Why hasn’t populism done more economic harm?

If you’re so smart — goes a not very smart saying — why aren’t you rich? Well, Americans are adapting that question for Donald Trump. “If he was so bad, why were we rich?” Even voters who regard him with fear and distaste remember that he oversaw a non-inflationary boom as president. Much of that “achievement” was an accident of timing, of course. He had received a benign economic inheritance from Barack Obama. He was long gone when the invasion of Ukraine turned the global trade in vital commodities upside down.

But, and this is the worst that can be said, Trump didn’t squander that luck. Four years of rule-breaking and mob-rousing didn’t do active harm to US living standards.

Now consider another controversial leader who is up for election this year. After a decade of Narendra Modi, India has the fifth-largest output in the world, up from 10th. It could dislodge Japan from third place before the 2020s are out. Given India’s potential in 2014, a different government might have achieved much the same performance. However, as with Trump, the point is that even if a boom was always due, Modi’s alleged authoritarianism didn’t stop it. As international watchdogs marked India down from “free” to “partly free”, its economy soared.

This is the liberal nightmare: not that populists abolish democracy to remain in power, but that they perform well enough not to have to.

It is also intellectually confounding. Populism should be bad economics. It tends to set itself against things conducive to growth, such as immigrants (who expand the labour force), judges (who enforce contracts), technocrats (who set interest rates and competition rules) and free trade. Business professes to hate arbitrariness, the defining feature of strongman rule. Better a bad but consistent law than a leader’s personal caprice. The autocratic habit of feuding with independent central bank governors should on its own depress the animal spirits of investors.

Yet here we are. Of the world’s most famous populist heads of government, how many have a defining economic failure on their record? Recep Tayyip Erdoğan, perhaps. Other than his losing fight with inflation, there are fewer examples than you’d think. Italian growth is not much slower under Giorgia Meloni than it was under more conventional prime ministers. Benjamin Netanyahu has been feted abroad for Israel’s economic performance.

The UK is rare in that a causal link can be drawn between a discrete populist act (Brexit) and national economic underachievement. Sure enough, politics there has corrected somewhat, with chastened voters turning towards sensible-to-bland politicians as though it were 2005 again. The lesson? In order to get over populism, a country must suffer materially at the hands of it. (The moral case against populism isn’t enough.) The surprise is that such economic damage has been so rare.

And why? One view is that, from the beginning, we commentators lost all sense of proportion. These “strongmen”, “autocrats” and “demagogues” are much more pragmatic than such excitable language allows. Whenever the Supreme Court ruled against a Trump policy, he didn’t have the judges arrested. He appealed, or tweaked the policy. He hounded Jay Powell via Twitter, but didn’t countermand his decisions as the Federal Reserve chair. At some base transactional level, Trump seems to know how far he can push things before harming the institutional framework in which commercial life takes place.

A bleaker view is that economic harm takes time to show. This month, Lawrence Summers warned US corporate bosses against embracing Trump. Citing Mussolini, the economist said such wild leadership can be of transient use to business but “ultimately brings a great deal crashing down”. The important word is “ultimately”. Populism’s drag on the economy is gradual and cumulative. It is there each time vilification of the “deep state” puts a talented graduate off a career as a regulator, or an unfunded tax cut swells public debt, or a tariff gums up world trade, or partisan manipulation of the law saps confidence in the sanctity of contract.

When populism began to break through around a decade ago, I wasn’t alone in assuming that it would be too expensive to the average voter to last. For the most part, I was over-optimistic (or, if you prefer, pessimistic). Think of the ideological challenge here. It was awkward enough that China enriched itself without democratising. If existing democracies become authoritarian without getting poorer, even the sunniest liberal will feel night closing in.

© The Financial Times Limited 2024.
All Rights Reserved. Not to be redistributed, copied or modified in anyway.

Money.it has hosting rights to certain limited Financial Times articles. This is not a live feed of Financial Times content.