perilous populism

The Downside of Democracy

by David K. Levine, Andrea Mattozzi and Salvatore Modica on April 23, 2017

Acemoglu and Robinson argue that the reason nations fail is because of their institutions: there are inclusive institutions that represent a wide range of interests and there are extractive institutions in which a few steal from the many. Inclusive institutions lead to economic success and extractive ones lead to economic failure. Democracy is good and autocracy is bad - not just for our liberty but for our economic well-being. We might well ask whether this is wishful thinking or if it is  true. The graph below shows per capita income for two countries since 1960: one starts low and ends much higher - it is an economic success as the other is a failure.

China grows faster than India

Which country has the more inclusive institutions? The economic failure is India: the shining success of democracy among post World-War II newcomers. The economic success is China: a country which has never known democracy. Notice that it is possible to create all sorts of comparisons - but the China-India comparison is a crucial one because the two countries contain about two and a half billion people - roughly a third of world population. By contrast those who point to places such as Hong Kong or Singapore must reflect on the fact that these are very small and special cases.There is no reason to believe that institutions that work well in Singapore - a rich city protected from greedy neighbors by strong geographical barriers - would work well in the hinterland of China.

The example of China and India is surely not an advertisement for the idea that the way to economic success is through inclusive institutions as Acemoglu and Robinson assert. More importantly, it highlights an important difference between democracy and autocracy, which is missing in the Acemoglu and Robinson narrative. China shows both the strength and weakness of autocracy. With  bad rulers you get the horror of the cultural revolution. With good rulers you get the greatest growth in economic welfare in the history of humanity. By contrast India - with its well-functioning democracy and peaceful transitions of government - has held a more steady course: it had neither the ups nor the downs of China.

As many have argued, policy matters as well as institutions. “Good” institutions can generate bad policy as in India and “bad” institutions can generate good policy as in China. Nor is it the case, as some political scientists assert, that autocratic governments are condemned to short lives due to their inherent contradictions - that "coup proofing" by autocrats weakens institutions to the point at which they are doomed to fail. The history of China is a strong (and large) counter-example. China maintained autocratic rule through a professional bureaucracy for roughly 1300 years from  605 CE (some would argue 134 BC) until 1905 CE a period of generally high prosperity - and far longer than any democratic institutions have survived.

Democracy - and inclusive institutions more broadly - are surely imperfect. We are all familiar with the two most important imperfections: the power of special interests to subvert democratic rule and the power of the many to elect foolish and short-sighted populist governments.

Special Interest Lobbying

Two of us grew up in a country famed for its cronyism and corruption. The other of us became interested in the issue of corruption and special interest lobbying in 1998 when the U.S. Congress passed - on a voice vote without dissension - the Copyright Extension Act. No large group of voters voted for or asked for this. The act extended retroactively 39 years of additional copyright protection for works that had originally been promised 56 years. It does not require a Nobel prize in economics to understand that increasing the length of copyright in 1998 on books produced before 1978 in no way changes the fact that they already exist - the only allowable reason in the U.S. Constitution for copyright. On the contrary - the  effect is to take money out of the pocket of the many who do not hold copyrights and put them in the pocket of the few whose copyrights are about to expire - with some money being lost along the way. Even more remarkable: Supreme Court justices who asserted that only the dry letter of the law matters upheld this act not only ignoring the fact that retroactive copyright in no way serves to "to promote the progress of science and useful arts", but ruling in addition that an infinite length of time is limited - a conclusion that might cause even King Canute to blush!

The Copyright Extension Act is by no means the worst result of successful special interest lobbying: AIDS deaths in Africa due to patent protection, bank bailouts transferring money from the middle income many to the rich few are certainly more serious. But the point is that the outcome of most lobbying has some degree of ambiguity associated with it. Retroactive copyright extension does not: it is a pure money grab by relatively rich copyright holders from everyone else.  Larry Lessig, who had spent his entire career writing and thinking about copyright - and who argued against the constitutionality of the act before the Supreme Court - was so dismayed that he gave up working on copyright to focus on special interest politics. His solution - and his campaign platform during his brief 2016 run in the Democratic presidential primary - is simple: get the money out of politics. Replace private campaign funding with public. Implicit in this is the idea is that campaign funding is the primary avenue through which corrupt special interests bribe politicians. Would that it were so simple!

