By Susan Guthrie and Gareth Morgan
The downgrade to New Zealand's credit rating highlights something we are all prone to forget when World Cups, elections and the good times roll.
Our economy is not structurally sound, we have spent over 20 years investing in one asset class to the detriment of developing a suite of sustainable income and employment-generating industries.
Property speculation is the national pastime and with that obsession we have missed the opportunity to use the vast imports of overseas capital to develop a robust economic base.
Instead we have run up a large external debt to fund this tit-for-tat escalation of each other's house values.
Building more and more houses as part of playing this game can hardly be regarded as a credible growth strategy.
This is precisely what the downgrade is about.
The rating agencies, like many of us, are contemplating a second leg to the Great Financial Crisis of 2007-8, and in that scenario China does not get to carry on buoying commodity prices and hence the economies of the commodity producers New Zealand, Australia, Canada and Brazil.
With Europe contracting and the US stuck in stagnation, China would have to keep building roads to nowhere, train tracks into its deserts, and surplus airports for the commodities demand to stay up.
But nobody is using its new infrastructure, the productivity of the investment is terrible - and that's inflationary.
Incomes in China aren't enhanced by such hollow investment and its households face the same high prices of basic commodities that we do - although on far lower incomes.
The average household there spends 67% of its income on food alone, the ratio of central and local government debt to GDP is 65% now, hardly insignificant. And sure the country has foreign reserves - mainly in the high debt, weak currency areas of Europe and the US - hardly assets that are appreciating in value.
Meanwhile back in New Zealand the sweet spot of high commodity prices and a subdued domestic economy has seen our balance of trade swing mightily into surplus.
Despite the highest terms of trade in a lifetime, our balance of payments deficit has reduced only to 3% of GDP - thanks to the money we have to pay foreigners that own assets here and the cost of servicing the debts we owe them.
What will that annual balance do now commodity prices are coming off and should the domestic economy stir from its slumber? Expand back out to over 6% of GDP most likely, a debt-exacerbating number.
One small mercy is that the NZ dollar at least can fall and partially correct our malaise.
This is what the credit agencies fear and why we're becoming a greater credit risk for lenders.
All that borrowing we've been doing over the past two decades has not rid us of the structural weakness in our economy. We remain highly indebted and even record export prices still see us borrowing.
In a deleveraging world where lenders no longer want to lend bigger and bigger dollops we are a weak horse to back.
How can we have been so negligent and what remedial steps can we take?
We all know property speculation has been our addiction.
The scandal is that it arose because we've had a couple of weak Reserve Bank governors who on the one hand publicly bemoaned the rise in house prices but on the other specifically directed the banks to give mortgage lending priority over all other types of lending, all the while pondering whether asset price inflation was really inflation at all.
Albeit that this was just our local version of weak central bank governance that has gripped the Western world since financial market deregulation. But in conjunction with a tax system that confers a total tax break for speculation on housing, we ended up with a toxic combination that has seen house prices here catapult to unsustainable heights.
Today we are only part way into that adjustment.
But what a wasted two decades. Far from diversifying our income base the concentration of credit flows to property speculation has seen even greater concentration of income from (property-intensive) agricultural production.
After all these decades we remain a one-trick pony - protein producers. Nothing wrong with that in moderation, but it's not moderation - we now require record prices for the stuff to avoid debt-exacerbating balance of payments deficits. Ours is a morbid dependence on land-based production.
How do we reduce the chronic reliance on commodity prices?
First, the central bank needs to understand that lending on property is not less risky than other forms of lending, that if it directs lenders to treat it as though it is, then they will lend and lend on property until that regulatory assumption is defeated.
That's how markets respond to arbitrary regulations.
Second, we need an overhaul of our taxation regime that taxes all forms of income from capital in the same manner, whether its cash or imputed income. The holes in our taxation regime on capital have sponsored a misallocation of our most scarce resource.
Next we need to arrest the exponential growth in the administrative cost of delivering our targeted social welfare which sees families earning $100,000 a year qualifying for a needs-based benefit. As if bureaucrats could determine whose needs are the greatest anyway, and it certainly takes a lot of them even to try to implement the impossible.
When the rich can access targeted assistance by virtue of a broken tax and transfer regime, we have the ingredients for the sort of social breakdown we are seeing in Europe.
The only thing holding that back in New Zealand so far has been this 'sweet spot' from buoyed commodity prices. Take that away and the festering sore of social disparity is well and truly exposed.
There is much to do.
To see National trumpeting its benefit "reform", that amounts to no more than the trivial pursuit of 2,000 youths from dysfunctional families on the independent youth benefit, is more evidence of political paralysis on these issues of tax and distribution. Just as the Prime Minister has been wrong-footed by the credit downgrade, we have tax and transfer policy stuck in a hiatus lest it disturb the status quo of a comfortable election victory.
There is a naive single dimension to our economic policy - we either raise or reduce the budget deficit or we raise or reduce interest rates. That's the sum total of the intellectual capital being applied to managing our economy.
That it could be so bereft for so long has led to the persistence of our "structural imbalance".
There is a chronic need for policy enlightenment and a sweeping aside of a simplistic policy orthodoxy that has been rigidly paid homage to for 30 years now.
If we support innovation by flat but comprehensive rates of tax on income, if we underwrite social cohesion by giving effect to the right of everyone to live a dignified life and recognising that paid work is only one form of contribution to our society, and if we get some intellect into the central bank so its "prudential" policies stop distorting the capital markets, we have a chance to capitalise on the appeal of New Zealand as a place to live by the world's most innovative and wealth-creating minds.
Only then can we expect to break through the endemic structural weakness of being a spendthrift society - the very illness the credit rating agencies, at least, recognise we have.
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Gareth Morgan and Susan Guthrie are authors of The Big Kahuna - Turning Tax and Welfare in New Zealand on its Head - published recently.
This item was first published in the NZ Herald.
Here are links to Part 1, Part 2 and to Part 3 in this series.
77 Comments
Gareth Morgan rails against "property speculation" once again showing that as a money manager he hasn't a clue. Now that he has the luxury of arrogance through wealth he should have a chat to his own son Sam Morgan ( the one who really made the money) who seems to have no qualms about a pouring millions into property speculation through the purchase of life style blocks,
Investing $28M represented about a third of the Morgan's wealth from the sale of Trademe which demonstrates a pretty strong commitment to property speculation. Anyone know how this development is going?
"Trade Me founder Sam Morgan has waded into the South Island property market, purchasing a 2665 hectare country station from Infinity Investment Group for just over $28 million."
And, Big Daddy, not only Gareth M but Bill English railing against property speculation too; from his speech yesterday
".. the long-term we’re trying to shift the incentives in the economy to favour savings and investment, and returns from working, and to penalise excessive consumption and property speculation," English said.
. It's not just Gareth giving you a clue BD, but YOUR Government...the one most likely to be back in power in a few weeks time .Take cover, sir....!
(NB: AS you are aware, Infinity Group are struggling with the debt they may have to repay to BOS, and I am sure Sam got a good deal, paid much less than prvious market price, as Olly Newland does from time to time. They may be ahead of the others, but most are going to get the same chance to buy property at much lower price levels than on offer today)
As per usual trying to tar someone's comments because you dont like them...
Buying a country station is hardly a PI buying (multiple) houses inside the urban boundary to rent out...and lets see the URL or proof he's done it purely as a speculation and not your guess work....which if it shows its usual (lack of) quality will be wrong.
Besides which you miss as per normal the bigger picture/message......not least is we have borrowed from abroad to specualte on property on the crazy assumption others will pay more.....and that will be calle din at some stage.
regards
Your wrong BD, GMs right. To much borrowed on un productive property to people who can't afford to pay it back. Same for $ borrowed by the Government to be paid back via increased cost of living.
NZ cant indefinately fend of a financial collapse, all the economic statistics point to stagnet and negative growth relative to high/unaffordable property values.
NZ is very similar to Ireland economy, a path on which we are bound.
Far more important issues Gareth !
What do we really want here in New Zealand – ??? - public debates first – looking into world events – and it turns out to be a philosophical question.
Ongoing costs in the billions for the clean up, health issues and permanent environmental damage.
The latest assessment performed by the Gulf Rescue Alliance reveals not only that the oil spill is still happening, but also that the Gulf of Mexico’s sea floor grew more unstable since the explosion in 2010.
http://real-agenda.com/2011/10/10/gulf-of-mexico-sea-floor-unstable-fractured-spilling-hydrocarbons/
A NZgovernment without any sustainable economic strategy.
http://www.youtube.com/watch?v=EQqDS9wGsxQ
Economic growth without solid ethic and moral standards leads into more man made catastrophic events costing life’s our environment and billions. MASSIVE REPAIR COSTS to restore the planet and our rotten culture ! Where is the will and the money to pay ?
Kunst, there is no more economic growth no matter if its 100% ethical and moral (by whomever defines it btw).....its a geological limitation of cheap fossil fuels.....we wont be able to get any more out per day going forward....and it wont be cheap and the output will decline....
Gareth is right IMHO.....we need to re-direct investment and do it before lack of it kills our economy and rockets our un-employment......
Sooner of later it will dawn on even the densest pollie and voter that 10% or more of our GDP has to go on the effort of moving to renewables all the while 10% of GDP is used to keep us functional on fossil fuels....so consumerism etc is finished.....wave bye bye to SUVs etc...welcome to the long emergency and civil defence lwa(s) being permanetly in place......tribeless etc will blow all of his few cogs left.....
regards
Steven – please !
