Economics Policy & Regulation Article

Populism Revisited

Expect More Twists and Turns Ahead

14 January 2019

3 min read

What You Need to Know

Updating our two-year-old research on populism, we find that the agenda continues to advance on multiple fronts. Investors should expect more populist policies in the years ahead, which is likely to shift macroeconomic outcomes in a more challenging direction.

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19%

Share of votes

for populist parties globally in 2017

10%

Approximate decline

in labor’s income share since 1947

3

Likely results of populist policies:

lower growth, higher inflation, margin pressure

In the second half of 2016, following the Brexit vote and the emergence of Donald Trump as a US presidential candidate, we kicked off a research initiative into the rise of populism. The goal was to understand populism’s drivers, how long the shift might last and what it could mean for the global economy and markets.

Was the tidal shift in politics temporary, reflecting influences such as residual anger from the global financial crisis of 2008–2009, or from the handling of the European sovereign crisis? If this were true, we would see a return to “normal” for politics and policy as economies recovered. Policymaking would revert to what had been its guiding framework since the early 1980s—an emphasis on global openness, independent macroeconomic policy and market deregulation.

But if populism were a structural theme, it would have a much more lasting impact. In this case, populism would reflect long-term trends, including rising inequality, stagnant incomes, fears of disruption and a sense that the political system just wasn’t delivering. In this world, we would see a “new” policy architecture that would likely be delivered through three main channels:

1. Raising the drawbridge, as policies become more local and less global
2. Institutional erosion, with institutions facing attacks or being undermined
3. Redistribution, characterized by efforts to transfer wealth among society’s segments

When we conducted the initial research, our thinking was heavily biased toward viewing populism as a far-reaching structural theme. One of our major conclusions: this political dynamic would likely be a central factor in driving global inflation higher over the medium term.

Two years after that initial research, does populism seem mostly temporary, or does our initial conclusion of a long-term political shift still stand? To answer that question, we first needed to look at how politics and policies have evolved. Based on what we see, the factors driving populism seem to be alive and well.

The Politics: Disillusionment Continues to Grow

The global economic backdrop has continued to improve, with unemployment rates in many developed-market economies sitting at multidecade lows. But despite this progress, the attraction of populist candidates has continued unabated (Display).

Display 1: Populism Is Still On the Rise

Share of Votes for Populist Parties

Display 1: Populism Is Still On the Rise

Through December 31, 2017
Source: Timbro (data extracted using WebPlotDigitizer)

Candidates or parties who paint debates in simple choices—“us” versus “them,” “the people” versus “the corrupt elites” or other constructs—are taking a bigger share of the popular vote. These groups push a similar agenda: at its core, the message is antiestablishment, authoritarian and nativist. Across Europe, these inroads continue a trend that’s been under way since the early 1990s.

It’s not surprising that populists are now in charge in Italy, given how poorly the Italian economy has performed under the European Monetary Union. But even in Germany, recent state electoral results showed a further deterioration of the political center in favor of both the left and right extremes.

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