January 17, 2021

The cost of populism | Economy

The cost of populism | Economy



The economist Dani Rodrik has published an investigation that concludes that intense periods of globalization and technological revolution are followed by periods of protectionism that he calls populism. The study analyzes the causes that justify the social reaction. But we already have empirical evidence to start estimating the costs of the new global populist era.

Trump promised America first and embarked on a commercial war to reduce the external deficit. What is the result two years later? The trade deficit has increased 150,000 million dollars and Chinese imports continue to grow exponentially. It is evident that Trump ignores the basic identities of the economy and ignorance is very daring. The external balance of an economy is equal to the difference between your savings and your investment. Trump promised a tax cut that increases the public deficit, reduces the saving of the economy and increases the external deficit.

Our brain prioritizes the immediate objective that is why populism works electorally in the short term even if it has disastrous long-term effects. According to the Budget Office of the US Congress, the structural public deficit is 5% of GDP. No tax increases or spending cuts will remain above 4% of GDP over the next decade. And the net public debt amounts to 80% of GDP.

In 2018, the public deficit in the US increased $ 100 billion, which is the same amount as the fall in revenue that led to the reduction of Trump's corporate tax. The business investment in 2018 was lower than in 2017 and the reduction of the tax has not had an impact on the real economy. Companies have used the increase in their profits to buy back shares of their own companies by increasing the share price. According to Nobel laureate Robert Shiller, Wall Street lives in a financial bubble that exceeds that of 2007 and it's only comparable to the one in 2001 and the one before the Great Depression of 1929.

Since the Reagan policies in the eighties, the United States has a serious pathology of twin deficits, public and foreign, which has increased the external debt and threatens the position of the dollar as a reserve currency. It is likely that Trump has pressed the red button and activated the end of the hegemony of the dollar, although it will take years to see its effects.

In Spain Pablo Casado, Albert Rivera, Santiago Abascal and their reaganomics They promise tax holidays like Trump. Our deficit is similar to the US but our public debt is higher. Already we were rescued in 2012 and, if we follow the path of Trump, the next rescue can coincide with Italy and be the end of the euro that many prophets have been announcing.

The economic historian Francisco Comín has taught us that Spain is the country in the world that has carried out the most debt restructurings. The alarm ratio is the service of the debt, interest plus amortizations, on the total of public expenditure. We are close to 50% historical highs and a default would be charged all the human development achieved in the last forty years of democracy. We will see.

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