If Donald Trump had heeded the simple injunction – “It's the economy, stupid” – that guided his opponent’s husband to victory in 1992, he might have had a shot at beating her. But, for today’s populist leaders, cultural battles come first – which is why they are losing ground so quickly.
With the menacing prospect of a Donald Trump presidency in the United States fading fast, other problems – both economic and political – are reclaiming the world’s attention. This is no surprise for Project Syndicate’s commentators. Their analysis of populism has rarely been confined to particular examples like Trump, Philippine President Rodrigo Duterte, Hungarian Prime Minister Viktor Orbán, or Britain’s Brexiteers.
Instead, most have understood the need to focus on populism’s defining traits, rather than dwelling on specific cases. As Andrés Velasco, a former finance minister of Chile, argues, the populist phenomenon, wherever it is found, “rests on a toxic triad: denial of complexity, anti-pluralism, and a crooked version of representation,” and each facet must be addressed.
From this perspective, the question raised by Trump’s impending defeat is not why he lost, but whether, as Anatole Kaletsky of Gavekal Dragonomics asks, “the revolt against globalization and immigration” will “simply take another form.” And, like many Project Syndicate columnists, he challenges the question’s underlying premise. “While the rise of protectionism and anti-immigrant sentiment in Britain, America, and Europe are widely believed to reflect stagnant incomes, widening inequality, structural unemployment, and even excessive monetary easing,” Kaletsky argues, “there are several reasons to question the link between populist politics and recent economic distress.”
Woman Trouble
Trump’s vertiginous fall in opinion polls in recent weeks has, no doubt, resulted mostly from his deep personal flaws – not just his failure to stay on message, but also, as the political analyst Elizabeth Drew notes, revelations of his “sexual aggressiveness.” And Trump is not the only populist to misjudge the politics of gender. Jarosław Kaczyński, Poland’s unelected leader, has been weakened by the response – massive protests and the threat of a general strike – to his Law and Justice party’s ham-fisted effort to restrict (almost entirely) and criminalize abortion.
“Both Kaczyński, and Trump,” says Sławomir Sierakowski, the director of the Institute of Advanced Studies in Warsaw, “have recently been confronted by a political force that neither reckoned with: women.” Indeed, says Sierakowski, “[i]t is only fitting that Trump, and possibly Kaczyński, will be defeated by those whose dignity and equality each refuses to recognize.”
Populists, however, are merely an extreme case of a broader problem. Despite mounting evidence of the damage that gender discrimination causes, it remains the norm in too many countries and businesses, argue Laura Tyson of the University of California at Berkeley and Jeni Klugman of Georgetown University. They cite recent studies showing “that greater gender equality in a country is associated with better education and health, higher per capita income, faster and more inclusive economic growth, and greater international competitiveness.” Moreover, “companies with more women in top leadership and board positions have higher financial returns.”
To be sure, the number of women on the world stage – Hillary Clinton, German Chancellor Angela Merkel, British Prime Minister Theresa May, the Nobel Peace Prize laureate Daw Aung San Suu Kyi in Myanmar, and Yuriko Koike, who was recently elected Governor of Tokyo in a landslide – has grown. And yet, beyond the economic impact of gender discrimination, Anne-Marie Slaughter, a former director of policy planning at the US State Department and current president of New America, and Elizabeth Weingarten of the Global Gender Parity Initiative, show that it affects national security as well. Even when policymakers do acknowledge that gender matters to their deliberations, too many “think they are overcoming their gender blind spot because more women are sitting around the table.”
This is a crucial oversight, Slaughter and Weingarten argue. Taking into account “the divergent ways men and women might act, think, or respond is not just ticking a politically correct box,” they say. “It can actually help us craft better policy and identify emerging threats.”
Conversely, as Germany’s refugee policies have shown, ignoring gender can have perilous unintended consequences. Despite having a “strong female chancellor and its first-ever female defense minister,” they point out, Germany “failed at first to consider how its policy might have different effects on men and women.” The fact that “most government refugee shelters didn’t provide gender-exclusive toilets and showers,” for example, was “a disaster for women from conservative Islamic backgrounds.” And mandatory language programs “didn’t account for women’s inability to attend class without childcare.” These oversights, they say, “made those policies less effective for the entire population, and could lead to long-term security consequences for Germany.”
