The German economic model is a poor alternative to Anglo-Saxon capitalism

The financial crisis of 2008 was too frightening for any sane person to enjoy, but for the centre-left there was some grim satisfaction to be had. With Wall Street and the City of London in meltdown, they could point to Germany’s robust stakeholder economy and say: ‘I told you so.’ Then came the Eurozone crisis and things got more complicated – very few people were right about casino capitalism and the single currency (though plenty were wrong about both). 

One can always argue that the German economic model has proven itself in spite of the Eurozone – and that it is only Germany’s economic strength that has held the single currency together. But in an article for the Peterson Institute for International Economics, Adam Posen takes a very different view:

• “If Germany's economic model is the future of Europe, we should all be quite troubled…”

Indeed, leftwingers might like to note the essential ingredient in “Germany's path to competitiveness”:

• “... cutting the cost of labor. Make no mistake; that has been the basis of the nation's export success in the past dozen years, and exports have been its sole consistent source of growth in that period. But low wages are not the basis on which a rich nation should compete.”

Remarkably, “Germany now has the highest proportion of low-wage workers relative to the national median income in western Europe.” Ah, but at least there’s been plenty of investment in the country’s future prosperity, right?  

• “Ideally, a wealthy country should stay competitive through research and development, and capital investment. Instead, total gross fixed investment has fallen steadily in Germany, from 24 percent to less than 18 percent of GDP, since 1991... 
• “The other way for a rich country to stay at the top of the value-added chain, and thus compete on productivity, is to invest in human capital—that is, to educate its workforce. In Canada, France, Japan, Poland, Spain, the United Kingdom, and the United States, the share of young workers with advanced education is at least 10 percent higher than in Germany—in most of them, 20 percent higher or more…”

Germany’s educational saving grace is its system of apprenticeships, but the country has not built on this established strength. Compared to other OECD countries German productivity growth is lacklustre and manufacturing employment is shrinking away:

• “With these productivity numbers, it is no wonder German business is competing only by reducing relative wages and moving production east.
• “...The export obsession has distracted policymakers from recapitalizing its banks, deregulating its service sector and incentivizing the reallocation of capital away from old industries.”

Instead of restructuring its economy, Germany restructured its exchange rate – through membership of the Eurozone. Not only did this artificially reduce the price of the country's exports, it also enabled Germany’s trading partners to borrow lots of money to pay for them.

Far from being an unfortunate and undeserved burden on the German economic model, the Eurozone crisis is, in part, a consequence of it. Angela Merkel’s aim now is to ensure the survival of the single currency by pressuring other member states to follow Germany’s example and squeeze their workers’ wages too.

Of course, no one owes any of these countries a living – but to create a lean and mean workforce across the Eurozone will undermine the competitive advantage on which Germany depends.

Heresy of the week: The case for abolishing patents

If there’s one thing that unites the right, it’s respect for property. This includes intellectual property, which modern societies defend through legal mechanisms like the patent system.

And yet there’s a problem with patents. When they’re too broadly defined, they can act as a break on innovation and therefore growth. Ideas and concepts that should properly belong in the public domain are instead monopolised, enabling those who happen to own the property rights to extract economic rents from genuine innovators and entrepreneurs. Such rights are often sold on to third parties – known as ‘patent trolls’ – that specialise in this form of rent-seeking.   

In an article for the Washington Post, Timothy B Lee reports that one industry in particular is suffering as a result:

• The number of software patents has soared in the past two decades. In 1991, software-related patents… accounted for fewer than a quarter of all patents issued by the U.S. Patent and Trademark Office. In 2011, for the first time ever, software patents accounted for the majority of all patents issued:
• The rise in patent litigation is a more recent phenomenon. “The overall number of defendants in [patent] cases increased from 2007 to 2011 by about 129 percent over the 5-year period,” the GAO [Government Accountability Office] reports. “Lawsuits involving software-related patents accounted for about 89 percent of the increase in defendants during this period.”

