Reading this blog can make you rich! Honestly, your contributor invested in one of his own predictions and made a return of 20% in 48 hours.

All right, before this sounds too much like a scam, a few words of explanation are necessary. Having predicted consistently that President Obama will be re-elected, it seemed only ethical to follow the ancient principle of “put your money where your mouth is” and a fairly substantial sum was placed at the local bookies at 5-1 odds on. The low odds, far from being a turn-off, were the whole point: making relatively small margins on near-certainties is a far more effective strategy than betting at long odds.

It is in effect the strategy pursued by the bookies themselves – which is why the purpose of this post is not to encourage anyone to become a professional gambler but the complete opposite. It is all too easy for one successful punt to blind someone to the mathematical fact that, over time, the odds always lie heavily with the bookies.

It was noticeable that everyone in the betting shop – except your contributor of course – looked poor and depressed. Gambling is visibly not a short cut to wealth and happiness. Yet the gaming industry is thriving in recession because it offers the – illusory – hope to people who have no hope in anything else. One hears even experienced entrepreneurs saying “if I win the lottery” rather than “when my business succeeds”.

It is clearly in the interests of both the individual and the economy as a whole for people to apply their money, their attention, and their hopes to building viable businesses rather than to betting unproductively against the odds. Yet public policy encourages gambling and discourages economically-desirable enterprise. On-line “casinos”, targeted at the most vulnerable, are allowed to advertise on British television. Gamblers face none of the paperwork that demotivates entrepreneurs, and if they happen to win the tax regime favours them rather than entrepreneurs. It is a recipe for insanity.

Meanwhile, your contributor understands that his success this week was a one-off: Mr Obama’s re-election was so probable that Irish bookies Paddy Power started paying those who bet on him the day before the American people voted. Otherwise, he remembers what his old economics master said about gambling – “Never bet with money you can’t afford to lose ...cheerfully.”

The teacher counted the stock market as gambling. Your contributor still has “blue chip” Lloyds TSB share certificates to prove how right he was.

That America’s growth figures are better than Europe’s is hardly something about which anyone should boast. Europe is at least being forced to confront some underlying structural problems which America has yet to address. The US federal deficit is still out of control, but spending money on credit does generate the illusion of prosperity – an illusion people are reluctant to give up if they have nothing else.

Part of the problem is that this is election year and politicians of all parties have been even more wary than usual of anything that resembles decisive action. Yet it is difficult to see how things will improve after November.

Our New Year prediction that President Obama will be re-elected comfortably is now looking more solid than ever. Whatever one thinks of him in other respects, the net effect of this for business is No Change – if a President does any good at all, he usually does it in his first term. It is fair to say that the Obama Administration to date has not been driven by sympathy for small business. Right or wrong, its healthcare reforms have added to the burden on employers. The President himself has never run a business and his lack of understanding has come out in some recent comments. First he made the bizarre suggestion that everything was fine in the private sector, and then he seemed to pour scorn on the role of entrepreneurs in the success of their own businesses.

On paper, his opponent, Mitt Romney, has the perfect curriculum vitae. He has both a law degree and an MBA from Harvard, and a brilliant track record as a corporate recovery expert – just what America needs, one might think.

However, as we have often remarked before, there is a world of difference between good on paper and good in practice. Mr Romney is failing to convince. His selection of a leading House Republican as his running mate shows a lack of understanding of the public mood, which is strongly anti-Washington. He also missed the opportunity to show that his party is more than the exclusive preserve of middle-aged white males – it is not tokenism to say that, because Condoleeza Rice, Bobby Jindal, and Marco Rubio are all better qualified than the man he picked.

The ideal President would combine Mr Obama’s undoubted communications skills and Mr Romney’s undoubted business savvy. Does such a man exist – and how likely is it he would get a major party nomination if he did – or has the job of President, both Head of State and Head of Government, become too big for one man?     