It is unlikely, however, that more careful consideration of gender differences would have made Germany’s refugee policy more politically palatable. “Merkel took a principled stand on the refugee crisis, accepting more than a million refugees into Germany,” argues Princeton’s Ashoka Mody, but “she was soon punished at home.” Her Christian Democratic Union “has lately suffered a string of humiliating losses in state elections” ahead of next year’s federal election, whereas the far-right Alternative for Germany “has made substantial gains.” Not surprisingly, the CDU has become bitterly divided over Merkel’s stance on the refugee issue.
Whereas Merkel has had policy failures imposed upon her, May has given the impression of seeking them out. Mark Leonard, Executive Director of the European Council on Foreign Relations, recalls that May “once warned her fellow Conservatives of the perils of being known as the ‘nasty party.’” And yet, “after 100 days in office, she is in danger of going further, turning the United Kingdom into the nasty country.”
It has been a remarkable turnabout for a prime minister who opposed Brexit as a member of the previous government. “In just a few months,” Leonard notes, “May has launched attacks on ‘international elites’ and decided to prioritize immigration controls over single-market access in negotiating the UK’s withdrawal from the European Union.” Her seeming embrace of positions and rhetoric associated with hardline Brexiteers like her foreign secretary, Boris Johnson, has been as far-reaching as it has been unexpected. “At one point recently, companies faced the threat of being compelled to furnish a list of their foreign workers,” Leonard points out. “And the 3.5 million European citizens who are settled in the UK were left to worry about whether May’s government would guarantee their residence rights.”
Expensive Old Rebels
Just as the role of women is not always what people expect it to be, voting behavior often runs counter to the belief of politicians and pollsters that economic motivations are paramount. Not so, says Kaletsky: “Most populist voters are neither poor nor unemployed nor victims of globalization, immigration, and free trade.” Rather, “the main demographic groups behind the anti-establishment upsurge have been people outside the workforce: pensioners, middle-aged homemakers, and men with low educational qualifications receiving disability payments.”
Consider the Brexit referendum. The common assumption in Britain has been that people who felt directly threatened by immigration delivered the winning margin. In fact, “the group most directly affected by low-wage competition from immigrants and Chinese imports – young people under 35 – voted against Brexit by a wide margin, 65% to 35%.” By contrast, “60% of pensioners who voted backed the “Leave” campaign, as did 59% of voters with disabilities.” And “53% of full-time workers” taking part in the referendum “wanted Britain to remain in Europe, as did 51% of part-time workers.”
These data – which, as Kaletsky notes, are comparable to the breakdown of support for Trump among US voters – pour cold water on the idea that the main catalyst for the populist upsurge has been the diminished economic prospects of those left behind by globalization. “The main relevance of economics,” he argues, “is that the 2008 financial crisis created conditions for a political backlash by older, more conservative voters, who have been losing the cultural battles over race, gender and social identity.”
This suggests why the Brexit vote may have been the high-water mark for populism, at least in the advanced economies. “To achieve majorities,” Kaletsky notes, “socially conservative protectionists had to unite with the remnants of the Thatcher-Reagan laissez-faire movement, who resent the interventionist economic management of the post-2008 period and want to intensify the competition, deregulation, and globalization that social conservatives resent.” But this “unstable political compound is now dissolving in the US, and also in Britain, where the May government is divided between ideological nationalists and economic liberals.” Assuming that “the US election on November 8 confirms Trump’s failure to bind social conservatives and economic liberals into a winning coalition, similar disintegration is likely among European populists, too.”
That the old could vote their prejudices with blithe unconcern about the effects on their country’s economy points to a culturally-driven change in their definition of self-interest. As Bill Emmott, a former editor of The Economist, points out, “13 OECD countries – including Japan, Germany, Poland, and Greece – devote the equivalent of 10% or more of their GDP to public pensions every year.” And, with the proportion of their populations over the age of 65 expected to increase from one-fifth to one-third, “public-pension expenditures will increasingly crowd out other public spending.” This implies that “reducing public-debt levels will become more difficult” without “a miraculous revival in economic growth, which current pension policies makes less likely every year.”
Fewer Banks, Better Growth?