Though the patent system is all about defending property rights, it is also a form of state bureaucracy – and, as we know, bureaucracies aren’t very good at regulating complex, rapidly-developing industries:

• “The GAO says that ‘many recent patent infringement lawsuits are related to the prevalence of low quality patents; that is, patents with unclear property rights, overly broad claims, or both. Although there is some inherent uncertainty associated with all patent claims, several of the stakeholders with this opinion noted that claims in software-related patents are often overly broad, unclear or both.’
• “Why is software-patent quality so low? The GAO speculates that ‘language describing emerging technologies, such as software, may be inherently imprecise because these technologies are constantly evolving.” Also, it says, ‘claims in software patents sometimes define the scope of the invention by encompassing an entire function — like sending an e-mail — rather than the specific means of performing that function.’”

So how do we resolve this dilemma – protecting legitimate property rights while ridding the software industry of its patent trolls? One solution would be to resort to ever more complex regulation:

• “The GAO suggests some modest changes to improve the quality of software patents, such as amending the law to ‘require more detail for algorithms’ in software patents.”

However, this suggests a future in which technological progress is held up while a growing army of expensive geek-lawyers argue over lines of code. Timothy B Lee argues for a very different course of action:

• “...eliminating software patents altogether. There’s little evidence that patents promote innovation in software, and a great deal of evidence that they hinder it.
• “And this is more than an abstract possibility. New Zealand voted to ban software patents this week. The European Union has been debating whether to allow patents on software for more than a decade, with a strong grass-roots movement pushing to disallow them.”

As the world becomes evermore connected by information and communication technology, with software becoming ubiquitous, we need to decide who we want shaping this future. It seems likely that those countries that opt for innovators and entrepreneurs over lawyers and regulators will have the best of it. 

Our banks behave like a bunch of toddlers – but the naughty step of regulation won’t restore order

In terms of their willingness to lend, the banks have gone from one extreme to the other. For Tim Harford – the Undercover Economist – such behaviour reminds him of something:

• “Like monstrous toddlers, the world’s banks have stumbled from manic exuberance, destroying all they touch with clumsy glee, to petulant refusal to get up off the floor. As any parent will tell you, round-the-clock supervision of toddlers is impossible and clearing up the crap is no fun...”

In an ideal world, misbehaving bankers would be fully exposed to the harsh discipline of the market place. However, as with toddlers, reality dictates a more interventionist approach:

• “The fundamental problem is that governments – rightly, given the present set-up – regard certain banks as too big or too interconnected to fail. In the last resort, they must be rescued lest the financial system as a whole be destroyed.”

In other words, until the banks are made to grow up, the state – and therefore the taxpayer – will be forever mopping up after them:

• “We need to return to a market-based system of banking regulation – one in which banks can be allowed to fail. In a market-based system, banks would need to reassure their backers that they were acting like grown-ups – a process likely to be more subtle and robust than ticking regulatory boxes.”

If banks were to raise more of their investment capital in the form of equity then they’d have more of their own money to lose – which should encourage more responsible behaviour. But banks prefer to risk other people’s money (by borrowing it and then lending it out again) and therefore won’t resort to equity unless told to by the state:

• “Regulators, then, are forced to craft rules to oblige banks to use enough equity capital. These rules do not work. Complex risk-weighted systems have failed utterly: again and again, banks have failed despite meeting regulatory requirements.”

However, there is another way:

• “A new debt contract, the ‘equity recourse note’ (ERN), is at the heart of a proposal by market veteran Jacob Goldfield and two economists, Jeremy Bulow and Paul Klemperer.
• “An equity recourse note would work like a traditional bond, except that at times of stress, the interest payments would be made in equity rather than cash. ‘Stress’ is defined not by regulators, who might hold back for fear of causing alarm, but by the bank’s share price.”
• “Let’s say the share price is $40 when the ERN is issued. The trigger price could be one quarter of that, or $10. At any point when payments were due but the share price was below $10, the payment would be made in shares instead, at a nominal price of $10. A $10,000 interest payment would instead be 1000 shares.”

What’s particularly clever about this proposal is that the state would only have to make one big decision – i.e. that "all unsecured bank debt must be in the form of ERNs." From that point on, the market would take over.  For instance, should the bank in question get into trouble, those lending to it would be automatically ‘bailed-in’ according to the terms of the ERN. 

Of course, with skin-in-the-game, it’s much less likely that investors would pump their money into poorly managed, reckless banks in the first place:

• “...investors would prefer to receive cash, not shares, and for this reason bankers would have to work hard to prove their honesty and competence. All this sounds refreshingly like grown-up market forces in action. Banking regulators should give it a try.”

