The End of the World as We Know It

The four decades from 1980 to 2020 produced the greatest growth of liberty and prosperity in human history. Most of the great 20th Century dictatorships that had imprisoned half of the world's population collapsed or were replaced by more liberal versions of themselves. Average human income as measured by GDP per capita increased from approximately $2500 (in current US Dollars) to more than $11,000, and those living in extreme poverty as defined by the World Bank reduced from 44% of the world's population to less than 10%. The economic deregulation of the 1980s resulted in a wave of technological innovation in medicine, telecommunications, energy production, finance and consumer goods that has enabled people all over the world to live better and longer lives. The social liberalism that started in the 1960s accelerated during this period and, in the West at least, most of the remaining discriminatory laws against minorities such as gay people were swept aside.

The authoritarian instinct wasn't gone, however. In China, the Communist Party refused to follow its Russian and European counterparts into oblivion and in 1989 at Tiananmen Square reasserted its totalitarian rule with a bloodbath of tanks and guns against unarmed protestors. A few formerly-liberal countries like Venezuela also bucked the trend and embraced an austere form of socialism of which even the Khmer Rouge might have been proud. The United States reacted to the terrorist attacks against the World Trade Centre and other major landmarks in 2001 by invading Afghanistan and Iraq and introducing the repressive Patriot Act, turning its sophisticated surveillance capabilities against its own people, and many other Western governments followed suit. We had some economic stumbles, most notably the dotcom crash of 2000 and the global financial crisis of 2008, but while these interrupted the long periods of growth, the overall upward trend continued.

That era is over. Covid-19 has been the catalyst for, but not the exclusive cause of, a sea change in our social, economic and political lives that is unlikely to be short-lived. The signs were there before the pandemic. Elements of the environmental movement such as Extinction Rebellion had become shrill in their calls to sacrifice our economic and political freedom to avert a millenarian doomsday, and a combination of enhanced censorship laws and a "cancel culture" - complete with virtual-pitchfork-wielding mobs - saw the casting out from mainstream discourse of anyone who defied the increasingly narrow political orthodoxy. Voters responded by electing contrarian political bruisers such as Donald Trump in the United States, Jair Bolsonaro in Brazil and Viktor Orbán in Hungary, who vowed to overturn some of their opponents' excesses and imposed a few of their own. Covid-19 has merely brought all of this to a head.

Whether or not the Covid-19 lockdowns that most countries have imposed are justified from a epidemiological perspective, there is no doubt now that the economic costs and the political and social impacts will be significant and long-lasting. The elimination of the spread of the disease within a country's borders is just the beginning of the journey back. We will have to live with a less-onerous form of lockdown, including quarantine at the border, until we have a vaccine or develop natural herd immunity. According to the OECD, the lockdowns will have an initial negative impact on GDP of between 15% (Ireland) and 35% (Greece). The longer term economic impact is uncertain, although many economists are now expecting a U-shaped, rather than a V-shaped, recovery. We almost certainly haven't seen the full impact on stock prices, and as earnings plummet and more companies fail, the consequential impact on global markets is likely to be felt for years to come. Governments that already have high levels of national debt and large deficits will have limited capacity to use monetary and fiscal policy to drive long-term economic recovery, particularly with interest rates at historic lows.

Many of the changes we have adopted during the lockdown will survive the easing of restrictions. Some of these changes are positive - for example, the widespread use of working-from-home technology lessening the need for people to commute to central city offices (with a consequential reduction in traffic congestion and pollution). Others aren't so positive - such as the permanent loss of jobs in retailing and food service from the accelerated use of online shopping and home delivery. One of the worst effects may be a permanent disruption to social relations, particularly amongst the elderly, as people struggle to restore tenuous community relationships that existed before the lockdown. The pandemic has seen traditional social niceties replaced by mutual suspicion and this trend won't be easily reversed.

The biggest permanent impact is likely to be political. Covid-19 has seen the largest expansion of state power over our lives since World War II. We have broken through an invisible wall of convention that constrained governments as much as any formal constitutional barriers - the presumption that a citizen can do anything so long as it isn't legally forbidden has given way to the expectation that our governments will tell what we are allowed to do. This hasn't happened in defiance of the will of the people - polls indicate that a majority of voters in most Western nations favour the extension of the lockdown, and any questioning of its necessity is regarded by many as disloyal. The established media have been cheerleaders of the measures and their traditional role of holding government to account has been assumed by bloggers and podcasters, who are often cast as troublemakers. The traditional Western political divide between conservatives and progressives hasn't defined the battlelines over the lockdowns - governments of both political hues have adopted similarly stringent measures and it has been the ultra-progressive Sweden that has been a libertarian outlier.

