Boris Johnson’s Gamble Will Fail

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by Paolo von Schirach – 

WASHINGTON – Boris Johnson won the UK political elections –in a most spectacular way. Indeed, it seems that his new version of British Conservatism cum Populism upended British politics. Old Labour Party bastions located primarily in the North of England fell, this way transforming the British political map. Congratulations on this splendid and unanticipated performance. This is the good news.

The bad news

And now, for the bad news. Johnson won by shamelessly over promising almost everything to everybody. There will be Brexit, of course, and this was baked in the cake anyway. But Brexit, according to Johnson, will not cause any pain or discomfort to the UK –a country that does most of its business with the European Union. On the contrary, we are told that Brexit will be a salutary tonic. It will unleash the long dormant British creative spirit. It will trigger a new wave of innovation and entrepreneurship, this way unleashing unprecedented prosperity for the British people. This fantasy land proposition is credible only if you believe in miracles.

Well, the truth is that this uplifting vision is not just uncertain, it is in fact a most improbable dream, simply because Britain today (in case you missed this) is no longer the mythologized Great Britain that pioneered the industrial revolution. Today’s Britain is a sleepy country where not much happens, except for a few islands of innovation. So, please forget about creating –almost overnight– Singapore-on-the-Thames, once the ties with the EU have been cut.

Delivering growth to the North

But the real problem for Johnson will be delivering a tangible level of new, top-down development and attendant prosperity to the Labor bastions in the semi-impoverished North of England that decided to give him a chance by switching sides and dumping the Labor Party, at least for now. In order to lure them to his re-engineered Conservative-Populist camp, Johnson deliberately promised all sorts of goodies: better health care, better public education, better transportation systems, and more money for all sorts of services.

So, there you have it. Johnson promises a smooth and painless exit from the EU, robust growth caused by new investments in productive enterprises, (this is absolutely necessary in order to get the extra revenue to pay for at least some of the infrastructure and social services he promised), and new prosperity and security for the neglected British working class. And all of this between now and the next elections in five years!

It will not happen

Without getting into too many details, it is clear that this is not going to happen, at least not between now and the next elections. Common sense and the long record of mixed results –at best– for welfare policies and top-down government-led investments indicate that profligate spending, after the initial sugar high, does not change any of the pre-existing negative fundamentals. Indeed, the only measurable change will be widening budget deficits. And this will create pressure down the line to increase interest rates in order to attract buyers for the growing national debt.

Jump-starting a sleepy economy?

As for the otherwise noble goal of restarting the economy and aspiring to remake Great Britain into a dynamic global hub of innovation and enterprise, the only thing I can say is: “Good Luck”. Mountains of evidence indicate that genuine entrepreneurship, (as opposed to subsidized half-baked efforts), cannot be willed into place by well-meaning governments relying mostly on cheap credit, tax holidays, incubators, or other gimmicks.

Create a business friendly eco-system

The best that a government can do to stimulate innovation is to create and sustain a credible business friendly ecosystem: reasonably low taxes, good education institutions, including at least some top notch research universities, robust IP protection, easy to understand laws, reliable dispute resolution mechanisms, healthy financial markets, well-funded venture capital firms, and reliable state of the art infrastructure. And these –mind you– are just preconditions. Indispensable preconditions, but only preconditions. Indeed, while absolutely necessary, having them in place and functioning gives you a chance to compete; but they are by no means a guarantee of success.

I wish that Johnson’s optimism could be truly contagious. I wish he could inspire would-be innovators to innovate and –most critically– bring to market commercially viable new products and services. I just do not think this will happen, at least not between now and the next elections, and on the scale that would be necessary to transform in a meaningful way this aged developed country that lost its spirit of discovery and adventure a long time ago.

Big programs will cost real money

That said, while future growth is aspirational, the promises made to the new former Labour and now Conservative voters are real. If Johnson wants to consolidate his newly broadened electoral base, he will have to deliver. And this will cost real –not hypothetical– money. Extra money that the British Treasury does not have. And this inevitably means higher deficits and more debt.

Of course, for many “progressive” economists (strange adjective indeed!),  all this –higher deficits and a swelling national debt—seems perfectly alright. Indeed, looking at the rest of Europe, the US and Japan, it is clear that these days more spending and bigger government programs benefiting retirees or other deserving constituencies, all of them financed with more borrowing, are the norm.

Most Western governments –and the UK is no exception– are now defying gravity, or so it seems. They keep borrowing in order to finance bigger entitlements, while the monetary authorities keep interest rates at zero, this way making it easier to finance larger deficits, while –so far at least– there is practically no inflation. These policies once were called lunacy inevitably leading to fiscal disaster. Today, they are main stream. Well, truth be told, so far no catastrophe ensued. Or at least this is what appears.

Atrophy is here

My contention is that whatever else may happen down the line (in the UK and elsewhere) when the debt burden will become unsustainable, a real (albeit silent) catastrophe has already happened: and it is called atrophy.

This is not about the apocalypse, about countries going down in flames convulsed by the pain and despair of bankruptcy. This is about becoming comfortable with the new normal of anemic growth, or no growth at all, as long as the government keeps doling out some subsidies relying on borrowed money to all deserving constituencies.

This is about redirecting increasing percentages of static tax revenue away from productive investments and on to more public services and debt service. As this process continues, eventually there will be zero money to invest in future growth. In a word, this is about secular stagnation. However, since this most insidious phenomenon manifests itself only slowly and incrementally, it is easy to explain it away, or ignore it altogether.

I wish Prime Minister Boris Johnson best of luck. Still, I am quite skeptical about his ability to deliver innovation, growth, prosperity, and more entitlements –and all of it within the next 5 years.

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