“How can I be substantial if I do not cast a shadow? I must have a dark side also if I am to be whole.”
― C.G. Jung
We experience emotional turmoil from time to time in our lives. This can include bullying, romantic rejections, or even condescension on the part of other individuals. Since I was a young boy, I have been directly criticized by people on several occasions – “You’re a fat loser”, “Useless dickhead”, “There is no way you can succeed in this position“. In response to my writing, I have recently received feedback from some individuals that “This is bullshit.“. To be honest, all these criticisms and disappointments breed resentment and frustration. The cycle feeds on itself and deeply hurts me. There are times when the emotional turmoil and suffering manifest themselves in negative emotional reactions toward others. Sadly, this is the default setting for me, and I need to improve it. Patience and sensitivity have been two of my weaknesses.
Nevertheless, I have found that reading Stoic philosophy calmed my mind and helped me recognise that sometimes these critical comments can be used to fuel positive developments. Every individual has a dark side that we try to repress by claiming that “this is not me”. Yet if that is the case, we are deluding and lying to ourselves. As a matter of fact, we can either channel that energy into productive and constructive activities, or we can allow it to manifest itself into destructive outcomes that negatively impact us and those around us.
In relation to the dark side of human psychology, personal trainer Tim Grover explored the hypothesis in his book, ‘Winning’. He is well known for being one of the best trainers on the planet. He trained world-renowned NBA players including Michael Jordan and Kobe Bryant. Both of these men channeled their energy into their passion for basketball. He asked three questions of those who wish to succeed:
Do you bet on yourself?
When things get tough, do we trust ourselves? Do we rely on the opinions of others or our gut instinct? As a Los Angeles Lakers player without Shaquille O’Neal, Kobe exceeded everyone’s expectations and won titles after titles without him. He retransformed his game.
Michael Jordan exceeded the expectations of the crowd by scoring the highest points average in the league for the Chicago Bulls during the 1990s when he was expected to fail by adding 30 pounds of muscle.
Both went against the grain and followed their instincts.
Do you leverage your dark side?
It is no secret that Kobe Bryant had a dark side. He even coined the nickname for it – “Mamba”.
It enabled him to accomplish all the tasks he had at hand. Michael Jordan used his negative past experiences to outwork and outperform other players. His rejection by his peers and his coaches inspired him to become the best of the best. This resulted in a successful outcome for him.
According to Tim Grover, we are best served by our dark side by remembering all the disappointments we have experienced – those who said ‘no’, those who teased us, those who rejected our applications, and those who said to us, “You’re not good enough.” We should mentally connect with how each of these moments made us feel. If that made you feel “fire and fury” inside, then that is the kind of energy you should direct toward productive pursuits. That is our dark side fuel for growth. Turning anger into focus is our superpower. Rather than using this energy for despair or impulsive pleasure, we re-direct it towards activities that will benefit us long-term.
In my case, it is writing this blog – practicing my writing; reading the authors and intellectuals that I admire; pushing myself harder to build greater understanding in economics; and lifting weights harder at the gym.
Do you live an unbalanced life?
There are always trade-offs to be made in life. For Grover, winning demands obsession. In order to reach our potential, we must make sacrifices. It is important to avoid socializing too much, not committing to family obligations, hobbies, vacations, or leisure activities. In order to succeed, one must focus on the long term.
It is impossible to have it all. Depending on what we want to prioritize, our decisions are always the lesser of the two evils. Those who seek to have it all will not become true masters of their craft. According to Grover, this will be a difficult choice for most people, but in his opinion, a ‘balanced life with leisure’ does not make sense. It is purely about becoming world-class. Perhaps those who take the decision to become masters are considered obsessive, selfish, and neglectful of others.
However, the results speak for themselves. It pays off to have an obsession with something and strive towards mastery and victory. Tiger Woods, for example, has won 109 PGA Tour events, won 15 major championships, and has been ranked number one for 683 weeks in total.
Conclusion:
“Decide. Commit. Act. Succeed. Repeat.”
― Tim S. Grover
For a life of true fulfilment and long-term satisfaction, we must channel our dark energy. Dark energy can be used either productively or destructively. We use our negative emotions as fuel to achieve success in our craft. If we combine this strategy with Stoicism, rely on our guts, our obsession to win, and make important life trade-offs, we can achieve our goals.
Imagine what it would be like to see yourself in the future and prove everyone wrong. That would provide real satisfaction.
We’re on a slope where monetary policy has become increasingly ineffective in promoting real economic growth. Every crisis was met with monetary easing that caused debt and other imbalances to accumulate over time, and that caused the next crisis to be bigger than the previous one.
William White, Former Chief Economist of The Bank of International Settlements
Cracks on the Wall in 2021
A few weeks ago, US Secretary of Treasury Janet Yellen announced that the US government is heading towards default if Congress does not lift its ‘debt ceiling’. As we all know from economic history, the default of the United States would be a catastrophic ‘financial Armageddon’. With the US being the largest economy in the world, this is alarming news.
On the other side of the world, China’s second largest property company, Evergrande is facing a debt crisis. The default of Evergrande may have potential spillovers with the residential market being worth 29% of China’s GDP (Rogoff and Yang, 2020). Excess leverage of the Chinese corporate sector does not spell financial confidence. Some are claiming that this is potentially a Chinese ‘Lehman Brother’ bubble bound to pop like the 2007-08 global financial crisis (GFC).
In Europe, since the advent of Covid-19, the European Central Bank bought virtually all the government bonds (quantitative easing) of European countries like Italy and kept its interest rates at zero percent. No private investor is willing to buy government bonds at this stage. The only market players in this area are central banks.
Something strange is happening across the world economy. We are witnessing imminent cracks in the global financial system. It’s difficult to predict what may occur in the next few months or years, but one thing is clear – the global economy is extremely fragile. The net worth of many individuals and households are bound to crash sooner or later.
There are strong correlations between populism (both left and right wing) and the 2007-08 global financial crisis. (By Ingram Pinn for The Financial Times).
Introduction
Virtually everyone understands that getting into excess debt leads to trouble. Whenever someone sees a ‘red’ balance in their bank accounts, they panic and try to do everything they can to either lower their deficits or pay back the debt. Financial circumstances matter to people. Saving before spending is the common wisdom. This logic applies to governments too. Except they have the ‘printing press’ with government-controlled (or owned) central banks to fill their coffers (as lender of last resort), on top of tax revenue.
Whilst it may be true to claim that governments are different to individuals and households, its economic decisions have significant consequences on our livelihoods.
It’s been a year since the Covid-19 pandemic began. In contrast to last year’s 3% economic contraction, the International Monetary Fund (IMF) projects that the world will face positive economic growth of 6% for 2021 (IMF, 2021). It seems that high vaccination rates are allowing cities and regions to get out of lockdowns. The United States, the United Kingdom, the European Union and other parts of the world are opening up to the rest of the world. In hindsight, financial circumstances appear better than 2020.
However, there are serious questions as to whether this will be the case in the medium term. In response to the Covid-19 pandemic, many governments across the developed world have accumulated debt levels well-beyond their annual economic output (Gross Domestic Product – the value of every single thing sold on every single shelf around NZ and the value of every single person who worked for a whole year) and the net worth of these governments are heavily in the negative (considering the assets and liabilities of governments).
Table 1: Net Worth of Governments
Country
2016
United Kingdom
-141
Finland
-109
United States
-69
Austria
-41
Canada
-29
Germany
-22
Australia
-21
Switzerland
12
South Korea
41
New Zealand
46
Norway
384
As of 2016, governments were already under in the heavy negatives (IMF, 2018)
This is an unprecedented level of debt during peacetime. Instead of fiscal surpluses, we have so far witnessed the exact opposite from governments. Unfortunately prudence is not a popular term for government officials. Low interest rates from central banks induced more governments to borrow more money. They decided to get the money now instead of the future. Instant gratification took precedent over delayed gratification.
