Dr. Lee’s Article


The current economic slowdown, triggered by the collapse of the housing market, sub-prime mortgage mess, high oil prices, the huge deficit of the federal government and of a reportedly $800 billion trade deficit, is further aggravated by a bank run similar to that of the 19th century run on the banks, and may drive American economy into a possible depression. As stock prices plummet, an increase in the price of commodities may ignite fearful stagflation. A traditionally slump in business activity has been initiated by a bottleneck in the supply and demand of goods and services. But today’s turmoil in the financial markets appeared to play a dominating role in bringing up the business cycle in the commodity market. To be specific, the current financial crisis under way is basically an updated version of the wave of bank runs that swept the nation generations ago. A shadow banking system, that replaced the old system, in which savers had federally insured deposits in tightly regulated savings banks, induces savers to buy collateralized debt obligations created from securitized mortgages. In a shadow banking system, people are pulling money out of the shadow banking system and putting it into Treasury bills. When investors begin to lose confidence in security firms, they try to withdraw their invested money out of the shadow banking system and put it into government secured bills, as the same way depositors began to withdraw their cash out of bank. If depositors at one bank lose their money, depositors at other banks are likely to get nervous, setting off a chain reaction. As bank runs can be contagious, collapse of security firms like Merrill Lynch, J P Morgan Chase and Bear Sterns can be contagious, too. Bank runs cause a credit crunch, which leads to more business failures and more financial troubles, and so on.

When Bear Sterns, the nation’s 5th largest securities firm on Wall Street was on the brink of bankruptcy last week, the Federal Reserve Bank took quick action to prevent the possible chain reaction at other investment houses, in a fear that a domino effect might lead into economic chaos in the financial market.

With the intervention of the federal government into the free market, American capitalism is now applying a Keynesian doctrine which was applied during the Economic Depression in the 1930s. Contrary to the laissez-faire theory of Adam Smith’s “Invisible Hand”, the federal government finally helped arrange J P Morgan Chase’s acquisition of Bear Sterns in a fire sale by paying only $2.00 per share, down from $170.00 a year ago. Bear Sterns threatened to lay off 14,000 employees. We remember the wave of bank runs that swept across America in 1930 and 1931. This banking crisis of the 1930s was attributed to unregulation and unsupervsion of financial markets. As a credit economy dominates our economic system today, financial troubles at banks generate catastrophic economic problems such as a credit crunch, business failures and in the end a vicious circle of financial contraction.

The chairman of the Federal Reserve Board, Ben Bernanke, is making every effort to avoid the possible vicious circle of financial cataclysm, by mobilizing Keynesian methods of government intervention in financial markets with a lower interest rate policy.

In order to escape from this bad scenario-recession, to bank run, to depression – further cuts in interest rates, with the Fed to the rescue, is absolutely necessary to hopefully turn around the current financial turmoil by late summer of this year. Whether government intervention will be successful to stay out of the current economic trouble remains to be seen. Or, letting the market forces of supply and demand find a solution in the financial market and housing market should be a better long run remedy for the current economic cataclysm would be a hot issue to be debated in the time to come. If we take the latter option, we will witness a drastic restructuring of the financial organization of Wall Street and precipitous declines in the value of housing by perhaps as much as 30% in many areas, until an equilibrium price is determined by the supply and demand function.

Hubert Lee, Economist of BH Group. March 25, 2008 

With professor Paul A. Samuelson, MIT, Nobel Prize Winner in Economics in 1998.



