Luigi Guiso, Helios Herrera, Massimo Morelli and Tommaso Sonno: There Is a Cultural Channel Causing People to Vote for Populism, But Not a Cultural Cause. The Cause Is Still Economic Insecurity
Note: This post is closely related to "Brian Flaxman: Yes! Economics Did Sway Obama Voters to Trump."
Bonnie Kavoussi pointed me to this interesting VoxEU article. The gist is given by these excerpts:
Economic insecurity is our key determinant of the demand for populism. Because we consider turnout, we can establish a mechanism for the effect of economic insecurity on populism. It acts on two margins: it discourages participation, and increases the chance of voting for a populist party among those who decide to exert their voting right.
An individual who goes from no economic insecurity to economic insecurity is more likely to vote for a populist party. The probability increases by 14.5% of the unconditional sample mean. The individual is also 21 percentage points less likely to vote, equivalent to 27% of the sample mean. These are substantial effects.
Voting, and voting for a populist party, are affected also by two cultural variables:
Trust in political parties ...
Adverse attitudes towards immigrants ...
So, there is a cultural channel causing people to vote, and vote for populism but not a cultural cause. The cause is still economic insecurity. Trust and attitudes towards immigrants are proximate causes of the populist vote, not deep drivers.
I want to point out that the current sense of economic insecurity in turn has identifiable causes. Technological trends—in particular manufacturing going the way of agriculture—and trade deficits have played an important role. But flawed monetary policy has also played a big role. If there had been full economic recovery by 2010, politics in the US, the UK and the euro zone would have evolved in a dramatically different way. And such an outcome was quite possible, given a different monetary policy, as I argue in "America's Big Monetary Policy Mistake: How Negative Interest Rates Could Have Stopped the Great Recession in Its Tracks." The details of how to successfully implement deep negative rates can be found in "How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide."
Also, dramatically higher capital requirements could have made the Financial Crisis of 2008 no worse than the popping of the dotcom bubble in 2000. On that, see my post "Martin Wolf: Why Bankers are Intellectually Naked."
Finally, note that high capital requirements and a readiness to use deep negative rates when called for are complementary policies that work better in combination than separately, as I lay out in "Why Financial Stability Concerns Are Not a Reason to Shy Away from a Robust Negative Interest Rate Policy."
Monetary policy matters for politics and the broad sweep of history, not just for immediate economic outcomes. The storified tweets in "The Historical Effects of Monetary Policy Mistakes" point to some obvious examples from the past.
What matters going forward is to reduce economic insecurity in the future:
- Central banks need to be prepared to use deep negative interest rates in the next crisis.
- Capital requirements, and in particular, the capital conservation buffer should be pushed to a much higher level, despite those in the pay of—cognitively captured by banks—who want to keep capital requirements relatively low.
- US Trade deficits should be reduced by the method that will actually work: by raising our saving rate and insisting that foreign-government-generated capital flows be negotiated. See "How Increasing Retirement Saving Could Give America More Balanced Trade" and "Alexander Trentin Interviews Miles Kimball about Establishing an International Capital Flow Framework." (This, too, is a policy that is complementary with central banks around the world having robust negative interest rate tools.)
- Economists and other scholars need to search for answers to the long-run problems that I discuss in "Restoring American Growth: The Video." (For the short version, see "Bonnie Kavoussi's Tweetstorm on 'Restoring American Growth.'")
Those who care about the direction of politics need to also care about technical economic remedies that can make things better. It isn't just about winning elections by talking about things that sound good. It is also about delivering the goods to people when your faction is in charge, as I write in "Economics Is Unemotional—And That's Why It Could Help Bridge America's Partisan Divide":
Subtler dimensions of economic policies may not work in stump speeches—but they can be the kind of good governance that gets politicians reelected.
... the party that gets to stay in power the longest will be the one that does a good job handling economic policy when it gets its turn in the driver’s seat.