We don't have to be dire pessimists to think that it will be many years before we shake off all of the effects of Covid-19. International travel, for example, won't return to normal until we have a vaccine and airlines may be required to make social distancing permanent, halving the number of passengers on a plane and doubling the fares, thereby returning air travel to the relative luxury of the 1970s. Perhaps we will see a levelling of the disparities in incomes that have grown up in recent decades between blue collar jobs and the managerial elite, as some of those "essential" workers demand wages more commensurate with the importance of their role in the lockdown. Recent moves towards greater protectionism in trade is likely to accelerate as nations embrace isolationism and autarky, which is likely to further constrain economic recovery and growth. And some governments will be reluctant to hand back the power they have assumed during the lockdown, justifying further constraints on liberty by the ongoing impacts of the lockdown itself, in a vicious circle of escalating repression. It will be a virtuous government indeed that abandons all of their lockdown measures at the earliest possible opportunity.

Those of us whose adult lives have largely played out over the last four decades should be grateful that we have lived through the best of times, but we owe it to our children and grandchildren to give them at least the same opportunities that we have had to enjoy happy, healthy and fulfilling lives. How we handle the recovery from Covid-19 will determine whether we do so.

Understanding Risk in the Time of Covid-19

I am something of a risk management expert. A significant part of my professional career has been advising organisations on how to effectively manage risk, so I can justly claim to know a thing or two about the subject. The responses of governments all around the world to the Covid-19 outbreak have demonstrated how poorly understood the science of risk management is amongst our leaders.

Risk is quantitatively assessed as likelihood times impact. In other words, the chances of the risk eventuating (if we don't do anything to avoid it) multiplied by what happens if it does. One of the problems with Covid-19 is that governments, at least initially, under assessed the likelihood. They have also overestimated the impact with their projections of huge numbers of deaths. Having assessed the risk, you then have to assess the possible mitigations and their costs. Governments have compounded their errors by going straight to the most extreme form of mitigation and not quantifying the costs.

Time can be a significant factor in risk mitigation. I was listening to a podcast this morning in which an academic in America was discussing the poor state of infrastructure in many US states. He gave an example where a state government had decided to defer repairs on a short stretch of highway that would cost $6m if done today. Leaving the maintenance unaddressed for just two more years would result in a six-fold increase in the cost of repair. Under those circumstances, it seems crazy not to carry out the mitigation today.

One of the worst effects of a lack of understanding of risk management is the precautionary principle. This is the belief that unless you have complete knowledge about the likelihood and impact of the risk, either you shouldn't take any action at all (e.g. not allowing the trial of a new drug) or you should go all-out to prevent the risk eventuating (e.g. locking down the population in a pandemic).

Imagine you have a sore leg and you go to the doctor, who takes one look at it and says it might be cancer and therefore he should amputate. This is the precautionary principle. At the very least, you would want to understand the likelihood of it actually being cancer and the prognosis for that particular form of cancer before you agreed to the surgery. Some cancers are benign and don't need to be treated at all. Others are minor and localised and a simple excision of the tumour might be sufficient. You would weigh up the likelihood and consequence of the diagnosis against the cost (in loss of mobility, ability to work, etc.) of the mitigation. You may decide that the cost of any mitigation is more than the benefit gained from the treatment (a not-uncommon decision particularly amongst elderly cancer patients).

The most obvious real-world example of reliance on the precautionary principle today is the various zero-carbon initiatives legislated by governments around the world. Stopping all or most of the use of fossil fuels, which we literally rely on to keep us alive, in the belief that it will prevent global warming is, from a risk management perspective, extreme folly. The claims of "settled science" notwithstanding, we have little certainty about the direct impact of manmade carbon dioxide emissions on the climate, so banning the most common, economic and safe forms of energy before we have the chance to develop reliable alternatives, is unjustified.