How quantitative easing in the West screws up the rest of the world

With Syria and Egypt dominating the headlines, an international crisis of a different kind is going largely unnoticed. In countries like Turkey, India, Indonesia and Brazil, currencies and stock markets are plunging in value, with governments desperately trying to control inflation and prevent capital flight.

But, hang on, aren’t these the fast-growing ‘emerging economies’ that are supposed to be compensating for the moribund West? Er, yes.

So, why the sudden crisis of confidence? In an eye-opener of an article for Project Syndicate, Stephen Roach pins the blame on trade imbalances:

• “According to the International Monetary Fund, India’s external deficit, for example, is likely to average 5% of GDP in 2012-2013, compared to 2.8% in 2008-2011. Similarly, Indonesia’s current-account deficit, at 3% of GDP in 2012-2013, represents an even sharper deterioration from surpluses that averaged 0.7% of GDP in 2008-2011. Comparable patterns are evident in Brazil, South Africa, and Turkey.”

Worried about how these imbalances are going to be financed, investors are pulling their money out, thereby exacerbating matters in the time-honoured fashion.

But as Stephen Roach explains, there’s more to it than that. While we in the West worry about the impact that quantitative easing (QE) might have on our economies, we’ve given very little thought to the impact it might have further afield – and, in particular, upon global flows of capital.

The original purpose of QE was to artificially reduce interest rates and ease the repayment of accumulated debts. The inevitable side effect was that some investors took their money elsewhere in the hope of a better return. And where better than those exciting emerging economies?

• “[This] provided a surplus of yield-seeking capital from investors in developed countries, thereby allowing emerging economies to remain on high-growth trajectories. IMF research puts emerging markets’ cumulative capital inflows at close to $4 trillion since the onset of QE in 2009. Enticed by the siren song of a shortcut to rapid economic growth, these inflows lulled emerging-market countries into believing that their imbalances were sustainable, enabling them to avoid the discipline needed to put their economies on more stable and viable paths.”

Now that western economies are showing signs of recovery, finance ministers and central bankers are making plans for the unwinding of QE. Again this is a very self-centred debate, in which the experts worry about getting the timing just right (exit from QE too soon and we could stall the recovery; exit too late and we could unleash inflation).

Meanwhile, the money markets are anticipating the fact that QE is on its way out – and are looking towards a QE-free future:

• “Never mind the Fed’s promises that any such moves will be glacial – that it is unlikely to trigger any meaningful increases in policy rates until 2014 or 2015. As the more than 1.1 percentage-point increase in 10-year Treasury yields over the past year indicates, markets have an uncanny knack for discounting glacial events in a short period of time.”

Thus much of the capital that flowed into the emerging economies is flowing back out again – returning home to the West where interest rates and investment yields can only move in one direction.

In terms of distorting capital flows, QE has worked in a remarkably similar way to the Eurozone – pushing easy money at unreformed economies and then yanking the prop away at the worst possible moment.

Good news! Healthcare costs are bankrupting us at a slower rate than ever before!

The decision to ring-fence the NHS budget is taken by some on the right as evidence that the Government is insufficiently serious about cutting public expenditure. In fact, securing acceptance for a near freeze in health spending is one of David Cameron’s more notable achievements. 

Just how long this restraint lasts remains to be seen. It is widely assumed that the aging (and fattening) of the population will, in the long term, drive healthcare expenditures ever higher. 

However, in an article for Bloomberg, Megan McArdle brings us some mildly encouraging news from America. Spending on Medicare (state funded health insurance for the over-65s and younger people with disabilities) “has been growing more slowly than its historical average”.

It should be stressed that it is the rate of increase in spending per beneficiary that is slowing down. Nevertheless, this could be a sign that an end to the escalation of healthcare costs is finally at hand. 

A Congressional Budget Office investigation has tried to identify the causes of the slow-down:

• “If you had to guess why Medicare was growing more slowly, you’d probably come up with one of two answers: ‘Obamacare’ or ‘the recession.’ (No bonus points for guessing which party prefers which answer.) But the CBO largely rejected both those answers.”

