TV Interviewer: Yes.

Ann Elk: … This theory goes as follows and begins now. All brontosauruses are thin . . . → Read More: American Disease, 2009]]>

Ann Elk: Where? Oh, what is my theory? This is it. My theory that belongs to me is as follows. This is how it goes. The next thing I’m going to say is my theory. Ready?

TV Interviewer: Yes.

Ann Elk: … This theory goes as follows and begins now. All brontosauruses are thin at one end; much, much thicker in the middle; and then thin again at the far end.

(From Monty Python’s Flying Circus)

I too have a theory, which is to say it is a theory and it is mine. I hope it’s a bit less silly than Ann Elk’s theory, but in any case let’s try it on. The next thing I’m going to say is actually not my theory, but another theory, which is someone else’s and got me to thinking about my theory.

This other theory is something called Dutch Disease, which is an economic diagnosis of the Netherlands’s loss of competitiveness in goods producing industry following a 1959 discovery of natural gas off its North Sea coast. In the simplest terms, this leads to inflows of investment, which pump up the exchange rate and alters terms of trade in such a way that exports become uncompetitive. In this perverse fashion, a lucky strike in natural resources creates not employment and growth but unemployment and stagnation.

America, my theory states, has a version of that, only the natural resource is money. I want to name the problem “American Disease” but I read in an article by Bryan Caplan (http://bit.ly/tkDRJ) that that’s the name of a syndrome of Americans living beyond their means. Actually the problem I pose is closely related, just as H1N1 influenza is closely related to other strains of the flu. Perhaps I can say “2009 American Disease” to differentiate it from old established strains, or should I call it “California Disease” to reflect the fact that the disease has advanced furthest in the Golden State?

America is a country with real natural resources, of course, but the high costs of extraction and environmental compliance and restrictions on land use places them increasingly out of reach. In the days when the country did produce resources and processed them into manufactured goods which foreigners bought, the U.S. generated a vast amount of wealth, much of which was invested in buildings and infrastructure and so remains visible in the present day as a reminder our peak of economic power.

(Exactly the same is true of Argentina, by the way, which was the wealthiest country in the world 100 years ago and still has the buildings and boulevards to prove it, even though Mr. Juan Peron and the generals set the country on an unusual course from first world to third world status.)

Now, even after the financial crisis, America’s most important industry is finance, broadly defined. The financial industry differs from the auto industry and the chemicals industry in one interesting respect. The auto industry inputs steel and plastic and outputs autos, the chemicals industry inputs primary and intermediate materials and outputs finished chemical products – in other words, they work on raw materials and change them into something else. Most industries do this. But the finance industry has money both as input and output – it changes money’s form but not its nature in its processes. Money is both the input and the output, the resource base and the finished product.

The American finance industry is competitive, one of the nation’s success stories in terms of services exports. Our political class, which increasingly impedes us from taking coal out of our mountains, irrigating our farmlands, and manufacturing products with processes that are not squeaky clean, has long promoted clean, non-polluting financial services, and it has prospered as the industry prospered.

However, I believe that too much money in an economy based on financial services has given us a condition akin to Dutch Disease. It could probably be shown that the maintenance of the U.S. as a financial center has made the American dollar stronger than it would otherwise have been, reducing our competitiveness in global markets. Moreover, the high level of compensation in the financial industry and supporting services has probably driven up wages and benefits throughout the U.S. labor economy, another blow to the competitiveness of any entrepreneur who wants to defy the odds and manufacture a product for our own use.

While the American political class stands in the way of development of (real) natural resources and domestic manufacturing, it does see the residual financial wealth of the nation as a resource that it can cut and drill and strip mine – endlessly, in fact, as it recognizes no restraint on the size of resource, but treats it as infinite. The people entrusted to run the country reckon without the necessary diminution of the resource as taxes, penalties, and compliance costs leave less and less to reinvest, even as the potential returns on investment are inevitably being reduced. Their static models fail to capture the fact that producers will not produce – or innovate, or hire – out of sheer altruism even as the returns on their capital and labor are stolen.

The impoverishment of the United States by the Argentine model is thus well under way.

Oh, and why do I say California has the most advanced case of the “2009 American Disease?” Well, just look at the Golden State. There is oil offshore, but its development is not permitted. Manufacturing is being driven out. And the Central Valley is experiencing 40% unemployment in agriculture in order to mudfish habitat; but the fiscal position continues to deteriorate as California’s political class absolutely will not live within the means of the state’s reduced circumstances.