Some experts were calling for the New Zealand Government to quarantine everyone entering New Zealand back in February, when we had no Covid-19 cases. That mitigation, as disruptive as it would have been on our tourism and international education sectors, would have cost a fraction of the complete lockdown of our economy that was adopted once we had multiple cases of the disease within our borders. Philip Thomas, a professor of risk management at Bristol University, has estimated that if GDP falls by over 6.4 per cent over the next two years as a result of prolonged economic inactivity, more lives will be lost than saved thanks to rises in poverty, violent crime and suicide. So, even if you ignore the actual dollar costs, the lockdown may end up costing more in lives than the unmitigated impact of Covid-19 itself.

Effective risk management is almost always about choosing the lesser evil. There is seldom a costless mitigation option. Economists and actuaries understand this, which is why they quantify the value of human life in their models. For example, the economic cost of a death from a motor vehicle accident in New Zealand is valued at $4.34 million. Personally, I consider my life worth a lot more than that, but the transport authorities have to use an average value of life that represents the trade-off they are prepared to make in mitigating the risk of death on the roads. Make it too high, and the models would indicate we should ban all travel by motor vehicles, which would cost a lot more than the value of the lives lost. The problem with government responses to Covid-19 all around the world is that they haven't done these calculations, so it is not surprising they all jumped on the precautionary principle bandwagon and locked us all down.

A further problem with risk management is reliance on specialist expertise. This may seem a strange criticism for a risk management expert to make, but experts are, by definition, narrowly focused on their area of expertise. It would be surprising to find an epidemiologist, for example, who knows a lot about economics. So when governments take their advice exclusively from a epidemiologist, it isn't surprising that their response doesn't give sufficient weighting to the economic costs. Part of the challenge in defining and quantifying a risk is in finding the right range of expertise to do a balanced assessment of likelihood and impact. An engineer who specialises in fluid dynamics, for example, may be as qualified to advise about the spread of a disease as a doctor.

I feel like we're in the early stages of a nuclear war and there is still time to stop the missiles with only moderate damage to each side, but no one has the courage to agree a ceasefire. At some point rational thinking has to enter the higher realms of decision making about Covid-19. Our governments have largely ignored the costs of mitigation, but once these become apparent - like the smouldering remains of nuclear strikes - we're all going to wonder why we didn't come to our senses earlier.

Ignorance Upon Uncertainty

It has been more than a week since I last posted and since then in New Zealand we have come out of Covid-19 lockdown Level 4 into Level 3. I have no idea what these levels mean in terms of detailed rules and the authorities seem to be making it up as they go along, with the New Zealand Police refusing to release their own advice about the legality of their enforcement of the rules. This Kafkaesque uncertainty is the hallmark of authoritarian governments everywhere - if the rules are arbitrary, you can always be deemed to be in breach of them.

I have imagined that among the small blessings of the lockdown, an increased appreciation for the value of the producers in society might come out of this situation. People have become aware that they can't take it for granted that their supermarket has plenty of the right type of toilet paper or packaged flour. They have also become aware that the people who run the factories, who drive the trucks that deliver the goods, or who stack the shelves in the stores, should be considered "essential workers" as much as the doctors and the nurses tending the Covid-19 patients. But most don't understand the workings of the complex supply chains that ensure the shelves are full with what they need, or how the packages that they order on Amazon or AliExpress miraculously arrive at their door from the other side of the world. It would astound most people to know that there is no central organising authority that operates those supply chains, but rather they are a result of the collaborative efforts of a myriad of businesses, big and small, all around the world.

Even worse is the fact that most people (including many of our leaders) don't understand how the broader economy works, and they don't seem to appreciate the economic and social damage that is being done with the Covid-19 shutdown. They believe the government can flip a switch and turn the economy off or on at will and that all will soon be back to normal. Employers are being criticised in the media for laying off workers or even for closing down, as if the proprietors of such businesses are traitors acting against the national interest.

Our prime minister, Jacinda Ardern, showed her utter ignorance of how the economy works - or worse, a Marxist understanding of the economy - with her comments that the private sector should value their workforce in the same way government does. This is particularly galling to business owners who are struggling because of her lockdown policies (which, as I have written before, are only necessary because of Ardern's early inaction to prevent Covid-19 entering New Zealand) and in increasing numbers are losing their life's work. Does Ardern not realise that every cent government spends ultimately comes from a private business somewhere? She is criticising private business owners for not being as generous as she is with the money she seizes from them!

Ardern's criticism came after one of her colleagues, Deborah Russell, in an example of the most breathtaking left-wing arrogance, blamed businesses themselves for not being able to withstand the government-ordered lockdown. The left likes to go on about victim-blaming but in typically hypocritical fashion are happy to engage in a little of it themselves when the victims are business owners.

