Macro Matters: populism and the pandemic - with Barry Eichengreen

Macro Matters: Populism and the pandemic with Barry Eichengreen

Stephanie

Hi, and welcome to Macro Matters. My name is Stephanie Kelly and together with my co-host, Paul Diggle will be guiding you through the complex world of politics, economics and markets. As we approach the end of 2020, it's hard not to start to think back to this time last year. I'm really feeling like we just had no idea what was coming our way. The COVID crisis has presented really unprecedented shocks to how we live our lives. And then that kind of really profound implications for the global economy and for markets. In addition to all this COVID uncertainty, the kind of biggest political risk event on the calendar, the US presidential and legislative elections are set to redefine the policy and political backdrop in the United States, particularly as president elect Joe Biden is set to take office in January most likely would slip Congress. And we've talked a lot about those US elections on this podcast in previous episodes. So we thought this would be a good opportunity to think of how 2020 has affected one of the key themes that we talked about a lot in our kind of investor discussions, which is the rise of populism. And to do that, I'm absolutely delighted to be joined by Barry Eichengreen Professor of Economics and Political Science at the University of California in Berkeley. He's widely renowned for his work at the intersection of politics, economics and history. And he's the author of really quite a lot of publications, but in particular, the smash-hits that are really well renowned, 'Golden Fetters', 'Exorbitant Privilege', and most recently, 'The Populist Temptation'. So thank you so much, Barry, for joining us.

Barry

Good to be with you.

Stephanie

So I thought maybe we could start with talking about your work on populism. So we first met after you published your book in 2018, looking at populism drivers and the challenges in the modern era. So I wonder if maybe to start off, before we get into all the mess of 2020, can we talk about what the key thrust of that work was? And maybe even start off with a really simple question, or what might seem simple, which is, how would we even define a populist? What is populism?

Barry

It's actually not such a simple question. I've been grappling with it now for four or five years. I was prompted to write my book, 'The Populist Temptation' by the election of Donald Trump in 2016. By the Brexit referendum, and there was debate then there has been debate ever since about whether Trump is a populist whether leave was a populist movement, and if so, what that meant. My preferred definition of populism is a political movement or a populist political leader is a politician with three aspects to him or her typically, him. Anti-elite, authoritarian, and anti-other were the other can mean anti-immigrant, anti-foreigner, anti-religious-minority, anti-feminist. If you look at Trump, there is an element of that in his other rhetoric as well. So that implies that there are different flavours of populism. I'd like to distinguish left wing populism, which emphasises the anti-elite aspect, and right-wing populism, which emphasises the anti-other.

Stephanie

That's a really useful framework, I think, particularly because we do get that kind of question mark, there's a tendency, and maybe for investors, that tends to be more of a focus on that right-wing populism, in part just because of, I guess the impact that that anti-other can have on concepts like globalisation and things. So maybe, maybe to move on, then? What are the key drivers in your work that you've identified? What causes populism to increase? You know, is it an event? Is it a series of events? Do you kind of buy into the economic arguments or the cultural arguments? How do you see it?

Barry

There is the economic interpretation and then cultural or identity politics, interpretation. I'm first and foremost an economist. So I'm more comfortable analysing the economics and that is what I tended to emphasise in my book, that economic grievance economic insecurity, especially our drivers of populism, but the China shock had a lot to do with political polarisation in the United States and I think in the UK, as well. It had a lot to do with the rise of Donald Trump. But, the identity politics aspect, the once dominant majority feeling that it is being crowded-out politically and socially by new groups of recent immigrants, other minorities - women. I think is an important aspect as well. And as time has gone on, I have tended to acknowledge and place more weight on identity politics aspect. Trump's appeal is not so much that he really caters to the left behind manufacturing worker, although he spouted some of that rhetoric, as much as it is the identity politics aspect, which I think has become increasingly clear over time.

Stephanie

Yeah, I think that that. To be honest, I mean, I've read a lot of your work, and I think the kind of natural intersection there becomes difficult, I think, to even, you know, identity politics, there is an economic link as well, that you can kind of tease out and I think as we go on to the Covid conversation, we might tease that out a little bit more. But maybe just to round off on the concepts that you touched on in your book. What are the impacts, you think that populism has on economic policy? As you said, you're an economist. And, obviously, a lot of our listeners are interested in what all these things mean, from an economic perspective. So what kind of impacts can this kind of increase in populist support have on on policy and on economic growth?

