The Financial Times describes the global rise of populism:
In an age of rising populism, the Mexican president, though, is not alone in his suspicion of policymakers. US President Donald Trump prefers to follow his gut, Indian prime minister Narendra Modi has ridiculed western-educated economists and piled pressure on the reserve bank, while UK cabinet minister Michael Gove stated bluntly that people “have had enough” of experts.
The new Italian government might be the best example of this phenomenon, as the ruling Five Star Party has no real expertise in governing. Wolfgang Münchau argues that “Europe is in More Trouble Than You Think” and cites Italy as a possible trigger for the next crisis. He sees slow economic growth as being the underlying problem.
I’ve previously argued that bad monetary policies can lead to a distrust of free markets, which opens the door to extremist parties on both the left and the right. Argentina during the late 1990s and early 2000s is a classic example. But there’s another problem with weak aggregate demand, which is easily overlooked.
For the most part, populism is self-limiting. Most populist economic policies are destructive and voters quickly tire of the resulting economic stagnation. There is one exception; populist stimulus policies are actually constructive for a country that is suffering from deficient nominal spending.
It is well known that the Great Depression led to a surge in votes for the Nazi Party. These dramatic election gains put Hitler in a strong enough position to seize power in early 1933. Less well known is that the destructive monetary policies of 1929-32 also made it relatively easy for Hitler to subsequently generate rapid economic growth, which gave him even more political power than he would have had in a stagnating economy. Even under a dictatorship, public opinion has some influence on the power of the government.
In the United States, FDR was quite popular during the mid-1930s, even though most of his economic polices were actually destructive. This is because one policy in particular, dollar depreciation, was so constructive that the economy grew fast despite being held back by other policies such as the NIRA and the AAA. Something similar happened with a left wing government in Argentina after 2002. Obviously, the German case was very different from the democratic left wing governments of the US and Argentina. But all three had one similarity, unearned popularity that resulted from the incompetence of the previous government.
Suppose that over the next few years, populists sweep to power in EU elections as well as in numerous national elections. In that case, there will almost certainly be a change in the ECB mandate toward a more pro-growth policy. And that new ECB policy will likely be successful in the short run. Growth will pick up measurably. In the voters minds this will tend to confirm that the technocrats that had previously run the EU were wrong and that the populists are right about economic policy. The unearned popularity of the populists will give them the political capital to enact other aspects of their agenda.
The European elite is playing a very dangerous game. By insisting that the ECB stick with its current dysfunctional (contractionary) monetary policy, which leads to extremely slow NGDP growth, they are opening the door to political forces that could end up eventually sweeping them aside. If this happens it would not be just the bad ECB that is transformed. Europe may also end up losing many of its good institutions and practices.
PS. Italy already spends roughly 50% of GDP, and has a national debt that is widely regarded as excessive. Now the new Italian government is toying with the idea off selling off its gold reserves to pay for additional spending. What could go wrong?
READER COMMENTS
Benjamin Cole
Feb 11 2019 at 7:26pm
Excellent blogging.
The religion of tight money is part of the problem. The idea that an elite can import cheap labor without consequences also needs a review.
Hey, I am just saying what we need to do to get the employee class to buy into the current system.
Trump completely flattened the GOP field in the last primary season. The GOP is something of a Potemkin village.
And the Donks? See the girl from the Bronx.
Pyrmonter
Feb 11 2019 at 10:13pm
2 observations:
(a) the widely accepted proposition that Germany grew rapidly in the 30s is debateable: much of that ‘growth’ was reflected in increased government capital accumulation and consumption in the form of re-armament. In the private sector, it’s as likely that the popular history rests on re-allocation of consumption away from households headed by women or Jews, as both were excluded from the labour market, as by growth in consumption. The position is similar to the Higgs critique of ‘growth’ in the US after 1940: http://www.independent.org/publications/article.asp?id=138
(b) the Bruenning/von Papen governments pursued disinflationary policies; as did the Argentine government of de la Rua; and have lately most of the Euro-periphery economies. They are not the first governments in history to do so – notably, the Harding administration did so in 1921; Volcker did in order to extirpate US inflation at the end of the 1970s; and Thatcher did (with somewhat less success) 1981-1985. The interesting question is why did the latter regimes succeed, and the former fail? In particular, what happened between the early 1920s (when most western economies disinflated, at least to some extent) and the late 1920s, by which date disinflation had seemingly become impossible?