Meanwhile the deputy prime minister, Winston Peters, leader of the "far right" New Zealand First Party, wants to "put up the shutters" to foreign investment and trade, returning New Zealand to the "Polish shipyard" economy of his mentor Robert Muldoon's government during the 1970s and early 1980s. New Zealand at the time had a protected manufacturing sector that produced shoddy, expensive goods; draconian exchange controls that meant you had to apply to the Reserve Bank to get a strictly-limited amount of foreign currency before travelling overseas; and - Muldoon's coup de grace - wage and price controls that meant a corner store had to apply to the prime minister personally if it wanted to put up the price of tea. The economy was Soviet in all but name and it is to this state that Peters wants to return this country.

The problem is not just with central government. Local councils refuse to cut back their spending in the crisis and are intent on increasing their tax take from struggling businesses and home owners. They seem oblivious to the evidence that many New Zealanders are already struggling to meet their existing financial commitments.

All of the Covid-19 assistance programmes have involved greater spending by the state. The Government is acting like a benevolent rich uncle, doling out wage and salary assistance, business loans and increased welfare benefits as if New Zealanders won't realise they will have to pay back every cent. Perhaps the Government is right to count on the public's ignorance - it is apparent that many people do not realise governments have no source of funds other the taxes they extort from hardworking citizens. Even government borrowing is just a demand on future taxpayers.

I don't see any evidence that Covid-19 will result in an increased appreciation for the producers in society. I think we are fated to repeat the mistakes of the past, whereby governments and the public regard the producers as milch cows, to be exploited until they are empty vessels, and then to be blamed for not being productive enough. Perhaps if the economic downturn from the Covid-19 is long and deep enough, governments will realise at some point that they need to release their grip on the producers' throats. I fear that may take many years.

As bad as the Great Depression

We are starting to see the economic impact of Covid-19 with the announcements in the last few days of the closure by Bauer Media of its magazine publishing business in New Zealand and by NZ Media Enterprises of its Radio Sports network. Many other businesses are already struggling and we can expect to see many more announcements of closures and receiverships, notwithstanding the Government's wage subsidies and other handouts. The surprise expressed by Prime Minister Jacinda Ardern at the Bauer Media decision only shows her ignorance and insensitivity to the costs being imposed on New Zealand businesses. Of course, the Government's insensitivity didn't start with the Covid-19 response. Its treatment of landlords, farmers, banks and many other businesses as pariahs had already served to stymie business confidence since the socialist-nationalist-environmentalist coalition took power in October 2017. Only this week we have seen the implementation of a new minimum wage law, which prevents businesses from employing anyone for less than one of the highest minimum wages in the world. The government chose to go ahead with imposing this significant increase in costs on businesses despite the obvious signs that many companies will not survive the Covid-19 lockdown.

Make no mistake, we are in this Covid-19 situation for the long haul. Even if we bring the spread of the virus under control during the lockdown in New Zealand, and that is by no means certain at this time, it is going to continue in other countries for many more months, which means we will need to keep our borders closed for that time. Our tourism industry is facing a long period of utter devastation and many of our exporters may lose markets during this period. Domestic businesses such as retailers and restaurants will recover somewhat after the lockdown ends, but many companies and individuals will continue to hunker down, not investing or spending until they are sure the economy is well on the way to recovery. The OECD estimates [H/T Michael Reddell] that the impact of the Covid-19 shutdown on New Zealand will be amongst the worst of its members at nearly 30% of GDP, which is a similar impact to the Great Depression.

The Government will be gambling on an economic resurgence as soon as the lockdown ends. It will try and spend its way out of the downturn, as it always does. It will prime the economy with a flood of cash such as we have never known, and it is already doing this by hiking welfare benefits as part of its $12.1 billion "economic recovery package". The problem is that this money won't go a fraction of the way to covering the business and individual losses from the lockdown and consequent recession. Besides, the economic situation is primarily a supply-side (i.e. business investment and revenue) problem and governments today seem to only understand demand-side (consumption) policies.

