The case for free enterprise in a populist moment

logoby Arthur C. Brooks

trump-populismConservatives are deeply split over the rise of Donald J. Trump. Some see it as apocalyptic; others as refreshing. But two pieces of conventional wisdom are largely unchallenged by either side.

First, Mr. Trump’s populist takeover of the Republican Party was shocking and unforeseeable. Second, love Trump or hate him, he has revealed important realities about the electorate, and Republicans must move toward more populist positions on issues such as trade and immigration or be left behind.

Both of these beliefs are mistaken.

The first false assumption is that Trumpist populism is unprecedented. In truth, what we see today has happened many times before. Indeed, political populism has often followed economic meltdowns like the one America has endured over the past eight years.

Financial crises have occurred throughout history, and they follow predictable patterns. The economists Carmen Reinhart and Kenneth Rogoff, whose 2010 book, “This Time Is Different,” offers a comprehensive study of financial crises around the world, find that they often take much longer to resolve than ordinary recessions — about eight years on average.

In Japan, the financial crisis of 1992 touched off the “lost decade.” Smaller crises such as Black Monday in 1987 or the dot-com collapse in 2001 generally rebound in just two or three years.

This is not to say that nobody prospers for a decade after a severe financial crisis. Indeed, after the Great Recession of 2008-9, the wealthy came roaring back quickly. This gave the illusion of widespread prosperity but hid the fact that the recovery was wildly uneven, with a majority of Americans seeing little or any economic improvement.

Census Bureau data show that from 2009 through 2014, only about the top fifth of the population saw any income growth while the bottom 80 percent have averaged no income growth at all.

Some scholars like Robert Barro, my colleague at the American Enterprise Institute, see the malaise not as the inevitable result of the crisis, but as the product of bad public policy. Whichever account you find persuasive, the financial crisis and the long, uneven recovery sowed the seeds for the current populism.

In an article in The European Economic Review, German economists look at the effect of financial crises on politics, reviewing 800 elections over 140 years across 20 advanced economies. They found that, after a financial crisis, nationalistic, populist parties and politicians, using language that often attributes blame to minorities and foreigners, typically increase their vote share by about 30 percent. There is no such effect after ordinary recessions.

Consider moderate, tolerant Sweden, where a 1991 parliamentary election came amid a financial crisis. Swedish voters rewarded a brand-new “New Democracy” party that focused heavily on law and order issues and proposed stringent restrictions on immigration.

With no simple solution for reviving equal opportunity, conventional politicians struggle with increasingly angry voters. Into this gap walk populists who specialize in identifying culprits: rich elites who are ripping you off; immigrants who want your job; free trade that’s killing our nation’s competitiveness. Their proposed solutions usually involve some combination of increased redistribution, protectionism and restrictionism.

Today, some conservative leaders take these populist claims at face value, leading to the second piece of incorrect conventional wisdom: No matter what one thinks of Mr. Trump personally, one must concede that mainstream positions on issues such as trade and immigration must be fundamentally rethought. Right?

Wrong. Trade and immigration are the lightning rods, but these issues are not the real triggers of our political moment. The illegal immigrant population was 8 percent lower in 2014 than in 2007, and our trade deficit was lower in 2015 than before the Great Recession.

The real issue is weak, unevenly shared growth. If we addressed this issue, and if people felt their lives improving, the appetite for invective on secondary issues such as trade and immigration would dissipate. So walking away from free enterprise principles on trade and immigration is not the solution.

But merely returning to the narrow economic strategies of past decades will not work, either. Conservatives love to emphasize the need for higher economic growth, but have often missed the importance of more widely distributed growth. Leaders should set their focus on a system with more opportunity in the middle and bottom of the economy.

This requires a generational strategy to build an education system based on innovation, school choice and an emphasis on vocational training. It means rewriting tax and regulatory law to stop discouraging domestic investment and squelching job creation, while also attacking the corporate cronyism that gives special treatment to wealthy and entrenched interests. It demands authentic compassion for people on the periphery of society.

These should be the core positions of conservative reformers. Throwing away free enterprise will neither solve our nation’s problems nor create enduring political victories. Only strong growth, evenly distributed, will do the trick.

Arthur C. Brooks is president of the American Enterprise Institute (AEI).

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