Can it be said that it is a price for the government to tighten its finances by entrusting the private sector with what the state has to do? The virus has too easily found a way to economically destroy the vulnerable. The health crisis caused by the spread of infection clearly revealed the structural vulnerability of our economy. It includes severe inequality in income and assets, too many poor people, a weak social safety net, a lack of public health systems, a care gap, a marked difference in working conditions by employment type and labor market status, and the poor self-employed sector, which acts as an industrial reserves. These are familiar problems that have already existed in our society even before the crisis hit.
(Picture from Unsplash)
The structural vulnerability that market fundamentalism and fiscal conservatism have fostered has amplified the crisis by conveying the threat of the virus as if it had become a crevasse. Perhaps a similar situation would have occurred even if it was not for COVID-19. This is because structural factors that would spread to a big fire once the embers were transferred by any other catalyst were lurking in our economy.
As the damage from COVID-19 hit the economy, the damage to the self-employed sector, which has grown due to weak welfare, has snowballed. Korea was the country that saved the most public welfare expenditure to the OECD in preparation for the COVID-19 incident.
Did social structural factors such as inequality really amplify the risk of infection? The graph presented in Figure 1 compares the Gini coefficient by country (relatively equal if close to zero as an indicator of income inequality and relatively unequal if close to 1) and the death toll from COVID-19 per 100,000 people by country announced by Johns Hopkins University. The graph shows that the more unequal countries, the higher the mortality rate. Such observations make it difficult to readily deny the possibility that structural vulnerabilities related to inequality may have deepened the crisis. Inequality breaks down the foundations of social security. It is aimed at the lives of the vulnerable. In a society with a large gap, the poor are easily excluded from social protection. However, the safety of society as a whole in the crisis of infection depends on how safe the most unprotected people are. Exclusion is what brings danger.
In a report released in February this year, the Lancet Committee, a group of public health researchers centered in North America, criticized the privatization of Trump's health insurance subscriber base and budget cuts for public health programs. The report pointed out that the number of COVID-19 deaths could have been reduced by 200,000 if there had been no such change, and if the United States had shown public health capabilities at the level of other advanced countries.
Inequality has an aspect that depends on how large and comprehensive the public sector is within that society. Neoliberalism has systematically violated the public domain, widening the gap and widening the economic risks that health and ecological crises can pose. Such a choice is not necessarily unreasonable for those who want to shrink the public sphere. Even if the risk of society as a whole increases, there is no reason to consider it in decision-making unless it is a private cost that one directly bears. However, the tragedy that occurred in the U.S., the home of neoliberalism, was not unique to that country. There may be differences in degree, but wouldn't it have been Korea? The fact that citizens of our society realized the need to strengthen public health care in the process of responding to COVID-19 could not have been ignored.
If economic inequality increased the risk of infection, on the contrary, the risk of infection threatened growth. The more successfully the health crisis was controlled, the better the performance of economic growth was. The graph shown in [Figure 2] compares the number of deaths per 100,000 people and the economic growth rate in 2020 by country announced by the OECD. Looking at the graph, the higher the mortality rate, the lower the economic growth rate. The economic retreat was also significant in countries where the health crisis was amplified by structural vulnerabilities linked to inequality. The health crisis is becoming an intermediate medium and economic term that causes inequality to negatively affect growth.
If so, how should economic policy, especially fiscal policy, cope with this situation? According to the existing doctrine of mainstream economics, the control of the economy and prices can be left to monetary policy, and fiscal policy can be achieved with balanced finances. It is said that the best principle is "neutral" that does not affect the allocation of resources in the market, whether in terms of taxation or expenditure.
However, this perspective has led to a bias of passiveness and conservatism in fiscal management. It has been used as a logic that justifies the avoidance of national responsibility. The actual progress of history testifies to the bankruptcy of such past theories. In fact, the only real-world standard for evaluating fiscal policy has always been the stable growth of the national economy. Today, more and more economists agree that economic recovery should not be impeded by remaining obsessed with fiscal soundness indicators. In this regard, there are notable implications for the "new agreement on fiscal policy" formed among economists against the backdrop of the recent COVID-19 economic crisis.
