Columns2025
The next debt crisis
Hardly any mature economy is undergoing a recession. Since the end of the Covid-pandemic, public debt has slightly fallen in real terms due to inflation. Although interest rates have risen, they still remain below the economic growth rate. So, you may wonder, what is the problem? I am afraid that there is a problem when looking at the situation more thoroughly.
The French pay the highest taxes (46%) of all European Union member countries. French politicians hate to make budget cuts to balance government’s books. France’s debt is 113% of the country’s GDP – a very high percentage indeed. One would have hoped that France would be the exception to the rule of fiscal frugality. However, quite a few rich countries are knee-deep in debt; pundits talk of a looming debt crisis.
Britain, Japan, and the United States, just to mention a few, live beyond their means, made possible by borrowed money. A White House economic advisor said that America is doomed to indebtedness because global investors give it the rope with which to hang itself. Rich-world public debt is now 110% of rich-world GDP. The question is how much more can they borrow before the bubble bursts? In 2023, the average deficit of OECD countries was 4.6% of GDP, while America’s deficit was 6.1%. In the medium-term these are unsustainable percentages, as demonstrated by bond markets. Ten-year government bonds now yield more in most large rich economies than they did when, in 2024, their central banks started cutting short-term interest rates. In short, bond investors sense danger. Another danger they fear is inflation. After all, when debts increase, politicians may be inclined to pressure central banks to apply inflationary policies to lower the real value of debt.
Finance ministers of indebted rich countries anticipate higher expenditures. They are faced with ageing populations resulting in more pension and health care costs. They also face higher defence spending, greater costs from climate change, and the prospect of rising interest rates. As for government’s income, i.e., taxes, politicians rather have one of their arms chopped off than raise taxes. At any event, taxes are already high in EU countries. In the US the political sentiment is not about tax increases but tax cuts.
Not all rich countries have incurred unsustainable debts. Take Canada, as of the 1990s, the country applied a very strict fiscal policy, including privatisation of government businesses. Other frugal countries are in Scandinavia, Germany and the Netherlands. The four Tiger countries, Hong Kong, South Korea, Singapore and Taiwan, also belong to the ‘frugalist’ club. So, cutting down debt can be done. What are the possibilities be? One is a growing workforce. Increasing productivity is another. As mentioned, inflation is yet another possibility. Finally, there is default.
Countries with an ageing population may benefit from high-skilled immigrants to boost economic growth. Government debt will be spread over more inhabitants and deficits will decline as tax income rises. But in the long run immigrants only delay but do not prevent the average age of the population from rising.
It is hoped that AI may result in productivity and economic growth. But is this justified? At any event, productivity growth should be higher than economic growth to make debt shrink. Exorbitant investments in AI make investors wonder whether AI firms can pay back the loans, given anticipated small profit margins. Should AI replace workers on a large scale, unemployment outlays will increase and social cohesion may collapse.
Should economic growth increase, in countries with large welfare provisions not just incomes will rise but also pension and health care outlays. Economic theory says that interest rates will also rise. This will result in more expensive debt servicing which might eat up the higher tax income resulting from growth.
Promoting a bit of inflation to let the real value of debt shrink, is politically attractive but it may be dangerous. Inflation has the tendency to turn into hyperinflation, as we have seen happening during the late 1970s and early 1980s. It may well happen again, this time not in middle-income countries such as Mexico, Brazil and Argentina, but in rich countries not addressing their debt problem adequately.
Now, what are the likely measures that governments can take to prevent a debt crisis? Spending cuts are unlikely, given the ageing population and related higher health expenditures. Economic growth, propelled by AI, will have an upward effect on interest rates and may destabilase society’s social fabric. Tax rise is another possibility, but a very hard sell for politicians of both sides of the political spectrum. What about inflation and default? Regarding the latter, there is a taboo in rich countries on default.
This leaves inflation as a solution. A combination of central banks buying bonds and at the same time, holding interest rates below the inflation rate, would result in shrinking debt in real terms. The Fed is under pressure from President Trump to lower its short-term interest rate. Apart from the president eroding the independence of the Fed, bond buying beyond what is strictly necessary will funnel inflation. This latter effect runs counter to one of the Fed’s central objectives: price stability (the other is full employment). In addition, inflation is unpopular among creditors, people depending on a fixed nominal income, as well as among real estate and bond holders. Inflation can run out of hand and then it is too late to stop it without doing much harm to the economy.
It may well be that, even before a debt crisis breaks out, the AI bubble will burst and the ensuing financial crisis will force governments to take urgent measures to prevent a meltdown of their economies.
Peter de Haan December 2025
Poor France, the rich and how to tax them
France’s public finances are in trouble, and so are the country’s politics. Since his re-election in 2022, President Macron has appointed five prime ministers; not particularly a sign of political stability. Regarding the financial picture, it is simply gloomy. As of the beginning of 2025 the country’s pubic debt was 113% of France’s GDP. Last year’s annual budget showed outlays around 6% higher than income from taxes and other sources. What should be done? The simple answer is cutting down expenditures and raising taxes.
Both will be difficult to achieve given the political realities on the ground. I limit myself to the tax issue, in particular the so-called taxe Zucman, proposed by Gabriel Zucman, a pupil of Thomas Pikettty. Zucman proposes a new wealth tax on France’s ultra-riches: Taxing wealth of more than €100 million at an annual rate of 2%. The 1,800 very rich French households would fall under this wealth tax. Needless to say, they don’t like the idea. France’s richest man, Bernard Arnault, said that it would destroy the economy. They liked President Macron’s decision much more, when in 2018 he abolished the wealth tax.
The overall tax in France is 45% of GDP - the highest in the EU. The French tax and welfare system corrects inequality to some extent. However, Mr Zucman concludes that, as a result capital flight and tax evasion, French super-rich pay only 27% of their annual income.
