Basic income is myopic antidote to 'Hell Joseon'

Koh Woo-sung

By Koh Woo-sung

In 1953, the Korean Demilitarized Zone (DMZ) split Korea in half. Decades later, one half evolved into an economic beacon iconized by a vibrant market economy, while the other remains untethered from the world. Capitalism has undoubtedly improved the welfare of the South Korean people but at the cost of socioeconomic equity.

Consequently, the Korean people have become malcontent with their country. In 2020, amongst 38 OECD countries, Korea came 9th in income inequality and 4th in relative poverty. The modern Korean language captures their collective frustration well, anointing their homeland with the title, “Hell Joseon.”

In response, a populist idea has been gaining traction: basic income.

Its popularity is growing ― nurtured by the misfortunes of those on the bottom-right of the recent K-shaped recovery. It is hardly a new idea, aiming to guarantee minimum welfare through non-discriminatory cash handouts.

Indeed, at face value, it is seductive and straightforward; but like most utopian ideas, the devil is in the details. Basic income will impose steep opportunity costs for the public while failing to address socioeconomic issues at their root.

It is in society's best interest to pursue policies that mostly improve the aggregate welfare per won expended. Meaning, lawmakers should pass the basic income bill if ― and only if ― there is no better alternative.

This is imperative as wealth transfer mechanisms face the timeless equity-efficiency trade-off.

A former economic adviser to U.S. President Lyndon B. Johnson, Arthur Okun summarizes the trade-off with the “leaky bucket” metaphor. Although policymakers would like to simultaneously grow and divide the economic pie fairly, the two interests are often at odds. Transferring wealth by decree is akin to redistributing water with a leaky bucket.

The leakage primarily represents incentive distortions. Generous welfare tends to discourage individuals from participating in and maximizing contributions towards the labor market. As a result, economic advancement stagnates, and the aggregate welfare growth, too, slows.

On the other hand, proponents argue that basic-income-induced behavioral changes do not distort incentives to the extent that economists fear. Articles such as, “Stockton study shows that universal basic income can be life-changing,” in The Los Angeles Times emphasize positive behavioral observations.

However, we should remain cautious for two reasons.

One, these studies often highlight positive effects of welfare programs in general, not basic income. Case in point, the participants of the aforementioned study are under the median income level, making it inconsistent with the very definition of basic income.

Two, these short-term studies are unable to capture longer-term behavioral changes.

Consider the “Peter Pan Syndrome” in small-medium enterprises (SMEs) ― a long-term observation of Korea's fiscal intervention. An ample array of supportive policies are available for SMEs. For example, in 2016, Korea's guaranteed loans for SMEs to GDP was 3,700 percent of the U.S.

Strangely, however, they have repeatedly failed to raise their competitiveness.

A leading hypothesis is that they remain their size to receive generous benefits. To avoid the same fate as the Peter Pan SMEs, we should support carefully designed fiscal interventions, instead of unnecessarily leaky ones, like basic income.

Effective interventions are granular because targeting problems at a fundamental level require an individualized approach.

At the root of modern Korea's dissatisfaction is the perception of viscous socioeconomic mobility and inequality. This perception is brought forth by the ruthless winner-takes-most environment. To illustrate this institutional problem, consider our labor market and corporate landscape.

Relative to Japan, large firms pay 55 percent more, while SMEs pay significantly less. Moreover, this gap has been widening for decades. On top of this, Korea's labor market has a sizable ratio of underappreciated irregular and self-employed workers. Unfortunately, this trend is worsening: from 2014 to 2020, the proportion of irregular workers has risen from 33 percent to 37 percent.

Mirroring the stark contrast between large and small firms, the full-time-to-irregular wage gap is substantial. Irregular workers at large firms earn 35 percent less, while those at SMEs earn 75 percent less than their large firm full-time counterparts. Comparably, the monetary conditions of the self-employed are poor.

Deservedly, social assistance should be expanded for irregular and self-employed workers. To this end, vocational training programs must be accessible and modified to aid human capital development dynamically, responding to the rapidly changing demands of the market.

Additionally, SME support programs should take the form of milestones that incentivize meaningful growth. Other policies that target or amend the root cause of structural dualisms should also be considered.

Although an introductory look at the Korean labor market and the corporate landscape showcases only one of many systemic polarizations, it is apparent that these issues cannot be remedied by universal cheques alone.

Basic income is a stimulating food for thought which raises meaningful criticisms of our welfare system. Accordingly, it is perhaps time we widen and deepen our social safety net. Nonetheless, the public should remain pragmatically skeptical of the efficiency and effectiveness of basic income.

Instead of masking structural problems with bandage-like policies, we should continue fostering sophisticated programs that target socioeconomic challenges at a fundamental, systemic level.

Messiness is a feature, not a bug of social welfare.

Koh Woo-sung is a student at Yonsei University.