The Bear’s Lair: The appeal of populist economics

The Greek government’s failure to elect a President has caused a snap election on January 25, at which the left-populist party Syriza seems likely to win a majority. Similar parties in Spain (Podemos) and to an extent Italy (the Five Star movement) are also a threat to established political norms. On the other political side, Britain’s UKIP, Sweden’s Sweden Democrats, Germany’s Alternative für Deutscheland and France’s Front National are just one electoral breakthrough from dominance. While all these parties base part of their appeal on opposition to the existing power structure, there is also a populist commonality between their economic nostrums which needs to be addressed.

Popular agitation has compelled governments to adopt particular economic policies throughout the ages, but the policies adopted have depended on who is doing the agitating. In 1816, Lord Liverpool’s government was compelled to abolish the income tax by a mass popular revolt, with majority backing in the House of Commons, destabilizing government finances for several years, since the burden of debt service was enormous after the Napoleonic Wars. However that agitation had nothing to do with Luddites, or the slightly later Peterloo riot; it consisted of middle-class voters with relatively large cash incomes, who wanted taxation to revert to the protectionist and land-tax measures that bore less heavily on the cash-wealthy and more on the landed and the poor.

Later a largely urban working-class populace combined with the cheap-labor lobby of the manufacturing interests to force the repeal of the Corn Laws in 1846. Here the major losers were the landed and the rural poor, whose land values and livelihoods were destroyed by cheap foreign grain imports. Again, as in 1816, the populist surge was unrepresentative of the population as a whole, but of groups already included in the franchise (heavily biased against rural interests by the 1832 Reform Act) but opposed to the dominant political interests of landowners and the urban middle class. Meanwhile, the populist group that had forced the abolition of the income tax in 1816 was no longer strong enough under the post-1832 franchise to prevent its reintroduction in 1842.

In modern times the franchise in most countries is universal, but as in 1816 and 1846, some groups, especially the educated clerisy, tend to dominate government. Thus populist movements arise from those excluded from the current governing elite. However unlike in the early 19th Century neither opposition to income tax nor free trade are among their principles.

Free trade has become an elite preoccupation, not shared with populists on either the left or the right. Syriza and Podemos largely reject the capitalist system as a whole, and regard foreign investors as oppressors of the people. At the other end of the political spectrum the Front National and UKIP are both protectionist, in the latter case surprisingly so as free trade is pretty obviously in the interest of 2014 Britain, even if it had been much more doubtfully in the interest of 1846 Britain. The global surge in populism is a threat to the world’s trading system, and therefore to its economic health.

There are also few populists opposed to government spending. Indeed Syriza and Podemos owe much of their force to opposition to the “austerity” imposed by Brussels in an attempt to stabilize finances wrecked by three decades of overspending in Greece’s case and eight years of it, combined with a property recession, in Spain’s. Both parties, if elected, would throw public money at social spending and other popular programs. In France the Front National does not run on a platform of government austerity. Again surprisingly, neither does UKIP, although it certainly wants to eliminate spending dictated from Brussels.

Within the EU, other than for UKIP, much populism derives from the feeling that local interests are getting an insufficient share of the Brussels gravy train, rather than from opposition to the gravy train itself. In the United States, the Tea Party began as a movement opposed to the “stimulus” spending of the Obama administration, but it has shown no great opposition to military spending or agriculture subsides, for example.

Populists across the political spectrum share a nativism; indeed that is their principal common factor. All including the Tea Party are opposed to immigration, and left-populists are opposed to foreign investment as well. The immense drop in the cost of international travel, together with astute lobbying by cheap labor interests, have greatly increased immigration in most countries beyond all historical levels, and the unfortunate immigrants are blamed, rightly or wrongly, for a decline in Western living standards that appears more directly due to the efficiencies of modern telecommunications. Populists exploit the belief among ordinary people that their culture and living standards are threatened by an unwelcome flood of outsiders.

