🚨 Lee Jae-myung Government's Dilemma: Price Stability vs Economic Stimulus, Catching Two Rabbits
Today Korean Economic News | 2025.06.12
📌 President Lee Jae-myung mentions ramen prices, faces difficulty pursuing both price stability and economic stimulus
💬 President Lee Jae-myung recently mentioned ramen prices at an emergency economic review task force meeting and ordered measures for price stability, while also pushing for a second supplementary budget. However, fiscal spending for economic stimulus could increase money supply and raise inflation pressure, making these two policy goals conflict with each other. Experts say "achieving price stability and economic stimulus at the same time is a very difficult task" and point out that "careful policy design and timing are important." The government is trying to solve this dilemma through selective support and supply chain improvements, but questions are being raised about effectiveness.
1️⃣ Easy to Understand
President Lee Jae-myung faces a very difficult challenge in economic policy. On one hand, he needs to control prices, and on the other hand, he needs to boost the economy. The problem is these two goals can work against each other.
Recently, President Lee Jae-myung directly mentioned ramen prices at an emergency economic review task force meeting. He said "With ramen costing over 1,000 won per pack, ordinary people's shopping burden is growing" and emphasized the importance of price stability. Indeed, ramen prices have steadily risen over the past few years, becoming a burden for ordinary people.
But at the same time, the government is pushing for a second supplementary budget. A supplementary budget means the government spends additional money beyond what was originally planned. This method is usually used when the economy is struggling and the government wants to inject money to revive it.
Here's where the problem starts. In economics, when the government spends a lot of money, more money enters the market and prices tend to rise. It's similar to how prices go up when more people want to buy the same product. So if the government uses a supplementary budget to boost the economy, prices might go up.
To put it simply, it's like trying to put out a fire with one hand while pouring oil with the other. To control prices, you need to reduce money in the market, but to boost the economy, you need to pump money in - these are opposite directions.
This situation is called a "policy dilemma" in economics. It's when you have to give up one thing to choose another. Many governments in the past have struggled with this dilemma.
The government is trying to solve this problem through "selective support." Instead of spreading money everywhere, they want to focus investment only where it's really needed. They also want to improve supply chains so goods can be supplied more smoothly, preventing price increases.
But experts are still skeptical. They say when money enters the economy, it affects everything eventually, and it's hard to completely prevent inflation pressure.
In the end, the Lee Jae-myung government is walking a very difficult tightrope. They need to solve the challenge of reducing people's living costs while also reviving the economy at the same time.
2️⃣ Economic Terms
📕 Supplementary Budget
A supplementary budget means the government changes or adds to the budget they originally planned.
- It's mainly used during economic recession, natural disasters, or crisis situations like COVID-19 when the government needs to urgently inject money into the economy.
- It requires approval from the National Assembly and usually ranges from several trillion to tens of trillions of won.
- It has short-term economic stimulus effects but can cause fiscal deficits and inflation.
📕 Policy Dilemma
A policy dilemma is when two or more policy goals conflict with each other, making them difficult to achieve at the same time.
- Examples include price stability vs economic stimulus, growth vs distribution, efficiency vs equity.
- The government must set priorities or find creative solutions.
- In economics, this is also called a "trade-off."
📕 Fiscal Spending Multiplier Effect
The fiscal spending multiplier effect shows how much national income increases when the government spends 1 won.
- If the multiplier is greater than 1, it means government spending has a positive effect on the economy.
- The multiplier effect is usually larger during recessions and smaller during economic booms.
- However, it can also increase inflation pressure at the same time.
📕 Inflation Targeting
Inflation targeting is a monetary policy where the central bank sets an inflation rate goal and makes this their top priority.
- The Bank of Korea sets an annual inflation target of 2%.
- When inflation goes above target, they raise interest rates; when below, they lower rates.
- Policy coordination becomes important when fiscal and monetary policies conflict.
3️⃣ Principles and Economic Outlook
✅ The Basic Conflict Between Price Stability and Economic Stimulus
Let's look at why the government's two main economic goals clash with each other.
First, expanding fiscal spending creates inflation pressure through increased total demand. When the government spends money through a supplementary budget, more money enters the market, leading to increased consumption and investment. According to economic theory of aggregate demand and supply, when total demand increases, production and employment grow in the short term, but prices also rise at the same time. This is especially true in countries like Korea that are close to full employment, where additional demand increases can directly lead to inflation. If Lee Jae-myung's government plans a 20 trillion won second supplementary budget, this represents about 1% of GDP and could create significant inflation pressure.
Second, tight policies for price stability directly conflict with economic stimulus. To control prices, you need to reduce money in the market, but this leads to reduced consumption and investment, making the economy even more difficult. The Bank of Korea currently maintains the base interest rate at 3.5% considering price stability, but if inflation from the supplementary budget becomes visible, they might need to consider raising interest rates. This would put the government in a contradictory situation of loosening money (fiscal policy) on one hand while tightening it (monetary policy) on the other.
Third, Korea's current economic situation makes this dilemma even worse. Korea's consumer price inflation is currently 3.1%, significantly above the Bank of Korea's 2% target. Food and energy prices have risen sharply, making ordinary people feel inflation even more. At the same time, economic growth is slowing, increasing the need for economic stimulus. As KDI forecasted this year's growth rate at 0.8%, Korea's economy is stuck in a low-growth trap. In this situation, it's very difficult to choose between price stability and economic stimulus.
