Sometimes elites control economic policy so that the transfer of authority to independent agencies or the acceptance of global rules do not serve society, but rather a small caste of insiders.
Populists fear the institutional limitation of executive power. Since they claim to represent "the people" as such, they see any restrictions on their power as undermining the will of the people. According to them, such restrictions can only serve the "enemies of the people" - minorities and foreigners (in the case of right-wing populists) or financial elites (in the case of left-wing populists).
This is a very dangerous approach to politics, as it allows the majority to trample the rights of the minority. Without separation of powers, an independent judiciary and free media - which are despised by all autocratic populists, from Vladimir Putin and Recep Tayyip Erdogan, to Viktor Orban and Donald Trump - democracy turns into the tyranny of whoever is in power at a given moment.
Regular elections are turning into a smokescreen under the populist regime. In the absence of the rule of law and basic civil liberties, populist regimes maintain themselves in power by manipulating the media and the judiciary as they please.
Populist aversion to institutional constraints extends to the economy, where total control "in the interest of the people" means that populist rule must be unimpeded by independent regulatory bodies, independent central banks or global trade rules. But while populism in the political domain is almost always harmful, economic populism can sometimes be justified.
Let's start with why restrictions in the domain of economic policy are considered desirable in the first place. Economists love these kinds of constraints because economic policy that is absolutely dependent on domestic political turmoil can produce extremely bad outcomes. A particular problem of economic policy is what economists call time inconsistency: short-term interests often undermine measures that would be much more desirable in the long run.
A classic example of this problem is discretionary monetary policy. Politicians who have the power to print money whenever they want can cause "flash inflation" to boost output and employment in the short run - say before an election. But this measure pays off later, as firms and households adjust their expectations to inflation. Discretionary monetary policy ultimately results in only high inflation, not growth in output and employment. The solution is an independent central bank, insulated from political influence and empowered to maintain price stability.
The costs of macroeconomic populism are known from Latin America. As Jeffrey Sachs, Sebastian Edwards and Ridiger Dornbusch have shown years ago, unsustainable monetary and fiscal policies were the bane of the region until economic orthodoxy began to take over in the XNUMXs. Populist policies periodically produced painful economic crises, which hit the poor the hardest. To break this cycle, countries in the region turned to fiscal rules and technocratic finance ministers.
Another example is the treatment of foreign investors by the authorities. Once a foreign firm invests its money, it becomes hostage to the government's whims. Promises made to attract foreign companies are quickly forgotten and replaced by measures that fine them in favor of the state budget or domestic companies.
But investors are not stupid, and in fear of such an outcome, they invest elsewhere. The need for national governments to confirm their credibility has led to the establishment of trade agreements with investor-state dispute settlement (ISDS) clauses, which allow companies to sue states before international tribunals.
These are examples of economic policy constraints that take the form of delegation of authority to independent agencies, technocrats, or external rules. They have an important function of preventing the ruling elite from implementing short-sighted economic policies.
But there are other scenarios in which the consequences of limiting economic policy can be harmful. In particular, restrictions may be imposed by special interests or elites themselves to cement control over economic policy. In such cases, transferring powers to independent agencies or accepting global rules does not serve society, but only a small caste of "insiders".
Part of today's populist backlash is rooted in the somewhat justified belief that this scenario describes a good part of the economic policies that have been implemented in recent decades. Multinational corporations and investors increasingly shape the agenda of international trade negotiations, resulting in global regimes disproportionately favoring capital over labor. The strict rules governing the right to patents, as well as the international investor tribunal are typical examples. Banks and other financial institutions have been particularly successful in carrying out their schemes and introducing rules that exempt them from liability.
Independent central banks played a critical role in reducing inflation during the XNUMXs and XNUMXs. But in the current situation characterized by low inflation, their exclusive focus on price stability bends economic policies in the direction of deflation and prevents job creation and economic growth.
This kind of "liberal technocracy" has probably reached its peak in the European Union, where economic rules and regulations are tailored almost entirely independently of democratic deliberation at the national level. In practically every member state, this political gap - the so-called "democratic deficit" of the EU - has led to the rise of populist and Eurosceptic political parties.
In such cases, loosening restrictions on the conduct of economic policy and restoring autonomy to elected governments may be desirable. Extraordinary times call for the freedom to experiment with economic policy. Roosevelt's New Deal is a good historical example. His reforms required the removal of economic shackles imposed by conservative judges and financial interests at home and the gold standard abroad.
We need to be constantly alert to the danger of populism, which stifles political pluralism and undermines liberal-democratic norms. Political populism is a threat that should be avoided at all costs. Economic populism, in contrast, is sometimes necessary. In fact, at times like these he may be the only way to prevent the victory of his much more dangerous political cousin.
(Project Syndicate; PEščanik.net; translation: R. DINIĆ)
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