November 10, 2016
The NYT ran a piece with the headline, “Trump rides a wave of populist fury that may damage global prosperity.” The headline is absolutely bizarre for the simple reason that we are not seeing anything that a serious person can call “global prosperity.” Thanks to the austerity policies pursued across much of the across Europe, and to a lesser extent the United States, countries across the developing world have seen a decade of weak or even negative growth. The employment rate of prime age workers (ages 25-54) is still below its pre-recession level in many countries, including in the United States.
These points are actually a major point of the article itself, which emphasizes the poor performance of most economies as a trigger for populist sentiment. In this respect the headline effectively contradicts the point of the article. While the populist policies being advocated by politicians may not offer a good answer for economic problems, we do not have to worry that they somehow will ruin an economic golden age. The mainstream leaders designing economic policy already destroyed prosperity, which doesn’t mean that some ill-designed populist policies couldn’t make things worse.
One point where the article is mistaken is in dismissing the idea that some people in the UK might be benefited by Brexit.
“In northeastern England (something like the Rust Belt of Britain) people who voted to leave Europe speak openly about doing so to punish those who beseeched them to vote to stay — people like the exceedingly unpopular former prime minister David Cameron. The situation is so depressed, it cannot get worse, the logic runs. Any economic pain will fall on wealthy Londoners, people say.
“But that is almost certainly nonsense. A rupture of trade with Europe is likely to hit these industrial communities hardest. And if that happens, the people living there will be angrier than ever.”
Actually there is a very plausible story under which Brexit may benefit left behind industrial communities, which comes directly out of standard economics. Brexit is likely to first and foremost hit the London financial center by denying it privileged access to the EU. This will lead to less exports of financial services, which lower the value of the pound, other things equal. That makes the goods produced by industry in the UK more competitive, increasing output and employment.
This is largely consistent with what we have seen in the months since the vote for Brexit. The pound has plunged against both the euro and the dollar. Also, we have seen a sharp decline in London real estate prices, while house prices have risen in the rest of the country.
While Brexit may not have been an ideal tool for the purpose (policy is never textbook ideal), it may actually provide an effective way to divert resources from the financial sector to the rest of the UK economy. It is certainly too early to pronounce the policy successful in this respect, but it is also too early to insist that it is a failure.
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