it’s useful to understand how the systemworks and the key turning point is avery remarkable period it’s WilliamJennings Bryan William Jennings Bryan in1896 was a fairly young 36 year oldNebraskan who got up in the middle ofthat particular I guess you could sayAssociation of then the Democratic Partyand it was the one of thoseextraordinary events which turnspolitics around the Democratic Party wasa highly conservative party prior tothem and essentially it’s characterizedby presidents who thought that the leastgovernment the best it was essentiallylazy fair he got up Bryan got up andmade this extraordinary speech which isnow historical and then cross of goldspeech about the American worker and theAmerican farmer of being crucified on across of gold called being the goldstandard and that propelled himstrangely enough into the head of theparty he got nominated he never becamepresident because he kept losingyou think he went three times and failedeach time but left a very majorindelible stamp which led to WoodrowWilson and all the way through toFranklin Roosevelt and I you know Ilooked at Bryan as the root of FranklinRoosevelt’s New Dealthat’s fascinating cause I think mostpeople that part of it’s often beingobscured in history it’s again one ofthe reasons why this book is sointeresting is it throws up thesecreating the existing tax pattern [M]yview is that that’s the right thing todo provided you funded the result ofthat is a bit of variance is going to bea very large federal budget deficit andfederal budget deficits invariably downthe road out qualification in genderinflation at the moment we have thetightest labor market I have ever seenthat is the number of job openings issignificantly greater than the number ofpeople looking for work and that mustinevitably begin to push on wages italways has and always will but it’salways delayedand my told you that is something hasgot to give and that’s I don’t knowwhere it all comes out well your blyatcomes out with inflation well theproblem basically is if we do nothingwe’re going to end up with probablystagflation which is an inflation rate Ishould say it’s partly stagnation whichas mentioned was very significantlyslowed output per our output per hournow which used to be 3/4 percent peryearback in the early post-world war iiperiod it’s now well under 1% whichbrings me very nicely on to the nextquestion from the audience which issomeone has asked for you to share yourthoughts about president Trump’s recentcriticism of Jay Powell and the Fed Ilike him to answer that with all theanswers I think it’s very short-sightedthe issue of the Federal Reserve isrequired by the Congress to maintain astable currency which means no inflationno deflation and the policy they’reembarked upon at the moment seems verysense it will be caused as I mentionedbefore the wage rates are beginning toshow signs of moving and you cannot havereal wages rising without it ultimatelythink if they continue on the road wouldthat we willgoing Pretlow I should say that thepresident wants to go we’re gonna end upwith a very significant budget deficitand very significant inflationultimately not not in the short termthat it takes a whilepolitical system doesn’t care aboutdeficits what they do care about isinflation when the inflation rate was 4%in the 1970sPresident Nixon imposed wage and pricecontrols were nowhere near there yet butit’s wrong our wayif we are though heading towards apotential rise in inflation rise in debtat a time of growing populism do youthink there’s a chance that the FederalReserve will lose independence I’mtrying to follow you which I mean wellcheating is a chance at Congress or thepresident will try to control theFederal Reserve or take away some of itsindependence I really don’t know one ofthose forecasting aspects which isdifficult another question from theaudience as the Federal Reserve’s reachgrows do you think that leged ofoversight will become necessary againthat’s above my pay gradeor do you think that Congress shouldexert more control or oversight of theFed I think the Federal Reserve is bystatuteremember the Federal Reserve Act of 1913which essentially did something veryunusual we had a long period wediscussed this in the book in whichfinancial crises kept surging up andthen collapsing which is a typical cyclewithwhich went on to a decade upon decadeand the populism that evolved as aconsequence of this looked atever-increasing lead to find a way tosolve the problem of why the crisesoccur and the general solution was ifthe economy is accelerating and it’srunning out of gold species and you’regoing to get into a situation in whichthey are always going to be crises sowhat the Federal Reserve Act actuallydid was very very interesting itsubstituted the sovereign credit of theUnited States for gold and then if no westayed on the gold standard technicallythat was a major