Romney’s vulture capitalism, the Balls backlash and more downgrades

David Blanchflower looks at US unemployment, the France downgrade, and why Labour has not reversed i

It has been a strange winter in New England because there has been scarcely any snow, which means that my two snowmobiles sadly remain in the barn. Even so, just recently, and like the Republican candidates (minus Jon Huntsman, who quit the contest on 16 January), I headed south for warmer weather. In my case, I went to Florida for a little fishing and reflection, while in theirs it was on to South Carolina, the Palmetto State - named for the sabal palmetto or cabbage palm, which is the state tree - for more silliness.

South Carolina is very different from New Hampshire. It has a right-to-work law that prohibits agreements between labour unions and employers which make membership, payment of union dues or fees a condition of employment, either before or after hiring, and which would require the workplace to be a closed shop. In 2010, only 4.6 per cent of workers in South Carolina were union members; today, the state's unemployment rate - 9.9 per cent - is well above the national average of 8.3 per cent. In contrast, 10.2 per cent of workers in New Hampshire were union members and its current unemployment rate of 5.2 per cent is well below the national average. Incidentally, the Republicans in my state tried to pass a right-to-work law in 2011 but it was vetoed by the Democratic governor, John Lynch.

Jobs are a huge issue of contention in the Republican primary that takes place in South Carolina on 21 January and, according to a recent American Research Group poll, Mitt Romney and Newt Gingrich are in a statistical dead heat.

Capitalist punishment

My man Newt has stepped up his attacks on Romney, calling him a heartless capitalist, a "corporate raider" who made his money from other people's misfortunes. Rick Perry, governor of Texas, also went on the attack, calling Romney a "vulture capitalist" who used to feed on the carcasses of American workers.

Romney has claimed that he created 100,000 jobs during his time at Bain Capital, the private equity company he co-founded. The three successful companies he claims to have helped to start or grow are Staples (a gain of 89,000 jobs), Sports Authority (15,000 jobs) and Domino's (7,900 jobs). This tally does not include job losses from the other companies with which Romney was involved while at Bain Capital. And what is less well known is that his record on job creation as governor of Massachusetts, between 2003 and 2007, which is perhaps most relevant to his bid for the presidency, was relatively poor.

Accentuate the negative

President Nicolas Sarkozy is reeling from the decision by Standard & Poor's (S&P) - which surprised no one - to downgrade France's AAA rating to AA+. This will make it even more difficult for him to get re-elected as president in the spring. In addition, S&P downgraded a further eight countries. Austria, Malta, Slovakia and Slovenia were downgraded one notch while Cyprus, Italy, Portugal and Spain were downgraded two notches. All except Slovakia were also put on negative outlook, which suggests more downgrades will probably follow.

The first casualty was the European Financial Stability Facility (EFSF), backstopped by France. S&P downgraded it by one notch from AAA. The consequence of this is that the EFSF will be forced either to pay higher premiums or to operate with more meagre funds at its disposal. The euro area is in a terrible mess.

I was much amused by the ridiculous comments by Michael Fuchs, deputy leader of the Christian Democratic Group in the German Bundestag, who said: "This step is out of order. S&P must stop playing politics . . . Why doesn't it act on the highly indebted United States or highly indebted Britain? . . . If the agency downgrades France, it should also downgrade Britain in order to be consistent."

The reason why this has not happened is simple. Like our own dear Chancellor, George Osborne, Angela Merkel and Sarkozy may not have a growth plan, but neither do they have a sensible monetary policy, as the UK does. It is their incompetence and dithering that is res­ponsible for the downgrades.

The failure of the EU-wide negotiations over the restructuring of Greek debt has raised even further the probability of a definitive Greek default in the next three months - and worse will flow from there.

The brave and the bold

What should we make of the important but rather defensive speech by the shadow chancellor, Ed Balls, to the Fabian Society on 14 January, in which he sought to persuade the public that Labour has a credible economic plan and deficit-reduction programme? Certainly the speech has enraged Labour's paymasters, the unions.

The crucial phrase that caused so much consternation in the media was this: "[We] cannot make any commitments now that the next Labour government will reverse tax rises or spending cuts."

However, Balls made a useful clarification a couple of sentences later: ". . . because we don't know how bad things will be on jobs, growth and the deficit".

This is not a policy reversal, as some have claimed; it simply provides greater flexibility. How could Balls make spending promises when there are so many risks to the downside for the public finances, and also risk a downgrade for the UK when the banks are still not lending? According to both the Ernst & Young Item Club and the Centre for Economics and Business Research forecasts published on 16 January, the UK economy has already entered recession, with little or no growth at all expected in 2012.

Yet what Balls should have been more clear and robust about is what can be done to spur growth, beyond slowing public spending cuts and his rather timid five-point plan. The UK government can borrow 30-year money at roughly 3 per cent, which represents a once-in-a-generation opportunity to borrow long at negative real interest rates and to use the money to invest in our crumbling infrastructure, with a powerful emphasis on job creation. Now that would be a bold plan.

Professor David Blanchflower is economics editor of the New Statesman