Thursday, December 27, 2007

Populism at Home

I saw this on The Economist magazines's blog, Free Exchange. I think there are a couple of debates here: (1) What is the role of "populism" in a democratic free enterprise (market) economy? (2) Can one be "populist" (of the people) and still be pro-globalization.

First, about the tides of populism in America. LOU DOBBS DOES NOT OWN AMERICAN POPULISM. There is a rising tide of populist sentiment in the U.S., and not all of it has the nationalistic xenophobic venom that Mr. Dobbs spews out. Ironically, some of it is coming from the elite (which is odd since the most traditional forms of populism embrace the masses by rejecting the elite). In fact, there is rising tide of "plutonomy" among the elite and among traditionally conservative economic journalists, like George Will (see, for example, this column by Mr. Will). Instead of touting the role of the elite as savers, investors and engines of economic growth, these elites and economic conservatives tout the role of the wealthy in promoting charity and helping the poor. With a smilar irony, I will argue over the next couple of posts that "populism" or promoting the interests of the people CAN be (and often is) mutually compatible with markets, openness to trade, and pro-growth policies, with some caveats.

Now, what is the role of populism in a free market democracy? This is an interesting point because many of the neoclassical school of economic thought talk about the optimality free markets, ignore the politics of democracy (or any other system for that matter), and scorn populist ideas. These ecnomists are right to advocate free markets (most of the time), but their naivity to the political constraints makes them blind to the important questions of income distribution that affect the political feasibility of "optimal" pro-growth policies. (In fact, neoclassical models are fundamentally flawed in this regard because they focus on the "representative agent," or essentially the "average" citizen or mean. This is one reason why their models do so well emprically.) In addition, timing, sequencing, and distributional consequences, as it turn out, all matter. Quick example: from 2000-2006 the US promoted policies that neoclassical economists supported as pro-growth. Real aggregate output increased. Real per capita output increased. Shouldn't this have been good for the "growthies?" However the real median household income declined by 2.1 percent. The middle to lower half of the population sank as the rich took off. Populism thrived. Mr. Bush, meet Speaker Pelosi.

Next up: "Populism without Borders."

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