The age of uncertaintyWhat would happen if banks charge you fees for your deposits instead of paying interest return? In mainstream economics context, one would take out the money from the bank and spend it on a new wardrobe or even a car based the consumer rational choice theory. But what is actually panning out these days debunks the orthodox belief. Instead of spending, consumers are tightening their belt even further. The drastic actions by central banks in Europe and Japan of sending the interest rate into the negative territory little helped to stimulate spending, but only wrecked havoc on the banking sector. Banks running short of reserves began to redeem loans, further squeezing the liquidity.
Monetary easing, or lowering of interest rates, is aimed to artificially inflate demand to stimulate the economy. If demand does not grown even with the interest rate under zero percent, the demand side must have become dysfunctional. The familiar scene of an industrialized society is a train of thousands of workers clad in same uniform hunched over an assembly line before them and working in mechanical rhythm. But with technology becoming so advanced to have artificial intelligence like AlphaGo beat human intelligence, machinery is quickly replacing human labor. The shift to automation has been taking place in so sudden pace that even the workers had not been fully aware what had hit them. The gap in intelligence turned out to be more consequential than capital gap.
The upsurge in the age of intelligence came about coupled with globalization phenomenon. When it remained the sole superpower, the U.S. economy fared well regardless of how poorly the rest of the world was doing. The global economy no longer has borders. It is why the U.S. Federal Reserve abruptly stalled its tightening cycle after it lifted off base rate from the near zero percent in December amid volatilities and monetary actions in other economies. The demographic graying also has become universal problem. The triple acceleration of shift to intelligence-oriented society, globalization, and aging has worsened the inequalities. The middle class is breaking down not only in the developing world, but also in advanced nations. No monetary stimulus — even with the interest rate at negative zone — helps.
Macro-economists and policymakers are mixed in their alternative solutions to the unfamiliar economic circumstances. Former U.S. Treasury Secretary Lawrence Summers believe the rates in the negative territory would work no more than addictive drugs and instead called for aggressive fiscal expansion. Since households do not budge in spending, the public sector must do its part to fill up the gap in the demand, he claims. Thomas Piketty, a professor at the Paris School of Economics and author of “Capital in the Twenty-First Century” suggests higher taxes on the wealthiest. He demands governments to unify to prevent the riches from talking their wealth elsewhere to dodge taxes. Olivier Blanchard, former chief economist at the International Monetary Fund, believes everything would be solved if companies all raise their wages.
But the problem is affordability. Governments of developed economies have already passed their limits on fiscal deficits. Governments also cannot easily dare to levy higher taxes on the rich. Companies hardly would agree to up wages. If there is no solution from the demand end, options must be explored in the supply end. Some calls for impetus to accelerate digital revolution where everything goes automated and digital to radically up productivity. Since enormous investment is necessary to make it happen, governments should cut corporate taxes, liberalize the labor market, and remove various regulations.
But supply-end economics also has its downside risk. Lowering corporate taxes and wages could fan polarization in wealth. Unlike industrial revolution led by innovations of electric power and automobile, human jobs cut be cut instead of increasing in digital and automated age. The gap between people with education and intelligence and those lacking would widen. It would be a huge political gamble at a time when inequalities already pose as huge social problem. It is why self-proclaimed Democratic Socialist Bernie Sanders ascended as a formidable rival to Hilary Clinton in the race to win the next presidential candidacy ticket for the Democratic Party in the United States. Economic equalities also remain as key platform in our election campaign.
When nothing worked, the mankind resorted to a war. Overcapacity was solved with a few bombs. The U.S. might have pulled itself out of the Great Depression of the 1930s not through the New Deal programs but through World War II. It is dreadful to imagine what could happen if Europe and Japan cannot save their economies even with negative rates and if China fails to resolve overcapacity that weighs heavily on its economy.
We must strive not to contain the Korean Peninsula from turning into a hotspot amid such uncertain times. We should remember what horrid consequences we last had gone through when our land became the testing grounds for the power game among global powers.
JoongAng Ilbo, Mar. 18, Page B8
*The author is the business news editor of the JoongAng Ilbo.