In defense of economic populism

Populists resent the restrictions of executive political power. Since they claim to represent the “population” written in large terms, they see restrictions on exercising their power as damage to popular will. Such restrictions can only serve “enemies of the people” minorities and foreigners (for right-wing populists) or financial elites (in the case of right-wing populists).

It's a dangerous approach to politics, because it allows a majority to violate minority rights. Without power sharing, an independent judiciary or free media which all populist autocrats from Vladimir Putin and Recep Tayyip Erdogan to Victor Orban and Donald Trump hate democracy degrade in the tyranny of anyone who happens to be in power.
Periodic elections under populist rule become a smoke. In the absence of rule of basic human laws and freedoms, populist regimes can extend their rule by manipulating the media and judiciary.
The populist aversion to institutional restrictions lies in the economy, where the exercise of full control “in the interest of the people” implies that no obstacles should be placed on their path by autonomous regulatory agencies, central independent banks or global trade regulations. But while populism in political domain is almost always harmful, economic populism can sometimes be justified.
Let's start with why restrictions on economic policy may be desirable in the first place. Economists tend to have a weakness for such restrictions because policymaking, which is fully responsible for the extraction or withdrawal of domestic policies, can generate very unpleasant results. In particular, economic policy is often the subject of the problem economists call incompatibility: short-term interests that often hinder the pursuit of policies that are most desirable in the long term.
A common example is discrete monetary policy. Politicians who have the power to print money at will can generate <x0 microflation” to promote production and employment in the short term ) to say before the elections. But this has consequences, as firms and family members adapt to inflation expectations. In the end, discrete monetary policy results only in higher inflation without bringing benefits to employment or production. The solution is a central independent bank isolated from politics, operating only with the mandate to keep the price stable.
The costs of macroeconomic populism are similar from Latin America. As they argued years ago, Jeffrey D. Sachs, Sebastian Edwards i n Rüdiger Dornbusch, the unstable monetary and fiscal policies were the disaster of the region until it started cutting down economic dogmas in the 1990s. Populistic policies have repeatedly produced painful economic crises that harm the most the poor. To break this cycle, the region has returned to fiscal rules and technocratic finance ministers.
Another example is official treatment of foreign investors. Once a foreign firm makes an investment, it essentially becomes hostage to government whims. Promises made to attract the firm are easily forgotten, replaced by policies that press it for the benefit of national budget or domestic companies.
But investors are not fools and fearing that result, they invest elsewhere. Governments' need to establish their credibility has thus given trade agreements with so-called clauses to resolve investor-state disputes, allowing firms to sue governments in international courts.
These are examples of restrictions on economic policies that take the form of the delegation of autonomous agencies, technocrats and foreign regulations. As described, they serve the valuable function of preventing those in power from harming themselves through policies without foresight.
But there are other scenarios, too, in which the consequences of restrictions on economic policy may be less beneficial. In particular, restrictions can be created by particular interests or the elites themselves to cement permanent control in policymaking. In such cases, the delegation of autonomous agencies or the adoption of global regulations does not serve society, but only a small group of people.
Part of the current populist opposition stems from confidence, not entirely unjustified, that this scenario describes many economic policymaking in recent decades. Multinational corporations and investors have increasingly shaped the agenda of international trade negotiations, resulting in global regimes bringing unproportional capital benefits at the expense of the labour force. Severe patent regulations and international investors' courts are key examples. And the capture of autonomous agencies by the industries they're supposed to fix. Banks and other financial institutions have been particularly successful in achieving their goals and establishing rules that give them free hands.
Independent central banks played a critical role in reducing inflation in the 1980s-1990s. But in the current low inflation environment, their primary focus on price stability gives a deflation to economic policy deflation and is tense with employment generation and development.
A “liberal democracy” such may be in its own position in the European Union, where economic rules are designed without much consulting democracy at the national level. And in almost every member state, this so-called EU democratic deficit has promoted populist and Eurosceptic political parties.
In such cases, lowering restrictions on economic policies and turning policymaking autonomy into elected governments can be desirable. The extraordinary times require freedom to be tested in economic policies. Franklin D. Roosevelt offers a proper historical example. His reforms demanded that he remove the economic restrictions imposed by conservative judges and financial interests at home and by the national gold standards.
We must constantly be cautious of populism that stifles political pluralism and undermines liberal democratic norms. Political populism is a threat that must be avoided at all costs. Economic populism, rather, is often necessary. In fact, in such times, it may be the only way to prevent his most dangerous political cousin.

Project Syndicate