The master of macroeconomics, Olivier Blanchard, summarizes the new consensus on fiscal policy in a March 2021 report by the Peterson Institute for International Economic Research, with three arguments. The first argument is that in a situation where effective demand in the private sector is chronically depressed, macroeconomic policy measures should be used to fill the insufficient effective demand. The second argument is that fiscal policy should be a central macroeconomic policy tool when monetary policy capacity is already exhausted. And the third argument is that, although the absolute size of the national debt itself is not small, it is not currently unsustainable, and there remains room for fiscal policy to be utilized. This third argument has a clue that it presupposes economic conditions with low interest rates. In short, the new agreement on fiscal policy is nothing less than the recognition that active expansionary fiscal management is essential for the healthy recovery of the economy and civil life in the post-COVID-19 phase.
Then, how should the fiscal policy of the Korean economy set its direction in the future? First, in the short term, the government must use all available means to escape the economic crisis. In particular, the total employment should be defended. The Corona economic crisis has caused massive destruction of jobs. As the unemployment period is prolonged, the survival base of working households is collapsing. Human capital is also being lost. The resulting "history effect" (the effect that the state of the economy that has been through in the past continuously affects) is a factor that can delay the recovery of the Korean economy in the future. The labor cost system, which is the total amount, should be reorganized to fill the shortage of field workers in the public sector. A plan to drastically increase public jobs should be considered, focusing on the safety and care sectors where social demand is increasing.
The role of finance is also important in the process of the economy escaping from the crisis and then restoring its normal trajectory. Above all, it is desirable to focus on fiscal input by designing strategic tasks that can drive growth. Public investment in human capital and social infrastructure may be a representative area of expenditure. If the economic growth rate can remain higher than the interest rate of government bonds, it will be free from unnecessary controversy over fiscal sustainability. Meanwhile, it should also be noted that financial support during the crisis period will remain intact as a burden of living household loans afterwards. After the loss of working-class households is confirmed, financial support may be required in the process of restructuring household debt. Economic recovery should be supported in various ways through flexible fiscal management.
Even if mass immunity is formed by vaccination and treatments are distributed, the aforementioned structural vulnerability of the Korean economy cannot be fundamentally resolved. The structural vulnerability could hit citizens at any time, again pushing the face of death. Accordingly, we find the direction of fundamental structural reform of the Korean economy after COVID-19 from the resolution of the accumulated inequality. In the long run, the fiscal policy stance in the post-COVID-19 era should be to give the best value to distribution improvement. It is necessary to clarify the direction to alleviate and manage various structural vulnerabilities of the Korean economy, which are intertwined with inequality issues, including hereditary capital. To this end, it is necessary to expand the proportion of the public sector in the economy and establish a public system in areas such as medical care, care, and housing.
The Korean economy has a lower ratio of public welfare expenditure to GDP compared to the OECD average, but at the same time, the national burden ratio (the ratio of tax revenue to social insurance contributions to GDP) is low and the national debt ratio (the ratio of national debt to GDP). This means that there is still some opportunity to properly combine tax increases and "deficit spending" (the government issues government bonds) in the future as we move toward welfare countries above the OECD average.
Perhaps it is no different in that the government brings private funds and then spends them for the private sector again, whether it raises taxes or issues government bonds. If so, the tax increase and the issuance of government bonds differ only in whether the government provides assets in return for the private sector and pays interest. When issuing government bonds, the government provides savings to the private sector and pays interest, but there is no such thing when collecting taxes. Moreover, if a financial company such as a bank acquires government bonds through credit creation, private funds that could have been used elsewhere are not reduced by the amount of government bond acquisition.
Among the theories that students learn in the economics department of the university is the "overlapping generation model." In this economic model, the process of interacting with different generations of economic actors living in the same era is captured. One important conclusion of the overlapping generation model is that if the economic growth rate is greater than the interest rate of government bonds, the issuance of government bonds increases the economic growth rate and improves the dynamic efficiency of resource allocation between generations. If so, deficit spending and borrowing for it should not be recklessly guarded.
However, in order to increase taxes, a reorganization of the system for fair taxation must be accompanied. In Korea, the average effective tax rate is low, so the size of revenue itself is small and tax cuts are concentrated in the top groups of income and asset holdings, so progressiveness is also weak. Accordingly, it is known that the effect of alleviating inequality with taxes and welfare expenditures is insignificant compared to the OECD average. In particular, in the case of asset taxation, the declared value does not properly reflect the market price, so the effective tax rate of real estate holding tax is too low and even backward due to the non-equalization of declared prices between regions. The post-corona fiscal policy should also push for tax reform to correct this.
Writer: Yeyoung Jeon