Friday lay day – South Korea shows us a different way

Its my Friday lay day blog where I pretend to take it easy. Today I have a nice story to contrast with the shocking news we have been following over the last month or so from Europe. The economics news has been dominated by the madness and badness of the EU in recent weeks and how the miserably depressed Greece has been brought to heel by the EU bullies and will have to inflict even more austerity on its suffering people. Unemployment already above 26 per cent will rise further and more of its youth will head to other shores in search of opportunities. It is a process that is hollowing out the capacity of a nation. They do things differently in South Korea. The Korean government appears to actually care about its people. It provides a lesson for all nations who have become infected by the Recession Cult of Austerity (RCA).

While all the focus has been on Greece in the last few weeks, Korea has been battling the – Middle East Respiratory Syndrome (MERS) – which has claimed the lives of 36 people to date and as of today, 186 confirmed cases have been identified. 39 of the cases are medical staff who have been treating the other casualties.

The Korean Ministry of Health and Welfare released the latest update on the MERS situation today –

MERS is a nasty infection, which was first detected in Korea in May 2015 when a 68-year old male who had been visiting Bahrain on agricultural products business became sick when he returned to Seoul.

This excellent mapping application – MERS Corona map – allows you to track the incidence of the MERS virus across the globe.

The Korean Ministry of Finance identified fairly quickly that the MERS virus outbreak could have quite significant negative effects for their economy.

The Korean economy is already struggling a little with slower exports and relatively flat domestic demand as household saving increases.

The main sector impacted by the MERS outbreak would be tourism and various estimates have been made of the negative effects that might be experienced. The impacts could be of the order or 0.1 percentage points up to 0.8 percentage points depending on who you ask.

Statistics Korea (KOSTAT) – reported that in May 2015, industrial production fell by -1.5 per cent while retail sales were flat.

The fall in mining and manufacturing production (mainly in automobiles, semiconductors and machinery) was largely due, according to the Ministry of Finance press release (July 8, 2015) – Current Economic Situation, July 2015 – to “sluggish exports”

The inflation rate is zero (reflecting the flat domestic demand and low international oil prices) and the unemployment rose by 0.4 percentage points over the last 12 months to June 2015 to 3.9 per cent.

Unemployment – rose from 949 thousand persons in June 2014 to 1,050 thousand persons in June 2015.

The Ministry of Finance concluded in their ‘Current Economic Situation, July 2015’ that:

Both internal and external uncertainties are increasing as the MERS outbreak has dampened consumption and service sector activities including tourism & leisure, and the Greek bailout issues are posing another risk.

The government will closely examine the effect of the MERS outbreak on the economy, in particular consumption and the service sector, deal with difficulties felt by businesses, and provide financial support for those affected.

The Korean government will implement stimulus measures including a supplementary budget, and will step up efforts to promote investment, encourage exports and revitalize tourism.

Yes, that sort of slowdown – fairly modest one would estimate – provoked an immediate fiscal response from the Korean Government, which followed the sensible macroeconomics textbook approach – stimulate as a counter-cyclical measure to avoid a major loss of private sector confidence and a slide into recession.

The upshot was that two weeks ago (July 3, 2015), the Korean government announced that it would increase net public spending by 22 trillion won (which is about $US19.8 billion).

The – Supplementary Budget Proposal (July 3, 2015) said that the package would be funded by a mixture of government bond issuance, cash from the Bank of Korea (central bank) and other reserves.

The Government said that as a result of the stimulus:

Fiscal deficits will increase by 0.9 percentage points from 2.1 percent of GDP to 3.0 percent of GDP.

They recognised that the slower economy was reducing tax revenues by 4.9 trillion won but that this did not signal the need to cut public expenditure.

Rather, they saw the increased expenditure as being necessary to fill the spending gap left by the slowdown in export revenue and private domestic spending.

The stimulus would provide:

1. “Support for overcoming the MERS outbreak and drought, and working class support … support disease prevention in hospitals, finance emergency aid for hospitals directly affected by the disease outbreak and help businesses suffering due to the disease outbreak, such as the tourism industry.”

