Managerialism v individualism

Although contemporary society is supposed to champion individualism, it often fails to do so in practice because the desires of the individual frequently clash with the smooth functioning of the managerial state.

A classic example of this is the modern state's attitude to owner-operated small businesses.

Despite the pro-small business rhetoric that we’ve been hearing since the late 70s, most modern liberal governments almost invariably consider small businesses a pain in the ass.

As DIY generalists, owner-operator businessmen and women, violate one of the primary tenants of economic theory, that people should specialise in one task if possible, since according to rational economic thinking, specialisation equals efficiency and small-scale multi-tasking doesn't.

Government bureaucracies also find educated specialists a lot easier to deal with. This is why government and big business get on so well. Both have large bureaucracies staffed by professional employees with specialised skills who can talk to each other in the same jargon-filled language. Subsequently government's in most western countries have been making life more difficult for small business, with increasing regulations, indirect taxes and new or expanding accident compensation levees. Some free business advice is now available, but it tends to be of the generic common-sense kind, which is often of limited use to those in specialised, technical fields.

The recent bailouts of big US and UK corporations in the financial sector, is only likely to add to the already high level of grievance felt by the western small business sector.

Interestingly, while governments in the individualist West have been steadily making life harder for small businesses, governments in communitarian Japan have been trying to make life easier for them, with specialist help for example in research and marketing, and in learning to use the latest technology.

This seems paradoxical from the perspective of western individualism -shouldn't collectivists who believe in tempering economic goals with social ones be anti-small business?

Well it does make sense if you take into account that small business is in many respects a communitarian activity, and that people often go into business for non-rational reasons.

People prefer working for themselves for all sorts of reasons; they don't get on with their co-workers, they want to work in a place of their own choosing rather than sit in traffic for hours, they don't have a great CV, they want to pass on a business to their children, and so on and so on.

Since Japan is more communitarian society than most western countries, it understands that rational managerialism can undermine social cohesion if pushed too far, so the country’s elites try to direct the goals of the bureaucracy towards the needs of society rather than re-mould society to fit the rational logic of the bureaucracy.

No doubt Japanese small business owners still have a lot of hassles with government bureaucracy, but at least they know that the bureaucracy isn't ideologically opposed to them.

Unlike westerners, the Japanese also have a more concrete, producerist mentality when it comes to the economy and they realise that in a post-industrial society, many people will struggle to find productive employment which adds real value to society.

Conversely, western elites seem to assume that laid off manufacturing workers can easily find steady, reasonably well-paid work in the service sector, even though much of what the service sector produces is non-essential distractions that people have to cut back on in a recession.

Another example of managerial opposition to practical individualism is secondary taxation. Since people who hold multiple jobs are an inconvenience to the state, it discourages people form taking on more than one job by overtaxing them and then making wait in hope for a tax rebate.

A similar bureaucracy first mentality exists in welfare departments, where, in New Zealand and Britain for example, those seeking short-term unemployment relief are treated like minor criminals, while long-term welfare recipients like solo parents and sickness beneficiaries are regarded as permanent wards of the state.

Coming to terms with low growth

The apathetic response of U.S authorities and the WHO to the Mexican Flu virus, highlights the modern Anglosphere's obsession with making sure nothing gets in the way of short-term economic growth.

Despite the flu being containable (with only two deaths outside Mexico) Gywnne Dyer points out that the US and Canadian government's response has been pretty lax compared with Japan and Europe.

Even the modest sacrifice of losing a few weeks tourism income and spending a little extra on flu medications seems to be just too much for America's commerce-obsessed elites.

Probably the flu won't turn out to be as serious as the media's hyped it up to be, but the fatalistic U.S attitude typifies the short-term thinking that's pervaded the Anglosphere since the early 70s.

Economic growth in Continental Europe and Japan has been stuck in the 0-2 percent range for 20 years now, yet it still hasn't dawned on the English-speaking West that 3 to 4 percent growth just isn't sustainable in a post industrial economy.

Take for example the Obama administration's extravagant 1930s-style stimulus plan, which started out as a way to stabilise the banking sector, but has now turned into a full-blown
Keynesian attempt to stimulate consumer spending in the face of unprecedented private debt. Instead of rationing out the methadone, the Democrats are continuing to dish out the Chinese-supplied heroin.

Canada and Australia have taken a slightly more long-term view, but only slightly - the Commonwealth resource kings may have a greater concern with fiscal solvency, but their focus on sustainablity high growth rates can be seen in the on-going commitment to expansive immigration policies in the middle of the biggest recession since the end of WW2.

Industrially speaking, the English-speaking West has pretty much been in recession since 1973, when they passed the baton of industrial growth on Japan, Germany and Korea, who then passed it onto China in the early 90s.

The recent bankruptcy of Chrysler is just the latest in a long series of Anglo-American industrial setbacks starting with the ill-fated nationalisation of the British car industry in the 1970s.
From the late 70s to the early 80s there was at least an attempt to face the bad news and revive the old protestant values of thrift and prudence that took a battering in the late 60s.

President Carter warned Americans about the cost of debt, waste and dependence on foreign oil, while Reagan and Thatcher went someway to down-sizing the state and rolling back the unions.

However, by the mid-80s, voters had had enough of bad news and the baby boomers "live for today" philosophy was once again the dominant theme on Wall Street.

When the share market inevitably crashed in the late 80s the focus turned to real estate, as Australia, New Zealand, Canada and the U.S stoked-up the housing market by bringing in large number of immigrants and building houses for them (or in the U.S case simply selling the land and getting the immigrants to build their own houses).

Naturally, running an economy by selling land was only a temporary solution to economic decline and the long housing boom has now finally come to an end. For many Australians and New Zealanders is has also meant the end of the colonial dream of affordable housing for the masses.

Continental Europe of course, has had it's own share of denial since it's post-war peak in the 1980s.

In a age of low growth, intense industrial competition and demographic decline, Europe's extravagant income-related welfare programs are like a heavy ball and chain on the ankles of its shrinking workforce.