Many politicians and voters don't seem to appreciate the reality that every dollar spent by the government needs to come from taxpayers, who need to earn that dollar in order for the government to take and spend it. Even when the government borrows money to fund its splurge, it is just postponing the bill to future taxpayers. The problem for many Western governments is that they are already overextended in terms of government debt and these events are just going to make the situation worse. Countries like the United States will be counting on the fact that they will quickly recover to their recent levels of strong economic growth, but while New Zealand is in comparatively good shape in terms of the government's balance sheet, no one can have a great deal of confidence that we are going to grow our way out of the hole we are digging for ourselves (the US GDP per capita growth rate has hit nearly 4% in recent years compared to New Zealand at less than 2%).

The reality of Covid-19 hasn't really hit the global economy yet. The recent falls in stock markets around the world have only taken us back to where markets were about three years ago. Once companies begin to announce the expected impact of Covid-19 on their earnings, I believe we will see significantly greater drops. The property market hasn't really shown any impact yet (other than a pause in sales), but given that some commercial tenants are simply refusing to pay rent during the lock down, we can expect a significant down turn in prices to reflect lower earnings in this sector as well. The reductions in earnings will mean more layoffs of employees, greater losses to investors, and even lower taxes to fund the government splurge. We will be in a race against time to recover from Covid-19 before we lock in the greatest economic downturn since the Great Depression.

I have written before about how complacent New Zealanders have been in recent years. I have been pessimistically confident that a significant economic downturn was coming, and although I didn't predict it would be due to a pandemic, I was expecting it to come this year. Now that it is here, I think we lack the political leadership in New Zealand and in many other countries to respond effectively. But that topic is probably best left to another post. 

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.

Turning a Rock Star Economy into a Basketcase

In 1984, the newly-elected Labour Party Government saved New Zealand from becoming a third world economy. Prime Minister Robert Muldoon's Stalinist economic policies had resulted in high inflation, increasing unemployment, a run on the dollar. and the imminent failure of the country's largest bank. The new finance minister, Roger Douglas, devalued the dollar, deregulated the economy, sold off inefficient state assets, and the economy recovered to experience a period of sustained growth for the next three decades that was interrupted only by global economic downturns. Roger Douglas's liberal economic policies continued with remarkable consensus under successive governments but now the Labour-New Zealand First coalition government seems determined to undo all of its predecessors' good work.

New Zealand was acclaimed as a 'rock star economy' after the 2007 Global Financial Crisis because of its resilience in the face of rising debt and sluggish growth in the rest of the world, but as economist Michael Reddell points out (here and here), our economy hasn't really been performing that well since the mid-2000s.

So what is the new government doing that risks our economic performance? The answer is almost everything. It has banned oil and gas exploration at a time when other countries such as the United States and Britain are freeing up regulations and encouraging investment in new fossil fuel extraction technologies like fracking. It has introduced new petrol taxes, which will raise the price of everything that has a transport cost, and it is about to introduce its Zero Carbon Act, which (as Michael Reddell points out here) will reduce our GDP by between 10% and 22% by 2050.

The government is choosing to pick winners with its cronyism Provincial Growth Fund, which is based on the mistaken belief that taxing people and businesses so that the government can dole out money to other businesses is good economics. It is increasing welfare payments across the board and eliminating incentives for beneficiaries to get back into work. It is raising the minimum wage to one of the highest in the Western world and it is pushing 'fair pay' - forcing employers to pay workers more than their market value - which of course will reduce demand for labour, thereby increasing unemployment (because, in reality, the minimum wage is always zero). The government is also reviewing tax, through its Tax Working Group, and if New Zealanders don't believe the result will be to increase taxation across the board they are deluding themselves.

All of these policies will be a dead weight on our economy, dragging down its already non-rockstar performance while other countries continue to soar past us. The net effect will be to make New Zealand, and New Zealanders individually, poorer compared to the rest of the world. I have travelled all around the world and have seen the stark contrast between countries that have high GDP per capita and those at the other end of the scale. New Zealanders take their relatively high standard of living for granted and do not realise that prosperity is fragile. I don't want to live in a poor country but it seems that is where we are headed.

The truth of the rock star analogy has always been more Ozzy Osbourne than Taylor Swift, but if we continue down the path the new government is laying out, even the aging Black Sabbath rocker will look more lively than New Zealand's economic performance.

The Mandibles - a realistic view of the future

I am currently reading The Mandibles by Lionel Shriver. The author is best known for her book about a Columbine-style killer, We Need to Talk About Kevin, and for getting into trouble for her politically incorrect speech last year to a Brisbane writer's festival about 'cultural appropriation' (which I discussed here). I think she is one of the best writers on the planet today and her latest work has only confirmed my view.

