‘Big Government’ and ‘the Capital Market’ at Odds - 경향신문
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Lee Hyung-ho, who served as Minister of Health and Social Affairs under the Park Chung-hee regime, said in an interview published in the Kyunghyang Shinmun on November 16, 1972, that if the economic development plan being driven by the government proceeded smoothly, “our country would before long become a welfare society ‘from the cradle to the grave’.” The slogan “from the cradle to the grave” embodied the grand ambition to build a social security system that enables everyone to live with human dignity from birth to the end of life.
At the time, Big Government was the spirit of the age. In the wake of the Great Depression of the 1930s and the Second World War, the active role of the state in overcoming the limits of the market was emphasized, and Keynesianism, which provided theoretical support for this trend, took the lead in economic policy. Yet as the role of the state grew, so did the costs. In the United States, the top federal personal income tax rate exceeded 90% from 1951 to 1963. The standing of Big Government began to wobble in the 1970s, as Keynesian prescriptions revealed their limits in the face of stagflation. Cultural backlash had already begun in the late 1960s: resentment toward bloated bureaucracies and authoritarian order sparked youth resistance across the West, symbolized by the ’68 movement.
From the 1980s, market-oriented economics symbolized by Milton Friedman gained strength. Tax cuts, deregulation, and privatization became the new zeitgeist. But history called Big Government back. Just as Big Government in the last century arose amid crises that markets alone could not solvethe Great Depression and warBig Government in the present day returned through the 2008 global financial crisis and the 2020 Covid-19 pandemic. Major companies were nationalized, and governments directly transferred cash to households and firms, scenes that no longer seemed unusual. This was a process of state intervention in problems the market could not resolve, but as governments grew accustomed to spending money, fiscal discipline loosened.
The shift has not been confined to progressive circles. Germany’s Christian Democrats, once a symbol of fiscal conservatism, last year accepted a loosening of the debt brake and large-scale infrastructure investment. The UK Conservative Party propped up employment during the pandemic with massive fiscal outlays, and the US Republican Party, while pushing tax cuts, appears to have no intention of reducing public expenditure. This is less a progression of conservatism than a retreat of fiscal conservatism.
It will be difficult for the tasks facing government to shrink in the years ahead. Long-term growth slowdown and population aging increase the need for social safety nets. Even when the overall economy grows, polarization that prevents the gains from being shared evenly also calls for a larger state role. Amid US-China tensions, securing stable supply chains for semiconductors, energy, and critical minerals is hard to achieve through the choices of individual firms alone. Issues once left to the market are now being shouldered by the state in the name of security and industrial policy. Korea is no exception. Buoyed by a semiconductor boom, this year’s growth rate is expected to exceed 3%, well above potential. Yet the warmth of the macro indicators is not reaching households. The phrase “rich corporations and poor households” no longer sounds unfamiliar.
Of course, companies are not all the same. Memory chipmakers benefiting from expanded investment in artificial intelligence (AI) are enjoying a record boom, but in 2025 about 43% of domestically listed manufacturers could not cover interest costs with operating profits. This is not unique to Korea. The surge of Chinese companies is threatening global manufacturing. Europe’s auto industry is locked in a grueling contest with Chinese electric vehicles, and Korea’s memory chipmakers face fears that the ‘ultra-gap’ over China could lose its ‘ultra’. That does not mean China’s domestic demand is booming. In JanuarySeptember this year, China’s retail sales rose only 1.1%, while fixed asset investment fell 7.2%. This is a paradox in which manufacturing growth coexists with weak domestic demand. In Japan and Taiwan, too, a gap has opened between the performance of the overall economy and what households feel.
The changes AI will bring add to the unease. Even if productivity improves, profits are more likely to accrue to capital than to labor. The public sector’s role in cushioning shocks to employment and wages and sharing the fruits of growth is bound to grow. The worry is that just as Big Government becomes necessary, government and the capital market are at odds. Long-term government bond yields are surging across many countries. Massive issuance of sovereign debt and concerns about fiscal sustainability are pushing rates higher.
No matter how sound the rationale governments cite for their spending, the bond market does not guarantee low yields on that basis alone. What investors ultimately price in is repayment capacity. Rising rates not only increase the government’s interest burden but also hit households and firms whose strength has already weakened. The more urgent the need for a social safety net, the higher the cost of financing the fiscal base that supports itthis is the dilemma.
The more progressive the government, and the more it emphasizes the state’s role, the more carefully it must communicate with the bond market and persuade it of fiscal sustainability. That said, a government that has failed to convince the bond market so far is unlikely to present a clear masterstroke going forward. Ultimately, a situation will arrive in which the central bank must again step to the fore to stabilize markets. In the wake of the global financial crisis and immediately after the pandemic, large-scale central bank purchases of government bonds lowered yields. It was also a powerful intervention in the bond market’s price formation.
Recently, the Bank of England reorganized the way it sells long-dated government bonds and temporarily suspended auctions for sales tied to quantitative tightening (QT). This is not yet a return to quantitative easing (QE) that resumes bond purchases, but it does show a moderation in the pace of tightening under market pressure. With inflation still unsettled, central bank bond buying cannot be a cure-all. There is also a need to guard against moral hazard, in which governments postpone fiscal reforms while the central bank props up the bond market. Even so, it is clear that the era of Big Government is colliding with the era of high interest rates. The problems governments must solve are multiplying, while the market’s patience in financing the bill is thinning. This is the most uncomfortable shadow hanging over the world economy today.