On the plus side, most of Europe has at least resisted the temptation to make things worse by joining the Anglosphere's orgy of debt-driven pseudo prosperity. This was highlighted by Angela Merkel's curt dismissal of Obama's stimulus appeal during his recent European visit.

The challenge now is to somehow get the Anglosphere to follow Continental Europe's fiscal realism, while getting Europe to par-back it's bloated welfare state and poor record in family formation.

Protectionism isn't Marxism

As popular support for the British National Party continues to grow, the mainstream centre right has stepped up its attack on the party's protectionist economic policies, arguing that it's hypocritical for a socially right-wing party to be supporting "Marxist" economics.

This shows how confused many mainstream centre-right pundits are about the connection between political ideologies and economic policies.

Protectionism is an economic strategy, not a moral principle, and over the last two centuries it's been used by both the right and left according to the economic needs of the time.

Despite what many contemporary mainstream conservatives claim, free trade is not an ideological cornerstone of conservative thinking. Many traditional conservatives such as Patrick Buchanan support protectionism because they are opposed to the modern welfare state, and would rather protect local industries from foreign competition than compensate workers through welfare.

Similarly, many of free trade's most active supporters have been progressive left-liberal governments, who have used the disruptions caused by free trade to expand the power of the welfare state and promote left-liberal social policies. Lange and Keating for example, had no problem reconciling their anti-Western cultural Marxism with staunch support for neo-liberal free trade policies.

Similarly, many people on the nationalist right don't necessarily support protectionism. Ethno-nationalists who support free trade argue that protecting low-wage industries will encourage more third world immigration as manufacturers seek to establish sweat shops at home rather than abroad.

Arguably the BNP does need spend more time thinking about the workability of its economic policies, and whether too much protectionism will alienate potential middle-class voters.

However, voters are unlikely to be put off from voting for the BNP just because it questions existing free trade dogma.

Trade policy is a difficult and complex area which needs to be addressed pragmatically, not ideologically.

Economic management in the second/third world

Political pundits in Western countries like New Zealand and the UK may be divided over whether raising the minimum wage is a good idea or not, but few of them would advocate the kind of drastic changes introduced in Honduras over the last few years.

Hopefully this isn't a taste for what California can expect when it becomes part of Aztlan.

Is free trade going too far?

Listening to the radio this week, I heard the New Zealand Army is now joining the armed forces of other western countries like the U.S and Britain in having uniforms made in China.

While uniforms might not be considered a strategically sensitive type of military hardware, more significant components like aircraft parts are also being manufactured in the people's republic.

Neo-liberal economists claim this is a good thing, since free trade supposedly discourages countries from going to war with one another.

However, the problem with this argument is that we now have an historically unprecedented situation where just one country, China, is doing almost all the manufacturing.

The West's ability to wage war may be declining, but China's ability to wage war is rapidly increasing.

With economic nationalism making a comeback, we might want to consider whether contracting out armaments production to a powerful non-western country that might attack us is a sensible idea.

Spending your way to prosperity

There seems to be a consensus among independent conservative pundits like Pat Buchanan and Steve Sailer that Obama's plan to get the U.S economy out of recession through public spending programmes won't work.

In this situation I'm definitely inclined to agree, fiscal stimulation didn't really work in the U.S in the 1930s, and it's even less likely to work today. Infrastructure spending during recessions only works if it complements the growth of new industries and if the government actually has surplus funds it can afford to invest.

For example, between the 1930s to 1960s, infrastructure investment was a general success in Australia and New Zealand because, A, the government was fiscally solvent and B, it tied in with the rapid growth of agriculture and mining. Without roads, bridges, schools and telephones it was difficult to attract settlers to new areas and transport products to overseas markets so back then investment in these areas made a big difference.

Similarly, the development of a national highway system in the U.S after WW II helped fuel the demand for a raft of new domestically made products from trucks and cars to refrigerators and lawnmovers.

In the modern post-industrial U.S economy though, there aren't really any productive industries that are being seriously held back by lack of investment in infrastructure. Some of the high-tech sectors like biotechnology and robotics might benefit from greater investment in research and development, but in terms of basic transport, power and communications infrastructure, the U.S is in reasonably good shape. This kind of crude Keynesian stimulation can only really work in countries at a much lower level of development.

Nor does this kind of approach work if there is a shortage of markets for locally made goods and services. One reason the 1929 Depression dragged on for so long in the U.S was because the U.S was shut out of many overseas markets that were putting up tariffs at the time to protect their domestic producers.

In contrast, the Depression was much less severe in Commonwealth countries like Canada and Australia, which had access to a protected Commonwealth market.

Indeed, if it wasn't for the fact that more Americans had cars, relatively cheap housing, and land on which to grow food than in European countries, America could well have gone down the Fascist path of countries like Italy and Spain. Today the U.S also faces major problems exporting overseas. This is partly due to tariffs, subisidies and currency manipulation, but also because of global over-production in manufacturing and farming.

Then there's the fact that (as Ron Paul often likes to point out) America just doesn't have the money.

With a federal deficit of over $1 trillion, the U.S government should really be cutting federal programs, not increasing them. While getting out of Iraq should leave the government in a slightly better financial position, it still won't be enough to compensate for the massive increase in Medicare and pension costs that are set to occur over the next decade.

As least that's one good thing about the election of National last year - New Zealand's now one of the few countries going in the tumultuous 2010s with a reasonably fiscally conservative (albiet right-liberal) government at the helm.

Economists and the great unwashed

Economists hate people, people hate economists.

It's a prickly relationship, but one which both sides have learned to live with.

Unfortunately though, it seems not all economists are happy with the status quo.

In the Myth of the Rational Voter Bryan Caplan argues the ignorant masses can be turned into economic rationalists, provided they are given the necessary ideological training, and that once provided with a suitable economic education they will then become rational voters.

Yes, we're not stupid after all, just ignorant.

