Fatal illusionPresident Moon Jae-in vowed to usher the country into greater prosperity with a policy shift to growth led by wage and income increases. He and his economic team are well aware of the high risks in that venture, as a concept that one cannot find in economics textbooks has never been proven to work. It only exists in studies by a small group of non-mainstream economists.
As a result, Moon’s team is looking for as much cheerleading as possible from respectable people or institutions. A vote of confidence from International Monetary Fund Managing Director Christine Lagarde would have been perfect. But when she met Moon, she advised balance and discretion in the pursuit of his signature economic policy.
The IMF is an international lender. South Korea is a major stakeholder and board member. Lagarde’s caution should not be taken lightly. Other IMF economists who visited Seoul with her said the balanced growth the IMF recommends is a different concept from income- or wage-led growth. They said they were taken aback by the decision to push up the minimum wage by 17 percent in a single year. They pointed out that South Korea’s wage floor has been rising at the fastest pace in the world, increasing 6.1 percent to 8.1 percent annually from 2013, and asked whether the Korean economy has grown fast enough to accommodate such increases.
Another person from whom the Blue House desired economic blessings was former German chancellor Gerhard Schröder, whose unpopular labor and social welfare reforms dubbed Agenda 2010 ended up transforming the German economy from the so-called sick man of Europe to the region’s top performer. But Schröder was the wrong person to seek approval from. If he had pursued wage-led growth, he would have raised wages and welfare benefits to bolster household income and spending. Schröder’s reform agenda that began in 2003 went the other way. Through a tripartite agreement, he cut wages and welfare benefits. That persuaded companies to keep manufacturing facilities in Germany. They invested more and increased hiring. Schröder would have been the last person to praise Moon’s economic ideas.
The proponents of Moon’s economic theory are mostly local economists. They invented their theories based on non-mainstream schools critical of colonization, enrichment centered on the rich, and monopolistic capitalism. The income-growth concept is therefore born from their warm and fuzzy hearts. They have joined an administration led by former student dissidents and tapped into their liberal urges.
Income-led growth would work the same way as perpetual motion in physics. When wages increase, the economy grows. When the economy grows, wages increase further. The cycle should go on and on. This perpetual motion device requires no additional energy to maintain it. It won’t be long before it’s proven a pure scam.
Korea is the rare country where economic textbooks can become bestsellers. Economics books written by Cho Soon and Chung Un-chan sold over 200,000 copies over the last 40 years. “The Modern Economic Theory,” a must-read for people preparing for civil service exams, sold over 350,000 copies. Out of 2.5 million copies sold of “Principles of Economics” by N. Gregory Mankiw, 300,000 were purchased in Korea. All these books teach that income is the fruit of growth, not the source of growth. A theory reversing longstanding belief is radical. It is a wonder that Koreans, who are used to incomes increasing as the result of better economic performance throughout their lives, do not question the novel concept floated by our new government.
The Mankiw book at one section says that price controls often do more harm than good. It warns that minimum wages can increase salaries for some but jeopardize jobs for others. The author cited an empirical study that showed a 10 percent hike in the minimum wage could reduce economic growth and youth hiring by 1 percent to 3 percent.
The result of Moon’s income-led growth policy could be entirely different from what he desires. Wages are incomes for households, but costs for companies. Consumer spending could increase when wages rise in the near-term. But in the longer run, companies would cut back on labor and investment or move their operations abroad. If income-led growth proves to work in the real world, all the Nobel Prize-winning economists will have to return their medals and rewrite their books.
Bureaucrats at economy-related government offices are mum as economists-turned-aides of the president push the income-led agenda. Economists at labor research institutes crowd the presidential office and other state think tanks like the Korea Development Institute are pushed into corners. Mainstream economists keep a low-profile. They fear they could be stigmatized as the “old guard” championing an old model if they advocate for companies and corporate investment.
Moon’s belief that a tax spent on creating jobs is honorable is based on ideology. He is convinced that taxes spent on his agenda of increasing jobs in the public sector are noble while the agendas of former conservative governments — such as promoting green growth — were not. But tax office data shows otherwise. There is clear data on which tax spending helps public good and productivity. Too much politics mixed into the economy could be catastrophic. I fear the rashness in the push for income-led growth could end in a crash.
JoongAng Ilbo, Sept. 13, Page 35
*The author is a senior editorial writer of the JoongAng Ilbo.