[THE VIEW] Do Not Underestimate the Market's Memory

The Hotel Economy Theory:
Where Short-Term Stimulus Meets Long-Term Distrust

Recently, the concept of the "hotel economy theory" has taken center stage in economic discourse. The core of this theory is that money continuously circulates within the market, thereby invigorating the entire economy. This seems similar to the concept of the fiscal multiplier, where an increase in government spending results in a greater increase in national income. However, the hotel economy theory focuses more on the velocity and total volume of money circulation than on fiscal policy itself.

There are various debates surrounding the hotel economy theory, one of which is the idea that even if a hotel reservation is canceled and does not result in an actual stay, it still contributes to economic revitalization. If this logic truly holds, it would lead us to conclude that stimulating the economy is an easy task.

However, it is difficult to expect sustained growth through such means in the real economy. In the short term, it may appear that the velocity of money circulation has increased temporarily, and it may create the illusion of consumption in certain sectors. However, from a long-term perspective, economic agents adapt to these patterns and adjust their behavior, which can ultimately have a negative impact on the overall economy.

Let us consider this situation from the perspective of a hotel operator. Initially, when a reservation is received, the operator naturally expects payment and plans finances and expenditures accordingly. However, if the cancellation rate after reservations gradually increases, hotels will become more conservative in their financial management due to the uncertainty of reservation income. In other words, keeping in mind the high probability of cancellations, they will refrain from making proactive investments or expenditures as much as possible. In the short term, the impact on the overall economy may be minimal, but if such behavior spreads throughout the industry and persists over time, it can lead to reduced investment and employment in related sectors. Ultimately, unpredictability undermines the trust of economic agents and becomes a major cause of diminished economic activity.

These issues of uncertainty and trust are deeply connected to the efficiency of government policies and the overall social system. For example, many of the recent concerns about the direction of U.S. government policy can be attributed to unpredictability. The government may pressure counterparties by announcing strong tariff policies, only to suddenly change course and make conciliatory gestures when clear results are not seen. In addition, while hinting at the possible dismissal of the Federal Reserve chair, the administration may back down when faced with legal issues, continuing a series of unpredictable actions. This has led to a sharp rise in the economic policy uncertainty index, which has chilled corporate investment sentiment and slowed individual consumption spending, thereby having negative ripple effects on the real economy.

A photo of a material shared by Lee Jae Myung, the Democratic Party presidential candidate, in 2017, saying "A supporter made this by hand drawing and sent it." Photo by Lee Jae Myung's Facebook

Looking at the domestic situation, it is clear that public trust in economic and social issues is declining. Allegations of corruption and misconduct involving key figures in politics and business continue to emerge, but actual punishment and the realization of social justice seem far off. If this situation persists, ordinary citizens may have no choice but to acquiesce in the short term, but in the long term, distrust of the social system and community will deepen. Even in situations that require social cooperation, people are more likely to display uncooperative attitudes or revert to extreme individualism.

Meanwhile, individuals who exploit social chaos and legal loopholes to evade the law or pursue personal gain may learn that they can weather crises at low cost, potentially causing even more serious social problems as a result of this lesson.

We are well aware of the tragic consequences of lost trust through Aesop's fable "The Boy Who Cried Wolf." The boy who repeatedly lied lost the trust of the villagers, and when a real wolf appeared, he received no help and lost all his sheep. Our society is not much different. Trust among members of society, and between the people, the government, and institutions, is one of the most important pillars supporting society. We must not forget this.

The path to overcoming this crisis of trust is surprisingly clear. All national institutions?including the government, the legislature, and the judiciary?must meet the legitimate expectations of members of society in their respective roles, and instill confidence through consistent and fair principles. No matter how excellent a vision or policy may be, we must deeply recognize that if there is no trust in those who implement it, it will amount to nothing more than an empty echo.

Park Sungkyu, Professor at Willamette University, USA