Populism on the rise: Is there a rational policy response?

More than two months after his inauguration, the President of the United States (US) is visibly still in campaign mode. He seems to have identified half of the US-population and the mainstream press as his personal enemies and searches for scapegoats for every problem he encounters. His rhetoric is still polarizing and one can hardly imagine that he will ever behave like a statesman.

Sadly, the new US-President is not an outlier in modern politics. The Western world is experiencing rising populism among its leading politicians. This is a rather new phenomenon in the West although populism in politics has been a long-standing companion of Latin America and other developing regions.

Western 21st century populism puts the post WWII achievements concerning wealth and peace at risks and threatens to halt development processes in emerging economies and developing countries. This blog is the first part of a mini-series in the upcoming issues of the Tutwa Newsletter meant to explore the populism phenomenon. The first part is dedicated to defining populism and discussing its roots and causes. In the following issues, I will analyze its potential effects on the economy, and strategies to keep populist tendencies at bay, respectively.

With the rise of populist movements all over Europe, a need emerges to define populism and distinguish populist behavior from other political actions. One common element of all definitions is that populists claim to represent the people – defined as a homogenous “us” – who are being exploited by a ruling elite or by foreign powers – defined as “them”. The populist allegedly expresses a “volonté generale”. A second element is a general distrust of scientific expertise and media coverage, since scientists and journalists are presented as part of the elite. Third, populist politicians – having simple explanations for problems – also offer simple solutions: higher barriers to trade, expulsion of immigrants, retreat from international agreements and organizations. Interestingly, populist movements are not restricted to the left or right. Whereas the Brexiteers are more or less free traders, the French Front National is very protectionist.

So far, nothing is new. We have seen these patterns for instance in Argentina since the 1950s and Venezuela since the 1990s. These countries, however, were not stable and thriving market economies when populism rose. Contrary to the prevailing conditions of Latin American populism the Netherlands, for example, is one of the richest economies, yet populism still finds fertile ground between its windmills and polders.

This begs the question, what are the driving forces of 21st century populism? The academic literature regularly identifies demand and supply side factors. I add vested interests and their influence as well as the emergence of new ways to spread populist messages, in particular new media and social networks.

Demand side explanations comprise two main directions.

  • The first, and foremost, is the deteriorating economic situation of a broad and increasing share of Western population. Losers of structural change and those who fear to fall behind, are prone to simple arguments and follow populist movements. Their support is further enhanced if politicians and managers are misbehaving.
  • The second demand side argument focuses on cultural aspects, but is directed at more or less the same constituency as the first argument. A long-standing core group of society (white middle class males in the US for instance) no longer feels represented by elected politicians who allegedly place too much emphasis on non-discrimination, gender mainstreaming or integration of immigrants, but are blamed for allegedly not caring about the core population.

These two arguments only explain parts of the picture. An additional branch is dedicated to supply side explanations. Interestingly, the literature does not offer the whole set of potential causes. This may well be explained by the fact that these explanations – if they contain some truth – can be directly traced back to the very politicians, scientists and journalists who are blamed to be elitist.

  • First, there has been a neglect of the losers of globalization – who in fact are rather losers of technological progress, which in turn is stimulated by globalized markets. Neither analysts, nor observers, nor politicians, have done enough to mitigate the problems of those who lost their jobs. In economic analyses provided by computational equilibrium models, a comparative static view is taken. As a general result, further trade integration leads to a net growth of jobs. However, there are losers and there is a process of structural change to be mastered. It is simply not enough to pay social security.
  • In addition, better and targeted education as well as properly regulated labor markets offering chances for outsiders, i.e. unemployed persons, are urgently needed. These – or better put: the lack of both – are the second supply side explanation.
  • After the world-wide financial and economic crisis, income and wealth distribution has increasingly been skewed within Western societies. In particular, the low interest rate monetary policy of leading central banks contributes to this development, since the monetary expansion of the past decade resulted in a strong increase of asset prices and a much less accentuated increase in investment. Middle class savers suffer from negative real interest rates while wealthy people, being able to diversify their portfolios, gain.
  • This line of reasoning leads to a fourth supply-side explanation for, in particular, European populism. The global crisis, as well as the European crisis, have led to a string of rescue packages which are mostly not covered by the European Treaties. It may be too much to blame the Eurozone for breaching the Treaty, but it is fair to argue that the rules of the Eurozone meant to prevent fiscal crises have been permanently stretched. The European Commission has identified more than 60 incidents of excessive budget deficit – to be eventually sanctioned – but there has been zero sanctioning. This has contributed to a very critical public stance towards the Eurozone in many countries and to new nationalism.
  • The response of European politicians to criticism is another explanation for growing populism and dissatisfaction with the European Union (EU). Instead of allowing a widespread and open discussion of the right means to meet a common objective (European integration and stability), Eurocrats have constantly reacted in a quasi-religious manner to criticism. Critics are often being accused as nationalists if not neo-fascists. This contributes to dissatisfaction even among convinced “Europeans”.
  • There is another important problem that leads to Euroscepticism. The European Commission regularly has to take the blame for over-regulation (one reason for the Brexit). This sentiment might be correct as the Commission shows a tendency to behave like a Niskanen-type of budget-maximizing bureaucracy. However, it often reacts to domestic initiatives, delegated to Brussels because domestic politicians felt they are unpopular, partly because they were driven by lobby groups. Domestic politicians outsource the dirty work, as economist Roland Vaubel famously put it. This strategy works for a while, but it leads to an increasingly bad reputation of the European institutions.

In addition to demand and supply-side driven explanations, one has to analyze vested interests, in particular “Big business”.

  • The financial sector has been generously bailed out by governments during both the worldwide and the European crisis. Some critics argue that financial actors take too high an average risk, because they can privatize the profits and socialize the losses.
  • In addition, in Europe the issue of excessive manager salaries has got some attention, in particular related to environmental scandals in the car industry.

Finally, one can observe an increasingly aggressive tone in public debate, in particular when the internet is involved. New technologies and social media allow for distribution of imprecise and false news, which often stir up excitement and resentment. This is further deepened by the general tendency of media to focus on bad news.

An empirical confirmation of these hypotheses is yet to be provided. In order to test such hypothesis, more efforts have to be made to define populism and find indicators about the degree of populism in societies. This being said, the arguments themselves make sense. As long as we have only anecdotal evidence, we use them as working hypotheses. They also give strong hints about strategies to combat populism. Before this step is taken, the case against populism is to be made – maybe President Trump is right and 35% tariffs on Chinese products could help make America great again. But, let’s discuss this in the next issue.

Photo credit: Gage Skidmore via VisualHunt /  CC BY-SA

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