Why the ₩250,000 Payment Is Wrong

Consumption without production drives up prices,

reduced investment leads to economic decline and a lower quality of life.

Higher economic freedom is needed for productive activity to flourish.

Voters must judge these “pledges to destroy national wealth.”

When I was in elementary school and knew nothing about economics, I thought, “If the government gave every citizen 1 million won, everyone would live well without worrying about money.” But these days, there is someone trying to do exactly what I imagined back then. It is Lee Jae-myung, leader of the Democratic Party of Korea. He proposed “providing a ‘livelihood recovery support payment’ of 250,000 won per person for all citizens, averaging 1 million won per household.” He said, “If you give each household 1 million won so they can shop in their neighborhood markets, money will circulate and the economy will be revitalized. People can buy and eat beef—it’s nice, isn’t it?” I came to understand how wrong that way of thinking was only after studying economics properly.

To consume, one must first produce. This is the most basic principle of economics. We sell the goods or services we produce, and with the income earned from that, we purchase and consume the goods and services produced by others. Then we save part of what remains after consumption. In this process of exchange, money changes hands. Although money moves back and forth, what is actually being exchanged is the goods or services I produced for the goods or services produced by others. Money merely makes the exchange of the goods and services we produce easier. It does not itself create wealth. For us to live better, we must create wealth by producing more goods and services.

To produce more goods and services, we use saved money to purchase capital goods such as tools and machinery. That is because capital goods raise productivity. As we can see, using a chainsaw rather than a traditional saw allows far more trees to be cut in a much shorter time, and when digging the ground, using an excavator instead of a shovel makes it possible to do much more work in far less time. This shows that savings are the source of increased production of goods and services—in other words, the source of economic growth and improved living standards. If savings decline, the economy deteriorates and our lives become impoverished.

When the government prints and injects money, the value of people’s savings is damaged, making them worse off. If the government releases more money while everyone’s level of production remains unchanged, consumption occurs without production to support it. More money then chases the same quantity of goods and services. As a result, the prices of all goods and services, including capital goods, rise. Then people can no longer buy, with their savings, the capital goods they could previously afford. As the use of capital goods declines, production falls, the economy weakens, and people’s lives worsen. In this way, when the government pumps money into the economy, the public does not become better off but worse off. On a national scale, because the economy does not grow, the country declines.

Moreover, when the government releases money, it distorts the economy’s overall production structure in the long run, reducing the production of capital goods and inflicting fatal damage on economic growth. When the money released by the government reaches consumers’ hands, demand for consumer goods increases. Then, in order to produce more consumer goods, factors of production move from the capital goods industry to the consumer goods industry. This means the contraction of the capital goods industry. In other words, new and improved capital goods are no longer produced. Because new and improved capital goods are not produced, better goods and services are not produced in greater quantity over the long term, and the people’s standard of living does not improve.

In fact, the theoretical foundation of this economics is nothing new. Adam Smith already said 250 years ago in The Wealth of Nations that “money is an important medium of circulation and instrument of commerce, but it does not itself create wealth; the essence of national wealth lies in the production of goods and services.” That is, the economy grows and national wealth increases only when goods and services increase, allowing people to live better. He also said that the most important factor in increasing goods and services is economic freedom. A free economic environment induces vigorous economic activity and increases the quantity of goods and services available for us to consume. If we truly want people to prosper, we should not release more money but work to create a free economic environment.

It is fine not to know economic theory in depth. Just remember this one fact: if people could become prosperous simply because the government released money, then no poor country could exist on this planet. On the contrary, not a single country that tried to revive its economy by printing and distributing money has succeeded. Argentina, Venezuela, Zimbabwe, and Greece are representative examples.

“The 250,000 won payment” does not increase our wealth; it destroys it. It is truly lamentable that we live in a reality where such a pledge can be openly proposed.

Jaewook Ahn

Professor Emeritus, Department of Economics, Kyung Hee University

Chairman, Center for Free Enterprise (CFE)

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Original title: ‘25만 원 지급’이 잘못인 까닭

Author: Jae-uk Ahn

Date: 2024-04-09

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=26554