Populism then and now – EMBA elective reading 1(*)

Consider the following list of political facts: high and rising income inequality; a perception that global market forces are leaving local people powerless; anti-immigrant feelings; blaming banks and monopolistic corporations; a perception that politics is dominated by the rich; anxiety about culture and values being eroded.

This might well describe the US and some European nations in 2019. But it’s actually a description of the US in the late 19th century, from distinguished American economist Barry Eichengreen‘s recent book The Populist Temptation. In the late 1880s farmers in the US, then still a significant force in the economy, were suffering from low prices (because of increased imports from a globalising economy) and rising real interest rates (which they blamed on Wall Street). It was the time of rapidly rising corporate power based on high concentration, even outright monopolies, in key industries such as oil, railroads and steel. Concentrated railroad ownership meant higher charges to farmers. JPMorgan used his financial power to bring about industrial concentration. John D Rockefeller created a near monopoly of the US oil industry in Standard Oil. Great wealth led to political power, as it usually does, so that the government appeared less and less concerned with the plight of farmers and other marginalised groups. Abraham Lincoln’s vision of government “of the people, by the people and for the people” seemed to be disappearing.

The result was anger against banks, the government, immigrants and “others” (chiefly Jews and blacks, but also Chinese immigrant workers). People joined the White Supremacist Ku Klux Klan as a way of protecting what they saw as a threat to their culture. People wondered if the US republic would survive the strain.

Eichengreen describes the core of the discontent: “The common denominator is the sense on the part of a growing segment of society of having been left behind.” What creates the potential for populist politicians is that “All this leaves voters with a helpless sense that their fate is being decided not by their local communities and governments but by forces, some anonymous and others all too identifiable, beyond their borders and beyond their control.” In the US the late 1890s were a big change from the optimism of before: “In 1851 Alexis de Tocqueville had famously described the United States as “more equal … than … any other country of the world … in any age of which history has preserved remembrance.[..] Now, less than fifty years later, the economy was dominated by Carnegies, Vanderbilts, Morgans, and Rockefellers, robber barons who accumulated vast fortunes through new technologies utilized by mega-corporations that operated unrestrained by anti-trust law or other regulation.”

Part of the political response, one that is now seen as characteristic of populism is “nativism“, a fancy word for favouring indigenous nationals over immigrants or others who are accused of not being “one of us”. A certain type of politician is always on hand to explain whatever is felt to be the problem of the day as being caused by somebody else, and this approach is often successful, at least for a while.

What makes this story familiar is that the US (and to some extent other rich countries in Europe) are going through something similar. What is widely termed “populist” politics is a response to widespread discontent, not just with the economy, but with politics itself. Populism is a sort of anti-politics in which new or re-branded parties try to attract support by offering solutions to the perceived failure of the mainstream parties and the “elites” who run them, typically offering some combination of radical change and blaming of others, especially those who are foreign, have different coloured skin or who are in some other way easily identified minorities.

Positive (and successful) responses to populist anger

Eichengreen’s book is somewhat encouraging because it tells us that populism and the situations which give rise to it are not new. He considers the 1930s, when populism turned truly frightening, with the rise of fascism and national socialism in Europe. But he also tells us that in the US, both in the response to the late 19th century problems and in the more serious challenge of the 1930s Great Depression, the US political system found solutions.

In the early 20th century, the US government under President Theodore (“Teddy”) Roosevelt broke up the corporate monopolies that were strangling the economy and restored some confidence that a government elected by the people could be sovereign over vested interests. The period from about 1890 to World War One is known as the Progressive Era, because it was one of reform, anti-corruption and a constructive response to the problems caused by rapid industrialisation. It was also lucky (for US farmers) that international food prices rose and the economy generally moved out of deflation (though there was a financial crisis in 1907 which was so severe that it led to the creation of an American central bank, the Federal Reserve).

In the 1930s, another President Roosevelt (a cousin of Teddy) Franklin D. Roosevelt (“FDR”) introduced even more radical changes to fight the mass unemployment of the depression, caused by the failure of the US banking system.

In both cases, what could have been a challenge to the entire political system was prevented by assertive action which was radical by the standards of the day but largely protected the status quo. Optimists will see in these episodes the ability of the US political system to meet even grave challenges from a divided country. Europe’s record is less encouraging, though the post-war history of reconciliation and the creation of what became the European Union show the extraordinary reconciliation that took place between nations formerly at war. The fact that today’s European populist parties are often hostile to the EU itself is therefore worrying.

Britain’s decision to leave the EU, along with the election of President Trump, have many causes that are specific to their time and don’t necessarily have an historic precedent. But, as Mark Twain is supposed to have said (but probably didn’t) “history doesn’t repeat, but it rhymes.” Eichengreen’s history suggests that we have confronted these dark forces before and successfully overcome them, so there is every reason to think we can do so again. Let us hope that in 2019 we start to see evidence of that more positive response from our politicians and other leaders.

(*) I am teaching an elective for the Cambridge Executive MBA in February 2019 titled “Brexit, Trump and the backlash against globalisation: why the international economic system is at risk”. This is the first of a few posts that are background reading for that course.