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 1 – Deficit spending 101 – Part 2 – Deficit 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.
The Saturday Quiz will be back again tomorrow. I have checked to make sure I don’t make any mistakes this week.
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Some relevant links to further information and availability:
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4. You can buy the book in – eBook format – at Google’s Store.
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.