Economic Consequences of Populism
by Joseph Joyce
Economic Consequences of Populism
Who is the true populist: Bernie Sanders, who promises single-payer health care and college without tuition, or Donald Trump, who campaigned on a promise to “drain the swamp”? Jeremy Corbyn of the UK’s Labour Party, who wants to nationalize public-sector firms, or Marine Le Pen of France’s National Front, who wants to take France out of the Eurozone? And what would be the consequences of their policies?
To answer these questions requires first an understanding of populism. One definition of populism, such as the one found here, refers to it as policies for the “common people.” Populism, therefore, divides the world into two groups: the good “common people” and the evil “them.” “They” deprive the “people” of the rewards of their hard work and exclude them from the political process. But just who are these “common people”? And who are not?
Dani Rodrik of Harvard’s Kennedy School in one recent paper and a second coauthored with Sharun Mukand of the University of Warwick proposes an analytical framework for understanding the different strands of nationalism. Rodrik and Mukand suggest that populist politicians obtain support by exploiting divisions within a society, and envisage two kinds of separation. The first is an ethno-national split, such as occurred in Europe in the 1930s and again in modern-day Europe, and is usually associated with right-wing movements. The second is a partition by economic class, as seen in the U.S. in the 1890s, Peron’s Argentina and contemporary Venezuela, and is often found in left-wing organizations.
Under this classification, Trump and Le Pen are nationalist populists while Sanders and Corbyn have a class-based agenda. Once we understand this demarcation, we can see they will advocate different policies. The nationalist populists are suspicious of all foreign contact. They regard trade pacts as zero-sum transactions: one side to an agreement wins, and the other loses. Similarly, immigrants hurt native workers and impose fiscal costs on society. These populists are in favor of government expenditures for the “people,” but not anyone else. They favor domestic firms and will support measures to benefit them.
Class-based populists, on the other hand, are concerned about the “workers,” who includeindustrial laborers and farmers. They are suspicious of property owners and the financial sector. They seek to use taxes and other measures to redistribute property. They may also advocate government control of the economy through public ownership or the use of licenses and other means to guide production. They can grant subsidies for the purchase of basic needs, such as food or fuel. They will oppose foreigners if they are seen as allied with domestic financiers.
Initially, populist measures of either type may lead to prosperity, as more domestic and/or government spending leads to more jobs. But less efficient firms are subsidized, which increases costs. Over time these costs must be paid, as well as those made directly to households. If the bond markets are reluctant to finance government budget deficits (except at very high interest rates), the government may turn to the central bank to finance its expenditures. But the resulting inflation leads to more spending and monetary creation. A country with a fixed exchange rate, like several in Latin America, eventually runs out of foreign exchange. The resulting crises are blamed on “foreigners” or “capitalists,” and eventually may lead to a collapse.
Rudiger Dornbusch and Sebastian Edwards (currently at UCLA’s Andersen School of Management) wrote an analysis of the populist policies of Latin American governments that appeared in the Journal of Development Economics in 1990 (see working paper here). In their view:
“We mean by “populism” an approach to economics that emphasizes growth and income redistribution and deemphasizes the risks of inflation and deficit finance, external constraints and the reaction of economic agents to aggressive non-market policies.…populist policies do ultimately fail; and when they fail it is always at a frightening cost to the very groups who were supposed to be favored.”
The most prominent manifestations of President Trump’s nationalist populism have come in the negotiations over NAFTA and the administration’s refusal to abide by the decisions of the World Trade Organization. In addition, there are its policies that affect illegal immigrants and its support of measures to cut legal migration. None of these will lead to an immediate crisis in the U.S. economy, but they will have long-run consequences for the growth of the economy. Moreover, the law of unintended consequences has a wide reach, The Trump administration may find that retaliation can sting.
Trump did keep his promise to “Drain The Swamp”. He drained it low enough to find numerous bottom feeders to fill his Administration and Cabinet positions.
Thus we now have an Administration in the White House that resembles a crime syndicate more then any form of working Government group.
It seems if you go back to the populist movement if the 1870-1900 period by your classification it would be class populism, because it was the virtuous farmer against the evil eastern bankers. Prime example here is the cross of gold speech. Of course that in another sense was sectional populism also midwest versus the east.
“Bernie Sanders, who promises single-payer health care and college without tuition”.
“Jeremy Corbyn of the UK’s Labour Party, who wants to nationalize public-sector firms.”
The Overton window has shifted a long way to the right if things like single-payer and free college are considered unaffordable in a rich country like the US while enormous expenditure on the military is unexceptional. Is anyone really arguing the US is too poor to feed, clothe, house and provide medical care to all its citizens?
Equally, Jeremy Corbyn is arguing that privatization has been in many or most cases and obvious and expensive failure which should be reversed. The market fundamentalists who drove the privatization process should be able to provide definitive evidence of the benefits (other than to the well-connected insiders who profited handsomely). As a consumer of privatized services, I have seen no improvement in service and a substantial increase in prices and complexity.
Berge
let me take the opportunity to suggest something less ideological:
i think single payer health care is the only thing that makes sense given the pay or die nature of the market for health care and the disparity of power and information between buyer and seller.
i think free college might make sense if people can realize that college may not be for them. there is no point in “educating” those who are only looking for a job. there should be ways to help people make a good life for themselves that don’t involve pretending that all it takes is a college degree.
i don’t think nationalizing firms makes any more sense than privatizing government jobs. we need capitalism up to a point. we don’t need to give capitalists the right to collect taxes.
well, that (my above) was meant to suggest there might be something better than either-or thinking.
but i failed to notice the below the fold implication in the main article that you can’t have government spend on social needs without running a deficit.
actually, you can.
the people can pay for their own health care. they may need the government to keep the providers honest and to distribute the risks (insurance). the point of “single payer” is not that everyone is provided health care paid for by some magic fairy or even “the rich.”
the people can pay the wages of public workers doing the work that is most efficiently done by the government.. work that protects the people. without turning that work over to private enterprise that makes a profit by cheating the workers and cheating the public. and in fact only exists by virtue of bribing legislators. we used to call that graft.
but as long as you can get votes by “cutting taxes” and turning the government over to big money, the people will get what they deserve. or most of them deserve. some will be hurt more than others.
Of some relevance.
THE SENATE’S MILITARY SPENDING INCREASE ALONE IS ENOUGH TO MAKE PUBLIC COLLEGE FREE
Alex Emmons
September 19 2017, 1:13 p.m.
https://theintercept.com/2017/09/18/the-senates-military-spending-increase-alone-is-enough-to-make-public-college-free/“
Berge
begs the question. which is more valuable to the taxpayer…military spending or your college education?
i would bet that what we are seeing here is “we tried universal college education in the sixties and seventies and what did we get out of it?”
don’t get me wrong. i would rather see money spent of education than on military toys, but i’m not sure that college is as good for people as they hope and believe it will be.
but don’t blame my spelling on my education. i used to be good at that, but i can’t see where it did me any good.