AEA Papers and Proceedings 2018, 108: 196–199

https://doi.org/10.1257/pandp.20181122

Is Populism Necessarily Bad Economics?†

By Dani Rodrik*

Economists dislike populism, and for good regimes can prolong their rule by manipulating
reason. The term evokes irresponsible, unsus- the media and the judiciary at will.
tainable policies that often end in disaster and Similarly in economics, populists reject
hurt most the ordinary people they purportedly restraints on the conduct of economic policy.
aim to help. The emergence recently of popu- Autonomous regulatory agencies, independent
list movements in Europe and the United States central banks, and external constraints (such as
has made these concerns more relevant. But global trade rules) narrow their policy options
populism is a term with many possible mean- and hence need to be overcome.
ings and its political and economic ramifications It is important not to conflate these two dimen-
are different. In this short paper, I will provide a sions of populism—political and economic—as
limited defense of economic, but not political, they need not always go hand in hand. Table 1
populism under our present circumstances. shows the possibilities.
Personalized regimes such as Vladimir Putin’s
I.  Defining Populism and its Political and in Russia or Tayyip Erdogan’s in Turkey are
Economic Variants characterized by the absence of restraints in both
the political and economic domains (box 1). But
The distinctive trait of populism is that it it is possible to conceive of autocratic regimes
claims to represent and speak for “the people,” where important aspects of economic policy are
which is assumed to be unified by a common placed on automatic pilot or delegated to tech-
interest. This common interest, the “popular nocrats (box 2). Pinochet’s regime in Chile pro-
will,” is in turn set against the “enemies of the vides an example.
people”—minorities and foreigners (in the case Alternatively, a regime can be populist in
of right-wing populists) or financial elites (in the the economic sense without rejecting liberal,
case of left-wing populists). pluralist norms in the political domain (box 3).
Since they claim to represent “the people” at Finally, a regime that is constrained in both pol-
large, populists abhor restraints on the political itics and economics might be called a “liberal
executive. They see limits on their exercise of technocracy” (box 4). The European Union may
power as necessarily undermining the popular be an example of the last type of regime: eco-
will. nomic rules and regulations are designed at con-
In politics this is a dangerous approach siderable distance from democratic deliberation
that allows a majority to ride roughshod over at the national level, which accounts for the fre-
the rights of minorities. Without separation quent complaint of a democratic deficit.
of powers, an independent judiciary, or free My focus here is on the respective advantages
media—institutions which all populist autocrats and disadvantages of regimes (3) versus (4). I
detest—democracy degenerates into the tyranny ask: when is lifting restraints on economic pol-
of those who happen to be currently in power. icy a good idea, or equivalently, when is liberal
Elections become a sham: in the absence of the technocracy too constraining?
rule of law and basic civil liberties, populist
II.  Economists’ Soft Spot for Technocracy

Economists tend to prefer rules, or delegation

* Harvard University, 79 JFK Street, Cambridge, MA to autonomous technocratic agencies, because
02138 (email: [email protected]).
† 
Go to https://doi.org/10.1257/pandp.20181122 to visit of the tendency of short-term interests to dom-
the article page for additional materials and author disclo- inate when economic policy is in the hands of
sure statement. politicians. In particular, policy is often subject
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VOL. 108 IS POPULISM NECESSARILY BAD ECONOMICS? 197

