Nonsense, horsefeathers, and idle musings from a decade in South Korea (2002-2012).


31 January, 2012

A Midweek Buffet of Goodness

By Aaron
31 January, 2012


  • Over at Korea Business Central, I am the author of the latest "Korea Economic Slice," a regular feature in which guest writers are invited to comment on current issues in the Korean economy. My intro:
If the election of Park Won-soon as Seoul’s mayor last October is any indication, the upcoming April parliamentary elections will turn on matters of social welfare and inequality. More importantly, however, these elections will be a sign of the degree to which Koreans are willing to accept the vagaries of a market economy which, while leading to unequal outcomes of wealth accumulation, is a precondition for a sustainable welfare state. Discussion of such matters could scarcely come at a more pivotal time for Korea, facing as it does an aging and declining population, a slowing economic growth rate, and reinvigorated concerns about reunification with North Korea. Unfortunately, Korea’s political class shows little sign that it understands the gravity of the moment, competing not in a battle of ideas over how to revive the economy but rather to see who can most flamboyantly give away other people’s money.

  • As the old joke says: if you want to save the polar bears, start eating them. For the past few decades, some Texas ranchers have taken that advice to heart with regard to endangered African critters, raising them on their huge spreads and allowing big game hunters to bag a trophy. Animal rights activists, meanwhile, appear to be more concerned with simply not hunting the animals rather than actually preserving their numbers. This segment from 60 Minutes (also above) is a great lesson in incentives, private property rights and how easy it is to be self-righteously wrong. (h/t Carpe Diem)
  • My friend Steven Denney informs me that PEAR (Papers, Essays, and Reviews), the Yonsei Journal of International Studies is seeking submissions for its Spring/Summer 2012 issue. The website is here if you've got something you think might interest Steve.
  • Finally, you'll be doing yourself a favor to read this piece by the always-insightful Mark Pennington on "'The Left' and Public Choice Theory." (h/t Cafe Hayek)


Creation Precedes the Transfer

By Aaron

Over at Korea Business Central, I am the author of the latest "Korea Economic Slice," a regular feature in which a guest writer comments on a current matter of interest in the Korean economy. Here's the full text:

"Nurturing SMEs & Fostering a Welfare State: How Much Can Korea Afford?"

If the election of Park Won-soon as Seoul’s mayor last October is any indication, the upcoming April parliamentary elections will turn on matters of social welfare and inequality. More importantly, however, these elections will be a sign of the degree to which Koreans are willing to accept the vagaries of a market economy which, while leading to unequal outcomes of wealth accumulation, is a precondition for a sustainable welfare state.

Discussion of such matters could scarcely come at a more pivotal time for Korea, facing as it does an aging and declining population, a slowing economic growth rate, and reinvigorated concerns about reunification with North Korea. Unfortunately, Korea’s political class shows little sign that it understands the gravity of the moment, competing not in a battle of ideas over how to revive the economy but rather to see who can most flamboyantly give away other people’s money.

Park Won-soon, of course, rode into office by pledging to increase social welfare spending and to improve the “fairness” of the capital city’s culture. As his first order of business as mayor, Park signed a bill extending “free” school lunches to all Seoul elementary school students regardless of family income, a program which he has vowed to expand in 2012 to include middle school students. Sensing this direction in the political winds, the ostensibly conservative Grand National Party, led by President Lee Myung-bak, has put forth its own set of welfare proposals, ranging from state-funded childcare to subsidies for university tuition. That these are as much middle class handouts as they are social safety nets for the poor is especially troubling given the looming demographic and economic challenges facing Korea in the coming years.

In 2008, according to the OECD, South Korea had 6.3 workers for every non-worker (that is, a person under 14 and above 65 years of age). By 2050, this number will fall to 1.5. Clearly, this signals that a progressively greater burden will be placed on the working population to support the older members of society. Thus, even if Korea’s current slate of social welfare programs were frozen in its present state, simply meeting the needs of a growing class of retirees would require an ever-higher rate of economic growth.

Moreover, the recent death of Kim Jong-il, and the ascension of his son, Kim Jong-Un, to the throne has created that most dicey of situations in a totalitarian state: a leadership transition. The sixty-plus year division of the two Koreas has caused many to treat reunification as a mere abstraction, but the costs, which could come at any time, will be all too real. Indeed, estimates begin at US$1 trillion and scoot upward from there. Yet, while South Korea is committed to taking in its northern cousins, no concrete plan has yet been put in place to pay for the world’s most expensive family reunion.

As if these challenges were not enough, the nation’s economy has begun to sputter just when South Korea needs increasingly robust economic growth. South Korea’s growth rate, so impressive for so many years, has recently begun to look rather pedestrian, growing at 3.6% in 2011 (BOK) and expected to grow at 3.8% in 2012 (OECD). To be sure, the global economic woes have been a blow, but many economists are beginning to speculate that Korea’s export-led manufacturing model may be losing steam and thus incapable of carrying the country into its next generation of development as an advanced economy.

At the same time, the nation’s public debt has been ticking steadily upward for several years now, reaching 33% of GDP in 2010 – a number which does not even include the liabilities of heavily-indebted state-owned enterprises, which push the figure to over 60% of GDP. The thought of adding the weight of further entitlements to the government’s budget, even as current and future promises will be challenging to meet given expected growth trends, should thus be cause for concern.

As Korea’s slowing growth rate shows, the country is failing to maintain its past sense of economic vibrancy. To revitalize the nation’s economy for the 21st century – a necessary step if the economy is to throw off the revenues necessary to support increased welfare spending – the government must loosen its grip on the economy and especially on the nation’s small-scale entrepreneurs, whom it claims are among those most in need of market protection and welfare assistance.

