The Populism Puzzle

Questioning economic explanations of populism

Beyond the specifics of Pastor and Veronesi’s formal model, there is a bigger question of how useful economic explanations are in explaining populism. Economists cannot even agree under which economic conditions populism is likely to flourish. For Pastor and Veronesi, populism is provoked by growth, but this contrasts with economic analyses that tie populism to financial crises or economic downturns. In their global analysis, Mian, Sufi, and Trebbi find that historically, financial crises routinely lead to political polarization and growing extremism. They conclude that the rise of populism was a predictable political result of the Great Recession—and therefore an outcome that is as cyclical as the economy.

Granted, Sufi is surprised that more than five years after their research was published, populism remains a powerful political force. He now says he is not sure that economic conditions correlate with populism. “There’s got to be something missing in the purely cyclical argument, precisely because if anything, it’s getting worse, even though the economy, if anything, is getting stronger.” This mismatch, and the length of the populist backlash, has led Sufi and many other economists to look for longer-term explanations. “Was it really what happened in the recession, or something more fundamental that was just made obvious during the recession?” he asks.

Pastor argues that the financial crisis deepened people’s inherent aversion to inequality. “The America that used to be so tolerant of inequality discovered during the financial crisis that there were some people, like bankers, who seemed to have become wealthy in a way that wasn’t exactly fair,” he says. “People’s tolerance for inequality dropped.”

However, Sufi remains skeptical of the inequality argument. He points to the work of Princeton’s Anne Case and Sir Angus Deaton, who catalog the rise in the US of “deaths of despair”—by drugs, alcohol, and suicide—as well as slowing progress against heart-disease deaths among less-educated white communities. Case and Deaton reject inequality as the principal cause of such phenomena, arguing that macroeconomic trends such as inequality and growth “can account for part of the increases in mortality and morbidity, but only a part, and . . . it leaves more unexplained than it explains.”

Sufi says the populism puzzle may have more to do with polarization than inequality per se. “Inequality fosters an environment in which people are going to be more upset generally,” he says, “but it doesn’t explain polarization in the way that we have now.” And while economists have done much to measure polarization, “I don’t think economists are the people to be asking about populism,” Sufi says. “The people who have said really smart things are the political scientists
and sociologists.”

Technology, globalization, and community

Rajan certainly borrows from sociology in The Third Pillar, in which he argues that there are three principal societal forces: the state, the economy, and the community. (Read more in a Q&A with Rajan, “Raghuram G. Rajan says capitalism’s future lies in stronger communities,” and in an excerpt from the book, “Technology is splitting the job market,” Spring 2019 and online.) When the three are in balance, a society has the best chance of providing for its people’s well-being. But the source of today’s discontent is imbalance—local communities have become unsustainably weak, which explains the gap between national statistics that paint a picture of economic growth and low unemployment on the one hand, and voters’ lived experiences on the other.

Similarly, Rajan says that aggregate measures such as the stagnant median wage fail to capture the unevenness of people’s economic lives. “It’s particularly felt in these communities that are left behind, whether they are historically disadvantaged or newly disadvantaged,” he says.

Ultimately, Rajan says populism can be explained by economic forces, especially automation and trade competition. These have combined to create devastating job losses in some communities, particularly of middle-income jobs held by people without a college education—the same demographic analyzed by Case and Deaton.

Rajan also emphasizes “the secession of the successful,” in which people with skills and greater education leave their native communities and cluster together, creating a lack of social mobility for those left behind in communities with fewer job opportunities and lower-quality schools. These residents tend to have fewer transferable skills and cannot afford to move to areas with brighter outlooks.

Inequality does not explain populism, argues Rajan, echoing Sufi, Case, and Deaton. He notes that there is a great deal of inequality in cities such as London and New York; yet in these places, populism has little political support compared with more rural areas. “Big cities feel the both good and bad effects of automation, so [the effects] even out,” he says. “Yes, a few people’s jobs are automated away, but different jobs are created, and there are more incomes because of the effects on productivity. There is a basis for economic activity, which hasn’t gone away. You lose your job as a factory worker, but you get reemployed in a laundromat or as a security guard. It’s a lousier job, but at least there’s a job. In a smaller town, when the big employer leaves, the laundromat also closes down.”

