Been silent recently: democracy dies in the noise. Some signal in the noise:
FT Books Essay Economics books Add to myFT
The price of populism. Anti-elitism threatens liberal democracy and capitalism. Martin Wolf asks: Is reform the answer?
Populist forces are on the rise across the transatlantic world. They delivered the vote in favour of Brexit in the UK, the election of Donald Trump in the US and a government consisting of La Lega and Cinque Stelle in Italy. Authoritarian populists are in control of Hungary and Poland. The rightwing Alternative für Deutschland is on the rise in Germany. Populists are also well entrenched in Austria, France, the Netherlands and Sweden.
The common thread of all these movements is rejection of the contemporary western elite and the synthesis of liberal democracy, technocratic governance and global capitalism that it promoted. It is a revolution against the establishment. It may also prove to be a historical turning point, away from liberal democracy, global capitalism, or both. Whether the outcome proves to be that radical depends on how the establishment responds and how the economy and politics now unfold.
The three books under review have important similarities, but also illuminating differences in how they analyse what is happening.
Barry Eichengreen is a distinguished economic historian with, in US parlance, the “liberal” views of the majority of members of the US policy elite. Robert Kuttner teaches at Brandeis, but is best known as a journalist with strongly “social democratic” or “democratic socialist” views. Charles Dumas is a British macroeconomist. He is an unconventional and often penetrating analyst of the global economy, as chief economist at TS Lombard. All these books help illuminate aspects of these important, complex and often threatening contemporary developments.
Eichengreen’s The Populist Temptation is a lucid analytical history. He traces the story of anti-elite movements, often also suffused with xenophobia and authoritarianism, over the past two centuries in the US and Europe. He discusses their roots in “the combination of economic insecurity, threats to national identity, and an unresponsive political system”. He also argues, more cheerfully, that such movements “can be quelled by economic and political reforms that address the concerns of the disaffected”. The classic example of successful reform at a time ripe for populist authoritarianism was Franklin Delano Roosevelt’s New Deal of the 1930s.
The author asks whether a new round of necessary reform is either politically feasible or likely to bear fruit soon enough to stem the populist tide. Eichengreen concludes that neither the US, with its ferocious hostility to the notion that government may be the solution, nor the EU, with its technocratic governance and complex bargaining among members, is in a good position to respond. Yet the populists themselves, usually indifferent to the constraints imposed by reality, do not have good answers either. His end point — there are no “easy solutions” — may be realistic, but it is decidedly depressing.
Kuttner sounds a call to arms against such defeatism. Can Democracy Survive Global Capitalism? starts with the New Deal and the social democracy created in western Europe, after the second world war, with US support. Under this successful settlement, he argues, characterised by rapid growth, full employment and unprecedented equality, democracy contained capitalism. While economies became more integrated through trade, governments were firmly in control, labour markets were regulated, trade unions were strong and, above all, finance was caged.
Then, Kuttner argues, came the disastrous counter-revolution of the 1980s and the relaunch of deregulated capitalism. The results included the emergence of an immensely powerful and wealthy business elite, the collapse of trade unionism, increasing worker insecurity, soaring inequality, financial instability and, inevitably and dangerously, the rise of populist, xenophobic and authoritarian attitudes in a growing proportion of the population.
While Eichengreen proposes a wide range of sensible reforms, Kuttner calls for putting capitalism back in a cage. The emerging system, he concludes, will “be either more autocratic and more controlled by capital — or more democratic and less capitalist”.
Dumas offers much less politics and more global macroeconomics. In Populism and Economics he suggests that the political shocks of the past decade have their roots in three global economic changes: the entry into the world economy of billions of cheap workers, as China and then India opened up and the Soviet empire collapsed; technological change; and, not least, the emergence of a huge structural savings surplus in “Eurasia” or, more precisely, in northern Europe, centred on Germany, and east Asia, centred on China and Japan.
These surpluses drove counterpart savings deficits, especially in the US and peripheral Europe. The latter, in turn, were stimulated by loose monetary policy and financial excesses, which ended inevitably in a huge financial crisis. Within the eurozone, the huge structural surpluses of Germany are particularly problematic, because there is no workable adjustment mechanism, other than shifting the surpluses on to the rest of the world via a weak euro, pushing less competitive economies, notably Italy, into semi-permanent depression, or a combination of both.
It is impossible to do full justice to these three stimulating books. But they do raise at least five big questions.
First, how far do economic forces drive the populist counter-revolution? All three authors agree — rightly, in my view — that economic developments explain much of the revolt against elites. All three lay out the long-term adverse trends for less skilled workers and post-crisis stagnation in real incomes, which explain the discontent.
While status anxiety and questions of identity matter, these clearly have economic roots and bite more keenly in times of economic insecurity. Male anxiety is surely related to the declining economic position of many men. Again, the hostility towards elites is in part a consequence of their economic greed and incompetence. Above all, the bailout of banks and bankers is neither forgotten nor forgiven, especially in the US.