Instead, the leading identifiable cause is demographic change:

• “The largest effect was one I hadn’t expected: the changing age profile of Medicare beneficiaries. The boomers bulge is adding a large influx of relatively young people to the system, dragging down its average age – which in turn, lowers the average spending per beneficiary.
• “If you’d ask me what effect the boomers would have on Medicare, I probably would have thought of this eventually, but I wouldn’t have predicted that the effect would be so large. The CBO estimates that this factor alone lowered the annual growth rate of spending per beneficiary by three-tenths of a percentage point.”

Actually, this isn’t at all encouraging. All those newly retired baby-boomers may be bringing down the average age of people on Medicare – but only by increasing the overall number of beneficiaries. Furthermore, as time goes on, younger retirees will become older retirees – with all that implies for demand on the system.

However, the average age effect only accounts for some of the reduction in the rate of increase in spending per beneficiary:

• “...that still leaves a good bit to account for, since the gap between the current rate and the historical rate is 3.2 percent. The remainder of that gap is explained by…well, we don’t know. It may be changes in the way that care is delivered…”

If true, this really would be good news, because progress on efficiency is absolutely vital if healthcare is not to bankrupt the western world.

It’s also worth noting that if such progress is being made in America, then it began before Barack Obama’s much-vaunted reforms:

• “...probably driven by insurance companies and Bush-era Medicare changes, not Obamacare, since the broad economy-wide decline in health-care cost inflation started in the middle of the last decade…”

Perhaps healthcare providers have realised that the future of their industry is all about value-for-money. Certainly, there can be no more blank cheques from the taxpayer – not even for the NHS.

It’s time to start worrying about Japan again

Sometimes you have to wonder whether most people understand the enormity of our national debt, let alone the debts of other nations. Perhaps the problem is one of terminology. We hear talk of trillions of pounds or euros, but what proportion of the public knows what a trillion actually is?

Here's a quick reminder (not that you'll need it, of course): a million is a thousand thousands, a billion is a thousand millions and a trillion is a million millions. In other words, for every thousand-fold increase there’s a new name for the numbers we’re talking about.

According to Jay Zawatsky in the National Interest, the Japanese have moved beyond trillions to  the next level:

• “In actual currency, Japan’s debt has crossed the quadrillion yen threshold. That is a 1 followed by 15 zeros. Of course, with a yen being worth a (U.S.) penny, Japan’s debt is equivalent to $10 trillion. But with a GDP equal to one-third the size of U.S. GDP, Japan’s debt is like the U.S. having a $30 trillion national debt, about twice its actual size of just under $17 trillion, which is the largest absolute national debt of any nation in all of modern history.”

So, what are the Japanese doing about their quadrillion yen debt? Well, much like the British and the Americans, they’re turning on the printing presses – only more so:

• “The Bank of Japan (BOJ), under its new governor, Haruhiko Kuroda, just announced that it will purchase 7.5 trillion yen (that’s $75 billion) per month in Japanese government bonds. Yes, $75 billion is less than the Fed’s $85 billion, but Japan’s GDP is only a third the size of the U.S. GDP…”

Indeed, the BOJ’s actions are set to double Japan’s monetary base in the space of just two years. But why? What could have possibly prompted the Japanese to follow such an extreme course of quantitative easing? The answer to that is is the failure of fiscal stimulus. The kind of expansionary spending policies that Ed Balls wants us to try in Britain simply haven’t worked – and not for want of trying:

• “Despite spending more than 60 trillion yen (approximately $600 billion, but equal to approximately $1.8 trillion in U.S.-GDP-equivalent spending) on Keynesian stimulus programs (scores of roads and bridges and other shovel-ready projects to nowhere) in fourteen supplementary budgets since 1998, the Japanese GDP has risen at less than one half of one percent, on average, over the last three fiscal quarters.”

If the Japanese economy isn't growing, then how are they funding all that stimulus?

• “Japan’s public debt has grown from about 60 percent of GDP in 1990 to over 230 percent today. At the rate of deficit spending planned by Japanese prime minister Shinzo Abe for the rest of 2013, about 10 percent of GDP, that ratio could top 240 percent in 2014.”

Hence the extreme QE – when your debt burden is so huge, it’s vital that interest rates are kept low. For rates to stay low, you either need the confidence of the money markets or a population that’s willing and able to lend to the state. For decades Japanese governments mostly borrowed from their own citizens, but in the world’s fastest aging society that’s not the option it used to be. Thus it is increasingly vital that foreign investors see Japan as a safe haven.

