Resisting the Ghouls

It is Day 3 of our universal house arrest (and I think that is a more accurate description than “lock down”) here in New Zealand, and I’m well set up to carry on working. I have every videoconferencing application known to mankind on my desktop Mac – Microsoft Teams, Zoom, Skype, Facetime, Jabber, etc. So far, the internet is working well despite everyone else in my household bingeing on Netflix, Amazon Prime and Apple TV+. Yesterday afternoon I was even able to participate in my usual “Friday Fours” – the regular drinks I have with a group of associates – by videoconference. The biggest topic for discussion was how to buy alcoholic spirits in a Puritan lock down. Supermarkets, which are considered essential services and remain open, can sell beer and wine but not spirits. Other liquor outlets have to remain closed, unlike in Australia where “Bottle-Os” (take out liquor stores) are considered an essential service. You have to hand it to the Aussies, they have their priorities right!

I was listening to a podcast yesterday and one of the presenters was discussing Covid-19 with his elderly father, who was a doctor until retirement. The presenter asked how he would’ve coped with the virus in the heyday of his medical career during the 1960s and 1970s. The old man said they wouldn’t even have known it was a distinct virus, not having the DNA analysis we have today, and would’ve regarded it as just a form of influenza.

The story made me realise that some of our worst concerns are subject to what I would call information arrogance – a case of a little knowledge being a dangerous thing. This is the problem with climate science – we know that an increase in carbon dioxide in the atmosphere ought to lead to an increase in average temperatures, all things being equal. The problem is, all things are never equal in real life, and we understand very little about the influence of other factors in climate change such as cosmic radiation, the sun’s radiance, the formation of cloud, and the absorption of CO2 and heat in the oceans. The same is true of Covid-19. In most countries, we don’t know the true incidence of the virus because most people haven’t been tested. We don’t know the real mortality because we’re only testing people we think have already got it.

Perhaps the most unsurprising thing to me about the pandemic is that it is being exploited by the usual ideological thugs to push their dystopian agendas. We have already seen numerous claims that “there are no libertarians in a pandemic” and “we’re all socialists now”. The exploitation of these difficult circumstances by those on the left to justify their illiberal political views has been described by Brendan O’Neill of Spiked (an old leftie himself) as the “socialism of ghouls”. He goes on to say:

If your overarching thought upon observing a crisis of this magnitude is to feel ‘vindicated’, almost to welcome the crisis as an opportunity to promote your political worldview, there is something wrong with you. 

Indeed.

There has been much praise of China's response to the pandemic, despite that country’s regime being complicit in the spread of the virus. The idea that only a highly centralised authoritarian state could respond effectively to the virus outbreak doesn’t stand up to the most cursory examination. If China had been a more free and open country, instead of arresting those who sounded the alarm, the virus might have been confined to Wuhan. Other repressive regimes, such as those in Iran and Russia, have also botched the response. You could counter that Western governments haven’t exactly covered themselves in glory in responding to the virus and certainly the New Zealand Government underestimated the risk and responded too slowly, but others such as South Korea and Singapore have managed to bring the pandemic under control comparatively quickly.

We have heard much about how we are all in this together, but ultimately our response to the pandemic is personal and individual. We may be under the confinement orders of our governments, but we each have to take responsibility for how we respond to the circumstances in which we find ourselves. In particular, our ability to recover from this will depend on the decisions of millions of individuals - decisions about whether to invest, start a business, apply for a new job, buy a house, get married and have children, or take early retirement. Governments need to remember this once the pandemic is over. If they lock in the measures they have sold as a temporary necessity, and make all of us dependent on the state for ever after, we may never fully recover economically and socially, and the ultimate cost will be far higher than that of the pandemic itself.

Liberty has been the driver of the huge improvement in the health and prosperity of human beings all over the world for more than two centuries, and we are currently sacrificing that driver to bring this virus under control. The worst effect of the pandemic would be to make that sacrifice permanent.