Most government have tools/ legislation in place based on economic growth – this need to be changed.
Yes steven - ethical and moral principles make a difference - think about.
I’m aware that growth doesn’t happen – but not governments - one of the reasons why so many man made accidents happening - see Japan building massive infrastructures, which are financially difficult to maintain. Welcome to Auckland.
Of course Gareth is right, but first of all - the nation need direction - coming from the NZpublic. Get rid of our “Patchwork economy” supported by 125 most of them - useless parliamentarians.
.and steven listen to the video : http://www.youtube.com/watch?v=EQqDS9wGsxQ
"ethical and moral principles" I agree....however and my point is nature/geology/maths/physics doesnt care how moral or ethical you are.....it is simple what is or will be.
"listen to" i already have Walter, several times....and all the pieces of similar nature before it....
The big eye opener is the Robert Hirsch report circa 2005, watch that on youtube also........
"robert hirsch 2005" or 2011
regards
When things are going "well" no one wants to discuss how things "may" go badly.......
Take peak oil, it was warned in the 1950s.....and every year since.....it peaked in 2006.....no one (Pollies) is taking any notice because when they do their entire promises gravy train gets de-railed and there is nothing else on offer.
regards
Jeez Brushy, who wants party poopers in the spin cycle...whole fecken show runs on spin and humbug wrapped up in credit and BS. When the star spangled farce blows to bits, the same liars will claim they warned us all and it was our fault and how we have to vote them into power to solve the crisis and make us all wealthy again. It's a 'Cunny' world Brushy!
If you argue that "we have built to many houses", that is what you are saying when you say we are investing TOO much in property, then PLEASE tell me where are all these EMPTY houses? If you do not back up your claims with some facts then your article looses it's credibility.
You may argue that the investment is in existing housing stock and inflating prices, but then it becomes cheaper to build and so on and so on.
Why would anyone, particularly an investor, buy a second, third or fourth house that sits empty? That makes no sense. It also shows that there ARE people who need a house to live in.
Maybe your plan is to give the poor people ten grand a year flat and say they can now live really well in a tent or a caravan so now we can reduce taxes even further for the rich. THE BIG KAHUNA
The real problem with housing is the greenbelt restricting land sales for housing (just look at the high cost of sections).
I believe that controlling borrowing by putting up interest rates should be a crime. The Reserve Bank loweres interest rates and when enough people get hooked on a loan they pull the rug from under them by pushing up interest rates. That is immoral.
As for excessive borrowing i would like to see a "Buyer Beware" principle used. That is, if you lend someone money that you knew, or should have known they could not afford, then if they cannot repay the loan, you loose your money and the debt is wiped. That will make lenders more carefull with lending.
This subject could go on and on so better stop.
Brilliant assessment of China, Gareth.
But Gareth, when are you going to WAKE UP about what urban growth constraints do to an economy? Read just one thing, I beg you: Alan W. Evans' 2004 book, "Economics and Land Use Planning". The author was the head of the Spatial Economics Research Centre at the University of Reading, for years following the retirement of Sir Peter Hall from that position.
Once you have read this book, you will be enlightened about why the economics profession is in such a mess when it comes to "planning" arguments. They simply haven't had the education that Evans provides in his book.
Of course the productivity of NZ's urban economy is sub-par and wracked with speculative distortions. Of course too much investment is going into 1) urban land speculation and 2) the less distorted rural economy.
It is simply ridiculous for us to accept that the cost of policies of urban growth containment, are justified. IF urban growth containment is justified, then we need to contain urban growth WITHOUT INCURRING ECONOMICALLY SUICIDAL COSTS IN THE PROCESS. This means either high land taxes; or compulsory acquisition of land by the government for development, at the same fair prices free of "planning gain" that would occur in the absence of urban growth constraint policies.
IF you are one of the in-crowd that regards the status quo as acceptable, then you are either a willing party to the utterly corrupt urban land racket that is destroying our country, or just another typically ignorant ill-educated "economist".
Where is YOUR land bank, Steven? Your inconsistencies of argument can only be explained by your having vested interests and desperately trying to keep the issue as befogged in ignorance as possible.
The drum you are banging, is wrecking the economy. The drum I am banging will rescue it if the right people listen.
I am very consistant...Peak oil is going to kill our global economy and wipe out the libertarians day dream of living 'free" like parasites off the world and the rest of us. Not that the rests of us will be too happy mind you.....not unless you get over thinking you are happy consuming for the sake of it.
Vested interests, my vested interest is powering down to a sustainable way of life with as little pain and misery for all as possible....you seem to want to carry on living on a flat earth....plainly that isnt possible as our planet is a sphere which makes it finite.
Making the greenbelts available wont effect in a meaningful way the impacts of expensive energy....you are delusioned, making a few millions worth of land available "cheaply" will not rescue our NZ economy....when its crippled by huge debt and expensive and scarce oil ....it really does not matter. In fact you are advocating the first time buyers get into a negative equity hell hole they will never climb out of......nice that.
Ignorance, no Ive said time and time again what the issues are if ppl wish to read.....
http://www.youtube.com/user/brucesoltani#p/u/11/w5DwdPMSKI0
regards
How's this for killing two birds with one stone. Sell obsolete oil platforms to libertarians, never hear from them again (at least after the first hurricane).
You are the one refusing to engage with rational arguments - not me. Anyone who has followed our previous arguments will know this.
You do NOT "improve the resilience of your economy/society to future shocks" by INFLATING the price of basic human necessities, AHEAD of the free market doing so as resources truly DO become scarce (IF they do).
You do NOT improve the resilience of young households by lumbering $200,000 excess debt onto each of them, or its equivalent in the "present value" of rentals they will have to pay - all for NOTHING. This excess debt does not BUY ANYONE ANY FUTURE PROOFING. It does NOT buy anyone a more efficient location. It does not buy anyone any infrastructure. It does not buy any more efficient infrastructure, or house construction, or insulation, or double glazing. It does not help anyone buy a more efficient vehicle. The effect on ALL these potential "future proofing" measures is NEGATIVE. The money that COULD have been spent on them is GONE ON NOTHING.
Your bloodyminded idiocy over all this can only be explained by corrupt motives. Where is your land bank, Mr corrupt exploiter of the young people Steven? Or what corrupt exploiter is paying you to repeat and repeat and repeat your crap Malthusian propaganda to provide a smoke screen for his gouging and racketeering? All you can do is repeat and repeat and repeat the crap. No engagement with rational arguments. Just repeat the mantra, Om Om Om Om Om.
You do NOT "improve the resilience of your economy/society to future shocks" by INFLATING the price of basic human necessities, AHEAD of the free market doing so as resources truly DO become scarce.
Rubbish.....you ignore the time to impliment at your peril.....
"(IF they do)."
Peak oil is past tense, it was 2005/2006.....its not if its when on a finite planet with expotential growth, thats basic maths if nothing else.
Anyone buying a house today is indeed going to find 50% of more of that value has "GONE ON NOTHING."
LOL.....so now you cant argue an argument so now accuse me of corruption...or vested interests....
You are pathetic....
"corrupt motives" nope only the truth...yours on the other hand are blinkered by political ideology, and a libertarian viewpoint......ppl can choose who the listen to, as always. Hopefully they will read both and decide to do their own research and reach their own conclusions....
On and On....and you are not the same? oh no of course not......Phil 2 year old "banging on my libertarian drum" best....
"rational arguments" In 2 odd years Ive never seen such a thing from you....like I said Im perfectly happy for ppl to do the research and draw their own conclusions....
regards
steven, I watched the video on your link and have a couple of comments.
Firstly, Mr Rubin bases his core argumentation on the economic reality associated with the costs of moving goods. He then fails to notice his sword has two edges by arguing for government expenditure on things that don't make any economic sense right now. Vast public transport networks may be needed at some time, but right now are loss making endeavours.
Secondly, there is some sense in the idea that changes must occur, but does seem out of touch with reality today. He predicts triple digit oil pricing within five months of the video, which was 2010. He wasn't pushed for this prediction but went out of his way to make it. Obviously he was wrong.
Thirdly, he totally goes off track talking about the state of the US economy today. Without actually stating as much he blames the oil price for the current recession. Not only is this highly a questionable connection of cause and effect, he doesn't present any argument for this assumption - he simply talks right through it. Oil pricing may be a fact of life, but it's not the only thing happening in the economic world.
Lastly, whilst the increasing costs of oil will undoutably changes the shape of the economies worldwide the stridency by which proponents of 'peak oil' promote their scenarios does little for debate or understanding.
What is often missed is the world is not a static variable. That is to say none of us have full view of all the variables in the future, so to make even medium term predictions with half the information leaves us open to ridicule as events unfold in ways we had not even imagined.
To reply to your points,
"economic sense right now" the problem is time scale....it will take 5 to 10 years to ramp up public and freight (rail) transport and you are right businesses wont do so unless they see the profit and if the risk is acceptable (note Warren Buffet bought a railway, its principle goods is coal) ....the problem is in say 5 years if ppl cant afford petrol and there is no public transport then that will be a huge problem....for them and businesses....
So the idea is a Govn thinks ahead and commits to meeting future needs, its known as planning.....and yes generally there is a risk that the best estimates of future demand will not materialise on the time scale expected....
This is a risk management exercise, its an attempt to protect the economy and voters/workers from the impacts that are coming......so its a choice.....now if voyters and workers are saying we dont care do nothing, well at least they have made that positive decision...and its their responsibility if they get shafted......right now they are not being given that option/choice.
