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- [00:01]
A
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B
Pushkin Many more or less orthodox economists and market watchers are surprised that Donald Trump's nationalist populist policies have not stopped the US Economy from growing nicely this year, especially relative to the rest of the world. And they haven't stopped US Markets from screaming higher either. Today on the show Populist Economics and Does It Work? This is Unhedged, the Markets and Finance podcast from the Financial Times in Pushkin. I am Rob Armstrong, coming to you from a drizzly New York City. Joining me down the line from London is Martin Wolff, the FT's chief economics commentator. Thank you for being on the show, Martin.
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C
It's a pleasure, of course.
- [01:26]
B
Let's start with the most basic question, Martin. What is populism? It feels like one of those things we know when we see it, but it's not easy to define. What makes a populist a populist?
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C
I think it's a very good question and it's difficult to define because it has one or two broad characteristics which all populists seem to share. But there are many, many varieties and flavors. Scholars have focused down on the idea that all populists share, as it were, a style of politics. They operate within democratic systems where systems where the votes of large numbers of people really count and their appeal is to quote, unquote, ordinary people. And what they say is you are suffering for whatever reason, different reasons, economics, socially, whatever, because there are elites which are malevolent and are ruling against your interests, usually in a sneaky and nasty way, but they're against elites. And the populist leader says, trust me, allow me to do what, whatever I want on your behalf, because I represent the people against these elites and you're all going to be fine.
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B
There's another term you used in your column on this topic a week or two ago which I think is important, which is institutions. Populists take a certain stance towards the institutions that define a democracy.
- [03:09]
C
Well, I would say that these are really two sides of one coin in a moderately sophisticated system. Anything like what we are familiar with across the world today, to run a complex society requires quite an array of quite complex institutions. It's not as it was in the Middle Ages, where institutions were really very underdeveloped. One or two, there were the courts, it was the church, but really nothing like today. So the populist can appeal to the idea that these elites that people mistrust run the institutions. They are the people whom they deal with every day, who run the courts, the bureaucracy, the political system and corporations. If they're left wing populists, they will be appealing against the latter. So the elites and the institutions are, if you like, almost two sides of one coin in the, the modern polity.
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B
There is a side of me that says this populism, it sounds like it's doing what democracy is supposed to do. In a democracy, power flows from the people. And the point of the government is to help people. And not just people, you might say it's there to help the little man the least advantaged. So what's the problem here, either from a kind of broad point of view, or specifically from the point of view of economics?
- [04:38]
C
Let's start with the broad point of view, because I think you've got to the heart of what one might call the democratic dilemma. I recently wrote a book called the Crisis of Democratic Capitalism and a lot of it was about the role of institutions. There's obviously, as it were, a naive view of democracy, which is decisions are made by the people, everything is decided by the people. And probably the best example of that was sort of Athenian democracy, where the people, where it was actually just the men and only the citizens. But anyway, the people all met in a council consisting of whoever turned up and they voted on everything they put stones in, if I remember correctly, in this jar and made their decisions in this way. Now the problem with this is we don't live in the Athenian economy or the Athenian state. We have extraordinary large countries by historical standards. In the case of the United States, what is it, 350 million people or so. And decisions have to be made by these people. And we've decided, I think, on the whole, rightly, even in Switzerland, we'd use referenda a lot. It's still decided in this way that a lot of decisions have to be delegated to institutions with expertise, because basically you can't have votes on everything. And really the people can't be expected to understand, for example, the details of monetary policy. What should the central bank be doing about monetary policy this week? Well, even among economists, most wouldn't really know. If you think about the military, if you think about the police forces, if you think about the courts, the people who run the health system, the people who protect the environment, all these areas of government that we know we need now require a great deal of expertise to run. And we rely on these technocrats because they obviously are technocrats, because they've spent their lives in this particular area to do this. But we also think that the big decisions within which they operate should be made democratically. And there's obviously and profoundly a tension in this. And my view is very, very simple. The tension is one that won't go away. So we do need democratic sovereignty, but we also need these institutions to operate in a reasonably effective, professional manner. Well, what happens if, if the elites sort of fail in a very visible way? Well, then you get inevitably a politics which says these elites have to be cast aside, and that's populism.