In a glowing review Caplan's work in the Press, ( Saturday, January 5) University of Canterbury economist Eric Crampton latches onto his findings to launch an attack on those "redneck" conservatives and populists who have the impudence to see the world a little differently from mainstream economists:

"Clustering together the differences between the public and economists on a variety of questions, Caplan concludes that the public is severely biased agianst foreigners, biased against markets, biased in favour of make-work projects, and biased towards pessimistic assessments of how well things are going."

Crampton goes on to describe teaching economics as akin to "teaching evolutionary biology to an incoming class of new-Earth creationists."The general public may be ignorant about many things, like the history of western civilisation or how to write a grammatically correct sentence (damn my English teachers!), but one thing they aren't usually ignorant about is basic economics.

Even the most ignorant skinhead in a medium security prison knows about the law of supply and demand, hence his opposition to immigrant labour. Sure, this may not be the only reason for low wages and increasing economic inequality, but no one can automatically say it is economically illogical for the unskilled and uneducated to be in favour of limited immigration.

To illustrate the public's supposed ignorance of basic economics, Crampton picks the odd example of Labour's introduction of an interest right-off for student loans prior to the last election:

"When Helen Clark in 2005 argued that students wouldn't take on more debt at a zero interest rate, folks up and down the corridor in the economics dept tore their hair out at the sheer irrationality. But the statement seemed entirely reasonable to non-economists."

Well as one of those supposed irrational "rednecks" who Crampton ridicules, I can tell you that Clarke's statement didn't strike me as entirely reasonable, nor did it to most other lay people I spoke to at the time, redneck or otherwise.

If memory serves me correctly, most people, including populist politician Winston Peters, thought it was very risking giving students a full interest right-off and that it might have been more prudent to lower the interest rate a little and reduce tuition fees.

In any case, Labour's student loan interest right-off was just one of a number of policies which may have influenced voters, and I don't think it is reasonable to assume it was the primary reason why Labour won the election.

Of course, just because voters have a basic understanding of economics does not mean they will necessarily vote for policies in the public interest. As economists themselves famously point out, people can be selfish and often like to vote for policies which benefit themselves at others' expense. The most obvious example in New Zealand of voters failing to take account the public good is in the area of pensions. Today, It's largely verboten in NZ politics to talk about means testing for pensions, after the perfectly reasonable surcharge for higher income earners was repealed in 1998.

While Crampton insults the intelligence of New Zelanders, Caplan knocks his fellow Americans for having an stingly, irrational view on foreign aid. No mention of course that the estimated 12 million illegal immigrants in the US maybe dampening American enthusiasm for helping out those in the third world.

When China Wakes Up

How much longer will China be happy making cheap goods for the West?

Vdare columnist Paul Craig Roberts points out that once a particular industry is moved to China, research and development in that industry is also likely to move there. This could have dire consequences for western economies.

At the moment China is quite happy pandering to the needs of western consumers. The Yuan is pegged to the dollar at an artificially low rate, while the US dollar is propped up by East Asian investors. This is increasing the competitiveness of Chinese manufacturers and boosting the purchasing power of American consumers.

Since the mid 1990s, low and middle-income westerners have become dependent on cheap Chinese imports to offset stagnating wages and rising costs for services. A pricey ticket to a football game is still affordable when a new toaster or kettle only costs $20.

However, two things are starting to change:

1. China is now producing more sophisticated, better quality goods

2. Chinese domestic demand is rapidly expanding.

In the early stages of industrialisation, capital starved industrialists make sure that their workers produce significantly more than they consume, but as productivity picks up, a surplus of goods accumulates and employers increase wages so that workers can consume the surplus.

Chinese firms are now buying up unprofitable western manufacturers, such as the UK car manufacturer Rover, and shifting the capital equipment back to China. Soon component manufacturers will also have to move due to transport and communication issues and it will become impractical to maintain research and development facilities back in the home country.

Furthermore, the Chinese will be able to study how the blue prints of the capital equipment and set up their own industries for building capital equipment. At this point China won’t really need to subsidise western consumers since they will have control over the whole production process.

The Chinese will then be able to float the Yuan and charge western consumers higher prices for their products. The West won’t be able to respond by moving production to cheaper countries, such as Bangladesh and Pakistan, because the West won’t own the patents for the products or the capital equipment needed to produce them.

Two other factors may also serve to increase the price of Chinese goods:

1. The cost of raw materials, such as oil, copper and wheat, are likely to increase considerably in the next 10-20 years

2. The aging of the Chinese population will put upward pressure on wages and the Yuan.

Prices for oil and gas, as well as farm products such as wheat and beef, are likely to increase and China will need a stronger currency to pay for these essential imports. At that point it won’t make sense for China to compete solely in low wage manufacturing.

The Indian sub-continent, with a much younger population than China, will then take over a lot of the world’s low wage production. Although, most western economists seem to hate the term “strategic industries” the West is going to have to identify essential industries that it won’t surrender to China.

The fact that Chinese companies are already producing aircraft components for a strategic firm like Boeing, suggests that this is not yet happening.

Human directionals

The favourite human interest story on New Zealand television news last Friday night was the new US fad of "sign spinning" - apparently a new twist on the rather depressing human directionals trend noted by Steve Sailer.

Apparently a couple of American college graduates have made a tidy sum of money from teaching the sign-holders to put a "positive spin" on their signs, as the media usually likes to do with stories about wage rates and immigration issues.

Personally, I would have thought sign spinning would be an even harder way to make a few dollars than sign holding. How long can you spin a sign for? (at least in the 30s depression they had easy to hold sandwich boards), and how soon before the novelty wears off among the public?

Yet more service industry insanity coming to a western country near you!

The good, the bad, and the recycled

Unfortunately, I won't be doing a lot of posting in the next few months due to work distractions (the curse of the blogging class!). However, I 'll try to keep coming up with the odd post and suppliment things with some old posts from last year.

On the good news front, maverick US economist George Borjas has started a new blog.

Meanwhile, here's a rant from 2006:

The overrated importance of taxes

On the liberal-right, as well as among some elements of the liberal-left, there seems to be an ideological obsession with tax rates and their importance in economic success.

However, in the real world there is no clear correlation between tax rates and the economic success of particular states.