Oil prices, we have seen $100 oil this year.....WTI on April and Brent is still around $110...I dont understand why you think thats out of touch today....its very current.
"Without actually stating as much he blames the oil price for the current recession." That would be correct....he and others. the US economy and indeed teh World's economy only works with cheap and plentiful energy. There are oter pieces on youtube laying out the detail/theory on thsi.....some good charts on recession v oil price spikes. They suggest when oil as a % of GDP is 6% or grater the US goes into recession.....teh data supports this.
http://blogs.cfr.org/levi/2011/10/06/does-expensive-oil-inevitable-caus…
Wonders if tahts so however.....but poorly IMHO.
and this guy is an interesting Professor,
http://www.youtube.com/watch?v=jzsEf6UVgUM
and this,
http://www.youtube.com/watch?v=_2aE2gdvM0U&feature=related
Bear in mind the piece you have watched is but a short interview........
In terms of risk management there is enough info to make some very sounds calls on our future......one with less and less oil every year.
Robert Hirsh is a great listen to.
http://www.youtube.com/watch?v=0ksI6lxenuQ
Consider this, the world is a 56Trillion USD economy....the estimate for fossil fuel production assets in the world is $50 to $100Trillion USD...lets say $56TrillionUSD.
The US economy is 10Trillion USD per annum....
6% is the present energy where it goes into recession, or at about $100~120USD a barrel....
The most conservative estimate for oil decline is 4% per annum (of 86mbpd), or 3.6MBPD per year....
Oil demand is in-elastic, or in otherwords to get a small decrease in demnd needs a huge price increase.....
The present renewables % is.....16%, so we have to increase taht by 25% per year every year.....except renewables has a return of 1/2 oil...so to get 4% will cost twice (roughly) doing that from fossil fuels....
So somehow in a short time frame many trillions of dollars has to be spent moving to non-fossil fuels......now if that 56trillion is spread over 10 years its 5.6Trllion odd, 10% of the world's GDP......but we are not even doing that...
Investment, given the highly volitile price of oil and the state of finance I can but conclude that businesses simply wont invest, the risk is too great....so taht leaves the Govn. If the Govns dont step in, well, That all adds up to pain with a capital P......
regards
You continue to display, right from your first paragraph, how utterly ignorant you are about economics, and what a waste of time you are causing on a serious finance and economics blog (well, I WISH it WAS....)
You assume that rails and public transport are the "solution" to the problems you are ranting about? And the problem is, they will take 10 years to ramp up, and business won't invest in them? WHO DO you expect to "invest" in them if everyone has already been pouring money down a black hole of inflated mortgage expenses?
What will people use rails and public transport to travel to, once oil runs out? Downtown office jobs?
And are rails and public transport, that much more efficient than roads and cars, that they will "solve" the problem? Are they ten times more efficient? Five times? The true figure is already "less than twice as efficient". ANY sub 1.6 litre engine car is already more efficient than public transport. ANY car with a passenger as well as the driver is already more efficient.
The flexibility provided by roads and cars is a major contributor to the productivity of the urban economy. Kiss that good-bye and we have to shed a few percent of our existing employment, for a starter. The cost of energy contributes to so much in our economy, that government will have to get by on half the tax revenue it currently does, or less. There goes half the downtown bureaucratic jobs.
You envisage a resource-scarce "future" of massively LESS flexibility in the economy and society, to cope with "running out of resources"? A trend to urban high density and rails? Not a trend to lifestyle blocks and "Smart Cars"?
I am wasting my time with you. Your arguments are so contradictory and ignorant, that you have to have corrupt motives. Where is your land bank, Steven? Or which land banker is paying you?
There you go again...attributing your motives to others...
You have no concept of engineering, scale, time or risk it seems. I dont see even economics from you beyond the Austrian/liberatarian rant....
......"smart cars" try looking for smart lorries.....ie how bulk goods will be moved....the cheapest methods by far are ships and barges.....the next is rail........
Even smart cars dont stack up to well as transport for the general population when you consider they are 3 times the cost new of conventiaonl cars right now and last 1/2 as long......from that its hard to see how many ppl will have a car in the future....so they will need public transport or walk, or have a push bike. I for instance have a reasonable wage...a MiEV is $60K.....I'd have a job finding $6k let alone $20k for a new standard car and a MiEV is out of my price bracket.
"if everyone has already been pouring money down a black hole of inflated mortgage expenses?"
they already have.....these are the 30 somethings...tehy have 90% mortgaes that are about to go under water enmass....thay will not have the money to buy a MiEV for a decade or 2....
"...to travel to, once oil runs out? Downtown office jobs?" Oil is not running out, I didnt say that, I said that it will go into decline and we will need to move to using less and using an alternative. In the long run however, yes the question of huge unemployment is a worry.....even if your much vaunted sections were $50k and not $150k when you have no job, or its poorly paid, you will not be in the market....
This flows onto BBS who think their houses are worth $400k (say), they will be lucky to realise $200k.
"ANY sub 1.6 litre engine car is already more efficient than public transport. ANY car with a passenger as well as the driver is already more efficient. Not when the bus is full....certainly running empty or 10% full, buses is insane......but thats easy, public transport will be peak travel times only....our lives will change a lot......we will work around such things.
You seem to miss the fact that energy will be expensive and scarce, just how that pans out in terms of how it is used is certainly open to discusion but largely depends on how fast the changes occur.....certainly by 2030 I expect cars to be very rare for the rich or higher middle class only.....just like pre-ww2....
"corrupt" no I think, with your weighty idelogical libertarian blinkers you are unable to....this makes you extinct.....because you cannot or will not adapt, that choice is yours....
"Land bankers" it is actually you who are supporting these by agitating for the release of govn controls on fringe land....this will without Govn intervention allow such owners to make a killing at the expense of the poorer income ppl you claim you want to support....
Looks like a sub-prime fiasco in the making if you had your way......
regards
You tell ME I am supporting land bankers and the killing they make, by advocating for removal of boundaries to development?
Are you deliberately feeding lies onto this forum in desperation, or are you REALLY that THICK?
I am not explaining this again, or wasting any more time on you.
Who is paying you to spread these lies and cover their extortion racket in urban land, Steven?
To my way of thinking you have two major problems in your thinking.
Firstly, IF statements, by definition are assumptive. Assumptive logic has a place, but is not in-and-of-itself enough of a foundation for commiting trillions of dollars of tax payers money. What IF people can afford petrol in 5 years? It's lasting weakness is it's reliance on all other things being equal, which they are invariably not.
Secondly, if we were to accept oil pricing as a risk management challenge, government is amongst the last players that should be turned to. Whilst the easy and attractive option is to enforce your will on others by law, it is also close to a definition of fascism.
Goverments have a very poor historical record of risk management. The commerce system we call capitalism is the best, most well equipped and mature risk management tool humanity has ever developed. In contrast the large scale command economy experiment conducted last century by the Russians was by most measures a total disaster.
Lastly, the least important point - but - in my opinion, anyone who draws a cause and effect line between oil prices and the current global financial meltdown is, at best, myopic. It ignores the issue of debt, the place of regulatory capture and failure, the pursuit of mercantile policies by the Chinese government, the moral decay of western society and other significant factors. If we were to believe a commodity price increase is causal then we could equally blame gold, platinum or perhaps even milk powder.
Ralph, It looks like you are getting into a right wing / libertarian (political) quakmire....this isnt about politics...
Moving forward if the present situation continues well be seeing periods of oil at very low prices (<$80) and periods of oil at very high prices (>$100).....an economy and businesses have great difficulty in surviving let alone prospering in such a scenario. Could ppl afford petrol in 5 years? based on what i can se eI think petrol is going to ossilate around about $3 to $5 a litre....now if I still have my job sure I can afford it.....if I dont have a job I wont be able to afford it at $1......
Risk management challenge - govn's n one else will.....WW2 wasnt fought by private entities, it was faught by Govns....so frankly Govn's will be the only option....capitalism has no risk management in it....its about optimising the extraction and conversion of resources in the msot effective manner.....
Debt and oil, no I dont ignore debt at all it is the short term driver that will take us into a global depression.....however I am a believer that energy underwrites money.....so they are linked.....Now in terms of myopic, no not necesarily its possible that there is a chicken and egg situation.....for instance if oil had satyed cheap I suppose its argueble the meltdown of 2007/8 would not have happned at that time, it would have happened later.
Commodity prices rose due to future markets and speculation absed on cheap credit, but was that caused by a slowing economy lowed by pricey energy?.....and I think we agree its very complex and hard to get your head around.....certainly for me....
regards
I have to disagree on a couple of points.
Any time you propose spending public money on things that don't make any economic sense (public transport for example) it's almost entirely about politics.
Investment of any kind is everything about risk management and investment is at the very heart of capitalism.
My feeling is much of what you propose has yet to transpire. True causes and effects have very strong correlations I can't find with oil at this time.
Actually the link between debt, the GFC and the oil price (and resources in general) is relatively easy to understand (if you are not encumbered by dogma):
http://ourfiniteworld.com/2011/10/10/the-united-states-65-year-debt-bub…
As for capitalism being the best risk assessment vehicle - as I survey the wreckage of the global economy (operating largely as it has since the 1980s in its deregulated form) might I suggest to you that the evidence all points in the opposite direction?
