Bloomberg’s Head of Economics Stephanie Flanders interviewed the FT’s Chief Economics Commentator Martin Wolf at a well-attended SPE event on populism, kindly hosted by the Resolution Foundation on 1 July. Stephanie’s first question - how do you even define populism?
Both left- and right-wing populism share common traits, Mr Wolf argued - it is the mobilisation of people politically against existing elites to force social change. In America this has often been seen to be a force for good, versus the darker view of populism that has been witnessed in European history. The latter involves hostility to: the important and valuable institutions run by elites; foreigners; minorities (typical right-wing elitism), and has often been associated with a charismatic leader who believes themselves to be the answer to the problem (think Mussolini, Hitler).
Stephanie pointed out that there has been a sizeable rise in countries (as measured by share of world GDP) run by populists or non-democratic regimes over the past decade since the financial crisis, and that populist governments have generally been re-elected. Martin responded by noting that right-wing populists have generally done better than left-wingers in that respect (aside from in those countries having experienced true economic collapse). He argued that right-wing populism tends to think along class lines and the promotion of egalitarianism, whereas the right-wing version of populism thinks about ethnic groupings and nationality, often being comfortable with extreme inequality. Whatever the case, the political middle ground has been hollowed out everywhere - from both sides of the political spectrum.
But is populism changing political systems for the better or fundamentally undermining them, Stephanie went on to ask? Martin used the examples of both Roosevelts in the US - Theodore’s anti-trust policies and FDR’s New Deal. Both recognised that the political consequences could be much worse were they not to respond to populism in these ways. This is where populism can be especially helpful - in encouraging establishment politicians to engage by delivering sensible responses. The Europeans have handled populism badly, however, Mr Wolf argues - which is why we have Mr Salvini and not Mr Monti as the (effective) head of government in Italy right now.
Can populists do good things? It is rare, argues Wolf. Radical reformers are typically more self-disciplined than populists. Some sort of “disciplined social radicalism” would be the ideal response, he believes.
The debate then turned to central banking and government policy. Martin reiterated his view that following the financial crisis countries that had the means - such as the UK - should have done all they could to return to full employment more speedily. He argues that the inhibition of direct monetary financing is inappropriate in a severe recession. Governments also need to be more aggressive in addressing the decline in competition in market economies that has resulted from increased monopoly power and the concentration of asset ownership. Extreme concentrations of wealth are not consistent with democracies, Wolf argues.
Stephanie suggested that despite austerity (which admittedly was more limited than set out by the Conservative coalition government in 2010) the UK saw an impressive period of jobs growth and declining inequality (on some measures at least). QE, however, has prompted a populist backlash to some degree because of the perception of the impact it has had on boosting asset prices and therefore favouring the elites. In the event of another economic downturn could there thus be further backlash against more quantitative easing (QE)?
Martin agreed that central banks are indeed frightened about what they are able do to counter another recession, their tool boxes being very constrained. The Fed, for example, would normally cut rates by 5 percentage points which is simply not available with rates where they are right now. An amount of QE equivalent to rate cuts could be undertaken but with bond yields so low and with the US likely to see such a move by another country as an act of economic war, there are limits to what central banks globally can do. Wolf expects some version of helicopter money should another downturn arise. This might be a simpler solution than introducing significantly negative short rates which would probably require a restructuring of the banking sector. Lowering central bank lending rates into negative territory but maintaining positive (or zero) deposit rates could be an answer but that would be tantamount to a fiscal operation with central banks effectively supporting bank profitability).
The conversation then turned to fiscal policy and the Italian situation. Martin remarked that Italian fiscal policy had been reasonably disciplined over the past decade and that we were now talking about a relatively modest extra easing - just a few percentage points of GDP. While Europe and the UK were in respectable fiscal territory there has been a sizeable fiscal expansion in the US and the President has succeeded in encouraging the Fed to stop tightening during a period of very high employment. There is a question whether the US is thereby taking big risks with inflation.
As for US tariffs, Wolf was unsurprisingly critical noting that if the President were to put tariffs on the remainder of Chinese imports it would become more protectionist than India and close to Brazil in terms of average tariff rates. US citizens were likely to lose more from tariffs than tax cuts would provide. The US, it was argued, thinks it should be self-sufficient when it comes to trade which, historically, has been marginal to the US. This is, of course, not true of the UK and Germany. The US either thinks it can break open China leading to a trade “feast”, or cut off China and improve the lot for home workers as a China weakens. Wolf argues that whichever strategy the US takes it is unlikely to be successful.
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