Mr Zucman estimates that his proposed tax could raise €15 bn - €25 bn per year. French left leaders will certainly bring this to the budget negotiation table. In order to get the budget approved before the end of this year, France’s prime minister, Sébastien Lecornu, is desperately trying to reach a majority in the Assemblée. However, without substantial concessions to the left, such as delaying the unpopular pension reform raising the pension age from 62 to 64, Lecornu will not succeed.
The Economist is not a fan of taxing the wealthy. In its edition of 27 September last, it presents reasons why the Zucman tax would not work: the tax base would be too small, and nobody knows what superrich families would do if the Zucman tax would be introduced. When former President Hollande announced high taxes for the rich, the actor Gerard Depardieu threatened to move to Russia. President Putin granted him Russian citizenship. In the end, he settled in a small village in Belgium, close to the French border. Yet, most French superrich remained in France; to date, it hosts the largest number of billionaires of all EU countries. Nonetheless, The Economist projects that due to tax evasion and capital flight, Zucmasn’s estimates of €15 bn - €25 bn could well come down to only €5 billion in actual revenue.
Liberal-minded thinkers do not warm to the idea of taxing the rich. This goes all the way back to what liberal thinkers have said about the issue. Take 18th century Edmund Burke, the conservative forerunner of liberal thinkers. He was a member of the British Parliament on behalf of the liberal Whig Party. He argued that redistribution of property would not make a difference for the poor, as they far outnumbered the wealthy. Moreover, continued Burke in a peculiar fashion, it would reduce the numbers who could enjoy the benefits of wealth. Classical liberal, Adam Smith, favoured low taxes. However, he argued that it was not unreasonable that the rich should pay not just in proportion to their income, but a bit more. He also promoted public education to give the poor a better chance in life. Another formidable classical liberal (and utilitarian), John Stuart Mill, changed his opinion about taxation over time. Initially, he proposed equality of taxation. Regarding inheritance, the utilitarian Mill argued that inheritance should be taxed as society should agree that everyone should be equal. He made a clear distinction between earned and inherited wealth. Later in life, Mill accepted redistribution in that he proposed a slightly progressive income tax to help finance alleviating poverty. He maintained his inheritance tax philosophy.
Milton Friedman proposed a flat tax rate for all, which would prevent loopholes. He also proposed a negative tax rate for the poor, to provide them with a basic income. His soul mate, Friedrich Hayek, also proposed a flat tax rate, in which the rich would contribute larger amounts of money than poorer citizens. The very poor would be compensated for the indirect taxes they pay on top of the flat income tax rate.
Politicians typically evade having to increase taxes; in Europe taxes are already high and in America raising taxes is a ticket for electoral defeat. Much more popular are tax cuts; President Trump’s Big Beautiful Bill is a fine recent example. The problem, however, is that the time of small government, as proposed by Friedman and Hayek, is long over. In order to ensure adequate public service delivery, governments require adequate funding through taxes. In the typical high-income country, the share of labour contributing to the country’s GDP is going down, while capital’s share is increasing. Hence, there is every reason to tax capital more, including tax on wealth, to foot the bill.
The gap between the wealthy and the rest is widening, as Piketty and others demonstrated. Annually, the superrich load more capital to their already large fortunes. This is difficult to defend and it is morally unjust. Taxing the wealthy more than the less-fortunate would be fair. Moreover it would help curb the political influence that the very wealthy wield. It is high time that this issue is being brought up more forcefully, which has too long been neglected by liberal philosophers and quality newspapers such as The Economist.
Peter de Haan November 2025
China’s economic challenges
In 2021, I wrote an essay entitled Spinoza’s Legacy (included in www.peterdehaan.org), in which I identified challenges for China’s economy. The first one was public investment overstretch, as a result of the government boosting the implementation of Made in China 2025 (MIC), turning China into a self-reliant, green, and innovative manufacturing power. MIC was very successfully implemented. For example, high-tech manufacturing had grown by 8.9% last year, much faster than the economy as a whole. However, investment overstretch led to wasted investments undermining China’s total factor productivity (TFP), upon which President Xi pushed for ‘new productive forces’. China was also accused of unfair international competition, resulting from subsidising export products, such as electric vehicles. A third challenge concerned employment: Would there be enough Chinese high-tech capacity available to match high-tech demand triggered by MIC?
By the time I completed my essay, real estate investor Evergrande went bankrupt in 2021. Consumer confidence plummeted and China’s economy started to suffer from deflation. Since then, China’s government undertakes various attempts to deal with the problem.
Take the fall-out of Evergrande’s demise. In 2021, still 80% of household wealth was invested in real estate; now the figure is 70%. House prices fell sharply. In 2024, 80 million flats remained unsold. Scores of developers have gone bust. Also, dampening of consumer confidence triggered sluggish housing demand.
To date, house prices are not falling as much as they did. In Beijing, Shanghai, Guangzhou, and Shenzhen, houses are now being sold in a shorter period of time than before, although this is not yet the case for the housing market in general. The central government encouraged local governments to buy up excess housing. The renovation of shantytowns could create demand for 1 million new homes. Just recently, the central bank cut interest rates to counter deflation and invite consumers to again invest their savings in housing. Although house prices continue to drop, the real estate crash is bottoming out.
As for China’s TFP, from 1978 to 2022 TFP grew on average 2.73%; however, over the past decade TFP growth has shown a slower upward trend.
What about employment, including the demand for high-tech staff? Renowned Chinese scientists return to China to continue their work at first class universities, such as Zejiang University, home of Deep Seek. In 2021, President Xi set a goal to make China attract global talent by 2030 and become the top destination for the brightest by 2035. In the past, millions of young Chinese students went to America to study. President Trump’s policy to clamp down on American universities prompted Western scholars to look for greener pastures elsewhere, including China. This also goes for students. More than half of the post-doctoral students in the US are foreign, most of them Chinese. This does not imply that demand for high-tech capacity will all be filled by returned scholars and post-doc students, but it helps. In addition, the quality of education of two top Chinese universities is rapidly improving: Peking University now ranks 14th on the QS World University Rankings, while Tsinghua University is 20th on the list.
