Is the tide turning?

One of the mounting concerns over the last four years has been the extent to which policy is being conducted on the basis of belief rather than evidence – particularly in the Anglo-Saxon world. The danger was always that at some point those who ignored the evidence would start to come unstuck. We appear to be reaching this point. The question is whether voters are beginning to see through the bluster.

This was exemplified by two items that surfaced on Twitter yesterday from people who are not known for their adherence to evidence-based analysis. The first example was provided by the current occupant of the White House whose TV interview on Covid cases in the US was a car crash of epic proportions. Amongst other things, Trump failed to appreciate the importance of normalising the number of cases and deaths to account for differences in the size of population and appeared not to understand the argument that the journalist from Axios was putting to him. As much as anything, it showed up Trump’s inability (or maybe unwillingness) to engage in intellectual debate. It was far worse than anything I remember four years ago during the presidential campaign. Having recently watched the outstanding film Hillary by Nanette Burstein, I could not help wondering why the US public hated Mrs Clinton so much that they chose a reality TV star in preference to her as president (if you are interested in recent US politics, the film is a must-see). 

The second item was as bad, if not worse in its own way. This series of Tweets by former leader of the Tory party and Brexit hardliner MP Iain Duncan Smith, explaining why the EU Withdrawal Agreement was such a bad deal for the UK, was incredible. IDS argues that the EU wants “our money and they want to stop us being a competitor.” As if that were not enough, the following statement was both wrong and a masterclass in irony: “To avoid their own budget black hole, the EU gets £39billion as a “divorce payment” from us, reflecting our share of the current EU budget. But it gets worse. Buried in the fine print, unnoticed by many, is the fact we remain hooked into the EU’s loan book.” 

It is wrong because it fails to differentiate between the liabilities incurred by the UK which it must meet on its departure and some kind of exit payment. The UK is not somehow filling in holes in the EU budget. It agreed to undertake certain projects whilst it was a member of the EU and agreed that it must pay its share of the liabilities incurred. But the supreme irony is in the phrase “Buried in the fine print, unnoticed by many.” It is the job of MPs to scrutinise legislation. The text of the Agreement was published in October 2019. It then went through the UK parliament, where bills are debated three times by the House of Commons before being passed into law precisely to avoid any hidden items from sneaking through. So what precisely had he and his colleagues been doing prior to January 2020 when they voted by 330 to 231 to pass the Withdrawal Bill? 

The sheer absurdity of the ultra-Brexiteer position is difficult to understate. They clearly seek absolute autonomy over every aspect of the UK’s legal and economic framework without ever once acknowledging that no country in the world – not even the superpowers – have that kind of control. This handy little guide gives an overview of all the areas where the Centre for Brexit Policy think tank believes the UK should simply rip up any agreements with the EU in order to obtain absolute sovereignty. The people who believe this stuff are simply zealots who have no regard for how the international economy works. I have been calling them out for the past seven years but like cockroaches their arguments just won’t die, irrespective of how much logic you apply to them. 

They share with Trump a desire to break down the status quo without giving any real thought to what might come in its place. Their various projects run on finding grievances in order to stay relevant by tapping into the perennially dissatisfied. In a way, the worst thing that could happen to them is that we give in to their fantasies because then they would become irrelevant, having nothing to protest against. But that way madness lies, so we won’t go there.

All this begs the question whether voters think differently now compared to four years ago? In the US, Trump has had worse net approval ratings over the last three years than he is polling today but you have to go all the way back to summer 2017 to find them (chart). It is not a good look just three months before a presidential election. Nor do the polls find much support for Brexit (at least not in the form proposed by the British government over recent months). According to the European Social Survey, just 35% of Brits supported Brexit, with 57% wanting to rejoin the European Union. It is just one survey and we have learned not to trust the polls but this is consistent with the message coming from a number of polling sources in recent years. There is no appetite for the hard Brexit which the UK government says it is prepared to deliver. 