We might start with the obvious fact that a number of regulators are appointed: Supreme Court justices do not campaign for office, so if they are corrupt changing laws regarding campaign contributions is unlikely to solve the problem. Moreover, public funding of political campaigns has been tried extensively in other countries - without, it seems, eliminating corruption. Take Ireland where political campaigns are publicly financed: in September 2008 the Irish finance minister used 64 billion Euros of taxpayer money to bail out private banks that had made some bad bets. Or take Italy where public financing of political campaigns has been introduced and banished at various times. Italy is not a country known for its lack of corruption - and these various changes in campaign financing do not appear to have had much effect.

What if campaign financing was only the visible tip of the iceberg? Far more effective means of bribery are to give in kind gifts, to give money to a family member, or to offer a good job after leaving office. Chris Dodd was once known as the Senator “from Disney” for his role in pushing through whatever copyright protections the movie industry demanded.  After he retired from the Senate he took a several million a year job as the CEO of the Motion Picture Association of America. His job was that of a lobbyist: to meet government officials and persuade them that they should support the movie industry. But is the message he brings "our proposal is good for the American people?" or is it "look at me - if you play ball like I did you too can one day be a rich and sleek lobbyist?” How many 31 year olds have been offered a $600,000 a year do-nothing job as “special correspondent” for a television network? The only one we know of is the daughter of Presidential candidates.

This is not to say that the problem of lobbying is an insoluble one: indeed autocracies as well as democracies have to contend with corrupt state officials and special interest lobbying. In China and Turkey this problem was once solved by requiring that government officials should be castrated male slaves who were separated from their families at an early age. Unfortunately, this solution seems unlikely to be acceptable in the current social environment. The more moderate solution adopted by the Catholic Church - celibacy - does not seem to have worked particularly well.

Good Lobbying, Bad Lobbying and Democracy

To see how democracy can easily go astray a simple example may help. Suppose that we live in a cold country where everyone can light a fire to keep warm but at a cost to others who must suffer from the smoke. In this direct democracy, people vote on regulations: each regulation prevents a specific person from lighting a fire. There is an existing status quo of regulations and each election one regulation is chosen at random to either be added or subtracted by majority rule. Since every regulation is favored by everyone except the person it is directed against, every new regulation is approved and no existing regulation is ever removed. Eventually we wind up with no fires.

The problem with no fires is that it could be good or bad depending on whether the benefit to the individual of having the fire exceeds the cost to the others of the smoke: either way there are no fires. If fires are socially bad then democracy works. If fires are socially good then democracy fails. Indeed, in the latter case we have the classical example of a Condorcet cycle: if once fires are banned and we have a referendum on whether to abolish all regulations, it will pass unanimously and we will start all over again banning fires one at a time. Moreover if fires are socially good then corruption is good as well: it would be best if public officials could be bribed to look the other way!

Just because something is good for a special interest does not mean it is bad for society. For example, it is often argued that in countries with excessive regulation the only reason the country functions at all is because these regulations can be avoided by bribery. Italy is both excessively regulated and famously corrupt, and India does not look much different. Of course it might be best to have more moderate regulation, but to decrease regulation it is first necessary to overcome the special interest lobbying of the bureaucrats who get employment (and bribes) from the existing system.

The Antidote to Corruption

One of the most astute observers of special interest politics was the late Mancur Olson. Olson argued that inevitably as time goes on, more and more special interests arise until they strangle the economy entirely. It is certainly true that countries that are notably corrupt such as Italy and India are not great economic powerhouses. But we can hardly describe them as abysmal failures. Italy has maintained a standard of living high by world standards, and India as the graph above shows has had slow - but steady - improvement.

