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Comment by dunpeal | Hacker News Reader

Why would anyone expect higher taxes to increase growth?

> Under President Moon Jae-in, South Korea has raised taxes and the minimum wage in the name of economic growth. So far, it hasn’t worked out as planned.

That's not how that works at all. Whoever made this "plan" apparently skipped Macroeconomics 101.

> Growth has slowed, unemployment has risen and small-business owners like Moon Seung are complaining.

Any Economics undergrad would tell you that's exactly the expected outcome.

Raising taxes hurts growth and increases unemployment because you are reducing the profitability of all businesses.

Raising minimum wage increases unemployment because you are raising the cost of labor.

And small businesses often pay the highest price for these policies.

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When I took Economics 101 I was told that there was one school that says "taking people's money away will make the economy worse because they know how to spend it best," and another school that says, "the economy is powered by money changing hands, so if you take away money that would otherwise have sat around and use it to buy random items, you will force the economy to be more active than it would otherwise have been."

Keynesian stimulus is intertemporal not redistributive.

The latter makes intuitive sense. If you give money to the poor and needy, they will spend it on things they need (food, cars, etc..) so the money will end up back in corporations' hands anyway.

You are assuming any of that money will end up with the "poor and needy", instead of hiring more bureaucrats whose function is often to hinder economic activity and growth by numerous rules and regulations.

I reject the idea that money is sitting around idle. Very little is - most people keep a little idle cash in their wallet and a few coins in a jar: the rest is in banks and other investments were the money is not idle it is working. When you take the money away you don't remove it from changing hands, you just remove me from the changing hand.

It it good or bad to remove someone from their money? That depends a lot and is subject to lots of complex debate.

> the economy is powered by money changing hands

The economy is powered by creation and exchange of value. Money changing hands is mistaking the incentive for the act itself.

Most economic schools of thought advocate stimulus during recessions to stop a slowdown of money changing hands, but this is a short-term measure. Money isn't the economy and there's no reason to believe making money fly around willy-nilly will help the economy in a permanent way.

Exactly. The key factor in growth is the production of goods an services.

To easily demonstrate: imagine everyone stopped producing goods and services tomorrow in the US.

Everyone would still have the exact same amount of money, but you will not be able to use it to buy a fresh loaf of bread (since none are being baked) or have your car serviced.

The value of money will drop to zero. It won't matter at all if it changes hands; indeed, it won't, since there won't be anything to buy.

Thinking "money changing hands" powers the economy is thus mistaking effect for a cause.

> Money changing hands is mistaking the incentive for the act itself.

I think there's more to it than that. There is no particular reason to think that money changing hands benefits the economy, or society, but there is at least one party that does benefit: the government. Every time money changes hands the government takes a share in the form of income and/or sales taxes. Ergo, there is reason for the idea that higher monetary velocity is better to be popular among both politicians and the economists who advise them.

Econ undergrads might say that raising taxes hurts growth, as might highschool students. Policy experts and professional economists are very much divided on the issue. There is plenty of evidence where raising taxes appears to produce economic growth, where it doesn't make any difference, and where it appears to hinder growth.

Raising the minimum wage also redistributes money to low wage earners, who tend to spend their all money, as opposed to richer people who save. Increases to the velocity of money results in economic growth. That's one of the counterarguments to the minimum wage argument. Society is complex and when you change the minimum wage it has rippling effects on employment, housing, consumer spending, investment and so forth. On top of that you have psychological effects and signalling issues. Predicting the consequences of a minimum wage hike is hard.

The real world is not Macro 101, and pretending policy questions like these are trivial is very very silly.

> There is plenty of evidence where raising taxes appears to produce economic growth

Please cite such evidence.

> Raising the minimum wage also redistributes money to low wage earners, who tend to spend their all money, as opposed to richer people who save.

Raising minimum wage increases the cost of labor, which will reduce hiring and trigger layoffs. Minimum-wage earners are the most vulnerable class of employees, the most easily dismissed and replaceable. As such, they will be the first to be laid off as profits decline, especially when these profits are declining as a direct result of the cost of employing them

Rising cost of labor also hurts growth directly, especially when its due to government intervention and not voluntary free-market forces.

