According
to this
report from The Korea Herald, President Park Geun-hye is
seriously considering levying a tax on corporations for holding on to
its profits. To be specific, if corporations do not spend “enough”
of their profits on investments, salaries, and dividends, the
government will levy a ten percent tax on those profits.
How
much would be considered excess profits and how long a corporation
has to hold on to its profits before the taxes are levied have
apparently not been hammered out in detail just yet.
On
top of that, the
Bank of Korea cut interest rates to 2.25 percent just recently,
which is the lowest that it has been since
November 2010. What's more, further interest rate cuts are
expected and it is feasible that interest rates could fall as
low as 1 percent. And about a month ago, the Korean government
expanded tax
deductions for debit card users.
In
other words, the Park administration wants us to spend money. And
preferably a lot of it.
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| Ka-ching! Image Source |
The
government's rationale is that if business owners come to terms that
their “excess” profits will be taxed, they will choose to pay
higher wages, salaries, and dividends so that people will spend more
money, thereby spurring economic growth. Furthermore, assuming that
businesses increase workers' wages (instead of diverting more of
their profits to off-shore shell companies and tax havens), coupled
with low interest rates and tax incentives for debit cards, the
government hopes that the people will choose to spend their money
rather than save it (instead of investing their money in riskier but
higher-yielding investments).
(It
is my opinion that the government is either completely ignorant of
the concept of unintended consequences or it is aware of the concept
but simply does not give a damn about it.)
The
government's rationale behind this series of decisions is that
savings is deleterious to economic growth. It is an
idea that was made popular in the twentieth century by the great
(which does not necessarily mean “good”) John
Maynard Keynes.
People
who subscribe to this economic school of thought often compare money
to some kind of metaphor that can be found in the natural sciences.
For instance, only just recently someone mentioned to me that money
is like water; that it's supposed to flow freely. But does money
flow? The words “flow” and “circulate” are often used to
refer to the movement of money within a given economy. It allows
people to simplify money; something which is far more complicated
than people actually think it is.
However,
money does not actually “flow” or “circulate.” In fact, I
think it is misleading to say that money “flows” or “circulates.”
It implies that money is somehow spent independently of human will.
Money does not flow or circulate. As boring as it may sound, money
is transferred from one person's cash balance to anther’s. And
this transference depends entirely on how much people are willing to
hold on to their money at any given time.
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| Believe it or not, this does not happen in reality. Image Source |
The
basic argument behind the government's series of policy changes is
the assumption that “hoarding” money (something that more sober
minded people refer to as “savings”) somehow causes economic
stagnation. It assumes that if far too many households and
businesses save money rather than spend it, the savings will stifle
demand for goods and services, thus leading to an economic
contraction.
Many
Keynesian economists have therefore always urged people, and
especially the government, to spend. Even when there is no
money to spend.
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| Image Source |
However,
these policies do more than to simply set the stage to get people to
spend more money. It also tacitly makes villains out of people who
wish to save money. Though the language used has thus far been
benign, what has remained unsaid but expressed tacitly nonetheless
was that those who do not spend their money are causing the economy
to shut down. It assumes that businesses that choose to save money
inevitably lead to reduced sales, which in turn leads to increased
layoffs. Then as the total social income decreases, this leads to
less money being made available for overall consumption. Then, as
individuals begin to fear for their economic well-being, they too
will begin to refuse to spend their money. The government's
rationale is that hoarding begets more hoarding and that it causes
the economy to sink ever deeper into a downward spiral.
In
the end, what the government is actually saying is that people who
save their money, these selfish hoarders, will eventually doom the
economy into a permanent economic stagnation.
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| DOOM! DOOM, I TELL YA! Image Source |
But
is there any truth to this viewpoint? I, for one, do not think so.
There
is a question that we have to ask ourselves. Why do people even save
their money in the first place?
There
is only one answer to that question. People save their money so that
they can insure themselves against an uncertain future. Think about
it. If the future weren't uncertain, if each and every one of us had
the gift of being able to accurately predict when and how much money we will need, none of us would need to save our money. We would simply
spend our money and make the necessary investments so that we may
receive the amount of money we need to spend on the day we need to
spend it.
Fortunately
or unfortunately, however, the future is uncertain. We do not know
how or when or where we will face our next calamity or good fortune.
And the more uncertain and fearful we are, the more money we tend to
save. And considering the fact that Korea is the
fastest aging society in the world, and further considering all
the financial
troubles that are associated with aging, Koreans have all the
reason in the world to be fearful of the future.
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| Image Source |
There
is another reason why businesses save money. If businesses expect the value
of money to fall in the near future, they will spend their money now
while the money is more valuable. However, if businesses expect
the value of money to rise, they will wait to spend their money
later when it is more valuable.
Milton
Friedman once said that there are four ways to spend money. One
of the ways to spend money is for an individual to spend his/her own
money. When people do that, people try to get the most for their
money and tend to be more careful about how they handle their money.
Therefore, for the most part, people's decision to save or spend
their money tends to be based on very sound reasons.
The
Korean government might think that its recent policy changes is for
the benefit of the public. In the short-run, the Park administration
might just be vindicated. But what happens in fifteen years when
Korea becomes a “super aged” society (meaning that more than
one-fifth of the population will be over the age of 65), when there
will be more retirees, who will have minimal income and will
therefore need more government handouts, than there are working
people?
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| For those unaware, Korean subway cars reserve the seats at the end of each train car (where the two kids are seated) for senior citizens whereas the other seats are for everyone else. This picture asks its viewers to imagine a future when those seats will be reserved for children instead of senior citizens. Image Source |
The
idea that savings somehow impedes economic growth is a popular one,
especially among politicians. However, just because something is
popular does not make it right. Saving for a rainy day does not
cause negative economic growth or economic stagnation. That is
because savings don't take money out of the economy. Savings are an
insurance. Therefore, savings is really just another word for
deferred consumption.
There
is, however, yet another rationale behind the government's series of
policy changes. It is the presumption that the more money there is,
the more wealth there is. As counter-intuitive as this may sound,
that is just not true. The units of money that we have in our
wallets or bank accounts do not matter. If such a thing actually
mattered, Zimbabweans would be the richest people in the world!
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| Image Source |
What
people really want is not more money, but more bang for their buck.
In other words, they want their money to be able to buy more things.
Simply increasing the amount of money, which is all that the Korean
government will be able to achieve with its policies (assuming that it is successful), will simply
dilute the effectiveness of the money that people do own. It will
not improve the people's standard of living.
The
only thing that can make the money more valuable is for there to be a
fall in prices aka deflation, which is the very thing that every
government wishes to avoid. After all, although deflation is what
people need, it is not what they want (whether or not deflation is a
good thing is an entirely different topic that shall be dealt with on
another day).
To
be specific, people want the prices of all goods that they buy to
fall. However, at the same time, they want the price of the goods
that they sell to rise. Therefore, though nobody will actually claim
to want it, what their actions often belie is that
everyone actually wants inflation. And politicians are only too
happy to give people what they want, rather than what they need.
It
is possible that the Park administration's war on savings might lead
to some short-term economic gains. After all, almost anything can be
proven to be correct by resorting to clever statistics. But in the
long run, I just don't see how it is anything but doomed to fail.
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