The collective cries of rage on both sides of the Atlantic were hailed in many quarters as the full throated roar of a population willing to take back control and make their respective countries great again. But after giving the electorate just four months to consider the immensely complex topic of Brexit, which was decided by the narrowest of majorities, politicians have had four years to implement it and now its leading protagonists do not appear to like what they voted for. In the US, such was Donald Trump’s popularity that he actually polled far fewer votes than Hillary Clinton. Indeed the vote deficit was the largest in history of anyone going on to be declared president (almost 2.9 million). There was no huge majority in favour of the populist policies on offer. And now that they are proving difficult – if not impossible – to live up to, maybe the sound you hear is that of the tide turning.

You don't know what you've got 'til it's gone

Viewed in a global context Brexit is very much a sideshow. However, it is all part of a global backlash against the status quo which is perceived to have acted against the interests of citizens in the developed world. Nowhere is this more evident than in the actions of the Trump administration which earlier this month imposed higher tariffs on the first $34bn worth of imports from China and threatened to escalate still further, thereby risking Chinese retaliation and a further step on the path towards a global trade war. The biggest danger in all of this is the prospect that the current global economic architecture could well be jeopardised, which may not be perceived to be a problem in Hicksville USA or Smalltown England, but might result in turning our back on the most successful period of prosperity generation in world history.

To put some figures on it we rely on the database put together by the late Angus Maddison which looks at very long runs of GDP data. Measured in real terms, the increase in world GDP between 1950 and 2000 outstripped anything seen in the previous two millennia, rising at an average annual rate of 3.9% versus 0.2% in the preceding 1950 years (chart). The same is also true of the US, although its most rapid growth occurred during the early years of the industrial revolution. Nonetheless, average US growth of around 3.5% per year between 1950 and 2000 compares pretty favourably with the 4.4% rate recorded during the nineteenth century. Growth is not everything, of course. When comparing living standards, what matters is the absolute level of income. Whilst it is true that US per capita income growth has stalled over the last decade, the US still ranks ninth in the world behind three oil-rich Gulf states, four smaller European economies (Norway, Luxembourg, Switzerland, Ireland) and Singapore. For the record, Chinese real income per head is just 23% of US levels.

It might suit some American politicians to claim that their country has never had it so bad, but the US is still a pretty good place to be. The US has attained these lofty heights, thanks to an exceptional period of technical innovation – which it drove – and a huge rise in world trade which allows it to buy products more cheaply from other parts of the world, thus allowing American citizens to spend their excess income on other products. Whilst it is true that China is closing the gap with the US, per capita GDP growth has recently slowed to an annual rate of less than 3%. At current rates, it will take China 55 years to reach current US  levels and assuming China is able to sustain a 2.75% growth rate way out into the future (which is unlikely) and US incomes grow at 1% per year, it will take the better part of a century for China to match US living standards.

Worse still, the US Administration appears to have no concept of the gains from trade. As The Economist put it a few weeks ago, “Trump appears to see the world as he saw the New York property market, a place of screw or be screwed.” China may be stealing US technology and engaging in sharp practices to ensure that the playing field in the Chinese market is far from level, but that does not mean that the US should cut off its own nose to spite its face. Adam Smith – a hero of many on the right – argued in his 1776 publication The Wealth of Nations that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage.

The US may no longer be the world’s primary producer of traditional industrial products such as steel, but it is still the world’s most technically advanced nation which in the past 20 years has given us Facebook, Amazon, Netflix and Google (the so-called FANGs) which also happen to be the largest global companies by market cap. Moreover, many companies rely on outsourcing production to external markets, and retaliation in response to US actions would imperil global value chains and force a rethink of how companies operate across borders with unanticipated consequences.

But rationality is not the order of the day. Western historians will probably look back at the first two decades of the 21^st century as a golden period punctuated by a severe crisis that prompted irrational policy choices. They do say that you don’t know what you’ve lost until it’s gone. I miss the good old days even before they have ended.