India, Singapore and New Zealand

I have just returned from a few weeks in India. It was my first visit to the subcontinent and it was an amazing experience. India is, to use a hackneyed phrase, a country of contrasts. I saw some of the most beautiful scenery I have seen anywhere (the Thar desert in particular), delved into the histories of what were some of the most advanced civilisations in the world, and met some amazing people from all levels of Indian society. But India is also, to borrow a descriptive term from Mr Trump, a shithole - somewhat literally (in view of the amount of animal and human excrement everywhere) as well as figuratively. Fortunately for Indians, their circumstances are rapidly improving as they have ditched the statism and socialist economics of the post-Independence period to adopt, in recent decades, free markets and deregulation. They have a long way to go but as with every experiment of its type, they are realising the fruits of capitalism. Extreme poverty has reduced from nearly 60% of the population in the 1970s to around 20% today, despite the population roughly doubling over that period. In fact, so successful has been India's economic revolution been that some of its biggest problems today are those associated with advanced economies - traffic congestion, air pollution and the rising cost of housing.

Singapore is a place that I have visited numerous times since the 1980s and over that time I have seen it progress from an ambitious but relatively poor city state to the one of the most prosperous countries in the world. When I first went there, Singapore's GDP per capita was 40% below New Zealand's, its dollar was worth about one-fifth of ours, there were still slum areas outside the central city, and the water wasn't safe to drink. Now its GDP per capita is 25% higher than ours, its dollar is more valuable, the entire island is clean and green and modern, and Singaporeans pride themselves on having drinking water equivalent to Norway's. It is not exactly a paragon of democracy, with the ruling People's Action Party having been in power since self-government was granted by the British in 1959 and two of the three prime ministers since then being Lee Kwan Yew and his son Lee Hsien Loong. However, Singaporeans seem well-satisfied with their political leadership and choose not to concern themselves with politics but rather get on with managing their own (increasingly prosperous) lives.

New Zealanders, by contrast, seem obsessed with politics and expect the government to micro-manage every aspect of their lives and solve every problem that confronts them. We imagine ourselves to be rugged individualists with a can-do attitude, but the reality is that we are like infants in our expectations that Nanny State will take care of us. Indians and Singaporeans alike would regard this dependency as pathetic and unbecoming. The more I travel the world, the more I realise that New Zealanders are complacent and far too self-satisfied. Our economic trajectory is not good - we continue to fall behind comparative nations in income per capita and productivity, as the following graphs show.

The graphs show that the decline in our relative economic position is a long and intractable trend. Our GDP growth has averaged around 2.5% in recent decades, whereas India and China have averaged 7.5% and 9.5% respectively. There is no reason to expect these trends won't continue and the ultimate result is that China will have a higher GDP per capita than New Zealand by about 2040 and India well before the end of this century. Is this what New Zealanders really want?

I wouldn't want to live in India today and while Singapore has its appeal, New Zealand still beats it on lifestyle. But the lifestyle of a nation is in large part a factor of its relative wealth - in other words, shitholes are such because they are poor. What is our lifestyle going to be like when we are one of the poorest countries on Earth, rather than one of the wealthier ones? It is a sobering thought.

Niall Ferguson loses the plot

I have been a fan of the renowned economic historian Niall Ferguson for many years. The bookshelves in my office, where I am writing this, contain his works The Ascent of Money, Empire and Civilisation. I think he added a lot to our understanding of the extraordinary dominance of Western civilisation since the 15th Century with his identification of six 'killer apps' that drove the West's political, economic and military growth - competition, science, the property owning democracy, modern medicine, the consumer society and the Protestant work ethic. Therefore, I had high expectations of Ferguson's latest book, which I bought a few months ago but only got around to reading over the summer holidays.

The Square and the Tower is about networks and their ability to challenge established hierarchical political and social structures. Ferguson starts with the Illuminati, the secret society established in Munich in the 18th Century whose membership came to include princes, archdukes, clergymen and intellectuals, and which some people claim is still around, pulling the strings of power like some grand puppet master. Ferguson, to his credit, dismisses most of the conspiracy theories, for example pointing out that the Illuminati was shut down by the Bavarian government within a few years of its establishment. 