In addition, central banks across developed economies printed trillions of dollars out of nothing to stimulate the world economy away from the recession. They also lowered its interest rates to zero-bound levels. In essence, central banks have made borrowing extremely cheap for everyone, including governments. But the such low interest rate levels are unprecedented.
Spending has become easier. Saving money is not rewarded. Inflation undermines the real value of the dollars in your bank account. This forced individuals to speculate in the stock market or the housing market for a decent return. Unproductive zombie firms have been propped up without falling, forcefully maintaining low unemployment levels without ‘creative destruction’ (Banerjee and Hofmann, 2018, 2020)
But what happens if these markets face downturns again later? Everyone may lose everything. Can they react in a similar manner to the GFC of 2008 or Covid-19? Are bailouts from governments even feasible? I’m not entirely sure.
This is why governments and central bank policies matter to all of us. This essay will explore the few key variables that culminated into the current state of financial affairs. The moral hazard problem; the public debt precedent set by the 2007-08 GFC; the doubling down of debt with the responses to Covid-19 and finally the potential long-term ramifications of these responses.
In times of uncertainty, policymakers pursued these policies for correct short-term reasons, but the decisions have created unintended consequences for the future. Central Banks cannot raise interest rates, nor can they suck the printed money out of the system for fears of creating a worse recession. They are now stuck at a corner by kicking the ‘recession’ can to the future. In the words of former Federal Reserve economist Bill Dudley, central banks are “running out of fire power” (Dudley, 2020).
The decisions in response to the pandemic were understandable. In the face of uncertainty, it is entirely rational to have pumped money into the economy, and to have spent billions on the wage subsidy and other fiscal programmes across the developed world – including New Zealand.
But the net consequences is that the financial system does not look healthy or sustainable. In contrast to optimistic scenarios, the reality is that the world is at a crisis point.
Overall, the decisions by governments and central banks have created a financial system that is chugging along entirely on the “excessive build-up of debt” (White, 2021). This is unsustainable and a form of a financial crisis will loom the world soon. It is uncertain how this next crisis will occur, but economic history tells us that risk is always present (Reinhart and Rogoff, 2009).
We will explore the reasons why that is the case. The origins of the problem started with the end of the stagflation period under Paul Volcker.
The Rise of Moral Hazard
The only way to contain the economic damage of a financial fire is to put it out, even though it’s almost impossible to do that without helping some of the people who caused it.
Ben Bernanke, Henry Paulson and Timothy Geithner, on their policy responses to the GFC
Moral hazard is a common economic term used to define human behaviour when people get incentivised to take more risks for greater profit at the expense of the other party. Another term for this is the ‘principal-agent problem’. For example, if I have health insurance I have the incentives to be more careless with my health, assuming the insurance company will bail me out when I need heart surgery based on my heart attack. It’s the problem of taking more risk when you are not as personably liable.
On similar grounds, beginning with the Federal Reserve Chairman Alan Greenspan, central banks intervened in the economy whenever there was a downturn in the stock market. In contrast to health insurance where there is a risk premium demanded by these companies, what Greenspan did was essentially bail out investors and financiers for free repeatedly. Under Greenspan, the Federal Reserve intervened by lowering the Effective Federal Funds rate during the 1987 stock market crash, the 1994 Mexican peso crisis, the 1997 Asian Financial Crisis, the collapse of Long Term Capital Management and the dotcom bubble in 2000 (Rudd, 2009). By easing monetary conditions whenever there was a downturn, he propped up the stock market and economic activity. Essentially, the Fed was providing free insurance to investors. During his reign between 1987 and 2006, he was world renowned for presiding over the ‘Great Moderation’ period of moderate economic growth, low unemployment, low inflation and ‘managing’ the global economy well.
But if you continue bailing out the people that fail, they are more likely to make riskier decisions, assuming a massive profit by taking that risk. Why wouldn’t they!? The Fed had their backs. The higher the S&P 500 went, the more riskier investments they made. We see this in the growth of new financial products in the likes of subprime mortgages market (Mortgages lent to people that do not have the collateral, capital or employment to buy homes, but loaned out on the basis of higher risk. These were sliced and diced into non-risky assets into the form of Collaterized Debt Obligations) and credit default swaps (financial instruments purchased on the assumption that other parties will fill for bankruptcy, which is essentially a bet) during this era. This was a timebomb in the residential sector that was bound to fall, but for the medium term, as long as house prices continue to go up, things looked rosy. Then the global financial crisis happened beginning in 2007.
The Road to High Government Debt Levels: GFC 2007-08
New Zealanders might recall the tumultuous period during the 2007-08 GFC. The fall of Lehman Brothers and other financial institutions across the stock market left investors in panic mode. The financial ‘cancer’ of subprime mortgages and CDOs spread to the entire global financial system. Banks such as Northern Rock in England faced bailouts from the British government and the Bank of England. With the help of the Federal Reserve, the United States had to spend USD$1.5 trillion in bailouts and tax cuts to stimulate the economy and stir away from the global recession. It was a transfer of a banking crisis into a public debt crisis.
Alongside the Federal Reserve in the United States, other central banks – such as the ECB, the Bank of England and the Bank of Japan – begun the process of what economists call quantitative easing (the printing of money) and reducing their interest rates to low record levels. This was to save the economy from falling into further recession.
Millions of people lost their homes, life savings and their livelihoods. Many people became unemployed and lost jobs – some even permanently became redundant. It was an extremely unpleasant sight at the time. Alan Greenspan’s reputation had tarnished completely.
It affected the New Zealand economy as well. NZ unemployment jumped from 3.6% in 2007 to 6.1% by 2010. As a response, under both the Fifth Labour government and Fifth National government, we pursued fiscal stimulus programmes. Thanks to our prudent fiscal measures beginning in 1994 to 2008, we were able to respond well. Under John Key’s National government, our government debt levels went up from 5.4% debt to GDP in 2008, to 25.4% of GDP by 2014. The Reserve Bank under then- Governor Alan Bollard dropped interest rates by 5.75% to stimulate the New Zealand economy (Bollard and Ng, 2012). New Zealand did not need to pursue quantitative easing.
According to Ben Bernanke (the former Federal Reserve Chairman and successor to Greenspan), it was imperative for policymakers in American ‘to do everything it takes’ to stop the world economy facing a modern ‘Great Depression’. They bailed out financial institutions bound to fail, they provided liquidity to the US Treasury by purchasing government bonds and rapidly expanded their balance sheets. The total assets of the Fed increased from USD$1 trillion to USD$2 trillion by 2009, and the Federal Funds rates at 0.75 as indicated in Figure 1.
Under Obama, the US Federal government pursued fiscal stimulus programmes such as the American Recovery Reinvestment Act of 2009. This programme alone added USD$840 billion to the budget deficit. As indicated Figure 2, the federal debt held by the public ballooned from 35.7% in 2008 to 75.9% of GDP by 2017, which is more than double before the GFC.
Other economies such as The European Union, the United Kingdom, Japan and other developed economies spent their way out of the problem. The banking crisis originating in American transformed into a public debt crisis across the developed world (except for fiscally prudent nations such as Australia and New Zealand), culminating into a sovereign debt crisis in Europe – also known as the 2011 Euro crisis.
The GFC revealed excess public borrowing. Countries in Europe such as Greece, Portugal, Ireland, Spain and Cyprus were unable to repay or refinance their debt obligations to their bond holders. Many looked to other European Union member states for financial assistance or even bail outs. An extreme example is Greece. The small Southern European country received series of 100 billion euro bailouts from the International Monetary Fund and the European Union (Voigt, 2012). Germany was the most generous of lenders. Yet despite this, Greece defaulted in 2015 (and is currently barely staying afloat with Greek government debt levels remaining well above 100% at 210% of GDP as of 2021). Many European economies are also floating along thanks to the financial support from prosperous economies such as France and Germany, and low interest rates from the European Central Bank.