Yes, capitalism remains the best risk assessment vehicle. In "The Genius of the Beast", Howard Bloom remains an optimist on the subject of bubbles and crashes, pointing out that every single one in history has been associated with new innovations in markets, finance, and policy; and has been followed by a period of adjustment and refinement that preserved the benefits of the innovations while safeguarding against their pitfalls. Each such stage involved free market democracy moving to a new level of prosperity. This is "the genius of the beast". Innovators in technology and innovators in finance and banking; both are involved in the utter superiority of free market democracy over the alternatives. You can't simply buy your own computer in a Communist country; and neither can you have a charge account, or a cheque account, let alone a credit card.
There is nothing wrong with "derivatives" per se; they are merely a form of insurance. Look at the crisis this way: everyone thought "house prices can never fall", therefore insurance on house prices falling became a favourite "safe" investment, and ridiculously cheap to buy. The same would happen to disaster insurance if people somehow came to believe en mass that natural disasters had ceased to happen. Blaming the "free market" for people's mass beliefs in something wrong, is like blaming the system of weights and measures, grams and kg's, for obesity. Or like blaming "powered flight" for Airbus's fly by wire systems going wrong.
People need to learn the hard way, then the next growth phase will be even more stable. The danger we are in now, is of big government and crony capitalism ruining everything. "Bailouts" are wrong in every way. The wide boys on Wall Street have played ignorant and hubristic politicians for suckers. Reagan would have told them to get stuffed. THAT is "free market, small government" ideology. I do not believe a word of the doomsaying about the consequences of NOT bailing out finance institutions - it would be painful, but not as bad as the politicians "cure" - as we are experiencing.
Ralph's point is still quite right about oil prices. Correlation is not causation. Oil prices do not have linear effects on economic outcomes, they cause a myriad of changes in behavior meanwhile. The cost of "automobility" relative to incomes, for example, has been stable for decades in spite of oil price rises from $8 a barrel at one time. And we still have heaps of resilience even at current technology levels, let alone with new. Plenty of people are still buying new V8's. They don't HAVE to.
A couple of things in your post. You see nothing wrong with derivatives? You should research the total amount of outstanding derivatives positions compared to the total GDP of the entire planet. If you then still believe there is nothing wrong with derivatives then you need help.
"People need to learn the hard way" - Yet it is always the people who have had the least input into and the least influence over the market that suffer the most.
Since you appear to be a free market cheerleader, please explain for us what the invisible hand of the market is and how it works?
I implied there is nothing wrong with derivatives as a form of insurance. But the total amount of derivative positions today really relates to gambling. The total "value" of bets placed on horse races is probably shockingly large too.
My solution to this, would be to tax all "gambling" derivative transactions. Think of the potential tax revenue.
Soverign CDS are the new alpha. Which is why Greece and the entire world of bankers are so keen to avoid default. A 21% haircut is deemed voluntary and does not trigger the CDS but 21.01% haircut is involuntary and we will see how safe and risk free they really are (and how many are out there). It's just a matter of time really.
Well it depends on your assumptions.
What we have witnessed since the bailout of LTCM in 1998 is constant government interference with capital markets. It is in no way or measure a principle of capitalism to socialise losses of privately owned companies.
Government bailouts of shareholders and bond holders with public money is a politcial idea more akin to socialism (because it's public money and done from a position of central command) or fascism (because the elite force their will on the majority).
So I would retort that as I survey the wreckage of the global economy what I see if the failure of central government risk management policy.
By the way, the racket in China is very similar, only it involves a lot more visible building of developments that are over-priced for the millions of people who need them, because of the "flicking on" that is going on among corrupt officials and local governments. They just don't have "Green" politics providing a fig leaf of "respectability" for the racket.
"Once you have read this book, you will be enlightened about why the economics profession is in such a mess when it comes to "planning" arguments. They simply haven't had the education that Evans provides in his book."
PhilBest, well the economics profession are being educated well in terms of equipping them for their role to rationalize current social arrangements. I have read you citing Mason Gaffney and I assume you've read his illuminating book, the Corruption of Economics, though I think he gives Henry George far more credit than he deserves. Neoclassical economics emerged as a political strategem to defend the interests of the European aristocracy and American land barons (individuals or corporations) who through fair means or foul had acquired immense landholdings due to land grants offered by the U.S. government, especially in the American West. As they say, who pays the piper calls the tune.
Sadly amongst my fellow environmentalists, there is a reluctance to admit to the culpability of the State for the environmental destruction they so strongly condemn. Its largely due to government meddling and interference, that much environmental damage is done. Without immense government intervention, the farming sector would have a far, far smaller footprint on the land in New Zealand. They provided cheap land, finance, settlers, assistance with drainage, planting of exotic grasses from imported seeds, transport infrastructure, etc, etc. The same is true of development in the United States.
"If development has scarred American landscapes and shredded ecosystems — and it has, Mr. Babbitt and Mr. Kennedy argue — much of the damage has been done with the connivance of the federal government .".
http://www.nytimes.com/2006/05/30/science/earth/30book.html
Owen MacShane points out in his Alternatives to Smart Growth paper, that is largely due to government constraints over development that drives pressure for expansion beyond urban limits. Inevitably commercial ventures with a large footprint, but low profit margins will be pressured to beseech government regulators to expand urban limits as rental prices are driven higher than they otherwise would be, if not for "growth boundaries". And often its the poorest amongst us who are first to be driven to the city margin, because they can't afford to pay the astronomically high urban rentals and condemning them to long and costly commutes, because their neighbourhoods are poorly serviced by public transport.
Its funny, that in the United States, governments are pursuing two totally incompatible ends. Promoting Smart Growth policy in a bid to stem suburban sprawl AND promoting economic growth at the city margins. Where else would economic growth emerge, but where the cost of land is the least? Total cognitive dissonance.
The findings add a new spin to the debates over suburban sprawl. People usually cite such factors as crime and declining quality of urban schools. Now it turns out that state governments, or localities acting with state permission, are actually shelling out taxpayers' money to accelerate outward the shift of jobs.
Governors across the country, notes LeRoy, have begun to talk "smart growth," urging that land-use policies undergird existing communities. But their development programs keep promoting sprawl. "It's nuts. The two-state policy silos need to be broken down and corrected."
http://seattletimes.nwsource.com/html/opinion/2003675084_peirce23.html
Noam Chomsky sums up most of what economists don't understand about economics in just 10 minutes,
While I don't agree with where you are coming from (if the handle "Anarkist" means anything), MAAATE, it is a breath of fresh air to me to encounter such an intelligent contribution on this forum. Glad you've noticed what I've said previously. I agree that Gaffney gives Henry George too much credit. I think Gaffney and Fred Foldvary and some of the modern land tax advocates have taken the argument and analysis to a much higher level than George himself ever did.
I think you imply too much deliberate causation to the mis-education of economists. Urban growth boundaries are what has done by far the most damage while serving the interests of incumbent land owners; and these are mostly a recent invention. The Poms started it in 1947 but they were way ahead. The decades preceding UGB's were marked by a massive "democratisation" of urban land ownership - The concerns of Karl Marx and Henry George were ameliorated by "automobile dependant development". (ALL previous forms of urban expansion, based around rails and foot transport, were easily captured by the land owning class).
So firstly, you have to explain how the land owning class "lost control" for a few decades until Urban growth boundaries got going thanks to environmentalist fig-leaves of respectability. And secondly, you have to explain why there is actually SO MUCH academic analysis CONDEMNING urban growth boundaries. It is the capture of bureaucracies that is the main problem here. The truth just isn't getting through to the coal face of the profession. It is very easy to enlighten a young economist on this subject, especially if they have not yet bought their own first home. (Self interest gets in the way once they are on the property ownership ladder, even if they realise they have been lumbered with far too much debt).
http://www.performanceurbanplanning.org/academics.html
I am heartened to discover a self-confessed environmentalist who actually understands the role of the State in causing environmental damage. The free market, without subsidies and wealth transfers enabled by the State, would actually never put as much land into use for farming as NZ has and the USA has. I am really encouraged to discover SOMEBODY else out there who understands this. One of the costliest subsidies is the running of rail routes out to every corner of the country, just to carry extremely low value farming produce to ports for export.
Of course the State itself, involved in semi commercial activities, is often a far worse destroyer of the environment than businesses operating in the free market. And Communist countries have always been the worst of the lot (refer Feshbach and Friendly, "Ecocide in the Former USSR").
It is also a breath of fresh air to discover someone who understands that different industries have different requirements for land and differing abilities to pay for it. Of course we cannot expect a dairy farmer to compete with an international finance firm for space within an UGB - so why do we expect a production line maufacturer to do so? A UGB actually destroys the very industries that might increase our wealth via export of "value added" goods.
The cost of living for the workforce also adds to the burden on urban industries, undermining its international competitiveness. The still significant parts of the USA where there are no UGB's are actually gaining industry from those urban economies that do have them (eg Boeing opening a plant in North Carolina instead of Seattle) AND even from China where urban land prices are ridiculously higher than in US cities without UGB's.
You are SO right about THIS:
".....often its the poorest amongst us who are first to be driven to the city margin, because they can't afford to pay the astronomically high urban rentals and condemning them to long and costly commutes, because their neighbourhoods are poorly serviced by public transport....."
I have been banging on about this for years. The economists Anthony Downs and Alain Bertaud have both written significant stuff on this point. The famous "sand suburbs" in the USA with all the foreclosures, ONLY exist in areas where regulatory restrictions in established areas have forced housing to become unaffordable. There were no foreclosure-hit "sand suburbs" anywhere in the USA where there was affordable housing already in the established cities thanks to no UGB.
