It’s Still the Economy, Stupid

Instead of wringing our hands about the rise of populism, can we finally do something about it?


Because they are tailored to appeal to voters, all political platforms are, to some extent, “populist.” But what sets the wave of populism currently sweeping across the Western world apart from politics as usual is its impatience with constraints placed on democratic governments — in other words, its authoritarianism. When Fox News host Brett Baier suggested that the military would refuse Donald Trump’s orders to torture captured jihadis, the latter responded simply, “They’re not going to refuse me.”  The notion that leaders elected by popular majorities can flout legal norms, constitutional rules, and democratic checks and balances is at heart of the “illiberal democracy” promoted by Viktor Orban in Hungary and the ethos of Poland’s Law and Justice Party, which has held power since October.

Although most frequently associated with political right, authoritarian populism cuts across ideological lines. True to their Maoist and Leninist precepts, the more radical members of Greece’s Syriza oppose not just Greece’s European creditors but also “capitalism itself.” In January, Spain’s newly elected Chamber of Deputies held its swearing-in ceremony. In a departure from tradition, many of the new deputies from the left-wing Podemos party conspicuously promised not just to “abide by the constitution,” but also to “work toward changing it.”

Support for authoritarian populists is driven by different factors in different countries. Much like Tolstoy’s unhappy families, each unhappy in their own way, today’s populists, both on the left and right, are responding to grievances specific to each particular time and place.

Greece has gone through dramatic economic hardship since the beginning of the global economic downturn of 2008. The United Kingdom and Germany have seen large influxes of Eastern European immigrants and Middle Eastern asylum-seekers, respectively. France and Belgium have been shaken by Islamist terrorism. Some European countries are still struggling with historic legacies of nationalism, while others face a barrage of Russian propaganda. The world’s leading liberal democracy, the United States, has still other problems, which are not exactly mirrored on the other side of the Atlantic.

The academic literature seeking to explain why voters support populist parties is not always enlightening. There’s no consistent relationship between rates of immigration and support for right-wing populist parties. Neither do material wealth or social class do a good job in predicting support for such groups. Instead, support for populists is associated with certain ideological characteristics, such as opposition to multiculturalism and immigration or lack of confidence in political elites. A recent study from Flanders found that it is the perception of being vulnerable or underprivileged, rather than actual socioeconomic status, that induces individuals to support populists.

In any case, focusing on the beliefs or ideological dispositions that make individual voters fall for populists is no antidote to this disease of modern politics. If we want to find policies that could stem the tide, we have to look at the big picture.

Unlike the snapshots of survey data from different countries, this big picture is unambiguous: Financial crises lead to extremism. A recent study showed that between 1874 and 2014, financial crises increased support for far-right parties by 30 percent on average.

Indeed, the current populist onslaught is nothing new. Following the 1929 crash and the subsequent global depression, extremism of all stripes, left and right, rose across the Western world. Its growth was far more pronounced in countries that had weaker democratic traditions or by had been on the losing side in World War I. But an extended period of poor economic performance was a necessary ingredient.

A common objection to this argument is that the current wave of populism is rising in economically successful countries too. The recovery of the U.S. economy has shown it to be much more dynamic than Europe’s — yet American politics has given us Trump. Denmark and Austria are hardly economic basket cases. The former has a cabinet that relies on the support of the nationalist Danish People’s Party and the latter is likely to elect a far-right candidate for president in the presidential election later this year.

But this phenomenon only shows how dramatically our understanding of economic success has shifted. Real GDP in both Austria and Denmark today is at essentially the same level as in 2006. Even the United States, often invoked as example of a successful recovery from the Great Recession, has seen an annual growth in labor productivity of only 1.3 percent since 2005, compared to 2.8 percent a decade earlier. By 2014, real median household income was off by over 7 percent from its peak in 1999. Large numbers of Americans, especially men, have withdrawn from the labor market.

As result, if you are an average Dane, Austrian, or American, the odds are that your standard of living is disappointing compared to expectations you might have formed a decade or two ago. Provided that continuous improvements in standards of living are an integral part of the social contract that gives legitimacy to democratic capitalism, the current populist turn of Western politics should not look that puzzling after all.

