It’s still voodoo economics

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Lee Sang-eon
The author is a columnist at JoongAng Ilbo.

At the start of former President Moon Jae-in’s tenure, the main theme of editorials in the JoongAng Ilbo was the liberal government’s signature economic policy, which focused on income-led growth. Most had criticized the naivety of the theory that higher wages could spur a benign cycle of economic growth through increased disposable income and consumer spending.

Economics columnists have been strident in challenging the concept. They were 100% right. But privately, there was wishful thinking that liberal policymakers might be right. Journalists are also employees, aren’t they? If the economy ends up doing well, the means should not count. South Korea has a knack for challenging the common trend.

But if the economy could simply function well through increased wages, why is such a policy not common in the world? Any government would accept the option if a simple wage hike could stimulate the economy. Such a plan would win the Nobel Prize for Economics and Peace. But if there was such a miracle cure, it would have already been sold everywhere.

Unfortunately, the consequences were disastrous. Employment fell and income inequality worsened. Growth fell below expectations. Part-time jobs disappeared as more employers opted to limit workers to 15 hours a week so they wouldn’t have to pay benefits. To save money, many have turned to kiosks and service robots to replace human labor. Employers cannot be blamed. They are also self-employed and have had to improvise to cut costs.

What was thought to be good medicine ended up making sickness and disease worse.

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

Last week, Britain’s new government faced an epic backlash for its stimulus package proposing a tax cut for the wealthy. The pound slumped to historic lows and the yield on 10-year bonds rose to its highest level since 2008. Mortgage issuance had to be suspended.

There has been talk of London eventually asking for a bailout from the International Monetary Fund as it did in 1976. The Conservative party has even suggested that the new Prime Minister be replaced.

The fiscal stimulus package under new UK leader Liz Truss aimed to lower the top tax rate from 45% to 40% on annual earnings above 150,000 pounds ($170,295) for a trickle down effect. The government claimed the cuts would boost household incomes and boost consumption to spur economic growth. The argument is similar to that of the Moon administration’s revenue-led growth policy, except that the trigger is tax cuts for one and wage hikes for the other.

But the London financial community, which would benefit the most from lowering the top rate of income tax, has started to sell sterling for the dollar. Capitalists well aware of the mechanism of money predicted that a tax cut would worsen the budget deficit and weaken the British currency. Faced with the risk of losing her post, the new prime minister abandoned the idea on Monday.

Tax cuts are a hallmark of the Conservatives. They have used the idea repeatedly in times of crisis. Still, the prescription caused tantrums in the financial market. Unlike in the past, the tax reduction scheme was not accompanied by a tax reform with a reduction in the wage bill and the civil service budget and a rationalization of the social protection system.

During campaigning in Korea earlier this year, Lee Jae-myung – then the Democratic Party’s presidential candidate and now its chairman – brushed off concerns about the widening budget deficit by saying the won would soon be a reserve currency. But even the British economy experienced a currency crisis when the pound was a reserve currency.

Martin Wolf, economics columnist for the Financial Times, said growth by cutting taxes for the wealthy is like reciting “abracadabra” to wish for miraculous 2.5% growth. But there is no magic part for the economy, he said. What the country needs is much greater investment in human capital and technology, 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 are what a body needs, not some supplement advertised as a preventative and cure-all. In our National Assembly, dominated by the Liberal Party, a bill to increase social benefits is immediately approved while a bill to develop human resources in the chip industry is just gathering dust.

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