Making sense of social trends

Populism has been at the top of the political agenda for much of the last two years. It is manifest in the Brexit vote; the election of Donald Trump; the rise of the AfD in Germany and last weekend’s election in Italy, which saw the Five Star Movement and Lega Nord perform particularly well gaining almost 50% of the votes. To many people, this backlash against the status quo came out of the blue. In reality, it has been brewing for quite some time.

The economist Simon Wren-Lewis recently wrote in a blogpost that “those who think the UK descended into political madness with Brexit are wrong: the madness started with austerity in 2010.” I would argue that the roots extend even further back, and have long believed that Tony Blair’s decision to participate in the invasion of Iraq in 2003 marked a fundamental erosion of trust in government in the UK. Around the same time, in 2004, the journalist David Goodhart wrote an influential essay in Prospect Magazine, entitled “Too diverse?” in which he argued that tolerant western societies face a “progressive dilemma” as the greater diversity of lifestyles and beliefs make it more difficult to find common issues around which society can coalesce.

Goodhart is no tub-thumping populist – indeed he is very much part of the “liberal elite.” Thus, his argument that “large-scale immigration …  is not just about economics; it is about those less tangible things to do with identity and mutual obligation … It can also create real – as opposed to just imagined – conflicts of interest” saw him vilified in sections of polite society. But as the journalist Jonathan Freedland remarked last year in a review of Goodhart’s latest book “you don’t have to like any part of that argument to recognise that it was prescient.”

Fast forward to the present and the recent book by political theorist Yascha Mounk The People vs. Democracy argues that the glue that has held together the liberal democratic model of the post-war era is becoming unstuck. I suspect that the conclusion is a bit overdone but he does accurately nail some of the governance problems faced by western societies. In his view, “elites are taking hold of the political system and making it increasingly unresponsive: the powerful are less and less willing to cede to the views of the people.” In a highly readable review of this book in The American Interest, Shadi Hamid, a senior fellow at the Brookings Institution, argues that this is primarily the result of a change in the nature of government which has become more technocratic and thus has less room to listen to the people.

In Hamid’s view, “technological progress, scientific advancement, and the necessity of ambitious welfare states to maintain social order” has necessitated this more technocratic approach. The electorate has outsourced issues such as taxation, healthcare and a whole manner of regulatory issues to government – they simply do not have the expertise to deal with them nor the time to become fully informed. Hamid points out that governments made a mistake in treating immigration as just another technocratic problem that could easily be dealt with, but “voters didn’t see it that way and repeatedly tried to get politicians to listen.” Worse still, “governing elites wished to make sensitive conversations … off-limits for polite democratic deliberation. To make matters worse, it was done in a condescending way, with enlightened moral appeals … juxtaposed to the untutored bigotry of the masses.”

This was a particular problem in Europe where the rise of AfD; the Italian election result and the Brexit vote are all related in some degree or another to domestic concerns about immigration which governments were unwilling to confront. It may not be a problem that liberals such as myself are willing to acknowledge, but as a partial explanation of why the populist backlash of recent years has taken place it does fit the facts. This does not make the vast majority of the European population racist or xenophobic. But it does echo Goodhart’s warning that recent changes in western societies could “erode feelings of mutual obligation, reducing willingness to pay tax and even encouraging a retreat from the public domain. In the decades ahead European politics itself may start to shift on this axis, with left and right being eclipsed by value-based culture wars and movements for and against diversity.”

It also suggests that governments across the continent have taken their eye off the ball when it comes to addressing the concerns of their electorates. Obviously, these concerns have been magnified by the aftershocks from the global financial crisis of 2008-09, and perhaps governments were so preoccupied with trying to generate a recovery that they were distracted. But as I pointed out in early 2015, it is “evident that the world is not going to return to a pre-2007 “normality”... and policy makers need to start having honest discussions with their electorates about these issues.” In recognition of the fact that the French electorate has concerns, the government last month put forward a plan to tighten immigration controls. Had Angela Merkel known in February 2016 what she knows now about German voters’ concerns, perhaps the EU would have offered the UK more concessions ahead of the Brexit vote.