Most of the book is Ferguson's usual mix of facts, analysis and interesting connections, but where it parts ways with his earlier works is in its conclusions about current day events. Ferguson may dismiss conspiracy theories in the case of the Illuminati but is happy to embrace them in respect of Donald Trump, giving plenty of credence to the "Russia hacked the election" conspiracy and ironically blaming "fake news" for Trump's 2016 election victory and Brexit. 

He goes on to paint internet and social media giants such as Google and Facebook as the present day Illuminati and thinks they are "profoundly inegalitarian" because they are still largely owned by their founders. He seems to pine for a resurgence of totalitarianism when he says, "A generation mostly removed from conflict - the baby-boomers - had failed to learn the lesson that it is not unregulated networks that reduce inequality but wars, revolutions, hyperinflation and other forms of expropriation." This is reinforced when he claims equivalence between China and America, i.e. "both states are republics, with roughly comparable vertical structures of administration and not wholly dissimilar concentrations of power in the hands of the central government." Seriously, Niall?

In some of the later chapters he demonstrates his ignorance of the technologies on which he comments, for example when talking about digital currencies he says, "Bitcoin seems extraordinarily wasteful of computer resources because of the fact that it is 'mined' [on computers]." It is precisely because it involves the work of huge numbers of computers that gives Bitcoin its value, something I would have thought the author of "The Ascent of Money" would be able to appreciate. But, not to worry, if Ferguson is right, we'll all be using China's crypto-currency in future. 

Trump is right on China

China is a totalitarian dictatorship. The Chinese Communist Party continues to maintain an iron grip on power in spite of a degree of economic liberalisation over the past 40 years. The regime made it clear that it was not willing to countenance any challenge to its political hegemony in 1989 by unleashing its military might against its own defenceless citizens in Beijing's Tiananmen Square. If there was any doubt about the Communist Party's continued intentions in this regard, it has been dispelled by the more recent repression of the independence movement in the western Xinjiang province, the blocking of two separatist candidates from taking their seats in the Hong Kong legislature, and the continued imprisonment without trial of anyone who speaks out against the government such as the world-renown artist Ai Wei Wei. Most recently the Chinese government has begun to assert its military might outside its borders, particularly in the South China Sea where it has taken control of, and built military bases on, a number of small islands and atolls that are much more legitimately the territory of Japan, Vietnam, Phillipines and Indonesia.

In 1971 the United Nations switched from recognising the Nationalist China regime in Taipei to the Communist regime in Beijing. This was a expedient solution to the dilemma that faced the international community - the largest national population on Earth was represented by a government that had lost a civil war and now only governed a fraction of the original nation. Other countries that were similarly divided, such as Korea and Germany, split into separate nations both of which were recognised by the international community, but the Communist regime in Beijing has been completely intransigent on the question of separate recognition for Taiwan, and its 'One China' policy continues to prevail in international affairs.

Taiwan today is a relatively free, democratic and liberal state with one of the highest standards of living in the region. It is peaceful and non-aggressive but has a powerful military to deter invasion by the Communist forces just 100 miles away. The ruling Democratic Progressive Party supports independence from mainland China but all parties in Taiwan measure their language on the issue for fear of provoking the enormous dragon across the strait.

The international community has tiptoed around China's sensitivities for decades, tolerating the Communist Party's crimes against its own people and its belligerent foreign policy with barely a diplomatic frown. The United States in particular has courted China since Richard Nixon broke the isolation with his historic visit in 1972 and under Barack Obama there has been scarcely a peep from Washington about China's increasingly aggressive expansion into the South China Sea.

Donald Trump is still a month from his presidential inauguration and yet he is signalling a very different policy towards China. It started with his acceptance of a congratulatory telephone call from Taiwanese president Tsai Ing-wen, which prompted a chilly reaction from Beijing. Trump was not phased by the critical response and in an interview he stated that his acceptance of the One China policy is linked to China's positions on its currency (which he claims China has deliberately kept undervalued), the South China Sea expansion and its continued support for North Korea.

