If you’re wondering what gave rise to populism, look no further than the lack of real income growth. With purchasing power for most either flat or declining for more than a decade, voters rejected mainstream politicians in Western Europe and North America and turned to the fringes on the far right and far left.
Now, though, there is evidence that it is waning, or at least has peaked for the time being. Donald Trump’s popularity has plummeted in the early months of his presidency. In the UK, after the initial post-Brexit euphoria, the cold, hard reality of separation from the European Union is setting in. Fringe parties in Western Europe have seen their popularity wane.
Why is populism fading?
A number of reasons are apparent; some involve economics.
1. Mainstream parties regroup and adapt. Most were oblivious to the rise of populism, but Trump’s surprise election and equally surprising Brexit got their attention. UK Prime Minister Theresa May and German Chancellor Angela Merkel have both responded to anti-EU, nationalist sentiments.
2. Populism has failed to deliver instant results. It was unrealistic to believe Trump’s plans for speedy fiscal stimuli, tax reforms and replacement for Obamacare would be realized. Also, his personal attacks on both Democratic and Republican leaders mean there will be less cooperation in Congress to get his proposals enacted. Also, huge government spending, which all but the most ardent anti-deficit hawks desire, will take two to three years to be effective, even after the needed legislation is enacted. In the U.K., it’s evident that a clean, rapid Brexit is not possible. As with many major events, the devil is in the details.
3. Populism’s approach has been flawed. It’s now obvious to most everyone that populists concentrate on what they’re against, not what they’re for. Sure, Trump emphasizes ‘America First,’ but he concentrates on restricting immigration, reducing imports from Mexico, forcing China to abandon its mercantile policies, and compelling U.S. companies to hire Americans. His interest in positive changes such as improving education and training, opening America’s doors to skilled immigrants, and encouraging exports is much less apparent. In Europe, the emphasis is on containing the fallout from Brexit and keeping the extremists at bay. French President Emmanuel Macron’s plans for labor-market reform are viewed by workers as taking away their cherished 35-hour work week and essentially lifetime employment, not as creating conditions that will enlarge the economic pie so everyone gets a bigger slice.
4. Economic conditions have improved, especially in the euro zone. Economic growth covers a multitude of sins. It is what reduced the federal government debt-to-GDP ratio from 106 percent in 1947 to 23 percent in 1975. For the first time in a decade, all 45 of the world’s major economies tracked by the Organization for Economic Cooperation and Development are growing, and in 33, the rate of advance is likely to be higher in 2017 than last year. The International Monetary Fund projects global economic growth at 3.5 percent this year, up from 3.2 percent in 2016, with a rise to 3.6 percent in 2018. Of more importance to the waning appeal of populism, the unemployment rate continues to fall in the euro zone as well as the US and the UK. It’s interesting to note that these developments abroad are occurring even with a weaker dollar, which aids US exports but retards those of American trading partners, especially in the euro zone as the euro rises.
5. Real wages are rising. Real, or inflation-adjusted, wages have been rising in G-7 countries. But that’s because of slower inflation, not an acceleration of nominal wages. That is not the way the Fed and other central banks want real wages to gain, since inflation is chronically undershooting the 2 percent target at which the Fed, the European Central Bank, the Bank of England, the Bank of Japan and other major credit
Despite recent events, though, populism is unlikely to disappear because the fundamental driving force — the lack of real wage growth — will likely persist. In my columns on July 31 and Aug. 1, I outlined reasons why sluggish wage growth is likely to continue — including globalization, ample labor supply, cost-cutting by businesses that will affect labor, the bulk of new jobs being in low-paying sectors, the loss of high-paid union jobs, and poor productivity growth.
Populism may be down, but it isn’t out. If weak household purchasing power lingers, as it likely will for at least several years,
populism will persist.
A. Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation”