Red-Light Economy: Deregulation and Tax Cuts as Firefighters

The economy is flashing red warning lights. Danger signals are appearing across the board, including high inflation, high oil prices, and a trade deficit. If left unattended, this could lead to a major disaster. To minimize the damage of an economic crisis, it must be addressed properly in its early stages.

High inflation is the most dangerous factor driving our economy into crisis. Rising prices are the product of failed government policy. They are the consequence of excessive money creation and reckless fiscal management. Politicians, thinking only of getting through the immediate moment, pushed to release more money and spend more right away, while government institutions such as the Bank of Korea stood by and enabled it. The incompetence and irresponsibility of politicians, the government, and the financial authorities are the main reasons for today’s inflation.

Inflation has persisted for two years now. That is how severe the public’s suffering has become. The failure of real estate policy has prolonged the surge in housing prices, and many people have had to move because they could no longer bear housing costs. Those already burdened by sharply rising rents have also been hit by the double hardship of loan regulations and heavy-handed administrative guidance under government-directed finance.

Even as prices were soaring, politicians and the financial authorities looked the other way and kept releasing money. They misled the public by claiming there was no problem because the consumer price inflation rate was low. In Korea, the consumer price inflation rate does not properly reflect increases in real estate-related costs such as housing expenses. Whether they knew this and ignored it or simply did not understand it, politicians and bureaucrats turned away from the reality of surging prices and pushed the public into suffering.

The sharp rise in oil prices is devastating to the profit structure of our economy and businesses. Because the government has crippled nuclear power generation, the impact of high oil prices is even greater. It is also hurting the profitability of export firms that support our economy. Rising oil import costs are translating directly into a trade deficit. The fact that our economy, which had maintained a surplus for a long time, has shifted into deficit is a signal that risks across the economy have grown.

Although signs of an economic crisis are emerging, our economy is structurally ill-equipped to respond properly. That is because anti-market regulations have accumulated over a long period, increasing the rigidity of the economic structure. As rigid systems have been strengthened, the economy’s underlying resilience has weakened.

What measures are needed for our economy to overcome this crisis properly? If we continue the reckless policies of printing money and spending lavishly as in the past, we will fall into a prolonged slump lasting more than a decade. If we cannot respond to the crisis with flexibility, it will inevitably become protracted.

To break the vicious cycle of inflation, we must move away from an artificially low interest rate structure. Just as artificially lowering interest rates in the name of reviving the economy causes problems, sharply raising rates also damages the economy. Government interest rate policy should stop at a level that reflects market rates; forcing rates down or up only creates side effects. The government must abandon the idea that it can manage the economy through interest rate controls.

The best choice the government can make in responding to the economic crisis is to make rigid institutions more flexible and lower taxes so that supply chains can function properly. To reduce inflationary pressure, our economy’s productive capacity must recover quickly and increase. For this, a flexible production structure for businesses is essential. To raise productivity, companies need new workers, technology, and capital. To make this possible, the government should allow labor to be utilized smoothly and reform labor-related institutions in a market-friendly direction so that firms can hire workers more easily. Finance, too, must move away from government-directed finance and shift to a structure that responds to the needs of the economy.

Timing is crucial in responding to an economic crisis. If the timing is missed, the crisis will escalate to a serious level. The government must swiftly implement regulatory reform and tax-cut policies.

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

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Original title: 경제 빨간불, 규제완화·감세정책이 소방수

Author: Sung-no Choi

Date: 2022-05-30

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=24792