Figure 3 shows that governments have been induced to borrow more as interest payments continue to decline. The European system is not healthy by any means. Debt levels and leverage are far too high, encouraged by central bank intervention and help from other countries.
Figure 3:
Euro zone general government net interest cost and financial liabilities (OECD, 2021).
In conclusion, the responses to the GFC saved the global economy facing an economic depression. However, this came at a cost. The banking crisis turned into an inevitable public debt (or sovereign debt crisis). In the United States, public debt continued to accumulate with little indication of deleveraging or fiscal restructuring. Meanwhile, Greece created political and economic turmoil in Europe, amalgamating into populist sentiment in Europe. With the Brexit vote in 2016, the European Union and the euro currency’s future remains uncertain.
If the Greek default created such geopolitical turmoil, imagine what the circumstances would be if any of the major G20 economies face financial trouble. In addition, the initial quantitative easing from central banks restarted the economy following the GFC, but it incentivised governments, households, companies to all take more debt rather than less. The world essentially buckpassed the financial crisis to the future as a short-term band aid. Then in 2020, Covid-19 hit the world starting in Wuhan, China, forcing governments and central banks to make drastic decisions.
The Fiscal and Monetary Consequence of Covid-19
The supply shock to the global economy came from a pandemic. Governments and central banks again took swift decisions. The fiscal and monetary responses to Covid-19 were very similar to the GFC, except the scale and size of the quantitative easing from central banks and deficit spending of governments were far larger. For the Euro zone the average gross financial liability levels were close to 120% of GDP. The United was 141% and the United States was 146%. Under President Biden, the US Federal government’s fiscal deficit was 15.9% of GDP for 2021. For the Euro zone on average it was 7.2% and New Zealand was 4.2% deficit (OECD, 2021). Before in 2008, the ratio of global household, corporate and government debt to GDP was 280%. As shown in Figure 4, in response to the pandemic, in 2020, this ratio had grown by 75% to355%(IIF, 2021). The world has now mortgaged our future by getting into more debt now.
Figure 4:
Global Debt Monitor: COVID Drives Debt Surge—Stabilization Ahead? (IIF, 2021)
Governments around the world have never spent this much money in response to a pandemic in peacetime. The deficits created during the 2007-08 GFC look miniscule in comparison.
In monetary policy, the central banks have pumped more money and liquidity into the system than ever before, shown in Figure 5. ‘Trillions’ are being swashed around the global financial system (For context, 1 trillion is five and a half times New Zealand’s GDP). Bank rates are now virtually zero around the world – see Figure 6. The banks have little firepower left to tackle another financial crisis later down the track. Monetary policy has become less effective as a result of all of these responses beginning from the GFC.
When the United States and the rest of the developed world entered zero-bound rates during the GFC, former Bank of Japan Governor Masaaki Shirakawa noted that when Japan was adopting zero bound interest rates and quantitative easing policies beginning in the early 1990s, he never expected other countries such as the United States to follow suit (Shirakawa, 2014).Yet, other central banks did, and they all entered a road of no return.
Conclusion
The global economy has entered a cross road, unable to turn back towards a period of relative normalcy. Starting with the fiscal and monetary responses to the GFC, governments have accumulated record debt, and central banks lowered its rates and printed money to stir the economy away from prolonged recessions. We have kicked the can down the road to an even more precarious future.
Both governments and central banks are stuck into a corner. Governments’ cannot stop spending, because otherwise unemployment rates would erupt; central banks cannot lift rates for the fear of sovereign default and collapses of heavily indebted companies. The public cannot stop buying inflated assets with the ‘fear of missing out’. Rising inflation and low interest rates incentivise people to stop saving and risk their future wealth through speculation. All of these government responses create bad incentives across the whole global economy.
On monetary policy, the late macroeconomist John Maynard Keynes wrote in 1936 that “If, however, we are tempted to assert that money is the drink that stimulates the system to activity, we must remind ourselves that there may be several slips between the cup and the lip.”
The effectiveness of monetary policy has now been nullified with rates close to zero percent. What can central banks do to respond to the next crisis? Bailouts? Further quantitative easing? Economists cannot predict the future, but we can anticipate risks from recent trends.
Contemplating that future is bleak. The era of normalcy following the end of the Cold War seems like a distant past. The period of ‘normal’ interest rates and sustainable debt levels seem implausible at this stage. The trends have been towards more debt, lower rates and more money printing. What will governments and central banks around the world do? And more importantly, when will this madness end? We will soon find out in the near future.
References
Alan Bollard and Tim Ng, “Learnings from the global financial crisis,” Sir Leslie Melville Lecture, Australian National University, Canberra (9 August 2012).
Alan Rappeport, “As debt default looms, Yellen faces her biggest test yet,” The New York Times (23 September 2021).
Bill Dudley, “The Fed Is Really Running Out of Firepower”, Bloomberg (28 October 2020).
Emre Tiftik and Khadija Mahmood, “Global Debt Monitor: COVID Drives Debt Surge—Stabilization Ahead?” Institute of International Finance (17 February 2021).
International Monetary Fund. “IMF Public Sector Balance Sheet Statistics: Database.”
Kenneth Rogoff and Carmen Reinhart, This Time is Different (Princeton University, 2009).
Kenneth Rogoff and Yuanchen Yang. “Has China’s Housing Production Peaked?” China & World Economy 29:1 (2021), 1–31.
Kevin Rudd, “The Global Financial Crisis”, The Monthly (February 2009).
Kevin Voigt, “Eurozone approves new $173B bailout for Greece,” CNN (21 February 2012).
Mark Dittli, “Central banks keep shooting themselves in the foot,” Interview with William White, The Market (6 November 2020).
Masaaki Shirakawa, “Is Inflation (Or Deflation) ‘Always and Everywhere’: A Monetary Phenomenon? My Intellectual Journey in Central Banking,” BIS Paper 77e (2014).
Matt Egan, “‘Financial Armageddon’. What’s at stake if the debt limit isn’t raised,” CNN Business (8 September 2021).
OECD.Stat.
Ryan Banerjee and Boris Hofmann, “Corporate Zombies: Anatomy and Life Cycle,” BIS Working Papers No. 882 (2020)
Ryan Banerjee and Boris Hofmann, “The Rise of Zombie Firms: Causes and Consequences,” BIS Quarterly Review (2018)
The Economist: “How should recessions be fought when interest rates are low?” (21 October 2017).
US Federal Reserve, “Federal Debt Held by the Public as Percent of Gross Domestic Product.”
US Federal Reserve, “Credit and liquidity programs and the balance sheet.”
William White, “It’s Worse than ‘Reverse’: The Full Case Against Ultra Low and Negative Interest Rates,” Working Paper No. 151 (New York: Institute for New Economic Thinking, 2021).
Yardeni, and Mali Quintana. “Central Banks: Monthly Balance Sheets” (Yardeni Research, Inc. 2021).
Over the course of the last two years in Wellington, I have come to realise something. Many people enter politics with the best of intentions, however, they end up becoming a part of the system. In my opinion, the majority in the House of Representatives place poll numbers ahead of effective governance and public administration. And this is failing the public. There appears to be no vision, let alone a direction, for the future of Aotearoa New Zealand from either the government or Opposition.
Those who know me well will recall that I campaigned for Labour four years ago, and at the time I was genuinely enthusiastic about Jacinda’s message of hope, change and progress. I was proud to be part of a movement that fostered change. Solving the problems surrounding the housing market, inequality, education, health, well-being, and climate change was a moral imperative for me.
