The issue of populism in politics has gained popularity with the ascent of the ’’antiestablishment’’ movements in Europe and the USA. Among these, we should include the election of Donald Trump for the president of USA, the success of Brexit in the UK, results of the AfD in the federal elections in Germany etc. Political populism is connected to authoritarian tendencies and undermining of liberal democracy, and most people approach this phenomenon through these lences. Unfortunately, the issue of economic populism often is overlooked.

Populism is not a well-defined political ideology, but is more a technique for winning power or remaining in it. Although the populist tones that are present in different countries differ, having in mind different social situation, the overall populist narrative shares strong similarities: trust in the leader instead to institutions, collectivism (left wing, based on class or right wing, based on ethnicity or origin) and focus on the clash between people (interpreted as an organic, non-changing entity) and the sinful elite that works actively against the best interest of the people.  

Populism in economics

Economic populism is an ancillary tool for political populism. It is not by default against democratic procedures and processes, but it creates possibilities for a charismatic leader, ‘’presenting the will of the people’’, broadens the scope of his / her jurisdiction and control over resources that will later enable him to remain in power and further increase his / her influence through different misuse of state resources. Populism is evident in providing easy short-term solutions to complex economic problems. Economics is one of the areas that is especially prone to this kind of approach since in this area good intention can have bad results, long-term costs are usually significantly higher than short-term gains, while concentrated benefits are more visible than the dispersed losses.

Let’s take, for example, the issue of minimum wage. Most of non-economists would agree that the minimum wage should be increased, in order to provide higher incomes and quality of life for the least paid workers. On the other hand, most economists would not agree that an increase in the minimum wage would be a good way to increase income of the poorest workers. Economists consider wage levels to be connected to the level of productivity – which is the main reason why IT experts have higher wages than tailors, and therefore the increase in the minimum wage will lead to the fact that employers will not find profitable to employ some of the workers, those that have lower productivity than the increase in wages would presume. With the increase in the minimum wage, salaries of the workers that are least paid will actually be higher, but the total number of people employed be lower, while unemployment and consequently lower quality of life will hit precisely those that we wanted to help in the first place. Instead of the minimum wage increase, most economists would propose in lowering the labour tax wedge on lower salaries, improvements in the business environment and provision of more quality education which would increase productivity, encourage new employment and increase wages.   

50 shades of gray

Although characteristics and messages of economic populism differ across different populist movements, their basis is very similar. Idolatry of the omnipotent leader leads to the idolatry of state owned enterprises as development vehicles and representation of the state as a successful entrepreneur, which leads to demands for keeping government ownership over companies or their new nationalization. Collectivism further feeds this view, adding distrust towards foreign elements, such as companies and especially banks in foreign ownership. Imports are therefore presented as negative, and exports as positive, while certain industries are presented as strategic, so domestic ownership of the main companies in their fields is required, which is evident in policies of ‘’hungarizatrion’’ and ‘’polonization’’.

Since economic populism presents itself as panacea to local troubles, the one in the USA is more concerned with international trade and import substitution, while in the EU the dominant narrative concerns non-European migrants. It is true that the question of immigrants is also raised in the US, and that populist tendencies regarding foreign trade were also evident in Europe in the case of TTIP, but they for the time being do not seem to be the main point of the populist narrative

Consequences of economic populism

Economic populism enables authoritarian leaders to gain new powers and use them not to improve the overall economic situation, but to entrench his position in power. Positions in the public sector become available only to those with corresponding political ties, state owned enterprises are managed by party aparatchiks, the control over SOE advertising policy buys over loyalty of the media, new business regulations create situations in which people close to government do business more easily than those with ties to opposing political groups etc.

Because economic populism leads to state capture and the dissolution of institutions, it also brings bad economic results. Populism does not create room for independent judiciary and other institutions, from cadaster service to tax authorities, since it could challenge the influence of the leader and decrease the political benefits accruing from rent seeking activities. However, without the rule of law, secure property rights and competition, there is no business environment that is conducive to new investments and economic growth. Therefore, economic populism does not only harm the democratic liberal order that seemed unchallenged since the fall of the Berlin Wall, but also its economic foundations in Europe, that are visible in the 4 freedoms of movement: of capital, goods, services and people within the EU. And that would potentially lead to catastrophic economic results.