2025-03-07 18:19:30

I’m planning a trip to Japan, South Korea, Taiwan, and Singapore. I would love to meet with academics, business leaders, cultural leaders, and politicians, to understand the countries better and portray them accurately when I write about them. I’m especially interested in South Korea and its recent cultural explosion. If you are such a person or know someone I should talk with, please reach out by sending me an email (reply to this newsletter), DM me on Twitter, or fill in this form!

This week, I decided to merge both my articles into one. Enjoy!

A couple of weeks ago, we talked about why Japan’s economy hasn’t been growing lately, most notably because of its zombie loans. But their existence is linked to why Japan is rich in the first place. If you understand this, you can understand a lot of why some Asian countries are rich while others are poor—and see how this might apply to other countries in the world.

This is the GDP per capita of most East and South Asian countries.

There’s a clear group of outliers: Japan, South Korea, and Taiwan. The rest of the countries are half as rich or less, with Malaysia in between. Why? Japan was already richer, but after WW2, South Korea for example was poorer than the Philippines, Sri Lanka, or even the Congo! What happened?

In How Asia Works, Joe Studwell gives a thorough explanation. It’s because the rich ones did certain things right at the right time. Malaysia did them only half right—hence why it’s poorer. China is following in the same footsteps as JP TW SK, and that’s why it’s getting richer. And if other countries follow the recipe, they will become just as rich. Today, we’re going to explore the recipe, why timing matters, and what this tells us about the world today and Asia in particular.

So what’s the recipe? These successful countries did the right thing, in the right order:

1. Land reform

2. Technological learning through manufacturing

3. Financial support

Three Steps to a Rich Country

1. Land Reform

What’s the best size for farms: big or small? It depends on two factors and one key insight.

The key insight is that the more you work on a farm, the more food you produce per unit of land.

It becomes intuitive when you compare these two images:

The small plot on the left is very intensely worked, and produces an incredible amount of food. Every plant is tended carefully, watered with love, protected from the environment. Every pest is controlled, every weed removed. Spacing between plants is perfect. They are laid in different layers. This plot produces lots of food. Meanwhile, the farm on the right is not as productive per unit of land. But since it’s so big, it produces enough food that overall it can make the farmer rich.

To put numbers on this, Studwell calculated that an intensively-worked garden in the US might produce $16.50 per m² per year. A commercial farm would produce $0.25/m².y, so 66x less!

Here’s a graph showing this type of relationship:

So when your land is scarce, you have plenty of people to work it, and you have little money to invest in tractors and the like, you should move towards the type of farm shown on the left. If you are rich, have plenty of land, and are short on potential farmers, you should lean towards the big industrial farm.

In the 20th century, East Asia was poor and very populated, which made the land scarce. That put it squarely to the top left of this graph: It needed small plots very intensely worked. The problem is that land was concentrated in very few hands. As Studwell remarks, in one region of the Philippines, 17 families control 78% of farmland. Overall, the top 10% of owners own 50% of the land. This is a natural evolution of farming, because if one family is very productive and saves lots of grain and another one isn’t and doesn’t, at some point when there’s a bad harvest, the unproductive family will need to sell the land to eat, and the rich one will buy it. Keep doing that over a few generations, and the rich family accumulates more and more money to buy more and more land, and the rest become tenants—hired hands.

The problem is that these hired hands don’t own the fruits of their labor, so they don’t work as hard. The yield of the land goes down. That doesn’t matter too much to the landowner, because he has plenty of land and can buy more. Of course, he forces tenants to work as hard as he can. But beyond a point, it makes more sense to focus on accumulating land than on forcing tenants to work harder.

But the state is not the landowner. Unlike the landowner, it can’t easily expand by buying new land. It has a fixed amount of land, so it wants it to produce as much food as possible to make money.

So what’s the solution? Redistribute land.

By giving the land to the families who work it, you give them incentive to work it hard and produce more food:1 They’re going to keep the literal fruit of their labor!

Of course, the problem is that existing landowners don’t want to give their lands to their tenants, and they have plenty of money, which means plenty of power, and they usually block this land redistribution. So it takes very special circumstances for land redistribution to happen.

These circumstances arose in Japan, South Korea, China, and Taiwan just after WW2.

It was easiest in China: Land redistribution was the biggest proposition of the Communist Party during the civil war that ravaged the country from 1945-49. Later, China made land communal, though, and all the value of this land redistribution was lost.

Taiwan was similar. The Kuomintang, the party that lost the Chinese civil war, had already concluded that it had to redistribute land in Mainland China. When the party escaped to Taiwan and took over power there, it was not very connected with the local landowners—who had been pretty cozy with the Japanese who occupied the land anyways. So the Kuomintang had no ties with the landowners and forcibly redistributed the land.

Japan and South Korea were a bit different. In Japan, they redistributed land in 1868, during the Meiji Restoration, when the Tokugawa government was toppled. Eventually, land concentrated and was again redistributed after WW2, when the US basically told2 the Japanese what to do after their full surrender. In South Korea, the Communist threat (which would lead to the 1950-53 civil war) incentivized the SK government (nudged by the US) to redistribute land: In 1949, it forcibly bought land from landowners and sold it below market to farmers.

Meanwhile, in Thailand, Malaysia, Indonesia, and the Philippines, this redistribution didn’t happen: They tried, but the laws and implementation weren’t as good, and landowners kept their lands. This is the result:

Why does this matter?

In Taiwan, 56% of the population worked in agriculture just after WW2. In Japan, it was about 50%. Perplexity tells me it was 60-70% in South Korea. In other words, more than half of these countries’ populations were agricultural, so it made sense to optimize their output. That was best done by getting the people to work the land intensively. All three countries did that, and this led to huge increases in crop production. Part of their harvests fed each country’s population, but some were sold abroad, which brought currency to the country and funded the state’s next endeavor.

2. Manufacturing with Export Discipline

Once a country is well on its way to producing lots of food and exporting some of it, which brings money back, it’s time to start investing in manufacturing.

Manufacturing is great because you can take low-skilled workers—like the infinite farmers available in these countries after WW2—put them on a machine, and suddenly, they produce a lot more value.

Timing is important: You need to do this after the land reform for three reasons. First, you need lots of workers, who will come from farms. So you need these farms to have been producing for some time, and the families to have grown. Second, you need capital to buy the machines. A few years of crop exports will get you that. Third, as farmers move away from farms and into cities for manufacturing, you need to increase farm productivity, which means buying tractors, seeds, fertilizer, etc. This creates demand for these types of industries.

But if you just spend money on machines, you’re going to burn it: Foreign companies with decades of experience are much better than you at manufacturing stuff, so they will outcompete you: They will produce better products for cheaper. So you need protectionism early on: High tariffs on the industries you want to protect, so they have the internal market from which to grow and learn, which then gives them a chance at building their own expertise. There are other ways to support the domestic industry as well, like cheap loans or direct involvement from the government to thwart foreign competition.

Of course, if you don’t do anything else, the local champions will live cozily behind the import tariffs for foreign industries, extracting rents from their dominant local position. So you need to make sure there’s competition, and then somehow force them to improve continuously, to increase their efficiency and productivity. How do you do that?

With export discipline. The benefits to local champions must be conditional on their exports increasing every year. Why? Because you can’t game exports. If you are exporting more every year, it means you are world-class and getting better. It means at some point you’ll be able to stop supporting these industries and they’ll keep growing as global champions.

Conversely, if domestic companies are not at the cutting edge, you must cull them: Withdraw cheap loans, state support, and even push to sell, merge, or enter bankruptcy.

In this situation, how do you make your industries learn at light speed? How can they get to the cutting edge of technology? You still need to learn from the best. So deals are made between foreign companies and domestic companies (frequently supported by the government) for technology transfer. This can be done in many ways, such as hiring foreign experts, paying consulting fees, offering royalties, limiting sales of foreign companies into your domestic market, conditioning domestic presence with tech transfer, forcing joint-ventures between foreign firms and domestic ones…

Another important aspect is that, for heavy industry, you need the entire value chain to work really well. Back in the mid-20th century, that meant steel and coal, because without them you couldn’t build cheap cars or other manufactures.

Taiwan, South Korea, Japan, and more recently, China, all did these things:

• They heavily subsidized local industries

• They focused on heavy industries, including coal and steel

• They forced internal competition

• They culled losing companies

• They implemented high tariffs and other ways to limit foreign competition

• They conditioned all support on the growth of exports

• They did all this some time after land reform

• They facilitated technology transfers

This is the result:

All these countries are manufacturing export superpowers.

Meanwhile, none of the other countries in Southeast Asia did this. The one that tried most earnestly was Malaysia, but it failed in many regards. For example, it didn’t push for technology transfers, nor for export discipline. That’s why its exports are fairly mixed between manufacturing and natural resources:

Meanwhile, Indonesia exports an even higher percentage of raw materials:

3. Financing

You’re a lender. You have three options. Which will you choose?