History has taught us that appeasement of tyrants is ultimately more dangerous than standing up to them. Ronald Reagan took a much more aggressive stance towards the Soviet Union than his predecessors and history ultimately judged his actions to be right. China is in many ways a more challenging adversary than the Soviet empire was in the late 1980s, and Trump has not exactly demonstrated the composure and judgement that Reagan, for all his faults, showed as president. Trump is playing a bold hand and whether he has the nous to force China into compromise on the issues he has identified, or he precipitates a trade war or worse, is yet to be seen. But he is right to draw a line between support for the One China policy and the issues he has raised. It is past time for the international community to grow a spine in its dealings with China.

ACLU report on Chinese 'credit score' is frightening

Every now and then a news item appears that at first glance looks to be not very consequential but on examination turns out to be something that signals a real tipping point in the political and social environment. Such an article appeared on the ACLU website earlier this month and was subsequently picked up by a few libertarian news sites (but, interestingly, not to any great extent by the mainstream media).

The article states that China is introducing a "comprehensive credit score" system whereby everyone in that country is given a score by the government that is linked to their national identity card. The ACLU article states that,

In addition to measuring your ability to pay, as in the United States, the scores serve as a measure of political compliance. Among the things that will hurt a citizen’s score are posting political opinions without prior permission, or posting information that the regime does not like...

It will hurt your score not only if you do these things, but if any of your friends do them. Imagine the social pressure against disobedience or dissent that this will create.
Anybody can check anyone else’s score online. Among other things, this lets people find out which of their friends may be hurting their scores.

Also used to calculate scores is information about hobbies, lifestyle, and shopping. Buying certain goods will improve your score, while others (such as video games) will lower it...

Sadly, many Chinese appear to be embracing the score as a measure of social worth, with almost 100,000 people bragging about their scores on the Chinese equivalent of Twitter.

I should point out that some commentators have questioned the accuracy of the report, but it is consistent with the Chinese Communist regime's already rigid control of the internet and social media.

Paul Rahe on the Ricochet blog says, "Totalitarianism is a function of technology. Prior to recent times, governments might claim to be absolute, but they did not have the record-keeping, administrative capacity to make good on that claim. Now they can do so far more easily than ever before — without hiring armies of spies. All that they have to do is follow the population on the Internet and use computers to collect and analyze the data."

I have blogged against the encroachment of government electronic spying on all of our private communications such as the Telecommunications Interception Capability and Security Act brought into law by the New Zealand Government last year. Governments always defend such laws by saying they will only be used against threats to national security. But all around the world governments are also introducing laws against so-called 'hate speech', the definition of which is usually speech that offends someone, with the interpretation of what that means left to officials to decide. Where these two types of law intersect - the means to monitor all social interactions and the criminalisation of unacceptable speech  - you have the ingredients of totalitarianism.

The Chinese credit score, if true, takes the freedom of social media and turns it into what undoubtedly will be a very effective and pervasive social and political control tool. In East Germany one in three of the population were informers for the Stasi secret police. Under this system, China will turn almost everyone into an informer for the state.

We in the West should fear China. At a time when the Chinese leader, Xi Jinping, is being fêted in Britain, the Chinese are rapidly expanding their occupation of isolated, disputed islands in the South China Sea and continue to viciously suppress any political opposition at home. But we should fear them most of all because they lend legitimacy to Communist dictatorship and because their clout on the world stage turns our governments into appeasers of their authoritarian rule. 

Totalitarianism is infectious and we all risk catching the disease. That is why their credit score is so frightening.

Communist Vietnam is more capitalist that the West

I am on holiday in Vietnam and yesterday went to Ho Chi Minh's tomb in Hanoi. The Vietnamese Communist regime has developed all the trappings of a Leninist persnality cult around their former leader, right down to his carefully preserved corpse on display in a glass sarcophagus in a monolithic tomb. But it is apparent that Ho Chi Minh was a modest man. Near to the tomb and the immense French-colonial Presidential Palace that his Party cadres wanted him to occupy, is Ho Chi Minh's house, a modest bungalow on stilts in the style of traditional houses of the Vietnamese Northwest. The house suggests a self-effacing man who wanted none of the trappings of leadership.