With international attention of almost 200 million people around the world focusing on the historical music performance by the New York Philharmonic on February 25th, 2008 at Pyongyang, North Korea, the barbed wire curtain, erected between North and South Korea, seemed to be lifting up. This brings to mind the raising of the Bamboo curtain by the “Ping Pong” diplomacy of President Nixon, and the fall of the Berlin Iron curtain brought about by the rhetoric of President Reagan. The familiar “From the New World” symphony composed by Dvorak, “Arirang”, a beloved Korean folk song, as well as other works performed by The New York Philharmonic, moved even the normally stiff faced North Korean audience watching the play when the orchestra performed full-throated a piece deeply resonant for both North and South Koreans. The piccolo played a long, plaintive melody; cymbals crashed; harp runs flew up, and the violins soared. Tears began forming in the eyes of the staid audience, row upon row of men in dark suits, women in colorful high-waisted hanbok dresses. Sing Song diplomacy initiated by America marked a historical milestone in paving the way for uniting the tragically divided nation of 58 years. As a lone country, isolated from the rest of world, with dictatorial leadership, North Korea has been successful in producing nuclear weapons breaching all the international covenants, and used the weapons to threaten South Korea and the United States of America, in order to get oil, financial aid ,the capital for economic development, and grains. While the New York Philharmonic was playing notes of many symphonic works, on the street of Pyongyang, street signs still hang proclaiming “If America invades us, let’s sweep them from earth forever.” Against wishes of the people of both South and North, who so anxiously want unification for the past 58 years, the dream to unite the divided nation peacefully unfortunately never came true. However, we understand that consistent efforts will beat flipping, sunny beats gloomy, confidence beats whining. Sing Song diplomacy conducted by elegant and sophiscated Lorin Maazel was passionate and emotional enough to gradually change the mood of the closed society faster than expected. When this delicate symphonic diplomacy breaks down the barbed wire on the demarcation line, the every motion used by conductor Maazel in leading the 105 members of the orchestra in the performance of “New World”, “Lohengrin” of Wagner, “American in Paris” of Gershin will be reverberated as a phoenix on the wave of Arirang song. Dear leader Kim Jong IL, please open up your society to international society and you will get whatever funds you need to develop your backward countries. Please ride on the wave of globalism and benefit all the blessings an open society offers, not only for your peace for your rest of life, but also for the good people of your country. As the sound of New World Symphony, lead your nation into the new world. Open up and free the people from the bondage, break down the barbed curtain. One Korea, One nation under God, indivisible, shall be a nation of hope, dream and happiness. The performance of New World under the superior conductorship of Lorin Maazel at your capital Pyongyang glorified even my birthday. Your decision to free the people under depression will surely make you a hero in the history of world, as a leader of unification, human rights, and world peace. Remember 70 million good people, one Korea under God, indivisible, liberty, justice for all. 

With professor Lawrence Klein, University of Pennsylvania, Nobel Prize Winner in Economics in 1991.                     


Since the time when the Wealth of Nations by Adam Smith was published, the size of government has been debated; Neoclassical economists argued that an economy is most efficiently operated when it is run by market in terms of an efficient and optimal allocation of economic resources, therefore a smaller size of government is better than a large one. Meanwhile, the Keynesian school promoted the intervention of government in the national economy to correct market failure. Differences between these two schools regarding the validity of government intervention in the market economy are still hot issues among policy makers and politicians as well as among scholars. The economic theories from those two schools have greatly contributed to a deeper understanding of the modern economic issues all nations face today. In many cases, theory itself is not engaged in the problems of the actual world; solving problems of poverty, inequality and the environment… It remains somewhat ideological in nature. Such characteristics of economic theorists invited complaints and critique among many influential economists, when it was found that Nobel prize winners generally fall into one of three categories: too ideological, preoccupied with theory and mathematics. It is noteworthy to learn that Nobel winners in 1977- Gunnar Myrdal and Friedrich von Hayek- were so humble as to send a letter at the time of the award announcement to a Swedish newspaper rejecting the idea that the field of economics could claim a Nobel Prize on the basis of its scientific rigor. Amid the rigorous theory by the neo-classical economists that the size of government should be kept at bay for a minimum taxation to maintain defense, education and health, taxes are growing again around the world. According to OECD report, taxes in 2005 equaled the previous peak year of 2000 when 36.2 percent of gross domestic product in 30 industrial countries, including the United States, went to taxes at all levels of government. Taxes on developing nations today reach 36% of gross domestic product, as opposed to about 20% in 1975. The increase in the ratio of tax to GDP since 2000 has occurred despite cuts in tax rates on individual income and corporate profits. As a homeowner, I have witnessed property taxes rise 116% since 1980, and it will continue to do so in most part of the country. When the cost of government increases at a much higher rate than the growth rate of income, there will come a time for tax payers either to revolt or give up property to migrate to lower tax rate area to make both ends meet. When the combined taxes; (income, property, land and wealth) rise to 60% of GDP, market economy share out of public sector will be shrinking and the democratic capitalism based upon efficiency and productivity will lose its strength to socialism. The OECD date on the share of gross domestic product going to taxes increased since 1975 in most countries. Sweden, Denmark, France, Norway, Finland, Italy, Austria, Netherlands, headed to almost 50% from 35%, Britain, Spain, Germany, Portugal to 35 % on average, and Canada, Turkey, Ireland, Switzland, U.S., Greece, Japan, South Korea to 30% on average. An increase in tax receipts as share of economic activity would be desirable, while a greater individual income rate tax would choke economic activity. The greatest increases in the percentage of economic output going toward taxes since 1975 were in Turkey and Spain, where taxes more than doubled. There is some evidence that countries with higher tax-to-GDP ratios have a slower economic growth and have lower GDP per capita. As an example, Sweden, which has the highest tax-to-GDP ratio of the O.E.C.D. countries with the strongest economic performance over the past 20 years or so? Taxes in the United States-from the federal income tax and Social Security tax to local property levies- rose to 28% in 2006, from 25.6 % of gross domestic product in 1975. Professor Richard Musgrave, an expert in Public Finance and former Harvard professor, showed in his book (P 791) the relationship between Tax-GNP ratio and per capita income. It indicates that when a group of countries at widely different levels of development are compared the ratio is related positively to per capita income, in line with the rising-share hypothesis. The lower ratio for the low per capita income group and higher ratio for the high-income group. Using the cross-section data from a set of LDCs, he derived the equation: T= a + aYp +b X/Y + c E/Y + d A/Y, where T is tax revenue, Y is GNP, Yp is per capita GNP, X is export, E is output of extractive industries, and A is output of agriculture. We expect a, b, c. Coefficients to be positive while d will be negative. By plugging in the values of Yp, X/Y, E/Y, and A/Y for a particular country to calculate its presumptive tax effort or T/Y ratio and dividing the ratio by the actual T/Y ratio, we then obtain an index by which to compare the effort of this particular country with that of others. Considering population growth, expanded social insurance programs like universal health care and pensions, historically, there was a lot of justification to increase the size of government. However, if the ratio of tax revenue as a percentage of G.D.P approaches 50% or greater, the private sector of economy is gradually replaced by the public sector, damaging counter-productively the 200 year old tradition of an efficient capitalism. On the heels of ever-growing governmental intervention in the private market economy, how we define the optimum size of public sector and the most desired ratio of Tax-to-GDP would be a crucial issue that modern capitalistic nations have to deal with. How big is enough, how small is ideal for the size of government? Dr. Hubert Lee Economist Defender of Conservatism and Market Economy 