Employment opportunities for young people without a university degree are limited; youth unemployment is high: 17.6%. Growth of the labour-intensive services sector is the best option for employment creation. Consumers now spend more on services than on manufactured goods. Services now contribute 57% of the country’s GDP and employ 49% of the working-age population. The government is subsidising loans for firms in services such as entertainment, tourism, sport, and health care. Also consumers benefit from government subsidies to stimulate demand. This is a new phenomenon as in the past the government stimulated investment, not consumption, let alone consumption of services. Two hundred million people are gig workers; a huge number. They encounter difficulties in finding a formal job, buying property and accessing public services, including pension funds. In future, this may create problems for the government, ranging from further undermining TFP growth, homelessness and social unrest.
Growth of the manufacturing sector is reaching its limits; there is overcapacity, triggering price wars in China and dumping of Chinese goods overseas. This phenomenon is called involutionary competition, i.e., gaining a market share through lowering prices, forcing competitors to do the same. A race to the bottom is the result. For example, a Chinese citizen can now buy an electric car for only $8,000. The government is now introducing production quotas, a floor under prices, and capacity cuts in oversupplied industries. To further limit competition, the government also stimulates mergers.
Now, what about China fighting deflation? The government has increased its deficit to 4% of GDP to: (i) prop up consumer demand, (ii) counter shrinking property investment, and (iii) compensate lower exports. As the Chinese economy was slowing down, Keynesian fiscal stimulus was introduced, including dole-outs for low-income earners. At the end of 2024, the government also announced that it would apply a loose monetary policy. But can the government afford it? Not really. In mid-2024, the IMF calculated that China’s augmented debt, including local government debt, stood at 124% of GDP, while overall non-financial debt reached 312%; both sobering percentages. The IMF warned that in the medium-term China may run the risk of so-called debt stress.
Is China going to achieve its targeted 5% growth this year and overcome deflation? Once the government will have stabilised the housing market; regained consumer confidence; subsidies will have boosted demand; and the government prevents the country’s downgrading by credit rating institutes, China’s economy would indeed have ‘rebounded, and is on an upward trajectory’, as president Xi concluded in his New Year Address on 31 December 2024. Whether this was wishful thinking on the president’s part, the future will tell.
Peter de Haan October 2025
Economic consequences of AGI
Large Language Models formed the basis of ChatGPT, which most of us know and use. AI’s development did not stop there, it is rushing forwards. Now the talk of the town is Artificial General Intelligence (AGI), which is capable of replacing anyone with a desk job, and developing superintelligence. The public debate about AGI reminds me of the Luddites, John Maynard Keynes and Robert Gordon.
Early 19th century textile workers, the Luddites, protested against the introduction of more efficient weaving machines, as they were concerned losing their livelihood. In 1930, Keynes wrote Economic Possibilities for our Grandchildren, in which he projected that, as a result of rising productivity, the workweek could be limited. In 2016, economic historian Robert Gordon published The Rise and Fall of American Growth, in which he argues that the life-changing innovations between 1870 and 1970 could not be repeated.
AGI’s breathtaking developments trigger excitement, but also concerns. Potentially dangerous AGI should be controlled by governments. A modern ‘Luddite’, AI pioneer Geoffrey Hinton, argued that there is a 10-20% chance that AI may end in human extinction. In 2023, another ‘Luddite’, OpenAI’s boss Sam Altman, called for rules to control the development of superintelligence, to prevent possible disasters. All the same, contrary to what Gordon foresaw, AGI may bring about unprecedented productivity boosts. Spectacular economic growth would ensue, in which workers’ involvement will be much lower than what Keynes had anticipated.
What will AGI’s economic impact be? Silicon Valley bigwigs project that AGI will soon lift annual GDP growth to 20-30% a year, or even more. Explosive economic growth will obviously impinge upon labour, services and capital. But how much growth do economists project? Institutional economist Daron Acemoglu calculated growth of 1-2% over a 10-year period, assuming that roughly 5% of tasks would be taken over by AGI.
Others estimate that many more tasks will be taken over by AGI. Epoch AI, a think tank, developed a model assuming that large early returns from automation will be ploughed back into hardware and software research. Once AGI can automate about a third of tasks, annual GDP growth may overshoot 20%, much more than Acemoglu’s projections.
Epoch AI’s leader, Anson Ho, senses that something must be wrong with the model, but he has not found the answer. Others say they have: the model is simply too optimistic. But AGI companies point out that the model is underestimating feedback loops. Once AGI starts to improve itself, it is foreseen that it will rapidly result in a superintelligence, more capable than any brilliant human being. Meta’s boos Mark Zuckerberg recently said that superintelligence is in sight. Meanwhile, more and more computing power is being added at multiple AI labs.
When AGI-generated ideas create more ideas, economic growth could increase without limit. Suppose Silicon Valley bigwigs would be right in projecting annual economic growth of 20-30%, what would this mean for workers? In 1930, Keynes argued that their workweek could be limited to, say, 3 days. AGI may eventually become so cheap, that workers are redundant. In the end, when AGI capital substitutes labour, the source of income would be income from capital. In short, a future booming economy may result in a near-workerless society, and most income accrues to capital owners, i.e., big tech bosses. Even money and power than today will then be in the hands of a small very influential group of superrich.
This perspective implies formidable challenges for governments: What to do about people who don’t have capital? And what about the superrich? Redistribution is a logical option: A basic income for the jobless provided by the government. As for the superrich, they could be taxed more effectively and justly than today to help (partly) finance the basic income of the jobless. This is not the complete picture; there will always be jobs that cannot be taken over by AGI, particularly jobs in the services sector that are hard to automate.
