Populism has been on the rise for quite a while now. Looking at the 60 largest countries in the world, a study from the Kiel Institute for the World Economy shows that in 2000, only 10% of these countries had been ruled by populist leaders from the left or right. By 2018, populism had hit a high watermark going back to 1900 with 30% of the largest countries in the world ruled by a populist leader. Then this study asked an important question: How does the economy fare under populist leaders vs. mainstream politicians?
The chart below shows the 53 episodes analysed in the study where countries were ruled by a populist leader from the left or right of the spectrum.
Populist governments analysed in the study
Source: Funke et al. (2023).
Whether a politician is classified as a populist is based on the style of campaigning and the typical classification of populist politicians in political science work: A populist splits society into two artificial groups of ‘elites’ and the ‘people’ (with the dividing line between the elites and the people drawn depending on the individual circumstances in each country) and then claims to speak for ‘the people’ in their fight against ‘the elites’. Then, following the political science definition, one can differentiate between left-wing populists who fight against ‘economic elites’ (i.e. the rich) and right-wing populists who fight against foreigners and minorities and the political elites who protect them.
As the chart above shows, left-wing populists tended to be more common than right-wing populists after the Second World War and into the 1980s. In many Latin American countries (Venezuela, Argentina, Mexico), left-wing populists still hold power today. But over the last decade or so, we have seen a resurgence in right-wing populists, ranging from people like Benjamin Netanyahu in Israel, to Recep Tayyip Erdogan in Turkey and Donald Trump in the US. In 2020, 11 out of 15 countries ruled by a populist were led by right-wing populists.
Being governed by a populist doesn’t bode well for the economy. The chart below shows what happens to GDP growth in the 15 years after a populist takes control over government compared to the growth path of similar countries. GDP growth slows down significantly for countries governed by populists compared to countries governed by mainstream politicians. The difference isn’t just a short-term one. 15 years after populists took control, countries that had populist leaders are on average 10% smaller than countries that withstood the temptation of populist politics. As the chart on the right shows, right-wing populists tend to do more economic damage on average than left-wing populists.
Real GDP path after populist governments enter office
Source: Funke et al. (2023).
To put this in numbers, 10% of lost GDP implies a loss of $2.3 trillion in output for the United States in the fifteen years after a populist took office. For the UK, it implies a loss of output of £250 billion in the fifteen years after populist politicians took control of the country.
The mechanism that drives this loss of economic growth will sound eerily familiar to observers of current affairs. The chart below shows that under populist rule, trade barriers like tariffs are increased on average, with a resulting drop in trade and a drop in financial openness and the free flow of capital.
Populist governments hurt the economy by being less open
Source: Funke et al. (2023).
But where trade declines, job creation and economic output drop as well. The results are larger government deficits and higher government indebtedness because tax receipts drop faster than the populist government is able or willing to cut spending. And because international capital flows and international trade recede, the cost of goods and services rises, creating an increase in inflation.
Populist governments typically lead to higher government indebtedness and higher inflation
Source: Funke et al. (2023).
As we have seen over the past decade or two, electing populist governments isn’t just something that happens in far-flung countries like Venezuela or Argentina. It happens to countries with some of the proudest and longest histories of democratic governance anywhere. While populist leaders claim to fight against the elites and help the people, what happens is that the people tend to suffer more under these populist leaders than under mainstream politicians, at least economically.
As i wrote yesterday economists can be counted on to disappoint. How do they manage to sterilize the(ir) world so effortlessly? To summarize Dutch economist Wim Boonstra - Professor of Economic and Monetary Policy at Vrije Universiteit Amsterdam. He is also Chief Economist of Rabobank:
'The euro would work and mutualization too if only the Italians changed their ways'.
There. It's thát simple. 'If only'...
I predict soon economists will produce studies titled: 'Why aren't humans machines and what to do about it'. Subtitle: 'For if they were all our theories and equations would be validated'...
Here is one of the study's authors in the Guardian (of course) in sept:
'The researchers find that having a populist leader hits a country’s GDP per capita and living standards by about 10% over 15 years as the economy turns inward, institutions are undermined and risks are taken with macroeconomic policy.'
1) This says nothing about (re)distribution.
2) If the above has already happened to a (populist) voter segment - meaning while a perceived elite was still in power - why would populist voters care? From their perspective they're turning the heat on the elites: we're hurt, you're hurt. While the elite argument goes no further than: 'O stop being silly, you're so irrational'...
WHY do populists get voted in, is the question. (Another question would be: why are they traditionally depicted as angry working class rowdies while in reality many examples were carried by the middle classes? Hitler comes to mind but 1930s UK and US fascist movements also attracted the middle classes in droves. Could those have possibly been hit by economic trouble BEFORE the elites that they attacked? If so, populism may be nothing but redistribution of economical pain or indeed 'GDP losses').
