Is Korea mimicking MMT?

Suh Kyoung-ho
The author is the editor of economic news at the JoongAng Ilbo.

“Why worry about fiscal deficit? Money can be printed as much as possible by a government. As long as there are jobless people and idle factories, the government must keep on spending to achieve full employment.” This is the reasoning behind the heterodox macroeconomic theory called Modern Monetary Theory (MMT). Former U.S. Treasury Secretary Larry Summers called the theory “a recipe for disaster” and even “voodoo economics.” Billionaire investor Warren Buffet joined the scorn on the unrestrained spending scheme by calling it “asinine.”

Once regarded as the thinking of fringe or radical liberals, the theory has rapidly gained ground amid growing support from the political mainstream around the world. Former U.S. Democratic presidential candidate Bernie Sanders and his former adviser Rep. Alexandria Ocasio-Cortez have been fans of the big spending. Jeremy Corbyn, former leader of the British Labor Party, also was an avid proponent of the so-called “people’s quantitative easing.” The concept is broadly shared by the left-leaning Syriza Party in Greece and Unidas Podemos Party of Spain.

MMT has actually been in practice for some time. The United States, Europe and Japan have unleashed unlimited liquidity in the zero or even sub-zero interest environment since the 2008 global financial crisis. Yet their colossal deficit spending has not stoked inflation, as they are still concerned about deflation. In the preface to his book “Modern Money Theory,” L. Randall Wray, a professor of economics at Bard College and an MMT supporter, quoted Arthur Schopenhauer’s famous saying: “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” Since it has been hotly debated, the concept indeed could have entered the third stage of being accepted. In fact, given limitless fiscal and monetary stimuli actions across the world amid the Covid-19 pandemic, policymakers may be chasing the tempting new approach to public money.

MMT also has been floated in Korea by a ruling party lawmaker at a hearing of the Bank of Korea (BOK) at the National Assembly Strategy and Finance Committee on Aug. 24.

Rep. Yang Hyang-ja raised the need for Korean-style quantitative easing or MMT if the central bank’s benchmark rate is no longer effective in helping bring the economy back on track.

BOK Gov. Lee Ju-yeol said that MMT or helicopter money was being promoted by some scholars but that no country has officially engaged in it due to the evident side effects.

Other central bank chiefs also disapprove of the radical fiscal spending spree. U.S. Federal Reserve Chairman Jerome Powell said the concept of spending regardless of the impact on the fiscal balance was “just wrong.” Bank of Japan Gov. Haruhiko Kuroda joined the chorus by dismissing the basic principle of unrestrained spending, as it would inevitably lead to hyperinflation.

Still, whether policymakers wish to admit it or not, the Korean government seems to be dangerously following the MMT guideline. It has proposed another record-sized budget of 556 trillion won ($468 billion) for next year. After the spending, the government debt ratio against the gross domestic product would reach 46.7 percent. The share would rise to 60 percent in four years.

There is no strict basis for keeping debt under the debt-to-GDP ratio of 40 percent, as managing the debt would be more important than the number itself. The level of fiscal integrity is eventually judged by the market. It is no use insisting that the debt levels are manageable if the market sees it differently.

There are more reasonable reasons for the MMT phenomenon. The government cannot sit idly while the economy is in the doldrums and unemployment is ever-rising. The traditional monetary policy is not effective as before, because interest rates are already at record low levels.

Since inflation poses no immediate danger, direct helicopter money handouts could stimulate consumer and corporate spending. This is why governments around the world have been pursuing aggressive fiscal stimuli.

But excess spending can cause serious problems, as seen in the cases of Latin America and southern Europe countries that lack sovereign or reserve currencies.

Korea has not gone to the extremes yet. Though the Moon administration threw out fiscal restraint, it stopped short of forcing the central bank to print money without restriction.

But it may be considering it. If you happen to see the central bank dole out basic income to every household, we are already moving into the MMT environment.