AGI’s future development is constrained by energy, as AGI needs a lot of it. For example, OpenAI invested $500 billion investment in Stargate. However, Epoch AI’s model says that the optimal AGI investment this year should be 50 times more. Just think of the data centre being constructed the size of Manhattan, consuming the same amount of electricity in a year as New Zealand. Other constraints would be government regulation and institutional hindrances. Also, investors may be running out of patience. For example, the training costs of OpenAI’s latest model are sky-high, leaving a much smaller profit margin, putting investors off. A recent study by S&P Global, a data compiler, found that 42% of companies abandoned most of their AI initiatives, while a year ago the percentage was just 17%.
In sum, growth projections may turn out to be too optimistic. Acemoglu’s 1-2% annual growth might not be far from what AGI will achieve. Despite tech firms’ sky-high share prices, in general they don’t reflect expectations about explosive economic growth. As for bonds, their yields have on average declined after the release of new AI models. Does all this suggest that Gordon’s argument that the life-changing innovations cannot be repeated, still stands? Looking back at AGI’s development over the past decade, it has achieved much more than was forecasted. Although Silicon Valley’s projections may be too optimistic, and despite the constraints just mentioned, I would not be surprised if, within a couple of years, Gordon will be proven wrong .
Peter de Haan Augus 2025
Marx revisited
My new book, entitled Great Economists and the Evolution of Economic Liberalism, will come out shortly. In it, I pay attention to Marxism, since it became a formidable competitor of liberalism as of the first half of the 20th century.
When looking at pictures of Marx, one cannot escape from thinking that he must have been a humourless and principled man whose unwavering sympathy was with exploited proletarians for whom ruthless capitalists would have to pay dearly. After all, hadn’t Marx argued that the bourgeoisie had defeated feudalism, but now the proletariat would defeat the bourgeoisie! But was Marx such an unbearable and principled bore? He was not, nor was he one-dimensional in his thinking.
Marx understood that contemporary ideas were always ideas of the ruling class. He also believed that even the greatest revolutionary would be influenced by the ideas and morals of the ruling class. Let me illustrate this with an anecdote. Marx was the guest of the well-to-do medical doctor Ludwig Kugelman and his spouse. While staying there, he was correcting the proofs of his magnum opus Capital. During dinners, the guests talked about politics, music, and the arts in general. Marx always tried to evade questions about his political and economic views. However, during one occasion he could not escape talking about them, as a dinner guest asked Marx who would polish his boots once Socialism would reign. Marx promptly answered that the guest would have to polish them! After the embarrassed guest had left, Mrs Kugelman commented: ‘Dear Marx, I also cannot imagine that you, given your aristocratic tendencies, could live in a society where everybody would be equal.’ Upon which Marx retorted: ‘Me neither; we better make sure to have left before those times will come.’
Marx was not as one-dimensional in his thinking as one might expect. He had, for example, warned against the dangers of ‘raw communism’ in which the state would capture all power. In my book, I observe that Marxist praxis (as Marxists would say) as applied in the Soviet Union was far more radical and logically consistent. What had Marx himself in mind? The problem is that, in the end, he did not present a clear blue-print for the ideal society; it remained unfinished business. This opened the possibility for different interpretations, each of them claiming to be Marxist. When once confronted with erroneous interpretations of his thinking, Marx exclaimed: If this is Marxism, I am not a Marxist!
In the Soviet Union, mainstream Marxist interpretation was not what Marx had intended. He argued that Russian feudalism would first have to be replaced by bourgeois capitalism, before moving to a final utopian stage. Having skipped one evolutionary stage led to the emergence of a totalitarian state. Russian Marxists at the time, who better understood Marx’s thinking, were either imprisoned in Siberia or murdered by Stalin.
What we have seen happening in the Soviet Union, for example, is quite different from what Marx had said about the purpose of communism, in which class contradictions would be abolished. He foresaw a society in which the free development of each member would be a condition for the free to development of all.
Another example of Marx’s enlightened views is the following. Given the fact that machines would more and more take over manual labour, the traditional contradictions between capital and labour would evaporate. In other words, capitalism would be eroded from within. So, apart from his revolutionary model, Marx also contemplated an evolutionary model, which would usher in ‘a society of freedom’, as he called it in Capital’s third part; a far cry of how Marxism was - and still is -- applied in the real world.
Yet, Marx needed verelendung as a necessary phase in the process of moving to a society in which the shackles of poverty and submission would be thrown off. In other words, all suffering would in the end have served as a necessary condition for people finally enjoying the ‘society of freedom’.
A bone of contention between Marxists is whether violence is legitimate in processes of revolutionary change. Marx himself argued that violence was only justified if this was politically necessary, i.e., when the social circumstances would be ripe for change. However, his contemporary Michael Bakoenin was much more radical; he argued that revolutionary actions were always and everywhere justified.
This moral issue was the reason why, for example, Albert Camus and Jean Paul Sartre parted ways. Camus rejected the notion that violence was justified in order to achieve the ideal state. Instead, he defended a step-by-step approach by taking away injustices. Needless to say, Camus abhorred Stalin’s brutal rule, while Sartre defended Stalin far too long. Given the ongoing erosion of moral standards in our society, it is a hopeful sign that Camus’ philosophy enjoys a revival, while Sartre’s is tainted.
Peter de Haan July 2025
Joan Didion, celebrated novelist and representative of American New Journalism , mentioned in her posthumously published Notes to John about her and her husband John Dunne’s lavish lifestyle. They contemplated giving up their very lucrative business of writing film scripts, so as to have more time for writing novels and essays. Didion realised, however, that they would have to give up luxury, as they would earn much less with their novels. What would this imply, she wondered? To find out, Joan and her husband booked a very expensive Concorde flight to Paris. Whatever they may have found out during the flight, in the end they were not able to part with their very comfortable lifestyle.