• Lend millions to farmers who will buy a tractor and fertilizer and seeds and will hopefully pay you back if the next few harvests are all great.

• Lend billions to industrialists with no experience, so they can lose a big chunk of that money for a decade or two until he finally makes his company competitive. Hopefully.

• Lend a few hundred thousand to average citizens so they can buy a house, which you can recapture if they can’t repay—in a market where prices will keep climbing because everybody can access mortgage financing.

The greatest incentive for the bank is in lending money to the real estate buyer—or for simple consumption. These loans pay back handsomely with lower risk than the other kinds. Except this is bad for the country overall! The country wants productive land and industries, not expensive real estate. So the state must force banks to lend to industrialists (and farmers, but mainly industrialists, who need it the most).

These loans have to be cheap, so banks must be forced to lend at very low rates—in many countries, negative real rates.

But where will banks get the money? From the farmers who are now richer than they used to be. Of course, if banks are lending to industries at a loss, it means they can’t pay savers much. Savers must lose money when they put it in the bank. Why would they do that then? Because they have no other option.

So countries must have capital controls and prevent things like stock markets or ubiquitous mortgages. The lack of stock markets has the additional benefit that industrialists can’t finance themselves through market stock and bonds—they’re forced to go through banks, which means they depend on the state, which will tell them what to do.

Japan, South Korea, Taiwan, and China all had capital controls early on, no stock markets, negative interest rates for savings, and cheap loans to industrialists. Meanwhile, Indonesia, Malaysia, Thailand, and the Philippines didn’t, and they experienced real estate bubbles and suffered greatly during the East Asian financial crisis in 1997.

Timing

One fascinating aspect of this theory is that it doesn’t work to follow one single policy forever—which is the common belief of organizations like the International Monetary Fund or the World Bank. Instead, countries must have a dynamic approach to their policies.

They must start with land reform to get people working and produce cash.
Then, they should push industrial development with protectionism.

But at some point, they need to liberalize them all. Once farms can invest in capital and professionalize, and industries can compete internationally, the market should decide the winners and losers: Whichever firm is most productive should win. But not before they’re ready!

This is what Japan, Taiwan, and South Korea have developed well:

1. Redistribute agricultural land to increase yields and get the surplus of population working hard.

2. Support industry to make people even more productive. Protect it from foreign competition, but push it to prove itself internationally.

3. Fund this industrialization mainly by capturing citizens’ savings.

4. As these tricks get you close to first-world levels of wealth, unwind these measures and liberalize the economy.

But can other countries do the same? Here are my thoughts on:

• China’s past development and what it will do next

• Trump’s tariffs

• if Javier Milei can pull Argentina out of stagnation

• What the EU should do to develop its Internet industry

• Whether Japan can escape its long stagnation

• The economic future of Southeast Asia

Read more

2025-02-27 21:03:16

"I disapprove of what you say, but I will defend to the death your right to say it."—Evelyn Beatrice Hall, conveying the ideas of Voltaire

On February 14th 2025, US Vice-President JD Vance gave a speech at the Munich Security Conference.

Given the forum, you’d expect he would have used the time to address Russia and Ukraine. Instead, he argued that the biggest threat to Europe was internal: the loss of freedom of expression.

As a European and an American, I feel like I’m in a good position to address both sides of the argument: Why is Vance accusing the EU of backsliding on freedom of speech? Is he right? If both regions share their values of freedom, why are there differences between them? What is the right amount of free speech?

JD Vance: What Does the US Stand For?

Vance stated that the very point of the existence of the West, what we stand for, what we fight for, is freedom. Freedom allows people to enjoy their lives, but also to invent, to improve, to build. And he sees a lack of this freedom in Europe, giving some examples:

• The EU canceled Romania’s elections, apparently because of Russian interference. This means the EU believes Romania’s democracy is not strong enough to fend off a few social ads from Russia. If so, how valuable is that democracy? Do they believe it’s not worth defending?

• EU commissars threatened to shut down social media during times of social unrest the moment they spot “hateful content”.

• German police have carried out raids against people posting anti-feminist content on social media, to combat misogyny.

• In Sweden, the government convicted a Christian activist for participating in Quran burnings that resulted in his friend’s murder. The judge of that case said: “Sweden’s laws to supposedly protect freedom of expression do not in fact grant a free pass to do or say anything without risking offending the group that holds that belief.”

• In the UK, a person was charged for standing 50 meters away from an abortion clinic and praying silently for his unborn child who was aborted a few years earlier.1

• The Biden Administration pushed social media companies (among many ohter things) to silence the coronavirus lab leak theory, which turns out to be likely true.

So he wonders: What’s the point of fighting together if we don’t agree on what we fight for?

JD Vance’s argument is rooted in US tradition: The US Declaration of Independence states that Life, Freedom, and the Pursuit of Happiness are inalienable rights. This is the beacon from which all values flow in the US. It is why the US has pushed for democracy and freedom across the world over the last century.2

This is so important that the Founding Fathers gave it teeth, and freedom of speech in particular is backed by the US Constitution’s 1st amendment:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

Now, Vance’s speech would make it look like the US will one-up Voltaire and put the strength of the state behind defending your right to say anything, but that’s not true. There are a bunch of exceptions to freedom of speech in the US:

…obscenity, fraud, child pornography, speech integral to illegal conduct, speech that incites imminent lawless action, speech that violates intellectual property law, true threats, false statements of fact, and commercial speech such as advertising. Defamation that causes harm to reputation is a tort and also a category which is not protected as free speech. Hate speech is not a general exception to First Amendment protection.

You will notice some weird exceptions, including false statements of fact and advertising. What?!

False statements of fact means the US government can put you in jail for saying something false? No. Only when the costs of falsity outweigh the value of freedom of speech. One example is defamation: You can’t spread lies about someone else to undermine their reputation.3

You also can’t commit fraud: lie for personal gain. That includes perjury, false advertising, lying to investors…

You also can’t lie if your lie causes direct harm, especially to a private individual.4

So there are some limits to free speech, even in the US. How does that differ from Europe?5

What Does the EU Stand for?

The EU Charter of Fundamental Rights’ Article 11 is also clear:

Freedom of expression and information: Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers.

But the European Convention on Human Rights’ Article 10 starts similarly, but adds something that changes everything:

Freedom of expression:

1. Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers. This Article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises.

2. The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary.

This is vastly different from the US. It opens up the option for politicians to curtail freedom of speech at will, because any speech that is against your values can be subject to restrictions or penalties. It’s not surprising, then, that Germany’s criminal code bans hate speech6 and speech that reviles religions.7 Another law forces social media to delete hate speech, misinformation, and fake news. Insults in public are illegal. Reposting such content is illegal too. A 2020 reform can put people in jail for up to three years if they insult a politician!8 France, Belgium, and Germany have laws prohibiting people from denying the Holocaust. Poland has a blasphemy law. In Spain you can neither insult the king nor support terrorism… And this is just a sample.

You can imagine how easy it is for governments to abuse this. In the UK, thousands of people have been jailed for internet trolling or being offensive, even in private messaging apps. Here is the perfect example, this time from Belgium:

Here are a few more examples, just from Germany, to illustrate the point:

• Robert Habeck, the head of the Greens in Germany, and minister of economy and environment, and his colleague Annalena Baerbcok, have sued over 1300 Germans for their attacks against them on social media.

  • Here’s an example of the consequences of these: The police raided the house of Stefan Niehoff, a 64 year old pensioner living in the Bavarian village of Burgpreppach for sharing an image calling Robert Habeck “weak head”.

  • A woman had her house searched in 2023 and her mobile phone and her son’s laptop confiscated because she had shared a meme on social media that made fun of leading government politicians.9

• A 42-year-old man from Hamburg had his home raided by police after posting a tweet calling a local politician, Walter Wobmann, a "Pimmel" (German slang for "penis").

• A student was fined €1,500 for calling the state “dirty”.

• A man was sued because he wanted to fight antisemitism by exposing antisemites, who carried a swastika.

Here’s an example of these home searches:

I think we all agree that things like fraud and incitement to imminent violence are bad and should be banned.

Then there are things that the US bans that are debatable, such as lying. Purposefully lying with the express intent of hurting someone is defamation and should be illegal. But what if the lie wasn’t purposeful? Is it a lie then, or is it a mistake? What if the intent was not really to hurt? This is not so clear cut.

Then there are things that are totally legal in the US but illegal in many EU countries, such as negationism, hate speech, or toxic criticism of power.

AFAIK the main thing that the US bans that the EU doesn’t is obscenity, which is. For a country that prides itself on freedom of speech, it sure is righteously prudish. Outside of that, the US is much more permissive than Europe.

We can broadly summarize all this:

Where do these differences come from, and who is right?

US vs EU Traditions of Free Speech

At the beginning of the French Revolution, in 1789, the French wrote the Declaration of the Rights of Man and of the Citizen. Its Article XI says:

The free communication of thoughts and of opinions is one of the most precious rights of man: any citizen thus may speak, write, print freely, except to respond to the abuse of this liberty, in the cases determined by the law.