Looking at the New Zealand blog scene, it is apparent there is a strong contingent of libertarians and neo-conservatives that harp on about the endless benefits of low taxes and economic deregulation. There is also a smaller group of centre-left liberals that argue that high taxes will turn New Zealand into a Scandinavian style success story.

When you look at the tax policies of particular countries though, you don’t find a lot of consistent evidence to support either case.

Economic libertarians cite the economic success of the U.S as compelling evidence that low taxes lead to economic prosperity. However, there are plenty of other countries with strong economies that have much higher tax rates, including Norway, Switzerland, Finland and Denmark. High tax Sweden struggled in the 1990s but is now doing relatively well with 4.1 percent growth last year.

As Steve Sailer points out, according to neo-liberal theory Sweden’s economy should now be in tatters and its work ethic shattered by socialism. Similarly, the third world is littered with low tax economies, such as Nigeria, that are still struggling with high levels of poverty and corruption.

Tax rates in most economically successful East Asian counties are relatively low, but these countries also tend to have high levels of trade protectionism that economic libertarians also strongly object to.

The centre-left cites the success of Scandinavian economies as evidence that high taxes can produce stable growth with high levels of equality. However, countries that have tried to copy Scandinavian tax policies have had little success- a good example being Britain in the 1970s. Britain was forced to revise its economies policies and reduce its tax rates after being ignominiously refused assistance by the IMF in the late 1970s.

In the period from 1945-1975 New Zealand did well under a post-war high tax regime, but was force to lower tax rates in the 1980s as national debt and inflation reached unsustainable levels.

Clearly its possible to run a successful economy under both high and low tax regimes, but there is little evidence to suggest that switching from one to the other will lead to a long-term improvement in a country’s economic performance. Furthermore, many developing countries have been perennial economic losers under both high and low tax systems.

Obviously, factors other than taxes, such as culture, ethnicity, resources, geography and history are more important in long -term economic success.

Nor can tax ideologues argue that tax rates would be decisive if only there was universal free trade. China is developing nicely with relatively high levels of protectionism (through farm subsidies and currency manipulation), while protectionist Japan and Korea are now emerging from extended recessions with their industrial sectors still in good shape.

Centre-left proponents of ‘fair trade’ also fail to acknowledge that developing countries won’t benefit from ‘fair trade’ if they lack the infrastructure needed for exporting and are unable to maintain basic law and order.

Tax fanatics should move on from their ideological cul de sac and start looking at other, more decisive factors in economic development.

Remittances - A Long term Perspective

The World Bank is claiming that remittances are the best way to help developing countries and that third world immigration to the West won’t harm western economies.

However, this ignores the fact that many western countries are increasingly in debt to East Asian creditors and that East Asia doesn’t play the western game when it comes to immigration.

In western countries like The United States and Great Britain, most of the jobs done by immigrants from developing countries are service jobs like cleaning, catering and labouring. These activities may benefit individual middle class westerners but they don’t contribute to increasing exports or decreasing imports. Not surprisingly, the fiscal health of the United States is deteriorating as third world immigration continues unabated.

In contrast, immigrant workers in East Asia are usually compelled to do productive jobs in factories. Subsequently, countries like Korea and Japan are still managing to stay out of debt and are maintaining healthy trade surpluses.

Although the volume of remittances from the West to developing countries may be impressive to World Bank economists, there is no evidence to suggest it is sustainable. When the West finally has to face up to its debts, the volume of remittance contributions will rapidly decline as the West can no longer afford the luxury of employing legions of unskilled service workers.

Also, lets not forget the global population is still increasing as the number of rich westerners is decreasing. This means that we will need to become even more decadent and wasteful to satisfy the third’s world’s expanding need for remittance money. This is not something that social conservatives are likely to be happy about.

The two factors that will finally make the West face up to its debts are population aging and rising commodity prices.

China is short of resources and has an aging population so it is eventually going to have to float the Yuan to pay for essential imports. That will cut off the supply of easy credit and ultra-cheap goods to the West.

If western governments are going to import workers from poorer countries then they should at least make sure these people are directed into productive jobs like food processing and seasonal farm work where there may be genuine labour shortages.

If workers from developing countries are channelled into specific jobs, in productive industries, and in limited numbers, then it will be easier for the government to monitor them. This will benefit both foreign workers, who are vulnerable to exploitable, and local workers who may be forced out of work by unscrupulous employers trying to undercut minimum wage rates.

Although the ‘guest worker’ programmes used by East Asian countries, and some western countries, are far from ideal, they arguably do less harm to the host country then large-scale, liberal immigration policies that may have huge external costs for future generations.

When China Wakes Up

How much longer will China be happy making cheap goods for the West?

Vdare columnist Paul Craig Roberts argues that once a particular industry is moved to China, research and development in that industry will also be moved there - this could have dire consequences for western economies.

At the moment China is quite happy pandering to the needs of western consumers.The Yuan is pegged to the US dollar at an artificially low rate, while the dollar is propped up by Chinese investors. This is increasing the competitiveness of Chinese manufacturers and boosting the purchasing power of American consumers.

Since the mid 1990s working class westerners have became dependent on cheap Chinese imports to offside stagnating wages and rising costs in services. A pricey ticket to a football game is still affordable because a new toaster only cost 20 dollars.

However, two things are starting to change:

1. China is now producing more sophisticated, better quality goods

2. Chinese domestic demand is rapidly expanding.

In the early stages of industrialisation, capital starved industrialists make sure that their workers produce significantly more than they consume. However, as productivity picks up, a surplus of goods accumulates and employers increase wages so that workers can consume more of the surplus.

Chinese firms are now buying up unprofitable western manufacturers, such as the UK car manufacturer Rover, and shifting the capital equipment back to China. Soon component manufacturers will also have to move and it will become impractical to maintain research and development facilities back in the home country.

Furthermore, the Chinese will be able to study how the blue prints of the capital equipment and set up their own industries for building capital equipment.

At this China won’t really need to subsidise western consumers since they will control production. The Chinese will then be able to float the Yuan and charge western consumers higher prices for their products.

