mainly macro: Populism and Economic Prosperity

 

Mainstream political
parties normally claim that populist parties, if they ever got to
power, would damage the economy. We have clear evidence that they are
right, and right in a big way. A
paper in the American Economic Review (one of the top
economics journals) published nearly two years ago, looked at the
macroeconomic consequences of populist regimes coming to power. The
results can be summed up in the chart below (from this working
paper version)

The black line is
the average difference between GDP under a populist government
compared to a counterfactual GDP without the populist government. If
the populist government was in power for 15 years, GDP would be over
10% lower as a result of that government. I have used the analysis
for right wing populists: for a similar chart for all populists see
the paper, or this
useful summary by Joel Suss in the FT.

There are obviously
countless issues in any analysis of this type, like how a populist
government is defined, how you do the counterfactual, how you ensure
you are not getting reverse causality (i.e. bad economic times
encourage the election of populists etc) and so on. For those
interested in those issues the paper is very readable.

The UK is part of
this data set, because it rightly labels the Johnson government as
populist. We know that the Johnson government reduced UK GDP because
of Brexit, by a total of 4% according to the OBR. But the UK’s
response to the pandemic was also pretty bad in large part because of
the Johnson government. So our own national experience is consistent
with the chart above.

Besides GDP, the
paper also finds that debt to GDP increases under a populist
government, and there is weaker evidence that inflation also
increases. The reasons why GDP falls under a populist government are
only touched on in the paper, but they are pretty obvious. First,
populist governments tend to restrict overseas trade: Brexit, and
Trump’s tariffs, are clear examples. Putting barriers up that make
overseas trade more difficult reduces GDP. The paper provides average
effects for the impact of populism on trade, but it is more useful to
look at the specific measures imposed by a particular populist
government.

A second reason
populist governments reduce GDP is that they make their countries
less open to people from overseas, as well as goods from overseas.
Populist governments tend to weaken an independent judicial system,
and that among other things weakens the confidence of business to
invest. Our current vintage of right wing populists appear very
hostile to academia, and academia is where innovation starts, and
where the expertise to implement innovation often comes from.
Populists tend to devalue expertise, which allows them to make
unrealistic promises on tax and spending, creating budgetary
problems. I could go on with specifics, but more generally, societies where one part is
‘othered’ or declared the enemy within tend to work less well
than those that are more unified. Societies where the governing elite
is mainly concerned with making money at other people’s expense work less well
than societies where innovation is the key to becoming wealthy. [1]

One obvious question
is why, if the macroeconomic impact of populist governments is so
bad, they don’t get voted out of power quite quickly. Unfortunately
they generally don’t. The paper estimates that on average populist
governments tend to stay in power longer than other governments.
There are two reasons for this depressing result. First, populists
rig the democratic system to make their re-election more likely,
either directly through gerrymandering for example or by restrictions
on press freedom. Second, the social and economic reasons for the
rise in populism tend to be persistent.

The topic of our
time is why today we are seeing such a rise in right wing populism, populism that
all too easily morphs into forms of fascism. It is of course
important to understand why some groups of people are more receptive
to populist messages than others. But in understanding why now is
different from previous post-war decades, I don’t think that is
where we should focus. In the UK, for example, the BNP has always had
support, and racism used to be much more prevalent. What has changed
over the last few decades is
the attitude of the political and media elites.

When I started this
blog, it was the early period of UK austerity and I was obsessed with
how a UK government could disregard basic macroeconomics (don’t cut
spending in a demand deficient recession where interest rates have
hit their floor), but also why that policy was popular despite its
disregard for what every first year economics student is taught. I
talked a bit about the
transmission mechanism between academic knowledge and
policy, and how that mechanism can break down or be disrupted.
Periods where expertise was ignored or contested could still then be
considered undesirable departures from an accepted norm.

Of course since then
we have had Brexit, which was another case where this breakdown
occurred with devastating consequences for the UK economy.
Unfortunately today political parties ignoring academic expertise has
become routine. In the US we now have an administration that actively
contests expertise not just in economics, but in climate science and
medicine. I and many others have written extensively on how the
media, owned by self-interested members of the plutocracy or run by
their lackies, can not just ignore academic expertise but through
propaganda counteract any influence it might have. [2]

For those who still
doubt the critical role the media can play in all this just look at
what has happened and is happening in the US. The biggest social media company
bought up by someone who thinks Farage isn’t right wing enough for
the UK, and who has changed that company so that it promotes the far
right. US media that isn’t already owned by plutocrats who support
Trump
is being bought up by them. A media that once could be
described as manufacturing consent is being turned into a propaganda
machine for the Republicans and Trump. You can see the same processes
starting in the UK. As Professor Emily Bell puts
it in this fascinating discussion, “the patterns are
almost exactly the same” in the UK and US.

The information and
knowledge that populism severely damages the economy is there and is
in the public domain, but the media increasingly acts to hide that
from the public or distort that information so that much of the
public never gets to understand it. Reality tends to win out in the
end because it’s hard to disguise what is happening to people’s
incomes, which is why Brexit is now much less popular than it was,
but societies are increasingly losing their ability to avoid these
pitfalls in advance. The reason this is happening is because a
significant number of the ridiculously rich have
decided their interests are served by promoting
populism, and by investing in the means to promote populism.

[1] More
speculatively, as right wing populists often appeal to a rose
coloured view of the past as something to return to, it is not
surprising that they enact policies that take society backwards.
There also seems to be an aversion against current sacrifice for
future gain.

[2] It is sometimes
claimed that those voting for populists don’t care about negative
economic effects. I think this may be true for a minority, but is not
true for most. Those who voted for Brexit were significantly more
optimistic about the economy because they believed the lies about
‘project fear’ and more money for the NHS.