Now of course OUR "planners" want "REGIONAL" powers to stop people fleeing to rural towns for "affordability" and commuting 80 miles. It is nonsense to allege that rising fuel prices will make this exurban commuting unviable - the inflation in house prices is far worse, leaving considerable potential for "transport plus housing" cost savings even with 80 mile commutes.
Did you know the State of Florida has just repealed "Smart Growth" mandates? Hopefully this is a new trend. The City of Bend, Oregon, is suing the State of Oregon over ITS UGB mandates. The people of Bend have worked out what is destroying their local economy.
Do you see, as I do, that it is essential to keep urban land costs low and stable if we are to have any economic future at all? Therefore, if we are agreed that we need to contain urban growth, we need measures that do so WITHOUT inflating urban land prices. This means, land taxes, or "eminent domain". I throw this challenge down to ALL advocates of UGB's - if you won't advocate also for eminent domain, or land taxes, as part of your program, WHOSE POCKET ARE YOU IN? Whose pocket are you in, Len Brown, Mike Lee, Roger Blakeley?
UGB's plus still-free Real Estate markets and "property rights", deliver massive wealth transfers from the younger generation, to well placed property owners; AND DO NOT DELIVER NET BENEFITS. The "benefits" such as they are, accrue to a minority of people who are able to "buy their way in" to what are de facto systematized "gated communities". These people then sneer at the unwashed masses who dare to NOT "live sustainably like us in our walkable, transit oriented communities" (because, incidentally, the cost of a condo is 2 million bucks plus) and sneeringly discuss ways to penalise these people for their "unsustainable choices", like higher petrol taxes.
By the way, the "outward shift of jobs" you refer to, is actually coming to be understood among the most advanced urban economists, as a congestion-reducing, efficiency-gaining "free market" mechanism (although I agree with Gaffney et al that "horizontal infrastructure is subsidized while vertical infratsructure is taxed"). Check out the papers listed on the web site of Prof. Alex Anas (State University of New York at Buffalo); one of them is called "Decentralization and the Stability of Travel Time". Multiplying urban "nodes" actually makes huge sense when you think about it. The utopian ideal of "urban villages" is merely an over-romaticized version. Anas discusses this somewhere. "Walkable" communities and "Transit Oriented Development" is far more DO-ABLE if urban land costs are low rather than high.
By the way, there is a large number of useful references in THIS article:
http://www.newgeography.com/content/002471-florida-repeals-smart-growth-law
For example:
"...........Growth management has been cited extensively in economic research because of its association with higher housing costs. The basic problem is that, by delineating and limiting the land that can the used for development, planners create guides to investment, which shows developers where they must buy and tells the now more scarce sellers that the buyers have little choice but to negotiate with them. This can violate the "principle of competitive land supply," cited by Brookings Institution economist Anthony Downs. Downs said:
If a locality limits to certain sites the land that can be developed within a given period, it confers a preferred market position on those sites. ... If the limitation is stringent enough, it may also confirm a monopolistic powers on the owners of those sites, permitting them to raising land prices substantially.
This necessity of retaining a competitive land supply is conceded by proponents of growth management. The Brookings Institution published research by leading advocates of growth management, Arthur C Nelson, Rolf Pendall, Casey J. Dawkins and Gerrit J. Knapp that makes the connection, despite often incorrect citations by advocates to the contrary. In particular they cite higher house prices in California as having resulted from growth management restrictions that were too strong.
...even well-intentioned growth management programs ... can accommodate too little growth and result in higher housing prices. This is arguably what happened in parts of California where growth boundaries were drawn so tightly without accommodating other housing needs
Nelson, et al. also concluded that “... the housing price effects of growth management policies depend heavily on how they are designed and implemented. If the policies tend to restrict land supplies, then housing price increases are expected” (emphasis in original)......"
But do read the whole thing.
Financialisation and financial de-regulation obviously have a 10x more significant impact on housing affordability than any form of urban planning. Libertarians make a big deal out of it because they want de-regulation everywhere, either for idealistic reasons or for personal gain. That is why most of these studies are Libertarian backed.
Show me a correlation between urban planning regulation changes and the wealth gap.
Notice the very obvious effects of Reganomics in the 1980's, there is nothing unclear about that.
http://www.die.net/musings/national_debt/
Reaganomics was responsible for the blowout in US national debt? HUH? The Carter administration (and earlier administrations) didn't have anything to do with it? This is like saying the John Key government in responsible for the same in NZ today, when Clark and Cullen left them with a fait accompli situation.
"......Financialisation and financial de-regulation obviously have a 10x more significant impact on housing affordability than any form of urban planning....."
Absolutely wrong. Dozens of cities in the USA had no house price bubble at all during their famous crisis, because they had no urban growth boundaries or "planning" proxies for them. It is hard to find anything for which there is a more iron-clad analytical case to be made.
http://www.performanceurbanplanning.org/academics.html
It is extraordinary that this is so little understood in the wider world as yet. The urban planning profession and local body politics are in the grip of an iron, P.C., semi-religious, utterly post-rational groupthink.
".........Show me a correlation between urban planning regulation changes and the wealth gap......."
There is indeed academic research into this. Check out the papers co-authored by the LSE's Paul CHESHIRE. The London School of Economics is the most advanced at researching this effect because they have 6 decades of data under "urban planning" regimes. Another paper from the LSE, on that subject, is Overman, Gibbons, and Resende; "Real Income Disparities in Britain".
The 2 papers of Nicole Garnett (Notre Dame University) listed on "performance urban planning", are worth looking at on this subject too.
Really enjoy your intelligent and erudite contributions. Yes, I have read Colin Ward and respect him.
But I have argued with such people before, that true "free enterprise" in housing, as in Texas, is so efficient and beneficial in the truest Adam Smith sense, that hardly anyone NEEDS to erect their own "shanty". Modern houses are brought to market simply SO cheaply, and older houses depreciate and provide something far better at perfectly affordable prices for even the most modest income earners, than a shanty in an anarchist commune.
That is not to say that Texas bans anarchist communes at all, they don't. But genuine free enterprise both allows for anarchist communes, AND removes 90% of the need for them.
PhilBest,
I think your enthusiasm for Texas' "freemarket" in real-estate, is a little excessive. I think a far more important factor in the States' housing affordability has more to do with its unique geographical characteristics as compared to a city like San Francisco for example. Most cities in Texas lie on vast sprawling prairies, which enables them to expand freely in all direction, whilst San Francisco, is nestled on a peninsula within an ocean bay and its expansion is also bound by the Sierra Nevada mountains.
A cursory look at the planning regime reveals, local authorities in Texas, have essentially the same powers to regulate people's decisions regarding real estate development as in most other jurisdictions. Though with one exception, those developments, designated as "Planned Developments".
The presumption in mandating zoning ordinances and regulating land use does as much harm as designating growth boundaries.
I'm living in the Coromandel right now, in what could be termed as an anarchist commune, though I'm actually the only anarchist here. With some people anarchism is a bad word lol. We are currently beset by both departments of the local District Council, who wish to at the very least condemn some of the houses here, for breaches of both the Building Consent and Planning Consent bylaws. The trustees are hobbled by their aversion to getting into debt, so the house I currently live in is rather rough and lacks electricity, though it does have a water supply (Non council).
"So firstly, you have to explain how the land owning class "lost control" for a few decades until Urban growth boundaries got going thanks to environmentalist fig-leaves of respectability."
The loss of control of land policy by the aristocracy reflected their decline in overall economic fortunes subequent to the Repeal of the Corn Laws. With cheaper transport due to developing rail and shipping links to the United States and Russia, the importation of foodstuffs at a price that the English agricultural industry (owned by the aristocracy) declined to the extent that the UK was importing 65% of its wheat by the 1880s. This meant that the agricultural industry in the UK went into severe decline until their fortunes were revived during the War as demand and prices skyrocketed.
"In 1877 the price of British-grown corn averaged 56 shillings, 9 pence a quarter and for the rest of the nineteenth century it never reached within 10 shillings of that figure. In 1878 the price fell to 46 shillings, 5 pence. By 1885 corn-growing land declined by a million acres (4,000 km²) (28½%) and in 1886 the corn price fell to 31 shillings a quarter. Britain's dependence on imported grain in the 1830s was 2%; in the 1860s it was 24%; in the 1880s it was 45%, for corn it was 65%.[22] "
http://en.wikipedia.org/wiki/Corn_Laws#cite_note-21
"The plotlands were the result of several factors. First, the agricultural decline that began in the 1870s and continued until 1939, with a break in the First World War, forced the sale of bankrupt farms at throw-away prices."
http://www.historyandpolicy.org/papers/policy-paper-25.html#plot
Sure, but I am talking about the land owning class's grip on URBAN land ownership, including the monopoly of NEW lands brought in to urban use. While corn prices were dropping, urban land prices were rising.
But the families De Walden, Cadogan, Bedford and Portman still own most of the heart of London after centuries. However, if London had Houston's regulatory regime, these people would hardly have had a fraction of the "monopoly" gains they have had. When I am talking about the land owning classes losing their monopoly grip, I am really referring to those parts of the world that went in wholesale for urban sprawl and auto-dependent development. This included most of Europe, even if to a lesser extent than the USA.
"Sure, but I am talking about the land owning class's grip on URBAN land ownership, including the monopoly of NEW lands brought in to urban use. While corn prices were dropping, urban land prices were rising."