Finally, populists are suspicious of the tight business-government connections in such sectors as banking and defense procurement. In general populists believe that government officials are mostly corrupt (truer in some countries than others) and that large corporations are excessively able to manipulate complex political systems in their favor. Thus the Tea Party’s objection to the U.S. Eximbank derives from the same cloth as Syriza’s objection to the IMF. The term “crony capitalism,” almost unheard-of a decade ago, has come to describe accurately the tight nexus of mutually convenient arrangements that populists of both left and right are united in decrying.

There are some fields in which the differences between populists are more important than their similarities. For example their approaches to monetary policy, not a subject easy to whip into a demagogic frenzy, differ between the “”print money like madmen” enthusiasm of Syriza and Podemos and the “End the Fed” hard-money beliefs of the Tea Party.

It’s not surprising that populists of both left and right have a lot in common in their economics since their grievances spring from the same set of economic and, to a large extent, political conditions. The consensus economics of the 1990s, never truly free-market, has brought us to a world in which most institutions are grossly overleveraged while ordinary people’s living standards in the West are declining and regulated industries such as health and education increase inexorably in cost.

Meanwhile continued easy-money conditions have promoted short-term, highly leveraged business and investment strategies at the expense of the long-term approaches that allow working environments in which ordinary people can flourish. Today’s outlook is very different to the easy optimism of the 1980s and 1990s, and inevitably voters seek a solution, and someone to blame. One can argue that the earlier optimism was misguided (it certainly was in Greece, where little was done in the fat years to increase the productivity of the Greek people) but not that today’s populism is irrational.

Much populist economics is self-defeating. Certainly higher government spending and protectionism will do nothing to improve ordinary people’s living standards in the long-run. Nevertheless the popular demand is genuine, and attempts like that in Sweden to close the political system against the populists’ ideas will merely make matters worse. Instead we must employ a combination of the populists’ own ideas, where they are not economically self-defeating, and policies which will reduce the massive popular demand for populist nostrums.

In the first category comes tighter control of immigration. People are not goods and services, and the collapsing cost of international travel has excessively increased disruptive immigration worldwide, putting huge pressure on those with modest skills who would previously have suffered wage competition only within their local region. The attempt to make anti-immigrant sentiment illegitimate is monstrous in an allegedly free and democratic society. Elites will just have to realize that the marginal gains from very high immigration are swamped by its social and economic costs, and that the dangers of resisting the almost universal popular demand for tighter controls are far more important than any benefits from mass immigration.

The populists are also right in their critique of crony capitalism. To some extent this can be addressed by better macro-economic policies, but a direct assault on it, closing crony capitalist institutions such as the U.S. Eximbank and privatizing international bureaucracies such as the World Bank and the IMF, are also necessary. Sensible political-economic systems are self-correcting; ours needs to become more so.

Greece’s Syriza party has now stopped demanding that Greece leave the euro, because it has woken up to the fact that doing so would further reduce Greek living standards, and has instead taken to demanding bigger subsidies from northern Europeans to stay in. This should be rejected at all costs; granting them would set a truly terrible precedent and devastate the rights and living standards of productive Europeans. Instead, Greece should be allowed to leave the euro, and other countries should be told that a reversion to spendthrift policies will produce the same result.

Worldwide interest rates need to rise, and quickly. This will restore savings bases in countries such as Britain and the United States, and thereby allow middle class living standards to resume their rise. Combine this with the anti-populist policy of public sector austerity, and the world economy will begin rebuilding its balance sheet, as was necessary after 2008 and has been excessively postponed by funny money policies. The result will be fewer get-rich quick schemes and stabler working environments, producing a much more contented populace.

The populists are telling us something. Their economic nostrums are not all mistaken, and derive from genuine failings in the policies we have pursued in recent decades. We need to adopt those of their policies that won’t be too damaging, and adapt our current policies to reduce the populists’ level of grievance. The alternative, of de-legitimizing them, is wrong and won’t work.


(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)