Today, Vietnam is like a mini-China. Still ruled by a Communist Party that does not tolerate direct political challenge, nevertheless it is in practice a booming, dynamic place that in many ways seems more free than New Zealand. It is in everything but name a capitalist society, where most urban people run small businesses and rural people private farms, and the state interferes little with their lives. There is no free health or education, other than for the families of Party apparatchiks and former soldiers, and no welfare system. Indeed, if the anarchy of the traffic on the streets of Hanoi is anything to go by, the Vietnamese state seems to consider its citizens are perfectly capable of managing their own lives and ordering their affairs with little help from the government.

Whenever I visit a place like Vietnam, it becomes apparent that the future belongs to the people in such booming, unconstrained economies. In the West, we have become profligate and coddled by our governments, with the result that are increasingly unable to compete. It started with manufacturing, initally of unsophisticated product such as toys and clothing, and more recently of electronics and other high-technology goods. In places like India and the Phillipines, they have moved on and now lead the world in services such as call centres and software development. The West still leads in the development of intellectual property-based services such as design and entertainment, but there is no reason to doubt the Chinese and Indians, and eventually, the Vietnamese, will crack those industries too.

It is ironic that we in the West like to style ourselves capitalist societies. There is no doubt that Communist Vietnam is more capitalist in pretty much every way than any Western economy. Perhaps the only advantage we have is our lack of corruption and our rule of law, but it is no coincidence that these are the areas to which Chinese president Xi Jinping has turned his attention. It is apparent from the palatial houses and flash cars in the area of Hanoi where government officials tend to live that Vietnam also has a long way to go in this regard. But my guess is that, like China, this will become a necessary focus of the Vietnamese leadership as they strive to deliver economic growth and a standard of living to match our own. 

In the race to economic superiority, I know who I would put my money on.

Fonterra a Perfect Example of Crony Capitalism

New Zealand faces a number of major economic risks with the world economy continuing to experience slow or no growth, but one of the worst is our dependence on the dairy industry.  This country of just over four million people has the largest dairy export industry in the world, accounting for around one third of global cross-border dairy trade.  It provides one quarter of New Zealand's merchandise export earnings, worth nearly $15 billion last year.  This is all good, I hear you say, and you'd be right except for one thing - the entire trade is controlled by one company - Fonterra.  

Fonterra traces its history to the formation of the New Zealand Dairy Board in 1930.  It is a cooperative structure, owned by its farmer suppliers.  From its beginning, the organisation has had a statutory monopoly on the export of dairy products and ownership is restricted to its farmer suppliers.  In 2001, the Dairy Board was merged with the two dominant cooperative processing companies, NZ Dairy Group and Kiwi Dairy Company to form a monolithic, vertically-integrated organisation that controls every aspect of production and distribution of New Zealand dairy products from the farm gate to the overseas supermarket.

The monopoly has produced two negative effects, both of which were predicted by those who opposed the 2001 merger - it has led to domination of the domestic market with correspondingly high prices for New Zealand consumers, and it has created a systemic risk of market and brand failure. The latter has been demonstrated twice in the last few years, both times in the lucrative Chinese market - firstly with the horrific 2008 scandal involving Fonterra subsidiary Sanlu that led to the deaths of six babies and the hospitalisation of 54,000, and most recently with the Chinese suspension of imports of Fonterra's milk and whey powder due to botulism.  As this article in Bloomberg points out, the impact of this latest incidient is likely to go beyond Fonterra and the dairy industry. It has already led to a decline in the New Zealand Dollar and knock-on bans in other countries such as Sri Lanka.   

The failure of one company ought not to affect an entire economy.  In a competitive market, other companies with equally strong brands would be largely unaffected and would step in and fill the gap in exports caused by the failure of the offending brand.  This cannot happen with New Zealand dairy exports because of Fonterra's statutory monopoly.

Contrary to popular belief, monopoly is not the natural end-state of capitalism.  Monopolies may occur in a totally free market but only where the dominant player has some huge competitive advantage such as control of critical patents, and even then such monopolies are usually short-lived. Perhaps the greatest monopoly of the them all was John D Rockefeller's Standard Oil but even his monopoly wasn't absolute and was relatively short-lived - being confined to lighting oil in the late 19th Century. Contrary to popular belief, the end to Rockefeller's monopoly didn't come from the US antitrust Sherman Act enacted in 1906 (although this was vindictively used to break up his company) - Standard Oil's dominance was already being eroded by the innovation of electric lighting and the development of new oil products for automobile fuel.  In a free market, all monopolies are short-lived because they can never counter all the likely sources of innovation over the long term. We have seen this with Microsoft, which has not been able to extend its dominance in desktop PC software to the new markets for smartphones and tablets.

