A Critique of the Income-Led Growth Policy: Based on Statistical Data and Theoretical Analysis

The government interprets the improvement in distribution indicators shown in the 2019 Household Finance and Welfare Survey as a sign that the income-led growth policy has been effective. However, considering the policy transmission mechanism, interpreting the improvement in distribution as the government does requires two premises. First, the improvement in distribution must lead to increased consumption and economic growth. Second, it must lead to income growth for all income groups.

However, when both the National Accounts and the Household Finance and Welfare Survey are examined, it becomes clear that neither of these two premises holds. This result leads to the logical conclusion that one must choose at least one of the following claims: either that distribution did not actually improve, or that the theory of income-led growth is wrong. This report argues that distribution did improve, but that the theory of income-led growth is wrong.

In analyzing why the theory of income-led growth is wrong, this report draws on mainstream macroeconomics based on analysis of aggregate demand and aggregate supply. Among the policy instruments of income-led growth, it explains how the “sharp increase in the minimum wage” could function as a severe shock to both aggregate demand and aggregate supply, in relation to the characteristics of the Korean economy.

In addition, although they were not part of the income-led growth policy, this report also discusses government policies that functioned as other shocks (the 52-hour maximum workweek regulation and the slowdown in regulatory reform). Although this has the drawback of reducing the consistency of the discussion, it is included because it helps provide a detailed analysis of the causes of the marked slowdown in growth after the launch of the Moon Jae-in administration. Through the factors above, we confirm once again that the economy was subjected to severe shocks, as shown by the deepening decline in the potential growth rate.

In conclusion, this report urges the government to acknowledge that the income-led growth policy is not a growth policy but a distribution policy. It argues that, rather than relying on minimum wage increases, whose costs from constraining growth are greater than their benefits for distribution, distribution policy should be based on expanded transfer spending. It emphasizes that growth policy should be redesigned in a manner consistent with economic principles, and that the direction should be regulatory reform aimed at raising the potential growth rate.

I. Is Improved Distribution Evidence of the Success of Income-Led Growth?

II. An Analysis of the National Accounts Since the Launch of the Moon Jae-in Administration

III. Improved Distribution as the Scar of Economic Contraction

IV. The Errors of the Theory of Income-Led Growth and Problems in Overall Economic Policy

V. Conclusion

References

Wiki:

https://www.cfe.org/w/bbsDetail.php?&idx=36

Original title: 소득주도성장 정책 비판 - 통계 자료와 이론 분석을 바탕으로

Author: Jin-woo Park

Date: 2020-04-01

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=report&pn=2&idx=22527