The tension between capitalism and democracy

Rajan’s analysis points to a societal bifurcation in mature market economies. The haves, possessing skills that are increasingly rewarded by the economy, can shape the political system to their benefit. The have-nots, with stagnating incomes, feel that the economy and the political system have been rigged to keep them out.

The persistence of this long-held resentment has transformed populism from a fringe protest movement to a mainstream political force. In 2012, Booth’s Luigi Zingales published A Capitalism for the People, a book written as the populist Tea Party and Occupy movements were in full swing. In his original draft, he has said, he predicted that Donald Trump, or a similar figure, could become the US president, noting the similarities between cronyism in his native Italy and what he saw happening in the US. Zingales removed the section after a colleague told him the idea was so preposterous that it would make the book look not serious. Now he says he wished he had kept it, as Trump was the natural outcome of increased cronyism that was making the US grow in similarity with Italy. The US, he says, was bound to have a plutocrat-turned-president, like Italy’s Silvio Berlusconi.

Zingales identifies an inherent tension between capitalism and democracy: capitalism inevitably leads to some inequality, which is tolerated by society to the extent that its benefits are clear and the inequality itself is seen to be relatively fair. Making the benefits clear requires economic growth that is distributed across society, while the fairness requires opportunities for economic mobility. In Zingales’s view, the US has violated these conditions. “The surprise for me [in 2012 and today] is not that populism is exploding now, but why it took so long,” Zingales says. A quintessential American value has always been that hard work pays off, a creed that, Zingales writes, “has reduced antimarket pressures in the US and helped to make capitalism popular and secure.” But the stagnation of median wages now serves as the prime example of how capitalism’s benefits have failed to accumulate to most Americans.

One suggested cause of stagnant median incomes is global trade competition, whose connection to populism has been well documented in academic research. A group of researchers led by MIT’s David Autor has tied populist politics in some US congressional districts to rising import competition. Research by Italo Colantone and Piero Stanig of Bocconi University finds higher support for Brexit in parts of the UK hit harder by economic globalization, and greater support for nationalist parties in European regions most affected by Chinese imports.

But a second aspect of globalization has been somewhat overlooked, Zingales says: in the second half of the 20th century, the rest of the world gradually copied the US model of having a well-educated workforce and a free-market economy governed by the rule of law. As a result, US workers, who in 1945 had enjoyed something of a monopoly in attracting global investment, slowly lost their prime position. “Today, investors can safely invest in economies such as Vietnam or Cambodia, which was inconceivable 40 years ago, let alone 70 years ago, after World War II,” he notes.

In elites we distrust

In A Capitalism for the People, Zingales includes income inequality as one of three factors that he argues provoke populism. His other two: a struggling middle class and a distrust of elites.

Trust has long been an issue of interest for Zingales. For more than a decade, he and Northwestern’s Paola Sapienza have cosponsored the Financial Trust Index, an annual survey of Americans’ attitudes toward the stock market, banks, mutual funds, and large corporations. They conducted the first survey in 2008, at the height of the crisis, when the index stood at 22 percent. Ten years later, it had risen to 28 percent, mainly fueled by an increase in trust in the stock market.

In spite of the growth of populism, the survey records a marked decrease in anger about the economy—which has fallen from a high of more than 60 percent of respondents in 2011 who felt angry to 27 percent in 2018. But a supplement to the 2018 poll revealed that politicians were trusted by only 5 percent of respondents, compared with 65 percent who trusted in doctors, 29 percent who trusted in economists, and 19 percent who trusted in lawyers. This result echoes that of a randomized online survey conducted in 2011 and 2012 by Princeton’s Ilyana Kuziemko and a team of researchers, in which more than 89 percent of respondents agreed that “politicians in Washington work to enrich themselves and their largest campaign contributors, instead of working for the benefit of the majority of citizens,” with 47 percent “strongly” agreeing.