The Labour Party is now in power. But how well have they done on objective metrics such as Housing? With the exception of our crisis management – such as our containment of Covid-19 – they are worse.
In the past year, house prices have increased by 32%. The inequality gap in wealth and income worsened under the current government than under any of the previous three governments combined. PISA rankings in Math, Science, and Reading have all fallen significantly. We have inadequate public health measures due to a limited number of intensive care units, and our doctors and nurses are not receiving the salaries they deserve. Meanwhile, the Ministry of Health bureaucrats have more money in their coffers without delivering any meaningful results. In spite of government commitments to spend billions on mental health, the situation continues to worsen. With regard to climate change, our oil and gas ban has caused market externalities – we burn more coal to generate electricity, which resulted in higher emissions. This is utterly unacceptable.
Politicians always claim in the media that they tried their best. In a company or in the private sector, if this was the performance result, they would all be severely questioned by the Board of Directors. However, in politics, there is no direct accountability. Failures are not grounds for dismissal, except for the voting system every three years.
However, one of the reasons for government failures have to do with the lack of competition. Currently, the Opposition is in disarray. Instead of proposing public policy solutions of their own, they are fighting among themselves. There is little incentive for the leading party to push for positive change when they are dominating the polls without much being achieved. Essentially, there is no need for them to perform better. Furthermore, the quality of politicians throughout the House is abysmal. The fact that the Minister of Justice, Kris Faafoi, had to remain in politics – despite wanting to leave – tells us much about the lack of talent within the party.
Personally, I really don’t care who is in charge so long as the performances are excellent. In a similar manner to when the CEO of a company changes, where outputs and profits stay high. For this to occur in our political system, we must cultivate more competent and talented individuals across the political spectrum. We need people that care more about ‘policy’ not ‘politics’ in the future. This is essential to the economic growth and well-being of the country.
Kabul, Afghanistan, recently attracted global attention. Biden Administration’s hasty withdrawal was harshly criticized globally. Many allies viewed this humanitarian disaster as undermining the credibility of the West.
The situation in Kabul is unjust. Nevertheless, we cannot forget the fundamental cause of this catastrophe in the first place. It began with the West’s dogmatic geopolitical approach after the Cold War.
The West lost its sanity following the end of the Soviet Union. Numerous efforts were then made to forcefully spread liberal democracy throughout the globe. The decision was a terrible policy idea. Western reputation was ruined, trillions were wasted, and global democracy is in decline.
The fall of the Berlin Wall in 1989, led to the belief that the West was destined to lead the way towards a more liberal world. As part of the Third Wave of democratisation, liberalism also reached Eastern Europe.
The Cold War victory over the Soviet Union led to complacency on the part of the United States. Policymakers responded to Francis Fukuyama’s ‘End of History’ thesis with greater fervour. Inadvertently, this hypothesis empowered Washington and the Pentagon.
A fundamentalist turn was observed in foreign policy. Overconfidence led to exuberant confidence. The idea that any nation could be socially engineered into a liberal democracy.
Military intervention became more mainstream. By doing so, dictatorships would be overthrown, regimes would change, and democracy would be introduced. It was ideology rather than diplomatic history that shaped foreign policy.
The liberal internationalists and neoconservatives began to dictate policy in Washington. Stephen Walt coined these ideologues ‘the blob’ in the foreign policy establishment.
In the wake of 9/11, President Bush began the War on Terror. The Bush Doctrine led to regime change in many parts of the Middle East. Intervention in Afghanistan in 2001 and Iraq in 2003, led to the installation of new governments supported by the United States.
But instead of transforming into liberal democracies, the two nations ended up fighting civil wars. The overthrow of dictatorships such as Saddam Hussein and the Taliban led to anarchy.
Domestic order was impossible with a legitimate government. The practice of beheadings, violence, and Islamic extremism has become prevalent under Al Qaeda.
The Obama Administration failed to learn from Bush’s mistakes. In 2011, a Libyan intervention exacerbated the chaos in the region. A vacuum created the refugee crisis in 2015, which triggered mass migration into Europe. This fuelled national populist sentiments across the European Union.
Evidently U.S. international reputation and credibility were damaged. Political scientist John Mearsheimer viewed these interventions as “never-ending wars”. He knew it was bound to fail.
Without an understanding of local institutions and cultures, it is virtually impossible to build a nation. Lee Kuan Yew, Singapore’s greatest nation-builder, thought America’s policies were ill-founded.
He viewed the Middle Eastern nation-building as impossible. In 2009, he said, “I see imbroglios in Iraq and Afghanistan as distractions.”
Ultimately, he was right. The United States has spent more than 6.4 trillion dollars in both countries over the past two decades. A total of 7,000 American soldiers, 177,000 local officials, and countless innocent civilians were killed.
And liberal democratic values have declined worldwide since the Cold War. Freedom House reports in 2021 that global freedom has dropped for 15 consecutive years – a “democratic recession”.
The mistakes by the United States led to a world order less liberal and more authoritarian. The balance of power in the international order has started shifting towards Asia. The liberal West is currently on the defensive.
The United States continues to be distracted in the Middle East. An emerging superpower grew militarily and economically during this period. China is now a peer competitor in the international system to the United States.
During this period, China did the opposite of the United States. Since its conflict with Vietnam in 1979, it has not entered a single war. China concentrated primarily on its economic growth and development.
Deng Xiaoping led the Chinese government into the international economy. With a new diplomatic relationship with the United States, China opened its doors to foreign investment. In 2001, China joined the World Trade Organisation.
China increased its investment in public infrastructure, including roads, bridges, and cities. Thus, real GDP increased by an average of 10% from 1979 to 2010.
To build its technological capabilities, the government reverse-engineered Western products. Its technological capabilities have been enhanced through joint ventures with western companies.
The Chinese government has modelled its style of governance on that of Singapore. Meritocracy was at the centre with a technocratic approach to public policy. Consequently, a new system of governance was conceived, based on standardised testing and performance-based results.
They focused primarily on technical expertise, such as science, engineering, mathematics, and economics.
In the meantime, the West has cooled on meritocracy. Long-term, this poses a significant problem. According to the OECD, meritocracy is of critical importance for social mobility and economic growth.
However, many institutions in the West have become hostile to the meritocratic ethos. Adrian Wooldridge of The Economist deplored the West’s departure from meritocracy. He asserted that “flawed systems to promote equal opportunity should be reformed, not replaced by quotas and a grievance culture.”
The gradual departure from meritocracy is not conducive to strong economy growth. Nor can the West remain distracted in nation-building projects. Otherwise, it will continue down the downward spiral in its international reputation. These trends have harmed the global liberal movement.
If the West does not change its course, the Chinese will become number one. When one considers that China is becoming a larger version of Singapore, it is imperative that the United States wake up.
U.S. withdrawal from Kabul did not harm the reputation of the West. Through its fundamentalist approach to foreign policy, it shot itself in the foot. Kabul’s fall is a symptom of the inherent problem, not the cause. Foreign policy goals must be achieved through realpolitik strategy, not ideological dogmatism.
Far too many times across history, I’ve seen and read about policymakers causing blunders. At every step, most people utter the claim that they have ‘good intentions’. Well, as Samuel Johnson quipped, “hell is paved with good intentions”. This applies to both sides of politics.
We see the classic example on climate change. Indeed, we have the moral obligation to do everything we can to lower our emissions and achieve net-zero by 2050 (the earlier the better for me). The centre-left so far failed despite the good intentions, and the centre-right under National refused to put the agriculture sector into the ETS (explained later).
The centre-right did very little with the global issue when they were previously in government. Under the National government (2008-2017), the Emissions Trading Scheme (ETS) prices dropped with a ‘flexible’ cap, not binding like now; NZ maintained the status quo for climate change. The agriculture lobby within the right of politics made the sector exempt from the ETS. This was a problem and still a problem for those that want lower emissions as efficiently and effectively as possible.