- [07:31]
B
And so the economics comes into the picture now because you marshaled some empirical evidence. Not only that over time, populism diminishes economic growth relative to what it would have otherwise been, but there's actually differences in the economic impact from different flavors of populism. So walk us through the facts, as it were.
- [07:59]
C
This particular bit of research was done by three German economists and is, I think, rather remarkable. So the point is, times happen, and in fact, they give many, many examples of such times over the last 120 years or so when, for the reasons we've already discussed, people lose confidence in the institutions that are running their society. And there are a whole host of reasons for that, but often because they rather visibly fail. There's a crisis that's very often the trigger for it, like the financial crisis. I would argue that Donald Trump wouldn't be president if it weren't for a financial crisis. So they then say, we're going to elect somebody different who's going to discard all these elites and their mumbling about the way things ought to be done and rule for us because we're not happy. And that's what the populist offers. The problem is often there are mistakes being made, and quite often some changes would be very, quite a good idea. But the populace generally don't understand how these institutions operate, don't understand the consequences of tinkering with them, and in particular in the economic side. So let's focus on that. Tend to say, the problems they are creating for us, they're incredibly simple to solve. If only I'm allowed to print more money or run a bigger fiscal deficit or impose 100% tariffs on all the imports of, I'll get rid of the problem and you're all going to live happily ever after. And that's the deal. And that's what the populace is elected to deliver. And the consequences tend to be pretty bad in the medium to long run, not necessarily in the next few weeks or months or maybe even years. The initial boost can be rather fun, but in the long run they tend to create real problems. And if they're ignored completely, you start having an economic system doesn't work very well. Just to go to the distinction between the left and the right, by and large, the left is even more contemptuous of the operations of markets than the right. The right populace tend to be a little more interested in how markets are operating compared to as an invented alternative, statistically invented alternative. Without these policies, over a period of 15 years or so, the economy with left wing populism ended up up to 15 percentage points, or around 15 percentage points smaller than it would otherwise have been. And in the case of right wing populism, about 10% smaller than it would otherwise have been. So really quite significant losses, but still consistent with some growth. On the whole, I think the experience is that, well, really messing up markets, I mean totally messing up markets, is even worse than sort of semi messing them up. And that's, I think, why the left on the whole have tended to do a bit worse than the right because.
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B
It'S in the news in recent weeks. I want to talk about the experience of Argentina, which seems to have the worst of both worlds. You just described in that it's had at least a century of vacillating between right wing and left wing populism. And looking at it from the outside, it feels like it's become a trap for them that despite having tried both versions of populism several times, they keep going back to it. Is there an explanation for the sense that Argentina's in a trap it can't escape?
- [11:48]
C
Well, this was sort of the argument I made in my column, or an argument I made. All countries are sui generis. So anybody who's an expert on Argentina will immediately say, well, there is special condition A and special condition B here. But I think the long story that you're getting at is you have a populace in Argentina. It's been predominantly on the left. And the most famous figure is Peron, who was president in the middle of the 20th century. And essentially his view was we'll have high protection, give industrial workers a better deal, reduce our dependence on trade, we'll have big budget deficits and we will do welfare. And the problem is the big budget deficits were destabilizing and produced chronic cycles of Inflation and hyperinflation and led to defaults again and again and again. And the protection meant you had a completely uncompetitive, internationally uncompetitive external sector, sorry, manufacturing sector can now it taxed exports. So export performance was very poor. So you had chronic balance of payments problems, which meant you constantly had to borrow from abroad. So when you defaulted on your debt, you don't just default your domestic creditors, you default to international creditors. And that means you need rescues. And you have this cycle of mad populism, then a period of conservatism, attempts to lower inflation, stabilize the public finances. But these always led to and coincided with deep recessions because that's what taking away the fuel of huge spending by the government financed by the central bank. You take it away, you get huge recessions. The politicians doing that tend to get very, very unpopular very, very quickly, particularly if they don't do it very well. So after a while the people say in the next election, well, we hate this conservative orthodox repression. We want the real stuff again. So they go back to the populist, usually leftist populist politics. And that creates another financial come inflation, come fiscal crisis, and the cycle just sort of goes on and on and on. And right now with Milei, we're seeing another of those conservative periods.