2. “Small business support and working class housing support”.

3. “Investment made by public enterprises” in partnership with private investment.

4. Increase development funds available to industry via institutions such as the “Korea Credit Guarantee Fund, Korea Technology Finance Corporation”, etc.

The economic situation was considered in need of immediate public support after the Ministry of Finance revised the 2015 real economic growth estimates down from 3.8 per cent (December 2014 forecast) to 3.1 per cent.

The Finance Ministry estimated that the stimulus would add around 0.3 percentage points to real GDP growth and create (net) around 124,000 jobs in 2015 that would not have otherwise been created. In 2016, the stimulus effect will add 0.4 percentage points to real GDP growth.

They noted that if the stimulus had not have been forthcoming, real GDP growth would have fallen below 3 per cent per annum.

The Deputy Finance Minister said that the stimulus:

The extra budget will help revitalise the economy and stabilise the livelihoods of ordinary people who have been affected the most by the fallout from MERS.

So get your heads around all that!

The response by the South Korean government is exactly what a currency-issuing government should do when non-government spending growth slows and economic activity drops and unemployment rises.

The costs of allowing an economy to slow down to the point that unemployment starts to rise because there are not enough jobs being created overall are huge. They can persist for decades if action is not swift.

A national government should always intervene before the slowdown then causes psychological changes (increased pessimism) in the non-government sector. Once private firms and households become pessimistic about the future they cut back spending further and require stronger evidence of future growth before they will resume spending.

A pessimistic non-government sector is very hard to budge.

The South Korean government has allowed its fiscal deficit to rise (net public spending to increase) because it knows that spending equals income and if the non-government sector is restraining its own spending then the only sector that can intervene is the government sector.

They know that the economic activity generated by the rising fiscal deficit (0.3 percentage points in 2015, and 0.4 in 2016) will provide increased private incomes, more jobs and will break into the malaise immediately.

They value their people and know how bad a rising unemployment is.

They have not prioritised any pre-conceived fiscal ratios or debt ratios. They care about economic growth, national income growth and maintaining low unemployment.

They care about the “working class”!

How about that?

Go Greece! That nation could do exactly the same thing if it got out of the Recession Cult that the Eurozone has become.

Please read my blog – Greece should not accept any further austerity – full stop! – for further discussion.

In that blog, you will also see that while the austerity fanatics have inflicted the largest fiscal shift on Greece of all the nations shown (20.5 per cent between 2009-14), Korea actually dealt with the GFC and its aftermath by increasing its fiscal deficit over the same period – relaxed that it was caring for its people.

As a result, unemployment did not rise above 4 per cent in South Korea during the crisis.

But the tanks that invaded Greece in the 1940s, became the banks in recent years. Misery followed each invasion and ‘occupation’ and ‘occupied’ Greece now has more than 26 per cent unemployment.

The Korean example allows me to make another important point. The likes of the IMF would claim that Korea has more ‘fiscal space’ to introduce stimulus measures because it has a record of running small fiscal surpluses.

I dealt with the IMFs last entreaty into this discussion in this blog – The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency.

The Korean economy receives significant external spending stimulus (although this wavers) as a result of its strong export position. The fiscal balance is often in surplus, even though the private domestic sector can often save overall as a result of the export strength.

But a currency-issuing nation such as Korea can always increase its fiscal deficit irrespective of whether it has been running prior surpluses or deficits.

There is no sense that the prior fiscal outcome provides more or less opportunities to net spend in the current period.

Fiscal surpluses are not akin to private saving. The private domestic sector saves by postponing current spending in order to expand future spending possibilities. It does this because it uses the currency and is thus financially constrained in its spending in each period.

But when a currency-issuing government runs a surplus it is not increasing its future spending possibilities. It is, rather, destroying non-government purchasing power and running down non-government wealth.

Such a government can buy whatever is for sale in the currency it issues at any time irrespective of how much it bought last period.