Barry

Typical populist politician or populist inspired government doesn't make economic policy on the basis of facts. Or, doesn't easily defer to the so-called experts, economic experts, or others. So policy tends to be more scattershot. Policy tends to be less sustainable over time. There is often a disconnect between the aspirations and aspirations of policy, and the achievement. So none of the aforementioned is necessarily unique to populist politicians or leaders, but it's more pronounced. So if you look at the history of populism in Latin America, there is now a long history of such that span, basically spanned the 20th century in a variety of different countries and has now infected the 21st. You see very sharp swings in policy, as populist leaders gain power, they cry to reorient policy and that reorientation proves not to be sustainable in the end.

Stephanie

I think just what you've said there has really sparked a link that I hadn't thought about that much before. But you know, when you define populist leaders and populist parties, one of them is that authoritarian element. And I guess the natural upshot of that is if you're an authoritarian, your willingness to take advice from scientists or experts, is kind of, I imagine lower than a more moderate or, you know, more kind of consensus building approach to politics. Although, as you say, and I think frequently, I get questions from investors about why a politician of any stripe has made a decision. And it's not always necessarily on the basis of what we might think is the best economic choice. And what kind of solutions do you think there are to avoiding this? Because obviously, these wild swings and policy, the uncertainty that it creates the animosity, socially, that it can create aren't particularly desirable for investors. But, for individuals in general, what can we think of in terms of solutions to arresting the rise of populism or kind of challenging it?

Barry

I looked hard when I was writing my book for instances where populist uprisings or proto-populist uprisings were effectively subdued where the mainstream parties and politicians were able to remain in office. Populism in the United States in the late 19th century when William Jennings Bryan ran against William McKinley. Bryan being the candidate, both of the Populist Party and the Democratic Party, although going down to defeat and then FDR, looking forward to confronting some populist opponents in the 1930s. Both of those populist threats were repelled. Partly by the mainstream adopting elements of the populist agenda or acknowledging that there weren't valid economic grievances and addressing them through, in the US at the beginning of the 20th century, the progressive movement, what we call in the United States, Antitrust Effective Competition Policy to deal with all powerful railroads and large corporations in the 1930s. By addressing perceived economic insecurity, with, for example, unemployment insurance, something you did in the UK, as well, and the Social Security Act. So I think the name of the Social Security Act is revealing. It was addressing perceived economic insecurity in the 1930s. And that was enough for the Democratic Party in that instance, to remain in office. So I think we know what needs to be done to address the economic grievances.

We know In principle, implementing those policies, ensuring that people have access to health care and a living wage, and over time, education and training. We know how to do that. We're not so certain we have the political will, to achieve it. Addressing the identity politics, issues is more difficult. So we did that in the United States in the late 19th century, and early 20th, in a not very savoury way through the Chinese Exclusion Act. The so called gentleman's agreement with Japan where they wouldn't issue passports to Japanese citizens who wanted to come to the United States. The equivalent of voluntary export restraints. I think there are more constructive ways to deal with identity politics concerns, but they work very slowly, over time. So people don't fear the other as much when they have contact with this mysterious other. So I think the solutions lie in addressing problems of residential segregation, ensuring that schools are integrated. So you don't fear people have a different skin colour or national origin or religion. Because you get to know them on the football field, or whatever. But that kind of policy takes time to work its magic, if you will.

Stephanie

Yeah, absolutely. And I think sometimes people are really shocked to find out that the strongest kind of anti-immigrant sentiments can come from the most Anglo countries, the most white areas. Because, as you say, they don't have that contact and that familiarity, they just see headlines about immigrants coming into country. So I think that's, obviously, as you say, something that is a slow burn. And obviously, you need commitment at the local level, as well as the national level to get there. So maybe that's a natural segue then to how 2020 might have shifted things in terms of populism in particular, I think. So some financial markets, in particular, are hopeful that what the pandemic will do is serve to highlight the limitations of populist politics. But then what I'm more concerned about is the clear unequal economic impact that COVID has had. I'm interested as to where you see that kind of interplay between, it is likely that Donald Trump lost the election, in part because of COVID. But at the same time, does that necessarily shift those feelings that people have, the anti-other feelings, even if the individual that they've had in place is cast aside?