Well the fortunes of the aristocracy aren't any more uniform than they are for the rest of us. The fortunes of those who's estates were confined to the underdeveloped rural area's declined far faster than those like the Duke of Westminster, who still retains vast swathes of real estate in London.
The most valuable land belongs to Number 4 on the list, the Duke of Westminster, whose Grosvenor Estate, worth a whopping £6billion, takes in the wealthiest areas of London, including Belgravia and Mayfair.
"By the way, the "outward shift of jobs" you refer to, is actually coming to be understood among the most advanced urban economists, as a congestion-reducing, efficiency-gaining "free market" mechanism (although I agree with Gaffney et al that "horizontal infrastructure is subsidized while vertical infratsructure is taxed")."
When I read the above, I remembered the gist of an article I'd read awhile ago, which related what the author though of the absurdity of the fact that with development now occuring primarily in the suburbs, workers like himself had to commute from suburb to suburb to get to work, so the claim ain't necessarily so. I tried to search for the article, but the closest thing I found to it was below.
Today, gays and urban singles commute from San Francisco to work in Silicon
Valley, while family-oriented professionals live in Silicon Valley suburbs
and work in downtown San Francisco. What gives the Bay Area broadly
its advantage is that it has something for everyone.
http://www.creativeclass.com/rfcgdb/articles/Kotkins_Fallacies.pdf
Sorry but I have to put Gareth Morgan in the large camp of economists who still, simply don't get it.
Gareth you need to tear up the 'Efficient markets hypothesis' and everything related to it. This includes all economic models which don't consider credit and debt, surely economists can understand this now (Some how Paul Krugman doesn't). Until this is done people will continue to assume that the economy is some how in equilibrium or heading in that direction, something which is so obviously not true at all.
This is the same hypothesis which was used to justify 'supply side economics', we all know that they are daft, why does anybody still hold onto this unproven hypothesis that market efficiency leads to economic growth. It's proven historically that basically the total opposite is true. Look at my link above, Noam Chomsky is stating why in 1993 specifically explaining why NAFTA has had the effects it has had.
Only once you do this will you be able to stop making ridiculus statements like,
"First, the central bank needs to understand that lending on property is not less risky than other forms of lending, that if it directs lenders to treat it as though it is, then they will lend and lend on property until that regulatory assumption is defeated."
Lending on property is less risky, it does not matter what the regulations say, it's less risky because people will be willing to go through a lot in order to keep their homes. Fraudlent lenders understand this, which is why they find ways around regulations just so that they can lend and then profit, why don't economists.
Two points here.
One, WITH urban growth boundaries, you have "sub prime" mortgages of 3/4 million dollars to yuppie couples (as in California). WITHOUT urban growth boundaries, you have "sub prime" mortgages of $60,000 going to solo mum checkout operators (as in Georgia).
WHICH is the most damaging to the economy and the most profitable to the gougers?
TWO, Chomsky (and all Marxists generally) suffers from the same "culture blindness" as the free marketers. Classical economic theory on free trade is correct only in so far as the trade takes place between 2 societies that BOTH have freedom and opportunity. Chomsky is absolutely right about the effects of Free Trade, WHEN ONE of the participants has a culture or politics under which there always WILL be an exploited workforce. This is certainly the case in China, with its Communist Party nomenklatura; anyone conducting free trade with China is merely "importing" the same "denial of opportunity" to the worst off in society.
It still makes perfect sense to have free trade between two societies that DO have genuine "free enterprise" and opportunity. But there is hardly any of this left anywhere in the world now, because of State introduced obstacles. (Refer "What About the Poor" by Barry Loberfeld, and "The Paradox of the Statist Businessman" by Theodore Forstmann).
That is a good point about who is buying the sub-prime mortgages, Phil. I would rather the wealthy are taken advantage of more than the less affluent, specifically because they have real options. Also the affluent obviously have more political influence and so are better able to regulate and protect themselves.
Noam Chomsky is far from a Marxist. But it is pretty typical to accuse people of being Marxists, just because they have read 'das Capital'. Chomsky has himself made many times the point that free-trade can only be a fair system when there is economic equality, he has many times more made the point that no economy has ever flourished from free-trade, and in many cases economies have attained a hedgemonic position due to imposing free-trade on others while themselves having heavily protectionist economies.
http://www.youtube.com/watch?v=SgFlJjnULh0
Be sure to review all of part 4/5, this explains why Libertarianism is so corrupt. The falacy that Libertarianism is some how democratic or free has been understood since Plato thought about representative democracy.
Just because there is an exploitable population,
1) that does not make anyone obliged to profit from it, it is a moral choice to do so.
2) there are perfectly reasonable ways to participate on other economies even with great disparity, the fair-trade movement has been showing this for years.
Nic,
I don't follow your reasoning. Does the availability of houses for $60,000 represent "exploitation of the poor"?
Is inflated-price, unaffordable housing, "exploitation of the wealthy"?
Actually, inflated urban land prices are the ultimate denier of "opportunity" and social mobility; and low, stable urban land prices have already been described as an essential ingredient in "opportunity urbanism". Look up the writings of Joel Kotkin on "opportunity urbanism".
I don't know any economically corrupt libertarian myself. They are all "purists" in the extreme, railing against exactly the kind of thing you criticise. Ayn Rand used to say that "statist business men" should be hung. I think you are attacking the wrong label. By all means attack "capitalism", but "capitalists" themselves might not all be "statists" or "mercantilists". It often depends on the position they have already secured. It is "statism" or "crony capitalism" that entrenches existing privilege and denies opportunity to those starting out.
I think Chomsky is a Marxist because of his insistence on economic equality. This insistence renders anyone totally utopian, a dreamer, and lacking in rationality. There is simply no way to create wealth without inequality. But it is noticeable that for all that the "inequality" of free market economies is criticised by Marxists, the only alternatives in history have been either even more unequal, OR create equality by lowering everyone rather than raising.
I will tackle your question of urban planning above. You are 100% wrong about this.
"Fraudlent lenders understand this, which is why they find ways around regulations just so that they can lend and then profit, why don't economists."
Because economics doesn't allow for human behaviour. It is one of the big flaws (there are many) in the so called 'science' of economics. Economics theory always assumes that humans will do whatever maximises the outcome for themselves. It assumes that rational behaviour is always that which maximises profit. Economics is not a science, it is a contrived thing created by humans. It pretends to be relevant by having a glut of complicated equations but in reality it is a crock. Human behaviour is far far far more relevant than economic theory.
If you think Chomsky is a Marxist you need to actually listen to what he is saying.
Peter Schiff, good example of an incredibly corrupt libertarian. Currently trying to hoodwink the US government into government spending cuts so his prophecy of more bailouts, QE looks valid.
Name 1 economy which became rich on free market policies.
Oh, come on, I have encountered enough of Chomsky for 40 years to know that he is a modern exponent of Marxism. He is just another one of the slippery characters who insists that he has the secret to the real, pure thing, that none of the many disastrous and murderous political experiments in "equality" so far have been, according to his chimerical standard. He is really the leader of a modern day religion, for all the rational person can make of his ideals. But many of those who admire him and quote him today, are little more than slope-brow revolutionary dreamers who also idolize the mass murderer Che Guevara.
Peter Schiff, a corrupt libertarian? I suppose if you call libertarians who invest in gold as a safety measure, "corrupt". The rest of your comment makes no sense at all to me. I don't see a connection between small government ideology and corruption; I see the connection very much as between big government and corruption. I see no reason to believe that Schiff only advocates reductions in government spending so as to make QE more likely.......!!! Schiff has consistently opposed funny money, consistently opposed bailouts, and consistently advocated smaller government and reduced government spending, all his life. I fail to see how corrupt motives can be somehow be fitted in to his entirely consistent position now, just because changes that Schiff always was dead against, have occurred in the situation we face meanwhile.
".......Name 1 economy which became rich on free market policies."
Actually, I say it has a lot to do with a culture under which men trust one another, contracts are enforceable, there is the rule of law, people are largely allowed to retain the fruits of their own endeavours, people are largely free to engage in mutual exchange between one another, and there is a prevailing culture of morality under which the deadly sin of envy is largely suppressed. I would like to know what is your explanation for some nations modernising and lifting their people out of poverty, and others not. I do not even bother to ask you to show me one nation that has experienced rising incomes, standards of living, and well-being equally shared among all its citizens by compulsion, as the progress was experienced. There simply never can be such a nation. You can "share the wealth" by compulsion after a certain amount of progress has been experienced, but you reduce the progress proportionately, and many nations do reduce it to nothing and then wonder why. The resilience of a nation's economic growth to compulsory wealth sharing, relates mostly to its culture, something that Marxists and free-marketers are both equally blind to. But it also relates to the kinds of industry that have become established and the income levels that relate to that industry. Hence Sweden with its machinery, armaments and high technology, is far more resilient than NZ with its agriculture and tourism. Not to mention Sweden's Lutheran ethics of hard work and personal responsibility.
Marxists (and Chomsky-ites, if they are a different thing) will say it is all about "imperialism" and "exploitation", but there are simply no correlations observable in human history, with this theory. Sweden was never a colonial power. Japan has experienced its most growth as a helpless buyer on international markets, of nearly all the commodities it needs. The same applies to all the defeated WW2 Axis powers. Marxist imperialist exploiters did not increase their common wealth and never will, no matter how much imperialism and exploitation they are guilty of.
