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In today’s issue:

Have you ever wondered why Labour and the Conservatives can’t get a grip on immigration? However you feel about the issue itself, politicians’ inability to deliver on their promises is bewildering.

Cutting immigration is an obvious election winner. And easily achievable. Surely high immigration is less important to politicians than their own career…?

But, apparently, it isn’t. Government after government promises a crackdown. And then delivers the opposite. Migration takes off. Voters get angry. And the government gets fired.

It’s happening right around the developed world, too. From New Zealand to Canada.

It’s not until the real right-wing gets into power that the migration flows are finally stopped… sometimes.

It’s easy to presume that our leaders don’t know or don’t care about what’s going on. But what if they know something we don’t?

Why are they willing to sacrifice their careers in pursuit of immigration?

Just over a week ago, we finally got the answer.

Strangely enough, it’s the East Germans who have figured it out first.

Two East German states had an election. The anti-immigration AfD won in Thuringia and came a close second in the other. It’s created a pair of hung parliaments, because nobody is willing to work with the right wing.

Apparently, immigration was the dominant campaign issue. And the East Germans voted to keep foreigners out. Ironic given it used to require a wall to keep the East Germans in…

You can say what you like about Germany’s bizarre immigration policy…or lack of it. And the stupid politicians who make themselves so unpopular. But at least the immigration debate in Germany is an honest one…

Why immigration must get out of control, deliberately

In most Western countries, the government at least promises to cut unsustainable levels of immigration. In Germany… not so much.

Instead, the German media and intelligentsia openly ridicule voters for their anti-immigration stance.

The local medium sized and often family-owned businesses of the German Mittelstand even organised an anti-AfD campaign. Its motto? “Made in Germany, made by Vielfalt,” which means “diversity”.

To be clear, this is immigration for its own sake – for the sake of diversity.

But that’s not the real reason. This comment printed in the Financial Times was a bit more direct:

[The German Family Business Association president] pointed to the negative demographic trends that were threatening the regional economy, with Thuringia due to lose 385,000 of its 1mn-strong workforce in the next 10 years. “The danger is that one in four jobs can no longer be filled,” she said.

This seems like odd maths to me. But the point they’re trying to make still stands.

Germany faces demographic doom. It needs more people to fill its workplaces. Immigration is the only way to save German business… from having to invest in productivity-enhancing machinery like robots and AI.

As the Guardian pointed out last week, “The German problem? It’s an analogue country in a digital world.” The country has underinvested in tech for years. Here’s one example from the Guardian article:

Another is that Germany is nowhere when it comes to exploiting the possibilities of AI. The US and the UK have 5.22 AI startups for each 100,000 inhabitants; Germany has 1.9.

In my experience, the Germans are quite proud that 82% of businesses use fax machines. Unions are strong and often collaborative with big business to maintain the status quo of labour-intensive operations.

It’s all incredibly… inefficient. And efficiency is what really matters to living standards.

Productivity is the sole determinant of prosperity

There are only two ways to grow an economy. More people, or more output per person. Given how slow demographics operate relative to the election cycle, we call the first immigration. The second is known as productivity.

But what is productivity? How do you produce more with the same amount of people?

That’s simple. Technology and capital investment that make workers produce more per hour.

In refusing to improve productivity by sticking to their outdated business practices, the Germans are naturally resorting to the alternative method of growing the economy – immigration.

Their mistake is that adding people doesn’t necessarily make us wealthier per person – what we actually care about.

A new academic paper called “The Wealth of Working Nations” has put a very interesting spin on this.

A lost decade?

Japan has long been the posterchild of demographic doom. The economy can’t get off the ground because the population is falling. A bit like it will in East Germany.

Japan is held up as the reason why Germany must import Labour – to keep the economy growing. They don’t want a lost decade like Japan.

But what about GDP per capita? Even by that measure, the Japanese economy has done poorly. This implies that demographic decline really is bad.

But hold on a moment, say the authors of the new paper. GDP per capita is quite a specific measure. It includes retirees, who no longer work. Their productivity is zero.

What if we measure GDP per person working age instead?

This chart from the paper shows a shocking result. Yes, Japanese GDP has performed poorly. And GDP per capita has grown, but it didn’t keep up with Western Europe, let alone the US.

But in terms of GDP per worker, Japan is doing well – right in the middle of the G7 pack.

Japanese workers have kept up with their G7 competitors just fine. It’s the retirees who are making the Japanese economy look bad. But it only looks bad because of how it is measured.

The point is that it is the productivity of the worker that determines national wealth. Including retirees botches the analysis.

And productivity comes down to technology, capital investment and a lack of regulation. None of which Germany is performing well on.

In the AfD, the people of Thuringia voted for the party that has radical market-oriented policies in economics and an anti-immigration stance. They are rejecting massaging GDP with immigration in favour of boosting GDP per worker with productivity. It’s the Japanese way that has delivered deceptively decent economic performance.

By the way, my old friend Sam Volkering reckons we are on the cusp of a revolution in productivity. We’re talking a bigger boost to business efficiency than upgrading the Germans from using their fax machines.

Some businesses will prosper. Others fall by the wayside. It’s up to us to figure out where your money should be. That’s what Sam has done for you here.

But before you go, the German intelligentsia may have a point…

Why the economy must grow

While GDP per capita is what we really care about – the measure of our actual living standards – there is an additional factor to consider.

Our national debt doesn’t care how rich we are per capita. It cares about the total tax take and GDP.

Germany, and most other Western countries, need immigrants to keep the economy and tax base growing in order to keep the national debt affordable.

That’s what our politicians know, which most voters don’t understand. It’s why “Treasury” is cited by former cabinet ministers as opposing any immigration cuts, even if the party promised them.

They are using immigration to cover up decades of their own financial mismanagement.

Unfortunately, their plan to get the country out of this mess is even worse than immigration or austerity. It could destroy the value of your savings, unless you prepare.

The big question now is whether we can find some sort of technological boost that’ll make us all more productive. If we fail to offset the effect of demographic decline on GDP, we could be headed for a debt crisis.

Until next time,

Nick Hubble
Editor, Fortune & Freedom