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| Harvard University economics professor Robert Barro delivers a keynote speech during the Bank of Korea International Conference at the central bank's headquarters in Seoul in this 2014 file photo. / Yonhap |
Barro says BOK's rate cut was also 'bad idea'
This is the third in a series of interviews with global economic experts analyzing the economic fallout of the COVID-19 pandemic and possible countermeasures against a potential global recession. ― ED.
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Harvard University economics professor Robert Barro advised the Moon Jae-in administration against giving a "disaster payout" to all Koreans, amid growing controversy here over a universal basic income in response to the fallout of the coronavirus pandemic.
In a recent email interview with The Korea Times, the renowned macroeconomist answered "yes," when asked whether he thinks the Korean government giving everyone cash was a "bad idea."
He advised the government to give more support to the needy than to others.
"I'm unsure about the detailed structure of existing transfer programs in South Korea. [It] makes sense to raise temporarily allotments for unemployment insurance, etc., even though that has to be deficit financed," he said.
"It also makes sense for the government to carry out policies that limit the permanent disappearance of businesses that would be productive absent the ongoing crisis."
He stressed however that overall fiscal expansion is a "bad idea" in the current "unusual" environment.
According to Barro, the whole world has been "engineering" a decline in GDP by curbing economic activity as a way to reduce interactions and contagion.
"In essence, this is a voluntarily implemented negative supply shock, akin to a sudden loss in productivity," said the professor, who is currently studying the economic impact of the 1918 Spanish flu.
Barro expects various forms of expansionary fiscal policy considered worldwide, including the United States federal government's proposal of giving every American a check for $1,000 or more, will exacerbate a "serious threat of inflation."
He said the present environment of governments controlling economic activity contains a threat of a negative supply shock.
In this regard, aggressive monetary stimulus, such as key rate cuts, "makes no sense" either, according to the professor, because an expansionary monetary response would also be inflationary.
Asked whether he believes the Bank of Korea lowering its interest rate was a bad idea, his answer was a definite "yes."
"Rates should instead have been increased," Barro said.
As an alternative to expansionary monetary and fiscal policies, the economic guru proposed strengthening existing social-safety nets.
"More sensible are policy responses aimed at preventing individuals who lose jobs from having little income to use for basic purchases," he said.
"Notably, it would make sense to increase accessibility and perhaps benefit levels for programs like unemployment insurance, food stamps and Medicaid. These programs are much more targeted to the needy than is the passing out of $1,000 checks to everyone."
Temporary recession inevitable
The Harvard professor admitted that the international movement to engineer a reduction in GDP could temporarily cause a recession which would be worse than the 2008 global financial crisis.
However, he expected any recession to be shorter than usual.
"In the current situation, the U.S. and other governments are engineering a much sharper short-term fall in GDP and, hopefully, one that will be less persistent," he said.
"That is, the hope is for a sharp V-shaped recovery once the pandemic is controlled."
Ranked the world's fifth-most influential economist by the Research Papers in Economics, Barro has been well-known for his keen interest in Korea.
He delivered lectures at Seoul National University in May 2003, and served as a guest scholar at POSCO Research Institute just before the 1997 Asian financial crisis.
He is also considered one of the founders of new classical macroeconomics, along with Robert Lucas Jr. and Thomas J. Sargent.
