Barack Obama looks at a portrait of James Madison

Two hopeful signs in the last week actually illustrate the political obstacles to sorting out America’s moribund economy.

President Obama negotiated a deal with Republican leaders in Congress to extend Bush-era tax cuts, while a bipartisan commission on deficits set up by the President agreed to support some good ideas.

Tax cuts and deficit reduction would certainly help the economy in their own right, but their real significance would be that they would show that the US government has an agreed and stable policy in which investors and entrepreneurs could have confidence for the next few years.

Alas, that seems unlikely in practice. The price of extending the tax cuts is extending unemployment benefits – a political necessity but one which goes against the other objective, of cutting the deficit. The deficit reduction plan itself looks like a dead letter.

The problem is the way the US Congress works. This is a simplification, but in most other countries, the legislatures simply vote “Yes” or “No” on spending requests put forward by their governments; in the USA, individual legislators, Senators and Congressmen, can put their own spending proposals to the vote. They have every incentive to do so: spending someone else’s money, especially in their own home State or District, buys votes. They also have every incentive to help each other: Senator X will support Senator Y’s spending proposal because he needs Y’s support for his own.

No one has any incentive to be financially responsible. In other developed nations, that responsibility rests clearly with the government, the executive, and the legislature serves only as a check, but in America the legislature takes the initiative – and takes the country in several different directions at once.

This problem is rooted in America’s Constitution. When an idealistic bunch of lawyers, James Madison and Co, drafted the Constitution in the 1780s, the young Republic was a decentralised, mainly agrarian, confederation, with no idea what the future might hold. The main concern was to appear democratic and avoid strong centralised power or anything that resembled monarchy. The world has changed dramatically since then – and strong centralised power has developed by default to cope with it – but the Constitution has not changed to reflect that.

Nor is it likely to change: Americans revere their Constitution – but every businessman knows that you cannot run a major 21^st Century organisation with an 18^th Century management structure.

German business confidence is high. The country that gave us the Wirtschaftswunder, the original post-War “economic miracle”, may be Europe’s best hope for the future.

Perhaps the real miracle is that the Germans are so optimistic, given Germany’s underlying problems. The labour market is still over-regulated and Germany’s welfare state ensures that salaries are a relatively small proportion of the costs of employing people there. Germany is also the cornerstone of the ailing single European currency, and will almost certainly be presented with the bills for bailing out a succession of less disciplined countries in the near future.

Nevertheless, Germany has definitely retaken her traditional position as Europe’s most competitive economy – after losing it, briefly, to the UK in the mid-1990s. Other nations would do well to study the reasons for this...

1              Fiscal Discipline. Two years ago, German politicians from both sides of the political spectrum were united in their contempt for British and American plans to spend their way out of recession. Instead, they followed their own strict austerity programme. The result: Germany was out of recession before the UK and the USA, and is now two years ahead on the road to recovery.

2              Technology. Germany defies the decline of European industrial competitiveness thanks to a national obsession with constant technical innovation and precision. The Germans accept they cannot compete with the developing world on price and instead dedicate their whole economy to competing on quality. In Germany engineers have more status than lawyers – if only America could say the same!

3              Education. German Universities may not be as trendy as the American Ivy League or British Russell Group, but the German secondary education system is one of the best in the world, and their commitment to technical education is, predictably, given the national obsession, unsurpassed. A general population who are literate, numerate, comfortable in foreign languages, and technically skilled provides a better pool of potential entrepreneurs and key workers than a surplus of academic degrees.

4              Reputation. The emphasis on technical quality pays off. The German brand name is as strong as ever. Success builds success.