The AfD’s election win in Saxony-Anhalt on September 6 has shocked Germany and the world, but it should not have done so, being a direct result of the delusional policies of the last three decades. After the Wall fell in 1989-91, liberal pundits proclaimed the “End of History,” pronounced that international trade barriers would fall, benefiting everybody, that even illegal international migration was a boon, that interest rates should be lowered to zero even though inflation persisted and later that climate change required Western countries to accept much higher energy costs and erratic supplies. Only China, India and to a lesser extent the United States resisted these siren songs, which have led to spiraling economic disaster. Thank God that in genuine democracies ordinary people with common sense occasionally get a say, or the experts would wipe humanity out!
The key error was globalization, the attempt to remove all trade barriers, even with countries that had not developed a functioning private economy like China, or that regulated it into socialist poverty, like India at that stage. With the telecoms revolution of the middle 1990s, global supply chains became very much easier to construct. In a world where trade barriers were thought to be disappearing, lengthy, rickety and politically vulnerable global supply chains were pursued fanatically by big multinationals, who were incentivized by excessive poorly costed management stock options to pursue short-term profit at the expense of all other considerations.
In its early years, I generally bought the argument for trade globalization (though never that for increased immigration, of which more below). It appeared clear that outsourcing production to low-wage countries would increase global welfare, through Ricardo’s principle of comparative advantage. There were, however, two doubts even at first. First, what about the possibility that a low-wage country, having been given all the low-skill work in a particular sector, would use its new capability to shimmy up the value chain and steal the high-skill work that the outsourcers had kept in the U.S. or Europe? It was clear by the early 2000s that this was a severe danger in software, where Indian software providers were using the low-skill work they had been subcontracted from U.S. companies, together with information from the millions of H1B visa immigrants to the U.S., to expand their software market share in ways not at all conducive to U.S. welfare, let alone to U.S. tech employee welfare.
Viewed from around 2000, globalization and international sourcing would undoubtedly raise rapidly the wage rates and prosperity of poor countries that followed even moderately rational economic policies, as indeed has been the case. However, it was also likely to reduce wages in rich countries, especially those of blue-collar manufacturing workers, whose jobs were most vulnerable to outsourcing. If global GDP rose rapidly enough and outsourcing proceeded gradually enough, this would not be a major problem; the overall increase in wealth would allow the rich country losers to retrain and find new opportunities at equal or better wages than those they had lost. Regrettably, entirely through bad policy, global growth has been inadequate, and this did not happen. Given the very pernicious political effect of economic stagnation in energizing the left, this alone was an overriding reason why naively rapid globalization should have been avoided.
There were three further major policy failures that have made globalization highly counterproductive. First, the corporate low-wage lobby persuaded politicians that if trade globalization could be tolerated by their voters, then a massive immigration inflow could be tolerated also. The low-wage lobby of course saw the potential for this to lower domestic wages, especially with foreign competition from low-wage economies having become more severe, but Western politicians lacked the economic literacy to see the danger to their voters’ welfare from this – or in many cases the basic empathy to care about that danger.
Consequently, even before the flood of illegal immigration became a tsunami, all kinds of gimcrack schemes such as the U.S. H1B/H2B visas were invented to increase immigration, and make sure that the new immigrants functioned as low-wage helots, unable to join the higher-paid domestic workforce but still competing with it for jobs. These jobs were indentured servitude, of the same type that had led British elites before 1850 to send convicts to the American and Australian colonies, but they were sold in vast numbers to naïve sub-continentals who believed (in many cases correctly, given the ineptitude of U.S. immigration enforcement) that they could wriggle their way over time into full U.S. residency and even citizenship.
The immigration problem was made worse by Angela Merkel’s insane decision in 2015 to cease immigration enforcement altogether against the hordes of unskilled male Middle Eastern and North African immigrants that were pouring into Germany. This new form of “virtue signaling” became endemic across Europe and under Democrat and RINO federal and state governments in the U.S. This resulted in the parties of the center-left and moderate right dramatically losing support among disgruntled native electorates, whose living standards were being dramatically reduced and security imperiled by economic wokery.
Merkel herself could not have been expected to know this would be the consequence; she had been brought up in the Communist dictatorship of East Germany and had thrived under that system, becoming a Komsomol youth leader. Unlike the Berlin Wall, the wall in her mind blocking her from understanding a free capitalist society never came down. This explains her economically suicidal forced closure of the German nuclear power industry, her immigration policy, and her fanatic adherence to the economic self-destruction of “net zero” climate change policy. Since the CDU/CSU coalition imposed a dozy Communist on the country for 16 years, it is only fair that the CDU/CSU should be thrown out of work by the new freedoms that immiserated AfD voters have now chosen.