And why are they so persistent? Who do they represent? Just pied pipers leading simpletons? And why have they done well for generations in some places? Could there actually be something going on on 'the ground? I.e. in the lives of (ex)voters
For a similar (deliberate?) righteous-yet-hapless study compare with:
The study of populism in international relations
https://bit.ly/47ZItOZ
'In identifying establishment failure and linking the existence of a corrupt elite to wider socio-economic and socio-cultural anxieties and insecurities, populist performances and discourses simultaneously emphasise dramatisation, personalisation, emotionalisation, and conflict in their antagonistic framing of policy issues and representation of international politics (Moffitt, 2016; Wodak, 2015)
Populism thereby appears both as popular response by particular voter segments to a perceived crisis of legitimacy of liberal democracy, which leaves them disillusioned, emotionally adrift and disappointed (Mair, 2013), and as mode of political persuasion deliberately employed by political entrepreneurs to reinforce popular sentiments of political dysfunction, existential crisis, national decline and systemic failure.'
It's clear: populist voters are emotionally unstable and irrational: Why don't they pay more attention to the exchange rate?! What's wrong with these people?
Decent middle class people are NOT emotional nor irrational. That's why they marry other decent middle class people, and that's why they buy subsidized heat pumps and EV's. Who are on the list for rationing in o so rational Germany:
Jan 23' 'German electricity to be rationed as EVs and heat pumps threaten collapse of local power grids'
https://bit.ly/3R0r6Xl
Nov 23' 'EV chargers, heat pumps may be curtailed in Germany as of 2024'
https://bit.ly/3T4xsYl
And rationality is why Europe built a forest of windmills without the corresponding investments in the electric grid. Germany now proposes half a T in new debt to finance the EU grid:
EU to Put Forward Plan for €584 Billion Overhaul of Power Grids
https://bit.ly/47E8tQe
(Btw: i'm not saying rationing is irrational if you've first f up your elec grid. It's absolutely sound policy. And the Germans must be so thankful that around 8% of their heavy industry and manufacturing is still off the elec grid because of energy prices. The French have been less thankful for Germans lobbying them to raise FR elec prices, who are cheaper than DE prices because of the FR nuclear industry. 'Unfair competition', the Germans said).
Earlier, the very rational German middle classes closed their nuclear plants. Nuclear was first pushed by Merkel but then targeted for closure after an earthquake and tsunami in Japan caused Germans to reach peak rationality. So now they dig for coal underneath their own funky windmill parks:
Germany begins dismantling wind farm for coal
https://bit.ly/3Rwxo2B
Wind mill blades are terrible to recycle but next gen blades will be edible (German invention will allow them to be converted into chewing gum - no joke).
While NASA, another bastion of rationality. has the German's back:
Wind farms on Mars could power future astronaut bases
https://bit.ly/3JaOqyy
Thank God! No nuclear on Mars. Imagine the pollution! You see, nuclear pollution is a huge problem. The very rational Guardian (only naughty populists would call it a hysterical newspaper) showed us the main problem with nuclear waste in an 2019 article: since we don't know what language people will speak 300.000 years from now, we can't be sure the warnings at waste-storage sites will be understood by our descendants:
Poisoned legacy: why the future of power can’t be nuclear
https://bit.ly/3ksjgZZ
I may be out of bounds here but should nuclear waste possibly be stored and guarded by populists?
Sorry, forget about it.
After my celebration of middle class rationality in general and my examples of the feast of rationality called renewables economics in particular (Wim Boonstra is obviously very concerned about the planet and its thermostat), let's return to the above post's study.
A more important question for these deliciously righteous, nice young middle class German gentlemen from the Kiel Institute (I'm sure they are as alarmed about the GDP effects of populism as they are about cow-farts destroying the planet) is of course:
How on earth did they manage to omit - or simply miss? - the American blue collar & farmer movements of the first decades of the 20th century? Who were - quite literally - killed off by both establishment parties and their cronies with, let's say, 'street ability'.
And related: are we sure the Biden admin is not populist? It is running a deficit previously only seen in times of war. Where is Biden's war? Or his humongous depression? His language may be less populist, but his actions...Though perhaps the nice Germans from the Kiel Institute see his policies as Keynesian...
To rid oneself from any possible contamination of Kiel Institute snobbism read Thosas Frank's great article on current US populism, its previous version during an earlier bout of globalism and its destruction by 'rationalists'. (Rational in so far that they protected THEIR interests):
The Pessimistic Style in American Politics
https://bit.ly/47ZItOZ