But pulling up the drawbridge is not the answer. The idea that limiting immigration makes life better for European voters is based on the notion that there is a fixed amount of work, and reducing immigration reduces the competition for that work. This is clearly wrong, but whatever the economics profession might say, a large body of the electorate does not want to hear that message and in order to get re-elected governments have to take a line which may not be in their best economic interests. I am sure that the prevailing opposition to immigration will eventually change, but perhaps not quite for some time, and governments may not be quite so willing to open their borders for an even longer period for fear of the political backlash this generates. I hope I am wrong when I say we may well look back at the last 20 years as the golden age of the liberal economy.

Generating economic policy buy-in

Just before Christmas, the FT commentator Gideon Rachman penned a column which argued very strongly that “Economics is – or should be – part of moral philosophy  …  ‘the economy’ is not just about growth. It is also about justice.” This is a very important point and one that tends to be overlooked, or at least downplayed, by large parts of the economics profession. Rachman argues – as indeed as I have done on this blog – that many voters do not buy into the economic vision offered by politicians because they do not see how it benefits them. What is even worse, they often believe they are being discriminated against in favour of other interest groups.

Making America great again speaks to the millions of voters who believe somehow that the US’s status of top dog is being eroded by emerging economies that do not play by the economic rules and that the US is being penalised for abiding by them. In a similar vein, taking back control speaks to those British voters who see the UK as being held back by a monolithic EU. As an economist, I find such statements absurd. After all, the US is still the pre-eminent economic and military superpower whilst EU membership gives the UK access to the largest and richest single market on the planet. But there is no reason why this should cut any ice with the average voter who is struggling to make ends meet at a time of low wage inflation and against a perceived backdrop of mounting job insecurity (which incidentally is not backed up by the UK evidence).

The predominant economic model in the Anglo Saxon world over the last 35 years has been a market-oriented policy in which government has tried to reduce its role in the belief that the market will provide the most efficient allocation of resources, thus boosting welfare. Prior to 2008 the evidence appeared to suggest that whilst voters were aware of the downsides of this model, the economic tide was rising sufficiently quickly to float all boats. But political and economic circumstances have changed over the past decade. Society’s sense of natural justice was offended by government actions to bail out banks whilst simultaneously imposing a policy of fiscal austerity, which sowed the seeds of a belief that the system is rigged in favour of big business at the expense of the little guy.

This has resulted in many aspects of our current model being put under the microscope and raises questions whether economic policy is going in the direction which voters are prepared to buy into. As Rachman points out, intra-generational issues are uppermost in the minds of many voters. There are concerns across the western economies that those in born after 1980 will not be as wealthy as their parents. Evidence from the UK, for example, suggests that younger adults have much less wealth to their name than previous generations did at a similar age. Over the past decade, as younger voters have gone through university and entered the labour force, many of them are beginning to question whether they will be able to reap the economic rewards they were promised. UK students no longer get the benefit of a free university education and finish their university studies with much higher levels of debt than their parents. Indeed, UK students now carry a staggering £13bn of debt – an increase of almost 190 times what they owed in 1990.

At the same time, the younger generation must pay the taxes to cover the rising costs of providing for the welfare needs of the ageing baby boomers, whilst struggling to find the high-paying jobs which previous generations were able to secure. They will also have to deal with the fallout from the populist reactions triggered by the Brexit vote and the election of Trump – both of which were propelled by the votes of the older generation. Millennials in the industrialised world can be forgiven for questioning the legacy bequeathed to them by older generations.

Policies which offer a trade-off between more market solutions and lower taxes are increasingly unlikely to find electoral favour. Nobody wants to pay more taxes, of course, but there are limits on how far countries such as the UK can continue to reduce them and still maintain the reasonable standard of public services that the public has come to expect. Scarcely a week goes by without a newspaper story decrying cuts to the armed forces or the strains imposed on a health system which struggles to cope with the strains placed upon it. It is perhaps for this reason that we are seeing renewed voter interest in “radical left” parties across Europe which promise a greater role for the state in a bid to improve the lot of those left behind (chart).

