Why Populism Isn't Going Away

Authored by Ronald-Peter Stoferle via The Mises Institute,

The vote for Brexit and the election of Donald Trump has baffled the main stream and the establishment. Most market participants and observers didn't believe ex ante that they were possible, and as a result were completely surprised when the unexpected happened. Ever since the term populism has become socio-politically relevant in modern-day public discourse.

Google Trends illustrates that there was a veritable explosion in search queries for the term “populism” last year:

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Source: Google

But, populism - regardless of its political flavor - merely represents a symptom. The generally surprising results were consequences of the economical erosion of the past years.

Although there are idiosyncrasies in every country that foster the rise of populist movements, the ailing foundation of the economy provides the fertile soil and is the major driver of people's dissatisfaction and the associated voting decisions. To assert that populism is the reason for this process of political change is in our opinion far too simplistic. An analysis of stating that economic erosion is responsible for the rise in populism is supported by by a McKinsey study, which examines the trend in real household incomes in 25 industrialized nations.

McKinsey arrived at the striking conclusion that real incomes of 65 to 70 percent of households in developed countries either stagnated or even declined between 2005 and 2014. The following chart illustrates the trend in household incomes in selected countries. (The y axis shows the percentage of households with stnating or declining income between 2005 and 2014): 

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Source: McKinsey, Incrementum AG

The momentousness of this study becomes obvious when considering that the object under review are 25 industrialized countries with a population of more than 800 million people, generating 50 percent of global GDP.

Moreover, numerous studies show that the opportunities and expectations of coming generations to earn more than their parents have worsened significantly. While the probability that members of the baby boomer generation would earn more than their parents was 62%, this probability has declined to 50% for generations born since 1980.2 Income equality has deteriorated dramatically over time as well. The share of national income earned by the bottom 90% of the US population has decreased from 66% in 1980 to 50% today. Contrary to the picture painted by numerous macroeconomic statistics, the economic situation is apparently not as bright as it is often portrayed.

What cannot be quantified by statistical aggregates is the cause of the economic erosion suffered by the middle class, which can ultimately be traced back to our monetary system. The low interest rate environment orchestrated by central banks has not only failed to solve our economic problems, but is – in keeping with the business cycle theory developed by Mises and Hayek – the very cause of the business cycle.

Apart from creating the business cycle, ZIRP and NIRP-policies of central banks also result in an ever more pronounced concentration of incomes and wealth. In this context, it is crucial to understand the so-called Cantillon effect, which we have also discussed comprehensively in our book. As we point out there, when newly created money is introduced, it enters the economy at discrete points, it cannot be distributed evenly across the entire economy. Instead, every expansion of the money supply results in a transfer of wealth: the early receivers of new money can purchase goods at their existing prices and thus gain purchasing power, whereas later receivers of new money can only buy goods at prices that have already increased, and are losing purchasing power as a result. In today's monetary system, it is primarily commercial banks, the government and large corporations with good financial market access that are benefiting as the earliest receivers of newly created money, while all other sectors are losing out – the further removed from the source of money creation they are, the bigger their losses.

This concentration effect is inter alia reflected by real estate prices in international financial centers such as London or New York, as well as in large discrepancies between urban and rural areas. Maps showing the distribution of votes in the US election and the Brexit referendum can clearly be interpreted from this perspective as well:

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Source: Wikimedia Commons, Incrementum AG

It is conspicuous that the Trump election and Brexit met with high approval rates in largely rural areas in the US and Great Britain, while metropolitan areas tended to vote in favor of the status quo (i.e., for Hillary Clinton or Remain).

The economic situation in these regions undoubtedly plays a role in this.

While large cities have often benefited from the fiat money system due to their proximity to politics and financial markets, many rural areas are drying up economically.

These regions were often hit the hardest by deindustrialization.

The following chart shows the discrepancy between productivity growth and real household incomes. After World War II income and productivity growth tended to track each other closely, but since the 1980s a growing divergence can be observed:

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Source: EPI, Bureau of Labor Statistics, Incrementum AG

The same applies to hourly wages as well: between 1973 and 2015 net productivity grew by 73.4%, while the hourly wage of the average US worker rose by a mere 11.1% in inflation-adjusted terms, and thus effectively stagnated. Viewed from this perspective, it is not surprising that voters are increasingly warming up to populist ideas.

Comments

Dindu Nuffins Two-bits Wed, 11/15/2017 - 01:12 Permalink

The populism isn't one bit about economics in reality. I would gladly rather be poor and among my own people, than rich and surrounded by foreigners who despise me.The gated community rich set think they don't have to choose between social cohesion and cheap labour, and they think they can pump the country full of low wage foreigners from failed countries while demeaning the role that working class whites played, not only in the purely physical process of building their country, but also in the more intangible spiritual maintenance of the character and social mores that define what their own nation is and why it was so nice to live inside. They think the reality of what they bring can always be retreated from, but having spent time in South Africa, I'll tell them that eventually even gates and fences aren't enough.The Afrikaners chose cheap labour instead of their own people working the fields, and now they have no people left.

