9 December 2019

Why Keynes would want us to ‘get Brexit done’


“Cupid’s darts will fly once we get Brexit done. Romance will bloom across the whole nation.”

Though you may not share Boris Johnson’s confident weekend prediction of a post-Brexit baby boom, the Prime Minister is on the money when it comes to the economic benefits of ‘getting Brexit done’.

For whatever your views on the whys and wherefores of his withdrawal deal, many informed people now believe that simply resolving the UK’s status one way or another will give the economy a much needed shot in the arm after three years of Brexit purgatory.

The investment bankers at Goldman Sachs are predicting an uplift in 2020, while private equity firm Warburg Pincus talks of a “deal bonanza” if Johnson’s deal goes through.

All of this reflects one of John Maynard Keynes’ major insights. Simply put, uncertainty is damaging to an economy. Business investment is the most variable of the GDP components. How much investment we get is driven by what Keynes called the “animal spirits” of businesspeople, which in turn drive the business cycle itself. One of the great killers of those spirits, and thus of the investment that drives the cycle, is bad economic policy. But uncertainty over what that policy is going to be also dents confidence and economic activity.

It is therefore entirely possible to insist that Brexit is a bad economic idea, but acknowledge that the uncertainty over whether it’s going to happen, or the terms under which it will, is also damaging. At some point the uncertainty – being cumulative – becomes more damaging than the action itself. The argument being made by some observers is that we are now past that point.

It’s not just Brexit causing uncertainty, of course. Jeremy Corbyn’s intention to nationalise everything that isn’t nailed down would have a dramatic chilling effect in investment. Why put your money in, after all, if you risk the state snaffling your asset? But just as bad as Labour’s raft of dire economic policies is their insistence on another EU referendum, perpetuating the uncertainty that is holding back the economy.

And we can already see the effect that even the prospect of resolution is having on the markets. The Tories’ decent-sized poll lead has seen the pound rise in recent days, despite the standard models insisting that sterling will fall when we leave the EU. After all, we’re going to move to a different, probably worse, set of trading terms with our closest neighbours. The normal currency reaction to that is to decline. This is why sterling has declined over the past three and a half years.

And yet now we come close to a high probability of it actually happening it rises again. Why? Because that uncertainty is taken to be more damaging than the act itself. Or, perhaps, the cumulative effect of three and a half years of uncertainty is more damaging than the actual change in trading terms itself may end up being.

Now, as a former Ukip press officer I can admit to being horribly biased on all this, but note that the above argument holds for whether the decision is to not have Brexit at all as much as to insist on doing it in January. In that sense, a Liberal Democrat victory followed by revoking Article 50 should also lead to an upturn in our fortunes purely by dint of decisively resolving the issue (though thankfully that prospect is vanishingly unlikely).

Whatever my own – or your – desires for the decision,.it simply has to be taken and taken now. The economy will benefit from doing so whatever the actual answer is. And if you don’t believe me, just ask John Maynard Keynes.

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Tim Worstall works for the Continental Telegraph and the Adam Smith Institute