Modern Monetary Theory is not the right fit for Korea Inc.
This is the third of a three-part series, which highlights Modern Monetary Theory and the South Korean policies. _ ED.
There are disputes whether or not the Modern Monetary Theory (MMT) can help the world overcome the economic difficulties in the aftermath of the virus pandemic.
Most observers point out that the heterodox macroeconomic theory will do harm to the economy in the long run by encouraging to print more money without regards to snowballing sovereign debts.
In particular, South Korea should not adopt the theory because the country does not have a key currency, unlike such countries as the United States and the European Union.
“I don’t think that the U.S. will be able to brace for MMT even if the country can print dollars as much as they can,” Prof. Lee Phil-sang at Seoul National University noted.
“Then, how will we be able to embrace MMT? Our currency will eventually lose its value to lead to capital flight. They would wreak havoc on our economy.”
Former Prime Minister Chung Un-chan agreed.
“It sounds good to create many jobs and provide the minimum revenues to all the people by printing money if there are no side effects,” said Chung, who is a renowned economist.
“But there should be side effects, as global economists point out. MMT is kind of too good to be true.”
Mankiu’s critics on MMT
As Chung said, such economists as Gregory Mankiw from Harvard University rapped MMT. He came up with a critique titled “A Skeptic’s Guide to Modern Monetary Theory.”
He said that MMT had led him to find some common ground with its proponents without drawing all the radical inferences they do.
“I agree that the government can always print money to pay its bills. But that fact does not free the government from its intertemporal budget constraint,” he wrote.
“I agree that the economy normally operates with excess capacity, in the sense that the economy’s output often falls short of its optimum. But that conclusion does not mean that policymakers only rarely need to worry about inflationary pressures.”
“Put simply, MMT contains some kernels of truth, but its most novel policy prescriptions do not follow cogently from its premises.”
Kim Dong-won, a former professor at Korea University, said that the Seoul administration should resist the temptation to depend on helicopter money aimed at bringing a flagging economy back on track.
And he warned about the mounting sovereign debts of Korea.
“Typically, populist governments have been attracted by the MMT as demonstrated by some Latin American countries in the past and now,” he said.
Indeed, South Korea’s government debts have jumped from 626.9 trillion won in 2016 to 723.2 trillion won in 2019 and 846.9 trillion won last year, according to the Ministry of Economy and Finance.
The figure is feared to top 1,200 trillion won in 2023, and 1,300 trillion won in 2024. In other words, the national financial obligations would more than double in less than a decade.