In reply to by Two-bits

VWAndy Tue, 11/14/2017 - 14:11 Permalink

 Blob rules. Did ya notice how populists always seem to be a bit on the heavy side? Its not surprizing really when you think about it.

scraping_by Tue, 11/14/2017 - 14:22 Permalink

"While large cities have often benefited from the fiat money system due to their proximity to politics and financial markets, many rural areas are drying up economically. These regions were often hit the hardest by deindustrialization."This is the official narrative about the decay of the middle class, and while it's part of the truth, it ignores the effects of deindustiralization on manufacturing centers (Rust Belt) and the large number of smaller shops falling away in the population centers. Those displaced workers have moved to poverty level service jobs with useless middle managers for customers. And most middle managers are useless, or at least, underworked.Trickle down doesn't work. While keeping unproductive office drones around under obscure titles mostly in nonproductive organizations (hospitals, universities, and government contractors are the big ones) will keep some money flowing to the great mass, that's mostly inertia from the days of a productive economy and not new categories from the ever-richer financial sector. Alternatives to production, like the marketing myth of a Creative Class or group poverty from becoming ecological economy, put a gloss on the great decay of living standards the 1% have engineering through anti-government propaganda, bogus economic theories, and plain old corruption.In short, them today and you tomorrow.  

Cloud9.5 scraping_by Tue, 11/14/2017 - 16:47 Permalink

The political system and the banking system have both been built on the paradigm of exponential growth. The growth we have enjoyed over the last two centuries was built on the availability of abundant cheap coal and oil.  The expectation of perpetual growth was pragmatic right up until about 2005.  At that point, the world production of light sweet crude peaked.  The legacy wells have been in steady decline ever since.  Higher prices and creative bookkeeping have made the shale oil miracle possible.  Behind a façade of smoke and mirrors, the net surplus energy produced by oil has steadily declined.   Economic contraction has been under way since 2005.Populism is rising because the general public is beginning to sense that both the political system and the economic system created during the period of exponential growth are no longer relevant.  Any sentient individual realizes that the massive bureaucracy and the entitlement system we have created are not sustainable in a contracting economy.  What follows is devolution and localism.  

In reply to by scraping_by

Buddha 71 Tue, 11/14/2017 - 14:23 Permalink

the people of the us issue a mandate, a president is elected - the democrats spin this as the voice of the people /democracy to mean "populism" to mean socialism so its bad. so wtf mon ? and further all media repeats term saturates never ending news cycles so term populism takes on new evil meaning. las vegas shooting is being scrubbed from history and our fruit fly attention spans - ALL NEWS MEDIA keep repeating "Paddock, the shooter..." when it clearly was NOT paddock at all. media not talking about vegas, nyc, texas church etc - even the "true" news good media ??? keeps repeating the same mantras so re write history. all those years, jfk files now released, fully redacted, so no one cares anymore, wtf mon ?  

Scornd Tue, 11/14/2017 - 14:36 Permalink

stupid article. the little people are 80 years into a socialized debt system, and the Banks- the Fed- capitalize on them. so what the fuck ever.

GunnyG Tue, 11/14/2017 - 14:36 Permalink

The natural human condition is freedom and self-determination. We can only be repressed for so long by the elites before the pot boils over. The Left needs to be exterminated like roaches and rats.

Batman11 Tue, 11/14/2017 - 14:44 Permalink

Where did it all go wrong?They used dodgy 1920s neoclassical economics and put some complex maths on top and told everyone it was new and scientific economics. The world was fooled.It was right wing economics because it was rigged to hide private debt and rentier activity.To hide rentier activity they had to move the focus off the cost of living, leaving the West to formulate a model of global free trade that forgot about the cost of living (in detail in a comment below).Hiding private debt and removing 1930s regulations immediately led to a re-run of 1929 in a different asset class, real estate instead of stocks:https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.pngThe UK stopped looking at private debt and inflated the value of its housing stock with mortgage lending:https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.png

Batman11 Batman11 Tue, 11/14/2017 - 14:44 Permalink

Let’s help the West understand how free trade works.When Bill Clinton passed NAFTA millions of US jobs went to Mexico.What happened?Labour is cheaper in Mexico and you can make more profit there, when there are no tariffs and you have the free movement of capital it is better to move jobs out of the US to Mexico.Why is labour cheaper in Mexico?Wages have to cover the cost of living and the cost of living is much lower in Mexico.Disposable income = wages – (taxes + the cost of living)The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of livingAny light bulbs coming on yet in the West?The repeal of the Corn Laws ushered in the era of Laissez-Faire.The businessmen wanted lower corn prices, to lower the cost of living for lower, internationally competitive wages.Remember now?It’s all about the cost of living.No one in the West had a clue how free trade worked apart from the Germans.No silly housing booms to raise housing costs, and high end manufacturing that pays high wages.

