Populism Is Far From Over

Many people overseas infer from President Trump’s electoral defeat that most Americans are finally fed up with populism.

They miss the fact that populism is just as powerful in the Democratic Party as it is in the Republican Party and that Trump got some 70 million votes. Populism has been a defining trait of anti-Trumpism these past few years, just as it is defining trait of Trumpism. The polarization of U.S. society and politics sometimes makes it hard to see that populism invades a large part of the political spectrum.

The next administration will inherit a country in which everything points to the perpetuation of populism. Take the economic and financial situation. The broad money supply (M2) has shot up to a level that boggles the mind—almost $19 trillion after an annual increase of almost 25 percent. Is this growth going to stop? Nothing in the next administration’s plans points to fiscal and monetary containment (Biden has proposed spending $11 trillion in the next decade). On the contrary, they are bent on spending just as much, perhaps more, than Mr. Trump did.

We saw a $3 trillion stimulus package come out of the pandemic, and one can only assume that the federal government will spend trillions more, given the lasting effects of 2020. Where will that money come from? Everybody—including those who push for higher taxes for the “one-percenters”—knows that taxation alone will never cover the gap. Frantic money creation, the only other way in which the government can fund its profligacy, is here to stay.

This inevitability takes place in the context of a country that is already overleveraged. Total debt (including government, household and corporate debt) amounts to almost 400 percent of GDP, a dead weight that hangs over the economy. Even if technology and a reasonably flexible labor system can produce an economic recovery from a dismal 2020, the truth is that an economy with so much debt can only grow so much—and the temptation for big spenders will always be to stimulate it.

To make matters worse, money creation runs the risk of spilling into the real economy and causing significant price inflation.

Twelve years ago, when the financial crisis hit, the United States entered a period of money creation that led to asset-price inflation but not to consumer-price inflation. Most of the money went into excess reserves parked at the Federal Reserve and did not translate into the kind of too-much-money-chasing-too-few-goods dynamic that leads to inflation. One factor was that banks were not willing to lend, and consumers were not willing to incur more debt. Another factor had to do with the fact that the government’s intervention was mostly geared towards rescuing financial institutions and bailing out the rich than putting money in people’s pockets. This time fiscal intervention, including the $3 trillion stimulus already triggered by the pandemic and the trillions more to come, will aim for the real economy.

The Federal Reserve will place the money it creates into the government’s hands and it will circulate. It is hard to see how this would not translate into the kind of inflation seen in the 1940s and, particularly, the 1970s.

These policies are dictated by the kind of interventionist populism that pervades both Democratic and Republican parties and so much of public opinion. So will be the consequences.