Nor have the current centre-left government made much progress. What really frustrates me is that both the Climate Change Commission (CCC) and government failed to make empirical cost-benefit assessments. According to Stats NZ, our emissions have not fallen but increased by 2% in 2018-2019. This is criminal. Our net emissions are actually set to increase, not decrease. Why?
Let’s start with the oil and gas exploration bans. This caused ‘substitution effects’ in the market – where one consumption of a good gets replaced by another due to higher costs. Consequently, we have a record high imports of coal into the country. The passage of the Zero Carbon Act in Parliament means nothing when we are failing to reach our targets. The energy market shifted towards alternative resources that emit more carbon dioxide in the air.
To give some credit, some good policy mechanisms have been introduced, primarily under Climate Change Minister James Shaw. We have a binding emissions cap within the ETS. This follows basic economic logic – having a binding carbon tax, or ETS, is the simplest and fastest way of lowering emissions. According to the Pigou Club – with renowned members such as Joseph Stiglitz, Daron Acemoglu, Kenneth Rogoff, Greg Mankiw, and Paul Krugman – such a scheme corrects market externalities. Fortunately, New Zealand leads the way with a binding cap now.
The starting point and main tool in lowering emissions should be with the ETS, not government pet projects. Spending millions of dollars on EVs and other government-led projects do not reduce our net emissions overall. It simply allows other market players to purchase carbon credits that will pollute anyway. If the government decides to lower its emissions, other people can pollute more because of the binding cap. According to Professor Hazledine from Auckland, the CC has not made it clear whether we are sticking with the ETS or a carbon tax. We should focus on improving the ETS and finding other technological, urban planning and public transport solutions to lower emissions.
Free trade agreements with a sustainable development framework is excellent too – Switzerland and Peru signed one with the first ever ‘carbon offset scheme’ which lowers net-emissions between both sides by finding comparative advantages of their respective economies. Peru finances sustainable development projects in Switzerland and takes credit for emission cuts.
Climate change is a global issue and requires our country to play its role. Efforts from all of us, but primarily the largest emitters such as China, the US, and India are also imperative – we live in a global village and all our actions have consequences. New Zealand is a responsible stakeholder in the international rules-based system. I remind people that we must stop becoming doctrinaire to the government’s intentions and focus on the effectiveness of the policy.
Lower emissions with cost-effective policies should be the goal. For example, imagine sending your broken car to a repairer, and he fails. Would you be happy if he gave you excuses and just said “I tried and I had good intentions”. You’d be like, “screw that, do it again, and get it fixed properly”. Similarly, good intentions mean jack-all when it comes to climate change. Some good work has been done, but a lot of the policies that have recently emerged will do very little to lowering our emissions.
“In recent years it has become evident that the consensus upholding this system is facing increasing pressures, from within and from without… It’s imperative that we act urgently to defend the liberal international order.” — President-Elect Joe Biden in 2017.
The Liberal World Order is one of the most used phrases in international relations scholarship. It’s a repetitive term, but a significant one, considering the fact that it affects everyone around the world. The United States began the Liberal International Order with the end of World War II and the defeat of the Nazis. With Franklin Roosevelt’s vision, the Western superpower set up international institutions and created long sustaining alliances for a greater multilateral and tolerant global society. Without the liberal world order and brilliant American leadership in the likes of Roosevelt, Eisenhower, Kennedy, and Reagan, New Zealand and other allied nations would have not been able to thrive during the Cold War period. Regional and international institutions such as GATT, WTO, IMF, the World Bank, European Union, and NATO provided security and economic cooperation among allied nation-states.
And yet, there are a lot of people in New Zealand that criticise America for its role as the leader of the world. In fact, many of them want to see its role reduced substantially. I agree with that statement somewhat, I’ve been very critical of their nonsensically hawkish interference in the Middle East, its naive attempts at forcefully spreading liberal democracy around the world. Its eastward expansion of NATO and the EU was also a great mistake that resulted in the military retaliation of the Russians. America’s neoconservatives and liberal hawks that were fundamentalist on the ‘end of history’ ultimately created all this mayhem.
However, if they mean America’s leadership getting entirely compromised and allowing authoritarian governments to enter that space – such as Communist China – then my answer is an absolute ‘no’. As President-Elect Biden noted, “it’s imperative that we act urgently to defend the liberal international order”. The Thucydides’ Trap is incoming at this stage in history and the US-China geopolitical contest will be the defining historical turning point for global liberal democracy. As John Mearsheimer noted before, this security competition will continue even under the Biden Administration and beyond.
So what is the point of this post? My message to New Zealanders in this blog is simple, America matters for the western world and in fact democracy itself. They have to win, and it is imperative that they do. I say this, despite knowing America’s complicated history.
In many ways, America is somewhat a hypocritical concept – it started as the first constitutional republic against the British monarchy. It set out laws for equal opportunity…but for only white men, and simultaneously set out a brilliant Federal system of power by instituting checks and balances. Constitutional amendments were made for free speech and inquiry… but also allowed slavery. It also intervened in smaller nations and participated as a colonial power during the Imperial era. Then slavery was banned under Abraham Lincoln, and racial equality was not legally achieved until the 1960s, under Lyndon Johnson’s Civil Rights Act and Voting Rights Act… and also escalated the Vietnam War. They defeated the Soviets and ended Communist authoritarianism with the Berlin Wall falling. The American Pentagon stupidly intervened in Iraq and Afghanistan after 9/11. Then elected the first African American President, Barack Obama (whom I personally admire). Then the recent events that happened in Washington is another example of historical irony at work. It is clear that President Trump and his cronies led the world to a more chaotic, less democratic and hyper-partisan society. America as the beacon of freedom or just arrogance? In short, both. The American experiment is indeed full of both hypocrisies and social progress. Even today, many social science scholars such as Cornel West suggest that the nation has not lived up to its ideals, for instance, the inadequacy of equal opportunity for all. These are all empirically and historically accurate.
However, what separates America in contrast to other countries around the world is that it’s the first serious societal experiment in human history. The United States is like the ‘Republic City’ in the television cartoon, The Legend of Korra. The nation is defined entirely by civic values rather than on race, ethnicity, culture, background, or creed. You become American by embracing its liberal democratic values, its identity based on its historical strife against the British monarchy, its constitutional values, and individual liberty. It’s a nation created out of migration and a sociological result as a historical derivative of European enlightenment.
Diversity matters to many Americans, but what is unique is the tolerance towards others, the ability to fight for freedom around the world. Liberalism is the key symbol of America and that’s the beauty of it. As Francis Fukuyama mentioned in his column last year:
Liberalism was simply a pragmatic tool for resolving conflicts in diverse societies, one that sought to lower the temperature of politics by taking questions of final ends off the table and moving them into the sphere of private life. This remains one of its most important selling points today.
Indeed, liberalism allows for diversity. Other liberal democracies like New Zealand, Australia, the EU etc, need the United States for the sake of soft power. America as a symbol is still a liberal democracy with its political institutions stable. Even though there has been a rise of neopatrimonialism in their political process which has undermined the state to be held accountable to its people. Rent-seeking behaviour among some plutocrats has undermined Americans’ trust towards its politicians and state institutions. We witnessed such examples through the 2008 global financial crisis and the federal government’s response to Covid-19.
Historically the United States has been a success story so far, but it needs to sort its own domestic affairs out. We already have incoming challenges such as AI, automation, climate change and geopolitical tensions, that will cause more drastic disruption to the world. But those challenges cannot be solved if America’s civil society and political polarisation continues. The world needs America to be the genuine liberal captain it was when it led the liberal international order after WWII. As liberals, we have to preserve our values of freedom, justice, equality and liberal democracy in the face of rising China and revival of national populism. We cannot continue this trend of a global ‘democratic recession’.