The second gigantic error of the last 30 years has been in monetary policy. It began to go off course in February 1995, when Fed Chairman Alan Greenspan, who had been holding policy admirably tight to force down inflation, reversed course. From then on, his monetary policy and that of his successors, notably Ben Bernanke, might as well have been dictated by the Modern Monetary Theorists in the left of the Democratic party to which Greenspan’s TV journalist wife (from 1997) belonged. Interest rates were reduced to zero, bubbles and asset price inflation were ignored, budget deficits were encouraged by massive Fed purchases of Treasuries, and productivity growth spiraled towards zero.
Bernanke’s policies were followed by all major central banks; the Bank of Japan, an extreme leader in this folly, having been encouraged in the madness from 1998 by advice from Bernanke himself, then an unknown. The result has been a series of huge stock market and asset bubbles, which have made the already rich still richer while producing a surplus of unproductive assets that has squeezed productivity growth and savagely hit the living standards of those with earnings potential but no assets, especially the poor slobs in big cities. Rightly, rebellion has finally arrived against the pernicious results of these incompetent policies.
Finally, the political blob imposed the madness of climate change policies on electorates, which when as in Germany combined with Merkel’s insane closure of the country’s nuclear plants, have made the country uninhabitable for much of its world-class heavy manufacturing industry. The theory behind the irrational fear of climate change was tenuous at best, but it was backed up by alarmist 100-year projections of 2100’s supposedly dystopian future. There was no excuse for relying on such projections, which are always fallacious because unknown future events inevitably falsify the spuriously precise projections and make them worthless for anything beyond 5 years or so.
The fallaciousness of such projections had been demonstrated as far back as 1865 by William S. Jevons in “The Coal Question,” which forecast annual British coal output in 1965 of 2.6 billion tons, exhausting the country’s known coal reserves of 90 billion tons. Those projections, doubtless made laboriously on a beautifully engineered brass adding machine rather than on a computer, were out by a factor of 10 because of new energy sources. Coal production peaked in 1913 at 292 million tons, while Britain’s coal reserves never ran out, being currently estimated at 187 billion metric tons. The fallacy inherent in 100-year projections was also demonstrated by the 1971 Club of Rome, whose 40-year projections had the global economy collapsing in 2011, no matter what assumptions were made or policies pursued. In that case, the ubiquitous thoroughness of the error was almost certainly due to rounding errors in the computer simulations compounding over 40 years and forcing outcomes “off the page” no matter what the inputs – Jevons’ adding machine did not suffer from this problem, at least.
The policymaking blob then compounded the errors in climate change theory by refusing to adopt the market driven “carbon tax” approach to addressing it, which could have been balanced against reductions in other taxes, thereby causing only moderate economic damage. Instead, they went full “command and control” demanding elimination of all carbon emissions by 2050, an absurdly early date when the alarmist climate projections related to 2100. By draconian regulations such as unattainable fuel economy standards, they set the price of solutions that did not satisfy their often mutually contradictory regulations at infinity, inflicting further massive economic damage that destroyed voters’ living standards.
Other errors include the EU and Britain’s excessive regulations, intended mostly to hamper foreign competition, but making it almost impossible to start a business, thereby reducing economic potential still further. In this context, the attempts to hamper the adoption of AI, apart from handing the world economy to still-Communist China, which is at least more rational in its economic regulation, will prevent the economic renaissance that otherwise lies ahead. The AI renaissance, if permitted by the Blob, will resemble the explosion of new technology in the 1880s, which made that decade deflationary but prosperous, especially for ordinary people.
As a result of this combination of errors, Britain has enjoyed no increase in average living standards since 2007, which since capital owners at the top have been enormously enriched has greatly impoverished everybody else. In an earlier age, economic policies significantly less foolish produced the 1789 French Revolution. Modern Europeans are a more docile lot, but it is certainly unsurprising that when their opinion is asked, voters will choose parties with no responsibility for the disaster. Of course, the Blob is attempting to suppress dissent, but disgraceful censorship policies more severe than those of Louis XVI, by which 62,199 honest plain-spoken Britons were arrested for speech offenses in the 2021-25 quinquennium, may delay the long overdue reckoning at the polls, but cannot prevent it.
The center-left Establishment in the EU, Britain and elsewhere is attempting to close the doors to our prosperous free future before we can escape through them. Let us prevent it from doing so!
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)