We can see that the freedom of speech was already limited. Why?

The Europeans invented free speech. In the quote at the top, I shared the spirit of Voltaire in the 1700s: that he could vehemently disagree with somebody but defend to the death their ability to say it. But Rousseau was another influence, and unlike Voltaire, he thought we also had to take into account the common good. Here are a few other factors that influenced freedom of speech during the French Revolution:

• The French had one single Church (Catholicism), so religious diversity was not as important to the French as it was to the Americans, many of whom had escaped religious persecution, and whose country was founded on the ideal of religious freedom.

• In the mid-1700s, although there was censorship in France, it couldn’t have been very strict, since the ideas of enlightenment spread easily across the salons of the country. Notably, ideas against the Church and in favor of secularism spread widely, producing France’s fertility crash.

• The French suffered tumultuous times before and during the Revolution, which sensitized them to the value of censoring ideas to keep the peace.

All these reasons drove the French to push for rights—including freedom of speech, but with some recourse to censor it when needed.

In 1791, the Americans opted for a broader freedom of speech in the First Amendment to the U.S. Constitution, adopted two years after the French Declaration:

• One of their philosophical influences was John Locke, for whom natural freedoms were extremely important.

• The British were extremely strong censors, limiting use of the printing press and any criticism to the crown. The Americans grew extremely sensitive to censorship.

• Americans had to deal with religious diversity. They saw how important it was for religions to be protected, in part through freedom of speech.

• Originally, the United States were 13 separate colonies. They were very wary of federal power. They wanted to avoid any abuse of it, recalling how the British had abused their power.

So Americans and Europeans had different experiences that led them to create different laws early on. But their laws are not the only differences between them.

The US is about to celebrate a quarter millennium of continued democracy. This is unprecedented. And it has gone quite well for them. Therefore, they think: Freedom is good!

This has not been the European experience. Take Germany, for example: It became a true democracy10 in 1918, when the losses in WW1 pushed it to renounce the monarchy and replace it with a democratic republic. This first democratic experience only lasted 15 years: Hitler received enough votes in its 1933 elections to assume power and, through machinations, transform the state into his own dictatorship, resulting in the most catastrophic event of Germany’s history, the loss of a huge part of its land and people, and shame for decades to follow.

Hitler used many subterfuges, but he won people’s minds with his oratory and propaganda skills. He was simply a master communicator. So Germans have a great sense of how communication can be really bad. They fear it.

Here’s my attempt at graphing this:

In the continuum between total freedom of speech and total censorship, Europeans are more concerned about the rise of charismatic dictators than Orwellian, 1984-type governments. So they temper their freedom of speech with more censorship.

Americans are scared to death about the 1984-type dictatorship, with a bureaucracy that stifles speech and even thought, as the UK did before independence. So the U.S. position is more open to freedom.

Who Is Right?

Read more

2025-02-25 17:26:00

Today, I was going to analyze in depth the debate of free speech in Europe vs the US. It was one of the crucial topics that I didn’t address in the article about Germany’s elections because there is too much to say. But you guys had so many comments to the article on German politics that I thought it made sense to address them. Some I agree with, some were insightful, some I consider wrong. But what I love about them is that we were able to have such an intense, civil debate.

I never claim to always be right. In fact, I pride myself in making mistakes, because otherwise I’m not trying hard enough. It’s by making these mistakes that we can learn faster together, by pointing them out to each other and growing together.

So, first here’s my perspective on your comments, and in the next article we’ll dive into free speech.

1. Quick Election Update

• No party has a standalone majority.

• The right-wing AfD saw a massive increase in representation and is now the second biggest party in the country.

• These are the worst election results for the center-left SPD in all its history.

• The liberal FDP is unlikely to meet the threshold of 5% of votes to get into parliament.

• The left-wing BSW is on the brink of that threshold, but will likely miss it.

• Since the center-right Union CDU/CSU and the right-wing AfD parties have a majority between them, at least one of them is necessary to form a coalition.

• Since all parties publicized that they would not partner with the AfD, the CDU/CSU will definitely be a member of the coalition. It’s also customary for the most voted party to lead the government coalition.

• The natural partner is the SPD, as the parties have already partnered in the past, they’re pragmatists, and they are reasonably close in their views.

• From the latest numbers, the CDU/CSU can’t form a governing coalition just with the Greens. And since the CDU/CSU is much closer to the SPD than The Left, the CDU/CSU would rather partner with the SPD, giving them a majority in parliament, without needing the Greens to govern. I think this is good, as the Greens were irrational with regards to nuclear, which made them bad for energy and hence the economy.

• The CDU/CSU could try to go at it alone, but that’s unlikely: The last time it happened at the federal level was in 1920, and it would require the abstention of at least two big parties. This could happen, however, if the CDU/CSU plays the right and left parties against each other.

In other words: The most likely outcome is a coalition between CDU/CSU and SPD, but the CDU/CSU has alternatives (AfD, alone). This gives them negotiation power. The question is how well the CDU/CSU will play these options to get more power in the upcoming government.

2. Speed of the East/West Divide Map

You guys complained it was too fast. So here is a slower version, and I’ve added the current election results map.

3. Who Stopped Nuclear in Germany?

I claimed that the Greens closed Germany’s remaining nuclear reactors. Some commenters challenged that, pointing out that Angela Merkel’s CDU/CSU+FDP coalition decided to close the nuclear reactors in 2011, after Fukushima, and that the current coalition just executed this plan. This misses the point.

Yes, it’s true that Merkel pushed for this, and that most of the reactors closed in Germany as a result. But Japan also decided to close its nuclear plants, and later reversed course and is now embracing nuclear. Germany could have done the same, but it didn’t.

There were 6 reactors still in operation when Russia’s invasion started. At that point, the coalition could have decided to stop their closure, but they decided to go ahead.

The argument it used was a paper, written by the Greens, arguing it was simply impossible to stop their closure, citing things like lack of human resources or interest from energy companies.

I explained in these four articles why this was not just incorrect, but a lie:

• The document was completely one-sided and didn’t address pros and cons.

• Many of the statements were actually false.

• What energy operators needed was a long-term commitment to keeping the reactors open. Else, it was not worth their while.

• As some of you know, one of the Three Mile Island reactors (which suffered a core meltdown in 1979) is being reopened right now. It is ahead of schedule.

Even now, three German reactors could be restarted by 2028 (Brokdorf, Emsland, Grohnde). Six additional reactors could be restarted by the end of 2032.

This is why Merz, leader of the winning CDU, has said in the past that he would reopen nuclear reactors:

And yesterday, he said the work has started to open them back up:

So yes, Merkel decided to shut down the reactors in 2011, but by 2022 Germany knew much more. It’s ridiculous to say the SPD/Green/FDP coalition had no say in this. Reactors could have stayed open. It was the Greens’ insistence that led to their closure.

Some mention that the public changed their opinion only recently. Yes, that’s what intelligent people do! When they have more information, they adjust their conclusions. It was easy to be consumed by fear of nuclear in the wake of Fukushima. But the Greens should have been consumed by fear of CO₂ from the gas and coal plants that replaced nuclear, and by fear of energy dependence on Russian gas in the wake of Russia’s invasion of Ukraine. They didn’t change course, and that’s on them.

You might mistake my position for anti-environmentalism. This is wrong. I’m greener than spinach. But it angers me that those claiming to defend the environment are actually betraying it.

Much more on the topic of German nuclears here.

4. Energy Costs in Germany

Some commenters claimed that Germany’s dependence on Russian gas was a consequence of Merkel’s policies. That is absolutely true! Merkel turned out to be a terrible geostrategist. She put Germany at the mercy of one of its biggest historical enemies, and that shouldn’t be forgotten. The Traffic Lights Coalition (center-left SPD, liberal FDP, Greens) did a great job at eliminating their dependence on Russian gas.

Other commenters argued that the primary driver of the energy price surge was Russia’s war in Ukraine and Germany’s heavy reliance on imported gas, not the renewables push per se. This misses the point completely. Here is Germany’s electricity production up until last year:

The question is: What would have happened if they had continued the push for renewables, but kept nuclear, trying to eliminate coal instead?

Nuclear electricity would have replaced all coal and some gas. In the tradeoff between energy costs, environment, and Russian dependence, only one energy source was perfect—nuclear:

• Remember: All this nuclear energy would have been dirt cheap, because the reactors were already fully amortized! It was the cheapest source of energy.

• It emits much less CO₂ than either gas or coal, and way less of other types of pollution than coal.

• It didn’t depend on Russia at all.

That is the energy source the German Greens decided to close. As a result, Germany is dirtier, more dangerous, and poorer.

The enemy is not renewables.
The enemy is not nuclear.
The primary enemy was Russian gas, but Germany couldn’t know this for sure.
The secondary enemy was coal.
The tertiary enemy was the rest of gas.

