[Il-ho Yoo’s Economic Walk] Markets, Government, and Economic Policy

[Financial News, September 3, 2023] Il-ho Yoo (PERI Research Fellow / Public Finance)

[Il-ho Yoo’s Economic Walk]  Markets, Government, and Economic Policy

What is economic policy and why is it needed? This seems like a simple question, but it’s not always easy to answer. Especially when it comes to answering the theoretical question of why it’s necessary, which economics explains as follows.

Economic policy is government intervention in the marketplace. It has been proven that an “ideal” market economy is efficient (two fundamental theorems of welfare economics). Nevertheless, government intervention is often justified by the existence of market failures, the need for macroeconomic policy, and the need to redistribute income and assets, such as through welfare policies. Even in a well-developed market economy, there are areas where market intervention through economic policy is necessary.

Therefore, the question is not whether market intervention is inevitable, but to what extent. There is an expression that “no government beats the market,” which does not mean that intervention in the market is unnecessary, but that excessive intervention should be avoided because its negative effects outweigh its positive effects. In fact, “market intervention as policy” always has both positive and negative effects. Given this, a good policy should have a positive net effect, which is the difference between the positive and negative effects, and the larger it is, the better.

Due to the two-sided nature of such policies, there are both beneficiaries and detractors. To illustrate, consider the example of the US-Korea Free Trade Agreement (FTA). While there are sectors and workers (e.g., manufacturing) that benefit from the FTA, there are also agricultural sectors that are directly harmed, which is why the ratification of the FTA was accompanied by a number of support measures for the agricultural sector.

As with any policy, the process of formulating and implementing a policy to solve these real-world problems involves discussing and persuading people from different positions, including opponents, and if consensus cannot be reached, a vote is the only way to make a decision. It is necessary to recognize that everyday economic policies are also formed through political processes such as majority rule.

However, it is also said that “economics should not be subject to political logic”. This is true, but it means that excessive political logic (for votes) should not overwhelm rational economic logic. Economic policy is a political process, but we need to be careful.

Given this, the attitude of policymakers should be to disclose both the positive and negative aspects of the policy without hiding them, and to seek the consent of the people affected by the policy. It is tempting for policy makers to emphasize only the positive effects of a policy. However, doing so not only fails to provide the public with the right information, but also makes it difficult for the policy to be properly implemented.

About six years ago, Professor Heo Tae-gyun of Korea University wrote a newspaper column titled “Is it okay to misrepresent a policy?” Using the example of the rapid increase in the minimum wage during the last government, he pointed out that both politicians and policy makers emphasized the positive effects of the rapid increase in the minimum wage, but did not mention the negative effects it could bring.

He describes this as akin to mis-selling a financial product that emphasizes its benefits while hiding its problems, and he’s right. While intentional mis-selling is illegal, it is troubling that there is no one responsible for policy mis-selling. Policymakers have an obligation to clearly explain the various effects of their policies to the public, and the public has a right to know.

September 3, 2023

<Il-ho Yoo, PERI Research Fellow> Former Deputy Prime Minister for Economic Affairs and Minister of Strategy and Finance