Barry

I think that the jury is very much out still, on how COVID has going to affect people's attitudes toward mainstream politicians versus populists. On the one hand, I've done some research recently that looks at past pandemics and past epidemics, and shows that they erode trust in government and mainstream parties and elections. Boy, we've seen the impact of the pandemic on Croston in the electoral system in the United States. Recently. On the other hand, the extent to which trust in government and mainstream parties is eroded by COVID-19 dependent depends heavily on how competent the response of that government is. And we've seen that Bolsonaro and Trump and a variety of other populist-style leaders have responded incoherently. And that's pretty typical for a populist politician. He doesn't defer to the experts. And the incoherence of the response is corrosive of political support. So this second observation kind of cuts in the other direction that people seem that Trump doesn't know how to respond to COVID. A few of them swing over to Biden.

Stephanie

Yeah. I'm fascinated to see how that plays out in the coming years. Because I think the uncertainty is if the individual is no longer in the limelight, so to speak, do people's feelings change? Or can it be changed over time? And maybe that's a natural question I have for you, which is, what do you think about Biden's capacity? He talks a lot about uniting the country. Do you think - I mean this might be a personal view as much as an academic view but - do you think that the ability to unite is there given how polarised The United States is?

Barry

I think rhetoric is so important in politics. Rhetoric is especially prominent. It's a prominent weapon, wielded by populist politicians, in particular, very strong rhetoric, strong views, strong language that is not normally acceptable in the public sphere. Biden doesn't partake of that. So he is going to change the rhetoric that we hear coming out of Washington, DC, but of course he doesn't control the entire narrative. The Senate has some very strong voices, the house has added a couple of QAnon voices as a result of the election. So I think Biden can lower the the temperature of political discourse in the United States, which is something we need. But there are other people who will continue to fan the flames.

Stephanie

Absolutely. I think that that's a really good point. The tone and tenor is quite important, and maybe sometimes a little bit underestimated by investors. But maybe the last four years, waking up to tweets about tariffs, and China have kind of underscored the importance of that kind of stability for understanding the world that we're in. So we're kind of running out of time. But I did want to move to the work you've done in Europe. I know Europe is something you've looked at quite closely. And I wanted to ask, particularly because we had a podcast a couple of weeks ago, where we talked about the European recovery fund. And in particular, the potential that Poland and Hungary kind of hold off that recovery fund, because of the Rule of Law conditions that are incorporated to this very much still in the populism kind of realm. What's your assessment of the challenge that that brings to the EU's long term ability to adapt and evolve. I think the recovery fund was seen as a step forward in terms of the European Union's evolution and ability to evolve. But then you're seeing these kind of pushbacks from these countries saying, 'we don't want to have to ascribe to these Rule of Law conditions', which is a concern for what is meant to be a very Democratic Union. I'm really keen to get your thoughts on all of that.

Barry

I do think that recovery fund is very important for the EU symbolically. And it's very important for certain countries like Italy and Spain, whose financial problems can be helped a bit by the recovery fund dispersals. So it would be quite alarming to me if the fund was permanently held up by Polish and Hungarian objections. I think the EU will not back down on the Rule of Law point. It's fundamental to the key communautaire and what the EU stands for. And I think it will find creative political engineering and financial engineering ways to go ahead without Poland and Hungary. So the challenge is then going to be for Poland and Hungary. This money is going to be dispersed, but not to them. How did their governments and their publics respond to that? Do they decide they want to remain EU members in good standing or might they contemplate what the UK has done given this breach?

Stephanie

Gosh, well, I mean that does suggest that we might. One of the most frequently asked questions I've had, since ironically 2017, is the question - is populism dead? but I think everything that we've said here and everything that you've kind of discussed, suggests that this is a theme that's unlikely to resolve very quickly and more likely to play out over a number of years.

Barry

Yeah, Mark Twain never said but was alleged to have said reports of my death are those headlines about the death of populism, similarly.

Stephanie

Premature? Well, thank you so much. I'm afraid that it's actual all we have time for. But thank you so so much for joining us. We really appreciated having you on.

Barry

It was fun.

Paul

We're back for part two of the podcast and after hearing from Professor Eichengreen, I'm going to talk to Stephanie about what political populism has and will mean for markets and investors? So Steph, maybe the initial high-level question is what does populism mean for markets?

Stephanie

Well, I think that some of the conversation with professor Eichengreen alluded to this. The most direct impact is that populist politics can lead to this sense of unpredictability of what the policy choice is going to be. Is it going to change a lot after the next election? And what that does is, it creates these big risk events around elections, but also around policy decisions, and a larger sense of uncertainty about the political backdrop you're existing in. And then by association, if you take that one step further, it creates uncertainty about the world that we're in. I think President Trump's administration is a good example, whereby the role of the US in the globalisation agenda was completely turned on its head. And what we can argue that might have happened to a degree under any president. The reality is that the way in which President Trump approached trade policy was to create a huge amount of volatility and uncertainty for ambassadors. And those are I think, the two key things, from a market perspective, that populism and polarisation bring, which is, a really strong sense of uncertainty. And that leads to quite a lot of volatility when unexpected things happen.

