The government announced market stabilization measures on July 24 to curb the high volatility of single-stock leveraged products. Trading in such products fell sharply afterward, but the Kospi eventually suffered a steep decline following a period of heightened volatility.NEWS1
Kim Dong-ho
The author is an editorial writer at the JoongAng Ilbo.
The tangled problems confronting Korea’s economy, from a housing market caught between soaring home prices and a supply cliff to a stock market buffeted by relentless volatility, may look like “market failures.”
Look closer, however, and behind them lies a “government failure” that suppresses the market’s autonomous functions. In other words, the government itself has become a major reason markets cannot adjust supply and demand on their own.
Recent examples make the point. The government sought an excessive increase in the tax burden on people who own one home but do not live in it, while approving immature financial products such as single-stock leveraged exchange-traded funds (ETF) to fuel the stock market rally. Koreans are witnessing how government intervention undertaken with good intentions can disrupt markets and push household finances toward the brink.
Nobel Prize-winning economist Milton Friedman identified the weakness of government intervention. He argued that government solutions are generally as bad as the problems themselves and often make them worse. His insight was that when governments ignore how markets work and try to control prices through moral injunctions against speculation or ideological assumptions that owners of extremely expensive homes should bear punitive taxes, markets respond with greater distortions in practice today.
Punitive taxes, including the comprehensive real estate holding tax and heavier capital gains taxes imposed after owners of multiple homes were branded speculators, produced a “lock-in” effect that discouraged listings. Some extremely expensive homes in Seoul’s Gangnam area have come onto the market to avoid heavier taxation, but a new balloon effect has emerged as buyers flock to supposedly less desirable “one good home” choices elsewhere.
Faced with fierce public opposition, the government withdrew plans to reduce the basic comprehensive real estate holding tax deduction for nonresident single-home owners and raise the ceiling on their tax burden. A policy introduced without sufficient regard for market realities was forced into retreat.
Yet the government’s “my way” approach appears intact. President Lee Jae Myung said Korea should “prepare for a plunge in housing prices” even as Seoul apartment prices had risen for 114 consecutive weeks. Market prices, however, are notoriously difficult to predict.
Liberal economist Friedrich Hayek described the belief that people can perfectly design and control society and the economy as a conceit of knowledge. Markets in constant flux do not move according to the thinking of one or two people. Indeed, whenever the government has tried to control prices, the market’s capacity for autonomous adjustment has been damaged.
The Blue House replaced ministers responsible for taxation and real estate, then accepted the resignation of its policy chief. Public sentiment has deteriorated over confused housing policies and risks from inadequately prepared financial products, ultimately costing the administration its policy command center. But what needs changing is not merely the personnel. The philosophy behind the policies must change. Nothing will improve unless the government escapes its confirmation bias that it can beat the market.
The fatal malfunction of government omnipotence has been repeated in the stock market. The Kospi’s rise past 5,000 appeared to demonstrate the success of government value-up policies, including revisions to the Commercial Act. In reality, the driving force was an unexpectedly powerful semiconductor boom fueled by artificial intelligence.
The government touted the rally as a policy achievement. That misconception led to an expansion of the National Pension Service’s ceiling on domestic stock holdings and the hasty launch of single-stock leveraged ETFs. The market responded to these policy misjudgments with corrections in technology and semiconductor stocks and volatility in high-risk products subject to negative compounding effects. Investors exposed to those risks suffered substantial losses.
A bigger problem is that the bill for the government’s efforts to dominate markets is now coming due. The Bank of Korea raised its benchmark interest rate to 3.0 percent, citing inflationary pressure, and signaled that further increases could follow. Amid contradictory policies that promise to increase housing supply while tightening loans even for genuine homebuyers, investors who stretched their finances to buy homes or stocks on borrowed money now face the double burden of surging interest costs and greater stock market volatility.
The only way to reduce these risks is a return to market principles. Market fundamentalism, of course, should also be resisted. But bind the market’s hands and feet and it will return as a monster.
However benevolent its intentions, the government must escape the dangers of groupthink and listen to the market’s diverse voices. It should go beyond partially easing restrictions on nonresident single-home owners, reconsider excessive tax burdens from the ground up to increase available listings and focus on managing stock market risks rather than trying to lift share prices.
The government should restrain its regulatory instincts so Adam Smith’s “invisible hand” can function normally again. That is the only way to reduce the unintended consequences of government omnipotence destabilizing the very markets it seeks to control.
No government can beat the market. Bold change is needed before it is too late.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
