Populist Versus Liberal Democracy; The Choice Before Us?

Donald Trump is not the end of an era but the beginning of a new long one, argues the celebrated New Zealand economist Robert Wade, who is a professor at the London School of Economics.

 Wade thinks the new era may last up to thirty years. He points out there have been two post-war eras of about that length: welfarism from 1945 to 1975-80 and neoliberalism from 1975-80 to the Global Financial Crisis. (The interwar period was of a similar length.) He is not arguing that the thirty-year era is inevitable; just emphasising that the new era is likely to be measured in decades rather than years.

 Nor is it solely about Trump. Other leaders reflect the new political economy: Bolasario of Brazil, Johnson of Britain, Morawiecki of Poland, Modi of India, Orban of Hungary, Putin of Russia (perhaps Xi of China?). Their political style might be described as ‘populist democratic’, with strong popular followings who do not respect minorities, are casual about the rule of law and tend to be economically inward-looking.

 There is a fifty-year-old economic literature which may shed some light on this relatively new phenomenon. Once it was common to see the central political tension between those on high incomes and those on low incomes. But economists observed that there was a potential for a coalition of the rich and poor against those in the middle. That seems to be what is happening, although not quite in the way that was expected.

 Their theory did not predict the massive income tax cuts that Trump and his allies have given to rich Americans, with Trump’s mass supporters getting little economic reward. Johnson and his allies are promising major income tax cuts to the rich, while pursuing an extreme Brexit policy which will be damaging to the populist voters who went for Leave. In each case the tax cuts will be paid for by future generations there is little in the cuts for the populist support; they are likely to suffer from consequential cuts to public services.

 Instead, they are promised what are called ‘cultural’ benefits. Typically, these divide the populist supporters from others, including ethnic, religious and sexual minorities, and from other nations. The reward from the populist leader is that the supporters get their prejudices enhanced and the outsiders may be further demoted.

 Does this compensate them for their economic loss? The populist supporters have not being doing very well in the past; the bulk of Trump’s supporters may not have had a real income increase for a generation; most Brexit supporters have suffered greatly under Britain’s austerity policies since the GFC. (Wade calls it the North Atlantic Financial Crisis.)

 So while the economics rhetoric says ‘our policies have been good for you’, the reality has been that for many they have not been. But nobody listens, except the populist leaders who say to them  ‘I hear you; it is not your fault; I am going to do something about those wicked people in Washington (or London or wherever).’ What the something is, is unclear; the populist leader moves smoothly on to attending to their cultural prejudices.

 The fact is that the elite has frequently lied (or at least told half-truths) to these people.

 It has said that globalisation has been a benefit to everyone. That is a hard proposition to defend simply. It is true that usually the aggregate benefits from linking an economy into the rest of the world economy exceed the aggregate costs. But that will not be true for every single person. Some will lose their jobs and, if they find another, it may well be less well-paid, be less satisfying and provide less security than their former work. Typically, no significant support is provided to those suffering the painful experience of transitioning between jobs.

 Another one of these lies is well illustrated by New Zealand’s experience during Rogernomics. Famously, Walter Nash said that in times of hardship, ‘the young, the sick and the elderly had first call on the state’. It was at the heart of welfarism. But when the crunch came, those protected were at the top of the income distribution; the young, the sick and the elderly were left to take the substantial income cuts. Thirty years later some of the most brutal cuts have yet to be reversed.

 (A few weeks ago, I heard a senior Rogernome say in public that the eliminations of subsidies to industry during the Rogernomics era left fiscal room to provide greater social support; this from someone who was there when the greatest ever real benefit cuts were made.)

 So they are right not to trust ‘us’ when we advise against, say, Brexit. Given my expertise, I am certain that a no-deal exit will be catastrophic to the British economy, but why should they trust me? (I make a similar assessment about the US trade war with China, although the impact will not be as great.)

 The problem which Wade addresses is, why now? That the elite have been less than honest is not new; indeed there are nice examples of economists pointing out that the aim of the policies during the Great Depression aimed at shifting the burden of adjustment from the rich to everyone else. Coming to think about it, that was a time of the rise of fascism, which is a kind of the populist democracy.

 Wade suggests a key element is the rise of social media. In my childhood I well remember what we called ‘pub talk’ in which uninformed, divisive and inward-looking sentiments were common. Adjusting for changing times, they sound very much like what we hear on talkback radio today. Social media enables those holding such views to gather together, find common community and make the pub talk echo loudly throughout the world.

 From one perspective this is an extension of democracy, but somehow it is leading us into a form of politics with which we seem uneasy. This issue is around the meaning of ‘democracy’; the contrast between populist democracy and liberal democracy.

 In the former, the rhetoric is the rule of the majority, although, as it happens, populist leaders are not always there with majority support. Trump was elected with fewer votes than Hillary Clinton. Johnson’s Tory party did not win a majority of the votes. Essentially what has happened is that antiquated political systems enabled the populist coalition to leverage itself into a majority which gives it, so it claims, the right overrule all else.

 Liberal democracy is not dominated by majority rule. More important is the right of dissent, the vision of a society consisting of numerous overlapping minorities. When all else fails, the majority makes decisions sensitive to the interests of all the minorities.

 Liberal democrats have been too complacent about promoting their vision (except in exceptional circumstances such as the mosque massacres). And they struggle with how to deal with those whose minority status lies well outside the liberal democrat vision (such as the mosque killer).

 Nor has it been sufficiently recognised that to get a liberal democracy to work requires an informed community, not only in terms of access to the facts but with an ability to evaluate them. For generations we have failed to teach the simplest principles of evidence-based thinking. Instead the public rhetoric is dominated by ‘truthiness’ – that the truth in a statement is determined by whether its suits the holder to believe it.

 Social media has liberated those who rely on truthiness. Perhaps it was always there, in the pub talk of my youth. (I do not remember because,  at the time, I was not taught how evaluate it.) Until recently, the elite controlled the media (another grumble from the populists). Pandora’s Box has been opened.

 As Wade warns, we are in a new political environment. If we cannot think through the implications, his thirty-year prediction may prove correct, subject to the caveat that the populists may wreck the economy and it will be even worse. .