Good intentions, bad outcomes

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Good intentions, bad outcomes

The author is a Washington correspondent of the JoongAng Ilbo.

Recently, I spoke with an economist at an international organization here in Washington D.C. As we discussed inflation, the conversation led to how Korea’s deputy prime minister for economic affairs asked large corporations to refrain from raising wages.

At the Korea Employers Federation on July 28, Chu Kyung-ho, the deputy prime minister for economic affairs who also serves as finance minister, said, “Excessive wage increases exacerbate high inflation. I am asking employers to refrain from offering excessive wage increases considering Korea’s economic challenges.”

The economist found it strange that such a discussion is openly had in Korea, an advanced economy. It has already been verified that government-initiated price control and wage control at the time of fluctuating prices is ineffective. Furthermore, such an intervention would only bring greater adverse effects, the expert added.

The economist recommended a report published by the World Bank last year, titled “Good Intentions, Bad Outcomes.” During World War II, there had been attempts by governments in the West to directly control economic factors. But today, such attempts are mostly being made in emerging economies. Analysis of individual cases show that measures taken with good intentions ultimately hindered growth, added fiscal burdens, and made fiscal policies ineffective. While there could have been temporary effects at first, government interventions result in a decline in productivity in the controlled industries and ultimately cause supply shortages, leading to more serious price instability.

The United States has a painful memory of wage control in the 1970s. In August 1971, President Richard Nixon was eager to personally control rising prices. He appeared on national television and declared, “I am today ordering a freeze on all prices and wages throughout the United States.” The stock market went up temporarily and the media praised the move.

But the outcome was just as Nobel Prize-winning economist Milton Friedman had predicted: “utter failure and the emergence into the open of the suppressed inflation.” The good intention of Nixon’s price and wage control led to suffering of Americans for more than 10 years.

Chu’s warnings against riding on the inflation trend and competitively raising prices and wages may have come from his idea of “good intentions.” But there have been numerous cases of the adverse effects of government intervention accumulating around the world. It is questionable if Korea can avoid the “bad outcomes” of good intentions. I am worried that the move would bring no actual benefit and only highlight Korea’s “bureaucratic” image in the international community once again.
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