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KIM Kyeong-Won

Paradox Economics: Reasons Behind a Wrong Economic Policy

KIM Kyeong-Won

June 4, 2007

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Recently, books with titles that contain the word "economics" abound. A glance at bookstore shelves reveals a bumper crop of vaguely economic-sounding titles, from the playful - Freakonomics, to the austere - The Economics of Dollars and Cents, and The Economics of Illicit Transactions. Brisk sales of economics-related books may indicate that the public is genuinely interested in understanding the economy; and to an economist like me, this is only to be desired. On the other hand, increased public interest in economics might also indicate public impatience with the protracted economic slump in Korea.

Recently, such thoughts occur to me. In addition to their already high appetite for understanding "Economics," people, the general public and policy makers alike, are advised to learn about the notion of so-called "Paradox Economics." The idea involves an economic policy's unanticipated results or undesired side effects outweighing its benefits.

Throughout the world, including Korea, there are many actual cases that well-intended economic policies produced unintended consequences. The "paradox of layoff," for example, illustrates that legislation aimed at protecting workers can actually increase unemployment as companies avoid hiring people (who are costly to fire) from the very beginning. Therefore, workers end up being the victims of the very policy to be designed to protect them.

Many more paradoxes can be found in the real world. It is well-known that countries that enforce stringent minimum-wage rules for teenagers and older unskilled workers have high unemployment in these age groups, as companies will then have strong incentives to invest in automation processes. Longer maternity leaves have a similar effect on employment of women of childbearing age.

In Korea, in addition to what have been described above, many things have happened as the idea suggests. The best example could be the government's recent ill-fated measures to control real estate speculation. Although the housing market appears to have now stabilized, home prices were on a relentless upward march until only very recently, despite many desperate government attempts to rein in the market.

The current administration proclaimed upon its inauguration that its No. 1 policy priority would be stability in home prices. Indeed, the government did everything possible to control prices, including raising property and capital gains taxes by a substantial margin and announcing plans to build new large-scale residential towns (dubbed "new towns") in Seoul metropolitan areas. Many homeowners, however, postponed their plans to sell their houses on fear of being slapped with heavy taxes. This naturally drove up home prices as the existing house supply dried up.

In addition, money circulating in the economy from money paid to landowners to buy lands of sites marked for the development of "new towns" was simply plowed back into the real estate market, once again lifting overall price levels in Seoul and the surrounding areas.

Besides, many economists have noted that the problems of urban crowding, income disparities between big cities and rural areas, and skyrocketing Seoul housing prices all have one common cause: the government's insistence on building new residential towns around Seoul. According to a news report, more than 80 percent of the residents moving into the newly built "new towns" are not from Seoul. This means that the government's attempt to supply affordable housing to Seoul's low-income families has been off the mark.

In fact, the government policy has caused the decline of regional economies and attracted more and more people to more and more populated and therefore more and more job-abundant metropolitan areas, keeping home prices there high. Government policy makers, unfortunately, still do not seem to fully realize that unintended consequences from their actions exist. Only more experiences about unintended outcomes of their policies will let them know the fact. But the whole economy and the general public will pay the cost of their learning dearly.

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