Unsurprisingly, Japan’s aggressive monetary expansion has led to a weakening of the yen – which, in an export-orientated economy, should be a good thing. Unfortunately, the theory isn’t working out so well in practice:

• “For the first six months of 2013, Japan treated itself to its largest trade deficit in history, courtesy of the lower yen. As the yen has fallen, the prices of goods imported into Japan have risen quickly, much more quickly than exports have increased.”

And to think we used to worry about Japan's economic strength.

Soak the savers, we’ve got a national debt to pay off

These days almost anything can be described as a tax. The leftwing campaign against the ‘Bedroom Tax’ – actually a reduction in benefits – is a prime example. From the other end of the political spectrum, the Daily Mail pulls a similar rhetorical trick, portraying the Government’s policy of low interest rates and above-target inflation as a tax on savers.

Nevertheless, there is much to pay attention to in James Coney’s report:

• “A stealth raid by the Bank of England has stripped savers of more than £170billion, a Money Mail investigation can reveal.
• “By slashing the base rate to a record low of 0.5 per cent and allowing the cost of living to soar for more than four years, the Bank has whittled away the value of cash sitting in High Street accounts through a ‘secret tax’...
• “A saver who has kept £10,000 in the best easy-access account has seen the value plunge by £1,243.”

The purpose of this raid is to help the country pay off its debts. Both high inflation and low interest rates help debtors – therefore when this combination forms the basis of government policy, it can certainly be seen as a form of redistribution:

• “Renowned economists have also noted the sneaky way in which governments use inflation as a form of secret taxation. Milton Friedman, for example, observed that ‘inflation is the one form of taxation that can be imposed without legislation’.
• “And John Maynard Keynes said: ‘By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.’”

It’s worth noting that the state is not the sole beneficiary of this redistribution. Private sector debtors also benefit – as do the banks:

• “[Losses to savers] have been compounded by the introduction of the Government’s Funding For Lending scheme, which has given the banks a cheap source of cash. They no longer need to pay interest to attract savers’ money and so have been cutting rates.
• “There is currently £1.2trillion sitting in High Street accounts and it’s earning an average interest of 1.66 per cent. With banks and building societies now slashing the payouts on closed deals and reducing what they pay on best buys, this average is likely to plunge further. In total, since 2009 the inflation raid has cost savers £170 billion.”

One could argue that given the vast overhang of public and private sector debt the Government has no choice but to keep interest rates artificially low. If that is the case, then we should turn our anger on the policies that allowed our debts to mount up to such a level in the first place.

One can – and should – blame the last Labour Government for inflating the biggest credit bubble in British history. But Britain was hardly the only advanced economy to go for broke. Rightwing governments, as well as those of the left, used debt – both directly and indirectly – to fund their tax cuts and spending rises.

Conservatives should, of course, favour expenditure savings and/or measures to boost genuine growth as the main tools for managing the public finances. But to the extent that such measures fall short, taxation should be preferred over borrowing – because while the former is unpleasant, it is at least transparent: a proper account is made of the winners and losers. Borrowing, by contrast, is a great political deceiver – not only deferring the cost of government policy, but also exacting it with the minimum of honesty.

Why low paid jobs are a bigger problem than they used to be

According to James Surowiecki in the New Yorker, low pay is a now is big issue in US politics:

• “A few weeks ago, Washington, D.C., passed a living-wage bill designed to make Walmart pay its workers a minimum of $12.50 an hour. Then President Obama called on Congress to raise the federal minimum wage (which is currently $7.25 an hour). McDonald’s was widely derided for releasing a budget to help its employees plan financially, since that only underscored how brutally hard it is to live on a McDonald’s wage. And last week fast-food workers across the country staged walkouts, calling for an increase in their pay to fifteen dollars an hour.”

Why the sudden interest? It’s not as if there’s anything new about low-paying jobs. Furthermore,  “low-wage earners have long been the hardest workers to organize and the easiest to ignore.” Also, with so many people still out of work, you’d think that any kind of paid employment would be gratefully accepted.

Nevertheless, there’s a very good reason why we should be more concerned about this issue than we used to be:

• “…[it’s] not that the jobs have changed; it’s that the people doing the jobs have. Historically, low-wage work tended to be done either by the young or by women looking for part-time jobs...”