change in Americanfinancial history and debate the basicconsequence of that is that FederalReserve determines what in effect is asensible level of money supply expansionand one of the reasons the FederalReserve Act was actually passed was toprevent the political system whenbecoming so very dominant in determiningmonetary policy which is exactly whatyou don’t want to happen and I mean Iwas you know eighteen and a half yearsas you mentioned getting letters fromeverybody who won very littlecongressmen or otherwise who wants it’sa the issue of and don’t worry about theissue of inflationand nobody was well when I would begetting people who say we want lowerinterest rates I got tons of that mail Inever got a single letter saying pleaseraise them and it tells you that thereare some views which go against realityand reality always wins but if you lookat that the history of populism some ofthe worst populism you got was in the1970s some of the work that the angerthat was generated by inflation in thenineteen seventies were roiled right theway through the political systemeventually leads to the rise of ofRonald Reagan because and who comes inand then you know crushes crushesinflation so inflation is is not asolution to populism it drivers it makespeople very angry do you think thecurrent populism is going to get worsechairman Greenspan well let’s rememberwhere populism comes from it’s I don’tknow whether this is a generalproposition but I find it’s difficult toget around the answer that when theinflation rate or that must theinflation ratings as much as the levelsof income slow down when you getproductivity for example which is thatthe major determinant of income and youget productivity slowing down you get amuch lower increase in JD GDP and grossdomestic income and wages and salariesalike and there’s a great deal of uneasein the population which is saying thingsare not good somebody come help us andsomebody necessarily on the white horsebecause comes up and says I’ve got a wayto handle this and if you look at LatinAmerica the history ofgoodly part of Latin America is aremarkable amount of people like Peroncoming in and all the subsequent postWorld War two governments in LatinAmerica and it’s really quiteunfortunate and surprising it’s not thatthey try it and it fails which it doesalways it always fails but it doesn’teliminate the desire to do it in otherwords of Peru Brazil and like they’veall undergone very significant periodsof huge inflation and collapsing andnobody wears a lessonyeah well we’re almost out of time butthere’s one other question from theaudience which I think cuts to the heartof a lot of what we’re talking aboutright now which is this does the successof capitalism come at the cost ofenormous wealth disparity is it possibleto have this vision of creativedestruction of capitalism of dynamismwithout having massive income inequalityI doubt it and I doubt it for the reasonI said earlier namely that we’ve got theproblem that human beings don’t changebut technology as it advances and it’sembodied in the growth of an economy isalways growing and when you havesomething that’s growing and the otherthing that’s flat you get obviouslyinequality and the politicalconsequences of that can I qualify thatjust a little bit I mean there – thereare different sorts of inequalitythere’s a there’s the inequality thatyou get from suddenly like Bill Gates orSteve Jobs producing a fantastic newinnovation and idea which means thatthey reap a lot of rewardfor that but which means that society asa whole gets richer and better off andthere’s the inequality that comes fromcrony capitalism from people usingpolitical influence blocking innovationand and sucking out and do rewards forthemselves so I think we need to beabsolutely very very sensitive to thewrong source of inequality whilecelebrating the right sort of inequalityand also had that Joseph Schumpeter thatgreat man once said that the the natureof capitalist progress doesn’t consistof Queens having a million or twomillion pairs of silk stockings itconsists of what used to be theprerogative of a queen being spreadthroughout the whole of society silkstockings you know that become somethingthat go from being very rare and onlyworn by Queens to being worn by allsorts of people all over the place soit’s the nature of capitalism is tocreate new innovations which are atfirst rare but spread throughout thewhole of society and everybody uses soif you think think of the the iPhone orsomething like that some that wassomething that was incredibly rare and afew people had those sort ofcommunications vais now everybodycarries them around all the time and thegreat capitalists the Bill Gates theSteve Jobs don’t get rich by selling onereally really good iPhone to one purposeand they get into selling their productsto all sorts of people so there’s asense in which there is no realtrade-off