TCS Daily

Roh Jobs Plan Ignores Economic Reality

By Christopher Lingle - March 1, 2005 12:00 AM

Using a crafty political guise of strengthening the social safety net and improving public welfare, President Roh Moo-hyun approved a job "creation" plan. The stated intention is for the government to provide 360,000 jobs for elderly, disabled and poor citizens over the next five years.

The populist intent behind this decision was obvious in the suggestion that such steps will lessen the disparities between rich and poor. Other new spending would arise from establishing over 1,000 new childcare centers along with increased childcare leave and the provision of high-speed Internet service in rural areas.

Two things should be immediately clear. First, most decision concerning government policies in any democracy reflects the desire to remain in power. And so it is that the term populism describes choices based upon political opportunism.

Second, whenever government officials announce the introduction of bold new plans, hold onto your pocketbook. Whatever their plan will inevitably increase the tax burden on either present or future generations. This is because new spending obligations either require raising taxes now or running deficits that imposes higher taxes on taxpayers in the future.

Some of the features are worth considering. In the job "creation" category, jobs for the elderly would involve work as forest or culture tour guides while low-income individuals would be involved in caring for the sick and the disabled. Such "participatory welfare" may be worse than simple transfer payments if there is a need to increase government employees to oversee the new programs or the actual work while it is carried out.

There were some positive elements in the proposals. One good idea is the proposed increase on exemptions for contributions to charity groups and religious organizations. And another is the proposed stock option-based employee stock ownership program that might improve incentives for workers while increasing their own wealth.

It was not clear how the Roh government intended to fund these populist schemes. The only possibilities are to print more paper in the form of money (loosen credit policy) or more bonds or to raise taxes. None of these can change the real conditions of an economy. Such means are like trying to create bread from stone.

Since the high per-capita tax burden has risen to high levels, raising taxes would be ill advised. In all events, raising taxes would reverse recent cuts that have contributed to improvements in long-term economic performance.

But more deficit spending would violate a pledge to achieve a balanced budget from 2003 in order to improve fiscal soundness. But attempts to promote employment growth through deficit spending involves nothing more than redistribution schemes that involve NO net gains to the economy.

Salary for a new government employee creates an offsetting tax obligation. This will reduce the funds available for business investment and eliminate jobs in the private sector. At best, it is a zero-sum game whereby gains are exactly offset by losses. But administrative costs and deadweight losses of government spending almost certainly lead to a negative-sum game.

Government attempts to "create" jobs involve higher costs than a real job created in the private sector. This is because private employers have a strong incentive to limit the size of the staff for recruitment and management.

Politicians and bureaucrats operating within democracies face perverse incentives since they seek to implement popular measures in order to maximize voter appeal. In turns, they tend to choose policy alternatives with short-run benefits even if the resulting costs are higher, since the latter are shifted to the future. Likewise, policies that generate short-run costs but yield (even higher) benefits in the long run tend to be shunned. Offering quick response creates an impression on top of pressing problems that increases the likelihood of re-election or re-appointment. After all, the eventual impact on the community tends to be masked by a combination of ignorance and lagged effects.

More diabolically, government attempts to orchestrate jobs by spending beyond their means undermine or eliminate employment that would have been created in the private sector in the future. An increase in the share of GDP going to government tends to lead to slower long-term economic growth. This means that some jobs today will mean many fewer jobs in the future.

From an operational standpoint, it is better to allow the private sector to take charge of employment growth. This requires that there be more market-based reforms to change the fundamental nature of economic decision making. New government spending or debt cannot and does change the incentive structures arising from the burden of taxes or regulation. And both of these inhibit entrepreneurial undertakings.

Christopher Lingle is Global Strategist for eConoLytics.


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