The vote for Brexit and the election of Donald Trump has baffled the main stream and the establishment. Most market participants and observers didn’t believe ex ante that they were possible, and as a result were completely surprised when the unexpected happened. Ever since the term populism has become socio-politically relevant in modern-day public discourse. Google Trends illustrates that there was a veritable explosion in search queries for the term ‘populism’ last year:
But, populism – regardless of its political flavor – merely represents a symptom. The generally surprising results were consequences of the economical erosion of the past years Although there are idiosyncrasies in every country that foster the rise of populist movements, the ailing foundation of the economy provides the fertile soil and is the major driver of people’s dissatisfaction and the associated voting decisions. To assert that populism is the reason for this process of political change is in our opinion far too simplistic. An analysis of stating that economic erosion is responsible for the rise in populism is supported by by a McKinsey study, which examines the trend in real household incomes in 25 industrialized nations.1 McKinsey arrived at the striking conclusion that real incomes of 65 to 70 percent of households in developed countries either stagnated or even declined between 2005 and 2014. The following chart illustrates the trend in household incomes in selected countries. (The y axis shows the percentage of households with stnating or declining income between 2005 and 2014):
The momentousness of this study becomes obvious when considering that the object under review are 25 industrialized countries with a population of more than 800 million people, generating 50 percent of global GDP.
This post was published at Ludwig von Mises Institute on November 13, 2017.