‘Animal spirits’ from the top

Lee Ha-kyung

On March 10, three weeks before Japanese Prime Minister Shinzo Abe announced a sales tax increase, he met with Yale University Professor Robert Shiller.

Shiller, winner of the 2013 Nobel Prize in Economics, advised: “It is important to have it sound like a revolution. … Launching animal spirits is about capturing the public spirit - the zeitgeist.”

“Animal Spirits” is the title of a book Shiller co-authored. The phrase was originally used in “The General Theory of Employment, Interest and Money” published in 1936 by John Maynard Keynes, who saved capitalism from the Great Depression. The world had once announced that Keynesian economics was dead, but now sing that we are all Keynesian.

Keynes described the entrepreneurial spirit to assume uncertainty and decide on investment as “animal spirits.” Keynes wrote, “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic.”

The Park Geun-hye administration could also learn from Shiller’s advice to Abe, struggling to escape from the prolonged slump. The new economic team led by Vice Prime Minister Choi Kyung-hwan declared it would take the road less traveled in order to revive the Korean economy. The focus shifted from dependency on business and exports to households and the domestic market. Choi proposed that excess corporate cash reserves should boost household income through investments, dividends and wage distribution. Also, debt-to-income and loan-to-value mortgage regulations should be eased to spur the real estate market. By using policies from the left and right, the administration moved the market psychology, and economic policy changes were the biggest contributor to the ruling party’s landslide victory in the July 30 by-elections.

Now the problems begin. Companies with cash are not willing to make investments. “Animal spirits” live only in the minds of the new economic team. The absence of “animal spirits” in the private sector is not news. In 2006, during the Roh Moo-hyun administration, Bank of Korea Gov. Lee Sung-tae urged businessmen to have animal spirits. He deplored that companies were increasingly risk-averse, and the average rate of increase in facility investment fell from 9.6 percent in 1997 to 4.3 percent after the Asian financial crisis.

In retrospect, the founders were different. Samsung’s Lee Byung-chull pushed for the semiconductor business despite 13 years of deficits, and Hyundai founder Chung Ju-yung pursued indigenous automobile models under pressure by the United States to give up the project. They made risky investments. If the two founders chose the safe route based on calculation, their economic legends wouldn’t have been possible. In “General Theory,” Keynes also criticized contemporary businessmen, claiming entrepreneurs of the past depended on instinct and impulse rather than calculation when making a business decision. The president may feel the same now.

The president has to personally appeal to the economic entities. She needs to propose the grand picture of economic innovation in front of a TV camera and discuss the challenges frankly. In order to prod businesses to make bold investments and boost household incomes and consumption, she first needs to win the hearts of the nation.

The Park administration wasted away the golden time of the first 18 months. We need a special prescription of deregulation to ignite the investment instinct. The president needs to meet with CEOs and have in-depth discussions and consult with opposition lawmakers to promptly process the economic revitalization bills. It is about time the government comes up with drastic policies to reduce household debt worth 1,200 trillion won ($1.1 billion). The low-income group has a relatively high marginal propensity to consumption. When debt is reduced and income increased, they will start spending, and the domestic market would gain an immediate boost. Arranging a compromise between unions and management could add flexibility in the labor market and increase wages. A fundamental resolution of the irregular employment issue is unavoidable. The tripartite discussion and negotiation among the government, management and union must continue day and night.

Keynes linked irrationality, a taboo in conventional economics, with investment motivation. Instead of basing applying theories to reality, he drafted a theory based on reality. In 1919, a year after World War I ended, he published “The Economic Consequences of the Peace.” While international politics was not his area of expertise, he warned that Germany could start another war because of the enormous war indemnity it was forced to pay. He addressed the pending issues and predicted World War II 20 years later.

In order to save the slowly sinking Korean economy, the president must come out to the open square of reality. She must witness what is really going on in this country with her two eyes and make realistic, timely decisions. When the president shows the animal spirits, the companies and citizens will trust her sincerity and endure the ordeal.

JoongAng Ilbo, Aug. 6, Page 31

*The author is the chief editorial writer of the JoongAng Ilbo.

BY Lee Ha-kyung