Saw no evil when I looked into your eyes. I heard no evil while you told me all those lies. I spoke no evil when I called out your name. Look at us now, baby, who’s to blame. So go the lyrics to the song by the Bronxville New York band the Renovators.
I have been discussing the Occupy Wall Street protests in the blog lately because I believe that, while there are important issues that both OWS and the Tea Party movement have brought to the forefront, the positions of both the extreme left and extreme right make very little economic sense. This is because both of these movements are Populist phenomena, and populism always sounds good to those who are not well educated on how an economy actually functions. However, in the end Populism is based on faulty reasoning.The good people of the Occupy Wall Street movement are correct in pointing out that the Federal government is choosing winners and losers, and is subsidizing some groups (auto unions, bankers, government employees) and the expense of others (students, taxpayers, consumers). The Tea Party Movement is doing exactly the same thing. Unfortunately, they also both promote populist ideas as solutions to the nation’s problems. Policies that call for the elimination of student loan debt or for reducing the nation’s tax burden below that of its already committed expenses both do the same thing – they promote borrowing and inflation.
Populism is best defined as a political philosophy that places the people against the elite, and advocates policies that are intended to represent ordinary people’s needs and wishes. It differs from statist political philosophies such as socialism, fascism or communism in that they are based on the idea that the state should make decisions on behalf of the masses who are too uneducated or fickle to handle their own needs. It also differs from libertarian or laissez-faire objectivist philosophies in that populism assumes that the success of one group runs counter to the success of the people.
Populist politics has been around at least since republican Rome. In fact, the term comes from a faction in the Roman senate whose supporters were known for their populist agenda. In America, populist movements have been around at least since the early 1800s. The American Constitution was actually designed to keep populist movements in check. When it was written, only a limited number of free, male, citizens were allowed to vote at all; Senators were chosen by the States, not by the people; and, most importantly, the Constitution set up a framework known as the Electoral College that removed the election of the President from the popular vote. In 1824, even though Andrew Jackson narrowly won, pluralities of the popular and electoral votes, he did not win the necessary majority of electoral votes. Without this majority, the outcome of the election was decided by the House of Representatives which choose John Quincy Adams. This lead to a populist uprising that swept Andrew Jackson into office just four years later.
Unlike the more dictatorial redistributive programs of fascists and communists who simply steal from one group to give resources to another, populist policymakers embrace economic programs that expand credit, and encourage expansive fiscal policies to accelerate growth and redistribute income. It is true that such programs initially redistribute resources from creditors to debtors, but after a short period, unsustainable macroeconomic pressures result in the plummeting of real wages, rapid inflation, crisis, and potentially to the collapse of the economic system. History is bursting with examples of this pattern, from Argentina under Peron, Venezuela under Chavez, The United States under Nixon, and Italy under Berlusconi.
By promoting unconstrained growth and redistribution at the risk of inflation, deficit financing and the reaction of economic agents (including both labor and capital) to aggressive non-market and often random policy swings, populist policies can create an illusion of effectiveness and economic dynamism that will always in the end crumble when there is no real production to sustain the increased spending. Too much money will chase too few goods, leading to shortages, inflation, and in the end ill effects for the most vulnerable citizens who cannot either escape the economy by immigrating, nor by moving their capital to other jurisdictions.
Simply put, printing money and loosening credit does not in and of itself create wealth, and without wealth creation economies do not grow. Without growth, wages cannot increase, and without wage increases, the economic condition of the people cannot improve. Populist rhetoric on either side of the aisle cannot change this simple equation.