Analysis: Economic theory heats up South Korean presidential race

SEOUL, May 22 (UPI) -- An economic theory has sparked controversy during South Korea's presidential campaign, with the opposition leader introducing a classic economic metaphor called the "hotel economy."

The concept is straightforward. A traveler visits a small town and pays a hotel $100 as a deposit. The hotel owner uses the money to pay off a debt at a furniture store, whose operator uses it to buy chicken at a nearby restaurant.

The restaurant owner spends it at a stationery shop, and the shop owner uses it to repay her debt owed to the hotel. Finally, the traveler cancels the reservation, receives a refund of the original $100 and leaves town.

Although no money actually remained in the town, multiple transactions occurred, debts were cleared and local commerce was activated, according to Lee Jae-myung of the main opposition Democratic Party.

A Gallup Korea poll conducted Monday and Tuesday showed that Lee led with 46%, ahead of Kim Moon-soo of the ruling People Power Party, who had 34%.

Lee, a frontrunner in the campaign, is seeking to succeed impeached President Yoon Suk-yeol, who was removed from office following his brief martial law declaration late last year. The election is slated for June 3.

"No new money was added, but the money circulated. That's what an economy is," Lee said during his campaign speech last week in Gunsan, around 135 miles south of Seoul.

Lee used a similar analogy during the 2022 presidential election, where he narrowly lost to Yoon. The theory is widely seen as a rationale to support his signature policies of expanding fiscal spending, despite concerns about the growing national debt.

In particular, he is a strong advocate for local currencies, or regional government-issued vouchers that can be used only within a specific city, town or province to encourage local spending.

The ruling camp criticizes Lee's claims, as Rep. Choi Eun-seok, a former businessman, wrote in a social media post.

"The $100 deposit a hotel receives is not considered revenue until the guest actually stays at the hotel. Until then, it is regarded as a liability -- money that still belongs to someone else. Anyone with even a basic understanding of financial statements would never make such an argument," Choi said.

"It's nothing more than a deceptive scheme masked in sweet talk, geared toward misleading the public and pushing through massive local voucher programs that have no real economic impact, all funded by government finances and national debt," he added.

People Power Party's chief spokesman Shin Dong-wook concurred.

"What Lee proposes is a logic that simply defies reality. He is trying to create a narrative to justify his populist spending programs designed to win votes," Shin said in a phone interview.

"Such reckless spending will result in higher sovereign debt, which our future generations will have to bear," he said.

In response, Lee countered that his critics lacked basic economic knowledge.

"When the economy is not good, money needs to circulate within local communities for things to improve," he stated during a campaign speech Tuesday in Paju, north of Seoul.

"If money circulates at the neighborhood fried chicken shop and sales go up, the owner might have a drink and buy more chickens, as well as extra seasoning. Then, the local economy will get better, even if just a little. This is called the 'multiplier effect,' but there are fools who don't understand it," he said.

Many economists appear to remain skeptical about the validity of the hotel economy theory.

Lee Phil-sang, an adviser at Aju Research Institute of Corporate Management and former Seoul National University economics professor, told UPI that the theory was based on a flawed assumption that the country's marginal propensity to consume, or MPC, is one.

"South Korea's MPC falls short of 0.3, which means that if someone receives an extra $100, she spends less than $30 of it. Hence, the hotel economy does not hold up and will end up raising government debts," he said. "In addition, there is the crowding-out effect. Increased government spending can reduce private sector activity."

Economics professor Lee Yoon-soo, from Sogang University in Seoul, agreed.

"If the Korean economy is struggling due to a lack of liquidity, then injecting more funds may be a good solution. But in my view, the real problem lies in declining productivity. That's why some economists question the validity of the example," he said.

By contrast, Ha Joon-kyung, an economics professor at Hanyang University, noted that the $100 story example could be a tool to clarify economic concepts.

"The hotel economy theory simply illustrates a situation in which the local economy can be revitalized by keeping money in circulation without additional monetary expansion," Ha wrote on his social-networking account. "It is just an example intended to help explain economic principles more easily."