Populists in power have one thing in common: they regard limits on their power as undermining the will of the people.
For many, this aversion to institutional constraints extends to the economy, which explains why populists are so often at odds with regulatory agencies, central banks, and global trade rules.
But while populism in the political domain is almost always harmful, economic populism can sometimes be justified.
Economists tend to have a soft spot for limiting politicians’ discretion, because policymaking that is too responsive to short-term domestic politics can hurt long-term outcomes.
Politicians with the power to print money, for example, may generate “surprise inflation” to boost output and employment in the short run – say, before an election. The solution is an independent central bank, operating free from politics to maintain price stability.
But controls on economic policy are not always beneficial. Restraints may be instituted by special interests or elites themselves. In such cases, delegation to autonomous agencies or signing on to global rules does not serve society, but only a narrow caste of insiders.
Today’s populist backlash is rooted partly in the belief that economic policymaking has been hijacked by such interests. Multinational corporations and investors have shaped the international trade agenda, resulting in global regimes that benefit capital at the expense of labor. Banks and other financial institutions have been especially successful at instituting rules that give them free rein.
And what benefited society in one era may not benefit it in another. Independent central banks played a critical role in bringing inflation down in the 1980s and 1990s.
But in the current low-inflation environment, their focus on price stability imparts a deflationary bias to economic policy, and is in tension with employment generation and growth.
Such “liberal technocracy” may be at its apogee in the European Union, where economic rules and regulations are enacted without deliberation at the national level. This gap has given rise to populist, Euroskeptical political parties. In such instances, returning economic autonomy to elected governments may be the right move. Exceptional times require the freedom to experiment in economic policy.
Political populism that stifles pluralism and undermines liberal democratic norms is a menace to be avoided. But economic populism is occasionally necessary. In some cases, it may even help forestall the arrival of its more dangerous cousin.