Of course, the vast sums being siphoned out of the economy by pensioners are not the only – and perhaps not even the most important – obstacle to faster growth. There are the banks to consider. And, contrary to an argument embraced by populists and many on the left, the banks’ real problems may not stem from their large size; in fact, sometimes the opposite may be the case.
For the economist Dambisa Moyo, the “multi-billion-dollar fine recently imposed by the US government on Germany’s Deutsche Bank for mis-selling mortgage securities in the United States” is both a clear sign of what is wrong with the world’s biggest banks and an opportunity to revitalize the industry, particularly in Europe. The European Union, Moyo points out, “has no shortage of banks: Germany has more than 1,500, and Italy has over 600. But many are “zombie banks,” with too many branches, too few deposits, and funding costs that far exceed those of their more successful peers.” To restore stability, Moyo continues, “will require at least one-third of its banks to close or merge.”
That process could begin with Deutsche Bank, for which “market speculators already seem to be expecting a merger, such as with Commerzbank, another German institution.” That, however, may be the wrong approach. “[I]f such a merger is to be the first step toward consolidating the European banking sector,” Moyo argues, “it should be a cross-border affair, bringing Deutsche Bank together with a significant French and/or Italian financial institution.” Indeed, this “approach could be a game changer in terms of the EU’s political credibility, which is perhaps most crucial to keeping the EU dream alive.”
Lucrezia Reichlin, a former director of research at the ECB, and currently Professor of Economics at the London Business School, and Shahin Vallée of Soros Fund Management, also think that banking fragmentation is dragging down the eurozone economy. They point out that since 2007, “EU countries have provided in excess of €675 billion ($757 billion) in capital and repayable loans, along with €1.3 trillion in guarantees, to financial institutions in distress, so the desire to limit bailouts is understandable.” And the issue for policymakers is not just the amount of money spent or the opportunity costs of spending it. The “bailouts have often hampered restructuring, resolution, and consolidation to preserve existing banking interests and practices, thereby delaying the necessary repair of balance sheets and zombifying the European banking system.”
Moreover, Reichlin and Vallée continue, “the logic of isolated intervention” of the type that has occurred across Europe since 2007, “ignores the interconnectedness of the system, whereby distress in one large institution often creates spillover effects that feed destabilizing system-wide runs.” Where interventions succeeded – for example, in Spain and Ireland – they “were comprehensive and required large amounts of national and European resources to establish a ‘bad bank’ and ensure a system-wide subsequent triage of assets, recapitalization, and consolidation.”
This points to a way forward for Italy’s highly distressed bank sector, widely believed to be the eurozone’s next economic – and political – flashpoint. The main goal, according to Reichlin and Vallée, should be to establish “a comprehensive plan to restructure, recapitalize, and consolidate the Italian banking system, thereby ending decades of poor governance and bad supervisory practices.” Such boldness, they believe, could “provide a blueprint for redressing the inadequacies of the European resolution framework.”
The Center of Confusion
Central banks, which are usually charged with overseeing the health of their national (and, in the case of the EU, supra-national) banking systems, have been populist whipping boys no less than the commercial and investment banks they supervise. And, as Harvard’s Jeffrey Frankel argues, it is ironic that populists should lead the attack on ultra-easy monetary policy. “After all,” he reminds us, “low interest rates benefit debtors and hurt creditors, as does the inflation that can be spurred by monetary easing.” That is why, particularly in the US, populists historically “have supported easy monetary policy as a way to help the little guy against distant bankers with hard hearts devoted to hard money.”
Populists no longer make this argument. On the contrary, says Frankel, “the script has switched – and not only fringe populists are working from it.” In the UK, “May declared earlier this month that low interest rates were hurting ordinary working-class people, while benefiting the rich,” because easy money helps “push up the prices of securities – both stocks and bonds – which are disproportionately held by the wealthy.”
That, Frankel believes, misses the point of monetary policy, which “is not a particularly reliable tool for balancing income distribution.” That task is best assigned to “progressive taxation, universal health insurance, financial reform, and other such tools.” Monetary policy should focus on one thing and one thing only: promoting “overall economic growth, while maintaining price and financial stability.”
