Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, investigates the Populist Paradox.
To defeat populism requires coming to grips with a fundamental reality: bad economic policies no longer necessarily result in a government losing power. In fact, it is now entirely possible that irresponsible populists may actually strengthen their chances of being re-elected by making wilder and more impossible promises – and by causing more economic damage.
How did we get to this point, and what steps can we take to escape it as quickly as possible?
Powerful structural economic factors in recent decades – including automation, trade, and financial crisis – have left many people feeling neglected or ill-treated by those, on the right and the left, who have had control over economic policy. When anti-establishment populists come to power, however, they implement a range of policies that create uncertainty and discourage investment. And less investment means lower economic growth and fewer good jobs.
Ordinarily, this would lead to a feedback mechanism in which the responsible government would be held accountable, ultimately at the ballot box. But populists are effectively circumventing this mechanism by encouraging the belief that the media are biased, the experts are always wrong, and the facts are not the facts. The angrier people become, the easier it is to persuade them to accept this narrative.
Brexit is a good example. If you ignore or disbelieve the economic data (as well as what any credible analyst has to say), then your personal experience in the United Kingdom over the next 12 months may be this: The new Conservative government withdraws from the European Union without an agreement, which disrupts trade and discourages firms from investing in the UK. Either unemployment will go up, or there will be fewer good jobs – or both.
But will the electorate blame the government? Possibly not, as anger levels will increase – a direct result of the spike in economic and financial volatility. The government will therefore find it easier to blame the EU, experts, academics, the press, and immigrants. The politicians most responsible for the Brexit disaster could actually benefit at the polls.
In India, Prime Minister Narendra Modi’s Hindu nationalists actually increased their parliamentary majority in the recent election, despite the government’s failure to fulfill its promises to voters. And in the United States, President Donald Trump’s re-election bid may follow a similar path. Trump seems intent on disrupting the US economy by prosecuting a full-scale trade war with China. Ordinarily, you might expect this to hurt him with voters who care about access to export markets – such as America’s highly productive farmers. Instead, Trump’s support seems to be holding up across rural areas, as well as other parts of his electoral base.
Tariffs are a tax on consumers and also hurt domestic firms that use foreign inputs. For example, the domestic steel industry might benefit from steel tariffs, but there are many more people employed in industries that use steel and thus are hit hard by those same tariffs. Despite this, populists in the US and elsewhere welcome various forms of protectionism. If this slows the economy, as it almost always does, voters will become angry – and easier to distract.
The only way to break this cycle is with policies that go to the heart of the issue – creating more good jobs where they are needed. In the case of the US, Jon Gruber and I, in our book Jump-Starting America, propose boosting public funding of research and development, and creating new innovation hubs around the country. R&D creates new ideas and products, and such innovation consistently supports economic growth.
Some commentators agree, but argue that any additional science-related push should be concentrated in the existing innovation hubs, such as the San Francisco Bay Area and Boston. But those regional economies are already crowded and expensive, and providing public resources to lift them further is an idea that is unlikely to find many takers at the national political level.
The US has a lot of talented people in many different locations – Gruber and I identify over 100 significant cities that could become innovation hubs. (If you like the general idea but want to assess the details for yourself, our interactive website, Jump-StartingAmerica.com, can help you do that.)
Versions of this idea would work in many other relatively rich countries, such as the UK or Western Europe more broadly. A concerted push to strengthen the infrastructure for science can both boost productivity and create the basis for more widely shared prosperity.
Of course, this is not the only constructive measure the government should take. Infrastructure can be updated and strengthened. Distributive outcomes can be tackled directly, including by raising minimum wages and ensuring that rich people actually pay some tax. And better training should be made accessible both for young people and for anyone who needs to shift to another industry as a result of automation and trade.
Overcoming the populist paradox – and preventing the associated downward economic spiral – requires policies designed to create more good jobs everywhere. Crafting such policies is one promise that politicians really can fulfill, and that defenders of liberal democracy can no longer afford not to make.