The author is a senior columnist of the JoongAng Ilbo.
Before he was dismissed, former presidential policy chief Jang Ha-sung blamed the market for contradictions and imbalance in the Korean economy. The economy could become more polarized if it is left in the hands of the market, he claimed. Kim Hyun-chul, an economic advisor to President Moon Jae-in, said that repeated warnings about a looming economic crisis were simply an attempt to thwart the government’s reform drive. Presidential aides’ comments strongly suggest that the Blue House refuses to pay heed to cautionary and critical opinions about its policy direction.
Some may wonder why they are so stubbornly defensive when it comes to their economic platforms. The theory of stimulating economic growth through increases in wages (or income in Korea’s case) comes from a thesis published by the International Labor Organization in 2012 and a book titled “Introduction to Post-Keynesian Economics,” by Marc Lavoie, a professor at the University of Ottawa and the author of the ILO thesis.
The two publications have shaped the economic policy of President Moon. First of all, the post-Keynesian book claims that a state must regulate the market and control aggregate demand because laissez-faire capitalism generates destructive competition and waste. It argues that continuous state interference can only sustain an economy at near perfect employment.
Based on the book’s logic, the Moon administration has been faithful in upholding the theory — bumping up the minimum wage and cutting back the workweek to 52 hours as demanded by unions of salaried workers.
The book went so far as to argue that structural labor reform can unsettle job security, whereas the existence of strong unions enhances overall employment, production and livelihoods by preventing a fall in real wages. It asserts that job sharing should also be pursued with hourly wage increases so as not to hurt effective demand.
Likewise, the wage-led growth theory abhors free competition and market economy and strongly rejects the invisible hand of the market. The state must regulate prices, push up wages and a keep close watch on financial activities. Fiscal expansion is indispensable to sustain pro-labor distribution.
Can the theory really work? Unlike most economic papers that use affirmative narratives, the ILO publication resorts to ambiguous languages such as “It is highly possible …” or “… implies the high likelihood of ...” The theory brims with speculation and exaggerated reasoning. It ambiguously speaks of the relevance of wage increases to growth through increased consumption, but cannot prove the correlation with empirical evidence.
Lavoie’s book even speaks of the possible downside risks of the theory. He warns that in an open economy, real wage increases can weaken corporate competitiveness as exports can decline and imports increase so that less income stays at home. The book also says that without strong social security, higher wages do not necessarily increase consumption and savings due to uncertainties about the future. But Korea is not a good recipient of such a theory. Trade of goods takes up a whopping 84 percent of the economy and the national pension fund could dry up without action to fill it up. The policymakers have experimented with a precarious prescription even as it can do more harm than good to the economy.
The real weakness of the theory lies elsewhere. As policymakers are entirely engrossed with the upside of income increases on aggregated demand, they neglect the downside on the aggregate supply — employment, prices and competitiveness, for instance. Wages are the basis for spending for consumers, but they are also production costs on the part of companies. The hike in the minimum wage and the cutback in working hours have pushed up their production costs and caused tantrums on the supply end.
As a result, employment, production and consumption are all worsened. Hourly and manual labor jobs have been wiped out. Income disparities widened. Despite the liberal government’s ambitious goal of creating a society where everyone can live well together, it only made the rich richer and the poor and poorer and hurt the national economy.
Direction matters more than speed in the economy. If the economy speeds up in the wrong direction, it is bound to arrive at a dead-end soon. President Moon vowed not to return to the past ways. The Blue House enshrines the income-led growth policy as if its identity and viability is at stake. As they became more self-deluded with self-righteous reasoning, the policy has morphed into something like a religious faith. The Blue House is repeating the mantra that patience is a virtue. It is scary to imagine what would happen if their passionate prayer is not answered.
JoongAng Ilbo, Nov. 28, Page 35