More than 30 years ago, the economists Rudiger Dornbusch (one of my mentors) and Sebastian Edwards wrote a classic paper on what they called “macroeconomic populism.” Their motivating examples were inflationary outbreaks under left-wing regimes in Latin America, but it seemed clear that the key issue wasn’t left-wing governance per se; it was, instead, what happens when governments engage in magical thinking. Indeed, even at the time they could have included the experience of the military dictatorship that ruled Argentina from 1976 to 1983, which killed or “disappeared” thousands of leftists but also pursued irresponsible economic policies that led to a balance-of-payments crisis and soaring inflation.
Modern examples of the syndrome include leftist governments like that of Venezuela, but also right-wing nationalist governments like that of Recep Tayyip Erdogan of Turkey, who insisted that he could fight inflation by cutting interest rates.
Will the United States be next?
I wish people would stop calling Donald Trump a populist. He has, after all, never demonstrated any inclination to help working Americans, and his economic policies really didn’t help — his 2017 tax cut, in particular, was a giveaway to the wealthy. But his behavior during the Covid-19 pandemic showed that he’s as addicted to magical thinking and denial of reality as any petty strongman or dictator, which makes it all too likely that he might preside over the type of problems that result when policies are based on quack economics.
Now, destructive economic policy isn’t the thing that alarms me the most about Trump’s potential return to power. Prospects for retaliation against his political opponents, huge detention camps for undocumented immigrants and more loom much larger in my mind. Still, it does seem worth noting that even as Republicans denounce President Biden for the inflation that occurred on his watch, Trump’s advisers have been floating policy ideas that could be far more inflationary than anything that has happened so far.
It’s true that inflation surged in 2021 and 2022 before subsiding, and there’s a vigorous debate about how much of a role Biden’s economic policies played. I’m skeptical, among other things because inflation in the United States since the beginning of the Covid pandemic has closely tracked with that of other advanced economies. What’s notable, however, is what the Biden administration didn’t do when the Federal Reserve began raising interest rates to fight inflation. There was a clear risk that rate hikes would cause a politically disastrous recession, although this hasn’t happened so far. But Biden and company didn’t pressure the Fed to hold off; they respected the Fed’s independence, letting it do what it thought was necessary to bring inflation under control.
Does anyone imagine that Trump — who in 2019 insisted that the Fed should cut interest rates to zero or below — would have exercised comparable restraint?