As a liberal democrat – in the classical sense – I’m hoping that the new Biden Administration would bring some common sense back in the White House. The Electoral College just confirmed Joe Biden’s victory in the 2020 US Presidential election – He will be the next President. It’s a sigh of relief for many (including me) after President Trump’s tumultuous, chaotic, and unpredictable 4-year term. Although I criticised the Democrats in a previous post, that doesn’t mean I don’t want to Biden Administration to do well.
They have a huge task ahead. The Liberal World Order and America matter to all of us.
One of the core cultural values I found quite hard to grasp in New Zealand is the inherent egalitarian nature of Kiwis. It shows that Kiwis are friendly, respectful, and courteous of others. Prime Minister Jacinda Ardern’s viral catchphrase “Be Kind” symbolically embodies our culture. However, are there potential negative consequences because of our egalitarianism? I wondered whether if it was why we have a ‘tall poppy syndrome’ problem.
As Dr Oliver Hartwich mentioned in his recent column for The New Zealand Herald, New Zealanders have a lax attitude towards excellence. Although, we have a few world-class sportspeople, business CEOs and others. But as a society, it seems as though we put more emphasis on equality rather than excelling in anything. I’ve personally witnessed this through the Kiwi nature of the ‘Yeah, nah, yeah bro’ attitudes towards life. ‘She’ll be alright mate’ is the common answer we raise whenever we face internal troubles or domestic difficulties. This has had unintended consequences across the country reflected in our economic and social outcomes. I think New Zealand has a broad cultural problem – if most Kiwis take a complacent attitude towards life, we will witness a further decline. This starkly contrasts countries that outperform us such as East Asian nations like South Korea and Singapore.
Economic and Social Indicators:
Our ‘average’ international rankings speak for itself. Our international education standards have fallen substantially in the last few decades. In PISA, our scores dropped for Maths, Science and Reading substantially shown in Briar Lipson’s book ‘New Zealand’s Education Delusion’. Our productivity gap between Australia has continuously widened closer to 20%. Our economy is still heavily reliant on primary industries and international tourism, despite being a developed economy. Our FDI restrictiveness is number one in the OECD. Our Universities are nowhere near the top 50 in the world (In contrast to our neighbours Australia, which have more than 5 Universities). There are other economic and social indicators that I could mention, but the reality is that if Kiwis continue to be satisfied with mediocre economic, social and government policies, then our whole society will ‘pay’ for such mediocrity in the long term.
The Dramatic Turnaround of East Asia: From Developing to World-Class
Figure 1: Labour Productivity Levels Relative to the United States (%), 1950-2019 (S. Korea & NZ)
Internationally, countries in Asia (especially North-East Asia) witnessed a remarkable economic recovery beginning during the post-WWII period. Beginning with Japan’s industrialisation, the new four Asian Tigers – South Korea, Taiwan, Hong Kong and Singapore followed suit with the ‘flying geese’ model of economic development. Economists have coined these four countries’ world-class economic outcomes as the ‘East Asian miracle’. Coincidently, this contrasts starkly with New Zealand’s mediocrity witnessed in the last 70 years.
Economist Dr Üngör of Otago raised this in his recent Newsroom column. As shown in Figure 1, South Korea’s labour productivity level was less than 12% of US labour productivity in 1950, but by 2019 it was 63%. New Zealand was at 92% of the US in 1950 but dropped to 62% by 2019. The figure provides a humbling picture for New Zealand – The South Koreans have overtaken New Zealanders and we are falling behind the best performers in the world today. Back then, New Zealand was once one of the few nations with one of the highest GDP per capita in the world, but since then we have faltered into a mid-tier economy.
South Korea’s overlap of New Zealand should signal warning signs for New Zealand policymakers. The turnaround was possible because South Koreans built a prosperous nation by changing thecultural narrative towards competency, strived for excellence, and took greater communitarian responsibility towards long term prosperity. A similar change of mantra can be said about the Taiwanese and the Hong Kong people.
My personal favourite example is the South East Asian city-state Singapore. With the brilliant leadership of Lee Kuan Yew, the nation went from a wasteland with no natural resources into one of the finest economics in the world. His style of government was highly technocratic. Singapore is very competitive, meritocratic, and pursues economic policies that were practical and results-driven. A combination of state-intervention and liberal free markets, it’s the fourth-highest in the world for GDP per capita. Not only is the country extremely efficient, but it is also environmentally friendly and clean. A perfect combination of sustainable development and world-class governance. Whilst the nation is regarded as a semi-democratic society, there are many things New Zealand can learn from Singapore’s system, institutional mechanisms and broad culture. Lee changed the mindset of the Singaporean people to strive to excellence and competence.
Competent Response to Covid-19: South Korea and Singapore
In the earlier months of 2020, when Covid-19 hit the globe, the most effective responses were from East Asian states. I researched Taiwan, Singapore and South Korea during that period. They all had an exceptional public administration, competent execution of contact tracing, regular mask-wearing, mass testing of people and a well-mandated epidemic response team in their governments. These countries did well because they had a well-functioning society with the high-level expectation of competence and excellence. With these cultural factors in mind, they have world-class healthcare, government bureaucracies, a knowledge-based education curriculum and of course a competent response to Covid-19. This would have been impossible without having excellent administrators and a well-educated population.
New Zealand’s Covid-19 Response: Mixed Bag
New Zealand did very well responding to Covid-19 as well. However, I give much of the credit to our geographic proximity from the world. We were far away from epidemic centres such as China and Europe during the early stages of the pandemic. In addition, having Prime Minister Jacinda Ardern – not some of her Cabinet members – at the time was essential to keeping the public disciplined in our efforts to contain the virus. The lockdown was effective at stamping out the virus, but with an economic cost. Our Debt/GDP ratio is now projected to be 56% by 2026, despite beginning at 19.2% earlier before the national shutdown occurred.
Although this global pandemic is unprecedented, if we had the ambition and the drive to stamp out the virus without a national lockdown, I truly believe that would have been entirely possible. Our border quarantine procedures are still mediocre at best – after more than 9 months of Covid-19 – and blunders have caused the continuous resurrection of the virus in Auckland for the second time after complete elimination. It seems New Zealanders are ‘happy’ with the outcome without realising the combination of luck, public discipline, geographic proximity, and sound leadership. We have witnessed numerous examples of bureaucratic incompetence and administrative blunders in contrast to the East Asian states I mentioned before. Our contact tracing, testing, and border quarantine are still woeful in comparison.
Confucianism: The Cause of East Asian prosperity?
Perhaps some people might consider this East Asian trait of “excellence, merit and competence” as a broad Confucian phenomenon. Although Confucius himself did say:
“The will to win, the desire to succeed, the urge to reach your full potential… these are the keys that will unlock the door to personal excellence.”
But I can’t entirely agree with the view that it’s just a Confucian phenomenon. Cultural change across societies depend on the decisions policymakers or what individuals themselves make. For instance, Japan industrialised as a result of forced trade embargoes imposed by the Americans under Commodore Perry which led to the prosperous Meiji period. Historical critical junctures and circumstances are what changes societal culture.
The same thing can be said about the state of the Western world. Our cultural values have moved away from excellence towards equity. Previously, the West was leading the world on every economic, social and civilisational metric as indicated by historian Niall Ferguson. But now, the West – including New Zealand – are not as reputable as the past and the rise of Asia proves this declining trend. The West has lost the vital cultural component to its prosperity – The Weberian characteristics of work ethic, hard work and most importantly the strive for excellence.