Whether working in supermarkets or fast-food outlets, the low-paid were usually supplementing not supplying the main household income. Or, to put it another way, burger flippers and breadwinners were different people. That, however, is changing:

• “...over the past three decades, the U.S. economy has done a poor job of creating good middle-class jobs; five of the six fastest-growing job categories today pay less than the median wage. That’s why… low-wage workers are older and better educated than ever. More important, more of them are relying on their paychecks not for pin money or to pay for Friday-night dates but, rather, to support families.”

Surowiecki describes “a tectonic shift in the American economy” – with clear parallels to our own economy:

• “In 1960, the country’s biggest employer, General Motors, was also its most profitable company and one of its best-paying… it was not alone: firms like Ford, Standard Oil, and Bethlehem Steel employed huge numbers of well-paid workers while earning big profits. Today, the country’s biggest employers are retailers and fast-food chains…”

One might think that the rapid growth of high-tech companies like Apple and Google would have compensated for the loss of heavy industry. And, in some ways, that is indeed the case:

• “...the combined profits of all the major retailers, restaurant chains, and supermarkets in the Fortune 500 are smaller than the profits of Apple alone.”

But here's the kicker:

• “...Apple employs just seventy-six thousand people, while the retailers, supermarkets, and restaurant chains employ 5.6 million. The grim truth of those numbers is that low wages are a big part of why these companies are able to stay profitable while offering low prices.”

Because most of the jobs are provided in one part of the economy and most of the profits made in another, Surowiecki argues that a “higher minimum wage can be only part of the solution”, which leaves redistribution as the obvious alternative:

• “Fast-food jobs in Germany and the Netherlands aren’t much better-paid than in the U.S., but a stronger safety net makes workers much better off.”

The trouble is that by using tax credits and other redistributive measures to prop up the living standards of low-paid workers, the state is, in effect, subsidising low-profit, low-wage business models, thus further skewing the shape of the economy.

As Surowiecki concludes, “it isn’t enough to make bad jobs better. We need to create better jobs.”

Detroit: this is what happens if you lose the global race

David Cameron likes to talk about the ‘global race’ – by which he means the neverending struggle to stay competitive in a globalised world. ‘Oh, but it’s not a race’, certain sniffy commentators reply – making the rather facile observation that economic competition doesn’t have a finishing line.

That much is obvious, but it's missing the point of Cameron’s analogy. As on the track or the turf, the meaning of the global race is that if you don’t keep up you become irrelevant. The amount of financial and human capital in the world may grow over time, but at any one time it is limited, and with more places for it to go than ever before, the greater the likelihood of some places being left behind.

One such place is Detroit, which filed for bankruptcy last month – the largest American city to have done so (thus far).

A few figures, from Justin Fox of the Harvard Business Review, show just how far Detroit has fallen:

• “In 1950 the city had more than 1.8 million inhabitants; this year the population will probably slip below 700,000. Providing city services like police protection and garbage pickup across 139 ever-emptier square miles keeps getting more expensive and difficult… Just since 2000, the city has lost 26% of its people, with the white flight that began Detroit's decline in the 1950s long since overtaken by an exodus of middle-class African-Americans.”

While the city is getting more expensive to run, its remaining inhabitants are less able to pay for it:

• “Those left behind are increasingly those who can't get out — with a per capita income of just $15,261 and 36.2% of the population below the poverty line, Detroit is now by most measures the poorest big city in the country.”

This is remarkable because, as Jay Zawatsky notes in the National Interest, “in 1960… Detroit was the wealthiest city per capita in America among cities with more than two hundred thousand residents.”

From richest to poorest in just two generations, how did such a catastrophe happen?

There are obvious industrial explanations – and few cities are as closely identified with one particular industry than Detroit (a.k.a. Motown). The problems of the major US motor manufacturers in adapting to globalisation are well-documented; but, as Justin Fox argues, the blame for Detroit’s decline cannot be confined to local boardrooms:

• “...the [wider] Detroit area spawned new businesses… [but] they were all creatures of the suburbs. To an extent unparalleled in any other major American metropolis, private economic activity in metro Detroit came to almost completely bypass the actual city.” 