By targeting nuclear instead of coal, the Greens destroyed energy, environment, and economy.

Immigration, Russia, and Free Speech

These were the three other contentious parts of the debate. These are complex enough that we can only address them one at a time. This week we’ll do free speech. Eventually, I’ll do immigration, but it’s a thorny enough topic that I won’t do it immediately. On Russia, I was surprised at the polarization of the comments, which makes me think maybe I should address it sooner rather than later.

Gender Imbalance

In the meantime, there’s one more thing I wanted to flag. These are the election results for young men and women (18-29):

Younger people are more radical, that makes sense. But here each gender is radicalizing in a different direction! To give you a sense of how radical this is, here they are compared with the average voter (in black dotted lines):

Young men voted for the right-wing AfD more than the average. But young women voted radically more to The Left! this makes me think of this other graph:

What is your interpretation? My thoughts:

• Radicalization in general isn’t good. Radicalization of one gender is even worse. It can’t be good for either men or women.

• Politics might become gendered.

• The dating market will suffer tremendously: more incels—both men and women—women dropping from the market altogether, later marriages, fewer children, more IVF.

• Some people will take advantage of this market imbalance (eg, “tradwives”, men posing as more progressive than they actually are…)

See you later this week on Free Speech!

2025-02-22 19:54:03

Who wins the German elections this Sunday could lead to a future where Russia invades the rest of Europe—followed by China invading Taiwan, or the US co-opting Greenland. A world where speech is only free when vetted by the government; a world where Germany becomes a poor country, the laughing stock of the world. A world where the values of the West are thrown to the ground and trampled.

What are the stakes?
Who is most likely to win?
What does that tell us about the future of Germany, Europe, and the World?

Quick Primer on German Elections and Parties

From 2005 to 2021, Angela Merkel’s center-right CDU (Christian Democratic Union) led all German governments, in partnership with different parties. It usually partners with its sister party, the CSU (Christian Social Union) that operates in Bavaria. Aside from that, it had three coalitions with the center-left SPD, and one with the liberal FDP (Free Democratic Party).1 When Merkel stepped down, the next government was the “traffic lights coalition” formed by the red SPD, the yellow FDP, and the Greens. The tension between these parties ended up triggering a snap election, which will be held tomorrow.

It is the policies of Merkel’s CDU and the traffic light coalition that have led Germany to the risks it faces today.

The World’s Stakes in This German Election

1. The Russian Threat

Russia invaded Ukraine unprovoked, to grab its land and people.2 Until that invasion, the world had left imperialism behind, replaced by a system where every country tries to improve itself rather than steal from the neighbors.

If Russia succeeds, it’s only a matter of time until it continues its campaign.

Starting with the Baltic Countries, maybe Finland after that. Then, definitely Poland, whose people Putin hates as a competitor of Russia.

The dream is to recreate the Soviet Union, and in case Germans don’t remember, that includes a piece of their country.

And if they don’t remember well, this is the impact of Soviet management, 35 years after reunification:

Before WW2, the eastern side of Germany was more developed than the west. It is the Russian influence over 45 years that has led East Germany to be backwards compared to the West. Germany should fend off Russia to make sure its influence never even gets close to its borders.

When is it easier to fight your enemy: When it’s weak, mired in a neverending war with a strong neighbor that shares your values? Or when each one of your neighbors has been made to bend their knees, one by one, until you’re the last one standing? This reminds me of a quote that Germans know all too well:

First they came for the socialists, and I did not speak out—because I was not a socialist.
Then they came for the trade unionists, and I did not speak out—because I was not a trade unionist.
Then they came for the Jews, and I did not speak out—because I was not a Jew.
Then they came for me—and there was no one left to speak for me.
—Martin Niemöller

Except this time:

First they came for the Georgians, and I did not speak out—because I was not a Georgian.
Then they came for the Crimeans, and I did not speak out—because I was not a Crimean.
Then they came for the Ukrainians, and I did not speak out—because I was not a Ukrainian.
Then they came for the Balts, and I did not speak out—because I was not a Balt.
Then they came for the Poles, and I did not speak out—because I was not a Pole.
Then they came for me—and there was no one left to speak for me.

In graph form:

Germany has made amazing strides, nearly doubling its defense budget in the last decade, now passing the threshold of 2% of GDP spent on the military, as required by NATO.

But it’s not enough.

The target of 2% of GDP means ~€90B per year. But the ongoing military budget is ~€52B, 40% short of what is needed. The €38B gap is made up in part by a special fund of €100B that will run out in the next couple of years. It’s hard to make this allocation indefinite, because the German Constitution limits structural deficit to 0.35% of GDP—the famous debt break. And the remainder of the military budget was made up of obscure accounting allocations from other ministries like the foreign service.

Some German parties say Germany should not increase military spending to 2%. Others say they should, like the probable winner of the election, the union of the CDU and CSU, which I’ll therefore call Union.3 Its leaders think the 2% threshold is a lower bound, not an upper bound. How will Germany get there?

If it’s through debt, it means amending the constitution.4 Otherwise, it should be achieved by limiting other types of spending. No omelet without breaking eggs. Whether it’s through more debt or less social spending, what’s clear is that Germany does need to get to the 2%.

More importantly, it needs to spend the vast majority of that helping Ukraine. It is not.

As a share of its GDP, Germany is only the 16th in terms of bilateral aid allocated to Ukraine. If it doesn’t ramp that up immediately, in a few years it might find Putin at its doorstep.

2. World Order

Ukraine, of course, doesn’t just matter for Europe. It matters for the world.

Russia has revived an imperialism that was mortally wounded in 1945. China is observing intently: Its Georgia is Taiwan. But China won’t stop there: The Koreas, the Philippines, Okinawa, Vietnam… all appear on the menu. If China sees it’s OK to take over your neighbor, it will do it.

This is the lens to use when considering Trump’s crazy talk about making Canada the 51st state, co-opting Greenland, taking back the Panama Canal, or the stupid and childish renaming of the Gulf of Mexico.

Following this logic, if every country claimed what it thinks belongs to it historically or geographically, we would have Italy claiming the entire Mediterranean, Spain claiming Latin America, Mongolia claiming half of the world, and the UK all of it. Is this really the world we want to live in? A world where progress is measured in death, conquests and who is the heaviest gorilla? Or do we want a world like the last few decades, where the life of every person on Earth gradually improved through peace and trade?

As the richest country in Europe, and a former Russian colony,5 Germany is in the best position to nip this trend in the bud: If Russia is humiliated on Ukrainian soil, its imperialist instincts will be chastised on the world stage, and peace and prosperity might keep flourishing into the future. If not, we might return to the 20th century.

3. Germany’s Economy

It’s easier to spend money on the military when your economy is growing healthily. Germany’s is not. In fact, it suffered a recession in 2023 and 2024.

The business mood is “as bad as I have ever seen it”, according to Peter Leibinger, the new leader of the Federation of German Industries.

The main concerns are:

• Red tape

• High taxes

• Costly social security contributions

• Energy costs

• Competition from China

And the part of the economy that is suffering the most is industry. The CEO of Thyssenkrupp, a steelmaker, has said Germany is “in the midst of deindustrialisation”. Indeed, Germany’s manufacturing base is crumbling.

Red tape can certainly be improved, and should be, at the German and EU levels. Social security contributions are probably hard to change, yet they account for the lion’s share of government spending. So how can it then reduce taxes, while at the same time increasing military spending? Taxes are unlikely to go down by much. Energy, however, is a lever the government has to improve the economy:

The sectors that employ lots of energy, like steelmaking, fertilizer production, or paper manufacturing, account for 16% of German industrial output, but consume almost 80% of industrial energy. In the case of fertilizer, the cost of energy is 90% of its total costs. You can imagine what happened when energy costs shot up when Russia invaded Ukraine, or even more recently:

€150 per MWh in Germany in January 2025. Compare that with the US’s $40-80.6

If the German government was able to reduce energy costs, it could save about 15% of its industrial output. And it can do that without hurting the environment.

4. Good Environment AND Good Economy

Let’s take the fertilizer example. With 90% of costs coming from energy, importing fertilizer is basically importing energy in solid form.

Today, German fertilizer industries are forced to consume expensive German electricity and then buy expensive CO₂ offsets. Given these costs, their prices go up. Meanwhile, foreign competitors like Chinese firms consume dirty coal energy and don’t buy offsets, so their fertilizer costs are cheaper, they can undercut German competitors, and run them out of business. At that point, Germany is basically importing dirty Chinese energy while killing its homegrown industry. Does that sound intelligent to you?

Luckily, the EU has thought of that and has approved the Carbon Border Adjustment Mechanism, a policy to ensure that imported goods also account for carbon emissions in their price. This tool will gradually take effect over 2025 and 2026. The next German chancellor should accelerate this as much as s/he can.

But there’s an even better solution: cheaper energy.

Now, renewables are gaining momentum in Germany. That’s good! As I’ve shared, wind is good, and solar is not just better, but will get nearly 10x cheaper in the coming decade.