A rather fatuous campaign to “Make the Banks Lend” is reminiscent of claims that a “capital strike” was undermining America’s recovery from the Great Depression in the 1930s. President Franklin D Roosevelt actually ordered a criminal investigation of the alleged conspiracy to withhold investment – which, predictably, found absolutely no evidence that such a thing existed.

The very notion of a “capital strike” shows a lack of understanding of the nature of money. There were and are no men in top hats hoarding piles of spare banknotes. Investment is all about confidence and credit and a careful calculation of risk and reward.

It was Roosevelt’s own policies of increasing both tax and national debt that discouraged investment. They reduced the amount of money available for investment in the private sector, and the government’s debt itself sucked up what credit there was. Risk was increased at the same that reward was reduced by taxing any profits that could be made.

FDR is often given credit for saving America from the Great Depression, but there is a lot of evidence to suggest that he prolonged it*. After all there have been about two dozen major crises in the 300 odd years of modern capitalism, but in most cases the markets showed remarkable powers of recovery: only the 1930s saw a whole decade of continuing and widespread suffering. There was a distinct and avoidable “double dip” recession under FDR.

Moreover, although direct comparisons are not as easy as they are today in our age of greater economic integration, the statistical evidence suggests that the American recovery in the 1930s was far more sluggish than that in other developed economies, including the UK. In the end, it was not FDR’s policies but war profiteering that dragged the USA out of the Depression – several years late. Given that unpleasant truth, no wonder most Americans would rather give the credit to Roosevelt.

All this history is important because President Obama models himself on FDR. He obviously sees clearly how FDR’s strategy of gesturing at taxing “the rich”, while spending massively on credit, led to political success. Does he appreciate the economic price of that strategy? If so, does he have the strength of character to resist it? Will his response to this week’s “super committee” proposals – or lack thereof – be principles or politics?

*NOTE: in the interests of partisan fairness we should point out that the Great Depression was itself caused, at least in part, by the foolish imposition of tariffs by the previous Republican Administration. Roosevelt – to his credit – opposed those tariffs at the time, but did not reverse them later when he was in power.

It is with great reluctance that we must disagree with Warren Buffett, a man we admire and whose opinions we respect. But, one of the things we like about him is that he admits that he is not infallible.

He recently said that wealthy people like him should pay higher taxes. A group of the European “super-rich” said the same thing.

The obvious response is to say that, if they feel they are not paying enough, no one is stopping them making a voluntary contribution to the state. There is a precedent: the British Conservative MP, and later Prime Minister, Stanley Baldwin once donated a considerable portion of his own wealth to reduce the national debt in the hope that others would follow his example. Few did. There is no record of a similar gesture in the nine decades since then.

A more considered response is to acknowledge that Buffett made at least one good point: it is indeed absurd that our complex tax systems allow the “super-rich” to pay lower marginal rates than middle- or lower-earners. The solution, however, is not higher taxes on the rich but a flat rate tax system, ideally one integrated with the benefits system.

It must also be acknowledged that, although many “champagne socialists” are hypocritical in calling for higher taxes while paying as little as they can, no one can accuse Mr Buffett of such hypocrisy, because he is a great philanthropist.

Indeed, the correct response to Buffett is to appeal to his patriotism: “Mr Buffett, who is more likely to invest your money efficiently, you, with your track record of sensible investment over decades which earned that money in the first place, or the spendthrift US government, which is so incompetent with money that it just lost its credit rating?”

If America is to recover, it must invest in viable businesses. Private sector investment is almost invariably more efficient than public. The pool of surplus wealth held by the “super-rich” is therefore a more effective engine of recovery than the government. Some of this wealth may be wasted through personal extravagance, but very few wealthy individuals waste as much of their own money as our governments waste of ours.

