Let the Government Tighten Its Belt First

An economic crisis has arrived. With high oil prices and high inflation bearing down on our economy, the trade deficit reached $10.3 billion in the first half of this year alone. Stock prices are falling, and the activities of businesses and consumers are shrinking. It is hard to be optimistic about anything in the current situation.

Recent inflation is so severe that it recalls the economic crisis of the 1970s. Price increases originated in the COVID-19 crisis, but with structural factors stemming from changes in the global trade order added on top, they do not appear likely to end easily.

In the past, when a crisis struck, the won-dollar exchange rate would rise, and exports would increase accordingly. Rising exports became the turning point that helped the economy overcome the crisis.

But in this crisis, although the exchange rate has risen, it is difficult to expect the effect of increasing exports. Part of the reason lies in market changes since COVID, but it is also the result of the weakening competitiveness of our firms over time.

The term “stagflation” means that economic stagnation occurs at the same time as inflation. The money that was released under the pretext of COVID is now pushing up prices. If the government expands the money supply or increases spending, inflation will worsen further. To stabilize prices, there is no choice but to raise interest rates.

Is there really no other way to curb inflation besides raising interest rates? Two options remain. First, expand supply chains and improve productivity. Second, reduce consumption and respond to the crisis through restraint.

To expand supply chains and upgrade the production structure, market-friendly policies are needed.

That means deregulation to revitalize the weakened production structure of firms and greater labor market flexibility. Through the process of raising productivity, upward pressure on prices can be reduced.

This is the time for everyone to step forward, spend sparingly, and tighten their belts. The government must first reduce its own spending and conserve the budget. A certain percentage should be cut from the budgets of the central government, local governments, and public enterprises. Spending must be reduced rather than using up the entire budget.

Next year, current expenditure budgets should be reduced. Civil servant salaries should also be frozen. Only by removing the wasteful structure that is widespread throughout our society through such efforts can we respond effectively to the crisis. Only when the government leads by example in tightening its belt will the private sector also show a willingness to bear the pain together.

Some argue that the government should respond to the economic crisis by increasing spending and releasing more money. Such monetary easing by the government may be expected to have short-term effects, such as easing a credit crunch caused by a temporary shock, but in a situation like the present one, where the crisis is structural, no real effect can be expected.

When an economic crisis comes, there is really no other way. Economic actors must voluntarily save, economize, and endure hardship in their respective sectors. And only by raising productivity and expanding supply can the economy recover.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 정부 먼저 허리띠 졸라매자

Author: Sung-no Choi

Date: 2022-07-14

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=24851