What does this amusing little story tell us? The first thing which comes to mind is that rich people have the luxury to take outlandish decisions - such as booking a Concorde flight - to help them take a life-changing decision. Second, it is very hard to accept having to survive on a smaller income. Puritans would say that very high incomes are unethical, as it allows the rich to indulge in, to quote Thorstein Veblen, conspicuous consumption. Moreover, very large incomes are hard to defend as there are no objective standards on which large differences between high and low can be established. Surely, there are a few, such as hours of work, performance, responsibilities involved, exposure to health hazards, etc, but they can’t fully and satisfactorily explain the huge gap between top and bottom incomes.
In the end, market forces play an important part in how incomes are being established. Social norms also play a part. The more egalitarian a society, the greater the chance that a progressive income tax system is in force. The proceeds of which can (partly) be used to finance income redistribution measures to prop up the incomes of the poorer sections of society.
Is the sky the limit when considering top incomes, and at what level of income is a person is simply too rich? Indeed, should society establish limits beyond which incomes should not be allowed to grow any further? There is a branch in philosophy which is dealing with this issue, called limitarianism. It is a moral principle guiding the design of our economic and social institutions, including the moral call to share what we have with the least fortunate. On the basis of extensive interviews with very rich people in London and the Netherlands, Dutch philosopher Ingrid Robeyns concluded that the limit would be 10,000.- euros, dollars or pounds. Almost all respondents had no problem in drawing a 10 million (euros, dollars or pounds) line between rich and super-rich. Beyond the 10 million dividing line, a fortune starts to become wasteful, as it could be better used to rectify climate-related injustice and to meet urgent human needs, Robeyns suggests. Not a supporter of a completely egalitarian society, she argues that the key question is which constraints on the market and on private property we need if we are to achieve limitarianism?
Back to tax levels; how high should the level be for the very rich? In dealing with this question, not just economic but also ethical issues are involved. There is, as usual, no uniform opinion among economists. Some say that taxing the very rich at 70% can be done, while others even propose a negative tax rate for them, as the very rich contribute disproportionally much to a country’s economy. So the more you let them earn, the better it is for society.
Now, what would optimal taxation look like? Applying a marginalist and utilitarian approach would say that an extra dollar or euro of wealth would buy less additional happiness the richer you are. The problem, however, is that happiness can’t be objectively measured. In the end, the question about optimal taxation is an ethical and, therefore, a political one. There is also the legitimate question how much society would benefit from the efforts of entrepreneurs and innovators? A good question then is how much society benefit from letting people get rich? And how do tax rates promote, or frustrate, the incentives for innovators? The negative tax rate I just mentioned, is based upon the idea that if high earners propose a lot of ideas that help a society’s economy grow even harder, then subsidizing discovering new ideas through low tax rates may be justified. At first sight a logical idea, but a hard sell in the political arena.
Why not look at what happened in Scandinavia after the Second World War, so often mentioned by economists as the little group of countries that applied progressive taxation in combination with investments in welfare, approaching Utopia?
Peter de Haan June 2025
How to tax the rich?
Just a few months ago nobody had heard of DeepSeek, let alone its inventor Liang Wenfeng. He managed to develop a large language model (LLM) that rivalled Sam Altman’s OpenAI ChatGPT. More surprising is that developing this LLP had cost less than $6 million. However, its strength is limited to technical, mathematical and coding tasks. Deep Seek’s announcement came one week before Alibaba, a Chinese e-commerce giant, released a new version of its Qwen chatbot. DeepSeek’s $6 million investment was embarrassing for the US, taking into consideration President Trump’s announcement of a $500 billion investment to further develop its AI capabilities, ushering in ‘a new era of national successes’, as Trump characteristically added.
Why the Americans needed so much money to develop AI? America’s OpenAI provides better answers than DeepSeek, as they ‘think’ longer than DeepSeek before answering. Another explanation is that Mr Liang used second-rate chips, with which he built his LLM, while OpenAI uses very expensive first-class chips. After DeepSeek’s announcement, Nvidia, the chipmaker for AI purposes, lost $600 billion on the stock market. Other tech shares also plummeted, although their share prices bounced back. Nonetheless, DeepSeek’s damage had been done.
Coming from far, Chinese AI is now breathing down America’s neck, not least since, soon after DeepSeek, Manus was launched, the world’s first general AI agent, developed by another Chinese company. Nvidia’s CEO, Jen-Hsun Huang, confirmed that China is home to 50% of the global AI research. These surprising achievements, are the more impressive as America had cut off China from sophisticated chips needed to develop its own AI technology. Would America’s obstructions only have accelerated China’s AI prowess?
AI promises to boost an economy’s productivity. Let us take a look at the productivity of China’s economy over the past few years. Way back in 2015, then Prime Minister Li Keqiang launched Made in China 2025 (MIC 2025) – the country’s high-tech expansion program. Its objective was to turn China into a green and innovative manufacturing power, depending less on foreign supply chains, and more on home-grown technology. MIC 2025 consisted of key strategic sectors: AI, 5G, aerospace, robotics, semi-conductors, electric vehicles, green energy, biotechnology, and pharmaceuticals. The Chinese government had invested $300 billion in MIC 2025 upfront. After Covid-19, another whopping $1.4 trillion was invested in subsidies, cheap credit and inexpensive land. Has MIC 2025 achieved its aims and did it boost China’s productivity?
Overall, MIC 2025 has been very successful. Chinese businesses have become more innovative and sophisticated, having risen to the top of some global industries. They contributed to China’s record trade surplus of almost $1 trillion last year. The manufacturing sector grew from 26% of global value added in 2015 to 29% in 2023. Last year, electric vehicle maker BYD, surpassed Tesla in global sales. China is now the world’s largest drone, solar panel and battery producer. These products are typically cheaper than those of its foreign competitors, thanks to - not least - government subsidies.
