By Jeffrey I. Kim
In his inaugural speech on May 10, President Yoon Suk-yeol promised to protect liberal democracy and a market economy. The Korean people welcome his inauguration. However, many of them are concerned that the new government is confronting highly unfavorable political and economic conditions.
Currently, the main opposition Democratic Party of Korea (DPK) holds 168 National Assembly seats, more than half of the total 300. This requires the Yoon administration and the ruling People Power Party (PPP) to forge cooperative ties with the DPK to get parliamentary support for major policies, including an effort to improve the worsening economic situation.
Major economic indicators such as high unemployment, low productivity, and high inflation are all difficult to tackle. Among them, runaway consumer prices are the most difficult to curb because an improper disinflation policy will further reduce both employment and productivity.
Now we need to look into what Prof. Milton Friedman of the University of Chicago, who won the Nobel Memorial Prize in Economic Sciences in 1976, advocated to tame inflation. Retiring from the university in 1977, he traveled around the world for two-and-a-half years with cameramen from a public broadcasting station.
While visiting many countries, he gave lectures on economic subjects covering individual freedom and liberty, free market capitalism, the equality of opportunities and inflation. He and his economist wife, Rose Director Friedman, made a book out of the televised lectures in 1980. The title of the book is "Free to Choose."
Among the lecture subjects, Milton Friedman fervently explained the causes of inflation and blamed the treasury secretary and the Fed chair for causing high inflation.
When he gave lectures in the university classroom or in the public lecture hall, he said, "Recognizing that substantial inflation is always and everywhere a monetary phenomenon is only the beginning of an understanding of the cause and cure of inflation."
Excessive money supply by the government's debt financing or the central bank's money printing is the cause of inflation. Yet no government is willing to accept responsibility for causing inflation. Government officials tend to blame others by saying that labor unions, spendthrift consumers, greedy businessmen, and importers produce inflation.
In prescribing the cure of inflation, Friedman admitted that inflation would not end without side effects. He then suggested a strategy to mitigate the side effects. Reducing money supply should be done gradually and steadily with advance announcement.
This is because many people have entered into long-term contracts for employment, to lend or borrow money, to engage in production or construction on the basis of anticipated inflation.
Given time, these contracts will be completed or renewed or renegotiated. Therefore, an automatic adjustment for inflation known as "escalator clauses" should be included in the long-term contracts.
Friedman kept on emphasizing through his entire professional life that there is only one cure for inflation. That is, a slower rate of increase in the quantity of money.
As he said, we had been misled by a false dichotomy of inflation or unemployment shown in the Phillips curve. This option was an illusion. The real option is only whether we have higher unemployment as a result of higher inflation which is caused by excessive money supply.
The Yoon government has inherited humongous amounts of public debt from the previous Moon Jae-in administration. It will be unavoidable to witness higher inflation soon. The issues are what level of inflation, how long we can tolerate it and how much we should rely on the central bank's money printing.
In dealing with these issues, not only do we need to use Friedman's wisdom and suggestions, but we need to check the validity of the Tinbergen Rule.
Jan Tinbergen was born in the Netherlands in 1903 and won the first Nobel Memorial Prize in Economic Sciences in 1969 together with Swedish economist Ragnar Frisch. The Tinbergen Rule states that achieving the desired values of a certain number of targets requires the policymaker to control an equal number of instruments.
The Yoon government is now facing soaring inflation and the Korean people are deeply concerned about it. Recently, Bank of Korea (BOK) Governor Rhee Chang-yong said that he would lower inflation by raising its benchmark rate.
But the critical problem is that an interest rate hike will have mixed effects on key economic variables: harmful on bank borrowers, harmful in investment and employment, curbing capital outflows and putting downward pressure on housing prices.
Under these circumstances, Korea's disinflation policy can be successful only if the finance minister and the central bank governor honestly coordinate their policy with each other. In other words, the BOK's monetary tightening should go hand in hand with the finance ministry's fiscal tightening to bring inflation under control effectively.
