You can feel it around the world – people are mad. You hear it in the rhetoric of politics. You see it in the news headlines. They call it populism, but it is a deep-seated dissatisfaction with the way things are and the lack of control that is felt over fate. It is the feeling that “insiders” are controlling the economic and political game. Populism is not a new concept, and the current bout has been a long-time coming, but it has the potential for very real consequences both today and for years to come.
While there are any number of examples to observe, the clearest upcoming cases in the Western world are the rise of “anti-establishment” candidates in the US Presidential election and the June referendum in the United Kingdom to potentially separate from the European Union (“Brexit”). Several causes contribute to the strengthening sentiment, but they boil down to changing social values and rising economic inequality. Even before the financial crisis, the developed world suffered from stagnant to declining real wages for workers as the distribution of those earnings went to the educated in service-based sectors. Most of these “knowledge workers” still face economic challenge as the student debt used to finance education is burdensome. Finding employment in the developed world is challenging as nominal economic activity stays near lows. Those with financial capital feel repressed as central bank policies including quantitative easing and negative interest rates appear to “steal” from their savings. The impact of immigration and the lack of social integration creates fear as terrorism fosters security concerns.
Generally, a populist reaction is either separatist (“close the doors”) or accusatory (“point a finger”) both of which are divisive. In the short-term, uncertainty in the face of populism often manifests in the form of currency changes and general financial market volatility. Longer-term, the repercussions of policy choices flow through trade, cost of capital, immigration, capital investment and all other forms of economic activity affecting global growth. It is important to remember that populism is the momentary will. While often the feelings are grounded in real concerns, a course of action is not right just because a lot of people want it. Economic and political policy must be made as part of reasoned discourse in the context of long-term goals.