Table 1—A Taxonomy of Regimes a so-called investor-state dispute settlement

Restraints on economic policy
(ISDS) clause. These allow foreign firms to
bypass the local judicial system and sue the gov-
No Yes ernment in international tribunals.
Political No (1) (2) Yet another illustration is the problem of leg-
 restraints Personal Authoritarian islative logrolling, which produces inefficient
autocracy technocracy outcomes as special interests trade off favors for
(Erdogan) (Pinochet) each other. When trade tariffs were determined
Yes (3) (4) by Congress, the result was excessive protec-
Populist Liberal tionism. Delegation of trade policy authority to
democracy technocracy the president, and in turn to international trade
(Sanders) (EU) agreements, is often seen as a mechanism for
achieving freer trade outcomes that are on bal-
ance beneficial to more groups.
to the problem of time-inconsistency, which These are examples of restraints on economic
undermines the pursuit of policies that are desir- policy that take the form of delegation to auton-
able for the long term. omous agencies, technocrats, or external rules.
One canonical example is discretionary mon- As described, they serve the useful function of
etary policy. Politicians who control the printing preventing those in power from shooting them-
presses may have an incentive to generate “sur- selves in the foot by pursuing short-sighted
prise inflation” so as to boost output in the short policies. When power-holders represent the
run. But this backfires, since firms and house- majority, or people at large, such restraints do
holds adjust their expectations. In the end, dis- not harm the “popular interest.” In fact, they
cretion results only in higher inflation without advance it by ruling out policies that would be
any output or employment gains. One solution broadly harmful.
to the problem is the delegation of monetary
policy to an independent central bank, insulated III.  Restraints That Serve Special Interests
from politics, which is charged solely with the
task of maintaining price stability. Such cases are to be distinguished from
More broadly, the costs of macroeconomic another possibility. Commitment to rules or del-
populism are quite familiar in Latin America. egation may also serve to advance the interests
As Sachs (1990) and Dornbusch and Edwards of narrower groups, and to cement their tem-
(1991) analyzed a while back, unsustainable porary advantage for the longer run. Imagine,
monetary and fiscal policies were the bane of the for example, that a democratic malfunction or
region until economic orthodoxy began to pre- random shock enables a minority to grab the
vail in the 1990s. These policies produced peri- reins of power. This allows them to pursue their
odic and very painful economic crises, which favored policies, until they are replaced. In addi-
hurt the poor in particular. To break these cycles, tion, they might be able to bind future majorities
the region turned to fiscal rules and technocratic by undertaking commitments that restrain what
finance ministers. subsequent governments can do.
Another example is governments’ treatment These kinds of restraints on policy will not
of foreign investors. Once a foreign firm makes be desirable as a rule. Unlike under time con-
its investment it essentially becomes captive to sistency, delegation to autonomous agencies or
the host government’s whims. Promises that signing on to global rules will serve not society
were made to attract the firm are easily forgot- at large, but narrow interests. The results will
ten, replaced by policies that squeeze it to the be primarily redistributive rather than efficiency
benefit of the government treasury or locally enhancing. Were a future government to find a
owned firms. But investors are not stupid, and, way of relaxing restraints of this second kind,
fearing this outcome, they invest elsewhere. The society would benefit.
local economy is deprived of capital and exper- Part of today’s populist backlash is rooted in
tise. External constraints can help overcome this the belief, perhaps not entirely unjustified, that
problem too. For example, many governments restraints imposed on economic policy in recent
resort to trade or investment agreements with decades have been precisely of the second kind.
198 AEA PAPERS AND PROCEEDINGS MAY 2018

