Bankrupting cities – the US’s new cut-and-run scheme

$18 billion – that is the cost of Detroit’s debt.

$18 bn – that is the cost of Detroit’s debt, as revealed on Thursday when the city filed for bankruptcy, setting a new record in the US. This figure is a gentle reminder of America’s inequality – consider, not only that 30 of the nation’s billionaires could single-handedly pay off Detroit’s debt, but the news comes amid a gloat of optimism in the US.

US jobs figures – the most scrutinised of monthly data in the world’s largest economy – has beaten all expectations in June, May and April (monthly payroll gains averaging 196,000). Other good-news data has encouraged Ben Bernanke, the US Federal Reserve Chairman, to “taper” quantitative easing and equities are topping unknown heights.

But all this means nothing for the citizens of Detroit, or at least those 78,000 who remain in the city, down from two million in its 1950s heyday. Along with the citizens of America’s other bankrupt cities – Stockton, Mammoth Lakes and San Bernardino – they are the dead weight that America must cut in her struggle to the surface of economic buoyancy.

The message is harsh, yet simple – economic recovery is not universal and struggling cities must pay for their own recovery. How many more American cities, then, will we see go bankrupt as the inequality spits ever further? And what if this US tactic caches on in Europe – could we see a bankrupt Nottingham or Liverpool? (Admittedly, America’s Chapter 9 bankruptcy is not quite as dramatic as "bankruptcy" in the UK).

For Detroit, though, this means many more years representing America’s blue collar bust; the demise of industry and the heartland of sub-prime mortgages, while the rest of the country gets back on its feet.  When asked by CNBC if Detroit’s bankruptcy will affect markets, Steve Brice, Chief Investment Strategist of StanChart replied “markets seem to shrugging it off quite significantly”. 

However, to end on a positive note, this filing completes Detroit’s fall from grace. Here on, things can only get better in America’s industrial heartland.  

Photograph: Getty Images

Oliver Williams is an analyst at WealthInsight and writes for VRL Financial News

Photo: Getty
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Germany's political stability could be threatened by automation

The country's resistance to populism may be tested by changes to its manufacturing industry.

Germans head to the polls this Sunday 24 September. With Merkel set to win a fourth term as Chancellor, it has been dubbed a "sleepy" election – particularly compared to the Dutch and French campaigns a few months ago. Populism, while present, has not taken off to the same extent as in Germany’s neighbouring countries.

In a new Legatum Institute report co-authored with Matthew Elliott, we explore in detail why this is the case, evaluating the historical and economic circumstances as well as social, cultural and political attitudes. In short, support for both the populist Left Party (Die Linke/DL) and for the populist right Alternative for Germany (AfD) has so far been concentrated in former East Germany. At the national level, it has therefore been hard for either party to win more than around 10 per cent of the vote.

However, a longer term trend that might disrupt German politics in future election cycles is automation. With manufacturing making up a large proportion of the German economy, a significant amount of jobs are set to shift between occupational groups. According to the OECD, the portion of jobs at high risk of automation in Germany – 12 per cent – is one of the highest among countries measured.

While the elimination of some jobs and occupations does not necessarily mean net job losses – on the contrary, BCG estimates a net increase of 350,000 jobs by 2025 – it does mean upheaval, both in the job market and in the political sphere.

On the job market front, Germany has a shrinking pool of skilled labour. The Association of German Chambers of Commerce and Industry (DIHK) consider this poses the biggest risk to their businesses. The government is acutely aware of the issue – its August 2017 progress report projects 700,000 fewer skilled workers in 2030 than in 2014. Moreover, with an ageing population, the demographics are currently not in Germany’s favour.

Resolving this issue will require big and difficult political changes. On the one hand, it means that more immigration, particularly of young skilled workers, will likely be necessary. Given the backlash to Merkel’s "welcome" policy at the height of the refugee crisis, an anti-immigration sentiment was stirred which was dormant before.

On the other hand, while new jobs will be available, this does not necessarily mean that from one day to another that those working, for example, in manufacturing, will be keen to move into the service industry or another occupation altogether. Nor does it mean they will want to, or even perhaps be capable of, reskilling to carry out new digital roles.

In the UK and the US, we recently witnessed how these labour market changes were one of the big factors associated with support for the protectionist and anti-immigration rhetoric of the Leave campaign for Brexit and Donald Trump for president.

In Germany, the regions most exposed to the effects of automation are in the industrial south and west – parts of the country so far spared from the worst of populism. The potential for populist support to expand at the national level should therefore worry observers. To its credit, the current government has already been thinking about it, as evidenced in the Work 4.0 White Paper.

However, policy choices in the next few years will be crucial for mitigating the future labour market and political shockwaves of automation. If politicians choose to merkeln (do nothing) on the issue, the populist backlash might hit Germany, too.

Claudia Chwalisz is a consultant at Populus and a fellow at the Crick Centre, University of Sheffield. She is the author of The People’s Verdict: Adding Informed Citizen Voices to Public Decision-making (2017) and The Populist Signal: Why Politics and Democracy Need to Change (2015). Her guide to the German election authored with Matthew Elliott can be downloaded here