What do Detroit’s declaration of bankruptcy and today’s upper house election in Japan have in common? On the face of it very little, but they are reminders of both the US’s ability to do the right thing after trying the alternatives and why, if the rest of the world does not become a bit more like Uncle Sam, the next century will be American too.
Detroit is a tragedy, Ozymandias on a giant scale. And yet, it is also a reminder of the creative destruction that continues to make the US the most dynamic, self-renewing economy in the world. The admission this week that the city is bust marks the abandonment of a long period of denial. Picking up the tab for a 65 per cent fall in population and near-halving of tax revenues since 2000 will be painful, but it is no more than a reflection of reality.
Detroit is not alone in its misery. Stockton in California has filed for bankruptcy. Chicago is closing 50 schools to plug a U$1 billion hole in its education budget. And America has a long history of municipal failures or near misses such as the eleventh hour avoidance of collapse in New York in the 1970s. It is a measure of the genius of America that it can lurch from crisis to crisis in this way and each time emerge a little bit stronger.
In the face of a political system seemingly designed to avoid making any decisions at all, the US manages to make the right ones even when they stick in the craw for many Americans. So clearing up the banks in 2008, ensuring they had the capital to provide the credit for companies to create 7 million new jobs over the past five years was the right thing even if it felt distinctly un-American. Allowing the housing market to quickly find its proper level created a platform for sustainable recovery. Supporting the development of a robust Shale gas industry has transformed the competitiveness of US industry.
It is no wonder that the US budget deficit, which exceeded 10 per cent of GDP in 2009, will fall to 4 per cent this year and little more than 2 per cent in 2016. Moody’s has removed its negative outlook warning flag on the US’s credit rating.
On the face of it, Japan looks to be making the right decisions too but I am not so convinced. Prime minster Shinzo Abe is staking his political legacy on his ability to back fiscal and monetary stimulus with a set of economic reforms that he rightly sees as the only way out of a 20 year deflationary morass. He has a mountain to climb.
America’s economy is everything Japan’s is not. Even more than the US, Japan needs growth to escape a debt trap that will cripple the country if bond yields finally rise. But a labour market that discriminates against women and young people and a corporate culture that encourages conservatism and the hoarding of cash means that growth will be hard to find.
Until today’s election Abe had the cover for not rocking the boat – he needs a majority in both houses to push through meaningful change. But the vested interests of minority groups like Japan’s farmers and the electoral system which favours them disproportionately mean that real reform is no more likely tomorrow than yesterday.
New figures from the United Nations Population Division underscore another key point of difference between the US and Japan (and much of the rest of the developed world) – demographics. Japan’s population is predicted to fall from 125 million today to 85 million by the end of this century while America’s will rise from 285 million to over 420 million.
America is not afraid of the future. It spends more than $400 billion a year on research and development, a third of the global total. It is a world leader in the technology, energy and healthcare industries that will dominate in an ageing world. It is not afraid to replenish its workforce with young, hard-working incomers. And that is why any hand-wringing over the fate of Detroit is misplaced. The empty blocks and crumbling grandeur of the Motor City are not signs of America’s failure but its success in reinventing itself.
As Japan goes to the polls today, it must look at Detroit and ask whether it has the stomach for a real revolution. In the meantime, I know which country I will be backing with my long-term savings.