MIC 2025 achieved most of its aims, but what about the other side of the coin? Government’s huge capital investments raised concerns, ranging from public investment overstretch to unfair international competition. Commentators observed that MIC 2025 absorbed a disproportionate part of risky state-funded expenditure in new technologies. Others said that it would be better for a middle-income country, like China, to bet on market-based innovation in achieving a high-income country status. Still others argued that the money could have been better invested in education, health care, and social services.
Although labour productivity increased by 6% annually, it was slightly below expectations, and it required, as mentioned, enormous amounts of capital. Apart from labour productivity there is total factor productivity (TFP), which captures output growth that cannot be explained by increases in labour and capital. China’s TFP growth didn’t do well. Aggregate TFP growth slowed from 2.8% during the decade before the global financial crisis, to only 0.7% thereafter. Hence President Xi’s recent push for new productive forces, to boost TFP. It is too early to tell whether AI will indeed contribute to China’s productivity, but hopes are high.
Looking at countries’ development trajectory, once a country is moving up the economic ladder, the manufacturing sector, as a share of Gross Domestic Product (GDP), will be eclipsed by its service sector. This has happened in China: in 2020 the service sector contributed 54.5% of China’s GDP. However, in a mature economy, such as the US, the service sector contributes much more. For example, in 2021 America’s service sector contributed 76.4% to its GDP, while Singapore’s service sector contributed 72.4%. So, on the way to economic maturation, China will have to invest more in services.
As a thought experiment, let us suppose that the government concluded that MIC 2025 had achieved its aims. It would now introduce a different economic strategy. Suppose also that the government would want to address the Chinese economy’s deflationary tendencies. Chinese households could be stimulated to save less and spend more. The government’s second aim would be to stimulate the service sector. These two policy aims would reinforce one another. After all, if people get richer, they will spend it on consumption goods, on education, health, insurance, and entertainment, all benefitting the service sector. As this sector is labour-intensive, it would absorb large numbers of young unemployed people looking for a job.
Awaiting AI’s positive influence on the Chinese economy, the two policy aims just described would give the economy a shot-in-the-arm, China’s service sector would grow and, in addition, unemployment would diminish. China’s future economic growth will become more dependent on consumer spending at home and less on exports which are suffering from Trump’s war on tariffs.
Peter de Haan early June, 2025
China’s surprising successes and its challenges
Churchill and Mellon
Winston Churchill we all know , but Andrew Mellon? Well, he was America’s Secretary of the Treasury from 1921 to 1932. Churchill acted as Chancellor of the Exchequer from 1924 to 1929, when Mellon was his counterpart across the Atlantic. Former Treasury official, Jill Eicher, wrote Mellon, vs. Churchill, subtitled the untold story of Treasury titans at war. She vividly describes how both ‘titans’ dealt with the war debts incurred by European Allies during the First World War. Mellon is portrayed as a former banker-investor; a soft-spoken billionaire turned politician, while Churchill as the flamboyant, brilliant orator and seasoned politician.
What was at stake? America had lent the European Allies more than $10 billion (now roughly $180 billion), of which Britian’s share was $4 billion. At the time, it was the biggest liability ever recorded on America’s balance-sheet, equivalent to nearly half the national debt. Mellon, echoing America’s public sentiment, wanted the Allies to pay back the loans they had incurred during the First World War. Churchill, on the other hand, wanted the debt reduced; better even written-off altogether - an idea earlier launched by John Maynard Keynes.
Now, if Mellon would not accept the British proposal, Churchill said Britain would apply a ‘collect-if-you-will-America-but-shame-on you’ policy. The problem was that Germany was increasingly unable to pay the war reparations to European lenders, which these lenders needed to pay off their debt with the US. The sentiment in Britain was that during the war the British paid in blood, but America did not. This was not entirely fair, as America had come to the Allies’ rescue in April 1917. Nonetheless, it was felt that war loans were not the same as, say, commercial loans. The purpose of the latter was to boost productivity, while a war loan was there to defend a country and, above all, its values. Eicher wonders what nations owe one another in terms of trust, honour, and fairness in an interdependent world? A good question which president Trump should ask himself more often in dealing with Ukraine. During Churchill’s chancellorship, Mellon reached an agreement with Britain and the other Allies in 1927, to repay 97% of the principal America had lent them, against a lower interest rate. Regarding Germany’s war reparations, plans to ease the burden did not work. When Hitler came to power, he suspended further payments. Yet, in October 2010, Germany had paid all its war reparation obligations.
How would economists judge Mellon and Churchill? As Chancellor of the Exchequer, Churchill was also responsible for Britain’s re-introduction of the gold standard, which had been suspended at the beginning of the First World War, including an embargo on gold. In the meantime, the pound had lost its value against the American dollar. Keynes warned that the pound’s return to the gold standard, against the pre-war rate of exchange, would ruin Britain’s competitiveness. The overvalued pound would result in factory closures and mass unemployment. Instead, argued Keynes, home investment ought to be stimulated, boosting British manufacturing and exports. Churchill hesitated, after all he was not an economist, yet he sensed that the return of the gold standard would trigger deflationary effects.
One biographer observed that Churchill understood modern no better than old-fashioned economics, let alone deflationary implications of reintroducing the gold standard. In his memoir My Early Life, Churchill admitted not being good at all in doing ‘sums’ and mathematics. Regarding mathematicians, Churchill said that he was very glad that there were, unlike himself, quite a number of people born with a gift and a liking of mathematics, like great chess players, he added, ‘who play sixteen games at once blindfold and die quite soon of epilepsy.’
