&#91OUTLOOK&#93How to pry open those fat wallets

The rich can buy a pack of cigarettes with 1,000 won (83 cents), but the poor can buy something for lunch with it. The same 1,000 won can bring greater welfare to the poor than to the rich. A teacher paraphrased in this way “The Economics of Welfare” by Arthur C. Pigou, a British economist. But a smart-aleck student responded to the teacher, “The poor smoke more these days.” The teacher evaded the point by saying, “Well, Pigou wrote the book in the 1920s.”
Did the poor smoke less in those days rather than today because they were less angry then, or was the price of cigarettes in the 1920s well beyond their means? The teacher’s explanation was lacking.
Pigou’s theory created many controversies. For example, some asked, “Is there any evidence that a bowl of instant noodles is worth more than a pack of cigarettes?” That is to say, don’t confuse the sentiments of the public with economic theory. But let’s not try to reason with this heartlessly ugly conservative view. I agree with John Rawls’ warning in his “A Theory of Justice” that without increasing the welfare of the poorest people, we cannot expect any social improvements. But I now see in our economy that economics for the rich is no less important than economics for the poor.
At the end of last year, short-term floating-rate financial instruments that matured in six months or less amounted to 688 trillion won ($573 billion). That is a huge sum of money, about 120 percent of our gross domestic product. According to “CEO Information,” published on July 2 by the Samsung Economic Research Institute, 478 trillion won of that pool of money belongs to households and businesses. If that money flowed into banks and companies and stayed there for a long time, it would become funds for production. When the term of a loan is more than six months ― that is, when money becomes long-term capital ― companies can borrow without worry and increase investments; then the economy begins to recover. On the other hand, when this money flows indiscriminately into the stock, bond or real estate market, speculation becomes rampant. Because their desire to invest is reduced, defensive management is popular among companies that have to pay their debts. Saving is no longer a virtue, as demonstrated in the lowest growth rate of fixed deposits we have seen since the financial crisis in 1997.
In the past, people could not invest because they had no money to invest. Today people don’t invest even if they have money to invest. We are in a situation where the recession coupled with a “liquidity trap” is being discussed. That means a situation where investment does not rise even if money is poured into the economy. Although it is being criticized by the business community as pro-labor, the government has tried almost every means it could think of to boost the economy, including cutting interest rates and reducing taxes. Nevertheless, the economy shows no sign of recovery. People ask defiantly if the ethics of the market economy in this global age does not mean that they can do as they please with their money, be it investment or speculation. In that context, it is useless to long for the age of rapid economic growth under the rule of autocratic regimes when people obeyed orders from the government to make the economy grow.
Surplus funds of households and businesses amount to 139 trillion won. Of this figure, 129 trillion belongs to households and most of it, I suppose, belongs to about 120,000 rich people. When 129 trillion is left idly in the pockets of the rich, it’s a pity that the government should try to reform things like the movie screening quota system and try desperately to attract only foreign capital.
Investments can be made not only with dollars but also with Korean currency, and Korean money is safer than dollars from overseas. Ironically, floating funds increased sharply as Korea posted a surplus in its international trade accounts and foreign currency flowed in during the recovery from the 1997 foreign exchange crisis. The solution is to coax the rich to invest their floating funds for productive use. The problem is that there are no suitable methods. If the government tries to use carrots, it will face a barrage of criticism that the present administration is no better than the past administrations that colluded with the rich. If it cannot stand that criticism, it must opt for tough reforms. The choice is not an easy one.
If it is difficult to acquire the trust of the rich quickly, and the initial effects of such a policy may not be seen at first. Even if it is difficult to make the rich trust the administration after just one try, the government can try to convince them that it would be better to invest their money in factories rather than put it into Armani suits or real- estate speculation. What is important here is not discretion but rules. With rules, the crisis can be overcome.
Whereas laws should be equally observed by people, whether rich or poor, discretion runs the risk of leaning toward one group: toward vested interests in the past administrations but toward populism in the present administration. Coax the rich, not because they are lovely but because when they open their wallets, we can all have lunch, which is more urgently needed than cigarettes.

* The writer is a columnist of the JoongAng Ilbo.

by Joseph W. Chung