Well if you have been following for 40 years you certainly have not heard a word he has said. Not to put words in his mouth, but if Chomsky would have anything to say about free-market policies, it would be follow the principal of universalism. That is if you are going to impose something to someone else, you ought to be willing to impose the same conditions on yourself (at least in the same circumstances). That is hardly utopian. Obviously this applies pretty much directly to so called free-trade treaties.
You always have to judge people by what they actually promote, not what they say they believe in. I saw the transcript of Peter Schiffs testamony to congressional comittee. At the end he was asked a simple question by Dennis Kucinich, the US congress spends 50% of it's tax take fighting wars overseas, should it leave Iraq and Afghanistan? Of course Schiff answers yes, I would be in favour of that, something like this. Then what does Peter Schiff continue pushing? Cut spending on public education, Cut medicare, Cut taxes on highest marginal rate. It is so obvious he could care less about the military budget, complete hypocrit. If Peter Schiffs policies are followed then you end up in a situation where all the lower and middle income earners pay tax, specifically so that it goes in corporate subsidies straight to private military hardware manufacture. That is not something any kind of Libertarian (especially Chomsky) would support.
It's actually a democratic (and US Libertarianism is deeply un-democratic) issue. The people who run American representative democracy are all about themselves. They don't represent their constituents, they represent their campaign funding. But US Libertarianism refuses to acknowledge that it is handing over democracy to corporate tyrany.
So you take two huge paragraphs of nonsense to say that you can't answer his question. The Nordic countrie such as Sweden, have higher taxes and higher social welfare spending. They have less inequality, less poverty, higher incomes than most of the nations who base their economies upon 19th century British economic thinking. Higher taxes in the Nordic countries don't seem to have led them down the "road to serfdom" as Von Hayek suggested. Exactly the opposite in fact.
Free Market ideology is a crock, because you can never have a truly free market. For example, in order to have a free market, you'd have to get rid of central banks and fractional reserve banking.
Oh, you'd also have to have complete blind faith in some 'invisible hand' fixing everything. Smith was referring to God when he came up with the invisible hand so free market ideology is reliant on religious beliefs to work correctly.
I already covered why Sweden has such high resilience against the "disincentive" effect of higher taxes. But I do not think that this resilience will last forever. I believe that the Scandinavian countries are likely to suffer their own peculiar decline in our own time. By all means agree to disagree with this - it is just an opinion.
Interestingly, Hayek actually said in "The Road to Serfdom" that certain religious beliefs that involve "submitting to impersonal forces", was one of the factors that made the emergence of free markets possible. But that clearly does not mean that free markets have emerged in Islamic countries. A crucial difference, is that some religions adherents regard "power" to exploit, as merely a mark of divine approval, while those exploited simply do not have the divine approval.
Here is an interesting excerpt from "Being Indian", by Pavan K. Varma:
".......Their spiritualism, although lofty in its metaphysics, is in religious practice mostly a means to harness divine support for power and pelf.......Most Indians are 'other-wordly' only in their indifference to anything in the external mileu that is not of direct benefit to their immediate and personal world.
This complete self-absorption is truly evident in their remarkable tolerance of inequity, filth and human suffering. They are a pragmatic people, naturally amoral in their outlook. There is no notion of ultimate sin in Hinduism. Any action is justified in certain contexts, and 'gods' are routinely bribed. Corruption has grown endemically because it is not really considered wrong, so long as it yields the desired result........"
Well Phil you did ask a question, I guess it is worth giving an answer. "I would like to know what is your explanation for some nations modernising and lifting their people out of poverty, and others not.", For a start this kind of question, what is the most efficient way to modernise the economy is pretty non-helpful, that includes to the most laissez-faire supporters as well. Laissez-faire capitalists have already decided what they want, and the rhetoric at least is usually clear, though not always consistently followed. Basically no social system, no military, for others basically no government regulation (though there is little consistency about what that means). That is what they want, it actually doesn't matter much if the rhetoric about what that will deliver is correct or not. I don't believe the rhetoric holds up to rigorous logic but maybe it does.
So what does the majority want from their economy? Well I think it would be correct to say that people want an economy which is fit for their society, or the society they aspire to be part of. Basically when society decides to modernise and lift it's economy out of poverty, it's kind of a natural thing that this occurs, you really don't need to structure an economy in any way to have it improve. Maybe that sounds like a cop-out, it's not I am just saying people will work towards the good of the economy when it's in their interests to do so, otherwise you might be able to force them under some conditions, or participants might resist or work against these conditions. So having an economy fit for society is actually extremely important in order to have it modernise.
This implies two things, first for a democratic political system at least, it is important that the economic system provides reasonably equal incentives to as many of the participants as possible. This will minimise political interference in the negative sense of having a large number of disenfranchised participants who are not interested in participating in the economy, and will probably insist that the economy be 'reformed'. An additional reason for this is that a democracy functions better with reasonable economic equality, because the democratic intrests of the economically disenfranchised do not need to be suppressed.
Second, not only will economies all function differently, maybe even fundamentally so. The structure should obviously reflect the needs of the political system and society which they are supporting. Probably most importantly the economy should not be structured in the interests of people outside that economy, non-participants. This, by disillusioning many of the participants, is most usually going to result in poor overall economic performance.
Your argument cuts both ways. People need to feel incentivised to be part of the system and contribute to it. You are arguing that this means providing better for the people at the bottom via income redistribution. I am arguing that too much of this removes the incentive for the people who CREATE the MOST wealth in the first place, for sharing out.
We probably both accept the validity of the others argument, it is just a matter of finding the "degree" that works. But very few people seem to realise that because of rebates, the USA has the highest proportion of its population, in the world, that ends up paying NO income tax at all. This is precisely because there is such a HIGH proportion of higher income earners paying very large dollar sums of tax even if it looks small as a proportion of their income.
So why should the "bottom half" of people in the USA resent their lot relative to the bottom half of people in any other country in the world? The stupid trap most of us fall in to, is in preventing the emergence of a HIGH income earner class that contributes a lot of dollars in tax revenue, to allow for tax burdens to be removed from the lower segments.
I would have a lot of respect for left wingers who decry "tax cuts for the rich" if they advocated "tax cuts for the poor" instead. But they seldom do. I personally think tax cuts should be given "bottom up" by raising the amount of the "bottom" zero tax bracket. The worst marginal tax rates are faced by beneficiaries entering the workforce. The unwillingness of left wingers to address this, is explained by their preference for constituencies bogged in "dependency".
First of all I already made the point that high inequality creates an extremely dysfunctional representative democratic system. You end up with this US situation, where people at the top have to use their money to influence the politics, because otherwise everybody else will vote them out.
Second I should point out that there is no good reason, certainly none I have ever read, to assume that the wealthy do create jobs better. This is an assumption made by supply-side economic theory, which was never accepted in the main stream. It's also not worked out in practise several times.
Lets enter a completely delusional world and assume it is correct however. Well you can adjust tax in a more regressive manner this might stimulate the economy, but you can only do this so often until the gap between the wealthy and the poor becomes untenable. Certainly untenable under a democracy. Once this happens then the economy needs to go through a destructive re-balancing of the reward gap. This kind of growth is un-sustainable, and that is if it works. The sustainable balance of course differs by country.
I really don't understand why Adam Smith is still treated with any reverence in economics. His ideas have turned out to as useful as alchemy, for example here is the state of the art.
http://en.wikipedia.org/wiki/Dynamic_stochastic_general_equilibrium
Unfortunately what this wiki page does not make apparent is that the model typically assumes there is exactly one agent, representing a group, that is pretty un-realistic. For example, from Example the Smets Wouters model "(in other words, the model does not analyze individual European countries separately)", well I wonder why their financial system is in such a mess?
Most of the effects of policy 'reform' have been through non-tax policy changes. Often however these changes (underfunding public transport, underfunding the hospital system, underfunding education) effectively shifting the burden from the wealthy to the poor, usually to support a cut in marginal tax. This also creates job insecurity which obviously puts downward pressure on workers wages. To try to frame the argument in terms of tax, rather than social spending is simply a technique used to attack society.
"So why should the 'bottom half' of people in the USA resent their lot relative to the bottom half of people in any other country in the world?", You can't tell people what they should feel about something or what they should compare themselves to, that is pure propaganda, and it doesn't change resentments only on occasion outcomes. Since the US has still got a somewhat functional democracy they are absolutely right to compare themselves to their own rather than anybody else. They can still control the structure of their own society and economy. Of course many, many countries would be better off were the US to stop dictating the direction of their economic future as well.
Martin Luther King pointed out way back when he was alive, that even then, "African Americans", if they were a separate nation, would be the 7th best well off people in the world.
I do not believe that there are any other nations whose least well off minority would be remotely this well off. If African Americans have slipped since then, this can easily be explained entirely as a function of the rate of solo motherhood among them versus the whole population.
"Martin Luther King pointed out way back when he was alive, that even then, 'African Americans', if they were a separate nation, would be the 7th best well off people in the world."
Exactly, nobody would criticise the American civil rights movement for this. People in America are right to compare themselves to their own.