> The real world is not Macro 101, and pretending policy questions like these are trivial is very very silly.

Except in this case all these "policy experts" and "professional economists" were apparently wrong, and instead of increasing growth, these changes hurt it substantially, just as Macro 101 would predict.

So score one for basic economic good sense versus the "policy experts".

>Rising cost of labor also hurts growth directly, especially when its due to government intervention and not voluntary free-market forces.

Fine by me. A nation that does not have either strong (and not hindered by law) unions or a minimum wage to support the most vulnerable (your mention of which in the context of your comment comes across as libertarian concern trolling) does not deserve to "grow".

>Raising minimum wage increases the cost of labor, which will reduce hiring and trigger layoffs.

My solution to this is simple - abolish the wage. But I'm interested to hear to what extent this is true where minimum wages have increased so far, and whether it must necessarily happen. Taking the argument to its extreme, we ought not to pay anyone at all, since any amount >0 is a rising cost of labour and since growth is important, we out to minimize the cost of labour to zero or even lower.

I'm thankful for the fact that the eight hour work day and humane conditions, thanks to the socialists and social democrats of the 19th and 20th c. have prevailed over your "voluntary free market forces".

> A nation that does not have either strong (and not hindered by law) unions or a minimum wage to support the most vulnerable (your mention of which in the context of your comment comes across as libertarian concern trolling) does not deserve to "grow".

Increasing minimum wage is liable to cause a host of well-known unintended and paradoxical adverse consequences:

https://www.cnbc.com/2014/07/14/the-real-problems-with-raisi...

To you it seems like a simple way to benefit the poor, but in reality it raises unemployment - a far graver problem - among these very poor you are ostensibly trying to protect.

You can flame that as "concern trolling", but these are not just very real concerns - they are real consequences that have been observed numerous times across history, including in this very case in Korea, where unemployment has risen substantially as a result of the recent minimum wage raises.

> My solution to this is simple - abolish the wage.

Truly an excellent practical suggestion for the modern growth economy.

Your comment offers zero practical solutions, or anything but empty moral posturing and inciting inflammatory language.

It's a bit subtler than that.

On paper, if you increase wages and taxes to subsidize demand, you encourage consumption. And it actually works ... provided consumers a) aren't over their ears in debt (which they are) and b) are buying from locals (which they aren't, at least for industrial goods).

The French learned this the hard way during a short period in the early 1980s. They did exactly that, and it drove consumption up as expected, but this actually ended up helping more competitive manufacturers from their trading partners.

Korea is already super consumerist and much more service oriented country than the US.

Exactly. Such a policy should work, on paper at least, in places like China or some SE Asian countries. It won't in places like South Korea or other places where consumers are mostly indebted (in which case they repay them instead of consuming more) or buying cheap goods from China or SE Asia (in which case manufacturers from those countries benefit most).

Does this hold up for an economy that is primarily export driven?

It's not like money paid as taxes just evaporates. It's spent, i.e. put right back into the economy.

Except much of it is spent hiring more bureaucrats whose function is often to hinder economic activity and growth by numerous rules and regulations.

These very same people would be contributing to growth if they worked in the private sector and produced goods and service. Instead, they create either zero or negative growth.

What do those bureaucrats do with the money that is paid with taxes? Spend it on economic activity.

You take a person that could be producing goods and services in the private sector, and pay him to work in the public sector, where he produces no such goods or services, and often is tasked with creating and enforcing regulations that limit economic freedom.

Clearly you're going to end up with lower economic growth.

The fact he would spend his salary on purchases is small comfort, especially when he'd likely earn a larger salary to spend in the private sector.

It's a false premise that taxation does not produce a good or service. E.g. USPS, defense contracts, farm subsidies, etc.

It's not clear that you're going to end up with lower economic growth. For example, taxing some level of income that would otherwise not be spent on economic activity (e.g. savings or equity investments) and spending it on things that do result in economic active results in higher economic growth.

Not always, sometimes they try to engineer the economy and kill growth.