The West won’t be able to respond by moving production to cheaper countries, such as Bangladesh and Pakistan, because the West won’t own the patents for the products or the capital equipment needed to produce them.

Two other factors will also serve to increase the price of Chinese goods:

1. the cost of raw materials, such as oil and wheat, will also increase in the coming decades

2. the aging of the Chinese population will put upward pressure on wages.

Prices for oil and gas, as well as farm products such as wheat and beef, are likely to increase and China will need a stronger currency to pay for these essential imports. At that point it won’t make sense for China to compete in low wage manufacturing. The Indian sub-continent, with a much younger population than China, will then take over a lot of low wage manufacturing.

Although, many western economists hate the term ‘strategic industries’, the West is going to have to identify essential industries that it won’t surrender to China. The fact that Chinese companies are already producing aircraft components for a strategic firm like Boeing, suggests that this is not yet happening.

Some Thoughts on Economics and IQ

According to the controversial psychologist Richard Lynn, the secret to a successful capitalist economy is a population with a high IQ. However, maintaining a successful economy may also be about recognising and dealing with IQ weaknesses.

In IQ studies, Western countries tend to come out on top in measures of verbal intelligence. Conversely, people in East Asia tend to have higher non-verbal IQs. The verbal IQs of English speaking western countries like Britain and the United States are further boosted by an Ashkenazi Jewish population with an average verbal IQ (according to Philippe Rushton) of 107.5.

The IQ patterns of Western and East Asian countries seem to match their respective economic fortunes over the last few decades. After a period of industrial decline in the 1970s, the English speaking West has enjoyed a high rate of growth over the last 12-15 years, in part, by shifting from manufacturing into services, software and media products, ie, just the sort of economic output requiring a high verbal IQ.

In contrast, industrialisation benefits from a population with a high non-verbal IQ, and so it seems likely that China’s extraordinarily rapid rate of industrialisation is at least partly due to the high performance IQ of its population.

However, there is a danger in letting people fashion the economy in their own image without industrial planning. The English-speaking world seems to have forgotten the message that all wealth ultimately comes from production. In English-speaking western countries, there has been an explosion in jobs requiring a high verbal IQ that don’t really add to GDP. People such as real estate agents and public relations staff readily come to mind. Subsequently, productivity levels have stagnated while serious trade imbalances have built up with more industrialised Asian countries.

The Japanese seems to have the opposite problem. They have perhaps over-emphasised production and neglected their service economy. Even though Japan is highly efficient in manufacturing, its banking and distribution sectors are surprisingly antiquated. Subsequently, as manufacturing has peaked, the whole economy has stagnated. The Japanese have perhaps become too reliant on activities requiring a high performance IQ.

The IQ problem in developed countries is going to become more acute as their populations start aging. Hence it is important that western countries maximise opportunities for those with atypical IQ profiles.

In the West, it is important that workers with high performance IQs are lured into productive jobs and get the best available training and incentives. In New Zealand, it is absurd that maths teachers aren’t paid more than arts teachers, even though the former are in serious under-supply. Similarly, many of the countries best scientists are driven away by lack of government spending on scientific research.

Perhaps the most important thing in making the most of a nation’s intelligence, is good intelligence- acknowledging the importance of IQ in many life outcomes and taking steps to record it on a national level.

Oil and the Liberal Right

The recent increase in the price of oil and natural gas seems to be quite predictable to most military strategists and scientists but seems to be totally incomprehensible to right-wing, liberal politicians and economists. The fact is that most economic libertarians just can’t seem to grasp the concept of resource scarcity and its implications.

Today’s post-industrial, liberal yuppie floats around in a virtual world of ‘knowledge’, ‘communications’ and ‘networking’ where the concept of physical resources is pretty meaningless. Resources, in the liberal worldview, can be obtained and transformed into products so easily, that developed countries have little to fear from rising resource prices or disruptions in supply.

Since resources are so trivial, there is no competition between states for resources or need to conserve them in the national interest. Economic libertarians even claim there is such a thing as a ‘resource curse’, in which some countries, like Brazil, are relatively poor because they have too many resources (someone must have forgotten to tell oil-rich Norway, the world’s richest country).

Prior to the 1980s it was generally assumed that wealth came from production and that production requires access to cheap resources; Japan certainly though so when it attacked Pearl Harbour in 1941.

Many neo-liberal economists are also claiming that the current surge in oil prices is due to 'irrational' speculation and that investors are over reacting to political tensions that are only indirectly related to supply and demand. No doubt there is some truth in this argument, especially in the short-term. However, the long-term demand for oil looks set to rise enormously while oil supplies from politically stable countries are rapidly declining. It is only natural for investors to be getting excited about price rises.

It is also somewhat ironic that market pundits, who argued in the 1990s that it is ok to invest in ephemeral computer companies, are now criticising investors for being ‘irrational’ for investing in essential resources.

Most developed countries either have no oil themselves, or are rapidly exhausting their domestic supplies. The UK is in a particularly difficult situation because it is running out of oil and natural gas and all its nuclear power plants will soon need replacing. However, it is remarkably blasé about its looming energy crisis with no clear commitment to replacing its nuclear power stations or developing alternative forms of energy supply. The U.S still has significant petroleum reserves but these are rapidly being consumed by an ever-expanding population.

Being of the liberal bend, most U.S economists continue to sing the praises of high immigration. The fact that high immigration is making America more indebted to Asia, and more dependent on an unstable Middle East, isn’t seen as a serious cause for concern.

The Bush administration’s intervention in Iraq further highlights the unrealistic thinking of the liberal right in regard to oil supplies. Iraq is a county with a long history of political instability and factional conflict. U.S neo-conservatives though, believe, or did believe, that Iraq can be transformed into a western-style democracy and that oil flows can be restored to above pre-war levels.

