Spiraling toward statism
The author is an economic news editor of the JoongAng Ilbo.
When I was a college student and didn’t know much about the world, I could not understand the “crowding-out effect.” It refers to the mechanism in the real world where the government expands fiscal spending to boost the economy.
As a result, consumption and investment in the private sector are discouraged. The government has to collect more taxes or issue treasury bonds to expand fiscal spending. This reduces the capacity for spending and investment in the private sector.
The crowding-out effect is directly related to whether limited resources are used by the government or the private sector. As the private sector has higher efficiency in spending money than the government, the crowding-out effect is cited as an example of why the government must encourage consumption and investment in the private sector instead of stepping in.
There are many examples of a government ruining the economy by coming to the front through will. One of them was the economic boost through real estate during the Park Geun-hye administration.
The market always takes revenge on the government’s reckless policies. Its excessive measures to boost the real estate market shook the economy, causing household debt to reach 1.5 trillion won ($1.33 trillion).
The mismatch of will and policy is not different in the current administration. Expediting the minimum wage hikes resulted in a decrease in jobs for working class and low-income workers and caused countless small businesses to close. The wealth gap between the rich and the poor is the worst in 11 years. The jobs that employed the vulnerable disappeared due to mounting labor costs.
Only the government does not acknowledge that its income-driven growth policy has become a nightmare. It pursued the policy without thorough consideration. Despite its good intentions, the adverse effects of the income-led growth policy prove that the government’s role in increasing people’s incomes is quite limited.
Officials at the Ministry of SMEs and Startups say that the government only offers incentives to companies that autonomously introduce the system. But autonomy and law-making are not compatible. When many conglomerates and corporations are criticized for deep-rooted evil practices, which company would not follow the government’s orders?
The struggling Gwangju employment project is another case of state intervention — except that the intervening entity is not the central government but a local government sponsored by the ruling party. The original purpose of producing quality jobs at half the average wage in the auto industry is faltering. While Gwangju’s intentions are noble, the project is not going ahead as intended due to the wage level increase and the modification of a collective contract at the union’s demand.
The Korean economy is in agony as a slump is looming. No one can blame the government for increasing spending to reduce the pain. But the dependency on fiscal spending is crossing the line. Some are calling it a spending addiction. In 2017, the government’s contribution to growth was 0.8 percent, or one-fourth of the country’s 3.1 percent growth rate. As the growth rate decreases and government spending increases this year, the government’s share will be bigger for sure. This year, of the 100,382 new jobs created through September, 62,501 are in public sector.
The government planned a huge budget of 470 trillion won for next year. The budget plan reflects the government’s determination to spend to create jobs. However, without setting the focus of its policy on increasing employment and investment in the private sector, the government cannot recover our economy’s vitality.
When statist policies are criticized, the ruling party counters that the failures of the existing market cannot be neglected. They are right. It is government’s role to correct the market’s failures.
But when state intervention is excessive, it causes catastrophes. There are more than enough examples.
JoongAng Ilbo, Nov. 27, Page 27