But you can see fossil fuels still make up a huge share of Germany’s energy. Meanwhile, nuclear is the best source of energy: safe, clean, emits the least CO₂, causes less radiation than a banana, sustainable, reliable… And in Germany, it is also cheap, because its nuclear power plants are already amortized. Yet somehow the German watermelons led by the Greens decided to close Germany’s nuclear power plants against the will of the people.

Meanwhile, Japan has reversed course and now supports nuclear energy, just like the US, the Netherlands, Italy, and more recently Spain. The president of the EU commission, Ursula Von der Leyen, recently declared that the EU should not close nuclear power plants because they’re one of the cheapest and best ways to reach net zero (CO₂ emissions).

Yet somehow, the German Greens dumbly continue to oppose nuclear power. If they didn’t:

• CO₂ emissions would dwindle in Germany, improving global warming

• Germany would be less dependent on foreign energy

• Energy costs would plummet

• German industry would grow back

• The German economy would grow again

• This would liberate funds to tackle other challenges, like military support for Ukraine

Could we reopen some nuclear plants? Absolutely. We just need a commitment to open them for at least a decade, or operators won’t be interested. Too much hassle.

The leader of the front-running party in Germany, the CDU, says he will reopen nuclear power plants if he wins. That would be good: Germany is the last big country left to reverse course on nuclear. If it does, the country will improve, and the world will get a strong signal that nuclear is back.

5. Immigration

Last week in Munich, just before Vice President of the US JD Vance gave a speech complaining about immigration in Germany, an Afghan rammed into a crowd with his car, injuring 39 people, two of whom are still in critical condition. Just two weeks earlier, another Afghan stabbed a toddler and an adult to death, injuring two others. Two days ago, a person who doesn’t speak German stabbed a tourist in Berlin’s Holocaust Memorial. A Saudi rammed into another crowd in a German Christmas market, killing six and injuring 200.

Just around that time, a study appeared claiming this:

Migration to Germany does not lead to higher crime rates at the places of immigration.

When looking at the data, the methodology makes no sense.7 Also, the crime rates of immigrants are not only due to the fact that they tend to be younger and more male. The country of origin, however, does matter:

This type of crime might not be a problem when there are a handful of refugees. But about 17% of people who live in Germany were born abroad—and this number doesn’t count the children of immigrants, who don’t usually cause much less crime than their immigrant parents:

German politicians have at least two paths forward. One is to hide and ignore the problem. This is exactly the type of rhetoric that angers people, who then go on to vote for the right-wing AfD party.

The other is to handle the situation like the Swedes:

I believe immigration is net positive. But certain immigration is better than other. Even more importantly, it’s impossible to figure out which immigration is better if the data to analyze these issues is not available, or if the speech to discuss these problems is muffled.

6. Freedom of Speech

This topic is extremely relevant, too, but I will expand on it next week. The gist here is that Germany is curtailing freedom of speech in a more and more aggressive manner every day, and this has serious consequences for the country’s future.

Who Will Win the Elections?

This is the projection of Germany’s federal election results this Sunday

This map probably reminds you of the map of Germany’s phantom borders I showed you earlier:

This is the polling:

What does that mean?

• The Union (the center-right Christian Democratic Union plus the Bavarian center-right Christian Social Union) will probably beat all other parties.

• The right-wing AfD (Alternative for Germany) will likely come second for the first time in its history.

• All the “traffic light” coalition parties will probably suffer. The Greens are likely to crash from their 14.7% result in 2021, the center-left SPD will probably lose a third of its representation, while the liberal FDP might not even get into the parliament.

How does that translate into parliament seats?

If this is true, Union will have a plurality of votes, but not a majority. It should have enough votes to be able to pick a partner to rule between the SPD, the AfD, and the Greens. Except no partner is a perfect fit for them:

• Germans have grown tired of the grand coalition with the SPD: Two thirds don’t want it. The SPD has overseen the closure of nuclear plants, the latest rounds of immigration, the increase in electricity costs, the shrinking of industry, the economic stagnation… Many of these were due to the Greens, but still, Germans are manifesting in surveys that they want a change.

• The Union is even more at odds with the Greens, who they see as hurting the economy, and completely misaligned with regards to immigration.

• The AfD and Union are aligned in some aspects: They both think immigration has gone too far and that the environmental push has hurt the economy too much. They’re both also pushing for more free speech, which I agree with.8 But the AfD’s pro-Russian stance and their skepticism against belonging to NATO and the EU are huge red flags.

• The FDP seems quite aligned with the CDU and CSU, and a natural ally: It’s pro-NATO and Ukraine, against Russia, pro-EU, pro-free markets, against red tape, wants to push renewables and is open to nuclear, supports controlled, merit-based immigration, and defends free speech. But it’s unlikely to have enough seats to govern alone with the CDU/CDS.

I started this article having a strong opinion on what’s good for Germany, Europe, and the World, but without knowing much about the parties’ different positions, or who I’d prefer to see in power.

Based on everything I’ve learned, these are my conclusion:

• The Greens are a threat to Germany’s economy and environment. I would not vote for them.

• The AfD’s stances on Russia and against NATO and the EU are eliminatory for me. I don’t know enough about their stances on immigration and free speech to opine on those.

• The CDU and FDP both seem quite sensible to me, and I’m aligned with them across the main topics, even if I don’t fully see eye to eye on all

• I don’t know enough about the SPD’s. I like their stance on Ukraine and their increase in military spending, but they’ve presided over an energy and economic catastrophe, and the direction of the country in terms of immigration and free speech are not encouraging.

Therefore, it looks like the CDU/CDS’s lead in the elections is good for the country, for Europe, and the world. In an ideal world, it would have enough representatives to govern alone. If not, it would be great if an alliance with the FDP had enough votes. Another reasonable option would be a fourth grand coalition with the SPD. A minority government, if viable, would be interesting too. What should be avoided are agreements with the Green or the AfD, unless either the Green change their stance on nuclear energy, or the AfD change their stances on Russia, NATO, the EU, among others.

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I am not an expert in German contemporary politics. My expertise lies instead in the big trends of the world. But Germany influences them, so I wanted to form an independent opinion on what Germany should do, and conclude from that what the best election results would be for the arc of history. But I might have missed specifics of the country’s domestic politics. If you find mistakes, please call them out. Otherwise, do you disagree with my conclusions? What do you think should happen? What will happen?

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2025-02-20 01:00:33

This week is Germany’s elections, so it’s a good time to understand the country better.

You can’t undertand the country until you understand the unique way in which is was created. What is that?
Why is the country so rich and powerful?
Why so federal?
Why is Berlin the capital?
What lies in Germany’s future?
Why can we still see the old East/West partition on random maps of today?

Today, we’re going to start with the most important one: What is the weird way in which Germany was formed, and why does it define it to this day?

Germany’s birth has something unique. This map gives us a hint of that: German used to be spoken very widely across Europe, but within years of WWII, it collapsed.

You probably guessed this is due to WWII, but what exactly happened to the people who spoke German? How did German become so widely spoken to begin with—way beyond the borders of what is Germany today? How does this help us understand Germany, WWII, and even the attack of Russia on Ukraine today? Why were there so many pockets of Germans everywhere?1

How Did German Expand So Much?

For most languages, conquerors impose their language on the conquered people, who adopt it little by little. This is what happened with the Romans, for example: It took centuries for Latin to become the language spoken by the common people, mixing with local languages. Arabic came from the Arabian Peninsula, but is now spoken from Morocco to Iraq, albeit with different accents and dialects. Spanish spread through the Spanish Empire as a vehicular language and took centuries to become fully established, but the more remote areas kept some of their local languages, such as Quechua and Guaraní. English spread with the British Empire. Mandarin is wiping out about 300 languages right now…

This is not what happened with German. The language predates Germany! Why?

In fact, the very concept of “German” is misleading. There wasn’t a German language until very recently. What we now call “German” comes from the Indo-European family of languages:

As people from present-day Turkey developed agriculture, their superior ability to extract calories from land meant they could reproduce faster than their neighbors, and they expanded from there.

As they spread, they brought their language with them—Indo-European.

And the languages diverged.

This spread was anything but pacific. An early wave of farmers wiped out the existing population within a few generations. Then another wave of semi-nomads from the Russian steppe wiped these farmers out, again within a generation, around 2800 BC.

By the first millennium BC, the Proto-Germanic language had evolved in what is today Denmark and southern Sweden.

These people started expanding southwards, just as the Romans began expanding around the Mediterranean:

To this day, the areas that speak Germanic languages are all clustered around Denmark, northern Germany, and southern Sweden:

Why did the peoples from Denmark and Sweden start expanding south, and not, say, the other way around? I couldn’t find satisfying explanations. My hypothesis is that this area is very special:

• The continental part of Denmark, the Jutland Peninsula, only has a thin connection to the continent of about 68 km (~40 miles). Hard to find, easy to defend because your enemies can only come from one direction.

