Friday, October 11, 2013

Economic Arguments on Airstrip One

Airstrip One, formerly known as United Kingdom, is headed towards political and economical irrelevance. British industrial products are for the most part nothing but the bread crumbs left over by important countries like the US, Germany, and India. All that seems to be left is the banking sector. Still economists and government officials argue as if the Island and a third still had some relevance. As if it mattered if they went for austerity or not. The small state doctrine has turned Britain into what it is today Still conservative journalists live in some kind of fantasy empire, and tend to blame immigrants (Jeremy Warner, Telegraph) for bad productivity performance. But there are only a few industrial bright spots left; and those are in part not even British anymore.

Let's look at Mini. The production is based in Oxford, but the exterior design of the newest Mini was done in Munich. The engines were developed by IAV (50 % owned by VW - Berlin) for both PSA and BMW. It isn't that much of a British car anymore. What happens if we increase productivity? Well, first we will need new robots, which are designed and built by KUKA in Augsburg (Bavaria), then these need to be programmed, which is done by Sandmair in Friedberg (Bavaria), and workers might be fired, which will happen in Oxford (England). If done right, we should see higher profits for BMW in Munich (you guessed it Bavaria). So even though I agree with the premise that low wages hinder the productivity performance (though I wouldn't blame immigrants), I fail at trying to comprehend how a better performance could help Britain in any meaningful way. Don't get me wrong, I am all for making Bavarian industry and engineering even stronger, it's just a bit strange that the Telegraph does so, too, at the expense of the country they publish in.

Now, Britain does not only "export" German and American/German cars. Rolls Royce Group PLC, for example, produces aircraft engines. But the problem remains largely the same. Increasing productivity at RR means that German, French and American companies profit: Demag (German) will produce the cranes, ACB (French) the furnaces (for the internal high pressure forming), Yaskawa Motoman (American/Japanese) and Kuka (German) the robots. Britain just isn't relevant at all when it comes to automation. Even if the only remaining "British"(it actually isn't) car manufacturer Jaguar Land Rover has little choice but to use German, French, American, or Japanese technology if they want to improve their productivity. For example, they can either use CatiaV5 (basically all car manufacturers are using this program) or V6 (French) or SiemensNX (German) for their engineering CAD software. Newer version might improve productivity, but we aren't talking about Photoshop here, a license can cost easily over €35,000 plus a four figure sum p.a.. That is money that has no choice but to leave Britain.

The British prime minister Cameron seems to believe, that Jaguar Land Rover is producing "world beating cars".  Last year they sold 357,773 cars. Today even 15 percent more from January to August compared to the same previous period. In August they sold almost 28,000 vehicles. Really the whole "world beating" company sold almost as many cars total as BMW sold the 5 series alone. Of course, Mr. Cameron also neglected to mention that this pretty successful company isn't British. In fact, it is owned by the Indian Tata Motors, who have managed to turn things around.

[In the interview he also talked about a referendum about leaving the EU. Some time in the future. Why not now Mr. Cameron? Really, why don't you just leave now? There is no upside to Britain - or at that point possibly England and Wales, since not even the Scottish want to be in a union with England - being in the EU.]

The choice to walk the path to complete irrelevance was made in 1979. Instead of trying to get manufacturing going again, Thatcher decided to deregulate finance; and pick a fight with unions, which she might have won, but the battle for a a strong industrial sector had been lost at the end of her reign as prime minister. Today, there are a few industrial bright spots left but most of Britain's biggest companies are in finance (6 of the top 10), some are in mining or oil. In fact, most Europeans will have a hard time naming any British product, which they are interested in (the result will probably be that they name either BMW[Rolls Royce cars, Mini], VW[Bentley]).

Today, Britain has maneuvered itself into a corner, with no way to escape. If the euro breaks up then most banks in the EU will be wiped out. Germany, France and even Italy would still have a strong manufacturing sector. Within a few years the countries could get back on their feet. Britain? Well, Rolls Royce PLC would still employ a few thousand people, and Britain has some oil left. That's about it. Even when we assume that the euro survives, then the British economic model of faking growth by increasing bank leverage, money laundering, screwing over everybody else with Libor, is pretty much doomed, at least it should be.

Still, the argument is about austerity or not. Why? The whole economic model is not sustainable. Incompetent leadership has turned the country which was first to experience the industrial revolution into a state which is almost completely dependent on the financial sector. The biggest bully in town has become an old man completely dependent on others. Why should it matter if Britain increases productivity? This house on the cliff will soon be the wreckage on the rocks.

If you are still interested in which side won the austerity debate: The austerity is not expansionary side won of course; and people like Britain's prime minister aren't telling the truth. GDP per head, real wages, disposable income all look awful. Industrial production is still 3 percent below the level of 2010. Germany did not go for austerity, and here industrial production is 4 percent above the level of 2010 (but not looking all that good either). Or let's compare industrial production in the US to Britain. Britain had a single good month and that in the mind of the austerians proves that austerity works?! Britain's conservatives have once again damaged industry in Britain; and the voters are letting them get away with it.

Here is a rather funny explanation of austerity and why the austerians think they won: The King Who Disliked the Letter G.

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