- [14:11]
B
The medicine is so disgusting that the patient rejects it.
- [14:15]
C
In essence, the medicine is very unpleasant. It leads to high unemployment, the mass poverty. It doesn't solve the underlying economic problems quickly enough because really by now they need to create a whole new economy because the tradable goods sector is so damaged and they don't have enough time and the people get completely impatient. And that may have changed with Mr. Milei, who's done a bit better in this last election than we thought. But basically they need a long period of stable, good, decent policy. The Chileans, I'm not saying Jessing is the model. Manage that by having a military regime that was moderately competent and incredibly brutal. Not a policy one would recommend. So the point is that once you start down this sort of path, getting back onto a sensible path is actually quite difficult because it's so far from where you are. So if you want to remain Switzerland, you sort of have to remain Switzerland all the time. I'm overdoing it. But you see the point which brings.
- [15:19]
B
Us to the United States, which is giving populism a go right now. And let me put a challenge to you, Martin. You and I both issued warnings about the stupidity of tariff policies. We both, at least I issued warnings about continued fiscal largesse And I would say that the two characteristics, most salient characteristics of Trump's economics are high spending and high tariffs. But the economy has scraped along nicely, thank you. The world trading system has absorbed Trump's tariffs. Now he's walked them back a little bit to, you know, whatever. The average level is now between 15 and 20%, and things are chugging along. The accusation from some of our readers, Martin, is that we have been hysterical because Trump is not our guy and we're biased against him. How are we to respond to that challenge and say this is populism and insist that it's dangerous?
- [16:30]
C
Two different questions, but they're both very important. One, are these good policies? And I think the answer to that is no. We can discuss that at length. And the second question is over what sort of time horizon and how would you expect these policies to affect the US Economy? So, on the former, I think we can leave that aside for the moment because it's not directly relevant. But I think I certainly didn't have the view that this would crash the world economy overnight. Now, if he'd stuck with the tariffs of April ii, it might, but he didn't. There's a very famous quote from Adam Smith, the father of modern economics, that there's a great deal of ruin in a nation, and in the case of the United States, there's more ruin in the United States than anywhere else. So it has very solid international credit, clearly better than any other country in the world. It has clearly the strongest economy in the world, which is quite astoundingly self sufficient. If you look at its ratios of trade to gdp, for example, which is one of many examples. There are one or two things it needs from the rest of the world. Most obviously, we've discovered rare earths and critical minerals. But basically the US Is a fortress. It has extremely sophisticated capital markets and so forth, and a pretty prudent central bank, which has not done anything wild in any way since Mr. Trump got in charge. And the fiscal policy he's introduced is very expansionary and it's leading to a steady and progressive buildup of debt. But there's no reason to suppose that it's sort of going to go over the cliff tomorrow. So my view would be, so what's to worry about?
- [18:21]
B
You've just calmed me down immensely. The rest of the world may be damaged by Trump's policies, but what do we have to worry about as Americans?