• It’s harder to go towards colder areas than warmer ones here.

• The area is full of islands, hard to navigate for continental peoples, but easy for maritime ones.

In other words, the sea and the cold were barriers that were probably hard to pass for land-based people from the south.

And what did these northerners find as they went south?

The result was this:

So for centuries, Germanic tribes2 were in contact with Romans, learned their ways and their technology, and even formed part of the empire, more or less loosely. This made them stronger and more apt to fighting and replacing the Roman Empire, which is exactly what happened.

So what was happening was that peoples, originally from around Denmark, southern Sweden, and northern Germany,3 expanded south until they clashed with another people—the Romans. They learned from each other and when the Romans fell,4 the Germanic tribes expanded.

The pressure didn’t just come from the north. It also came from the west, most notably from the Huns and Magyars. They displaced local peoples—most notably the Goths and their variants, Ostrogoths and Visigoths—who then pushed into the Roman Empire.

Germanic in the Middle Ages

A few centuries later, around 800, it would be a Germanic king—the Frankish Charlemagne—who would unite France, Germany, and Northern Italy. This territory was so huge that he was considered the heir of the Roman Empire. Centuries after its fall, a new empire was formed: The Holy Roman Empire. The Pope crowned Charlemagne emperor.5

But Charlemagne divided his empire to share it with his three sons. The eastern part loosely resembles present-day Germany.

Since France had been occupied by the Romans for centuries, it was latinized enough that the Franks eventually adopted the local language.

Meanwhile, the Roman occupation of Germania had been mostly west of the Rhine, so east of it the influence had not been strong. The locals kept their language there. For the first time in history, there was a political union that spoke Old High German dialects.

It didn’t speak only that, because the Holy Roman Empire was huge:

But belonging to an empire doesn’t mean all subjects speak the same language. Especially in the Holy Roman Empire, where the elites might use Latin as a vehicular language. So how do we go from some tribes in Germany speaking Germanic languages to the spread of German across central Europe?

Trade

Look at this map:

You can see that in Roman times, variants of German followed river transportation: Dialects espoused rivers, and the farther you went from a river, the more differentiated the dialect was.6 This changed over time:

This map shows the difference in German dialects. As you can see, there are horizontal bands that correspond to…

The terrain.

The closer to the sea, the flatter the terrain. The farther south we go, the more hills and then mountains. Dialects follow this terrain. Why is this terrain like that?

The northern part of Germany is flat, criss-crossed with rivers, and has access to both the North and Baltic Seas. This is perfect for trade. Which is what happened.

As the Age of Vikings was drawing to a close, it was replaced by a boom in trade. In this area of the world, this meant the appearance of the Hanseatic League, a group of cities around the North and Baltic seas that united for trade.7 This union allowed them to fight piracy and help each other deal with continental lords who might have wanted to take over their riches.

Notice a few things. First, the heartland was in Germany. The cities of Lübeck, Bremen, and Hamburg were among the earliest and most powerful members of the Hanseatic League.

Many cities appeared across the Baltic, like Danzig (present-day Gdańsk in Poland), Königsberg (present-day Kaliningrad), Riga, Novgorod… Many of these cities were great natural ports and grew thanks to trade with the Hanseatic League. Some of them had been founded or settled by German traders.

What did they trade? Notice that many of these cities are not on the sea itself but on rivers.

Every city is at the intersection of rivers and the sea. Why? As we know, this is ideal for trade:

• Being close to the sea allows for trade with all other sea ports.

• Being away from the direct coast protects from attacks and weather.

• Access to a navigable river means the goods from that river and its hinterland could be traded with other ports on the sea.

In other words:

Unsurprisingly, this region developed a similar type of German—Low German, as in “from areas low in altitude”. If you zoom in, you can see further dialectic variance.

Where transportation was easy, German trade went, and German culture went. It followed the rivers and seas of northern Europe.

But the Cross could also travel.

Religion

German-speaking people migrated towards what are today Poland, Czechia, Slovakia, Austria, Hungary, Serbia, Bulgaria, Romania, Russia… forming pockets of Germans: Traders, engineers, and Christian proselytizers either traveled to these lands by their own initiative or were invited by local kings. Sometimes, though, they were not invited.

While the more famous crusades involved taking field trips to the Middle East, the Northern Crusades against Slavic, Finnish, and Baltic people successfully expanded Christendom northeastwards. Between 1100 and 1250, there were nearly a dozen such crusades.

The Teutonic Order was a military society that christianized the Baltic and… decided to stay.

This evolved over time into Prussia, which was the biggest component of what would later become Germany.

You can see the pattern here, where transportation speed means more trade—and more cultural exchange—but also eases religious and military penetration, in a way that all reinforce each other. The easier the transportation, the more united the region. The harder it is to go somewhere, the more distant it becomes physically, culturally, religiously, and politically.

This concept can be seen in German dialects. As you travel south, dialects gradually turn into Upper German.

The farther south, the more distinct the language. The more mountains, the more intense the linguistic change, so much so that all the southern mountain ranges mark a radical transition between Germanic languages and others.

What facilitated German expansion was sea and rivers, and what boxed it in were mountains and mighty foreign powers.

This whole process took centuries, but a new invention would accelerate it dramatically.

The Printing Press

You saw it coming.

I’ve talked about this in the past so I won’t expand on it too much. Very quickly: The printing press appears in the mid 1400s and suddenly allows the production of orders of magnitude more books. The printing press spread quickly, especially within the Holy Roman Empire (HRE).

The spread was helped by the fact that the HRE was so decentralized, which we’ll explore in a future premium article.

One of the first wide applications of the printing press was during the Reformation: Martin Luther printed his German vernacular bible, which allowed the language to reach far and wide.

He was very careful to use the most generic German he could, and added glossaries to translate the most regional words into other dialects, so that as many Germanic people could read the Bible as possible.8

And one of the core tenets of Protestantism was that you didn’t need the Church to access God. You should read the Bible and interpret it yourself. This led to a dramatic increase in literacy rate in Germany.

As a rule of thumb, the more protestant, the more people read books.

You can see this starkly here:

The more people read, the more they spoke the same language. The more they spoke the same language, the more books were profitable, so more books were published. More people learned to read them. And supply and demand fed each other until a majority of citizens of the Holy Roman Empire eventually learned to read a similar German.

A New World Order

Books carried Protestantism, and Protestantism carried books, in a virtuous cycle. Of course, Catholics did not appreciate that, so the epicenter of printing (Germany) also became the epicenter of religious strife. So much so, that just a century after Martin Luther published his 95 theses started the Thirty Years’ War: Protestants and Catholics went at it, and all the neighboring countries decided to chime in, using Germany as their battleground, and killing between 30-50% of the German population.

The most important outcome of this war was the Peace of Westphalia, which ended the old order of religion above all, and was replaced by one of nation-states above all. States agreed that each one could decide the religion they wanted to follow, and neighbors wouldn’t meddle.

Following this, the big nation states in Europe tended to opt for a single religion. Meanwhile, the spread of books meant that a single language (usually the one of the capital) was used as the vehicular language of the country, and spread throughout the kingdom. The combination of single religion and language reinforced each nation state—except for the HRE, which was made up of hundreds of political units ruled by kings, princes, dukes, counts, bishops, abbots… Each one with its own religion.

In the early 1800s, the HRE learned the weakness that came from that: Napoleon, in the back of the emerging French nation-state, was able to conscript millions of patriotic soldiers, invaded the Holy Roman Empire, and ended this 1,000-year-old institution.

Modern Germany

Napoleon eventually lost because all other countries united against it. But the shock of the invasion made it clear that the polities of the HRE had to unite or die. These small polities didn’t have a religion in common, but they did have a language. Larger polities started forming around German and the Germanic culture, driven by the new concept of nations that had appeared in the 1700s and exploded in the 1800s (thanks to the printing press).

Germans wanted to build a German nation around the trauma of Napoleon’s invasions; they obsessed about that never happening again. But who would lead that unification? At the time, the biggest contenders were the Austrian Empire and Prussia, followed by the secondary players of Bavaria, Saxony, and Württemberg. But the winner was Prussia, led by Bismarck. Prussia overhauled the military, modernized the economy and its industries, played its diplomatic cards well, and created the modern school system to shape citizens into productive tools for the state and obedient soldiers.9

This eventually led to the unification of Germany in the 1870s. It’s not a coincidence that the birth of that nation state was signed in Paris in 1871, after Prussia won the Franco-Prussian war: It closed the wound opened by Napoleon 70 years earlier, and closed the storyline of German people, initially humiliated by France, but united by it.

This is how we reach this map:

Lebensraumed Out

Since German [the language and culture] was the main vector for Germany [the polity] to form, Hitler just went one step further. He used Germans outside of Germany to expand the country.

Hitler:10

Step 1: Austria, since you’re not part of the Austro-Hungarian empire anymore, you might as well join Germany? OK, great, let’s do the Anschluss and unite!