To date, the Korean government has sought to help small- and medium-sized enterprises (SMEs) and start-ups chiefly by coddling them – for example, by giving them underpriced loans or by declaring certain business sectors (such as tofu, ready-mix concrete, and LED lighting) off-limits to the chaebol. Not only do such measures restrict consumer choice and saddle taxpayers with extra debt from non-performing loans, they do nothing to promote the long-term viability of these companies, which never learn to compete on their own.

While its recent devotion to new free trade agreements is laudable, the government must go further in freeing the Korean economy. Rather than cosseting SMEs, then, the government should remove restrictions which hamstring would-be entrepreneurs. To take just one example, regulations currently state that beer companies wishing to sell their brew on store shelves must be able to produce at least 3.8 million bottles per year, a rule which effectively quashes the ambitions of any aspiring microbrewer. This not only prevents the creation of new jobs (especially for woefully underemployed twentysomethings in Korea) and better quality products, but also serves to further reinforce the gaps between big companies and small, and between rich and poor, which so anger the electorate. Before it sets to enacting further subsidies and welfare programs, the Korean government should thus adopt a “first do no harm” policy by clearing its books of this and similar regulations which act as a barrier to initiative and ingenuity.

The first lesson of economics is scarcity, the fact that we live in a world of limited resources which we use in pursuit of our unlimited desires. Regardless of how much we might like to expand existing welfare programs, or how many new entitlements we might desire, the current question on voter’s tongues, therefore, should be “how much can Korea afford?” Wealth must be created before it can be redistributed, and given the inflection point at which Korea now finds itself, the nation’s voters and politicians should be seeking new ways to create rather than simply transfer. Before creating a raft of new programs which encourage dependency and restrain ambition, the Korean government should allow citizens to create their own prosperity.





23 January, 2012

Trading Ideas

By Aaron
23 January, 2012

Over this long, Lunar New Year weekend, I had the great good fortune to have lunch with Steven Denney. Steve's an ambitious young graduate student over at Yonsei University, the sort of fellow who makes the rest of us look bad with all of his get-up-and-go. As one would expect, he blogs at not one but two sites (here and here) and I seem to recall him mentioning that he had another site - focusing on North Korea - in the offing.

While Steve and I share many interests, our worldviews are a study in contrasts. As an illustration, Steve sent me two recent articles by former U.S. Secretary of Commerce Clyde Prestowitz, both of which - to my mind, at least - are filled with needless hand-wringing about the supposed decline of U.S. manufacturing and the eventual implosion of all that makes America worth a damn. As tough as it is for me to get through a Prestowitz article (for a Secretary of Commerce, he sure seems to have slept through a surprising number of economics courses), I figured I'd offer a few comments here rather than simply starting an email thread with Steve.

In the first article, from December 2011, Prestowitz argues that trade deficits are important and, further, that the United States must take steps to reduce its current account deficit:

The opportunity lies in the size of the $500 billion U.S. trade deficit. Just halving it would create 2.5 million jobs without the need for tax reductions, further deficit spending, or further quantitative easing. Indeed, taxes could even be raised without fear of job loss. President Obama should see this as a Godsend. He can have his cake and eat it as well by increasing jobs and reducing the federal budget deficit.

Prestowitz never explains how he arrives at the "2.5 million jobs" number, nor can I imagine how anyone would prove such a figure, so complex an organism is the global economy. More likely, government efforts to reduce the trade deficit would create some jobs, even as such actions destroyed others, all while punishing consumers and making the U.S. economy less competitive in the long run.

More importantly, though, a current account deficit equals a capital account surplus - that is, more investment is flowing into the United States than is flowing out. To bemoan the trade deficit, therefore, is to also lament the willingness of foreigners to invest in America. Of course, a sizable chunk of this "investment" is in the form of U.S. government debt (as well as corporate debt, real estate, facilities, etc.), which troubles budget deficit hawks like myself, but if you're a person who believes that the U.S. government should be engaged in greater deficit-financed stimulatory spending right now then you should also celebrate the U.S. trade deficit.

For more on trade deficits and (supposed) Chinese currency manipulation, I highly recommend this Econtalk podcast.

The second, and more recent, article finds Prestowitz lobbying for a defined U.S. national economic strategy as a way to counter the mercantilist tendencies of countries like China. Not surprisingly, I ain't climbing aboard Prestowitz's Industrial Policy Express, even if he could prove that China's export-promotion orientation helps the Chinese more than it hurts them. Rather than rehash my views on this matter, however, I'll merely direct readers to this 2010 piece in which I laid out my skepticism of politically-designed industrial policy. Briefly:

...to paraphrase PJ O'Rourke, a successful industrial policy requires that bureaucrats and politicians know more about everything than we do, and requires them to make smarter decisions than we can. And it demands that a state official make those wise and knowledgeable decisions without regard for his political or financial self-interest.

As it happens, the current issue of The Atlantic has a superb article by Adam Davidson which touches on these very issues. It is, in short, the best piece I've read on U.S. manufacturing and employment in recent memory. Indeed, it's one of the magazine pieces I've read on any subject in a long while. It's specific, nuanced, and I can't recommend it highly enough. Rather than offering my comments on it here, however, I'll simply get out of your way and let you get to reading it.



01 January, 2012

American History Revisited

By Aaron
01 January, 2012

Via two different sources come two curious new insights on American history:

The first is that Abraham Lincoln apparently walked around for several years never knowing that a watchmaker had inscribed his pocket watch with a secret message on its innards. From How to be a Retronaut comes the story and the image:



The second is this American artist Mort Kunstler's update of Emanuel Leutze's famous "Washington Crossing the Delware" painting . The Washington Examiner has the story here (via Marginal Revolution):