The government is generally bad at spending money efficiently, since they are a local monopoly and have few incentives to do so...which is why markets work better at this.

This is a BS statement that doesn't actually say anything beyond expressing this trite idea that government is always bad.

"The government" is not a singular entity, it's a collection of tens of thousands of smaller entities, all of which operate mostly independent of one another and whose relative "efficiency" is based almost entirely on the people working there. One town may have a school or fire department which operates extremely well under a very tight budget, while the town over might poor money into a corrupt and expensive institution which fails to provide more than basic services.

In this respect, it's no different than any other business. Some Walmarts are clean, tidy, and well run, others are a mess. But you wouldn't go around claiming that "The retail" is inefficient because of this fact.

Also, not every government department should be efficient. The military is often held up as the hallmark of an inefficient bureaucracy, but the fact is, we don't want a military that's cost-effective, we want a military that's combat-effective, no matter the cost. But we also have a post office that can mail a letter to the middle of Alaska for less than a dollar.

Your comment about the market working better at "this" (whatever this is, anyway) is equally as lazy.

The difference (and it makes all the difference in the world) is that as a consumer of Walmart, you can simply choose to shop elsewhere (Amazon, Target, CVS, mom and pop, etc). Wal-Mart cannot survive if it performs under consumer expectations for too long (see Sears, KMart, etc).

Governments are monopolies. The only incentive they have to be efficient is the leadership changes that possibly occur with each election cycle. Given the wide range of services and issues that governments must tackle, it's likely that voters have only a few key issues in mind when they go to the ballot box. With each change in leadership, a different set of priorities takes precedence. Sometimes long standing, mediocre services, continue unabated and unimproved for decades at a time with little to no innovation.

You're right but also wrong - people generalise about "the government" even though it's a large collection of entities because on average their performance is characterisable as worse than "the market" would be. Whilst you can have incredibly efficient and well run government departments, there's no particular incentive for people to run their departments well, doing so is difficult and so the noticeable trend is that they aren't.

The evidence that this stereotype is true is overwhelmingly strong, so, it's perfectly legitimate to set policy around it.

That depends on what you mean by efficient.

Let's say you want to build a road that connects 12 houses. You can do that without the government. You just need everyone to agree on who contributes what, who you hire to do the work, what happens if something goes wrong, who else is allowed to drive on the road, how maintenance happens, who polices the rules, and so on, and so forth.

This does occasionally work out in real life, but mostly people bitterly argue over the whole thing and it never happens. Having a government set some sort of policy and doing the planning is usually far more effective, even if it pays more than is necessary for the actual work that gets done. The government may pay more per mile of road, but the road has a higher odds of getting built.

Depends for what, the private sector is very inefficient to build large scale infrastructure for example.

> It's not like money paid as taxes just evaporates. It's spent, i.e. put right back into the economy.

That's not how taxes work. It actually does evaporate. Money is an IOU from the government that it guarantees it will accept as payment. The government doesn't actually need to give itself an IOU (it doesn't make sense except as a way to keep track of internal accounting obligations); it burns the IOUs it gets back in order to preserve the value of its still circulating IOUs.

It's always important to remember that governments print money, they don't discover it. The government doesn't need it from you, it needs you not to have it in order to keep it somewhat scarce.

Ultimately the purpose of taxes is to force citizens to use the currency the government produces, which in turn, makes their currency valuable to citizens.

> Raising minimum wage increases unemployment because you are raising the cost of labor.

You have no evidence of this.

And, even if true, it would only be true if the cost of labor was a significant input to cost of production.

In fact, most of the minimum wage increases in the US are currently resulting in "effect, if any, is so small as to be unmeasurable."

Obviously, you can raise the minimum wage to the point where it is 99% of the cost of production and that would be severely detrimental. However, given the stagnation of the minimum wage over the last decades in the US, apparently the minimum wage has quite a bit of room to increase before its contribution to the cost of production becomes an issue.

> Raising minimum wage increases unemployment because you are raising the cost of labor.

Not paying a livable wage just socializes the burden to the taxpayers.

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