On March 12, National Development Council Minister Kuan Chung-ming (管中閔) gave a report to the Chinese Nationalist Party’s (KMT) weekly Central Standing Committee meeting, saying that although a low inflation rate could increase real purchasing power, it would also increase the unemployment rate. It seems that he made the remarks in a bid to explain the recent sharp price hikes in the prices of daily necessities.
President Ma Ying-jeou (馬英九), who doubles as KMT chairman, agreed with Kuan’s remarks, which has caused a lot of discussion and criticism among the public. Some even joked that the Nobel Prizes in economics should be awarded to Ma and Kuan for their “contributions” to the field of economics.
It was not very surprising to hear Ma and Kuan’s comments, because although the causal relationship between low commodity prices and rising unemployment is not absolute and could even be wrong, it still seems as if it were possible to use a traditional Phillips curve to describe a negative relationship between commodity prices and unemployment.
The current situation with high commodity prices accompanied by high unemployment is closer to stagflation, which cannot be described using a Phillips curve.
However, the government says that commodity prices are at a reasonable level, and that the jobless rate has declined constantly since 2009, which means that stagflation is not a problem. Since that is the case and everything then is alright, one can only wonder why Ma and Kuan made these statements with their absurdly mistaken cause-and-effect logic. It is no wonder they were mocked.
However, the public anger over this issue is quite confusing. Remember that Ma was elected president in a landslide victory in 2008, despite proposing the absurd policy of expanding domestic demand in order to fight inflation. By comparison, his recent statements really are not a very big deal.
How could the expansion of domestic demand possibly reduce inflation? In a normal situation, the expansion of domestic demand will only result in rising inflation. Anyone with a basic knowledge of economics should be stunned by such a claim, and I even thought that it was a campaign-time slip of the tongue or a joke.
Therefore, it was very surprising, when, after Ma came to power, the Council for Economic Planning and Development endorsed this policy, saying that in response to both the surging international oil prices and the US sub-prime mortgage crisis, which are causing the downturn of the global economy, the government plans to expand domestic demand by increasing local construction in order to relieve the impact of commodity price hikes and stimulate economic growth. The Ma administration’s level of economic expertise was thoroughly disappointing. Taiwan’s current economic predicament has showed that my concern back then was justified.
As the Chinese saying goes: “Three feet of ice is not the result of one cold day.” Judging from Ma’s and Kuan’s economic knowledge, there is no reason to be surprised over Taiwan’s economic situation.
Lin Hsuan-chu is an associate professor at National Cheng Kung University’s Department of Accountancy.
Translated by Eddy Chang