J-nomics is doomedProgressive economists have only good things to say about J-nomics, which refers to the economic policy of liberal President Moon Jae-in. (The “J” stands for Jae.) Jeong Tae-in, architect of President Roh Moo-hyun’s early economic policy, lauded J-nomics as a “smooth and good blending of post-Keynesian thought [income-led growth based on effective demand] and neo-Schumpeterian theory [innovation-led growth for evolution in the supply end].” No economist in the past paid such blunt praise to an active government policy. The liberal front packages the action plans in J-nomics — raising the minimum wage, granting permanent status to contract workers and eliminating performance-based ratings in public-sector jobs — as if they all help enhance job security for workers. Liberal economists say that Korea’s public sector is starting to look like a Keynesian welfare state. That is meant as high praise.
Global institutions like the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) emphasize “coherence” in public policy because it is essential for its effectiveness. But J-nomics is full of contradictions. It aims to increase jobs but forces hikes in the minimum wage, expansion of the definition of a base salary, and upgrading of contract workers to the permanent payroll. But all of those things will prevent employers from hiring because of higher costs to sustain their existing work forces. No matter how much the government spends to increase jobs in the public sector, jobs cannot be increased in the private sector in such a way.
J-nomics didn’t bother with any advance study or preparation. When asked about the financing for increased government hiring, the government merely said it did not have the exact numbers yet. The hike in the minimum wage has the good intention of increasing incomes for people at the bottom of the pay scale. But the problem is that unproductive and financially stricken small enterprises cannot afford the sudden jump in wages they have to pay. The government tries to patch up problems by throwing some tax dollars at them. Progressive economists advise fiscal profligacy, claiming the government’s debt ratio to the gross domestic product can afford to move up to 44 percent from the current 40.4 percent over the next five years.
There is one common thread in J-nomics. It is decisively pro-labor and anti-corporate. The biggest support base for the Moon Jae-in administration is unions. Militant trade and teachers’ unions cheered at the candlelight vigils to oust former President Park Geun-hye. The ruling power dare not annoy its base. Moon publicly said he missed Han Sang-gyun, former head of the Korean Confederation of Trade Unions, who is currently serving a three-year jail sentence for his role in organizing a number of civilian protests.
Pro-labor policy can be anti-business. Employers have been bombarded with a bill of over 50 trillion won ($45.7 billion) from the minimum wage hike, reduced working hours, and extension of the definition of a base salary. If the increased income helps spur consumption, production and hiring, J-nomics will be a roaring success. The risk is that it could go entirely wrong. Increased labor costs could translate to higher production costs and reduced price competitiveness, causing an ultimate reduction in production, hiring and real wages.
The National Pension Service, in line with the government policy, said it will exercise its shareholder’s rights in corporate management. If it really wants to exercise a role as a major institutional player, it must clearly block out political influence. The NPS must prioritize the returns that it receives. In the past, the NPS meddled in corporate activities in a scandalous way. It is no longer a white knight for Korea Inc. Instead, companies are forced to defend their management rights by increasing treasury stock buyouts and dividend payouts to please foreign shareholders at the cost of reduced hiring and investment.
A commander-in-chief is absent in economic policy under the Moon administration. The Blue House has too many micro-economic experts and hardly any macro-economic specialists. Most of the aides recruited from universities and activist groups specialized in industrial organization, chaebol reform and marketing. There is no one to give advice on the bigger framework of the economy. The cabinet is also decisively pro-labor. Kim Young-joo, minister of employment of labor, and Moon Sung-hyun, chair of the tripartite committee of labor, management and government, are both from umbrella labor unions.
J-nomics does not have faith in the market or companies. The government can push it thanks to its high popularity. But the mood could change when some hefty bills start to come in around the third quarter of next year. Increased taxes and debts may be inevitable to finance the spike in government employees and welfare benefits.
The bold economic policy of Moon hinges on how people would respond to its tax hike plan and higher interest rates. Once borrowing costs go up, the government cannot easily issue debt. J-nomics is going in the different direction of global prescription. The IMF and OECD have repeatedly advised fundamental reform in Korea’s labor market. But under Moon, it has turned more rigid. J-nomics could flounder and bring down the administration if it entirely serves to pamper a few umbrella unions.
JoongAng Ilbo, Dec. 6, Page 35
*The author is a senior editorial writer of the JoongAng Ilbo.