The Mandibles is set in the future - between 2029 and 2047 - and tells the story of four generations of the eponymous family. You could describe it as a dystopian novel but unlike most other novels of that genre, the dire future it describes is only too realistic and inevitable given the current economic policies of Western governments. The United States has lost its position as the issuer of the world's reserve currency - the huge deficits, borrowing and currency production (i.e. 'quantitative easing') of successive governments have finally come home to roost and the U.S. defaults on its debts. A consortium of international governments - including a Russia still led by Vladimir Putin - replaces the Dollar as the currency of international exchange with a new commodity-backed unit called the 'bancor'.

The story doesn't focus on the 'macro' however, it describes the aftermath of these events through the eyes of a well-off American family whose lives are transformed when they lose everything they own. A populist Hispanic president, who seems cast in the image of Barack Obama, invokes emergency economic powers along the lines of those used by Franklin Roosevelt to seize privately owned gold - even wedding rings (which were exempted by Roosevelt) - and sends the Army to conduct door-to-door searches to collect it. The American future it portrays is the lives of Venezuelans todays - empty supermarket shelves, shortages of basic medicines, sky-high inflation and an increasingly oppressive government response to civil unrest.

There is no Big Brother in this story, no Fahrenheit 451-style burning of books (although books are largely obsolete in the digital culture) and no genetic-engineering of humans à la Brave New World. It is just American society today, projected twelve years into the future. That it is so realistic makes it all the more frightening. I hope at least a few of the members of the dysfunctional US Congress, which is once again debating raising the debt ceiling, reads it and considers the implications of their current spend-and-hope policies.

The 'give back' argument is the opposite of the truth

This post is an enlargement of a comment I made on Lindsay Mitchell's blog today. Lindsay wrote about the response of a 'social entrepreneur' who had contacted 300 local businesses to pay for school lunches for children, and who had had no takers. The 'social entrepreneur' said, 

"I'm not trying to sound harsh but if there are businesses that are making money off our community then I'm sort of garnering towards making them socially responsible to give back to the community that it makes money from."

What I said in my comment was,

"Businesses...'give back' in the taxes, rates and other government charges that they have to pay - often amounting to more than half their profits. But that is just the start of what they 'give back'. They also employ most people who work in their communities, paying their wages, their PAYE, their ACC, their holiday and sick pay, and their on-the-job training. Add to that the fact that many businesses sponsor local sports teams and cultural events, and that many business people are prominent in community service organisations, and you start to see why such claims that business people should 'give back' make me sick."

I have written before about the socialist U.S. senator Elizabeth Warren's "you didn't build that" argument - that businessmen do not create the wealth in their businesses but rather ride on the backs of everyone else in the community. As I pointed out in that earlier post, Elizabeth Warren exactly reverses the true facts. The reality is that everything in the community, every dollar* earned and spent by every worker, and every tax dollar collected and redistributed by the government has been created somewhere, sometime by a business owner or operator or investor.

But, I hear you say, the business owner sells his products and services to the community and therefore isn't he just recycling money that already exists? That would be true if the economy was a closed system and a zero sum game, and, if it was, we would never get wealthier as a society. In fact, we would get poorer because as the population increases and some wealth is destroyed by disasters, war and decay, our wealth per capita would decline. So how do we explain the following graph, showing an exponential increase in global GDP per capita (while the population was also exponentially increasing) over the past two hundred years?

The answer is capital, and by capital I don't just mean money invested. Capital is the sum of human knowledge - it is the equipment and processes, the inventions and patents, the brands and goodwill, and all the other things that go into producing and selling the goods and services we consume. It is the leverage that enables relatively unskilled workers, who would have trouble making a wooden cart wheel on their own, to produce a modern automobile. And because capital is as much about the ability of the human mind as it is about anything physical, it is limitless.

Marxists would have you believe that capital and labour are in conflict - that the more of the final price of the goods and services that go to reward the use of capital, the less that is available to reward labour. This is rubbish. Capital enables labour to be more productive and it is why workers in the Western world today are paid much more for their labour than at any time in history. It is the efficient use of capital that is characteristic of a free market (i.e capitalism) and that enables wealth to increase without limit - and for that increase in wealth to churn through society, thereby improving everyone's standard of living.