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C
In my view, there are two things that you have to worry about. Well, I would say there are three or four Things. First of all, I think cumulatively he is damaging core institutions of the United States, which will affect its long run growth potential. So one example, let's assume he is going to end up damaging very significantly American science. Over what time horizon would I expect that to affect the American economy? The next generation, not sooner than that. Most of the science that is going to be applied now in the American economy existed for a long time. Even AI is pretty old as the fundamental science. So these are things that will affect the economy over a generation if you mess up the rule of law. So basically corporations are less certain of the outcome of legal processes. They're fearful of what the government might do to them that might affect some investments at the margin and cumulatively more. And in the end you will end up in a different place. But Again, this is 10, 20, 30 years. If you look at American public debt, if the American public debt gets to 160% of GDP, will that be the end of America? Probably not. It's the most solvent country in the world.
- [19:43]
B
Not using the example of Japan.
- [19:45]
C
Admittedly, Japan is a creditor nation, but the US is the best debtor country in the world. The trade policy means that tax on imports is a tax on exports. There will be sectors that will be weakened cumulatively over time. A lot of the new production that will be created in the US will be inefficient. That will affect growth somewhat, but it's not gonna be like Argentina. America still has a very diversified economy. I think the problem with what Trump is doing is the damage will be real, but it will be long term. It's not gonna be tomorrow. And if you look at serious analyses of protection, what happens to a country which has protection? It leads to a smaller economy and a smaller trade sector, but it doesn't lead to a overwhelming crisis. Even the most extreme case I've worked on in my life, India in the 50s, 60s, 70s, yes, growth was slower than it should have been, but the economy still grew. So I think we should avoid saying this is the end of the world tomorrow. That's the whole point of this analysis. In this report, what it says is you lose quite significant GDP. They say maybe 15% relative to what it would otherwise have been over 10, 20 years. Less for right wing populism, 10%. So you would be poorer than otherwise, but it's not the end of the world. I think Brexit is making us poorer than otherwise, but Britain isn't disappearing. So I think it's very important for analysts not to go out there. And say this is the end of the world in terms of it's going to create a financial crisis. This won't create a financial crisis. The fiscal policy might at some point. The deregulation of finance. They're going in for might at some point. But normally these processes are slow. That's why you don't notice them till it's too late. And that's why when it does become difficult, it's so difficult to reverse because so much has been damaged that you haven't really noticed. That's, I think, the whole point of these analyses.
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B
It's boiling frogs.
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C
It's boiling frogs.
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B
Slowly. We are the frogs.
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C
That is, I think, a very good analogy. That's, I think, the most sensible way of viewing what this is doing to the US and it's doing to the world 20 or 30 years from now, if this continues, the US will be a different place from what it would otherwise have been with quite different institutions. We'll probably have got quite used to it, but I think it's pretty certain it won't be as effective as the U.S. we know.
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B
Listeners, it is getting a little warm in this pot of water. We'll be right back with Long and Short.
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- [22:45]
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B
Speaking of Alternatives, listeners, welcome back. This is Long and Short, that portion of the show where we go long things we like and short things we don't like. Martin, what are you long or short today?
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C
Well, I'm long on China, and I don't say that with all that happiness, but I think the world is moving very nicely in China's direction. They have shown themselves quite astoundingly technologically innovative. I think they are feeling quite confident about the rest of the world's relationship with them because the Western alliance is disintegrating and I've just returned from China. I've been there for a few days, and I think they're feeling very comfortable and I think they're probably right.
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B
Martin, I'm going to go short profitless tech companies. There's been a lot of worry and perspiration about what will happen with the AI bubble, but most of the companies involved in that, most prominently are large, profitable companies that can survive. Quite a lot less commented upon is is the small army of tiny, profitless tech companies whose valuations, both public and private, have shot through the roof. Martin, we've seen this movie before. It ends badly. With that, we will be back in your feed next week. Martin, thank you for coming on the show.
- [24:31]
C
It was a pleasure.
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B
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our Executive producer is Jacob Goldstein. Topher forges is the FT's acting co head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedged offer I'm Rob Armstrong. Thanks for listening. Sam.