Conclusion: Cultural Rejuvenation is an Imperative
New Zealand needs to renew this virtue of competence, excellence and merit. Whilst egalitarian values are important to keep society strongly harmonious with good social cohesion and trust, it is imperative that we recover our prioritisation towards excellence once again. We see this with our excessive cultural obsession with diversity and inclusion. Tolerance and social justice values are indeed important, but without a prosperous and thriving domestic economy, these values mean nothing. We must rejuvenate our old virtues of excellence in New Zealand. Across our education standards and our economic performance in the last few decades, we have so far settled with mediocrity.
The comparison and contrast between East Asian nations and New Zealand show us a few things. New Zealand is not good enough, we have been mediocre and sub-par at best across multiple performance indicators. We need to be more ambitious as a society for the long-run and we must rebuild our cultural values towards discipline, hard work, excellence and competence.
It is clear that so far both sides of politics have failed to address the ongoing problem of housing unaffordability. It’s been more than five years since the leaders of both major political parties acknowledged the housing crisis. Now, it’s 2020 and housing has become even more unaffordable with prices increasing by 19.8% with the median price of $725,000. Despite Covid-19 ‘supposedly’ cutting aggregate demand, how on earth did this phenomenon occur? It’s caused by multifaceted reasons which I will explore by sections:
Migration and Foreign Investment – Not the core factor
There is a fundamental misunderstanding of the housing crisis. Many New Zealanders believe that migration flow and population growth are the core reasons for growing housing prices. On face value, that is correct. Growing demography does mean growing housing demand. However, this would not be a problem if the growing demand is matched by a growing supply. Anti-developmental sentiments from central and local government artificially restricted land supply and housing development. In fact, migration is critical to our prosperity (especially those that are young with high skills and educated). The housing crisis is a supply problem rather than a demand problem.
Foreign investment and speculation are also conjectured by many in the public as the cause of housing hyperinflation. This is also incorrect. Much of the housing inflation is caused by local New Zealanders purchasing property and spurring up demand. In fact, only 3% of housing purchases were from foreigners between January and February 2016. Whilst further should be done to see the extent of the speculation over a long period of time, such evidence suggests that the effects are minimal.
Housing Supply < Housing Demand = Price increase
The core reason for the housing crisis is simply because growth in demand has exceeded growth in supply. One of the core fundamental economic principles is supply and demand. Housing has become extremely expensive because we have not built enough housing in New Zealand to address growing demand. In 1974, New Zealand was building 34,400 annually. However, because of the oil crisis in the 1980s and our unsustainable fiscal position, new annual dwellings dropped to 15,000 in that era. The current government have made some changes that resulted in a growing supply with 24,100 houses built in 2019. We need to note that the population in NZ was 3 million and now just over 5 million. Population growth and demographic ageing do mean that there is consequently excess demand. My research paper released in the new few months will explore this.
In the last three years, the current government has attempted to curb aggregate demand and expand supply with Kiwibuild. There has been progress with better infrastructure financing to aid local councils and important changes to the National Policy Statement on Urban Development. This removes unnecessary regulations that so far prevented intensification. On the negative side, the government passed new laws such as the ban of foreign buyers (with the exception of Singaporeans and Australians), extended the bright-line test to 5 years, amended the Overseas Investment Act, and tried to legislate a new capital gains tax. For supply, Kiwibuild was a colossal failure with only 548 houses being built. There has been some definite progression in contrast to the previous government, but also multiple failures.
The Reserve Bank’s Impact in Housing
The global Covid-19 pandemic has forced many central banks around the world towards expansionary monetary policies. The Reserve Bank of New Zealand (RBNZ) is no exception. Under Adrian Orr, the bank committed to $100 billion of quantitative easing and also cut the OCR rates to 0.25%. This is unprecedented regarding the scale of the policy (a third of our GDP). These two decisions alone will raise the returns from investment in housing and increase pressure on house prices. Low-interest rates mean cheaper mortgages incentivise investors and consumers into the housing market. These policies led to higher equity and asset prices. Although, some of their policies are completely understandable considering Covid-19’s impact on employment and the economy. However, regardless of the pandemic, this level of quantitative easing is unprecedented. Saying this, it is undeniable that RBNZ’s policies have made a significant contribution to greater aggregate housing demand.
Lacking incentives for local government
One of the key reasons for the current state of the housing market is because of poor local government incentives. Much of the infrastructure financing is imposed on the local councils, meanwhile, the revenue is centralised to government officials in Wellington. The current system gives far too much political leverage for those in central government, rather than allowing local officials to make important decisions on urban development. There are questions on whether the centralisation of such power into a larger government institution such as the Super City of Auckland Council led to efficient outcomes.
New Zealand’s current system does not incentivise local councils to grow but slows down development. Local government officials don’t want more people in their area, because that means greater demand for water, schools, housing, local parks, and other public infrastructure to accommodate growing demand. Meanwhile, the central government does not allocate funds based on proportionality, but rather on ‘democratic means’ of serving respective electorates and other political factors. The finance gets imposed on the councils with growing demand, but not given the finance from the central government. For example, more than 40% of newly arrived migrants settle in Auckland rather than other regions that need people. Auckland Council currently has growing debt and it wants to tackle that problem rather than expand urban development outwards. The same applies to many other local councils across the country. Without sufficient revenue provided by the central government, why would they want to grow? They would not want to free enough brownfield nor greenfield areas for housing development because all the costs are imposed on them.
To address these problems for New Zealand’s local governments, I advocate for ‘localism’ as it provides greater political leverage to local governments and decentralises decision-making. Countries such as Germany and Switzerland follow this form of local administration. In the United States, Houston in Texas also has a very decentralised governance system. At the federal level, they simply set out basic regulatory frameworks and for the implementation of policies, they leave it to local councils.
For instance, let’s take the case of Essen and Dortmund – the two regions have a competitive and cooperative governance arrangement. The reason is that the tax revenue created is tied to the number of residents in their area. It is essentially a form of a ‘means-test’ requirement for local officials to get their revenue. Because of the incentives to have more residents in their area, the government understands that they need to have good institutions, a clean and green environment, affordable housing and sound public infrastructure. the two cities needed to allow enough land supply available in their area to deal with growing demand. If certain residents leave their regions, they lose tax revenue consequently. In essence, a solid local structure that incentivises competition. Currently, both Essen and Dortmund have affordable housing. Since the 1980s, prices have only risen by 10% in the last 30 years. Simply by changing the tax incentives with a decentralised local government system, it leads to more optimal urban development that matches growing demand with sufficient supply.
Germany’s economic system is a strongly Keynesian-oriented system with high levels of taxation, a generous welfare system and a decentralised form of governance. Localism is neither a right nor left policy subscription, but an example that has worked in these areas. Experimentation in New Zealand wouldn’t be a bad start and we can learn from these international examples. I am not advocating for the de-amalgamation of Auckland Council, but rather changing the tax structure so that local councils get the incentives. Decentralisation of command towards district councils, for instance, is a potential alternative without removing the Super City’s institutional arrangement. As stated by renowned American investor Charlie Munger stated,
“I think I’ve been in the top 5 per cent of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it.”
Basic economics is about incentives. Incentivising local government to grow public infrastructure and push for housing development requires the officials to have the incentives. This will help the expansion of supply – both housing and infrastructure.
Conclusion
These are the many reasons why housing is unaffordable. Housing is an extremely complicated subject but this post attempted to explore fundamental factors as to why house prices increased in New Zealand despite housing demand ‘supposedly’ very low under the current era of Covid-19. It is clear that housing supply has not expanded fast enough to accommodate growing demand. RBNZ’s policies have exacerbated the problem fueling investment into the property market, and the current set-up of local governments prevents them from wanting to expand development because most of the costs are imposed on them, rather than the central government.
It is imperative for the new Labour government to push for the expansion of housing and land supply rather than continuing to just curb growing housing demand.