between very rich peoplegetting very rich and the rest ofsociety getting getting better off youknow they only get rich because theycreate things which everybody mostpeople want to have and buy you knowit’s it’s it’s it’s the Silk Stockingquestion really I you know I accept thatqualifications let me just say one thingyou going back to his mentioning hereWalter Isaacson’s book on innovation hewrote that book and I remember readingit and my final conclusion was and Iasked him why is it that most innovationis in the United Statesit’s American and he said you know I’venever thought of that I don’t think hewas aware of the fact that he here andall these innovationto developers and they all turned out tobe American which leads me to concludethat there’s something fundamental inthe psyche of American history in theAmerican public which creates it it’snot an accident which is why I won in itwho too often so which is what you ofcourse you sought to explain the book soif you had a chance to take this bookinto the Oval Office today or into theTreasury and give it to the Presidentand say this is a history of Americahere are the key lessons what is a topbit of advice that you would give to theadministration today to keep capitalismgrowing in America well you know we dohave we haven’t mentioned that there’san underlying financial problem which wehaven’t addressed in the best way todiscuss it as when I first became awareof itI would haven’t been looking at data andaccidentally created a chart whichshowed the relationship betweenentitlements spending which is socialbenefits in the rest of the world andgross domestic savings and I’m from 1965to the current period the ratio ofentitlements to the sum of those two isflat as a percent of gross domesticproduct which means or at least impliesthat one is crowding out the other andwhen you look at the individuals theyare actually looking different andenable one goes up the other goes downand so forth and I think that’ssuggestively the fact that there issomething in the sense of when we saythat entitlements by which a rising andthe baby boom generation is essentiallycrowding out gross domestic savingswhich in turn coupled withthe borrowing from abroad is how wefinance our gross domestic investmentwhich is the key factor in productivityright so entitlement reform well I lookforward to a tweet about entitlementreform I look forward to this veryimportant book being part of thediscussion about how to keep AmericaAmerica’s economy great and growing butin the meantime thank you both very muchindeed for sharing your thoughts it isindeed a fascinating book and quite anachievement and best of luck in gettingthis very important message out so thankyou both very much indeed[Applause]
At first blush, a populist message of “us vs. them” might seem less effective than a message of “all of us together,” given that elections are won with broad coalitions. But under conditions of widespread alienation and distrust, the political gamble of an exclusionary, anti-pluralist message can pay off big.CHICAGO – In the Middle Ages, Italian city-states led the European “commercial revolution” with innovations in finance, trade, and technology. Then something strange happened. In 1264, to take one example, the people of Ferrara decreed that, “The magnificent and illustrious Lord Obizzo … is to be Governor and Ruler and General and permanent Lord of the City.” Suddenly, a democratic republic had voted itself out of existence.In fact, this was not an uncommon occurrence in Northern Italy at the time. As Niccolo Machiavelli explains in The Prince, the people, seeing that they cannot resist the nobility, give their support to one man, in order to be defended by his authority. The lesson is that people will abandon democracy if they are worried that an elite has captured its institutions.Medieval Italy’s democratic institutions succumbed to what we might now call populism: an anti-elitist, anti-pluralistic, and exclusionary strategy for building a coalition of the discontented. The method is exclusionary because it relies on a specific definition of “the people,” whose interests must be defended against not just elites, but all others. Hence, in the United Kingdom, the Brexit leader Nigel Farage promised that a vote for “Leave” in 2016 would be a victory for the “real people.” As Donald Trump told a campaign rally the same year, “the other people don’t mean anything.” Likewise, former Colombian President Álvaro Uribe often speaks of the “gente de bien” (the “good people”).
There are two obvious reasons why such populism is bad.
- First, its anti-pluralistic and exclusionary elements undermine basic democratic institutions and rights;
- second, it favors an excessive concentration of political power and de-institutionalization, leading to poor provision of public goods and subpar economic performance.