Please read the following introductory suite of blogs – Deficit spending 101 – Part 1Deficit spending 101 – Part 2Deficit spending 101 – Part 3 – for basic Modern Monetary Theory (MMT) concepts.

The contrast between the measured approach to macroeconomic policy in Korea, which are centred on advancing the well-being of its people, and the manic austerity in Europe, which destroys national income and undermines the ‘soul’ of Europe, cannot be overstated.

Message for Labour and Social Democratic Parties around the world from a 20-year old Scottish woman

The following video is the maiden speech by Mhairi Black, the Scottish National Party MP elected in the recent national British election.

While I don’t agree with some of her comments, I think the British Labour Party and so-called progressive political parties should heed her message.

The problem is that they won’t and the austerity bias will continue with a leadership and lost progressive side of politics trying to outsmart the conservatives on who can deliver the largest fiscal surpluses.

Roll on Sweet Don aka Heaven and Earth

Here is what I have been listening to while working today. One of my favourite brass combinations, Don (‘Cosmic’) Drummond on trombone and Roland Alphonso on tenor sax.

Don Drummond – was one of the original members of the Skatalites. He also wrote a lot of music that defined the early 1960s Ska and later Rock Steady eras. The great jazz pianist George Shearing rated Drummond one of the “top five trombone players” in the World.

The song is Heaven and Earth (a Studio One Kingston classic), which became known as “Roll on Sweet Don” after Drummond died (see below).

I can recommend the great biography of Don Drummond by Heather Augustyn (2013) Don Drummond: The Genius and Tragedy of the World’s Greatest Trombonist – published by McFarland. It is a very political tract and worth reading.

You learn that Ska music was the:

… people’s music … conceived, played, and listened to by the poor. The middle and upper classed Jamaicans avoided it like a plague. And after labeling its ‘gutbucket quality as vulgar, they banned it from the island’s only radio station, RJR.

But its popularity could not suppress it and it soon became the defining political statement among the poorer Jamaicans.

She also recounts how the Skatalites were never chosen to represent Jamaica in festivals in North America. Quoting a source, she writes:

I can see why the government was concerned. Having seen various members of Skatalites act out in public over the years, these were valid concerns. Nobody knew what some of these guys would pull next, especially the drinkers like Tanamo and Jackie. The problem is that their music was so much better and the really the best representative of ska at the time.

Drummond was never “light-skinned enough to travel to the U.S. on a promotional tour” despite his undoubted talent and the fact that “his songs were lining the pockets of producers and labels in the U.K. as well” as the US. By 1965, Don Drummond had written more than 300 songs that were out on records somewhere.

The hypothesis is that the alienation and exploitation of his musical talents “broke Drummond’s fragile mental state”. He spent a lot of time in the Kingston mental hospital (self-committed and involuntarily committed).

Unfortunately, Drummond’s mental issues became intractable and he killed his girlfriend and was arrested on January 1, 1965 and was committed to an asylum for the insane upon the guilty verdict.

He died on May 6, 1969 at the age of 37 while still in custody in the psychiatric hospital.

After the murder, the two tenor sax players in the Skatalites, Roland Alphonso and Tommy McCook went their separate ways, with the former starting the band Roland Alphonso and the Soul Vendors, and the latter Tommy McCook and the Supersonics. The Skatalites were spread between the two bands with new members joining as complements.

While the massive collection of music from Drummond is a major legacy, his other influence was on the contemporary Jamaican trombonist Rico Rodriguez, who is another of my favourite Jazz/Reggae/Dub players.

These guys laid the foundations for what we now call reggae music.

Saturday Quiz

The Saturday Quiz will be back again tomorrow. I have checked to make sure I don’t make any mistakes this week.

Advertising: Special Discount available for my book to my blog readers

My new book – Eurozone Dystopia – Groupthink and Denial on a Grand Scale – is now published by Edward Elgar UK and available for sale.

I am able to offer a Special 35 per cent discount to readers to reduce the price of the Hard Back version of the book.

Please go to the – Elgar on-line shop and use the Discount Code VIP35.