Indeed, as the IMF pointed out last week in its regular assessment of the UK economy “greater reliance on revenue measures for [fiscal] consolidation than in recent years may be warranted.” Amongst the potential measures put forward were a reduction in “the tax code’s bias toward debt” which benefits corporations, and rebalancing property taxation away from transactions and toward property values. Ironically, the US appears to have gone in the other direction with the recently unveiled changes to the tax system primarily benefiting corporates and better off individuals.

If we really are in it together (to use George Osborne’s phrase) some changes to the incidence of taxation would be a good place to start to help win over voters that the system is not biased against them. Whilst many in the policy establishment draw on the laissez-faire teachings of Adam Smith, we should not forget that “The Theory of Moral Sentiments” extensively explored ideas such as morality and human sympathy. He never advocated the devil-take-the-hindmost policy which many of his adherents claim. It is a lesson the economic and policy establishment perhaps needs to relearn.

Holding the centre

In his poem The Second Coming, WB Yeats wrote “Things fall apart; the centre cannot hold; Mere anarchy is loosed upon the world.” It was written in 1919 as an allegorical description of the state of European politics in the wake of World War I. It is an apt description of where we are today. Over recent years I have consistently made the point that the failure of western governments to be honest with their electorate about the scale of the economic challenges they face will ultimately be to their detriment. We have seen this writ large in the form of the Brexit referendum and the election of Donald Trump but it has also been seen in the strong performance of populist parties in Dutch, French and German elections this year. It is thus interesting to look at the vote shares of populist parties over recent years to assess the scale of the problem.

The Swedish think tank Timbro notes that the share of the European populist vote, whether to the left or right of the political spectrum, rose from around 8% in 2004 to 20% today (chart). As the authors of the study point out “in the 33 countries included in this index, there are a total of 7843 seats in national parliaments …  representatives of illiberal and/or anti-democratic parties today hold 17.5% of all seats within European national parliaments.” It is popularly believed that populist parties advocate right-wing solutions – low taxes, smaller government and opposition to immigration – but as Timbro points out, there has been a resurgence of so-called radical left parties, particularly in those southern European countries so badly affected by the euro zone crisis.

The flip side of the rise of radicalism, of course, is that centrist ideas are squeezed out. To the extent that this has proven to be the bedrock upon which the economic successes of the past 70 years have been based, this has to be a cause for concern. Moreover, political extremists do not have to hold office in order to wield influence. In Germany, for example, votes gained by the AfD ate into the SPD’s vote share and prompted it to stand aside from the coalition government, raising the likelihood that the FDP will form part of the government. To the extent that the FDP does not necessarily share Angela Merkel’s future vision of the EU this could have a major bearing on whether Emmanuel Macron’s ideas on European reform will find acceptance in Germany.

We see the same forces at work in the UK. UKIP has had very little success in securing parliamentary representation yet it was one of the prime grass roots motivators behind the Brexit referendum. The wider consequences of the Brexit vote have yet to be realised but as Simon Nixon pointed out in the Wall Street Journal last week, whilst the Brits may have voted to leave the EU, they did not vote for a revolution. But in effect, that is precisely what they have got. In his words “what makes Brexit so destabilizing is that it shares two features common to revolutions. First, it has created a parallel legitimacy, pitching the supposed ‘will of the people’ expressed in the referendum against the traditional sovereignty of Parliament … Second, it has created a power vacuum … [Brexiters] shook the economic order but without a coherent plan as to what to put in its place.”

This resultant power vacuum at the heart of the UK government is a major problem, for it is diverting energy away from the most pressing issue of the day – how to ensure that Brexit does not tip the economy over the cliff. Instead, we hear a constant stream of press stories suggesting that ministers are fighting amongst themselves. Such is the apparent disarray that the prime minister, who would like to see some form of transitional agreement with the EU, cannot get her colleagues to fall in line. David Davis, the UK’s chief negotiator, has thus been allowed to hold to his hard line in the negotiating chamber with the result that at next week’s summit, the EU27 will almost certainly decide that “insufficient progress” has been made during phase 1 of negotiations to allow discussions on a trade deal to begin.