Nonetheless, populism can become an attractive political strategy when three conditions obtain.
- First, claims about elite dominance must be plausible enough that people believe them.
- Second, in order for people to support radical alternatives, existing institutions need to have lost their legitimacy or failed to cope with some new challenge. And
- third, a populist strategy must seem feasible, despite its exclusionary nature.
All three conditions can be found in today’s world. The increase in inequality over the past 30 years means that economic growth has disproportionately benefited a small elite. But the problem is not just inequality of income and wealth: there is also a growing suspicion that the social distance between the elite and everyone else has widened.
These economic and social disparities have profound implications for political representation. In the US, political scientist Larry M. Bartels has shown that while legislators have increasingly defended the interests of the rich, gerrymandering has spared them from political competition. In Europe, Jean-Claude Juncker, while serving as prime minister of Luxembourg, once described the European Council’s decision-making as follows: “We decree something, then float it and wait some time to see what happens. If no clamor occurs … because most people do not grasp what had been decided, we continue – step by step, until the point of no return is reached.” Such elitist logic is intrinsically vulnerable to populism.
In addition to managing new challenges poorly, institutions and policymakers have also failed to look beyond their own dominant narratives. For example, in the run-up to the Brexit referendum, the “Remain” campaign focused entirely on the economic costs of leaving the European Union, even though opinion polls showed that migration and other issues were of much greater concern to voters.
Finally, for populism to get a foothold, politicians themselves must see it as a viable strategy. Generally speaking, declaring that the “other people don’t mean anything” isn’t the best way to garner broad support. So, even when structural factors favor it, populism can succeed only in certain circumstances. In Trump’s case, the intense
partisan polarization in the US means that he can appeal to marginal or swing voters, because he knows that Republicans will vote for him no matter what. And, more generally, populism can win when the “other people” are narrowly defined or simply small in number, provided that they can still be depicted as posing a threat.
To defeat populism, then, one must address all the factors that make it a viable strategy. That starts with recognizing that populism can emerge only when there are real social and economic problems to give it electoral traction. It also means being honest about the fact that there are competing and contested visions of citizenship, which should be debated, not ignored.
As a de-institutionalizing strategy, populism appeals to the growing cohort of those who are disillusioned with existing arrangements. In the US, the widespread perception that institutions have failed to address issues such as inequality has been eroding public trust in major institutions since the 1970s. After failing to anticipate the 2008 financial crisis, US policymakers are now struggling to regulate (and tax) new “mega-firms” like Amazon and Facebook. They are also seen as having dropped the ball with respect to globalization and the effects of the “China Shock” on local labor markets. Similarly, in Europe, increased labor mobility and rolling refugee crises are widely seen as having surpassed EU institutions’ carrying capacity.
Finally, we need more democracy and representation – including, possibly, referenda – so that voters feel as though their concerns are being taken seriously. The political class should be exploring new ways to make government more representative of society. India, for example, has caste-based quotas for parliamentary seats and other positions, and many other countries do the same with respect to gender. There is no reason why the US and Europe couldn’t pursue similar measures.
Keeping track of the Jacksonians, Reformicons, Paleos, and Post-liberals.
I like to start my classes on conservative intellectual history by distinguishing between three groups. There is the Republican party, with its millions of adherents and spectrum of opinion from very conservative, somewhat conservative, moderate, and yes, liberal. There is the conservative movement, the constellation of single-issue nonprofits that sprung up in the 1970s —
- gun rights,
- right to work
— and continue to influence elected officials. Finally, there is the conservative intellectual movement: writers, scholars, and wonks whose journalistic and political work deals mainly with ideas and, if we’re lucky, their translation into public policy.
Prestige is in our genes. According to biological anthropologist Joseph Henrich, it evolved because we are a cultural species, in the sense that our individual survival depends on acquiring the knowledge that resides in the collective brain. We acquire it through imitation, but we need to decide whom to imitate. Numerous scientific studies have shown that we tend to imitate people who are perceived to have prestige, a sense that develops very early in childhood.