Unfortunately, the historical antidote to corruption is populism: a far more dangerous phenomenon. Populism is indeed the popular backlash against successful lobbying and rent-seeking. In the early 21st Century, for example, modern populist movements in the U.S. and Europe grew as the corruption of the banking sector and of experts became painfully clear during the financial crisis. Those who were able to do so used taxpayer funds as life-rafts to escape the consequences of their own bad decisions. In the 2016 U.S. Presidential primary the populist proposals of Donald Trump on the Republican side to a large extent matched those of Bernie Sanders on the Democratic side. Both argued strongly for "America First" especially when it comes to trade. Both demanded for the average voter some of those protections from competition previously reserved only for rich and successful special interests. Populism is political victory through the ballot box and is the inevitable consequence of successful rent-seeking by the small special interests groups who dominate lobbying.

This is not the entire story: for example, the change in social networks over time has also played a role in the surge of populism. The increased mobility of workers between jobs and locations and decreased interest in religious and other activities has loosened the social networks that used to underly the political party system. In the “old days” in Britain workers in the labor party socialized in their pubs while conservatives socialized in their clubs. Today suburban commuters go their separate ways and nobody knows their neighbors. As social ties are loosened, the peer monitoring on which  the system of mass political parties was founded becomes more costly. This resulted in lower turnout, it reduces barriers to entry in the political market, and eventually leads to a larger potential market for insurgent and populist parties. Without, however, a guarantee of success: over first half of the second decade of the 21st Century we have seen mixed electoral success by populists: success in Greece, the UK and the US but failure in Spain and the Netherlands.

The Problem of Populism

The danger of populism is that there is little guarantee that populist movements will achieve their stated goals. Indeed, popular remedies are often as harmful as folk medicine is for the genuinely ill patient - and not just metaphorically: the Italian populist movement M5S is anti-vaccine. Looking around we see that Trump far from draining the swamp has deepened it; Brexit is on track to crush a thriving British economy; in Greece Syriza has managed the nearly impossible task of adopting economic policies even more harmful than those of its predecessors; while the oil powerhouse Venezuela now lacks amenities such as toilet paper. Looking farther across time we see that Peronism in Argentina condemned the country to decades of economic stagnation, while Mugabiism in Zimbabwe has condemned an entire nation to poverty. By contrast the US populist Teddy Roosevelt brought antitrust law and other measures against monopoly that mitigated rent-seeking without much harmful side effect.

We see here at work a third fundamental problem with democracy: the curse of rational voter ignorance. Even after years of study resulting in a PhD in economics; even after years of academic or practical experience after a PhD, the consequences of economic policies are at best uncertain. While agreement among experts is greater than realized by the general public, there still is legitimate disagreement. It could not possibly be sensible for an individual voter - whose vote makes little difference - to invest years of effort in hopes of deciding what are the best economic policies.

Because we cannot sensibly know ourselves what constitutes good policy we must rely on experts. Indeed, even those who denounce academic experts and pretend unwillingness to rely on experts, nevertheless follow like sheep their own “experts” like Rush Limbaugh, Michael Gove and Donald Trump. And therein also lies a dilemma: to know who is a true expert and who is a charlatan requires a lot of knowledge. Not perhaps a PhD in economics - maybe only a MA? And this is a problem that cannot be solved by direct democracy in which laws are passed by referendum. To know how to vote in a referendum we must trust experts to tell us.

If this wasn’t already enough, there is more. Even if we can distinguish experts from charlatans, experts have their own agendas. Experts as well as politicians can be corrupted. For example, the famous academic economist Frederic Mishkin accepted $124,000 from the Icelandic Chamber of Commerce to praise its regulatory and banking systems: this only two years before the Icelandic banks' catastrophic collapse. Nor to our knowledge has he been denounced by his colleagues for this. Owing to social pressure experts - like the police, doctors, or any other professions - rarely discipline within their own social networks. The supporters of populist movements are quite right to distrust experts after all!


This may all sound pretty hopeless. Yet we live in a period of time during which economic well-being has increased faster and to much higher levels than ever before in history. So let us ask: what did we do right - and how can we keep doing it?