Flattery will get you everywhere

“And your large speeches may your deeds approve,

That good effects may spring from words of love.” (King Lear)

Whether we ordered it or not, chaos is back on the menu. The returning diet of negotiation 101s seasoned with the occasional real estate pitch has an aim. In the mind of the purveyors, the result will be sweeter deals than could have been struck using the traditional diplomatic toolkit. Those with longer memories may sense the tang of President Nixon’s infamous ‘madman theory’, repurposed to force better terms of trade for America.

Mutually Assured Destruction (MAD)

The idea that unpredictability is an asset to a leader predates President Nixon of course. In a game of chicken, who wants to go up against the madman who has thrown the steering wheel out of the window? However, following the 1945 atomic flash in the Jornada del Muerto desert and devastation of Nagasaki and Hiroshima, this well-worn negotiation tactic acquired more potent significance.

In October 1969, President Nixon put the theory to the test. He ordered nuclear alert, loaded up 18 B-52 bombers with nuclear warheads and aimed them at the Soviet Union’s eastern border. The intention was not to start war, but to convince the Soviets and North Vietnamese that the President was crazy enough to do anything to end the war in Vietnam.

In his own words, relayed by his aide H.R. Haldeman – “We’ll just slip the word to them that, ‘for God’s sake, you know Nixon is obsessed about communism. We can’t restrain him when he is angry – and he has his hand on the nuclear button’ – and Ho Chi Minh himself will be in Paris in two days begging for peace.”¹

The elaborate (and jaw-droppingly dangerous) plan didn’t work – neither the North Vietnamese nor Soviets rushed to the negotiating table and the war in Vietnam raged for four further years. President Nixon did achieve substantial victories in the foreign policy sphere, but using more traditional tools of diplomacy. President Nixon’s experience is consistent with studies analysing the success rate of leaders using a reputation for madness (feigned or otherwise) to coerce.²

Much to lose...

If history suggests unreliable upside from this cultivated chaos, is there a downside? Here again, the message from history is not reassuring. Stable and predictable background institutions are part of the recipe that allows the ‘chaos’ of innovation and creative destruction to flourish in the private sector, where the action needs to be.

As succinctly observed by economist Brian Albrecht, “Economic prosperity doesn’t require perfect policies, but it does require stable ones. A predictable, rule-based framework is what allows businesses to invest, workers to plan, and markets to function. Without it, we get paralysis, waste and stagnation”.³

Some would point to the recent experience of the UK as a perfect test case. In the last 17 years, there have been almost as many industrial policies. The wrestles with our international trading relationships, even the make-up of the union amidst a merry-go-round of leaders, cabinet members and the rest can be linked to a particularly subdued trend in private sector investment.

This is again consistent with the findings of the literature. Policy instability drags through many different channels, but it is the investment piece that sticks out. Making an investment in an economy, from data centre to factory to call centre, requires whatever visibility a country can muster as an offset to the many unknowable aspects of the future. Stable access to talent, markets, finance and predictable regulatory-compliance costs among other factors are central to the investment picture.

It may be that the opportunity set provided by a particularly juicy technological frontier at the moment could provide an offset to this Oval Office-imposed uncertainty tax. However, we are probably wise to assume that all of this action will be a net negative for a still ebullient US economy.

And the UK…

For its part, the Bank of England did as predicted this week, cutting policy rates to 4.5%. The message on the UK remains very similar. The doomers are likely too sure that the recent past is prologue. Some stability in the policy sphere, as hinted at by the industrial policy consultation Invest 2035⁴, alongside a more attractive opportunity set for businesses (see the US economy’s productivity pick-up), suggests a return to post-war pre-Great Financial Crisis growth rates should not be ruled out.