At present, oil flows are beginning to pick up, but are still below pre-war levels and the war has already cost the U.S a huge amount of money. Iraq is beginning to sort itself out politically, but not the way the U.S intended. Iraq is slowly ethnically cleansing itself on geographic lines like the former Yugoslavia. However, this process could take many years if not decades. Furthermore, if the U.S intervention is to pay for itself, then oil supplies will have to be cranked up to far above pre-war levels and no ethnically divided, middle-income country has ever pushed oil production up to such levels.

It could be argued that the U.S is at least stopping China from gaining control of Iraqi oil and increasing American influence in the region. However, the massive spending on the Iraq war could have gone into a wide range of domestic measures to improve oil supply and reduce oil dependence. Also, the more the U.S has to borrow money to pay for oil imports and overseas wars, the more indebted it becomes to Chinese investors.

In contrast to the U.S and the U.K, China is taking a hard- headed, pragmatic view of oil scarcity. While the U.S is increasing its demand for oil through immigration, China is trying to contain demand through its population control programmes. China also has no scruples about dealing with corrupt, authoritarian regimes and is striking unconventional deals with many different countries to reduce its dependence on any one region.

The rising cost of oil and gas is a real threat to the economies of most western countries yet the dominant liberal-right has little idea about how to play the old fashioned, territorial game of resource politics.

Western Overconfidence

The overly generous attitudes of many Western nations to China indicates just how overconfident their elites have become. China is just as much a threat to the vulnerable West as it is an opportunity. In particular, Westerners should not underestimate the intelligence of the Chinese or overestimate their own capabilities.

Since 1945 the West has steadily been losing ground to East Asia in hi-tech manufacturing and design. According to the field of psychometrics, East Asians have higher 'performance IQs' than Caucasian Europeans and this seems to correlate with the decline of Western manufacturing. The Japanese and Koreans build more cost effective and reliable motor vehicles than Europeans and Americans and seem to be able to adapt much better to complex just in time management practices.

Although the West has some brilliant designers many of their designs are too complex for Western workforces to mass-produce. A couple of recent examples: the delays with the new Aerobus Jets because of their unnecessarily complex electronics and the recent recall of 110, 000 Jepp SUVs due to faulty heated seats. If the West came up with simpler designs, with fewer superfluous features, then Western workers might be able to build them to a higher standard. This approach is certainly working for Skoda (albeit on a relatively modest scale).

In competition with China many Western firms are hamstrung by environmental legislation such as the Kyoto protocol, which China as a ‘developing country’, is not pressured to comply with. However, China is rapidly becoming the world’s second biggest consumer- it is already the world’s largest consumer of concrete and steel for example. Only struggling countries, with limited resources, should get special exemption from agreements like Kyoto.

There is also very little pressure on China to float its currency, which is kept artificially low and gives it an unfair trade advantage over both developed and developing countries. The arguments put forward by US paleoconservatives like Patrick Buchanan, in favour of retaliatory tariffs, are also rarely given serious consideration in the US media. However, Buchanan makes a strong point - how can Western firms compete without protection when they can’t freely export to China?

Even in areas where the West is more competitive than China, Western governments still take a soft line in trade negotiations. China provides a potentially massive market for Western agricultural goods and New Zealand has already rushed into a free trade deal with China. The New Zealand media though, doesn’t say much about Chinese farmers receiving significant production subsidies, even though it is very critical of the E.C for protecting Europeans farmers.

The Western media industry is held up as a showpiece of the so called ‘knowledge economy’ yet its profits are undermined by rampant piracy in China. If Western countries expect to import large amounts of goods from China they are going to have to export large amounts of products to China. This simply isn’t possible though, if their primary exports can simply be substituted by illegal copies. The Western media industry is only a viable export option if the West has the power and the will to enforce fair trade in media products - unfortunately, at the moment, such willpower is clearly lacking.

The elites of the Western world are spending too much time salivating about making money out of China and not enough time worrying about the Chinese making easy money out of the West.

Taxes II: The Problem with Lowering Taxes in N.Z

Although ACT, and to a lesser extent National, argue that lower taxes will make New Zealand more competitive with Australia and the U.S, they fail to appreciate that New Zealand suffers from serious under investment in key areas such as transport and energy infrastructure which are at least as important to economic outcomes.

Since 1984 an increasing percentage of government spending has gone into health and welfare. This is largely unavoidable because of the aging profile of the population. Furthermore, the elderly are very politically powerful and significant government cuts in health spending or pensions would arguably be political suicide. To pay for this increased health spending the government has reduced spending in other areas such as transport and defence. New Zealand now has no air force to speak of and is unable to cooperate in serious military exercises with its former ANZAS partners- Australia and the U.S.

Recently, the government has increased transport spending, but major projects are now subject to increasing costs and delays, thanks in part to the Resource Management Act. Cuts in transport spending reduce productivity since the more time people spend travelling, the less time they spend working and completing tasks. This is particularly true for tradesman and small business owners. Long journey times, to and from work, also make jobs less attractive to employees and are thus a negative factor in the competition for skilled workers in the international job market. Subsequently, it is counter productive for the government to cut transport spending so as to lower income tax rates.

New Zealand’s rate of spending on research and development has been very poor since 1984, although the Labour Government is now beginning to address this. Research and development spending is a major factor in the international competitiveness of New Zealand companies and a big factor in the nation's brain drain since clever people like the interesting jobs that R and D spending generates.

In the energy sector there has been little provision for New Zealand's growing population, with Auckland now increasing prone to power failures. In theory the country could save substantial amounts of power through power conservation. Most older homes and commerical buildings in New Zealand are very poorly insulated, so there is a lot of potential for the government to encourage energy conservative through incentives. However, the government currently spends very little on energy conservation.

Overall there is very little leeway in New Zealand for cutting taxes since any cuts in energy, transport, or research and development spending would be counter-productive, while cuts in other areas would be very politically unpopular. Similarly, defence spending has already been cut to the bone and it would be foolish to cut it any further. In practice, National realises that significant tax cuts are unrealistic and most of its proposals for tax cuts are modest, while Act is getting little electoral support for its flat tax proposals. Cutting taxes may have worked in the 1980s but it just isn't going to have a major impact today.

