[VIEWPOINT]How Not to Prime the Economic Pump

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[VIEWPOINT]How Not to Prime the Economic Pump

When a national economy stagnates, government must step in to resolve the problems. The first step is often cutting interest rates. If that does not work, then the government must spend money to boost the sagging economy. Now is the time for such action in Korea.

The condition is growing worse here because of mounting concerns about global economic stagnation after the recent terror attacks in the United States. That is why the Korean government announced a full-fledged pump-priming effort.

So there is no reason to object to the 2 trillion won ($1.5 billion) supplementary budget although Seoul has not yet spent all of its first supplementary budget of 5.5 trillion won. The opposition party objects to the amount and the purpose of the additional spending, but not to the principle of more spending.

Even the press, which has been critical of government policy, now urges the government to speed up its announced spending plans. Public sentiment, shocked by the spreading economic crisis throughout the world, began to support the government's move.

When the public senses a crisis at hand, the government has always tried to play down those fears. Even during the foreign exchange crisis, the government did so, knowing that a lack of public confidence in the economy can itself trigger an economic downturn.

But the government is now busy informing the public of the magnitude of the crisis brought on by the terror attacks. Recently, the Blue House economic advisor admitted to the National Assembly that Seoul shares some blame for the current slow economy. That is another indicator that the government wants to stress that we are indeed in a crisis.

Some take the cynical view that the government's purpose is only to gain public support for massive spending policies. Even though there is some logic in the government's pump-priming plans, I also see major flaws.

First, Korea may end up like Japan if the government continues on this course. Restructuring has been delayed despite the worsening financial troubles.

At the end of the 1980s, after Japan's "bubble economy" popped, there were rumors of large-scale restructuring there. But the government was too timid. Instead, it cut interest rates nearly to zero and increased government spending nine times. Japan ignored the real problem, and the government poured money into a leaky pail.

The results are plainly visible now. The economy has hit bottom and stayed there for more than 10 years; financial losses snowballed. At this point, Tokyo cannot raise public funds to support sectors in desperate need of restructuring. Japan got lost.

Maybe we are heading in the same direction. While the government puts all its efforts into boosting the sagging economy, restructuring advocates deplore the step, saying what is needed is to eliminate insolvency and instability and remove excessive government controls.

The government ignores fundamental problems but rushes to stimulus policies. It looks much like the Japanese government of 10 years ago.

Another concern is that the present stimulus policies will end with an even larger government hand in the economy.

Some worry that the government is more interested in empowering itself than in reviving the private sector. Seoul once argued that it should use deficit spending to boost the economy.

But it refuses to prime the pump by reducing taxes on private firms, which would indeed help them greatly, because it says that would result in too much loss of tax revenue.

Some analysts say private businesses and the government are engaged in a leadership struggle to revive the economy. Private firms argue that returning money to companies through tax benefits and removing government controls will boost the economy automatically.

But the government seems to be intent on reviving the economy on its own schedule - probably early next year when the presidential election draw closer.

The government has the whip hand. The situation is developing unfavorably for the private sector.


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The writer is an editorial writer of the JoongAng Ilbo.

by Kim Jung-soo

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