Paul

So let's talk about one of those obvious sources of volatility, which was the trade war, and in particular, the fact it was conducted, in part via Twitter. And it meant, quite literally, there was headline-volatility in whatever President Trump would tweet next. That particular headwind to markets has presumably gone away. But there's still ways in which the global trade agenda could be a drag on markets. Even under President Biden, but with other populist leaders elsewhere in the world, that trend isn't going away.

Stephanie

I think that's a really important point. And you know, we touched on it with Professor Eichengreen. But I think the challenge you have is that ,although President Trump and his unique leading-by-tweets won't be happening anymore, the reality is that in part, the way that populist leaders end up being kind of cast aside is, as Professor Eichengreen suggested, through centrist politicians adopting some of those kind of elements, some of that language. And we know for example, with Biden, while he is a political multilateralist, it's very clear that he kind of ran on this, I think it was called, build-back-better agenda, for his election. Which was to say, bring jobs back to the United States. And these kinds of working class traditional communities were actually an important part of Kay's election message as well, which I think is a very good example of where you see a moderate taking on elements of what the populist has stood for. That partly reflects a deeper issue, which I think is quite important, which is -individual populist leaders can come and go, but if the issues that people are concerned about that leads to the election of those populist leaders don't go away, and you haven't found a way to reconcile them, or reframe them or convince voters that that message is incorrect, then I think those issues just keep coming up again, and I'd expect that in the coming years, we continue to see that because with or without President Trump, there are deep concerns in the United States and well beyond the United States about the role that globalisation has played and global trade has played in terms of reallocated supply chains towards much lower costs, emerging markets, and what that's meant for kind of more developed, but relatively high skilled economies, but with lots of people who had traditionally worked in those roles. And I think that theme doesn't change just because President Trump's not in the White House.

Paul

Indeed and as your conversation with Barry Eichengreen brought out. It's not clear if the Coronavirus crisis sort of kills off some of those drivers of populism showing up populist leaders to be unable to govern a complex pandemic situation or indeed it just deepens and strengthens the economic grievances, which he's wrote so much about which fuel populists in the first place because of course, the pandemics have been very unequal in its economic impact both within countries and across countries as well.

Stephanie

Yeah, absolutely.

Paul

So maybe one of the other ways in which populism has mattered a lot for markets and investors Is that it threatens to deconstruct important economic and institutional structures. And the global trading system is one of those and threats to things like the World Trade Organisation are a manifestation of that. But another is, it has periods being a threat to the independence of central banks, whether it be through highly politized appointments to Central Bank boards or pressure on central banks to set policy in a more political way. And that threat isn't really going away, is it? Because, one, we could be about to have quite a political appointment to the US fed at the end of President Trump's term in the form of Judy Shelton and elsewhere? I think you can point to a number of authoritarian leaders who are still trying to pressure their central bank in a way that would benefit the political leadership.

Stephanie

Yeah, I think, to degree, that kind of central bank independence is something of a newer phenomenon. It's not historically always been the case that central banks were independent in that way. But obviously, it's been seen particularly in markets as a really positive step in terms of the way that monetary policy is set. But you're spot on to say that it's particularly political, populist leaders. And I think some of that conversation with Professor Eichengreen explains why. Which is that kind of authoritarian leaders don't like to take, you know, guidance from others they want to lead, right, that's part of what gets them elected or gets them in place and in non-democracies. And so the idea that then you would defer one major policy to a completely independent non-political arm is seeing, you know, you can understand the logic of why you see so much more pushback between those kind of populist leaders, then a normal kind of moderate and politician who would tend to be more consensus building or tend to be more reliant on the kind of expert networks. So we think, again, if you don't believe that the populism is going anywhere, and I really don't. I kind of ascribe to the idea that deep economic crises give rise to populist movements, and often that you're not necessarily expecting. I mean, we often say the populist movements we know today are as a result of the financial crisis 10 years ago, more than 10 years ago now. So you know, what will be the populist movements that spring out of the coronavirus crisis. And that might be a different kind of populism or it might be a similar kind. But the point is, those leaders can't be relied on in general to take advice, they tend to make decisions. Their whole cache is, you know, I can make decisions better than these other idiots around me. And so I think in that kind of environment, we have to expect that not only the fiscal policy and the regulatory policy of the trade policy, but also that monetary policy uncertainty, and independence is much more threatened to that environment.