To make up his mind, Churchill invited four dinner guests: two in favour and two against the return of the gold standard. The one’s in favour were both senior advisors to the Ministry Finance: Sir Otto Niemeyer and Sir John Bradbury. Needless to say, Keynes belonged to the latter team, joined by Reginald McKenna, an ex-Chancellor. Keynes lost, not just caused by the pressure from ‘City’ bankers put on Churchill (they wanted to preserve the City’s leading international position), but also because McKenna told Churchill that there was no escape: he had to return to the gold standard; however, added McKenna, it would be hell. Keynes sourly concluded that McKenna was always letting one down in the end. The next day, Churchill lifted the gold embargo and announced Britain’s return to the gold standard at pre-war parity. A year after the decision had been taken, a general strike broke out, preceded by one of coal miners, protesting wage reductions. Britain’s economy entered a slump, which worsened after an international tariff war broke out in the early 1930s.
Keynes did not rest his case. A few months after Churchill’s decision, he published The Economic Consequences of Mr Churchill, in which he presented a scathing attack on the decision taken. The gist of his bestselling pamphlet was that Britain’s return to the gold standard forced British manufacturers to reduce production costs. But this was difficult, because of the ‘stickiness’ of wage rates and other costs. Given the circumstances, it would have been better, argued Keynes, to adjust the international value of the currency to domestic costs of production.
Now, could Mellon be considered a good economist? From the outset let me say that he espoused Hamilton’s economic philosophy of protecting America’s infant industry, balanced budgets and limited public debt. Mellon was also strongly against government intervention in the economy. When during the Great Depression America’s unemployment surpassed 20 percent, Mellon advised president Hoover to, in his own words: liquidate labour, liquidate stocks, liquidate the farmers and liquidate real estate. He added: purge the rottenness out of the system. In the end, he said, high living costs will come down and enterprising people will pick up the pieces. In other words, the economic system would overcome the depression itself. But the situation got only worse. Mellon became one of America’s most despised politicians. Hoover removed Mellon from the Treasury. As an elegant way out, he offered Mellon the position of Ambassador to the United Kingdom. President Trum may have taken inspiration from Hoover, in removing his security advisor, Ted Waltz from his position, and appointing him American Amabbasdir to the UN. Returning to Hoover, he lost the 1932 presidential elections. His successor, Franklin Delano Roosevelt immediately countered the depression, by introducing Keynesian anti-depression policies, even before Keynes had published them in The General Theory of Employment, Interest, and Money (1936). Roosevelt’s New Deal was successful; Mellon had been wrong..
Is this the whole story about Mellon? No, it isn’t. He is best remembered as a philanthropist, having donated his impressive collection of paintings of old Masters and sculptures to the nation, including funding the National Gallery of Art, located at Washington’s Mall, where his art collection is on permanent display.
Peter de Haan May, 2025
Peter Navarro’s international trade gospel
President Trump’s trade war with the rest of the world is inspired by Peter Navarro’s thinking. All of us could have foreseen what Trump presented if we had listened to what Navarro had to say on tariffs and international trade. When the president announced his unorthodox tariff plans, I remembered having read The Economist’s interview with Peter Navarro in June 2024.
The 74-year-old Navarro was then still incarcerated on account of his refusal to comply with a subpoena from the American House of Representatives’ committee investigating the Capitol storming of 6 January 2021. Navarro, Harvard alumnus and former professor of economics, made his name as a disruptive and vengeful character during Trump’s first term. Navarro’s personality may have impressed Trump, who knows. What we do know now, is that the president’s international trade policies were fully inspired by Navarro.
Now, what is Navarro’s thinking on tariffs and international trade? In short, it comes down to a spraygun approach: slapping tariffs on almost all countries. This he elaborates in his recent book The New MAGA Deal. It is ironic that Navarro’s book’s title paraphrases President Roosevelt’s New Deal. Roosevelt was a Democrat, rather than a die-hard Republican.
Navarro argues that economic security is national security: protect the national economy from negative foreign influence. In this realm, Navarro blames China for dodging American trade tariffs by transferring their export production facilities to countries like Vietnam and Cambodia. Navarro’s policy is to prevent these countries from being usurped by China. Navarro includes Mexico and Canda in this list, as they also accept too much investment from China. In passing, he also blames many European countries for being too compromised by China to ever create a united front in a trade war. For example, London’s City is too dependent on Chinese capital and Greece and Italy’s ports are controlled by China. Navarro argues that China should be ousted from the World Trade Organization; a near impossible idea to implement by the way.
Echoing what Navarro proposes, President Trump repeats time and again that the US is a victim of other countries dumping their products (e.g., steel and aluminium) on the American market. The tariffs Trump put on these products during his first term, had been rolled back by President Biden. Now, they are reinstated, much to Navarro’s liking. He also advocates the passage of the Reciprocal Trade Act, which allows the president to mirror the tariffs, and non-tariff barriers, of any country that refuses to lower its own tariffs to the level of America’s. This would be additional ammunition in Trump’s trade war.
President Trump is after creating a balanced trade relation with other countries. In the end, no positive or negative balance would ensue. This is a very unrealistic aim, apart from the fact that it is a mistaken understanding of a country’s overall economic health. It also depend on, among others, a country’s capital balance, its balance of payments, and - above all- on the country’s productive prowess. In other words, a country’s trade balance does not exclusively say whether a country’s economy is healthy or not.
Now that Trump’s trade war has been declared, no one knows what will happen after the 90 days pause in which negotiations will take place between the US and affected countries. Pundits agree that Navarro’s extreme protectionist trade theory is hard to understand. It seems as of Navarro has not considered the dangerous downsides of what he proposes, let alone America’s trade balance in services is positive: $1.060 billion in 2024.
