor reforms and regulatory liberalization could be neglected. A weird test is going on in the 11th largest economy in the world.
JoongAng Ilbo, Aug. 23, Page 31
*The author is a senior editorial writer of JoongAng Ilbo.