[The Editors' Verdict] Concerns Over the Overuse of Policy

When examining scholars who have received the Nobel Prize in Economics, one cannot help but notice that those related to macroeconomics are particularly numerous compared to the academic weight macroeconomics holds within economics. Although there are various fields within macroeconomics, it is not an exaggeration to say that all research inevitably concerns policy implications. If a paper on macroeconomics ends without discussing policy, no matter how well-written, it is only half complete. This underscores that policy is the core of macroeconomic theory, and perhaps the Nobel Committee highly values this aspect.

Among macroeconomic policies, the widespread use of aggregate demand management policies today owes much to the Great Depression and John Maynard Keynes. It is no exaggeration to say that before Keynes, there was no such thing as aggregate demand management policy. In the era of classical economics before him, macroeconomics was treated as if the economy rarely deviated significantly from full employment levels. Since the economy was assumed to be at full employment, policies aimed at achieving it were considered unnecessary. Naturally, there was little deep research on policies to achieve full employment.

What changed this perception was the Great Depression of the 1930s. There was probably no other event in human history that shook the global economy so profoundly and widely without war, disease, or natural disasters. The extreme division of labor and specialization brought by industrialization, and the separation of production and consumption, vividly demonstrated how shocks, institutions, and psychology that disrupt the circulation of the national economy can cause severe consequences in a modern economy.

Who would believe that if the economy deviates more than 25% from full employment and is left alone, it would naturally recover to full employment? It was a crisis for economics. At this time, Keynes argued that since the economy lacked demand, if the government purchased more, employment and the economy would recover. He advocated for expansionary fiscal policy. The first to adopt such a proposal was U.S. President Franklin Roosevelt, known as the New Deal. However, even with the New Deal, the U.S. economy did not fully recover from the depression until after World War II.

After Keynes’ policy proposal, there was a period when many scholars believed macroeconomic policy was almost omnipotent. Some even argued in the 1960s that economics had ended because there was nothing left to study. Milton Friedman was the scholar who prophetically argued otherwise at the time. His prophetic theory was realized in the 1970s when stagflation occurred, a condition difficult to resolve with aggregate demand management policies due to the sharp rise in oil prices and inflation expectations (psychology).

Policy is not omnipotent, and paradoxically, it only works when market participants believe it will be effective. When policies are overused, their effects diminish or even backfire. I do not want to oppose using policies to respond to a situation where the economy’s circulation is almost paralyzed by disease. I especially recommend more aggressive support for small and medium-sized businesses and low-income groups. However, policies like universal disaster basic income for all citizens are an excessive luxury for us.

It seems foolish to follow the U.S. just because they do it. I also believe the effects will not be significant. There is no reason to oppose expansionary fiscal policy now. However, this is not the time to enthusiastically increase fiscal spending under slogans like the New Deal. Look at Japan. In response to a long-term recession, indiscriminate fiscal spending has pushed national debt beyond 200%, yet the effects are minimal. It is a grave mistake to think that South Korea can enjoy the same luxury as the U.S. or Japan. We must not forget that crises can come upon us unexpectedly. Policies are most effective and can prevent crises when viewed long-term and used only where necessary. I am concerned about the overuse of fiscal and policy measures.

Jo Jang-ok, Professor, Department of Economics, Sogang University