[Column] Shifting economic paradigms and Korea’s presidential election

Posted on : 2021-12-31 16:39 KST Modified on : 2021-12-31 16:39 KST
We’re witnessing the end of the era of austerity around the world
Lee Kang-kook
Lee Kang-kook
By Lee Kang-kook, economics professor at Ritsumeikan University

Larry Summers, a professor and authority on macroeconomics, said in an October 2020 interview that current macroeconomic policy has entered a period of revolutionary change. He said the change underway was similar in scale to what happened 40 years ago, when monetary policy became the main method of stabilizing the economy in response to inflation. And key to this change is fiscal policy.

A conservative approach to macroeconomics held sway for a long time after the retreat of Keynesian economics, and there was strong opposition to discretionary fiscal policy. But the outcome was long-term stagnation of the economy.

The negative impact of austerity became apparent in the wake of the global financial crisis and the European debt crisis, and the COVID-19 pandemic finally brought about the return of “big government” and fiscal policy.

Various national governments have been actively working to defend income and jobs amid the pandemic. Indeed, direct fiscal expenditure on COVID-19 has amounted to around 17% of average gross domestic products in advanced economies. Such moves were grounded in a new understanding that economic crises and other shocks of that nature slow down investment in introducing new technologies and create protracted employment that has a negative impact on increasing productivity and on long-term economic growth. I’m referring to macroeconomic research into hysteresis.

At a time when interest rates are lower than the economic growth rate, there are fewer concerns about the rising share of government debt, and expanding public investment can aid growth and governments’ fiscal situation.

Economic stimulus plans that the Biden administration has passed this year include the US$1.9 trillion American Rescue Plan and another bill including US$1.2 trillion worth of long-term infrastructure investment. Along with these massive stimulus packages, recent bottlenecks in the supply chain have provoked serious concerns about inflation, and it’s also worrying that a plan for large-scale investment in the social security net is in danger of being sabotaged by political opposition.

But what’s clear is that we’re witnessing the end of the era of austerity. Some even expect that increasing aggregate demand through public investment and achieving technological innovations on the supply side will create a virtuous cycle that will facilitate higher productivity while enabling us to overcome long-term stagnation.

The second paradigm shift has to do with inequality. There have been serious concerns about inequality, which has long been growing worse. And now several economists say that inequality leads to insufficient aggregate demand, depresses investment in education among low-income earners, and worsens social divisions, with a negative impact on growth. Economics are now attributing inequality not only to globalization and technological change but also to economic policy and workers’ decreasing bargaining power.

Therefore, various countries have been working for several years now to address inequality and promote inclusive growth. The Canadian government has made progress on distribution and growth through expansionary fiscal policy and through taxing the wealthy. Under conservative governments, the UK has steadily raised the minimum wage, while the new German government is eyeing a 25% increase in the minimum wage, which was successfully introduced there in 2015.

Even the countries of southern Europe that were pummeled in the debt crisis have been working recently to expand fiscal policy, redistribute income and raise the minimum wage. Portugal has succeeded at achieving growth through expansionary fiscal policy, and Spain raised the minimum wage by 22% in 2019.

Similar steps have been taken in Asia. In the second stage of Abenomics in 2016, Japan stressed a virtuous cycle of distribution and growth, while Prime Minister Fumio Kishida has recently been proposing a new approach to capitalism that involves raising workers’ wages and improving income distribution.

Since 2012, China has reoriented its economic growth strategy toward domestic demand with the goal of increasing wages and consumption. Through raising the minimum wage and expanding fiscal expenditure, China has achieved its goal of doubling income during the decade since 2010 and has also made considerable progress on inequality.

In the end, the macroeconomic lesson taught by the global financial crisis and the pandemic is that austerity and inequality are bad for the economy. As Korea holds a presidential election in this transitional period, the candidates ought to be providing a vision about how they will address inequality and what fiscal policies they will adopt.

But it’s not clear how the universal basic income espoused by Lee Jae-myung (candidate for the Democratic Party) could improve inequality in the real world, or what policies Yoon Suk-yeol (candidate for the People Power Party) would adopt to improve income distribution. Sim Sang-jung (candidate for the Justice Party) has proposed a minimum income for citizens and income insurance for all, but several of her pledges need to be vetted and debated in greater detail.

At the same time, the Korean government has spent much less on COVID-19 and its debt ratio has risen less than other advanced economies even as the household debt ratio has ballooned. Both the ruling opposition parties are talking about compensating people for their losses, but what’s needed now is not words but deeds.

What I’d most like to hear from the candidates is whether they think fiscal policy should be funded by government debt or by higher taxes, and which areas they think need more government spending.

I hope that Korea’s presidential election will serve as a valuable opportunity for discussing our new future.

Please direct questions or comments to [english@hani.co.kr]

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