In the end, the Lee Jae-myung government faces a policy dilemma similar to 1970s stagflation. This is a complex challenge that's difficult to solve with traditional macroeconomic theory.
✅ Government Solutions and Their Limitations
Let's analyze the solutions the government is proposing and their effectiveness.
First, minimizing side effects through selective fiscal spending. The government says they will focus investment only on necessary areas instead of spreading money everywhere. Specifically, they plan to concentrate budget on supporting ordinary people's lives, creating jobs, and fostering future industries. Theoretically, more targeted spending might have less inflation pressure on the entire economy. For example, cash support for low-income groups goes to people with limited spending power, so it might not cause overall overconsumption. Also, investments that increase supply capacity (infrastructure, technology development) could help price stability in the long term.
Second, supply-side approach through supply chain improvements. The government believes price increases are caused not only by demand increases but also supply shortages, so they're focusing on supply chain improvements. For food price increases, they're trying to solve this through improving distribution stages, expanding direct trade of agricultural products, and diversifying imports. Since ramen price increases are mainly caused by rising costs of raw materials like flour and packaging materials, the logic is that improving these supply-side factors can increase demand while suppressing price increases. Since global supply chain disruptions were a major cause of inflation after COVID-19, this approach could have some effect.
Third, but the limitations of these solutions are also clear. No matter how selectively they spend, when 20 trillion won of money enters the economy, overall liquidity increase is unavoidable. Due to what economics calls "general equilibrium effects," spending increases in one area inevitably spread to other areas. Also, supply chain improvements are difficult to achieve in the short term, and price increases due to global factors (oil prices, exchange rates) are hard to control. The bigger problem is market expectations. The signal that the government is expanding fiscal spending itself can raise inflation expectations, leading to actual price increases.
The government's solutions are theoretically sound, but in reality, it will still be difficult to completely block inflation pressure. The success of policies ultimately depends on timing, scale, and communication.
✅ International Cases and Policy Implications
Let's look at similar experiences from other countries and lessons for Korea.
First, lessons from US and European COVID-19 responses. The US conducted massive fiscal spending of about $6 trillion in response to COVID-19 in 2020-2021. This greatly contributed to short-term economic recovery, but inflation later soared to 9%, forcing the Federal Reserve to raise interest rates sharply. Germany, on the other hand, managed fiscal policy more carefully and maintained inflation at lower levels than the US. This shows that the scale and method of fiscal spending are very important. Korea's national debt-to-GDP ratio is still around 50%, leaving some room, but rapid fiscal expansion should be approached carefully.
Second, Japan's "lost 20 years" experience also provides important lessons. Japan continued economic stimulus policies after the bubble burst in the 1990s, but the effects were limited and only fiscal health deteriorated. This shows that in situations with structural problems, simple fiscal expansion alone cannot provide fundamental solutions. Korea also faces structural problems like low birth rates, aging population, and declining potential growth rate, so long-term structural improvements might be more important than short-term economic stimulus. Especially, investing in productivity improvements and innovation ecosystems would help sustainable growth.
Third, success stories of small open economies like Singapore and Switzerland are also worth referencing. These countries are similar to Korea in being small and highly dependent on external trade. But they achieved high growth through innovation and efficiency while maintaining fiscal health. They especially focused on continuous investment in education, R&D, and infrastructure, along with revitalizing private sector through regulatory reforms. Rather than simply pumping money for economic stimulus, Korea should design policies to improve economic efficiency and competitiveness. This is also a way to promote growth without inflation pressure.
International cases commonly show the limitations of fiscal policy and the importance of structural reforms. Korea should also pursue both short-term stimulus measures and long-term structural improvements in a balanced way.
4️⃣ In Conclusion
The dilemma between price stability and economic stimulus that the Lee Jae-myung government faces is a classic challenge in modern economics. Catching two rabbits at the same time is very difficult, but not impossible. The key is careful policy design, proper timing, and communication with the people.
The burden of living costs for ordinary people, symbolized by a single pack of ramen, is a real challenge that the government must solve. At the same time, revitalizing the Korean economy stuck in a low-growth trap is also an important duty. The problem is that these two goals can conflict with each other.
The government's proposed selective support and supply chain improvement strategies are theoretically sound. But in reality, there are still inevitable limitations. It's difficult to completely control the impact that a 20 trillion won supplementary budget has on the economy.
In this situation, the government should consider the following: First, maximize the efficiency of fiscal spending. Instead of simply spreading money around, focus on improving productivity and securing future growth engines. Second, policy coordination with the Bank of Korea is important. Fiscal and monetary policies should work closely together to avoid conflicts. Third, honest communication with the people is necessary. Acknowledge the limitations and side effects of policies and seek people's understanding.
Most importantly is the long-term perspective. While solving immediate difficulties is important, more attention should be paid to fundamentally improving Korea's economic structure. Without solving structural problems like low birth rates, aging population, declining productivity, and lack of innovation capacity, sustainable growth is difficult.
In the end, the success of Lee Jae-myung government's economic policies will depend on how well they build long-term development foundations for Korea's economy rather than short-term results. In difficult times, wisdom is needed to find creative solutions while maintaining principles.