Sebastian H
Feb 12 2019 at 12:06am
Arguably, this is exactly the kind of thing which led to Brexit. Part of the problem is that economic experts relied on aggregate measures like GDP, which caused them to fail to notice that a huge portion of the ‘gains’ in globalism were not being translated into gains for the middle and lower classes. They knew that they weren’t getting the gains, so they were/are convinced that either the experts are idiots (because they are claiming that their policies are good “for the country” when the middle and lower classes can plainly see the contrary) or actively lying to protect their self interest.
This loss of credibility was a long time coming, but won’t be easy to fix.
Scott Sumner
Feb 12 2019 at 1:18am
Pyrmonter. The Harding and Hoover cases are not as different as you imply. In both cases, industrial production fell sharply during the deflation and began rising sharply immediately after the deflation ended.
Unfortunately the recovery in the 1930s was then slowed by the NIRA.
As for Germany, consumption is not the only indicator to look at; employment did very well during the Nazi period. That impacts public opinion. Of course in the end the policies were disastrous, but it didn’t seem that way to many Germans in the mid-1930s
Brian Donohue
Feb 12 2019 at 3:25pm
Seems like the ECB, and Europeans generally, just doesn’t see this. The ECB is pushing toward its third “own goal” in a decade.
I’m guessing ECB policy isn’t in the top 5 of things European prognisticators are thinking about.
I don’t think the US population is anymore savvy about monetary policy, but for some reason we’ve gotten better results from our CB since 2009.
I dunno. Maybe running a more accommodative monetary policy reflects a more optimistic general outlook.
Scott Sumner
Feb 12 2019 at 6:07pm
Sebastian, I’d say almost the opposite. If the elite had focused more on boosting the GDP of the Eurozone, then the EU would be far more popular. The ECB’s tight money policy had very negative effects.
Free trade is very good for average people.
Christophe Biocca
Feb 12 2019 at 8:19pm
So you call the ECB’s policy “contractionary”.
I looked at the ECB’s interest rates. They’re zero (negative for deposits, though I assume this doesn’t matter as much).
I looked at M2/M3. They’re both growing at rates similar to before 2008.
I looked at NGDP: https://fred.stlouisfed.org/series/EUNNGDP#0, which, while it would support the story of a “contractionary” ECB policy from 2008-2013, doesn’t fit that mold from 2013 onwards. Eurozone NGDP growth is about 3% annually (compared to real GDP growth at 2% or so).
Not the 5% you advocate, but in line with historical Eurozone growth rates.
Where’s the dividing line between “contractionary” and not?
Matthias Goergens
Feb 13 2019 at 1:25am
That 3% is the average over the whole Eurozone? Greece and Italy are probably still doing worse by that metric than Germany?
When Italy and Greece had their own currencies, they didn’t see their nGDP shrink. (Usually they had the opposite problem.)
Christophe Biocca
Feb 14 2019 at 9:04pm
Best data I could find for per-country breakdown is: https://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tec00115&plugin=1
Mind that these are real-gdp growth rates, not nominal, but the gap should remain the same for all countries (since they all have the same currency).
Latest available for most countries is 2017, but there Greece grew at 1.5% real, Italy grew at 1.6% real, vs 2.2% real for Germany. Not a huge gap considering the massive structural problems of the first two countries, and combined with a 1-1.5% inflation rate these countries are still averaging 3% NGDP growth.
More interestingly, trying to predict which countries would do the worst in the aftermath of, based on NGDP growth over 2008-2009, you’d come up with the following predictions:
Eastern europe in general is doomed.
Greece will do about as well as Germany.
Italy will do worse than both, but substantially better than Ireland.
Many countries had much-worse NGDP shocks than the countries whose situation is here being blamed partly on too little NGDP growth.
Thaomas
Feb 14 2019 at 2:37pm
The price level has grown less than the 2% target and there is good reason to think (more price rigidity than in the US) the target should be higher.
Thaomas
Feb 14 2019 at 2:34pm
ECB technocrats HAVE been wrong not to adopt more pro-growth policies. Price rigidity in Europe must be higher than in the US and weaker fiscal transfers to lagging regions which implies that ECB should have a a higher target for the increase in the price level than the US target.
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