With professor James Tobin, Yale Univ. Nobel Prize winner in Economics in 1995.


The Nobel Prize in Economics was awarded to three professors; Professor Leonid Hurwicz, Professor Eric S. Maskin, at the Institute for Advanced Study in Princeton, N.J. and Professor Roger B. Myerson, at the University of Chicago. Leo Hurwicz, a professor emeritus at the University of Minnesota, has worked to show how mathematical economic models can provide a general framework for analyzing different economic institutions (like those of capitalism and socialism) as mechanisms for coordinating the individuals of society. Leo initiated the field of mechanism design theory that was further developed by two economists, who shared the prize. Professor Myerson engaged in the field of mechanism design because it promised a deeper understanding of the logic of conflict and cooperation at the most fundamental level that could possibly help build better social structures. His contribution to the research on the optimal design of auctions used by the Federal Communications Commission for selling radio frequency spectrum so that the government may collect ample funds brought him a share of the Nobel. Professor Maskin, who lives in the Princeton house once occupied by Albert Einstein, explains that mechanism design can be thought of as the reverse engineering part of economics. He emphasizes that designing a system that aligns private incentives with public goals will greatly improve the equal distribution of income and technical innovation. Mechanism design theory provides a framework for determining whether government taxation is called for, and if so, how to best design such as system. It borrows ideas from early game theorists like John Von Neumann and Oscar Morgenstern and applied them to the creation of more desirable economic arrangements. Building economic institutions, whether it is capitalism or socialism, will play a significant role in bringing a better income distribution and social welfare, not to mention enhancing private incentives of economic agents, thus their works contributing to rigorous analysis to the real world conditions. Their pioneering works developed a very sophiscated explanation of the interaction among individuals, markets and institutions, thus providing an unprecedented insight into shortcomings of the neoclassical economic theory of perfect competition, that have been inherited from the “Invisible Hand” by Adam Smith. Therefore, the award for the works of mechanism design theory opened a new opportunity and new intellectual tools to look into a different approach to enhance social welfare by focusing on designing new incentives and social institutions, to which traditional theory never paid attention. The Nobel committee shed a new light on improving the wellbeing of mankind with this award, for which we are grateful. Dr. Hubert Lee, economist Commissioner of Human Rights. Oct 16, 2007