This mistrust in politicians speaks to another explanation for the rise of populism: the failure of political elites. For UChicago’s Howell, this failure is the fundamental cause of populism, while economic factors often bubble up as the symptoms. “Failure sometimes takes the form of rising inequality, or unbridled immigration, or rampant corruption,” he says. “There are lots of problems that populism has pointed to, but this sense that the government has failed, has let us down, because of indifference and even scorn for average citizens—that is the stuff of populist appeals.”

This explains why in both the US and the UK, populist leaders have cast themselves as warriors against political elites. President Trump, who originally ran on a “Drain the Swamp” platform, has repeatedly attacked Congress, the judiciary, the Federal Bureau of Investigation, and what he calls the deep state more generally. UK prime minister Boris Johnson attempted to prorogue Parliament to prevent the House of Commons from blocking his Brexit deal. (He was overruled by the courts.)

For Howell, and for many political scientists, challenges such as automation, rising inequality, left-behind regions, or stagnant median wages do not, in themselves, lead to populism. Rather, it is the lack of a coherent, effective policy response to these challenges that makes populist appeals attractive.

This failure is stated or implied in most explanations of populism. Even Pastor and Veronesi, whose research is predicated on the inevitability of populism, concede that one could imagine a theoretical social planner who implements policies—such as high taxes on luxury goods—that save globalization. But they deem the required policies too complex and unrealistic to affect their model.

One way elites have failed is by neglecting to construct sufficient social safety nets, say some economists. Booth’s Marianne Bertrand points out that Germany and Canada, which haven’t seen high levels of populism recently, have more of a social safety net than the UK and US. The salience of globalization’s trade effects is greater when there is less of a formal mechanism to dampen the effect. “It’s not just ‘trade is bad,’” she says. “I think it’s that trade is bad in an environment where there’s no government spending in place to try to ease the adjustment to these shocks.”

Elites may have also failed at bringing in fresh perspectives from those who feel marginalized, often through turnover among political leaders. This idea mobility, in Zingales’s view, might reinvigorate established institutions.

Out-of-touch elites also may have underestimated the difficulties faced by the rest of the population. The 2012 book Why Nations Fail, by University of Chicago Harris School of Public Policy’s James A. Robinson and MIT’s Daron Acemoglu, argued that economic prosperity depends chiefly on building inclusive economic and political institutions. In their latest book, The Narrow Corridor, they construct a model that shares much in common with Rajan’s three pillars, arguing that liberty is only durable when countries balance the state and society. Brexit is not a challenge to UK political institutions, argues Robinson (who is British), noting that UK politicians have for decades used the European Union as a scapegoat for a host of issues. Robinson holds EU leaders responsible for the rise of populism across Europe. “They underestimated how difficult it was going to be to change institutions in Greece or Eastern Europe,” he says. “They thought that was going to be some smooth process. They underestimated the dislocation caused by all this labor mobility.”

Robinson cites work by researchers who analyzed the rise of the Sweden Democrats, a populist right-wing party that has risen rapidly to become the country’s third-largest political force. University of California at Berkeley’s Ernesto Dal Bó and Frederico Finan, Uppsala University’s Olle Folke, and Stockholm University’s Torsten Persson and Johanna Rickne find that candidates from the Sweden Democrats included more outsiders and “vulnerable insiders,” whose jobs are more likely to be automated away, while candidates from more-established political parties were more likely to be “secure insiders” from sectors less easily automated. “There is that element of increasing out-of-touchness,” says Robinson. “Clearly [former UK prime minister] David Cameron had absolutely no idea there was so much antagonism toward the European Union, otherwise he’d never have agreed to a referendum.”

