Political Economy Forum

Working Paper #6, Magistro and Menaldo

The Perils of Economic Populism

Beatrice Magistro

Victor Menaldo

The economic cost of populism is extremely high: after 15 years, GDP per capita is 10% lower compared to plausible non-populist counterfactuals (Funke, Schularick, Trebesch, 2020). We seek to look under the hood, so to speak, and explain the mechanics behind these numbers: we provide a framework to make sense of this pattern and explain the systematic, mutually reinforcing association between populism and economic dysfunction and underperformance. Populists emanating from either the left or the right tend to converge on a similar political economic model: protectionism, crony capitalism, and inveterate rent seeking. We also adduce supporting evidence from very different places, Argentina, Chile, Greece, and Italy, and across disparate time periods. We argue that populism almost always threatens both liberal democracy and welfare state capitalism and ushers in economic collapse. We posit that a key reason for this is that, rather than seeing economic interactions as “win-win” situations, populists are obsessed with zero-sum thinking.

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