The one situation where monopolies do thrive, however, is when they are government-mandated.  The only reason Fonterra and its predecessors have monopolised the New Zealand export dairy market for so long is their legislative protection.  A free market might have produced a dozen Fonterras by now.  If you want to see the potential, you need only look at another dairy cooperative in another country that was set up at the same time - Nestle in Switzerland.  Nestle has grown without the legislative protection of Fonterra to be a highly-diversified food manufacturing company and one of the best known brands in the world.  Fonterra by comparison, has remained largely a commodity producer.  A ban on the import of Nestle milk powder products to China would have minimal effect on the whole of Nestle's business and would be virtually unnoticed in Swiss export trade figures.   

We seem to especially like government-mandated and government-owned monopolies in New Zealand. Our energy, transport and accident insurance markets are totally dominated by such structures.  We pretend that these monopolies are the best for New Zealand but we never try to assess the opportunity costs.  It is no surprise that we have no other large, internationally-competitive private sector companies of the scale of Fonterra. So much of our capital stock in tied up in these protected, crony capitalist entities that there is little incentive or appetite to make New Zealand the home of an Apple, Nokia or Ikea. Perhaps that is one of the reasons New Zealand continues to languish at the bottom of OECD income-per-capita tables. 

Frailty of Global Economy is Obvious

This week we have seen the signs that the global financial crisis (or "GFC" as it has become known after five years of familiarity) is far from over.  The US stock market lost more than two percent of its value on Thursday, the Australia market suffered similar losses, China is reporting that business purchasing for the year is much lower than expected, and here in New Zealand our own stock market was down 1% (on top of news that GDP growth is an anemic 0.3% for the March quarter instead of the predicted 0.6%).

What caused the market jitters?  Well, US Federal Reserve chairman, Ben Bernanke, made an announcement on Wednesday that set the cat amongst the financial pigeons.  Those of you who follow the US economy will know that the Federal Reserve has been 'printing' money and injecting it into the economy at a rate of $85 billion per month (that's a trillion dollars, or around $3000 for every man, woman and child in America, per year).  Ordinarily, printing money at that rate would produce fairly massive inflation but Bernanke, who is almost too clever by half, has been buying huge amounts of Treasury Bonds and mortgages (to the extent that the Federal Reserve is by far the largest purchaser of both), thereby keeping interest rates down and containing US Dollar inflation. 

Of course, all this money printing and economic sleight of hand can't go on forever.  You can't keep writing yourself cheques and expect everyone you buy stuff off to keep honoring them - well, not unless everyone else is completely stupid.  There have been signs recently that the world is starting to regard the US economy as much too risky and the US Dollar as something less than the iron-clad reserve currency it has been for many decades.  The reason the Federal Reserve has to buy all those Treasury Bonds is that China no longer wants them - not at the low interest rates the US Treasury expects to pay at any rate - and we're seeing the impact in the declining value of the US Dollar.

So what did Bernanke say that spooked the market?  Did he call an end to his trillion-dollar a year printing of money? Well, not exactly.  He signaled that he might start reducing it towards the end of this year with a view to ending it by the middle of 2014.  Hardly what you would call cold turkey, but enough for the markets to suffer their biggest fall this year.

I've been predicting in this blog that the world economy is going to get a lot worse before it gets better.  The economic situation in Europe is not improving and the US is plainly addicted to printing money.  There is no way out of this except for a major correction that restores equilibrium between the money supply and real market demand for capital.  Interest rates must go up signficantly to bring about this correction and that will force a corresponding correction in asset prices, particularly in major capital markets such as real estate and stocks.  This loss of equity will have huge flow-on effects for a while on on business investment.  In other words, before this is all over many more people are going to lose their savings, their houses and their jobs and we're all in for more pain before things get better.