Most people in business are increasingly worried about the implications of where the Brexit negotiations are headed as pessimism mounts. There is also some evidence to suggest that voter preferences have changed, with the share of those believing that voting to leave the EU was the wrong choice now sharply higher than in the spring (chart). This may have something to do with the fact that Brexit is not the easy option which voters were promised. It is also a warning to those who are seduced by the simple policy prescriptions of populists. If something were that easy, it would have been done already. Now, Mr Trump, about that wall …

Vox populi

If Brexit was an earthquake which echoed throughout Europe then the performance of the AfD in yesterday’s German election is clearly one of the aftershocks. Like the performance of Geert Wilders’ Freedom Party in the Dutch election or the performance of Marine Le Pen in getting through to the second round of the French presidential election, the AfD has upset the fragile balance of domestic politics. More than six months after the Dutch election, the determination of prime minister Mark Rutte to keep the Freedom Party out of government means that as yet it has proven impossible to finalise the composition of the coalition. Angela Merkel faces a similarly difficult task to put together a coalition given that the SPD has indicated it will not continue the current arrangement. Moreover, with the leader of the Bavarian CSU faction apparently questioning whether it should continue in coalition with Merkel’s CDU, the picture has been further complicated.

The election clearly was not a Brexit moment for Germany. In that sense, we should not over-dramatise the rise of AfD. The general consensus is that it represents a protest which has gained momentum on the back of Merkel’s opening of German borders to huge numbers of refugees. Perhaps the tide of outrage prompted by the actions in 2015 may subside over time, but there should be no doubt that the German elite misjudged the domestic mood in much the same way as politicians did in the US, UK and France. Whilst The Economist does not speak for Germany, its views are very much in tune with well-educated liberal voters across the western world. But even two years ago, its editorial comment that “Willkommenskultur shows that the people of Europe are more welcoming than their nervous politicians assume. The politics of fear can be trumped by the politics of dignity” did appear a little complacent. No-one doubts that it was the morally right thing to do but Merkel’s unilateral decision enraged the likes of Hungary and prompted unprecedented border closures throughout the EU. With the passage of time, many domestic voters are beginning to wonder if it was such a good idea.

But we should not forget that AfD was originally formed as a party to protest against the Greek bailout. It was a protest movement in the truest sense. However, it morphed into something else as it attracted voters with rather more nationalist views. One of its founders was the economist Bernd Lucke who has since drifted away from the party. In an excellent overview of AfD’s rise to prominence, the Financial Times quotes Lucke as saying “[Its] views are opposite to the ones I had when I founded it …When I led it, I had the support of 7 per cent [of voters]. That doubled when they became anti-Islam and anti-immigrant.” 

Nonetheless, the surge in support for AfD was “part of a bigger shrinkage of the political centre” to quote Gideon Rachman in today’s FT. Perhaps it is more accurate to say that this represents more a reorientation of the political landscape. Voters have every reason to be unhappy with the response of their governments in the wake of the financial crisis, though some countries have more cause for complaint than others. Excessive austerity in many European economies, coupled with intensified pressures from globalisation and the use of market solutions to price people back into work (zero hours contracts in the UK, for example) have proven a toxic cocktail which eroded many workers’ faith in the present system. There is also a lingering grievance that the “elite” were bailed out during the financial crisis and that the ordinary working person has paid the price. Against this backdrop, it is not surprising that many voters feel the system is loaded against them.

US voters went for the full nationalist option in the form of Donald Trump. The Brexit vote was also partially driven by nationalism whilst the 2017 election result indicated that many British voters sought an alternative to solutions which rely on more market and additional austerity. Italian voters last December rejected constitutional amendments, in part because it was a chance to stick two fingers up to the establishment which supported the changes. Even in France, where Emmanuel Macron swept the board in presidential and parliamentary elections earlier this year, the new president’s polling ratings have dipped sharply and Macron’s party performed poorly in yesterday’s elections to the upper house, gaining only 8% of the vote.