Yet one particular change has an impact on politics out of proportion to its economic effects: immigration. Economists generally conclude that the economic impact of immigration has been modest and, on balance, beneficial. But people fear the visible stranger, especially when they are under stress. A crucial element, I would argue — in the US, with its “undocumented” aliens, the UK, with uncontrolled inflow from the EU, and continental Europe, with the people pouring across the Mediterranean — is the fear of loss of control over the border and so of “their” country.
More broadly, democratic politics are rooted in the idea of citizenship. Citizens expect the state to prefer them to non-citizens. Kuttner’s social democratic perspective recognises that reality. Individualistic liberalism finds this more difficult. This tension is particularly severe in the EU. Eichengreen cites a 2015 Eurobarometer in which 52 per cent of EU residents defined themselves primarily by their nationality. “Just 6 per cent defined themselves first as European and second by their nationality and just 2 per cent defined themselves as European only.” The EU possesses no great reservoir of loyalty. It must work, instead. For far too many, it did not, especially in the eurozone crisis.
Second, what are the most significant drivers of these unwelcome economic changes? It is an exaggeration to attribute them to global capitalism tout court, as Kuttner does. All high-income countries have become more open to the global economy over the past 40 years. But they did not all suffer similar increases in inequality, or comparable reductions in the state’s ability to provide public goods or welfare support. The US has been something of an outlier in these respects. Choices matter.
The hostility towards elites is a consequence of economic failure. Above all, the bailout of the banks is neither forgotten nor forgiven
This also suggests that room for different policies does exist. In the US, that option was blocked by the Republican elite, which decided to focus on tax cuts and increased freedom for business, while exploiting cultural and racial anxieties, as a source of votes. This is an update of the old Southern strategy of “Jim Crow”. The rightwing populism of Trump has been the natural result. This has been a stunningly successful political strategy, but one with dire results for the great republic — and so the world.
Kuttner argues that everything bad followed the abandonment of post-1945 social democracy. But that had been an exceptional period, with exceptional opportunities. Productivity growth had already turned down in the 1970s, well before the liberalisation of the 1980s. The changes in policies did go too far, as he argues. But the status quo was by then no longer a plausible option.
He also suggests that the growth of global trade brought essentially no benefits. This is quite wrong. The rise of China and India delivered the fastest and broadest reduction in extreme poverty in world history. There is no doubt that opening to trade and foreign direct investment played a big part in this. Similarly, Kuttner suggests that the loss of good manufacturing jobs was all to do with the rise of predatory capitalism and liberal trade. This also is untrue. Every high-income country has seen a huge shift in the labour force from industry towards services and, to a substantial degree, an associated shift away from good jobs for less skilled workers. These have been inevitable changes. The coming rise in robots and artificial intelligence is bound to accelerate them.
Where Kuttner is right is over the incompetent deregulation of finance, especially the growth of short-term cross-border capital flows and the plethora of regulatory loopholes. But if major countries wished to regulate finance or tax capitalists, they could certainly do so. Again, if the US had wished to take on the countries running huge current account surpluses, it could have done so.
Third, what might be the consequences of rising populism? We can see many different possibilities. The benign one would be the pursuit of radical reforms that take the interests and wishes of the majority into account. But the hostility of populists to the establishment might mutate, instead, into an assault on all restraints on the “will of the people”, including technocratic bureaucracies, a free press and the courts. The whims of the powerful might then decide what is right or true. This hardly seems remote any more.
It is no accident that rules-governed global institutions emerged from law-governed democracies. These are two sides of one coin. Once arbitrary despotism becomes the norm, the liberal international order will collapse. People who should know better think this will not matter. It will, as we may soon discover.
Fourth, how then might populist forces be channelled in fruitful, rather than destructive, directions? As all these authors indicate, in different ways, there is much need for reform. The financial system remains dangerously fragile. The tax system needs to be made fair and effective. Governments alone can ensure high-quality education, a well-developed infrastructure and efficient legal and other institutions. The main requirements — and opportunities — remain domestic. But international co-operation is also essential.
It would be a good thing if the new populism sought to achieve these things. Alas, as Eichengreen rightly notes, it is mainly a diversion from what matters to what does not, all the while blaming foreigners and immigrants.
Finally, is it already too late? We can still hope that a new equilibrium will be reached, one that will preserve the best of what we have inherited, while remedying the worst. For that, however, we need better politics and wiser politicians. That happened before, in the middle of the 20th century, as Kuttner stresses, but only after huge disasters. What will happen this time? That is the great undecided question of our era.
Populism and Economics, by Charles Dumas, Profile Books RRP£15, 192 pages
The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era, by Barry Eichengreen, Oxford University Press RRP£18.99, 260 pages
Can Democracy Survive Global Capitalism?, by Robert Kuttner, WW Norton RRP$27.95, 384 pages
Martin Wolf is the FT’s chief economics commentator