So next time someone says that a businesses should 'give back' to the community, just remind them that everything in the community has been derived from businesses in the first place.

[* Note that actually this isn't strictly true for a dollar of fiat currency, but it is true if you think of a dollar as a fixed equivalent amount of gold.]

The True Cost of Election Bribes

We have an election campaign underway in New Zealand. You would need to be a blind and deaf hermit to miss all the bullshit the media have been spouting about it. But in between the wall-to-wall coverage of the petty name-calling and downright lies, we are beginning to see some policy announcements from the parties and almost every one of them is trying to bribe voters with promises of more government spending. Even the so-called centre-right National Party thinks it can bribe first home buyers into voting for it (and Not PC gives a very good account of why that is a silly idea in this blog post). 

Unfortunately, many voters are too gullible to question where the money for these bribes comes from. Every dollar has to come from some hardworking taxpayer's pocket. In fact, every dollar of government spending means that around $1.25 has to come from a taxpayer because there is a transaction cost in collecting and spending the money. It costs to run the tax department and it costs to run all the government agencies that spend the loot the government extorts from taxpayers - and despite the ease of the task, they're none too efficient at spending the money because they have no incentive to be efficient (unlike businesses who have to compete with other businesses to be ever more efficient at producing the products and services they produce). 

But, in reality, it's even worse than that. The true cost of the government spending one dollar is much higher because the taxpayer's $1.25 probably would have been invested in a business (either directly by buying shares or indirectly via a bank) and that $1.25 of capital might have enabled the business to produce an additional $20 worth of products or services. That $20 worth of revenue to the company would have been spent on, say, $10 in wages, $5 of supplies and $3 in rent. And the workers that earned the wages would have spent their additional $10 on food at the supermarket or put it towards an Air New Zealand flight to see grandma, and the supplier would have spent some of his $5 on wages, and the landlord would have spent some of his $3 on paying a contractor to get the roof fixed, and so on and so forth.

Now you start to see the true cost of that one dollar the government is promising to spend on you. Talk about cutting off your nose to spite your face.

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.

The R Word

German Finance Minister Wolfgang Schaeuble warned this week that failure to address Europe's soaring youth unemployment rates and dropping the continent's welfare model could lead to revolution. This is the first time we have heard a Western political leader use the "R" word in association with the current global economic crisis but my guess is it won't be the last.

The fact that a sober-minded German finance minister should make a claim that until recently (if you believe the mainstream media) has been the preserve of the gun-toting, Bible-swearing, bolt-hole-building survivalists who are ridiculed for their predictions of a forthcoming economic and societal collapse, is pretty incredible.

I don't regard myself as one of those right-wing nut jobs (believe it or not) but I have been predicting for some time that the current global economic situation is going to get a lot worse before it gets better and that it will lead to widespread violence in some of the worst-affected countries. I think the course of events is obvious and if you want a road map, you only need to look at the 1930s.  The Wall Street Crash in 1929 was followed by a deep and prolonged economic downturn that became the Great Depression.  It took 4 - 5 years for the impact of the initial stock market collapse in October 1929 to be felt in economies all around the world.  The parallels to the banking crisis of 2008 followed by the Global Financial Crisis, which continues until today in much of Europe, is obvious.  Governments tried to spend their way out of recession in the 1930s but that only made things worse, particularly in the United States where FDR's huge spending programme ("The New Deal") led to the longest and deepest economic downturn of all.  We all know how it turned out for the world at the end of the 1930s.

The Prime Minister of Spain, Mariano Rajoy, in the same article referenced above, calls for more state aid and liberal lending policies towards small businesses - in other words, more of the excessive state spending and central bank pump-priming that led to the recession in the first place.  It didn't work in 1935 so why does anyone think it will work in 2013?

There is a myth that Europe is pursuing austerity policies.  If austerity means cutting government spending, Europe is doing anything but (as this article shows).  Almost all European governments have been spending more than ever before.  If that was going to work, it would already be doing so.

I agree with Herr Schaeuble that Europe risks revolution if the dire economic situation there is not addressed but I do not agree that more state spending on welfare and more money-printing to fund it are solutions. It is precisely the entitlement culture of the welfare state and the head-in-the-sand faith that more and more government spending will generate economic growth that is the problem.  It is the cause of societal collapse, not the solution.  We have seen evidence of this already in the riots in Greece and Spain - disaffected youths who understandably can't fathom why jobs don't magically appear and welfare payments won't keep flowing.