It was in 2016 when I first watched and observed the outcomes of a US Presidential election. I detested Hillary Clinton back then – I still do now – but I didn’t expect Donald Trump to win, yet he did. Following on from Brexit, this was another shock to the American Establishment and symbolic of the rise of national populism. Back then, I was a hardcore social democrat, and I was disappointed and sad that America lost the opportunity to elect a 21st-century version of Franklin Delano Roosevelt, Bernie Sanders. I consider myself a moderate centrist today, but that’ll be discussed in another blog post.
The world witnessed four years of a Republican White House and boy it was a period of pure entertainment and a complete mess. Now it’s 2020 and the Democrats have selected an old, weak and out of touch politician – Joe Biden – as their candidate. Throughout 2019 and 2020, I felt that the liberal establishment learnt absolutely nothing from 2016, and it shows. Despite the polls suggesting that it will be a landslide for Biden, they were completely wrong. The US election is still an ongoing dispute and it is still too close to call for either of the candidates. The rustbelt states such as Michigan, Pennsylvania, Wisconsin have moved back towards the Democrats, but only because of Trump’s incompetency regarding Covid-19. They have lost seats in the House and also the Senate is in the strong hands of the Republicans. If Trump didn’t have to deal with Covid-19, the President may have indeed had a landslide victory against Biden.
The question is why did the Democrats perform so poorly despite the expectation? The Americans have faced a period of complete chaotic governance by the Trump Administration but many still voted for him. The fact of the matter is that many Americans are sick and tired of political correctness, wokeness, and identity politics. And this is taking into account Trump’s disastrous policies. Many people including Sam Harris, Andrew Sullivan, Eric Weinstein, Paul Graham, and Niall Ferguson and others have previously warned centre-left people about this form of politics.
One prominent scholar that understood this problem for the Democrats was Stanford’s Francis Fukuyama. He covered this topic of identity politics in his book, ‘Identity: The Demand for Dignity and the Politics of Resentment’. The core thesis of the book surrounds the concept of ‘thymos’. Fukuyama described it as “part of the soul that craves recognition or dignity.” Fukuyama says that the thymos of blue-collar, white Americans was not recognised by the political and economic establishment in America in 2016. The craving of status and recognition is not a new phenomenon, which is evident from the cultural movements of the 1960s – the civil rights movement of African Americans, Women, LGBT, and even the environmental movement. These movements were legitimate and necessary but extended far beyond its necessity up until 2016. Because that sense of dignity was ignored by the Democrats, but recognised by Trump in the form of nationalist sentiment and protectionist economic policies, they switched to him. Even with his racial rhetoric, many didn’t care, they were just glad someone wanted to talk about the negative externalities caused by globalisation. The former core of the Democratic Party was on socioeconomic issues, but it moved on entirely into cultural matters, even in 2020.
Another scholar regarding this is Charles Murray. His book ‘Coming Apart: The State of White America, 1960–2010’, explored the economic consequences of globalisation and how there is a growing gap between white working-class Americans and the urban white-collar class. The sad state of working-class America was largely ignored by the liberal establishment. The state of white America is increasingly divided along economic lines, not cultural lines. The Democrats didn’t even talk about this topic in 2016, nor did they refer to it in 2020. The Party has taken the votes of traditional blue-collar Democrats for granted.
Hence many former voters of Obama switched to Trump. This is why they lost 2016, and may only just marginally win 2020 because of Covid-19. Instead of trying to legitimately deal with the adverse consequences of globalisation, and help those people that lost their jobs to China and Mexico, their mantra was focused on intersectionalism, transgender bathrooms, and the dangers of white supremacy. Think about it, if you are a former worker of a manufacturing factory in Pennsylvania, and you lost your job, got divorced and on unemployment benefits, and the Democrats are talking about 50/50 quotas, gender pronouns, refugee rights, global governance and so on – you would feel politically unrecognised. They ignored the former core base that has voted for them from the 1930s to the 1990s. The embodiment of woke politics is symbolised by Democratic politicians like Stacey Abrams, Kamala Harris (the unlikable Vice-Presidential candidate), Alexandra Ocasio-Cortez and others.
George Mason University Professor Alex Tabarrok’s Tweet sums this phenomenon quite well:
My takeaway is that a large number of people HATE the cultural left (not the econ left) and are willing to put up with almost anything, including incompetence, chaos, corruption and bad policy, to signal their views loud and clear.
The Democrats need to move on from identity politics and move back to the core economic issues of our time – this also applies to the New Zealand Labour Party and the Greens by the way. The world is witnessing the rise of a new technological revolution and developments in Artificial Intelligence and automation. This will disrupt the international labour market significantly. This will be far more pervasive than the Industrial Revolution and exponentially more consequential. We also have global warming and climate change that requires vigorous economic and scientific analysis to legitimately solve this international problem. We also have an ongoing geopolitical competition with the West and China. Are Democrats taking these challenges seriously? In my eyes, the answer is ‘No’. The economic left of the party needs to regain control of the narrative and the cultural left need to understand that this style of woke politics will drive more voters towards the right. There is a legitimately strong case for competent centre-left politics that can try to correct structural dislocation of manufacturing work and increasingly precarious jobs (including repetitive white-collar jobs too). I see politicians such as Andrew Yang and Tulsi Gabbard as the potential embodiment of the Democratic Party’s future (coincidently they are American minorities as well).
The Democrats have so far been absolutely hopeless. Regardless of what the 2020 election outcomes will be, they need to take socioeconomic issues far more seriously. As a fan and admirer of the United States, I hope they sort their domestic affairs out.
With the ongoing Covid-19 pandemic, the Sino-American relationship is worsening. Tensions are heating as President Trump recently imposed sanctions on China’s largest chipmaker, SMIC.
American actions are becoming a self-fulfilling prophecy towards direct conflict. The world is getting closer to falling for the Thucydides Trap. As foreign policy experts continue to reiterate the inevitabilities of a New Cold War, will conflict be the destiny of the two great powers?
Harvard’s Stephen Walt and Dani Rodrik offered a third alternative in their paper ‘Constructing A New World Order’. The aim is to set an international institutional framework that creates as much stability and cooperation as possible.
First, the authors reject the ‘deep integration’ goals of the liberal internationalists. Rejuvenating multilateralism and hyper-globalisation are well-intended policies. But it creates unintended consequences that undermine the economic stability of western liberal democracies. China would also be unwilling to further integrate into the global trading system from its state-led developmental model.
Second, they disregard the hard-line hawkish approach advocated by the Trump Administration. The current decoupling strategy against China creates ‘beggar-thy neighbour’ effects on other nations. This also prevents mutually beneficial cooperation occurring with the Chinese, especially regarding global public health, improving nuclear security, and addressing climate change.
The goal is setting a pragmatic and realistic approach within the Sino-American relationship. The international system should allow the nation-states to set their own foreign and economic policies.
There are four categorisations of policies that fit within their institutional theory. There is Universal Agreement; Cooperative Negotiations; Autonomous Policy; and Multilateral Governance.
Indeed, Walt and Rodrik’s ‘Modus Vivendi’ international system is a pragmatic institutional mechanism. But, can Uncle Sam stay committed to mutually beneficial cooperation and reduce the risk of falling for the Thucydides Trap?
The Sino-American competition will shape the next few decades of the world order. As both powers strive to compete for power and international influence, the goal for the world is to keep the competition away from a hot war within bounds.
Institutionalising a set of rules on foreign and trade policies could help assuage great power politics. This could also incentivise foreign policymakers from both sides towards restraint as both a peaceful international order and continued globalisation is critical for small powers like New Zealand.
The leaders of the two great powers in the system are two egomaniacs. Their recklessness may make a third alternative for the international system as impossible. But let us hope for the best.
Leonard Hong 