`Korean Gov`t, Not People, Should Spend More`

A prominent American economist says the Korean government should spend more money rather than asking its people to spend more and save less.

Robert Frank, a New York Times columnist and economics professor at Cornell University, also says the government should not discourage people from saving more and spending less on the excuse of the economic downturn.

To mark the release of the Korean version of his book “Falling Behind,” The Dong-A Ilbo held a phone interview yesterday with Frank, who also co-authored “Principles of Economics” with U.S. Federal Reserve Chairman Ben Bernanke.

Frank said his column was advice for middle- and low-income earners reluctant to cut back spending for fear of worsening the economy further, though some are having a hard time making ends meet.

The government, which can borrow money at an annual interest of about three percent at home and abroad, should increase spending rather than asking middle-income families to loosen their purse strings, he said.

From a macroeconomic perspective, increased spending by middle-income earners can produce no significant difference in economic revival, he added. More specifically, Frank said there is no reason for the middle-class to feel guilty about spending less, though increased spending is a key factor in overcoming the economic slowdown.

The only solution to end the crisis is injecting a massive amount of public funds or expanding fiscal spending, he said.

The Obama administration has drawn up many measures but needs to do more, Frank said. He said the new administration’s stimulus plan worth 878 billion U.S. dollars will be insufficient to turn around the ailing U.S. economy, given that it will take a considerable amount of time before the money reaches the market. He also said the economy needs additional stimulus measures with bigger budgets.

The professor is known for his unique analysis of consumption trends in the neoliberal era. He predicts the growing inequality between the haves and have-nots will bring the collapse of the middle class, the backbone of society.

The biggest reason the middle class is facing a crisis is excessive consumption, considering that many of them spend more than they earn, he added.

Frank says “relative spending patterns,” or peer pressure, triggers the chain reaction of spending. Simply put, middle-class families spend more than they can because of competition and pressure to spend as lavishly as upper class families do.

Spending lots of money is no problem for the upper class given their considerable wealth, but if a middle-class family increases spending without securing additional income, they will end up facing serious financial difficulty.

Frank said the U.S. subprime mortgage crisis put the break on the chain reaction of spending.

Pompous spending patterns are gradually disappearing due to the economic slowdown, he said, and the upper class has also started to feel the pinch and the middle class has begun to put more emphasis on saving than spending.

He also talked about “luxury shame,” saying superfluous spending is no longer something people envy and it has become what makes big spenders feel ashamed.

On the growing income gap in Korea, Frank said the Korean government should also play an active role as consumer through a stimulus package and offer incentives for saving.

On fears over the Obama administration’s inclination toward protectionism under the “Buy America” slogan, Frank said that it is too early to conclude that Washington will seek a protectionist policy.

He said the economic stimulus policy involves taxpayers’ money, so use of political rhetoric pleasing U.S. public sentiment at the moment was probably inevitable.

credo@donga.com