How to feed a moral hazard

The problematic bills will only worsen the problems and breed A moral hazard through market distortion.

Ha Hyun-ockThe author is an editorial writer of the JoongAng Ilbo.

There is little discretion in fiscal spending. Possible confusion and disarray in the spending process go neglected. The government has lost judgment on spending it should be careful about. Several bills going against market principles are expected to pass through the outgoing legislature on May 28, just a day before it expires.

The majority opposition Democratic Party (DP) has motioned revisions to the Grain Management Act and the Act on Distribution and Price Stabilization of Agriculture and Fishery Produce. The revision in the Grain Management Act enforces a mandatory government purchase of excess rice crops due to a price fall from surplus yield. The amendment in the price stabilization act requires the government to cover the margin for farmers if crop, fruit and vegetable prices fall below a certain level. A review committee sets the threshold in light of the average production cost and inflation rate.

The DP claims that the farm price stabilization program can ease the burden for consumers grappling with spikes in fresh food prices and stabilize agricultural products and distribution. It sounds catchy to consumers who cannot go near the fruit and vegetable stand due to the appalling prices.

But the law serves the producers — not consumers — by setting the price floor. Producers no longer would have to worry about how much their produce prices fall because the government will cover the losses anyway. Their practical choice is to increase supply regardless of the quality. Oversupply is the evident consequence.

Bias toward government-covered items can distort the general supply and price structure of agricultural produce. Farmers will shift to crops easy to grow and sell thanks to the government guarantee. The favorite will be rice. Rice farming is easy with an automation rate of 99 percent. The government and experts expect the two revisions to only worsen excess rice, a crop already with 100 percent self-sufficiency.

The revisions can force farmers to shun difficult crops and items uncovered by the government. A consequential supply shortage of these items will only fan their prices and disrupt the overall food prices and supplies. Owners of restaurants and other eatery establishments are opposing the amendments out of fear of a spike in raw material prices.

Another issue is the financing. The government estimates it needs more than 3 trillion won ($2.2 billion) to purchase and stock the excess rice every year. The Distribution and Price Stabilization Act also calls for a heavy budget. According to the Korea Rural Economic Institute, about 1.2 trillion won would be required a year to cover the minimum prices of five vegetable items. Cost and budget can snowball if the list goes longer due to farmers’ protests on the fairness of the subsidy. The government will have little left to spend on the overall agriculture industry if the bulk of the budget goes to covering for a select farm produce. It is why Agriculture Minister Song Mi-ryung criticized the bills for undermining our agricultural industry instead of stabilizing it.

Another controversial bill the DP is out to railroad is a special rescue bill for tenants. It requires the Korea Housing & Urban Guarantee Corporation or other state funds to buy the bonds backed by lump-sum rent deposits to return the money to the tenants first on behalf of the landlords and later redeem the amount through the exercise of the right to indemnity. The opposition insists on passing the bill after defining deepening rent fraud as “a social disaster.”

However, a government interfering to cover the damages from a private contract can leave a bad precedent. Other fraud victims could demand similar relief, citing the principle of fairness. The government indemnity can only fan rent frauds. Tapping into the reserves of the National Housing Fund, which administers savings for housing subscriptions, to relieve rent fraud victims also can be hazardous. The government worries about massive losses in the reserves if the savings of the people without homes go to pay tenants on behalf of delinquent landlords.

The problematic bills will only worsen the problems and breed a moral hazard through market distortion. The social cost will eventually be billed to the people. Valuable tax money is poised to become easy money to finance the populism of the opposition.