What’s wrong with populist policies?

Last year Jeremy Corbyn overwhelmingly won the Labour Party’s leadership contest here in the UK, on what is widely regarded as a “populist” platform – a range of policies that are popular amongst those on the left of the political spectrum. These include the renationalisation of utilities and other industries like the railways, and a more pacifistic approach to national defence. Corbyn also had the advantage of not being the “establishment” candidate, the one tainted with previous government, and the one perceived to be a “typical politician”.

This year the next President of the United States of America will be determined in a November election, and as current incumbent Barack Obama has served his two terms, both Democrats and Republicans are currently determining who will be their nominated candidate for the November election.

Last night, both of the non-establishment candidates won handsome victories in New Hampshire, one of the many contests around the US that contribute towards determine who is nominated by each party. For the Democrats, Bernie Sanders won apparently by a 20 percentage point margin – a huge win. For the Republicans, the controversial Donald Trump won, again by a large margin.

What does this mean? The common thinking is that as both candidates are more populist, and appealing to non-standard political audiences (Sanders, aged 74, is massively popular amongst younger voters, something that happened for Corbyn here), that the likelihood is of more populist policies in the future.

What are populist policies? Very simply, they are ideas that are popular amongst a substantial proportion of the population. As such, can this really be a bad thing? Populist policies are often disparaged by mainstream, or “establishment” politicians, because although they may be popular, they are probably quite unrealistic in their nature. Those “tainted” by government likely know the kinds of compromises that need to be made in order for policies to be practical and workable, and the kinds of interest groups and power factions that impact eventual policy outcomes in the political decision-making.

Perhaps as a result such “establishment” politicians tend towards promoting what they view as more work-able policies, which are less popular due to appearing watered down. This maybe explains why many people felt at the last General Election here in the UK that there wasn’t very much between the two major parties.

Hence if populism simply means some candidates proposing popular policies, with others arguing against them, this can hardly, in itself, be a bad thing? Debate about policies is surely important, as is a wider engagement in the political process, since the outcomes of elections do matter so much to many of us. Jeremy Corbyn has ploughed a lonely furrow in recent months arguing in favour of refugees displaced around the Middle East and Europe, even visiting the camps in Calais and Dunkirk – and being mocked in the press and by other politicians, including the Prime Minister, for doing so.

There is an additional element, however. Even if Trump and Sanders become the party candidates in November, only one will win, and even if they win, there is the likelihood they could not enact all the populist policies they wish because of the role Congress plays in decisionmaking in the US – current president Obama has repeatedly be blocked in attempts to take action by a Congress dominated by Republicans. The Labour Party in the UK is widely expected to perform miserably at the next General Election, meaning that for all the time spent developing interesting policy debate, there may really be little actual impact on policies, which will be conceived by and put into place by Labour’s opponents, the Conservative Party.

The big question, as it is often put, is whether politicians should follow their “principles” given that those principles risk making them “unelectable”. If unelectable, then the policies in question will never be put into practice, it is argued, and hence to a large extent any ensuing debate is pointless.

Regardless, these are interesting times when it comes to political events, and given that so much of politics is policies, and so many policies are economic in nature, there’s never been a better time to be studying economics!

Global Monetary Policy

While our focus is often just on what the Bank of England is up to (speaking of which, today is December’s interest rate announcement from the Bank of England), there are other more important central banks out there, most notably the European Central Bank (ECB), and the Federal Reserve, representing the eurozone and the US respectively.

This article in the Guardian worries about what seems likely to happen this month: the US will tighten monetary policy while the ECB will loosen policy further.

Why does this matter? The worry is of considerable exchange rate movements. As we’ll learn towards the end of next term, one of the ways in which we believe exchange rates move in the shorter term as economists is via relative interest rate movements. This is because rates of interest reflect how much an investor could earn by moving their wealth into that country.

Hence, everything else being equal, if interest rates are higher in the US than in the eurozone, it is feared people will move their wealth out of European assets into US-based assets, increasing the demand for US dollars, and reducing the demand for euros. This would then lead to an appreciation in the value of the dollar (more demand), and a depreciation in the value of the euro (less demand). This need not be a bad thing, since a recovering economy ought to be aided by a weaker currency.

Of course things aren’t necessarily that simple; if eurozone producers use goods imported from the US to make their goods, and if eurozone consumption is often of US-produced goods, then eurozone economic activity would likely be negatively affected by the movements.

The bottom line is that larger than normal exchange rate movements ought to be expected in the coming months…

Blow for Brexit?

The Guardian’s pic of British and EU flags

As you’re no doubt aware, there’s going to be a referendum on the UK’s membership of the European Union (EU) sometime between now and the end of 2017. Europe has always been an important and emotive topic, now as much as ever. We will, of course, spend time thinking about the issues surrounding any UK exit, or “Brexit” as it’s commonly dubbed, in the Spring – it’s a huge macroeconomic issue.

Those who suggest we ought to leave argue that the economy – the macroeconomy – would function much more effectively outside the EU. Our firms would be freed from red tape, our energy would be cheaper, we could sign our own trade deals and just more generally, do what we like. Of course, that “we” is very much the subset of us that thinks we should leave, but even then there is disagreement on what being outside the EU would look like. Would it mean we look like Switzerland (with its similarly bank-heavy economy, as Vince Cable pointed out last night), or Norway? Or even Turkey?

One of the planks of this argument though is being able to direct our own trade policy – who we have free trade agreements (FTAs) with, mainly. At the moment, trade deals are negotiated and signed at EU level, since the EU is a customs union where within the union no tariffs are levied on traded goods, but outside it a common external tariff (CET) is applied.

What would directing our own trade policy look like? Practically, the first step would be to negotiate all the FTAs we need with countries we currently have FTAs with, unless we want to increase the costs of trading for our firms. This is a non-trivial undertaking of a lot of diplomatic resources; FTAs aren’t agreed and signed overnight. Clearly a great expense of government resource, which would have to take place in the period after any Brexit vote and when we actually leave.

This first step, however, is made all the more fraught when we think that actually, those potential trade partners also have to stump up a load of their own diplomatic resources to negotiate these extra trade deals which while the UK was in the EU, weren’t necessary. Why would they be willing to do this? What if they are a big country whose share of trade with the UK is small, while at the same time the share of our trade with them was large? Like, say, the USA?

The news today is that a senior US trade official (it’s hard to imagine such an official being permitted to speak to the media without the consent of his/her superiors) has said that the US probably wouldn’t be particularly willing, if push came to shove, and that in reality, the UK would have to join at the back of the queue.

Those favouring Brexit like to point out that it seems likely a number of EU countries would wish to sign FTAs with the UK since they export more to us than we export to them (Germany being the prime example). Again, though, this does rely on that proportion of their trade being sufficiently large that it warrants the expense of resources necessary. From here we find that the UK accounts for about 6% of all German trade, below France, the Netherlands, China and the US, and 7% of all German exports. Not trivial, by any stretch – but essential? The Germans may be first in the line to negotiate a trade deal, but they may also not be: there’s a huge, vast amount of uncertainty surrounding the various building blocks required for the UK to succeed outside the EU.