[Column] Targeted, temporary and timely

Koh Hyun-kohn
The author is the executive editor of the JoongAng Ilbo.

The slackness in the financial markets has spilled over into the economy. The year-on-year fall in the GDP in the fourth quarter last year is expected to extend into this year. South Korea experienced negative growth only three times in the past — 1.7 percent in 1980 amid the second oil shock, 5.5 percent in 1998 following the Asian financial crisis and 0.7 percent in pandemic-hit 2020. Korea even managed to squeeze out growth of 0.7 percent in 2009 amid the global financial crisis.

But the minus growth could be repeated this year. Some think it won’t be as bad as before with the rebound in the stock market. But it is premature to let down the guard. If the economic conditions worsen, it can easily affect the financial market. Koreans still have vivid memories of the synchronized collapse of the corporate and financial sectors. Of 30 large business groups, 11 went bust followed by the shocking shutdowns of five major commercial banks, including the Korea First Bank.

Conventional wisdom says there are two stimuli measures — loose monetary policy and expansionary fiscal policy. But both are hard to apply this time. First of all, it is difficult to lower the interest rate. Though inflation seems to have peaked out, it still remains high, at above 5 percent. The policy rate would have to be held at the current level of 3.5 percent or even higher until the inflation rate drops to 2 to 3 percent. Financial authorities are trying to cap the rise in market yields, but they cannot beat the market.

Fiscal maneuvering is also tough thanks to the spending splurge during the Moon Jae-in administration to help sustain the economy hard-hit by the pandemic. An increase in fiscal spending now could fuel inflation further. Then there is the ideological dogma to consider: a small government for the conservatives and a big government for the liberals. The dictum demands a conservative government spend less instead of resorting to the expansionary fiscal policy. But that thought is relative. In the U.S., the Democrats are more liberal than the Republicans, but they are more conservative than their counterparts in Northern Europe. A blind adherence to the sclerotic division is not just childish but dangerous.

The equation often did not match in the U.S. Under Democratic President Jimmy Carter (1977-1980), fiscal deficit was 2.3 percent of the GDP. Under Republican president Ronald Reagan (1981-1988), the deficit ratio against the GDP rather rose to 4.1 percent. The ratio fell under Democratic President Bill Clinton (1993-2000) and rose under Republican President George W. Bush (2001-2008) again.

The results do not match the general belief. In Korea, too, the share of government spending to the GDP increased during the 10 years of the conservative administrations of Lee Myung-bak and Park Geun-hye.
 

 
Deputy Prime Minister for Economic Affairs Choo Kyung-ho, who also serves as finance minister, speaks before an emergency meeting with economy-related ministers in the Government Complex in Sejong, Jan. 4, to help boost the economy and stabilize livelihoods. [NEWS1] 

Economists also are not free from the ideology. Paul Krugman, a professor at the City University of New York, is a center-left economist — in other words, a Keynesian supporting a bigger role of fiscal policy. When the Joe Biden administration announced a $1.9 trillion stimulus to battle the pandemic in early 2021, Krugman supported the idea, brushing off concerns about inflation. His prophesy missed. He admitted that he had misjudged it after inflation went flying to decades-highs last year. Even a winner of a Noble Prize in economics can slip if he is trapped in the ideological frame.

Lawrence Summers, a former U.S. treasury secretary and Harvard economist, is a Democrat, but is subtler. He opposed the $1.9 trillion spending plan citing its impact on inflationary buildup. That’s an amount more than doubling Washington’s $800 billion stimuli after the Wall Street meltdown. Summers more coolly assessed the economic conditions for a more accurate prediction as he was not chained to an ideological or political dogma.

The conservative Yoon Suk Yeol administration aims to move in the opposite direction of the previous liberal administration. It must restore the health of public finance totally wrecked by the Moon administration. The Yoon administration works on the dogma of a “small government” and “monetary tightening.” But if the government cannot lower the interest rate to stimulate the weakening economy, the fiscal role must kick in. The government must shun its rigid adherence to doing the opposite of the liberal administration. It should be flexible in responding to volatile economic conditions. Ideally, the past government should have spent less, and the current government must spend more now. The Moon administration’s stimulus packages were full of problems as they were focused on temporary handouts and public hires. The Democratic Party (DP) in Korea still cannot shake out of the spending habit over the past five years. The majority party has proposed a 30-trillion-won ($24.4-billion) supplementary budget.

Fiscal spending should be effectively and efficiently spent for stimuli effect. The economic textbooks recommend 3 Ts — targeted, temporary and timely — in fiscal policy.