Research by the political scientist Gabriel Lenz suggests that in the case of economic data, voters focus on the most recent evidence “in large part because of the way the news media and the government report economic statistics.” He goes on to point out that “voter behavior appears to reflect a pervasive human tendency to inadvertently substitute an easily available attribute for an unavailable one, a tendency that Daniel Kahneman calls ‘attribute substitution.’”

This explains why populists can get away with making outrageous claims: They are simply not challenged on the evidence, which allows them to propose solutions designed to placate anxious voters but which will make many of them worse off in the long-term. But as Trump, Brexit and to a lesser extent the AfD have shown, appealing to reason will not work if that is not the message which people want to hear. As Charles Dickens wrote in 1859 in A Tale of Two Cities, “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity.” Some things never change.

Beware the economics of populism

Venezuela is probably the worst managed economy in the world today. It has the largest oil reserves of any country, accounting for around 18% of the world total and twice as much as the whole of Europe put together, yet its citizens suffer food shortages and a lack of access to basic medicine. In short, they live in a country whose economy is – to put it bluntly – a basket case. It should not be like this. The fact that it is can be attributed entirely to a policy of economic mismanagement, driven by a government which for the last 17 years has pursued a brand of socialism known as Chavismo, named after its initiator, former president Hugo Chávez. 

When asked in a recent TV interview what Venezuela must do in order to get its economy back on track, my first answer was “get rid of the government.” Chavismo is a ruinous policy which sought to build a mass movement of popular democracy in order to establish economic independence, equitable distribution of revenues and an end to political corruption. It has failed on every count. It is not popular; has failed to break the dependency on oil and has resulted in an even less equitable distribution of incomes than when the policy started. Meanwhile, Transparency International today ranks Venezuela 166^th out of 176 countries in its Corruption Perceptions Index, compared to 71^st in 2000. In short, Venezuela is a classic example of how not to run a populist policy.

But, I hear you say, this sort of populist nonsense only happens in third world dictatorships such as Venezuela or Zimbabwe – it would never happen here. And you would probably be right. But it is interesting to note that the share of electorates voting for populist parties in the so-called developed world is at its highest since the 1930s (see chart below). The chart was taken from a recent excellent study by Bridgewater Associates which is well worth a read (here) and which takes a look at how populism emerges, how it runs its course and what are the wider implications. As the report states, “populism is a political and social phenomenon that arises from the common man being fed up with 1) wealth and opportunity gaps, 2) perceived cultural threats from those with different values in the country and from outsiders, 3) the “establishment elites” in positions of power, and 4) government not working effectively for them.”

This all sounds very familiar after the events of the last year, and although neither Brexit nor the election of Donald Trump are expected to lead to the extreme outcomes associated with past periods of populist government, they do share certain similarities. Both were motivated by a certain degree of xenophobia and both to varying degrees involve elements of anti-free trade, as well as being highly nationalist campaigns. We have also seen some elements of this in the French and Dutch election campaigns in recent weeks.

The real concern is that populist agendas tend to do more economic harm than good in the long-run. One of the unsung economic populists identified by Bridgewater is Robert Muldoon, the New Zealand prime minister from 1975 to 1984. His policies promised a continuation of New Zealand’s generous social welfare programs and protections, which resonated with elderly and rural voters, who helped bring him to power. His policies, which included setting up a pension system described as “the most generous universal pension scheme ever introduced in any country in any era,” came against a worsening domestic and global economic backdrop. The upshot was that New Zealand was subsequently forced to backtrack and introduced a major restructuring programme in the mid-1980s (the Rogernomics programme) which caused a lot of pain in order to reverse the excesses of Muldoon's policies.

Donald Trump’s threats to impose barriers to countries wishing to trade with the US threaten to do more harm than good. Brexit, if not handled correctly, will cause much greater long-term damage than many of its current proponents believe. Whilst we may not be about to go along the same path as Venezuela, the historical evidence makes it clear that politicians who make promises their economies cannot keep do us all a disservice.