As California is the United States only more so, California’s political class is America’s in microcosm, with all its pathologies subjected to magnification. It puts me in mind of the passage from Atlas Shrugged:

As they proclaim that the only requirement for running a factory is the ability to turn the cranks of the machines, and blank out the question of who created the factory—so they proclaim that there are no entities, that nothing exists but motion, and blank out the fact that motion presupposes the thing which moves, that without the concept of entity, there can be no such concept as ‘motion.’ As they proclaim their right to consume the unearned, and blank out the question of who’s to produce it—so they proclaim that there is no law of identity, that nothing exists but change, and blank out the fact that change presupposes the concepts of what changes, from what and to what, that, without the law of identity no such concept as ‘change’ is possible. As they rob an industrialist while denying his value, so they seek to seize power over all of existence while denying that existence exists.

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New Zealand’s entire gross domestic product, the value of all goods and services produced within a year, was approximately $128.1 billion in 2007, around the same amount as the state of Iowa. The importation of one major piece of industrial machinery earlier this year required a comment in investment banks’ . . . → Read More: Is There Hope for New Zealand?]]> How Small Is It?

New Zealand’s entire gross domestic product, the value of all goods and services produced within a year, was approximately $128.1 billion in 2007, around the same amount as the state of Iowa. The importation of one major piece of industrial machinery earlier this year required a comment in investment banks’ economic reports so as not to set the import-export seesaw tottering. Economic analysts regularly track “external migration” as workers flock to Australia, Canada and the United Kingdom for jobs, then flow back home when economic times pick up. When 29,000 jobs were lost in the first quarter of 2008, that was 1.3% of all the jobs in the nation, and it was enough to send the unemployment rate from 3.4% to 3.6%.

Services comprise the largest single sector of the economy and in 2006 made up 76% of employment. Agriculture, although only 7% of the total economic pie, heavily influences the rest, with industrial sectors including food processing such as milk and meat, wood and paper production from forestry and textiles from wool. It’s estimated that the recent drought’s effect on agriculture, and its attendant industrial sectors and hydroelectric production, was enough to knock a full percentage point from GDP growth in the first half of 2008.

Industrial production is kept discreet so that it doesn’t injure the other major industry—tourism—nor the burgeoning film sector. Crude oil, extracted offshore from the Tui oilfield, is loaded aboard tankers from the wellhead and immediately exported to overseas refineries rather than touching those pristine shores, while the government has funded an agency called Film New Zealand as a “one-stop shop” (their term) for producers of movies both major and minor to simplify the process from casting to special effects.

Achilles’ Heel

But much of this economy is based on trade, and exports influence fully 22% of New Zealand’s GDP, leaving the economy at the mercy of global whipsaws. Although soaring commodities prices, including milk, meat and crude oil, have bolstered trade-based cash flows for the past few years, imported refined gasoline costs have surged even higher, rising 12.8% in the first quarter alone and driving consumer inflation to income-crunching levels.

The Reserve Bank of New Zealand’s attempts to contain inflation have included raising the interbank (wholesale) interest rate to an eye-popping 8.25% and leaving it there for a solid year. However, this has made the New Zealand dollar a favorite for international investors dabbling in what’s called the carry trade, where funds are borrowed in a nation with a very low interest rate (such as Japan’s 0.5% or the 2.0% current in the United States) and invested in a nation with a high one. Although the investor risks currency fluctuations wiping out those gains, the practice has become so popular that New Zealand’s currency has been pushed to frantically high levels—making their goods more expensive overseas and reducing the volume and value of those all-important exports proportionally.

It doesn’t help that there’s a housing market “correction” underway there, too, matching those in the U.S. and UK although not as severe. With banks passing on those high interest charges to their clients, mortgage rates are variable and in double digits, sending home sales plunging by 42% since June 2007.

The official definition of a recession is two consecutive quarters of negative GDP growth. With first quarter 2008 GDP printing at −0.3% and the second quarter looking even worse, it’s likely that New Zealand will be the first industrialized nation in 2008 to meet this definition.

Economic analysts expect that the slowing growth will cool inflation and give the Reserve Bank a chance to lower those interest rates, leading to higher domestic growth over time and sending international investors elsewhere in their search of carry trade profits. As the New Zealand dollar weakens against other major currencies, their exports will become more affordable overseas and those discreet industries will become more competitive on the global marketplace.

Who knows, Peter Jackson’s next New Zealand movie, The Hobbit, scheduled to go into pre-production in 2009 and into shooting in 2010, may be enough to pull the entire nation out of the recession. And an end to the drought won’t hurt, either.