Paul

Yeah, great points. And I suppose one of the terrible ironies of entering a global pandemic, or coming from a wave of political populism is that one of the things, as you were saying Steph, that populist did was undermine trust and faith in experts, institutions, even scientists, and of course, anti-vaccine-sentiment was one part of at least some political populace, particularly in Europe, where right wing populist can often be associated with vaccine scepticism. And that's really sort of one of the obvious ways that's manifested in which populism is a headwind for the economy, and has long term repercussions which we were talking and writing about for the past 10 years. The fact we then entered a sort of, you know, scientific crisis or health crisis unprepared in our institutional structures. And that's just one of the ways in which populism is a big drag and potential headwind on economies.

Stephanie

Yeah, the vaccine thing, I think, is a really good example. Because, you know, people may recall back in the UK during the Brexit in the ghost during the debate about Brexit referendum, and, you know, was it a good thing? Was it a bad thing? And, you know, there's that famous line, I think Michael Gove might have said, which was 'we're sick of listening to experts'. They're capturing the feeling of voters, but they also in so doing create a kind of an acceptance that they see that, you know, this is an acceptable thing. It's been said on national television by a very visible kind of politician. And so in so doing that kind of erosion of trust in institutions in individuals who are considered "experts" we're seeing play out quite visibly across a number of countries. Interestingly, the UK is actually one of the countries with the highest level of likely uptake for a vaccine. But if you look to France, if you look to the US, rates of scepticism are so much higher. And there you know, we can't just think of the traditional, white working-class and right-wing populist voters, but actually a lot of scepticism there comes from deep historical scepticism among non-white communities, and that reflect very deep and complex historical reasons for that scepticism and for those fears. But nonetheless, if you Have an environment where the credibility of politicians and the institutions that they work with and the scientists that they work with is generally low. It's so much harder to tackle crises. It's harder to do major structural reform, that is often needed. It's harder to do basic fiscal packages, because you've got much more polarised politics. And then it's harder to roll out major important crisis management tools such as track and trace. And most importantly, as we're talking right now, the vaccine.

Paul

So Steph, perhaps a question to end on is whether there are ways in which political populism is actually beneficial and a tailwind for economies and markets. And I'm thinking here about the ways that some people describe populism in 2015 and 16, in those sort of early days. Which was, it's not like the current system has been working great. Anyway, the financial crisis was seen in part as a failure of elites and institutions and experts to manage and to predict and manage and solve the financial crisis. And of course, there'd been a long period of low growth, which led to the economic grievance, which suffered populism in the first place. So, are there ways in which actually populism solves some of these issues and could well be seen through a more positive lens?

Stephanie

So I think that clearly what populism can do is highlight existing issues in an economy and in society. And in some ways, it's important to know what those issues are, right? You need to know what challenges there are, what voters are concerned about? And what's going to drive elections, because that's ultimately a deeper theme that's going through society, and you have to be able to tackle them. So in one way, it puts a spotlight on parts of the electorate, who sometimes don't have their voices heard quite as loudly, which I think is important. And then the second is when we think about what Professor Eichengreen talked about in previous episodes of populism. He talked about in the wake of the Great Depression in the United States, the creation of the Social Security system, we look back now and see that is a really positive thing. So to an extent, hindsight, is 2020 on this stuff. It is certainly not the case, you can say that there's outright no positives that can come from populist discussion, populist discourse. However, the challenge you have a lot of the time is that populist leaders can present at the moment quite simple solutions to very complicated questions. And the problem that that creates them for moderate politicians who want to help to solve those problems is they don't have the same catchy, simple trade tariffs. And that will solve everything. You know, that gives us the sense that things are complicated, the world is complicated. And the risk I think that populists bring is they might raise the issues, but then the ability for centrist or moderate politicians to try and solve those issues just looks weak in comparison, because they're kind of saying, well, we have to take into account this and that. That I think is where I slightly fall inside of there may be some positives that come through, but it might be noisy around that just because of the degree to which politicians are so under pressure to get quick, easy solutions to deep complicated questions.

Paul

Stephanie, thanks very much. And thank you, of course, to our special guest, Barry Eichengreen professor at the University of California, Berkeley and author of 'The Populist Temptation - Economic Grievance and Political Reaction in the Modern Era'. Thank you very much for listening to Macro Matters. If you're enjoying it, please consider subscribing and liking and we'll be back next week.

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