Dr. Jeffrey I. Kim (ickim@skku.ac.kr) is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago. He is a board member of the Mont Pelerin Society.
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Currently, the main opposition Democratic Party of Korea (DPK) holds 168 National Assembly seats, more than half of the total 300. This requires the Yoon administration and the ruling People Power Party (PPP) to forge cooperative ties with the DPK to get parliamentary support for major policies, including an effort to improve the worsening economic situation.
Major economic indicators such as high unemployment, low productivity, and high inflation are all difficult to tackle. Among them, runaway consumer prices are the most difficult to curb because an improper disinflation policy will further reduce both employment and productivity.
Now we need to look into what Prof. Milton Friedman of the University of Chicago, who won the Nobel Memorial Prize in Economic Sciences in 1976, advocated to tame inflation. Retiring from the university in 1977, he traveled around the world for two-and-a-half years with cameramen from a public broadcasting station.
While visiting many countries, he gave lectures on economic subjects covering individual freedom and liberty, free market capitalism, the equality of opportunities and inflation. He and his economist wife, Rose Director Friedman, made a book out of the televised lectures in 1980. The title of the book is "Free to Choose."
Among the lecture subjects, Milton Friedman fervently explained the causes of inflation and blamed the treasury secretary and the Fed chair for causing high inflation.
When he gave lectures in the university classroom or in the public lecture hall, he said, "Recognizing that substantial inflation is always and everywhere a monetary phenomenon is only the beginning of an understanding of the cause and cure of inflation."
Excessive money supply by the government's debt financing or the central bank's money printing is the cause of inflation. Yet no government is willing to accept responsibility for causing inflation. Government officials tend to blame others by saying that labor unions, spendthrift consumers, greedy businessmen, and importers produce inflation.
In prescribing the cure of inflation, Friedman admitted that inflation would not end without side effects. He then suggested a strategy to mitigate the side effects. Reducing money supply should be done gradually and steadily with advance announcement.
This is because many people have entered into long-term contracts for employment, to lend or borrow money, to engage in production or construction on the basis of anticipated inflation.
Given time, these contracts will be completed or renewed or renegotiated. Therefore, an automatic adjustment for inflation known as "escalator clauses" should be included in the long-term contracts.
Friedman kept on emphasizing through his entire professional life that there is only one cure for inflation. That is, a slower rate of increase in the quantity of money.
As he said, we had been misled by a false dichotomy of inflation or unemployment shown in the Phillips curve. This option was an illusion. The real option is only whether we have higher unemployment as a result of higher inflation which is caused by excessive money supply.
The Yoon government has inherited humongous amounts of public debt from the previous Moon Jae-in administration. It will be unavoidable to witness higher inflation soon. The issues are what level of inflation, how long we can tolerate it and how much we should rely on the central bank's money printing.
In dealing with these issues, not only do we need to use Friedman's wisdom and suggestions, but we need to check the validity of the Tinbergen Rule.
Jan Tinbergen was born in the Netherlands in 1903 and won the first Nobel Memorial Prize in Economic Sciences in 1969 together with Swedish economist Ragnar Frisch. The Tinbergen Rule states that achieving the desired values of a certain number of targets requires the policymaker to control an equal number of instruments.
The Yoon government is now facing soaring inflation and the Korean people are deeply concerned about it. Recently, Bank of Korea (BOK) Governor Rhee Chang-yong said that he would lower inflation by raising its benchmark rate.
But the critical problem is that an interest rate hike will have mixed effects on key economic variables: harmful on bank borrowers, harmful in investment and employment, curbing capital outflows and putting downward pressure on housing prices.
Under these circumstances, Korea's disinflation policy can be successful only if the finance minister and the central bank governor honestly coordinate their policy with each other. In other words, the BOK's monetary tightening should go hand in hand with the finance ministry's fiscal tightening to bring inflation under control effectively.
Dr. Jeffrey I. Kim (ickim@skku.ac.kr) is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago. He is a board member of the Mont Pelerin Society.
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