Tuesday, May 4, 2010

Populism and fiscal policy

Fiscal populism is always dangerous but the populism engaged in by the left is more dangerous than the center-right variety. Typically center-right governments simply bribe the middle class by offering 'free' services, subsidies and other benefits in return for votes. Left-of-center governments tend to bring into play not just greed but envy and resentment, demonizing big business and the rich.

Often they are driven by ideology in this, and are signalling to their core constituencies - radical elements and organized labor - that they have not been forgotten despite the compromises that being in power usually requires.

Recent verbal attacks by the Obama administration and various European governments on banks and bankers are examples of this kind of populism, as are this week's rhetorical assaults on mining companies by Australia's big-spending, left-wing government, and their announcement of a 40% 'resource super-profits tax'. (Already announcements have been made by mining companies that various Australian projects are not to proceed or are being reviewed.)

Does democracy inevitably lead to such populism and ultimately to government indebtedness and lower living standards? Or can voters take the long view?*

It remains to be seen if the tea-party movement and other advocates of smaller government in the US will have any real success. I suspect that the US debt is just too large and the measures required to fix it will be too painful to be carried through. Similarly I suspect that the Conservatives in the UK will provoke huge amounts of public anger if indeed they have the courage to tackle the UK's budget problems. [Added later: I guessed (wrongly) that the Conservatives would get an absolute majority. The hung parliament - and the prospect of another election within a year or two - makes the UK situation even more dire.]

A recent poll in Australia suggests that the fiscally responsible conservative coalition which was in power from 1996 to 2007 has a chance of winning an election to be held later this year, as the current Labor Party government seems to be losing credibility after introducing a string of ill thought-out programs and policies culminating in the new resource rent tax.

*It's worth noting in the current context that many of the European neo-liberals who advocated a return to market principles in the 1930s and again - with rather more success - after World War 2 were decidedly wary about majoritarian democracy, seeing it as posing a very real threat to responsible long-term thinking and decision-making on the part of political leaders.

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