Harvard’s Martin Feldstein, a former chief economic adviser to President Ronald Reagan, and Stanford’s Michael J. Boskin, who served as President George H.W. Bush’s chief economic adviser, would no doubt agree. But both worry that, by keeping real interest rates so low, developed-country central banks, and the US Federal Reserve in particular, are not doing their job. Measured “by the price-earnings ratio of the S&P 500 stocks,” Feldstein notes, equity prices “are now nearly 60% above their historical average.” Likewise, the “price of the 30-year Treasury bond is so high that it implies a yield of about 2.3%; given current inflation expectations, the yield should be about twice as high.” And “[c]ommercial real-estate prices have been rising at a 10% annual pace for the past five years.”
As a result, inflated asset prices, Feldstein believes, are now “the greatest risk” to the US economy. For example, “a 35% decline in equity prices to their historic average would involve a loss of more than $7.5 trillion” to the US economy. Similarly, a “return of real long-term bond yields to their historic level would involve a loss of about 30% for investors in 30-year bonds and proportionately smaller losses for investors in shorter-duration bonds.” And, given that “commercial real-estate investments are generally highly leveraged, even relatively small declines in prices could cause large losses for investors.”
Boskin sees yet another problem with central banks’ “unprecedented long-term monetary stimulus,” namely that is has “left governments poorly equipped to manage the next economic downturn when – not if – it arrives.” Although the Fed “is widely expected to raise its target interest rate again in December,” Boskin is alarmed that it seems to be “moving at a very slow pace.”
Where Have All the Dollars Gone?
Strange as it may seem, although the Fed’s unconventional monetary policies have been flooding the US economy with dollars, the wider world, according to Harvard’s Carmen Reinhart, is experiencing a dollar shortage. The cause, she says, “is not the need for post-conflict reconstruction,” as it was after World War II, when “European economies were coping with extensive war-related damage and a broad array of impediments to their efforts to rebuild their industrial base.” Instead, “countries in Africa, the Middle East, Central Asia, and Latin America – most notably Venezuela – have been hit very hard by plunging oil and commodity prices since 2012.” This prolonged price bust has “ushered in a wave of currency crashes, while those [countries] that maintained more rigid exchange-rate arrangements experienced rapid reserve losses.”
The results extend well beyond depressed investment or the need for government belt-tightening. “Of far greater urgency is that dollar shortages have become food shortages in countries such as Egypt and Venezuela, as well as much of Sub-Saharan Africa, which rely heavily on food imports,” Reinhart says. “Given import compression, the resulting scarcities, and skyrocketing black-market prices, the most vulnerable segments of the population have been left in profound jeopardy.”
The result could be a shift in populism away from the advanced economies and toward the developing world. As Nobel laureate Michael Spence points out, “economic exclusion and extreme inequality have always been unconducive to long-term high-growth patterns” in developing countries. “Under these conditions,” he says, “pro-growth policies are politically unsustainable, and they are ultimately disrupted by political dislocations, social unrest, or even violence.”
Reclaiming Democracy?
In the advanced economies, however, Spence sees a chance to quell populism in the advent of digital technology, especially social media, which “is shuffling economic structures and rebalancing power relationships.” In particular, “while money is still a part of the political process,” US President Barack Obama’s 2008 campaign, and that of Senator Bernie Sanders this year, has shown that “influence itself no longer belongs exclusively to corporations and wealthy individuals.” As a result, not only inequality, but also other issues marginalized by the dominance of powerful interests, may finally be addressed within the framework of representative democracy.
Velasco, however, is not so sanguine. Quoting the political scientist Jan-Werner Mueller, he believes that populism is likely to remain a “permanent shadow” on representative government. This is because “[p]opulism is not about taxation (nor about jobs, or income inequality), but about “who gets to represent the people and how.” And that question is framed by “a particular moralistic interpretation of politics,” according to which “those who hold the right view about the world are moral,” while all others are “lackeys of a corrupt elite.” In other words, “populism is a kind of identity politics. It is always us against them.” Viewed from this perspective, social media – not coincidentally Trump’s favorite medium of communication – could lengthen the populist “shadow.”
Still, Kaletsky is optimistic. A decisive defeat of Trump, he believes, will represent “the end of a backlash against modernity by an unstable alliance of social authoritarians and laissez-faire market liberals.” If so, Brexit will have been “the last gasp of an aging generation that tried to impose its nostalgic parochialism on an increasingly cosmopolitan younger generation, but succeeded in only one unfortunate country.”
Project Syndicate
