It’s still voodoo economics

Lee Sang-eon
The author is an editorial writer at the JoongAng Ilbo.

At the early stage of former President Moon Jae-in’s term, the main theme on editorials from the JoongAng Ilbo was the liberal government’s signature economic policy led by income-led growth. Most had been critical of the naivety of the theory that an increase in wages could spur a benign cycle of economic growth through higher disposable income and consumer spending.

Editorial writers on economy were vehement in their challenge of the concept. They were 100 percent correct. But privately, there was a wishful thinking that the liberal policymakers could be right. Journalists also are salary earners, aren’t they? If the economy ends up doing well, the means should not matter. South Korea has a knack of defying common trend.s

But if the economy simply could run well through an increase in wages, why is such policy not common around the world? Any government would take up the option if a simple hike in wages could stimulate the economy. Such a plan would win the Nobel prize in economics and peace. But if there was such a miracle cure, it would already have been sold everywhere.

Sadly, the consequences were disastrous. Employment fell, and income inequality worsened. Growth fell below expectations. Part-time jobs disappeared, as more employers opted for limiting workers to 15 hours per week so they are not forced to pay benefits. To save money, many turned to kiosks and serving robots to replace human labor. Employers cannot be blamed. They also are the self-employed and had to improvise to lower costs.

What was believed to be good medicine ended up worsening the disease and illness.

After controversy arose over the effectiveness of the income-led growth policy in 2018, the second year into the liberal Moon Jae-in administration, Hong Jang-pyo, senior presidential secretary for economic affairs at the time, explains how the policy works. [YONHAP]

Last week, the new British government faced an epic backlash for its stimuli package proposing a tax cut for the richest. The pound crashed to record lows and the 10-year bond yield hit the highest levels since 2008. The issuing of mortgages had to be suspended.

There was a talk of London possibly ending up seeking a bailout from the International Monetary Fund as it did in 1976. The conservative party even suggested the new prime minister be replaced.

The fiscal stimulus package under new British leader Liz Truss was aimed at lowering the maximum income tax rate of 45 percent to 40 percent on annual earnings above 150,000 pounds ($170,295) for a trickle-down effect. The government claimed that the cuts would increase household income and stimulate consumption to spur economic growth. The argument is similar to that of the income-led growth policy of the Moon administration except that the trigger is tax cuts for one and wage hikes for the other.

But London’s financial community who would benefit most from the lowering of the maximum income tax rate began to dump the British pound for the dollar. Capitalists well aware of the mechanism of money predicted that a tax cut will worsen fiscal deficit and weaken the British currency. Facing the risk of losing her office, the new prime minister dropped the idea Monday.

Tax cuts are a trademark for Tories. They have repeatedly used the idea during crisis times. Yet the prescription caused tantrums in the financial market. Unlike the past, the tax cut outline was not accompanied by fiscal reform with cuts in the public-sector payroll and the budget and rationalization in social welfare system.

During the campaign in Korea earlier this year, Lee Jae-myung — then presidential candidate from the Democratic Party and now its chairman — brushed aside worries about widening fiscal deficit by claiming that the won will soon be a reserve currency. But even the British economy experienced a currency crisis despite the pound being a reserve currency.

Martin Wolf, an economic columnist for the Financial Times, said that growth by lowering taxes for the wealthy is like reciting “abracadabra” to wish for a miraculous growth of 2.5 percent. But there is no magic portion for the economy, he said. What the country needs is far higher investment in human capital and in technologies, savings, an open economy and stable and credible policies without the constant risk of a trade war with neighbors, he wrote. A healthy diet, good sleep and regular exercise is what a body needs, not a supplement publicized as all-preventing and all-curing. In our National Assembly, which is dominated by the liberal party, a bill designed to increase welfare benefits gets immediate stamping whereas a bill meant to expand human resources in out chip industry only gathers dust.