Some relevant links to further information and availability:

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It is a long book (512 pages) and the full price for the hard-back edition is not cheap. The eBook version is very affordable.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

This Post Has 10 Comments

  1. Hooray for South Korea caring for its people and using deficits to keep the economy going. Why doesn’t the IMF get it? The fact that they use prior surpluses to decide whether thru can run deficits blow my mind. Why on earth do they think that money is still like one linked to a gold standard? It’s bizarre and I can’t wait for the word yo get out to enough people for humans to hopefully rest this madness.

  2. South Korea is exempted from neoliberalism because it is facing North Korea and may also fall into the Chinese zone of domination.

  3. I’d put ‘South’ in the title of the blog tbh.

    When Americans read ‘Korea’ they forget there is a successful southern tip to the peninsula.

    Astonishing speech by Mhairi there. I’ve got tears running down my cheeks here.

  4. “Astonishing speech by Mhairi there.”

    It was pretty good,wasn’t it.
    The SNP are not perfect,but the flatness of the landscape makes them look even better.
    Yet the labour front bench,that shambling bunch of self satisfied,robotic zombies, remains resolute in distancing itself from anything but the tory core electorate, gideon’s social engineering and wonders why noone can be bothered turning out to vote for them.
    Prospective leader of the all but defunct northen branch of the labour party had the nerve,or complete insensitivity, to ask what the SNP were going to do for “the people of Scotland” in the face of the social welfare cuts by the tories.
    Well they will vote against the bill, unlike the labour party.
    Beyond that, they are at westminster’s mercy, if such a thing exists.

  5. Bill, you may be wrong about the Labour Party. The austerity bias will not continue to be any part of party policy should Jeremy Corbyn become its leader. He is already on record as being against austerity, contending that Labour lost primarily because they went with Balls’ austerity-lite policies, although he would be the first to acknowledge that other factors played a role. We won’t know how this will play out until just after the end of the month, but, at the moment, he is in pole position, his only real opposition being Andy Burnham, a Blairite. So, don’t write the party off yet, Bill.

  6. British, Australian etc labor parties are not left wing any longer. That’s history. They are Liberal/Conservative Lite.
    They still have some empathy but otherwise they can be discounted as Labor/Labour in the traditional sense.

    If they want voters to support them, IMO they need to return to the policies of FULL EMPLOYMENT
    It should be an easy sell in todays environment. It’s easy for a sovereign government to pay for full employment [1%-2% unemployment] MMT explains it well. Have they got the ticker for it?
    Probably not, so they will remain in limbo, like in the rest of the world. Good Riddance unfortunately.

  7. Knowing that the Labour Party won’t defend the poor and the welfare state and will instead ally itself with the Tories, Mhari Black made a clever political calculation in asking Labour to join the SNP in their opposition to the Tories.

    The SNP will be successful in achieving independence within the next ten years or so. The SNP will be the only party in Scotland seen to oppose the neoliberal agenda, and their new policy of voting on laws that only apply to England will engender such hostility in England that the SNP will feed off it. The SNP is deliberately provoking England in general and the Tories in particular. The Tories may well fall into the trap being set by the SNP by then passing a law ensuring that Scottish MPs are not allowed to vote on English only matters.

  8. I bet there won’t be any inflation insight either.

    Bill it would be great if you could go back to this and show how this worked for South Korea.

    “The – Supplementary Budget Proposal (July 3, 2015) said that the package would be funded by a mixture of government bond issuance, cash from the Bank of Korea (central bank) and other reserves.”

    And how they recycle it so it does not need to be paid back.

  9. Neil, you’re mistaken, when Americans hear Korea, they automatically assume S. Korea. As in ‘Korean’ cars (Hyundai, Kia), Korean phones (Samsung). No one would think this Korea means N. Korea. And Americans are very much aware of the success of South Korea.

  10. True to form, 180 labour MPs (including the interim leader and all but one of the leadership candidates (Corbyn))abstained in the vote on the malevolent social welfare bill.
    48 broke the whip to vote against.
    Malignatly pathetic.

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