The West has forgotten what made it so successful economically in the first place - a combination of individual self-reliance, largely free markets and respect for private property, plus another important factor - a monetary system with integrity.  All of these things have been abandoned by Western governments and all of them must be restored if the West is to prosper again. 

Taking Offence When None is Due

In my last post I wrote about the misappropriation of language by political activists, particularly those in the left-wing.  A related manifestation of the left’s cultural hegemony is their unparalleled willingness to take offence on behalf of any convenient victim.

Niall Ferguson, the Scottish born Professor of History at Harvard, recently was forced to apologise for his comments about economist John Maynard Keynes. What was this dreadful comment that Ferguson made about the famous economist? Ferguson said that Keynes did not care about future generations because he was gay.

Neither of the two principle facts in Ferguson's statement are in doubt. Keynes himself said, in response to concerns about the affordability of his economic policies by future generations, “in the long run we are all dead.”  And there is no doubt that he was gay because he kept diaries detailing the many affairs he had with men. All that Ferguson did was to link the two.

Judging by the response of the media to Ferguson's comments, you would think the historian had gravely insulted a living person.  If you did not know your economic history, you might think that Keynes was a contemporary colleague of Ferguson's whom the latter had called a Nazi or something equally horrid.  But Keynes died in 1946, so it would be pretty difficult for him to take offence at Ferguson's recent comments, although perhaps his ghost is seething in some dark hallway of Cambridge University even as I write this.

Of course, it wasn’t the dead Keynes who took offence, but the hypersensitive serried ranks of professional offence takers in the political left-wing and their mouthpieces in the liberal media.  It does not matter to these professional offence takers whether anyone who might be considered the victim of the offending comment actually takes offence. It doesn’t even matter, as we can see with the John Maynard Keynes example, whether those who have apparently been offended are actually alive.  There is no shortage of causes for professional offence-taking and a great deal of competition to be the cause du jour.  Muslims, gays, disabled people and various racial minorities are the objects of offence whether or not they are really offended.

I believe that words are not offensive unless they are intended to be offensive.  Ferguson was attempting to make sense of Keynes’s incredibly destructive philosophy that future generations do not matter. Keynesian economics is the dominant philosophy driving Western economic policy today and is singularly responsible for the current economic failure in countries like Cyprus and Greece.  Frankly, I'm offended that such a misguided and irresponsible economic philosophy has caused such human misery all over the world and I think it was not unreasonable for Ferguson to seek a personal explanation for Keynes’s philosophy, in the same way that historians look for personal motivation in the destructive philosophies of political leaders.  Ferguson has said that he did not mean to imply that all gay people have a disregard for future generations and based on this I do not think he needed to apologise.

In the past, when no offence was intended, none was usually taken. Today, in the age of professional offence takers, there is always someone who is prepared to take offence for their own ends. Just as we should resist the misappropriation of language by the left-wing, we must resist the misappropriation of offence.

The Economic Death Knell or the Catalyst for a Resurgent New Zealand?

Now that the dust is settling in Christchurch and the sad commemorations for those who died in it are being held, thoughts are turning to how to rebuild the city.

The debate has already divided into predictable political lines with the left and even some of those previously associated with the right advocating more centralised planning, Government intervention, and higher taxes and levies. A few lone voices are advocating letting Christchurch businesses and residents determine their own future in a more grassroots, privately led recovery.

This earthquake is probably the greatest economic calamity to befell New Zealand since World War 2. The timing could not be worse - we are at the bottom of a long downwards spiral in economic performance that has seen us drop from number 3 or 4 on the OECD table of GDP per capita in the 1950s to number 23 today. Our response to the earthquake will determine, as much as anything else, whether we climb back up the ladder or slip further down - being passed on the way by many third world nations on the ascendancy.

The last thing this country needs is more government intervention, more regulation, and more taxes and government charges. Such policies will spell the death knell of NZ's already strained economy. We need greater economic freedom and lower costs to enable our businesses and investors to build the recovery both in Christchurch and throughout the country. Any other approach will stymie the recovery in Christchurch and drag New Zealand further down to third world status.

I'm not saying there is no role for Government in the reconstruction - of course there is. But the best thing the Government can do is get out of the way and remove all impediments to investment in the new Christchurch. It should be cheerleading the recovery, not trying to control every aspect of it.