Bertrand points to another finding of this paper, that the rise of the Swedish far right came after a center-right coalition cut both taxes and social-insurance programs, reforms that led to large shifts in inequality in a society historically known for its robust welfare state. This suggests that in their pursuit of fiscal orthodoxy, politicians may have inadvertently boosted populism.

Immigration, identity, and imagined community

One challenge of pinning populism on long-term trends is the question of timing: Why did populist politics surge in developed economies in the 2010s?

Rising immigration is one possible explanation. Famine, drought, civil wars, and organized crime have driven tens of millions of people to leave poor and conflict-ridden countries in recent decades, many of them bound for Europe and the US. The number of international migrants rose from 155 million in 2000 to 244 million in 2015, from 2.8 percent to 3.3 percent of the global population, according to the United Nations’ International Organization for Migration.

Immigration motivated many supporters of Brexit and President Trump. In a string of opinion polls, pro-Brexit voters cited controlling immigration as their first or second reason for wanting to leave the EU, while 52 percent of Trump voters wanted to tighten immigration controls, according to the Voter Study Group, a collaboration of 29 analysts and scholars from across the political spectrum, including University of Chicago political scientist Cathy J. Cohen.

While some of these voters tied immigration to a lack of opportunities for nonimmigrants, Bertrand says the rise in migration provided a perfect focus for workers affected by long-term economic forces such as automation. “The evidence of the impact of immigration on the stagnation of the middle class is very limited,” she notes. “We have much better evidence that technology is a big force. But it’s easier to get angry at other people than to get angry at machines.”

Epley sees immigration and inequality as two of many factors that feed into identity politics. “It isn’t inequality per se, so much as the divide it creates between ‘us’ and ‘them,’” he says. Epley notes there are other sources of division, citing research led by Jacob Westfall, now a data scientist at Home Depot’s data-driven pricing group BlackLocus, which finds that Americans consistently overestimate the extent of political polarization. “Partisanship can be driven by beliefs about partisanship—believing that the other side is more extreme than it actually is,” Epley says, “and it’s not obvious to me that that has anything to do with inequality.”

Epley notes that economic trends can fuel identity-based behavior, such as attacks on minorities and newcomers. University of Georgia’s E. M. Beck and Stewart E. Tolnay of the University of Washington analyzed lynchings of African Americans in the Deep South between 1882 and 1930, and find racial mob violence was more common at times when cotton prices were low and inflation was rising. You might well expect economic stress to lead to violence, but the fact that it led to racial violence suggests it has something to do with identity, Epley says.

In The Third Pillar, Rajan indicates how technology and globalization could fuel the assertion of identity, acting as “centrifugal disorientating tendencies” for those in communities that have been left behind. As well as turning people in these communities against out-groups, this disorientation provokes a nostalgia for a perceived glorious past. “When the proximate community is dysfunctional, alienated individuals need some other way to channel their need to belong,” Rajan writes. “Populist nationalism offers one such appealing vision of a larger purposeful imagined community.”

Identity politics reflect political rather than economic factors, says Howell. “There is a reasonably well-defined group of people—predominantly white, Christian, working-class Americans who mainly live in Red [Republican-voting] America—who constitute Trump’s base, who imagine themselves as true, real Americans,” he says. “Populism is a form of identity politics, but it’s not exclusively about identity. It’s in the aftermath of political failure that these appeals take on an identity characteristic. It’s the sense that you were right to expect the government to do something on your behalf, because you are quintessentially what it means to be American.”

Booth’s Reid Hastie—whose 2014 book Wiser: Getting Beyond Groupthink to Make Groups Smarter, coauthored with Harvard’s Cass R. Sunstein, analyzes the mechanisms of phenomena such as polarization—says the psychological explanation for populism should look beyond identity. There are three big psychological factors whose interaction with macroeconomic forces help explain political populism, he says: instrumental politics, when people vote according to rational self-interest; symbolic politics, when people support candidates who speak to their personal values; and partisan politics, when voters rely on cues such as party affiliation. “I see all three factors in play,” Hastie says. “Noncollege-educated white men might be mostly driven by symbolic factors, but college-aged populists might be mostly driven by instrumental factors. Anti-immigrant sentiment might be mostly an identity issue linked to symbolic politics, but views about taxing the rich might be mostly instrumental.”

