On 28 September 2018, Lorenzo Forni of Prometeia invited me to give a short comment on the relationship between ‘populism’ and economic policy-making.  Although, I hadn’t thought about that relationship before, I came up with four things I think we might want to consider (in addition to what we might useful think of as ‘populism’ in the context of the question Lorenzo asked).  My argument was that populists bring new people into the policy-making process.  They also bring a healthy dose of unpredictability.  Their messaging on policy issues is not great, which causes problems in a world defined by rational expectations, and they tend to be skeptical toward independent agencies like central banks.  Finally, populists are disinclined to international policy coordination.  The combination is not wholly bad — sometimes change is for the good! — but the results are often below the promises that populists make to the electorate.  The text of the presentation follows.

I am very grateful to Lorenzo Forni for inviting me to talk about politics in a room full of economists. I am even more grateful that he has allowed me to do so in English. I am most grateful of all that he has given me such an interesting topic – populism and economic policy. I am working on a book that tries to understand how established political elites in advanced industrial economies lost some of their control over macroeconomic policy-making and democratic processes at roughly the same time. It had not really occurred to me to focus on the flip side of that story – how new political elites manage the economy once they get into power. I honestly cannot explain why that question did not occur to me, particularly since I live here in Italy. What I can say as I watch the ongoing budget negotiations is that I have no doubt that the question is important.

So what does populism have to do with economic policy? As it turns out, it can be quite a lot. I am going to focus my comments on four different dimensions of influence.

• Who gets to make economic policy;
• How consistent the policies made by populist governments are with what came before;
• What any inconsistency means for the economic performance of populist governments; and,
• What happens when populists in one country bump heads with populists in another.

Before I can do any of that, though, we should straighten out what I mean with the term ‘populism.’ I have a number of colleagues who define populism through the lens of discourse and ideology. They have important things to say about what ideas bind people together and drive them apart. Specifically, they talk about populists as that group of politicians that promises to represent the ‘true people’ against the ‘corrupt elite’.

My own starting point is a little different – primarily because I am interested in understanding how populists become mainstream and what happens to them along the way. Silvio Berlusconi was a populist in 1994;fast forward to 2018 and Berlusconi is the establishment. Moreover, his case is not unique. Recep Erdogan was a populist in 2002 and now he is absolute ruler of Turkey; Viktor Orban took a populist turn in 1998 and now he dominates Hungarian politics. My point here is not that all populists succeed. Ross Perot vanished after two unsuccessful runs for president of the United States; Pim Fortuyn was assassinated; Nigel Farage declared victory and walked away. That said, the populists who get to power tend to find a way to stay there. Somehow along the way, it must be hard for them to represent the ‘true people’ against the ‘corrupt elite’. They can try, of course. Donald Trump still talks about his great electoral victory over Hilary Clinton. But they lose authenticity.

If you look at this life cycle a different way, though, the evolution is easier to understand. You start by asking how people get political power. They can either lead a political party, they can dominate a new and important issue, they can promise to represent a specific group of people, or they can do some combination of three – party, issue, constituency. Anyone who rises in the traditional way through an existing political party is going to be hard to describe as a populist. Rising up through existing political parties is how elites are made.

Populists are people who try to come to power from outside traditional parties. They tend to run against traditional parties. They may even challenge the whole party system. In doing so, they have to explain how they can represent voters without that formal institutional intermediation. They also have to explain why those voters are not already represented by the traditional institutional array. This explanation may focus on an issue – think of the environmental movements of the early 1970s or the peace movements of the early 1980s; now thing about immigration today. In any case, the explanation usually focuses on the identity of the people. There is something about these people, populists argue, that the mainstream parties are ignoring. It could be their culture, their religion, their place in society, or their economic circumstances. The important thing is that something makes these people special. The populist claims to see that uniqueness and to celebrate it. The appeal is direct, and it is personal.

That appeal has to be direct and personal because populists do not have access to the kinds of resources that political parties and traditional political institutions have to offer. That is the point. Populists have to work outside the system. They have to find new ways to do things. Sometimes that is easy. If you own your own national television network and publishing empire, you do not really need a political party to get your message out. More often it is harder. Populists have to create everything from scratch. That is why they often spawn movements. It is also why they embrace new technology. Think about Podemos. Now think about what Barack Obama did to Hilary Clinton in 2008.

When populists come to power from outside the existing party system, they face immediate challenges that traditional political parties do not face. Often, for example, they do not have a deep bench of economic policy experts. They face a choice between co-opting the existing bureaucracy that they ran against in coming to power or bringing someone new in to take over those policy responsibilities. Usually, they rely on a mix of the two – co-opting whomever they can and bringing in new actors with little or no economic policy experience. This is the first point I want to make. Populists influence economic policy by bringing new people into the policy process. They do not have much choice.

New is not necessarily bad. But new is often different. Sometimes that difference is retrograde. Usually this happens when populists draw upon experts from the business community. These are the ‘practical men’ that Keynes talks about at the end of his General Theory. They have some experience in economics, but they do not have deep familiarity with the models and assumptions behind the tag lines – so they end up pushing arguments as ideological commitments instead of conditional probabilities. But populists may also draw on economists from outside the mainstream. Think of Peter Navarro in the United States. He is not a mainstream economist. By implication, you get more variety in terms of economic policy than the mainstream parties would bring. Those parties all clustered at the center of the economic policy discourse around arguments that there is no alternative to doing what everyone agrees makes sense; populists change that calculus by bringing in people who do not know the mainstream consensus or who live outside that mainstream.