Fox blames this on the city’s divisive racial politics, which produced a “governing class clueless about and to a certain extent disdainful of economic reality and a regional economic elite with few ties and little loyalty to the region's main city.”

Jay Zawatsky, quoting Mark Steyn, has no doubt as to who he blames – the “malign alliance between a corrupt political class, rapacious public-sector unions, and an ever more swollen army of welfare dependents.” He goes on to note that:

• “...fully half of what the city owes—$9 billion out of Detroit’s unpayable $18 billion—is the unfunded pension liabilities to retired public employees and those still on the city’s payroll.”

So, were does Motown go from here? Michael Bloomberg, the Mayor of New York, has suggested that Congress "pass a law letting immigrants come in as long as they agree to go to Detroit and live there for five or 10 years, start businesses, take jobs, whatever."  Meanwhile, Detroit’s own mayor plans to abandon some of the city’s neighbourhoods in order to save the rest.

These are last ditch measures. But it all goes to show that while you can’t win the global race, you can certainly lose it.

British workers have done their bit for recovery, now British capitalists must do the same

The news that the British economy is growing again did not please everyone. Left-leaning economic commentators tried, but failed, to conceal their disappointment – desperately insisting that what’s happening is the wrong kind of growth.

At so early a stage in the recovery it is surely too soon to come to any conclusion, positive or negative. Instead, we’d do better to look back at the last few years – and try to provide some context for current developments.

In a guest piece for the Economist, John Van Reenen of the London School of Economics presents an overview of the the British economy since the crisis of 2008. The first thing he emphasises is the sheer depth of the recession we’re only just shaking off:

• “The ONS recently revised their figures of national output since the recession. It made grim reading. Popular attention focused on the economically irrelevant statistical revision that abolished the ‘double dip recession’. The brute fact is that UK GDP is estimated to be 3.9% below where it was pre-crisis in 2008 rather than 2.6% as previously thought. We are as a national economically around 14% smaller than we should be based on past trends. ”

Van Reenen describes the period since the recession as the “worst recovery for 100 years”, but notes the disconnect between GDP and employment trends:

• “...unemployment remains at 7.8% whereas we would have expected double digit joblessness given how sluggish growth has been.”

This, he says, is a “testament to the flexibility of the UK labour market”: 

• “Real wages have fallen by about 9% since 2008 due to three decades of reform that have simultaneously kept the pressure up on benefit claimants and weakened the ability of trade unions to maintain real wages even during recessions, as happened in the past. But although some job is better than no job, miserable wages are not the path to long-run economic health.”

A less miserable way of looking at the situation is to recognise that British workers have done their bit for the recovery. Unfortunately the same cannot be said for the owners of capital:

• “Business Investment is now 30% lower than what it was in 2007. This capital shallowing is reflected in the productivity puzzle: UK GDP per hour has not recovered as it did in previous recessions. A big part of this is because low capital per worker means low output per worker.”

A 30% drop is a truly staggering figure. Van Reenen blames it on dislocations within the banking system and cuts to public infrastructure investment. These have certainly played their part, but there must be more to it than that.

Extreme pay restraint on the part of the workforce, plus a big fall in the trade weighted value of Sterling amounts to a double boost of internal and external devaluation. Yet despite this shot in the arm, investment and exports have remained anaemic.

The bog-standard leftwing response is to call for more stimulus, for instance, through a cut in VAT as advocated by the Shadow Chancellor. Rather embarrassingly for Mr Balls, consumption seems to have recovered without the help of his debt-funded temporary tax cut. In any case, it’s investment and exports, not consumption, that is the challenge here.

The bog-standard rightwing response is to call for supply-side reforms. In particular, it is argued in some quarters that employment rights should be weakened or ‘voluntarily’ surrendered in return for company shares. Whatever the merits of some of these proposals, the overall emphasis is economically and politically misjudged. British workers are the heroes of the recovery not the villains – and should be recognised as such.

The real reason why investment has been so weak since the recovery is that it was weak before the recovery. For a while this was disguised by the availability of cheap credit and the abundance of get-rich-quick schemes to pump it into, but when the flow of credit was turned-off the bubbles deflated. By privileging speculation over genuine investment, Gordon Brown’s boom-and-bust policies did lasting damage to the culture of enterprise in this country.

We all know that easy money makes for bad government, but, in much the same way, it makes for bad business too.