Navarro’s proposals don’t fit into the trade theories the economic science developed over time. It started with David Ricardo’s international trade model in which England would best export its wool in exchange for Portugal’s port wine; products in which both countries had a comparative advantage. Specialization in international trade would act as a source of economic progress, Ricardo argued. Then there is the Hekscher-Ohlin theorem, named after two Swedish economists. Their theorem consisted of one poor country endowed with an abundant labour force and scarce capital, while the other country is rich and endowed with scarce labour and abundant capital. The labour abundant country will export labour-intensive goods, while the other would export capital-intensive goods. The end-result will be that in the first country the demand for unskilled labour will increase and, consequently, the wage gap between the two countries will grow smaller. An aspect that is sometimes overlooked in this theorem is that abundant labour does not necessarily translate into productive labour.
Another theorem about international trade is the Stolper-Samuelson theorem. It explains what, for example, happened in the US as a result of international trade. Stolper and Samuelson observed that while scrapping tariffs might cause money wages to fall, the positive side of the coin is that the reduction in the prices of goods workers buy would be larger. The theorem’s central message, however, is that even when free trade raises national income, companies that cannot withstand foreign competitors, fold their activities and their employees lose their job. If not properly compensated, these jobless employees lose confidence in their government. This is what happened in the US. During the de-industrialisation process, 1.2 million American blue-collar workers became jobless, driving them into the arms of Donald Trump.
Contrary to Navarro’s ideas, none of these models propose protectionist policies, not least since protectionism, combined with wrong-headed monetary policies as applied during the 1930s only deepened the Great Depression. As we now are aware of the downsides of free trade, governments can mitigate them by taking appropriate measures, such as retraining of laid-off workers, investing in regional development, and subsidizing early retirement schemes.
Peter de Haan April, 2025
Column1 2025
Happiness
Bhutan is a small landlocked Kingdom, located in the South East of the Himalayas, sandwiched between China and India. The country is beautiful, but poor. Given its location and lack of natural resources, King Jigme Singye Wangchuck realized that the fate of his flock was to remain poor until the end of Time. Thinking about poverty and misery, he felt that poor people were not exclusively destined for misery and unhappiness. There are other things in life that bring happiness, the monarch thought, not just income and wealth. Hence, way back in the 1970s the king introduced the Gross National Happiness (GNH) concept.
The king’s successor, Jigme Khesor Namgyel Wangchuck, aka Dasho Khesar, embraces GNH with zeal, as demonstrated in the entertaining documentary Agent of Happiness. The film follows two pollsters asking Bhutanese people how happy they are. At the end of each interview the pollsters sit down to decide what score to give. Unfortunately, the vast majority of interviewees were not terribly happy. Only one well-to-do Bhutanese beamed with happiness. Seated between his three wives, he said that he was very happy indeed. He even added that his wives were very happy as well, although they did not radiate any happiness at all.
The subtly depicted irony of the documentary is that one of the pollsters himself was deeply unhappy. This was not caused by a lack of money (after all, he had a nice government job) but by the fact that he was unsuccessful in finding a bride, further aggravated by the fact that he was a Nepalese (which hindered his career and marriage prospects) and had to take care of his ailing old mother(who did not intend to die soon).
After having watched Agent of Happiness, I was curious what Bhutan’s ranking in the 2024 World Happiness Report would be. To my disappointment Bhutan was not included in the list. Finland topped the 2024 list, followed by nine other high-income countries. Lebanon and Afghanistan shared the bottom of the list. The scores are based on subjective answers to questions such as how satisfied one is with one’s life these days. Feelings of misery (i.e., low life satisfaction) are also investigated and ranked. The final rankings are based on life evaluations, being the more stable measure of the quality of people’s lives.
When Agents of Happiness had ended, my wife, a very down-to-earth observer, concluded that Bhutanese people are unhappy simply because they are poor. From older research conducted by Daniel Kahneman and Angus Deaton, I had concluded that up to an annual income of $75.000,- people became happier as their income rose. But beyond that figure, happiness would not increase any longer.
However, this insight proved to be wrong. Mathhew Killingsworth challenged Kahneman’s and Deaton’s insight. He found that happiness continued to increase when income rose beyond the $75,000.- threshold. Kahneman took up the challenge and invited Killingsworth to find out whether Killingsworth was right and he (and Deaton) was wrong.
Together they had a go at the data they had gathered resulting from interviews of a representative sample of people. The first conclusion they drew was that, besides income and happiness, there is another dimension that plays a part: personality. For people with a limited capacity for happiness there is indeed a threshold somewhere between $100,000.- and $120,000,-. Beyond it, these people don’t get any happier. But for people with a sunny disposition, happiness continues to increase as they get richer. Better even, their happiness increases faster than the rise in income.
But hang on, happiness and life satisfaction are different concepts. After all, one can experience spells of deeply felt happiness in a miserable situation. The world literature is loaded with examples. Take Solzhenitsyn’s Ivan Denisovich, a simple carpenter sent to a Siberian prison camp without any legal justification. Poor Ivan, daily trying to fight hunger and Siberia’s freezing temperatures, enjoyed such a spell. At night, when evaluating the day, he realized that he had achieved a lot: during lunch he managed to get an extra bowl of oatmeal, he constructed a perfectly fitting wall, and he found a small piece of iron of which he would make a sharp knife - a very precious possession in a prison camp. Realizing all this, Ivan Denisovich fell asleep completely happy.
Or take Vaclav Havel, the dissident Czech playwright, detained by the Communist authorities on account of his subversive plays. In one of his letters to Olga, his wife, he writes that on a sunny day, when looking out of his small cell window, he saw a tree branch full of shining leaves. This gave him a sudden deep sense of happiness.
Neither Denisovich nor Havel had an income to speak of, yet both experienced sudden happiness. So, King Jigme Singye Wangchuck was not entirely wrong when he argued that happiness was not only dependent on a decent income.
A final inspirational word for people having difficulties with feeling happy. New insights in neuro psychology tell us that happiness and well-being are best regarded as skills that can be enhanced through training. Hence, for those whose happiness now stops at the $100,00.- $120,00.- threshold, a happier future is beckoning.
Peter de Haan January 2025