Hastie speculates that one response to the “why now?” question relates to the growth in social media, and he notes that polarization and groupthink can amplify causal forces. “If there is a tendency for electronic media to create partisan echo chambers, populist tendencies can be amplified for individuals who start out oriented in the populist direction.”

What should be done?

For some scholars, populism is a scourge that needs to be defeated. For others, it is a wake-up call. Some think populism can be harnessed for good. Others are pessimistic about where it is taking us.

Yet many economists agree that redistribution is critical to any response. “The textbook perspective is that globalization is good because it makes the pie bigger. Then we can always redistribute [wealth] and make everybody better off,” Pastor says. “The problem is that this latter part is not happening. People talk about how [wealth] could be redistributed, but it’s not actually getting redistributed. And that’s where populism is coming from.”

Given their focus on consumption inequality, Pastor and Veronesi posit that an appropriate response would be a form of progressive consumption tax, such as a very high value-added-tax rate on luxury goods, accompanied by negative taxes on consumption for the poorest, a solution Pastor admits is unrealistic.

Rajan, while not opposed to redistributive taxes, says those alone won’t address the concerns of communities that have lost their economic infrastructure. He prefers localism—policies that devolve power to local communities yet prevent them from becoming insular. These policies could include reforming zoning laws, encouraging affordable housing, and creating tax incentives for people to stay in poor neighborhoods.

Howell agrees there is work to be done in restoring local communities but argues that the most serious challenges will only be solved by national governments. “When you think about global immigration patterns, climate change, or structural changes to the economy or globalization, it’s hard to see how, community by community, we’re going to make headway on this.” His preferred response is to reform and strengthen national political institutions.

Bertrand wants to see redistribution used for policies that help support displaced workers, whether with economic benefits or education and retraining. But echoing Rodrik’s trilemma, she is pessimistic that politicians are capable of addressing some of the serious challenges. “So many issues that we face cross border lines—such as climate change and immigration—that it’s hard to imagine how we’re going to deal with them with national governments,” Bertrand says.

Robinson and Zingales both see populism as a movement that could be used for positive ends. And both cite the US populist movement of the 1890s, which emerged at a time of rapid technological change, economic growth punctured by financial crisis, rising inequality, anti-immigrant sentiment, declining trust in institutions, and a process of globalization whose benefits were not felt by many Americans. That movement evolved into the progressive politics of presidents including Theodore Roosevelt, William Howard Taft, and Woodrow Wilson, who set about reforming political and economic institutions, ultimately making them stronger and more inclusive.

Robinson notes that progressives achieved this by building a coalition that included, for example, people advocating for stricter immigration controls. In an article in Foreign Policy, Robinson and Acemoglu argue that a 21st-century coalition could focus on the shared priorities of both sides, such as improving access to health care, raising the quality of education, and updating infrastructure. Constructing such a coalition might require agreeing to tighten immigration, they note, pointing to Denmark, where the Social Democrats adopted more restrictive controls, but also cut the vote share of the right-wing populist Danish People’s Party by more than half in the 2019 election.

Zingales supports the idea of trying to make politics more inclusive, although he focuses more on changing public decision-making to introduce more direct democracy. But these days, he is less troubled by the challenge posed on behalf of the have-nots than by the response of the haves. “The problem these days isn’t populism; it’s elitism,” he says.

What really caused populism, in his view, may be secondary to what populism may cause. While social scientists debate the populism puzzle, a new, bigger challenge may emerge. Zingales worries that elites could conclude that liberal democracy is too precious to be left to voters. “We are heading toward a battle between democracy and, for lack of a better term, technocratic authoritarianism. And whether it’s the Chinese form or some elite of the US Democratic party, it doesn’t matter—it’s very dangerous.”