This is my second point. The new variety populists bring to economic policy-making can create confusion both because of the content of the policies and because of the process. Mainstream political parties spend a lot of time honing their economic programs and fine-tuning the machinery for making and explaining their economic policies. Populists tend to improvise. Ina world of rational expectations, improvisation can be a little disconcerting. It is not a good thing to suggest you are going to take Italy out of the euro, for example. It is particularly alarming when that shows up in an early draft of a government contract. But that is a hallmark of working outside the mainstream.

 Of course, mainstream politicians can think the unthinkable as well. The difference between mainstream politicians and populists is the strength of their message discipline. Mainstream politicians will still make mistakes. Silvio Berlusconi talked about taking Italy out of the euro in 2006 and that did not inspire a lot of confidence. Berlusconi’s team knew how to walk that idea back without doing any real damage. Populists have a harder time correcting their mistakes. As a result, their policies tend to look inconsistent both relative to past governments and on their own merits. Moreover, the more inconsistent those policies look, the less effective the policies are in having their desired effect – because in a world of rational expectations, shaping those expectations is an important policy instrument.

This is where I get to my third point. Populists tend to be less effective in managing the economy. I do not want to hit this point too hard. There are moments where it is good for governments to try new things.Consensus is not always the hallmark of good policy. Nevertheless, the point about rational expectations is worth emphasizing because of the time-inconsistency problem that has become so central in the way we think about economic policy-making. Sometimes what works in the short-term is not good in the longer term. Donald Trump may be able to brow-beat countries into granting trade concessions and he may be able to brow-beat firms into holding onto existing plants, but those short-term victories are likely to add up to longer term problems. Political parties – as institutions – are better at focusing on the longer term. We always joke about how politicians never look further ahead than the next election, but political parties are an important corrective on that tendency. Populists lack that corrective. Long-run economic performance tends to suffer as a consequence.

Worse, populists tend to distrust institutions that are designed to resolve the time-inconsistency dilemma. They view those institutions as constraints. Here I am talking both about politically independent central banks and about international patterns for macroeconomic policy coordination. Of course, some populists come to power and immediately put on the clothes of responsibility. I have already mentioned Barack Obama in this context. He was a populist at the beginning, but he quickly became the mainstream – and his original supporters still sting for the speed of that transition. Other populists take a different turn. One of Viktor Orban’s first tricks when he came to power in 2010 was to challenge in the independence of the Hungarian central bank. Recep Erdogan took longer to get around to that,but he did so eventually. Now Donald Trump is taking a hard look at the Federal Reserve and the World Trade Organization. I do not even need to mention the current Italian government’s attitude toward the European Commission.

These challenges are worth noting because they complicate the process of coordinating economic policies across countries. This is my fourth point. Populism tends to weaken economic policy-making at the international level. That is true in terms of monetary policy, fiscal policy, and trade policy. You can see the evidence everywhere around us. Moreover, the problems tend to get worse the longer populists stay in power and the more thoroughly they penetrate or take over the economic policy machinery. Of course, that is not always or necessarily the case. I am probably overusing the Obama allusion,but think about what Emmanuel Macron is doing. He came to power as a populist. He quickly morphed into the elite. He brought a cracker-jack economic policy team with him from the old stalwarts of Dominique Strauss Kahn. And he is pushing aggressively to reform the country’s institutions. He is not always successful,but he is pushing toward and not away from the mainstream consensus. In other words, it is possible for populists to do the right thing.

Often, though, they push in the other direction. This is partly because the people they bring into the policy machinery do not know what they are doing and so have to learn on the job. It is also partly because the existing bureaucracy tends to get disillusioned with public service and so leaves to find other opportunities. Worse, populist governments end up pushing in the wrong direction because some of the people who get brought in with the big changeover in economic policy-making are actually looking to profit from their new-found influence. Political parties tend to impose discipline on their members as they socialize new generations of elites. They teach an ethic of public service that is consistent with a high level of responsibility. Unfortunately,one of the side effects of populism is that it brings people into politics without that socialization or ethics. You can see that in Hungary, Poland, and the Czech Republic; you can also see that in Turkey. I do not even want to mention what is going on in the United States.

This abuse of public office is an international problem because it changes the way policymakers view each other across countries.International cooperation requires mutual respect. This is where I get to my final point. Every country right now faces the challenge of populism. Sometimes that challenge leads to renewal. All too often it heads in the opposite direction. Where the mainstream faces a threat at home, it those mainstream elites are going to be very intolerant of any failure or confusion abroad. If you want to know why the Dutch government is taking such a hard line on macroeconomic governance reform at the European level, that is your explanation. Mainstream Dutch politicians simply do not trust the new elites that are popping up in other countries and they are having a devilishly hard time fending off populist challengers at home. If they show weakness abroad, they will suffer politically. The Dutch government has a one seat majority in parliament. They cannot afford to suffer.The Dutch are not alone. I could tell the same story about Germany. The bottom line is that the question Lorenzo asked me to consider – what is the relationship between populism and economic policy? – is a vitally important question. The answer tells us a lot about why our economies are struggling. It also tells us a lot about the future of Europe. It is worth stressing, however, that future is not predetermined. I do not think that populists are necessarily bad for democracy. I do not think we should resist change in politics. We just need to find ways to adapt to this new situation. I do not know how to do that, but that does not mean adaptation is impossible. It just means Lorenzo will have to invite me back to talk about a different question. Many thanks for your attention.

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