A Note on the Political Economy of Populism

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Paul Krugman

A Note on the Political Economy of Populism



January 22, 2014

All indications are that President Obama will make inequality the central theme of his State of the Union address. Assuming he does, he will face two different kinds of sniping. One will come from the usual suspects on the right, shrieking “class warfare”. The other will come from a variety of people, some of them well-intentioned, arguing that while sure, inequality is an issue, the crucial thing now is to get the economy growing and create more jobs; these people will argue that populism is a diversion from the main issue.

Here’s why they’re wrong.

First of all, even on the straight economics inequality and job creation aren’t completely separable issues. There’s a decent though not ironclad case that rising inequality helped set the stage for economic crisis, and may be holding back recovery; there’s an even stronger case that weak employment is depressing wages and increasing inequality. So Obama can and one hopes will treat inequality-and-jobs as a single theme, and do so with a clear intellectual conscience.

Beyond that, there’s the political economy.



It has been painfully obvious, to anyone willing to see (a group that unfortunately doesn’t include a large part of the press corps) that deficit obsession hasn’t really been about deficits — it has been about using deficits as a club with which to smash to welfare state, and hence increase inequality. Even the supposedly nonpartisan players have this remarkable habit of including “reducing marginal tax rates” as a key goal of deficit reduction strategies, which is a dead giveaway to what it’s really about.

Conversely, talking about the need to help struggling families is also a way to shift the focus away from deficit obsession, and pave the way at least for a relaxation of austerity, if not actual stimulus.

And I think we also have to face up to an awkward political reality: moderate populism has a broad popular constituency, Keynesian macroeconomics doesn’t.

On the first point, recent Gallup pollingshows that most Americans are class warriors, at least in a mild sense:

On the other hand, the public doesn’t “get” macroeconomics; lines like “American families are having to tighten their belts, so the government should too” still resonate. You could blame Obama for not using the bully pulpit to teach the nation why this is wrong, and I wish he had made more of a stand. Still, the fact is that this is just a hard story to get across — God knows, half the macroeconomics professors in America don’t seem able to understand it — and no politician has ever managed to do it. Consider public opinion in 1936, just after FDR had won a smashing reelection victory. Did the public give credit to his heterodox macro policies, and favor their continuation? No:

And guess what: FDR went along with public opinion, scaled back stimulus, and plunged the nation back into recession — with devastating consequences in the 1938 midterm election.

So if I were Obama, I’d do what he’s apparently doing: focus on inequality, which is a valid and popular issue, and use it indirectly to move macro policy in the right direction too.


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