There is however, a lot of scope for debating how tax is weighted since many economists are now debating the merits of income tax compared with taxes on capital, as well as the feasibility of taxes on pollution. In the future, political parties may decide to appeal to voters by reducing income tax and increasing other taxes but this appears unlikely at present.


Since serious tax cuts are no longer politically feasible, New Zealand’s die hard libertarians should campaign over other issues such as- political correctness in education, the debt culture, welfare mis-management, and the red tape which frustrates small businesses as well as large contractors involved in infrastructure projects.

The Overrated Significance of Tax Rates

With the libertarian and neo-conservative right, as well as some elements of the liberal left, there seems to be an ideological obsession with tax rates and their importance in economic success. However, in the real world there is no strong correlation between tax rates and the economic success of particular countries.

Looking at New Zealand political blogs, it is apparent that there is a strong contingent of libertarians and neo-conservatives that harp on about the endless benefits of low taxes and economic deregulation. There is also a smaller group of centre-left liberals that argue that high taxes will turn New Zealand into a Scandinavian style success story. When you look at the tax policies of particular countries though, you don’t find a lot of consistent evidence to support either case.

Economic libertarians cite the economic success of the U.S as compelling evidence of the superiority of low taxes in a successful economy. However, there are plenty of other countries with strong economies that have much higher tax rates, including Norway, Switzerland, Finland and Denmark. High tax Sweden struggled in the 1990s but is now doing relatively well with 4.1 percent growth last year. As Steve Sailer points out, according to neo-liberal theory, Sweden’s economy should now be in tatters and its work ethic shattered by socialism. Similarly, the third world is littered with low tax economies, such as Nigeria, that are still struggling with high levels of poverty and corruption. Tax rates in most economically successful East Asian counties are relatively low but these countries also tend to have high levels of trade protectionism that economic libertarians also strongly object to.

The centre-left cites the success of Scandinavian economies as evidence that high taxes can produce stable growth with high levels of equality. However, countries that have tried to copy Scandinavian tax policies have had little success, a good example being Britain in the 1970s. Britain was forced to revise its economies policies and reduce its tax rates after being ignominiously refused assistance by the IMF in the late 1970s. In the period from 1945-1975 New Zealand did well under a post-war high tax regime but was force to lower tax rates in the 1980s as national debt and inflation reached unsustainable levels.

Clearly its is possible to run a successful economy under both high and low tax regimes but there is little evidence to suggest that switching from one to the other will lead to a sustainable improvement in a countries economic performance. Furthermore, many developing countries have consistently failed economically under both high and low tax systems. Obviously factors other than taxes, such as culture, ethnicity, resources, geography and history are more important in long -term economic success. Nor can tax ideologues argue that tax rates would be decisive if only there was universal free trade. China is developing nicely with relatively high levels of protectionism (through subsidies and currency manipulation) and protectionist Japan and Korea are now emerging from extended recessions with their industrial sectors still in good shape. Centre-left proponents of ‘fair trade’ also fail to acknowledge that developing countries won’t benefit from ‘fair trade’ if they lack the infrastructure needed for exporting and can’t maintain basic law and order.

Tax fanatics should move on from their ideological cul de sac and start looking at other, more decisive factors in economic development than general tax levels.

The Problems with Keynesian Policies.

It has become fashionable for Keynesian economists, such as Tim Hazledine of Auckland University, to criticise proposals for compulsory saving schemes on the grounds that credit driven economic growth makes saving unnecessary. However, Keynesian economics is a hedonistic economic system which is highly unsuitable for an age of decadence and deindustrialisation. What is needed today is a return to the cuture of thrift and investment which charaterised Western economies from the late 1930s to the mid 1960s

The Keynesian, full employment programmes of the 1950s and 1960s were successful at the time because of-
1. the pent up demand for goods and services that existed following the Second World War.
2. the high savings culture which existed at the time
3. the industrialised nature of Western economies at that time and the huge potential for productivity increases in farming, manufacturing, fishing and mining.
4. tight regulation of the finance and property markets following Bretton Woods.

It is clearly apparent, today that economic conditions are very different. Contemporary Western Economies have been profounded restructured so as to promote consumption and penalise savings and production. People are now consuming more than they produce, not producing more than they consume, as they did when Keynesian policies were first introduced. Keynesian policies came unstuck in the 1970s because of high oil prices and industrial decline due to increasing Asian competition. If Keynesian policies were followed today there would be massive inflation with little job growth and even lower rates of savings.

Most of the West's industrial production has now been moved offshore to Asia, so there is now, in many respects, no real economy left to stimulate. Although this is good for inflation, because many Asian goods are being produced very cheaply, is cuts off the option of stimulating the economy with low interest rates. Low interest rates (even if they can be achieved) will simply encourage more consumer spending on overseas goods and property speculation, resulting in unsustainable trade imbalances and boom/bust cycles.

Although a lot of labour intensive manufacturing has been moved offshore the West still has some productive industries worth holding onto than can compete in a global economy. Industries which the West should be promoting include:

1. Farming- the more Asia industrialises, the more expensive food will become. Hence land and water rich Western countries should be looking to get more money from farming and not surrendering good land to urban sprawl.

2. Wood, Metal, Paper Processing and advanced production of chemicals and plastics- these industries depend on efficient use of energy not cheap labour and China, India and Vietnam are increasingly energy poor.

3. Alternative energy- the less oil and gas a country imports the easier it is to compensate for indutrial decline (Britain has already demonstrated this in the 1980s and 1990s). Local bio-fuel production can also help ease trade imbalances in land/water rich coutries like New Zealand and Argentina.

4. Arms manufacturing- the West should not outsource arms manufacturing- this is a mistake from an economic and security perspective.

5. Energy conservation technology- a huge growth area with many opportunities for creating customised products and services. Energy conservative will increasingly become a significant factor in economic competitiveness.

6. Pharmaceuticals and medical equipment- again, the West should protect these industries from third world competition for economic and security reasons.