Henrich suggests that this is the outcome of an evolutionary game in which prestige is payment for the generosity with which the prestigious share their knowledge. We share alpha-male dominance with our primate cousins, but prestige – a form of “payment” that predates money, wages, and stock options – is quintessentially human.
While prestige solved a problem that has been with us throughout our evolution, it has had to interact with the technological changes of the past half-century. In particular, the rise of what economists call skill-biased technical change – the reliance of modern technologies on highly skilled workers – has led to growing wage differentials between skill levels.
In his new book The Future of Capitalism, Paul Collier argues that this increased wage inequality has changed the self-perception of the highly skilled: their professional identity has gained greater salience than their sense of themselves mainly as members of the nation. Using a model of human behavior proposed by George Akerlof and Rachel Kranton, Collier argues persuasively that the satisfaction conferred by one identity relative to another – say, the profession over the nation – depends on the esteem with which others regard that identity.
As wage differentials grew, and the highly skilled shifted the focus of their identity from nationhood to profession, the value for all others of maintaining their national identity decreased. The low-skilled were trapped in a less valuable national identity.
This dynamic, according to Collier, explains the vote for Brexit in Britain and the rise in right-wing nationalism in other rich countries: it is concentrated among lower-skilled inhabitants of more rural, less ethnically mixed environments where traditional national identity is still dominant. It also explains declining trust in elites: because members of the elite identify primarily with their more global professional identity, they are perceived as caring less about their reciprocal obligations with the rest of the nation. Delegating choices to experts is passé, because experts no longer care about the rest of us.
Rising wage differentials may destroy the equilibrium proposed by Henrich. If the prestigious are already very well paid, and are not perceived as being generous with their knowledge, prestige may collapse. This may be another instance of the incompatibility between homo economicus and community morality emphasized by Samuel Bowles in his book The Moral Economy: the self-interested, transactional behavior that defines the market is not acceptable in the family or the community.
The collapse in the prestige equilibrium can do enormous damage to a society, because it may break the implicit contract whereby society uses critical skills. To see why and how, look no further than what has happened in Venezuela.
In 2002, then-President Hugo Chávez’s left-wing populist rhetoric targeted the national oil company PDVSA. The company was already a state-owned enterprise, so nationalization was not the issue. For Chávez, the problem was PDVSA’s meritocratic culture: to succeed in the company, political connections were of no use. What the company valued most was the knowledge needed to manage a complex organization.
Social barriers to entry at PDVSA were low, because Venezuela had a 50-year history of free university education and decades of generous scholarships to study abroad, especially in oil-related fields. But once in, advancement was merit-based. A similar culture developed in the power sector, the central bank, universities, and other entities that were critical for state capacity.
The populist revolt equated knowledge with privilege and threw it out the window. When the merit culture was threatened, the company went on strike, and more than 18,000 workers – over 40% of the company’s labor force and almost all of its senior management – were fired. As a result, there was a spectacular collapse in the performance of the oil industry and, eventually, in all the other institutions affected by the war on expertise, leading to the catastrophe that is Venezuela today.
The lesson is clear. Given the requirements of today’s technology, dismissing expertise as privilege is dangerous. But because gaining expertise takes time and effort, it is not freely accessible to “the people.” The only way to sustain it is through an implicit prestige market: the experts are supposed to be generous with their knowledge and committed to the nation. Society “pays” them back by according them a social status that makes their position desirable, even if wage differentials are compressed, as they often are in the public sector (and were in Venezuela at the time of the lethal attacks on expertise).
The alternative to populism is an arrangement whereby experts demonstrate authentic public spiritedness in exchange for society’s esteem, as often happens with military leaders, academics, and doctors. A well-functioning prestige market is essential to reconciling technological progress and the maintenance of a healthy polity.