Fri, Apr 22, 2011 page8

• Drop discredited ‘voodoo economics’

  • By C.J. Wu 吳啟禎
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  Just as the luxury tax, which was passed by the legislature on April 15, has soothed popular resentment a little by slowing the rise in property prices, data released by the Ministry of Finance and other departments show that income distribution in Taiwan is becoming more and more unequal.

  Evidently, there is some relationship between the high price of housing in Taipei and the big gap between rich and poor. Indeed, many serious social and economic problems that Taiwan is facing, including the growing rich-poor divide, the impoverishment of work, the falling birthrate and so on, are closely related. Behind these phenomena lies a common causal factor, which is a certain set of policies and a certain way of thinking.

  The economic factors behind the growing divide between rich and poor can largely be divided into two kinds — internal and external. External factors include the way in which, along with the trend toward globalization, many Taiwanese entrepreneurs have moved their businesses abroad. This has led to an excessively rapid change in Taiwan’s manufacturing sector, which has damaged the employment prospects and incomes of middle-aged, older and less skilled workers, although it has brought benefits to capitalists and white-collar workers who have high-level knowledge and skills. As a result, the poor get poorer while the rich get richer.

  This is a very widespread phenomenon around the world in this age of globalization, but it is especially serious in Taiwan. That is because Taiwanese entrepreneurs have transferred a particularly huge amount of capital to China and they have been doing so for a long time. This has given rise to serious problems of structural unemployment and wage stagnation. More than that, when it comes to Taiwan’s long-term competitiveness, our society and economy have been systematically weakened, and so in turn has our capacity for innovation.

  It ought to be possible to moderate the detrimental effects these external factors have on a country’s long-term social and economic development through income redistribution mechanisms, and this is an important functional role of government. However, wealth redistribution mechanisms in Taiwan have been damaged by an economic mindset heavily biased toward the supply side that has long been held by successive governments. Around the world, this kind of supply-side economic thinking has come to be widely seen by academics as “voodoo economics.”

  This brand of economic thought has been carefully reconsidered and strongly criticized in the wake of the 2008 global financial crisis. Voodoo economics holds that slashing taxes on rich people and businesses can encourage investment and promote economic prosperity, which in turn will generate greater tax revenue to make up for the shortfall that results from the initial tax cuts. This is the kind of thinking that inspired the economic policy of former US president Ronald Reagan.

  Now, however, it is seen as lacking a scientific basis, as well as being detrimental to economic justice and being at least one of the factors contributing to the greed that led to the financial crisis. Since taking office, US President Barack Obama’s administration has taken a lead in reconsidering such policies and has implemented a range of reform measures aimed at correcting the problems brought about by the infatuation with voodoo economics demonstrated by the preceding administration of former US president George W. Bush.

  While countries around the world are following Obama’s example with a new wave of reforms, President Ma Ying-jeou’s (馬英九) financial team has not reconsidered the old model at all. On the contrary, since taking office, his administration has gone from bad to worse by putting forward various tax policies that heavily favor the wealthy and big business, such as slashing the estate tax and profit-seeking enterprise income tax.

  The government has implemented a range of policies and measures that leave the wealthy unscathed, such as issuing consumer vouchers, kindergarten vouchers and NT$50 billion (US$1.7 billion) in funding over five years for higher education institutions. The net effect is a reverse redistribution of wealth back into the pockets of the privileged. These measures have further weakened Taiwan’s already feeble wealth redistribution mechanisms. The middle class has been gutted and this has something to do with the country’s low birthrate, which has become so serious that it could pose a threat to national security.

  Voodoo economics favors the notion that “he who is more capable gets paid more,” but it is against the principle of taxation according to ability to pay. Its adherents think that making incomes more unequal enhances the incentive effect of monetary rewards. This kind of thinking leads to various kinds of problems. The most obvious of these are the “fat cat syndrome,” failings of corporate governance that arise when managers concentrate on short-term results, and, ultimately, the global financial crisis.

  Still more importantly, greater inequality of wealth distribution is detrimental to what those in government want most, namely economic growth. In this regard, a major transnational research project carried out by the UN proved that excessively uneven income distribution has an inverse relation to a country’s overall economic growth.

  The project also found that factors that gave rise to the gap between rich and poor, such as large-scale private land ownership, the gap between town and country, and different levels of education, are no longer applicable, and that the chief culprit these days is excessive opening of a country’s economy, along with related economic -policies pushed through in a hurry without first achieving a social consensus.

  It is one thing for the Ma administration to want to further open up Taiwan’s economy to China in pursuit of its political or other aims, but if it thinks such policies can serve the purpose of reversing the impoverishment of Taiwan’s wage-earning classes, moderating class antagonism between rich and poor or promoting economic growth, then it is barking up the wrong tree.

  Ma’s governing team remains infatuated with voodoo economics. In response to widespread media reports about the growing wealth gap in Taiwan, the finance ministry has announced seven major government policies aimed at dealing with the problem. First on the list is promoting private investment to expand domestic consumption. What on earth does that have to do with reducing the gap between rich and poor? Not only will it have no direct impact, it is very doubtful it would have any such indirect effect, either. It looks as though the state, with the aim of encouraging investment, is once again bent on following the old pattern of providing benefits and tax cuts to wealthy people and companies, while social, environmental and intergenerational justice is overlooked.

  Clearly, if the Ma government wants to reduce the gap between rich and poor in Taiwan and solve other problems that derive from it, it must pay attention to two things: first, the factors behind the widening rich-poor gap, and second, the only thing that can directly address the problem, namely mechanisms for wealth redistribution. In other words, the government must take on the fundamental issues of fair taxation and social welfare. Resorting to voodoo economics will only further sharpen the divide between rich and poor, and it will be detrimental to economic growth and long-term social development.

  C.J. Wu is a researcher with the Taiwan Thinktank

  TRANSLATED BY JULIAN CLEGG
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