In reply to by Batman11

scraping_by Batman11 Tue, 11/14/2017 - 14:56 Permalink

Remember also, foreign government subsidies to local production. There have been many cases where the products were sold wholesale in the US at lower than material costs. Getting dollars in exchange for local currencies.With mass production, the per unit labor cost is trivial. So low wage companies don't have that much of a cost advantage. The company can claim a larger percentage of revenue, but that decays pretty quickly. As we're watching with Foxxconn in Wisconsin, government makes rivers of money flow if you've got the right schtick. Any government anywhere in the world

In reply to by Batman11

BigJim Batman11 Tue, 11/14/2017 - 15:24 Permalink

 It was right wing economics because it was rigged to hide private debt and rentier activity.How is it "right wing economics"? These debt levels are only possible because we have nationalised our currency.Collectivisation of the monetary systen is the very opposite of "right wing". In a "right wing" monetary system, banks would issue their own (competing) currencies backed by a mixture of specie and yield-bearing debt instruments.

In reply to by Batman11

rf80412 BigJim Tue, 11/14/2017 - 16:19 Permalink

The challenge is that the drive to nationalization and regulation was fueled by private banks going bust with alarming regularity.  The banks themselves have no incentive to issue less debt, since debt is an income-producing asset to them.  If you think the Fed controlling the currency is bad, how would cutting out the middle man and letting the banks create money directly be an improvement?  As for gold, once upon a time, poor farmers pushed for expansionary monetary policy - in the form of a silver standard or bimetallism - in order to get themselves out of a debt hole: farming costs money all year round but only pays off once a year (at harvest time), and if the crop is bad, you need to go into debt in order to stay in business and try to recover.

In reply to by BigJim

BigJim rf80412 Tue, 11/14/2017 - 17:09 Permalink

Banks under a free-banking system have an extremely strong inventive not to issue too much debt: when they don't have a central bank to get their backs, they're incentivised to issue less currency because a bank run could wipe them out.The US didn't ever have a proper free-market monetary system because government regulations meant... Restrictions on banknote issuance, severe limits on branching, and regulations forcing banks to hold useless, idle cash reserves made the American banking system vulnerable to panics while other nations, such as Canada, avoided these crises. https://fee.org/articles/banking-before-the-federal-reserve-the-us-and-… for silver, it was part of the US monetary system right from the start; The Coinage Act of 1792 set the US dollar as being 371.25 grains of silver.ie, you have no idea what you're talking about.

In reply to by rf80412

iadr BigJim Wed, 11/15/2017 - 07:59 Permalink

Restrictions on banknote issuance, severe limits on branching, and regulations forcing banks to hold useless, idle cash reserves made the American banking system vulnerable to panics while other nations,And that is nonsensical.And as a Canadian (and son of a classmate of a Prime Minister) I know for a fact the format of "restrictions" is what has (so far) made our system more robust.

In reply to by BigJim

Manipuflation Tue, 11/14/2017 - 14:52 Permalink

It is OK to be white.  And those white offensive linemen from my University of Wisconsin are going rain shit all over Alabama.  Do you really think your SEC offense will do anything against the best defense in the nation that a white guy runs?  You will do NOTHING and you will shut your mouths.  Iowa got 66 yards the whole game. http://www.ncaa.com/stats/football/fbs/current/team/22I am sick and tired of Wisconsin being disrepected.  Don't worry about Hornitoad.  We have running backs and tight ends and fat placekicker.

Global Douche Manipuflation Tue, 11/14/2017 - 20:17 Permalink

Get rid of your unions. That might be a good start. Too damned much regulation for wind turbines ruined any chance of me making it there, except if Wisconsinites simply don't want the huge whirlys making $$ in the first place.The fat placekicker is a valid asset if he's good with his hands. It helps to have blubber when the nights get -20. This former Iowan said so. 

In reply to by Manipuflation

VWAndy Tue, 11/14/2017 - 15:04 Permalink

 Populism is like a religion for useless dweebs. Not for people willing to stand alone on their own merits. The leaders they would pick will be monsters every time.

911bodysnatchers322 Tue, 11/14/2017 - 15:50 Permalink

If you are fooled into thinking populism is a bad thing

That plebescites are a bad thing

That direct democracy is a bad thing

That even representative democracy is a bad thing

That self-determination and letting the individual have fractional political influence that isn't just some kind of electoral college sham show

That you should let other people run the show

Then think of John Podesta stepping on your face x forever

Because so far, that's all that "cybersteered" and plutocratic governments have produced.

John Podestas and cia rapesystems that bring in drugs export guns, topple countries, lie to your faces while selling you on protections from war crimes they create, sex slavery, child slavery, kidnappings, murders and mass murders as political psychological operations and criminal coverups,

expect that for the rest of your lives becaus that's the story of the last 50 yrs

flacorps 911bodysnatchers322 Tue, 11/14/2017 - 19:51 Permalink

What is the opposite of populism:

So long as elites focus on duty and arrive due to merit, populism can't thrive.

When the elites fail the populace, they are motivated to take matters into their own hands.

Whether they have that right or not, that is what theg will do.

The goal of technocracy has been to make populism impotent because people neither realize elites have fucked them nor how they might effectively thwart their influence: they love their servitude, as Huxley put it.

In reply to by 911bodysnatchers322