Nic, I noticed that you asked for an economy that got rich on free-market policies. One that I was familiar with is Hong Kong. When I lived there there was a truly astonishing economic transformation taking place. The government had a laissez-faire philosophy, and was not democratic, 4 million people being ruled by the governor and his advisors. Government expenditure was about 7% of GDP, and was mainly focussed on housing thousands of poor immigrants who covered the hillsides in corrugated-iron shacks. They (and many others) were really poor. There was not much in the way of social welfare, but the Chinese always looked after family. Church groups looked after the desperate. Nobody starved.There were no natural resources, unless you think volcanic rocks are a natural resource. It was remote from its principal markets. There were trade barriers against goods made in HK. There was not much land and freshwater had to be bought from China. At least it had a harbour. My father was on the top tax rate (15%). Most paid less than 10%. Of course, with a minimal government you do not need much tax. The government had almost no debt.The results of this laissez-faire experiment are there to be seen today. The energy of the place was remarkable. I saw 10 storey buildings being torn down to put up 20 storey ones, constant reclamation of the harbour as hills were removed and put into the sea. The HK Chinese really knew how to work hard and be creative in business. It was far from paradise, with pollution, corruption, a gambling mentality amongst many, and it was and still is crowded. With all its problems it is still a good example of what people can do against all odds if the government leaves them alone. The contrast with what was happening over the border in mainland China was stark. People braved shark-infested waters and gunboats to get around border controls and escape from the communist utopia and enter the Promised Land. I expect HK will eventually go the way of modern democracies with a bloated government slowly strangling the economy with taxes and regulations.
I might have to concede that example, but first of all it's not something which is likely to be repeated anywhere else.
"The Hong Kong government raises revenues from the sale and taxation of land but not engaged in industry and commerce for profit. From its revenues, the government has built roads, schools, hospitals, and other public infrastructure facilities and services. It has also operated a welfare insurance scheme. The government has avoided running up large budget deficits; and by restraining public borrowing, credit expansion and inflation have been held in check."
So bye bye to real private land ownership rights if this is a model. I suspect that the main reason that the situation in Hong kong is financially stable is because of the limits to credit expansion. This is really what does the most harm to any economy, no matter how free-market or not the actual market is. Should also be pointed out that that Hong Kong is in no way a democracy, and has some of the worst conditions in the world in terms of equality.
The lack of abundant natural resources obviously shows that it is increadibly profitable to exploit people by paying them next to nothing. this is hardly an original model for profit. So if we want New Zealand to become autocratic, polluted, corrupt and unequal maybe we should adopt free-market economics.
Of course laissez-faire has nothing to do with free-markets, to hold them the same in his name is really a great defacement of what Adam Smith actually wrote,
http://www.chomsky.info/books/warfare02.htm
Just because an economy gets rich, doesn't mean the people do. Hong Kong has one of the highest levels of income inequality in the world. Regardless, despite being probably the freest economy in the world, it is by no means a true free market economy. For example, you can't own land in Hong Kong, it is all owned by the government and leased out.
Nic, I do not think that Smith was laissez-faire in his view of economics. The term preceded his views. I think most people see free-markets occurring in a laissez-faire political environment. Your point about inequality maybe true, but I never met a HK resident who despised the mega-rich for being rich. Instead, they admired them and sought to emulate them. After all, they were upwardly mobile themselves, and would be puzzled by anyone thinking that they were 'exploited'.
I agree with your point about the stability caused by limiting credit expansion. A debt-free government (and people) can weather severe financial storms.
I do not think free-market economics causes autocratic, polluted, corrupt and unequal societies. Perhaps you meant to say that if NZ became autocratic, then it would become polluted and corrupt. I omit inequality because I do not think that inequality is bad, but everyone agrees pollution and corruption are undesirable. Unfortunately corruption is beyond the control of any administration, and reflects the kind of people we are. Pollution is always a problem wherever we congregate in large numbers, but this is also due to a neglect of the Golden Rule. The Golden Rule (Love Thy Neighbour as Thyself) was not a concern of the typical HK resident. In this way the HK experience shows that a free-market philosophy on its own does not make for a wonderful society. It would obviously work better in a society where people cared for each other in a way that manifested itself in a prominent community spirit.
Stray76: Yes, HK is not a true free-market economy, but it is an anomaly in a world world where the consensus is to have the state control more and more of the economy. The state ownership of land is not good, but remember that we do not own our land either, thanks to William the Conqueror.
"A debt-free government (and people) can weather severe financial storms.", Try A debt-free people (and government) can weather severe financial storms, because that is where the balance actually is. A debt-free economy will not be damaged significantly by external financial shocks either. That is why the financial system in NZ ought to be re-structured to fit the NZ economy.
"I do not think free-market economics causes autocratic, polluted, corrupt and unequal societies."
Maybe not for free-markets in the sense that Smith wrote about, but certainly in the current system they do. How else can a large modern corporate structure function? They are all highly autocratic of course. Many of the stakeholders don't care about environmental destruction, especially when that is happening somewhere else, many already break existing environmental standards. The unequal part is also obvious and structurally built in, shareholders and top management frequently reward themselves before rewarding wage earners for any gains. The wage earners are entirely outside this structure as they are not stake holders. From the outside the structure of a corporation is of course opaque, meaning corruption is going to be nurtured. Adam Smith would have been horrified if he saw the structure of society today.
"I omit inequality because I do not think that inequality is bad.", enlightened society however disagrees. People in the north of america used to consider wage slavery pretty much the same as slavery and something to be eventually abolished. Of course equality of rights and opportunity has been the gradual direction of society for centuries.
"Unfortunately corruption is beyond the control of any administration", I guess you have not heard the phrase 'sunlight is the best disinfectant' then? If you structure your economy around large unaccountable opaque autocracies then corruption will be nurtured. There are obvious ways to make corporate structure more accountable to stakeholders and less corrupt.
In fact, it is mainstream libertarian thinking to have tax revenue primarily raised from land, not incomes or spending. This would promote equality. Many of the less economically astute "left wing" political movements support policies that increase inequality. Like urban planning, for example.
I am advocating ABOLISHING urban growth boundaries.
The world's trend from rural to urban has in fact resulted in LESS "coverage" of the land mass by "people" if that is how you define "sprawl".
You would find "Making Room for a Planet Full of Cities" by Shlomo Angel, fascinating.
The world is approximately 0.7% covered in "urban" areas now.
EUROPE is far more densely populated than China, India, Pakistan, Bangladesh, or Indonesia. The Netherlands especially so.
AFRICA is the least populated major habitable continent.
IF third world nations developed AND urbanised AND their cities "sprawled" like the USA's cities, they would STILL not occupy as much of their "fertile" land as European cities occupy in THEIR nations. "Overcrowding" in third world cities today is not a result of "overpopulation", but LACK of "sprawl".
This stuff is a non-problem. The earth's population is projected to hit a peak and start declining at around 10 billion or so, as people get wealthier and have smaller families. Urbanisation and decent lower density living conditions are something we should celebrate along with longer life expectancies, human rights, etc.
I agree with you that there are nasty vested interests behind "urban growth constraint" and behind "population control", but I do not think these are both part of the same evil program. The "population control" people have been quite late out of the starting blocks, given the massive success they COULD have had if they had simply never allowed "aid" including modern medicines, to flow to the third world. Humanitarianism seems to have beaten them for most of modern history.
"Population control" in the WEST is all part of a certain civilisational self-hate death wish on the part of neo-Marxist and environmental ideologies.
"Urban growth constraint" is all just part of the consequences of "enlightenment". A staunch old atheist scientist admitted to me recently that GK Chesterton was right as far as the greater mass of people is concerned - "when they stop believing in God, they start believing in anything". The idea that "Urban sprawl" could possibly contribute to humanity "running out of land", is a classic example of the sort of unreason that results.
Did you know that the amount of land that used to be used to grow feed for horses and draft animals is LESS than the amount taken up by "urban sprawl" so far? References: Robin Best, "Land Use and Living Space"; and Eric Morris, "From Horse Power to Horsepower".
"Oligopoly pays." That’s the chief lesson emerging from Alice Poon’s excellent survey of Hong Kong’s real estate and infrastructure economies. Although Hong Kong is often characterized as one of the world’s freest economies, it is in fact controlled by a handful of wealthy individuals and companies who stifle—rather than encourage—competition.
Poon dissects the sinews of Hong Kong "big money" and isolates its key components, those being legislative and legal sway over land and competitive policies. Hong Kong’s biggest fortunes owe their growth and security to dominance over a wide spectrum of businesses ranging from transport, public utilities, supermarkets, and food distribution to, most importantly, land development. Huge amounts of real estate are developed by a handful of large companies who control all aspects of supply, construction, and property management. Indeed, the usual hallmarks of classically defined competitive markets are nearly absent; instead, Hong Kong’s market structure suffers from steep barriers to entry and government policies that serve to bolster the market positions of a half dozen huge conglomerates.
The situation of near-anarchy for Hong Kong’s corporate heavyweights may make for impressive annual reports but does little to relieve Hong Kong’s mounting social and economic tensions. Poon carefully details how government "of the rich, by the rich, for the rich" in Hong Kong has damaged civil norms and deprived its population of economic security and well-being. Not surprisingly, articulate protest groups have lodged forceful criticism of "business as usual" and gained widespread support, proving that discontent is deep-seated and justified.
http://alicewaihanpoon.blogspot.com/search/label/book%20review
This is very much a function of HK's constrained size.
If a city can simply expand freely like Houston or many other US cities, you NEVER get these oligopoly situations.
Any small city-state or island nation that literally runs out of space to build any more, will suffer these effects and ultimately decline because of it.
But REGULATORY boundaries that turn a city into a DE FACTO "island", have exactly the same effect. It is insanity to do this to your economy, as if to say, "lets play fair with Hong Kong and put all OUR industry and workers under the same disadvantages".
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