These industries don't rely on Keynesian measures to stimulate consumption but instead rely on venture capital and govenment assistance, especially in the area of research and development. Subsequently, Western governments need to stimulate savings and develop an entreprenerial culture in the public service. To achieve this they need to combine traditional neo-classical economics, along with the developmental and institutional economics of the likes of Schumpeter and Veblen, plus new thinking from environmental economics.

The Neo-Keynesian idea of government sponsored consumption is a policy for a by-gone era. The problems of de-industrialisation, overpopulation and cultural decadence, require a return to traditional Western values of thrift and investment in the future.

The Cult of Managment

Although the cornucopian idea, that technology can solve all the world's problems, seems to be on the wane, a related belief, that management can solve all our problems seems to go largely unquestioned. There are many books and internets sites discussing the down side of technology but few devoted to criticising the excessive claims of modern management (John Ralston Saul's 1992 book 'Voltaires Bastards' being a notable exception) . American economist Thorstein Veblen was one of the first to point out the coming problem with modern management. Veblen argued that as productivity in industrial increases too many people become engaged in unproductive activity- the old problem of too many chiefs and not enough indians.

In the area of environmental conservation fundamentals such as the rate of economic growth, human nature and population levels are treated as secondary to good management. In New Zealand our elites seem to believe that with sufficient managers, lawyers and legislation like the Resource Management Act, problems like supplying enough energy to a rapidly expanding population can be painlessly resolved. Tough choices like forgoing current consumption for future development, spending tax dollars on energy conservation or cutting immigration aren't necessary if we have sufficiently enlightened bureaucracy.

As organisations become more and more management focused they start to erode the 'espirit de corps' that helped make them successful organisations in the first place. Over the past decade the wages of upper management in English speaking countries have increased considerably more than those of workers. Although managers say this is the logical result of a limited supply of good managers in a global market place, they fail to appreciate the effect it is having on worker morale. Productivity levels in most English speaking countries have shown little increase in recent decades and union militancy is beginning to resurface. In contrast wage differentials are much lower in Continental Europe and Japan where productivity levels in corporations are generally quite a lot higher.

The Obssesion with management in English speaking countries is having a bad influence on the developing world. Developing countries need to get the basics right before striving for sophisticated systems of management. This means concentrating on developing law and order, basic education for both sexes, passable roads, reasonable agricultural practices and lower rates of population growth. The fact that many poor countries have very high levels of graduate unemployment yet provide little support for their peasant farmers indicates that the West is still providing the wrong kind of advice and funding through organisations like the World Bank.

According to John Ralston Saul the word 'manager' comes from a French term for someone that does domestic housework. Although management is certainly more demanding than getting out a vacuum cleaner he does have a point- managers maintain existing systems they don't produce or develop anything per se. Actual development requires not so much managers, as 'entreprenuerial technocrats' (for want of a better term) that can generate plans and ideas and get different parties together to produce something new. In New Zealand, such people are conspiciously absent from our current crop of politicans and civil servants. Probably the only conspicious example is Jim Anderton , founder of kiwibank. Not suprisingly, the think tank, The New Zealand Institute describes the frustrating state of the New Zealand economy as the 'tidy management of the status quo'.

The cult of management is in many respects a new version of the old socialist idea, now descredited, of trying to develop a perfect world through politics.

Technology, Resources and Reality

In the 1990s it was argued that globalisation and information technology would create a 'weightless economy' in the West in which manufacturing and farming would be largely obselete and commodities from the developing wolrd would be cheap and abundant. In this brave new world computer literate workers would prosper while manual workers would be largely redundant. The state would also be redundant as flows of information and finance across national borders would be impossible to tax and regulate.

However, the 'weightless, stateless' world theory overlooks four crucial factors- resources, geography, demography and previously accumulated wealth.

In 2006 the weightless economy looks like an increasingly unlikely prospect. The economic boom of the 1990s was initiated by U.S military intervention in Kuwait, and the political collapse in Russia, that lead to a drop in oil prices. In the 21st Century increasing industrialisation in China, India and Vietnam is pushing up oil prices along with prices for many other commodities such as rice, beef, copper, gold, steel and gas. The United States, which is increasingly dependent on foreign energy sources, is also becoming increasingly indebted to overseas creditors.

Although farming and manufacturing employ a relatively small proportion of workers they are still very important to the economies of the West. Revenues from farming in the U.S, Argentina, and Australia have increased significantly in recent years in response to rising demand from China and the Middle East. Although the U.S and Britain have been promoting a shift to a service economy they have also maintained large defence industries to offset the impact of industrial decline in the non-military sector. Meanwhile mining and metal refining is becoming an increasingly important part of the economies of Canada and Australia.

The weightless economy theory also overlooks the wealth the West has accumulated through manufacturing in previous decades. Many people are currently spending inheritances and retirement savings that were built up during the 1950s and 1960s when manufacturing was much stronger. However, rates of personal savings in Western countries are now at historically low levels and today's generation will have little to pass onto their offspring.

Even though capital may be highly mobile, people are not. In a world of 6 billion inhabitants migration is inevitably highly restricted by national governments. Subsequently workers in 'geographically fixed' professions such as construction are protected from overseas competition. Over the last 10 years wages in the buiding trades have increased while many white-collar professionals have struggled to find work with an increasing number of office jobs are being outsourced to India. Only the highest paid managers and technocrats are fully internationally mobile, and even then only between developed countries.

Rather than dying off, governments have actually grown over the last 5 years and this trend looks likely to continue. Security threats from terrorism, contagious diseases and biological pests have recently increased and highlighted areas where state involvement is essential. Organised crime has also grown in tandem with globalisation and prompted the state to increase border and intelligence networks. As the population ages the state is also becoming increasingly important as a provider of health services and pensions in most developed countries.

The state is also providing a vital role in developing the infrastructure for oil and gas extraction. Increasingly long pipelines are now needed to get shrinking oil and gas supplies from isolated regions to where they are needed and this requires considerable inter-state cooperation. The shift to alternative fuels such as hydrogen will require even more state involvement due to the massive long term investment required. Indeed, the development of alternative energy sources may become the largest single government expense of the 21st Century.