Step 2: Hey Czechoslovakia, see all these Germans in the mountains around Bohemia? We need to protect them. OK, now this is part of Germany, thanks!

Step 3: Uh oh, looks like you’re a bit unprotected now, Czechoslovakia… It turns out Germans occupied all the easily-defensible mountains, and now your plains are surrounded on three fronts. Who would have thought?!

In 1939, soon after taking over the Sudetenland, Hitler annexed all of present-day Czechia.

Step 4: Guess what other region is ALSO surrounded by Germans and can be attacked from three places? You wouldn’t believe it! That’s right, Poland!

And that’s when France and the UK said Basta and intervened. We know the result: Hitler lost, Stalin demanded western Poland for himself, and this part of Germany—which had not really been part of the Holy Roman Empire and had only become Prussian a century earlier—was given to Poland.

The Soviets kindly invited Germans to move out of the land.

Hitler's strategy had backfired. Fuck around, find out. Across Poland, the Sudetenland, and other regions, Germans were not welcome anymore. They were raped, killed, expelled, or fled the massacre before the Soviets could catch them. About 12,000,000 German civilians were expelled across Eastern Europe—that is, force stripped of their homes and property and citizenry for the crime of speaking German, ethnically cleansed. Soviets might have raped up to 2,000,000 German women.11 Between 500,000 and 1,000,000 Germans died during this expulsion: many killed, some starved to death. It was, until that point, one of the largest ethnic cleansing in history, if not the largest.

German shrunk along with Germany.

Putin has been using the same strategy as Hitler but with Russian in Ukraine. He first took over the areas where Russian was widely spoken, and then used the defense of Russians within Ukraine to launch the broader attack.

How Did German and Germany Form Then?

It’s time to answer our questions.

Germanic tribes started around what is Denmark, southern Sweden, and northern Germany today, and moved south during Roman times. They eventually clashed with the Romans, and through centuries of interactions, cultural mixing gave them institutions and technology, which they eventually used to conquer parts of the Roman Empire when it was weak.

There had been no serious German-speaking state until Charlemagne created the Holy Roman Empire, and even then this was not a German state: A big chunk of it ended up adopting the local Latin vernaculars—what would become French and Italian. The remaining Holy Roman Empire contained many languages, and the language of rulers was Latin for 700 years of the empire.

German and Germans expanded not through the state, but through trade, culture, and religion:

1. In the North Sea and the Baltic, via trade routes, Christianity, and war

2. Through the numerous internal rivers: Rhine, Weser, Elbe, Oder

3. By settling eastern regions, frequently by invitation from local leaders

4. Through the printing press, and its resulting Protestant Reformation

5. Through nationalistic consolidation after the crisis of Napoleon

6. Through state-mandated education, even before there was an actual German state!

This is not how it worked for other countries in the region. For example, France and Spain united politically much before they united linguistically. Their governments had a heavy hand in forcing the language through their populations, as a means to strengthen the concept of nationhood.

German generally expanded first, and the polity followed. Hitler just took it to the extreme.

But what had limited the expansion of German throughout history? Mountains and neighboring powers.12 The same thing happened again: Hitler overplayed his hand, and the powers that had always boxed Germany in, boxed it in again, this time into submission. Germany lost a big chunk of its land—and its power.

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But not all of it. Today, Germany is still one of the richest countries in the world. Why?
And why is it federal?
Why was the Holy Roman Empire such a weird and fractured country that nevertheless survived 1,000 years?
Why did the printing press and the Reformation emerge in Germany, of all places?
What’s going to happen in the upcoming elections?
After them?

These are the questions we’re going to answer in the upcoming series (some premium articles). Subscribe to read them!

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2025-02-16 23:03:41

I don’t usually do guest posts, but today is an exception. Maxwell Tabarrok is an economics researcher at Dartmouth College and author of the substack Maximum Progress. He proposed this article about the end of Japan’s stagnation, and I found it super interesting, especially as I am just studying Japan and the economic miracles of this country, Taiwan, South Korea, and China. Japan’s economy is also important to understand, as it’s the canary in the coal mine of low fertility rates. So Max and I worked together to make his article fully Uncharted Territories-like. I hope you enjoy it! I’m slightly late on articles this week, will catch up next week.

For more than three decades, Japan has endured near complete economic stagnation. Since 2000, Japan’s total output has grown by only $200B.

That’s less additional output than Nigeria, Pakistan, and Chile, even though they all started from much lower bases, and only around a fifth of South Korea’s growth over the same period.

But despite severe economic stagnation, Japan is still a desirable place to live and work. The major costs of living, like housing, energy, and transportation are not particularly expensive compared to other highly-developed countries. Infrastructure in Japan is clean, functional, and regularly expanded. There is very little crime or disorder, and almost zero open drug use or homelessness. Compared to a peer country like Britain, whose economic stagnation over the past 30 years has been less severe, Japan seems to enjoy a higher quality of life. In short:

What explains Japan’s lost decades? And how has the country still managed to maintain such a high quality of life?

Facts of Japan’s Stagnation

Before explaining why so many aspects of life in Japan succeed despite its economic stagnation, we ought to make sure that the stagnation is real.

Japan’s total GDP grew at less than 0.25% per year from 2000-2019. US GDP grew nearly 10 times faster over the same period.

Japan isn’t doing better on a per capita basis. Its GDP per capita growth is still sluggish compared to peer nations, so the picture isn’t much different than what’s shown in its total GDP trend.

What about productivity? Per capita GDP is usually highly correlated with productivity, but it’s a particularly biased measure in this case. Much of Japan’s population is too old to be in the workforce, so dividing GDP by the entire population counts millions of people as labor input when they don’t actually work. If you instead compare Japan’s GDP growth per working age adult to other nations, it doesn’t look quite as bad.

By this metric, Japan still has lower growth than everyone except France and Italy, but it’s only near the bottom of a tight pack, rather than an outlier far behind anyone else. So is Japan’s stagnation a statistical illusion masking what is actually reasonable performance?

No, the stagnation is real.

First, even by the adjusted metrics Japan’s growth is worryingly slow. It does the best relative to the US by GDP per working-age adult, but it’s still barely 6th out of the 8 countries graphed. The countries that Japan beats or matches: Italy, Spain, and France, are not examples of healthy, high growth economies. Compared to Japan’s neighbors like South Korea, Taiwan, China, Singapore, Malaysia, or Vietnam, its growth rate is a low outlier. Casting Japan as similar to Western European economies is evidence for the severity of its stagnation.

Second, and more importantly, is that total GDP matters! Japan needs a high level of total GDP to provide for its dependent population as it balloons compared to the working few. Japan needs to produce enough to pay for trillions of dollars of debt. Japan also needs to produce enough to defend itself against potential threats like China and North Korea. Productivity alone isn’t enough to meet these challenges; total output is what matters, and Japan is extraordinarily stagnant by that metric.

Causes of Japan’s Stagnation

Japan spent over a century on the frontier of global economic growth. What caused Japan’s growth to crash in the late 90s and never recover?

Demographics

Japan’s working age population is now the lowest it has been since 1973. The 65+ population in Japan is more than half the size of the working-age population and more than double the size of the under-15s. Japan has the 13th lowest fertility rate out of 204 countries, and the 6th lowest if you don’t count city-states. It’s difficult to grow economic output when supply of labor, the most important input, is shrinking.

Japan’s demographics drag down its productivity growth, too. Productivity is ultimately a result of new technologies and ideas which come from people. Fewer people means fewer ideas in total, but it also means smaller agglomeration benefits, network effects, and returns to scale, which makes each member of the smaller population less innovative, too. Japan’s patent rate per working age person peaked in 2000, a few years after its total patent numbers and working age population peaked in 1995.

Japan’s demographics overshadow and underpin all the other explanations for its stagnation. If Japan’s working age population had stayed at its 1997 peak and productivity growth had been the same, its GDP would be 20% larger than it is today. The true cost of population decline is even larger than this because of its effects on innovation and productivity growth.

Zombie Firms

There is more to Japan’s stagnation than demographics. The challenges posed by falling population are magnified by a debt-funded resistance to creative destruction. This has kept Japan entrenched in industries where it lacks comparative advantage while stifling the emergence of new, dynamic sectors to replace uncompetitive ones.

A key mechanism sustaining these declining firms is heavily subsidized debt. The practice of extending loans to failing companies is known as "zombie lending."

When a borrower fails to pay interest on a loan or goes bankrupt, their bank must classify the loan as “non-performing.” This means the bank can no longer count the loan value as an asset, and they have to set aside cash to at least partially replace the value of the non-performing loan. That leaves less cash available to loan out and thus less profit for the bank.

Alternatively, the bank can offer more money to the ailing borrower which the borrower uses to continue making interest payments on their loans. Thus, the loan remains as an “asset” on the bank’s balance sheet, even though everyone involved understands that there is little chance the loan will ever be repaid. This creative bookkeeping allows the bank to accept more deposits and loan them out to other, hopefully more profitable, ventures. A combination of explicit regulations, regulatory forbearance, and implicit social pressures among the tight-knit group of Japanese business, banking, and government leaders promote this practice of zombie lending.

