The moment of truth
The author is an editorial writer at the JoongAng Ilbo.
A woman managing a household would understand the national economy better than a man, British Prime Minister Margaret Thatcher told opponents as she fought to correct Britain’s chronic fiscal deficit. Any housewife would know that turning to debt is a bad idea. Since then, governments paid more attention to public finances and debt. That approach to public finance has been challenged by liberal American economists under the “Modern Monetary Theory.”
They argue that a budget black hole is not much of a worry to a sovereign state that has its own currency. After all, it can’t go bankrupt like an individual. A country that can borrow can go on printing money to aid the economy as long as the move does not produce excessive inflation. They base their arguments on the examples of the United States and Japan, whose debt stretched to 1.1 times and 2.4 times their respective gross domestic products in 2017.
If the two countries were personal debtors, their assets would have been seized by creditors a long time ago. Yet their economies are doing well without concerns about runaway inflation or a jump in interest rates. That backs their argument for stronger fiscal spending and attention to balancing their economies instead of their budgets. U.S. Rep. Alexandria Ocasio-Cortez even proposes such spending to invest in renewable energies — the so-called Green New Deal — to combat climate change in the United States and around the world.
Modern monetary theory has caught up with local proponents of fiscal expansion. But that theory cannot work for Korea. First of all, Korea does not have a reserve currency that exchanges easily in global markets, and its economy heavily relies on external demand. A reckless expansion of the national deficit will bring down the value of the Korean won and stoke instability in the foreign exchange market and interest rates. The theory is criticized as outlandishly dangerous by U.S. and Japanese mainstream economists. But it could be imported and packaged nicely just as the liberal Moon Jae-in administration’s income-led growth policy was.
The biggest challenge to monetary expansion is taxes. President Moon asked why our national debt ratio cannot go beyond 40 percent of GDP next year after he was briefed on the possibility by Deputy Prime Minister and Finance Minister Hong Nam-ki. Yet the government or the ruling party does not seem to worry about the ramifications.
When it was an opposition party, the ruling Democratic Party (DP) challenged the conservative government by asking how welfare services can increase without tax hikes. As the ruling party, however, the DP wants to put off contemplating such headaches.
The government has dumped the idea of scaling down credit card tax exemptions due to strong opposition from salaried workers.
The changes to the liquor tax code were also chucked after years of study in fear of angering ordinary people following a surge in soju prices. They cannot afford to implement policies that can eat away at votes when the general election is due next April.
There is some opposition in the ruling party, but party members mostly stay mum. Hiking taxes would cost votes. Sitting on their hands also can be uncomfortable when the economy is doing poorly.
So the ruling power does what is always easiest — collecting more taxes from the rich. Some in the DP suggest raising corporate taxes and income taxes on the rich, while turning a deaf ear to the other option of collecting taxes from the bottom 40 percent income class that does not pay tax at all.
Former U.S. President Bill Clinton pleaded for understanding for his agenda on economic reform and tax increases to address fiscal deficits in his first TV address in February 1993. His honest speech helped clean up U.S. public finances and fuel an economic boom. His achievement also helped make him one of the most popular American president in retirement. If a leader only talks of a rosy future without being honest about the price to pay, he or she lacks vision and courage. The government must think again before it is too late.
JoongAng Ilbo, May 24, Page 30