Populism and economic growth in the U.S.A.

"Amidst the debate over systemic regulation, the independence of U.S. monetary policy is at risk. We urge Congress and the Executive Branch to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability."

My post yesterday about the "Tea Party" emphasized the emergence of a populist force in American politics despite the extra-Constitutional 2-party duopoly that defines the status quo. It encouraged some reaction that I expected, articulated by growthology commenter Doug: "If they try and make the know nothing Sara Palin their poster girl, I believe I am going to have to pass." Good point. Today we continue by looking at where the movement might go right and wrong.

The movement's emphasis on smaller, more responsible government fiscally is something worth three cheers. In contrast, attempts to shift its emphasis toward supporting popular control of monetary policy is dangerous. Democracy is good at long-term decision-making, reflected in period elections and intitiatives. But it would be disastrous at short-term decisions like setting interest rates or planning amphibious invasions.

While many politians are scrambling to get in front of the crowd here, the movement remains ambiguous. What interests me is that a theoretical tea party candidate outpolls a Republican candidate! So naturally, Republicans are trying to co-opt the movement, as are Libertarians.

Historically, populism in America was similar to populism elsewhere: a protest of the people against the elites, almost always against the economic inequality where the status quo was, or was perceived as, a plutocracy. And the impact of populism in many Latin American economies is arguably the primary force that stunted economic growth there during the last century. A famous example is Argentina, once one of the wealthiest 5 nations on earth but in stagnating decline since the 1950s (while its neighbors in the region surpass it).

But modern populim in the U.S. mutated into something different. There remain strong tendencies of the orignal, fueled by anger at Wall Street banks and the Federal Reserve. But there is a modern sense, perhaps driven by the higher average incomes and higher levels of education, of protests for less government intervention, not more! That's a huge difference. Perot is no Peron!

Demagogues will instinctively want to channel popular anger for their own ends, and in inendiary times like these, the voices of wise (and disinterested) intellectuals are especially needed. That's why I am proud to see so many economists signing onto the petition quoted above.

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end the fed