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Michael R. Strain

Michael R. Strain

Populism has become a defining feature of public life. It embraces a narrative of victimhood and grievance, pitting “people” against “elites.” President Donald Trump’s protectionism and hostility toward immigrants are fueled by populist frustration on the political right. On the left, populism appears as resentment of the wealthy, and the Democratic Party’s presidential primary field is marked by proposals to penalize the rich. Compromise has become a dirty word. Political engagement with the other side is scorned. Taking half a loaf is worse than failure; it is betrayal.

How much longer will this last?

Economics has something to say on that question. In a 2016 paper, the German economists Manuel Funke, Moritz Schularick and Christoph Trebesch studied the political ramifications of financial crises. They built and analyzed a data set covering more than 800 elections in 20 advanced economies (including the U.S.) running from 1870 to 2014.

They found far-right parties see a 30% increase in their vote share in the five years following a financial crisis. The parties that gain are characterized by nationalist and xenophobic oratory. The most recent financial crisis fit this pattern, with right-wing populist parties more than doubling their vote share after 2008 in France, the U.K., Sweden, Finland, the Netherlands, Portugal and Japan.

Particularly since World War II, the economists found, crises make governing more difficult and are associated with shrinking majorities for the party in power, a strengthening of political opposition and greater political fractionalization. The number of parties represented in parliaments increases. Since 1950, more than one additional party, on average, has entered the legislature in the five-year period following a financial crisis. Street protests, riots and strikes occur more often.

In contrast, recessions not caused by financial crises see relatively little of this. The economists suggest non-financial downturns — think of an oil-price shock — may be seen by voters as excusable, out of the control of elites. Financial recessions, on the other hand, may be perceived as the result of policy failures and other elite decisions.

In addition, the measures used to combat financial recessions — central banks purchasing long-term assets, for example — are unusual, and may reduce confidence in government. Bailouts associated with financial crises may also be a source of populist angst, and financial recessions might cause ugly disputes between debtors and creditors that erode the social fabric.

The good news from the economists’ paper is the political upheaval caused by a financial crisis is temporary. Ten years after a crisis, nearly all the variables they study are back to their pre-crisis levels.

The U.S. is about a decade removed from the 2008 crisis. If the U.S. fits the pattern of the past century and a half, then its politics should be back to normal. Of course, they aren’t. Why? It may be the crisis a decade ago was so severe political normalization needs more time.

Indeed, the Great Recession ended sooner for some people than for others. It took nearly eight years after the recession began for the unemployment rate to reach its pre-recession level. In December 2012, over three years after the recession officially ended, 7.9% of workers were still unemployed. Prior to 2008, the U.S. hadn’t had a jobless rate that high since the mid-1980s. It wasn’t until about five years ago that the unemployment rate fell into the 5% range.

Given the slow recovery and the lingering economic and psychological toll of the Great Recession, it may not be surprising that populism is still an active force in the U.S.

Still, another argument for populism’s looming expiration date is the failure of its policies to deliver for the American people. Take Trump’s trade war with China, which has not led to a rapid resurgence of U.S. manufacturing jobs. It hasn’t even reduced the trade deficit. Average monthly trade deficits were higher in 2018 and 2019 than in the recent preceding years. And as its critics predicted, the trade war has lowered national income and increased the prices consumers face. (If a Democrat takes the White House in the 2020 election, a similar dynamic is likely to present itself. It’s hard to imagine, for example, that abolishing private medical insurance would deliver the health-care improvements its advocates promise.)

Economic reality is a powerful factor in politics, and given enough time the failure of populist policies will not be an exception to this rule. Indeed, such policies are already increasingly unpopular. In a new ABC News/Washington Post poll, 56% of respondents disapproved of the president’s handling of trade negotiations with China. Only 35% approved. Forty-three percent believed his trade and economic policies would increase the chance of a recession, and less than half approved of his handling of the economy. Sixty percent worried that the trade war with China would raise prices.

So don’t panic about of populism. And don’t overreact. The left shouldn’t weaponize the tax code to punish the rich. The right shouldn’t retreat from its long-held commitments to free trade, free markets, personal responsibility and openness to the world. The populist threat just requires a more mundane response: patience.

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Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”

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