For this reason – as well as for the incentive to generate more wealth – a group of British economists are right to suggest that a cut in higher rate tax would benefit the economy. That said, an even more efficient way of boosting productivity would be to cut taxes that increase the costs of doing business, such as payroll taxes and business property taxes, rather than taxes on the profits of business. President Obama is therefore right to emphasise cutting payroll taxes as the best short cut to new jobs – subject, of course, to the reminder that the debt crisis is still with us.

When it comes to political parties, this blog has a certain instinctive sympathy with the words Shakespeare put into the mouth of a man dying in a pointless faction fight: “A plague on both your houses!”

So we are not being partisan, merely stating an objectively verifiable fact, when we say that much of what is called, rather optimistically, the “business community” does not feel that it has received much sympathy and understanding from the current White House. At the same time, the Obama Administration is frustrated by the slow pace of job generation by the private sector.

These two facts are obviously connected.

However, following his party’s defeat in November’s Congressional elections, the President has expressed a desire to build some bridges. He held a high-profile meeting with 20 selected CEOs, supposedly representing that elusive “business community”. He also agreed with his Republican opponents a compromise on extending Bush-era tax cuts which has now passed the Senate.

So far, so good, but only time will tell if this represents a real change of direction. The CEO meeting was obviously cosmetic, with the President urging the businessmen to invest their surplus money without giving them any new reason to do so. Needless to say, small business was not represented at the meeting.

Meanwhile, with far more fanfare, the same Obama Administration has initiated massive litigation against BP, suing them for just about everything imaginable over the Gulf oil spill. BP certainly ought to be (and is) paying compensation to a lot of people, but endangering a legitimate business by claiming unlimited damages is all about politics, not justice.

The Federal Government is responding to, perhaps even stirring up the same lynch mob mentality we noted in our previous post, on the Madoff case. In doing that, it is also distracting attention from its own culpability in the Gulf disaster. It is particularly hypocritical that the lawsuit blames BP for not using the latest equipment – since when has the Government ever done that?

The message is clear: the Administration is backing business – except when it’s not.

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.

Businesses around the world – not just in America – are concerned about the continuing listlessness of the US economy.

This is one area where “Change” really is necessary. Yet Tuesday’s elections exposed how vacuous that word has become. It was Barack Obama’s slogan in 2008 – but this year it was the Republicans who were using it. Of course, what Mr Obama meant by “Change” and what the Republicans mean by the same word are two very different things, but what really matters to those of us who have to deal with the practical consequences is that major change of any sort is unlikely for the next two years.

Here are the hard facts. If the Republicans, who now control the House of Representatives, try to implement their idea of “Change”, it will be squashed by President Obama, who has power of veto, and by his Democratic allies who still control the Senate. If, on the other hand, Mr Obama still wants to push his own idea of “Change”, it is most unlikely to get through the Republican House.

It would be nice to think that this might encourage Mr Obama and the Republicans to work together for the common good. President Reagan was often able to charm Democratic Congressmen to vote his way in the 1980s, and President Clinton worked well with the Republicans on deficit reduction and welfare reform in the 1990s. However, there is little inter-party goodwill left in Washington these days. Whatever the rights and wrongs of the way Mr Obama rammed healthcare reform through Congress, it left him with no friends on the Republican side.

The irony is that all this might help Mr Obama. President Clinton faced a similar situation in 1994: after a disastrous start to his Administration, he lost control of Congress to the Republicans – and thereby saved his Presidency. A hostile Congress forced him to the political centre – where his Administration became more successful – while simultaneously giving him someone to blame. His party’s defeat in 1994 led directly to his own re-election in 1996.

Tuesday’s result has therefore made Mr Obama’s re-election more likely in 2012. However, unless he comes to a second term with a new economic agenda, real “Change” will be delayed for another four years. In the meantime, America’s enterprise culture will probably deliver a degree of recovery – in spite of the government rather than because of it: at least the squabbling among the politicians will mean they will have less chance to make things worse. However, all that time America will be losing her competitiveness, and the shift of global economic power across the Pacific will continue.