The Independent Market Observer

The Connection Between Economic Policies and Political Populism

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on May 24, 2017 2:42:54 PM

and tagged Politics and the Economy

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economic policiesYesterday, I talked about the problems that have led to the current surge of populism and ended with a link to a paper discussing the connection between conventional economic policies and political populism. Today, I will offer a look at what this connection might mean for politics and policies in the future and, of course, the impact for our investments.

Connection #1: Jobs and wages

This is a good place to start. One of the key complaints during this recovery has been that, while job creation has been strong, wage growth has lagged. On a real basis, after accounting for inflation, wages have stagnated for decades. This is the core problem—the one that gives rise to all of the others.

Looking forward, it’s possible that this problem will get worse, as many current jobs may be replaced by automation. Driverless cars, for all of the excitement they generate, could destroy millions of current jobs, including taxi drivers, truck drivers, and others.

Connection #2: Health care

While the media has focused primarily on health care insurance, the bigger concern is health care access. Regardless of whether one is insured, when care is really needed, it’s usually provided at an emergency room, and the system absorbs the costs. With the stagnation in wage growth, health care systems have been dialing back on providing public care, not to mention the number of medical professionals they make available. This has contributed to reduced access to care.

The Affordable Care Act has papered over the problem for the past several years, but if proposed reforms result in large groups of people losing health care, we can certainly expect this to turn into a populist driver as well.

Connection #3: Immigration and globalization

Immigration and globalization come next. And those hardest hit by points #1 and #2 are most affected here. Even while the economic argument for immigration remains strong, the facts on the ground elicit a reaction that will continue to drive populism.

The potential policy response

Big picture, all of the current trends, which are likely to continue, suggest populism will continue. Ultimately, then, both politics and policies will have to respond. What might that policy response look like?

Looking at Montier and Pilkington’s paper again, what strikes me is that many of the policies they recommend have more than a passing resemblance to Roosevelt’s New Deal. For example:

  • Guaranteed government employment at a living wage has a definite New Deal flavor.
  • Income redistribution and unionization, same thing.
  • Focus on income equality and more socially oriented corporate policies, ditto.

This isn’t surprising. Just as the Great Depression yielded certain policy responses, it makes sense that the recent Great Recession is yielding similar ideas—even if not yet implemented.  

The fact that many of these policies seem more oriented toward the traditional left should also not be surprising. Remember, Bernie Sanders had—and continues to have—a strong following, and the Democratic Party is moving left even as the Republicans have moved right.

Although the policy debate in DC is currently controlled by Republicans, it’s not over. Plus, it’s subject to review every two years. To the extent that Republican policies solve the very real problems facing a big part of the country, Republicans will probably sustain their position. To the extent their policies don’t help, expect even more political movement in the other direction.

As investors, then, even as we hope for the best, we have to be aware that less business-friendly policies are potentially not that far away, especially in the event of another downturn. Long term, politics is likely to get even more contentious, more economically active, and more potentially risky to our future returns.

Hang on tight.

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