Nor is it too difficult to link this analysis to the alternative accounts of populism discussed above. Any of the commonly identified drivers of support for populism — whether rejection of multiculturalism, fear of foreigners, concerns about seeing your community change, or sense that politics has become distant and incomprehensible — becomes much more bearable when one is busy having a career, seizing opportunities, building a life. It is no coincidence that one encounters less resentment of immigrants in cosmopolitan London than in the UK’s economically deprived areas, which have actually seen much less immigration.

Acknowledging that an economic malaise is at the heart of the current revolt against political elites gives much-needed compass to policymakers who might otherwise be tempted to stick with business as usual, or worse, try to appease the discontents by embracing populist ideas. Perhaps the most worrying example of the latter is the call by the former U.S. Treasury Secretary Lawrence Summers for a “responsible nationalism” that would scale back the neoliberal orthodoxy of creative destruction, unfettered trade, and open immigration regimes.

The central problem with “responsible nationalism” is that we know that economic protectionism and immigration restrictions will only deepen the West’s economic woes — just as a return to economic nationalism deepened the Great Depression.

What is to be done? Some elements of the West’s growth problem might not respond to economic reforms. The demographic changes that are reducing the size of the labor force, and with it the rates of economic growth, do not lend themselves to easy solutions. Japan’s example is extreme, but a similar pattern of aging affects practically all Western societies.

Yet even demographic trends can be fought — at least temporarily — through increased immigration. And while completely open borders are neither politically feasible nor desirable, a relaxation of currently existing restrictions would generate large economic gains.

Meanwhile, advances in fields from genetics to artificial intelligence belie the notion that humankind has exhausted its ability to innovate. More plausibly, in a better regulatory and policy environment, scientific advances would translate into marked improvements in standards of living much faster. According to a recent study by economists at Duke University and the Mercatus Center, the burden of federal regulation in the United States dampens growth by 0.8 percent every year. “Had regulations been held constant at levels observed in 1980,” the authors conclude, “the economy would be nearly 25 percent larger.”

The cost of compliance with complex regulation is only a relatively minor part of the problem. More serious is the extent to which regulatory barriers have shut down commercially viable innovations. For example, the FAA’s infamous 1973 ban on supersonic transport over the United States might have to do with the fact that air travel has seen very little change in the past four decades. More than a half of EU member states, including France and Germany, ban their farmers from growing genetically modified crops — despite the lack of evidence that these pose risks to humans or the environment. It’s also possible that heavy-handed regulation will kill the future of commercial drones or driverless cars before these industries even get off the ground.

More pedestrian of overregulation exist as well. Occupational licensing in professions where it is not justified by public interest (think florists, barbers, or carpenters) and restrictions imposed on the so-called sharing economy hinder social mobility and lock people in poverty, all while making insiders better off.

As the EU’s precautionary principle illustrates, excessive economic regulation often reflects an unjustified aversion to risk. More commonly, it also reflects a certain intellectual complacency — a belief that economic progress is sometimes not worth the disruption it comes with. But if such complacency was perhaps excusable in good economic times, it is hardly justifiable at a time when the post-war political order is coming under an unprecedented populist attack — precisely because of its failure to deliver shared prosperity.

This is not a call for a one-way ticket to a laissez-faire utopia. Of course, there is a role for government in setting and enforcing standards, preventing fraud, and protecting the marginalized and the vulnerable. But it’s not obvious that these goals are best served by a regulatory state that grew, as Niall Ferguson notes, by a factor of 30 since 1936 — while the U.S. economy became only 12 times larger.

It has become a tired cliché to say that the victorious march of populists is “a wake-up call” to political elites. It is also an unhelpful one, as long as it does not specify what exactly the elites should do once awake from their slumber. Here, in contrast, is to hope that they will understand that liberal democracy cannot flourish without a robust engine of sustained economic growth.

In the photo, protesters block the entrance to the Zappeion hall in Athens on September 16 to denounce the EU’s austerity policies.

Photo credit: LOUISA GOULIAMAKI/AFP/Getty Images

Dalibor Rohac is a research fellow at the American Enterprise Institute. Twitter: @DaliborRohac

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