The percentage of “zombie firms” i.e those firms subsisting purely on subsidized debt increased from around 7% in 1990 to more than 30% in 1996 and has stayed elevated since, coinciding with the beginning of Japan’s lost decades. For comparison, a similar measure of zombie firms in the US counted around 8% of firms as zombies in 2019. One important difference, however, is that US zombie firms tend to go out of business within 5 years. Japanese zombie firms, on the other hand, often last for decades and maintain high employment and market share.

Industries with more zombies have less churn of resources between firms; exactly the opposite of what is optimal in an industry with lots of unproductive firms. Usually, in an industry with unproductive competition, a highly productive firm will expand rapidly, but when the unproductive competing firms are subsidized by cheap debt, healthy firms grow more slowly and are more likely to exit the market altogether.

Zombie lending has lowered aggregate Japanese productivity growth by at least 30-50%. Productivity growth can be decomposed into four parts based on where it happens: Within firms, reallocation of resources between low and high productivity firms, entry of new firms, and exit of existing ones. Throughout Japan’s lost decades, the exit portion of productivity growth has been highly negative. That means that the lowest productivity firms are staying in business, and the highest productivity firms are leaving. This is a tell-tale sign of a lack of creative destruction due to zombie lending. Resources should be flowing from the lowest productivity firms to the newer, high productivity ones, but in Japan’s system, ailing firms get the most subsidies so they are able to retain workers and capital even when they make next to no revenue.

The negative exit effect decreased Japan’s annual manufacturing productivity growth by a full percentage point between 2000-2005, meaning productivity growth would have doubled without it and grown even more if firm exit had a positive effect as in most healthy economies. The other major productivity slowdown from shrinking “within-firm” growth is more directly related to Japan’s aging and less innovative population. Zombie lending also contributes to falling within-firm productivity. It prevents the death of stagnant firms and allows their innovation-stifling practices to ossify and spread.

To summarize, Japan's stagnation comes from two forces: a shrinking population, which means fewer workers to produce economic output and fewer inventors to raise productivity; and "zombie firms," kept alive by subsidized loans, which prevent creative destruction and drag down productivity growth across the economy.

Successes Despite Stagnation

Japan’s economic stagnation is among the most severe in the world, especially when compared to its world-beating growth in previous decades. Yet, Japan is still a great place to live and work. How does Japan retain these good qualities despite its poor economic performance?

Japan Gets Housing Right

A major source of economic pessimism in Western countries is high housing costs. These countries have throttled housing and most other physical construction activities with environmental proceduralism and highly localized zoning enforcement. This has led to major cities like San Francisco permitting less than 150 new units a year in a city of 800,000 people.

Japan’s zoning code is set at the national level and therefore tends to be much less restrictive than the local zoning codes found in the West. Its national system lays out just 12 inclusive zones, which means the permitted building types carry over as you move up the categories, allowing mixed-use development by default. This compares favorably to zoning codes in the US which often have multiple dozens of exclusive land use categories. Even the most restrictive category in Japan’s system, shown in the top left (below), allows people to run small shops and offices out of their homes. There are floor-area-ratio limits and setbacks, but they are modest, and there is no distinction between single and multi-family housing units within these limits.

For environmental permitting, Japan mostly relies on explicit standards for environmental impact, rather than a lengthy permitting process where applicants must write detailed reports about possible alternatives and mitigation measures under threat of lawsuit, as in the US. Japan does have a copy-cat National Environmental Policy Act (NEPA) procedural environmental law that was enacted in 1997, but it has two important differences that prevent its evolution into the procedural morass seen in other countries.

First is explicit numerical standards for which projects must go through the impact statement process, rather than the hand-waving ambiguities of NEPA. These standards generally only include large infrastructure projects like a port extension exceeding 300 hectares. Some residential projects are covered, but only those which exceed 75 hectares in area. Only 854 environmental impact assessments have been started in Japan since the act passed, and there have been zero for residential construction projects.

Second, the completed environmental assessments are harder to sue over than in Western countries. Plaintiffs need to have a personal and legally protected injury to have standing, rather than a generalized concern for the environment as in the US. Plus, the greater specificity of when the law applies and a court that has a much more deferential attitude towards agency determinations means the lawsuits are harder to win.

Permissive national zoning and an absence of environmental proceduralism leads to Japan having the highest rate of housing construction and the lowest home price to income ratio in the OECD.

Expensive and exclusionary housing can make the most prosperous and beautiful city on earth lose 10% of its population and conversely, abundant housing goes a long way to making a place feel prosperous, even when incomes are stagnant.

Capital and Culture

Japan has two other advantages which offset the bad vibes and welfare costs that one might expect from a stagnant economy.

The first is downstream of its demographic decline and its well-designed building regulations. Japan has a rising capital to labor ratio. Essentially, this means that each worker in its economy has access to more infrastructure and machines than in the past. This is because Japan has lots of durable physical capital but a shrinking population, and it probably explains a good portion of why its per-worker productivity growth has managed to stay high relative to its sluggish growth in GDP overall. In fact, standard economic growth models predict that with an exponentially declining population, living standards stagnate to a constant level because the loss of income caused by slower technological progress tends to be offset by this rising capital to labor ratio.

Japan’s second advantage is more difficult to quantify but is likely as important as the previous factors for offsetting the costs of stagnation: Japan has high levels of trustworthiness, cleanliness, order, and peace. Japan has extraordinarily low rates of crime of all types, drug use, and homelessness. Its trains are always quiet, clean, and on time.

Most crime is committed by young men, so Japan’s low crime rate is partly explained by its older age structure. For example, in 2019 Germany had four times Japan’s overall homicide rate but after adjusting for age differences it’s still twice as large.

Japan’s social order is incredibly valuable. The annual cost of crime in the United States is around $5 trillion dollars which is 18% of GDP. Higher crime rates would threaten the high-density urbanism which makes Japanese cities so affordable and desirable.

Japan’s exceptionally orderly and safe public spheres are matched only by other countries in East Asia, so the persistence of its social order is aided by low migration rates, and especially low rates from non-East-Asian countries. Higher rates of immigration could help with many of Japan’s challenges, especially its shrinking working-age population. And increasing immigration from China and Korea doesn’t pose a serious threat to its cultural norms, though these countries have their own severe demographic problems on the horizon. But as the experience of Western European nations show, it is possible to have high immigration rates alongside low growth. Under these conditions, zero-sum thinking is both more common and more accurate, and backlash against immigration is intensified. Japan should increase its immigration rates to offset the severe consequences of demographic decline, but this immigration increase needs to be paired with rapid economic growth and ideally growth of the Japanese population so as not to threaten its valuable cultural norms.

Can Japan Reverse Course?

Japan’s highest priority should be reversing demographic collapse. Directly addressing birth rates with subsidies is a simple first step. Given Japan’s fiscal obligations to its growing elderly population, each member of future generations must contribute 50 million yen to the government on net, or around $300,000.1 Thus, the government should be willing to pay up to this amount to induce new births, and perhaps more, since this fiscal accounting does not account for the extra economic growth that extra population would cause.

The success record of fertility payments is mixed but weakly positive, though no fertility payments in the same order of magnitude as what Japan can afford have been tried. The risk of wasting money with the world’s largest fertility payments are small compared to the risks that Japan faces if its demographic decline continues.

In addition to economic incentives, cultural initiatives to promote family life are important. It’s difficult for governments to push culture in desired directions, but it’s worth trying to explicitly celebrate fertility. Other interventions in between culture and economics can be more decentralized. Put free daycares in universities so that young people have exposure to parenting and the resources to try it without removing themselves from the social circles and career paths of their friends and role models.

Fertility is Japan’s biggest challenge, but it's not the only one. Japan needs to address its lending policies, allow more creative destruction and more startup formation. The practice of banks holding onto non-performing loans should be discouraged by stricter accounting standards that force recognition of bad debt. This would free up capital and human talent currently trapped in unproductive zombie firms, allowing resources to flow to more innovative enterprises.

Japan’s success in the face of demographic collapse and economic stagnation is one way of proving the importance of housing policy and social order. Getting those things right, as Japan has, creates a foundation strong enough to withstand three decades of zero growth. But even the strongest foundation will crack under enough weight - and the combined mass of demographic collapse and zombified capital misallocation grows heavier by the year. If Japan can turn these trends around, its other advantages would do more than simply offset stagnation — they would create rapid growth and widespread prosperity for decades to come.

I hope you enjoyed the article. Let me know what you think! If you want to read more about economics, science, policy, or AI, you can subscribe to Maximum Progress here or follow Maxwell on X.

The next article, for premium customers, will be about why Japan has the zombie lending policies today, why it’s a direct result of its past success, how that is similar to South Korea, Taiwan, and China, and why Southeast Asian countries didn’t follow the same path.

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