Take monetary policy, for example. have at their command have left public agen-
Independent central banks have played a use- cies necessarily at a disadvantage. The result
ful role in bringing inflation down in the 1980s has been the relaxing of regulations that had
and 1990s. But in a low inflation environment, previously reined in excessive risk-taking and
their exclusive focus on price stability tends to the unleashing of practices that render financial
impart a deflationary bias to economic policy. crises more likely and costlier.
In principle, this can be fixed by adjusting the In Europe, the emphasis on economic integra-
inflation target upward, say from 2 percent to 4 tion—removing transaction costs to cross-border
percent, as many economists have argued. But transactions—has encouraged rule-making that
the problem remains that central bankers moti- takes place at considerable distance from demo-
vated purely by inflation concerns will likely try cratic deliberation at the national level. EU-wide
to hit their target overwhelmingly from below. regulations, fiscal rules, and a common mone-
This may well create a tension with employment tary policy imply policy is increasingly made in
generation and growth. Brussels and Frankfurt while politics remains
When the conflict becomes severe, the inde- in the national capitals (to use political scien-
pendence of the central bank can be called into tist Vivien Schmidt’s 2006 evocative distinc-
question. In such circumstances allowing a cer- tion). The system serves skilled professionals
tain degree of politicization of monetary policy and internationally oriented companies well, but
may be the lesser evil. many others feel excluded. Complaints about the
Or consider global trade rules. One can make region’s democratic deficit, and the recent popu-
the argument that the agenda of international list backlash, are rooted in this style of techno-
trade agreements has increasingly been shaped cratic policy making, insulated from politics.
by special interests—multinational corpora-
tions, financial institutions, pharmaceutical and IV.  When Economic Populism Works
high-tech companies. The result has been global
disciplines that disproportionately benefit capi- In many of these instances, relaxing the con-
tal at the expense of labor. straints on economic policy and returning policy
For example, global and regional trade agree- autonomy to elected governments may well be
ments now incorporate stringent patent and desirable. This is especially true in times such
copyright rules, the main purpose of which is as these when much conventional wisdom has
to create and distribute rents for big pharma, been upended by political development and
Hollywood, and tech firms. So-called trade-re- political populism, in particular, is on the rise.
lated intellectual property rights (TRIPs) Exceptional times require the freedom to exper-
clauses enable such firms to extend their domes- iment in economic policy.
tic monopolies globally. It is difficult to make An apt historical example is provided by
the case that TRIPs enhance global welfare, in Franklin D. Roosevelt and his New Deal. FDR
the way that standard free trade does. famously called for “bold, persistent experimen-
Similarly, while international investor tri- tation” in 1932, arguing that correcting the faults
bunals (ISDS) can be in principle beneficial of the prevailing economic system required
to both foreign firms and host governments, in enthusiasm, imagination, and courage to tam-
practice they have increasingly turned into a per with established arrangements (Roosevelt
redistributive vehicle. They allow foreign inves- 1932). But to experiment he needed to do away
tors to effectively pressure governments not to with many of the shackles on economic policy.
adopt policies that affect their profits adversely, FDR came to office during the worst eco-
regardless of the public interest. As a result, nomic downturn in US economic history. The
many developing country governments are now challenge he faced was to both tame and redi-
reconsidering the value of ISDS. rect the populist passions the Great Depression
With respect to delegation to domestic regu- had inflamed. Huey Long, a demagogue and the
latory agencies, the possibility that they might authoritarian governor of Louisiana, was one
be captured by the industries they regulate has vocal nemesis, calling for a radical redistribu-
long been a concern. In recent decades, financial tion of wealth in the country. Another was the
institutions have been particularly influential in fascistic Father Charles Coughlin, with tens of
that manner. The expertise and resources they millions of followers on the radio.
VOL. 108 IS POPULISM NECESSARILY BAD ECONOMICS? 199

Roosevelt initially supported traditional pol- reforms, he explained, were needed not only to
icies such as a balanced budget. But he soon serve people better, but also for the “survival of
changed tack. Many of FDR’s signal economic democracy” (Roosevelt 1936).
initiatives were dressed in explicitly populist
garb. The 1935 Revenue Act which introduced V.  Concluding Remarks
a tax on wealth was known as the “soak the
rich” tax. The Social Security Act, providing for With the benefit of hindsight, we can say that
financial support to the elderly and the unem- Roosevelt was right. Saving the market economy
ployed, was in part a response to the popularity and democracy during the Great Depression
of a plan advanced by a physician named Francis required a significant overhaul of established
Townsend to provide all elderly Americans with economic practices that no longer served the
a stipend. interests of the vast majority of the nation. It was
FDR’s reforms required that he remove impossible to do so without significantly erod-
the economic fetters imposed by ­pre-existing ing the prevailing restraints on economic policy.
arrangements. When they collided with his More broadly, I have argued that delegation
economic objectives external and domes- to independent agencies (domestic or foreign)
tic restraints were both done away with. In occurs in two different contexts: (i) in order to
1933, he took the United States off the Gold prevent the majority from harming itself in the
Standard, which had been a major (external) future; and (ii) in order to cement a redistribu-
constraint on monetary policy. This allowed tion arising from a temporary political advantage
the dollar to depreciate and US interest rates for the longer term. Economic policy restraints
to come down. Output received an immediate that arise in the first case are desirable; those that
boost. arise in the second case are much less so.
In the domestic arena, it was the conser- Populism that undercuts liberal, pluralist,
vative courts that posed a major obstacle to democratic norms—what I have called the polit-
Roosevelt’s New Deal initiatives. For example, ical variant of populism here—is almost always
they rejected minimum wage laws as an unwar- dangerous. But economic populism is different.
ranted intervention in the bargaining relation- There are times when some economic populism
ship between employer and employees. In may in fact be the only way to forestall its much
what was perhaps his most daring gambit, FDR more dangerous cousin, political populism.
tried to increase the size of the Supreme Court
so he could obtain a majority by appointing
judges more sympathetic to his agenda. This REFERENCES
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