The rise of the populist authoritarians

Elites must consider their responsibility for the worldwide resurgence of strongmen

Martin Wolf

Brazilian president Jair Bolsonaro, right, on his way to Davos on Monday. Mr Bolsonaro's rise mirrors that of other populists in recent years

Authoritarianism is on the march. It is not only on the march in relatively poor countries. It is on the march in well-off countries, too — including, most significantly, the US, the country that defended and promoted liberal democracy throughout the 20th century. Donald Trump is a classic example of a populist would-be authoritarian. US institutions may halt his rise to the unbridled power he seeks. But the threat he poses seems clear.

How are we to understand this resurgence of authoritarianism? What form does it now take? What responsibility do elites bear for its success? These are among the most important questions westerners confront. How we answer them will shape the world. If we abandon the cause, for which so much blood has been spilled, how can we expect others to believe in it? We would be handing the world to Xi Jinping, Vladimir Putin and others who see the world as they do.

Erica Frantz of Michigan State University sheds a bright light on the ways of contemporary authoritarians in a short book, entitled Authoritarianism: What Everyone Needs to Know. This illuminates two main points. First, nowadays, the most common way for authoritarian regimes to emerge is by eating out democracy from within, rather as the larvae of some wasps eat out host spiders. Such processes make up close to 40 per cent of all contemporary collapses of democratic regimes. Second, these new regimes often take what the author calls “the most dangerous form of dictatorship”: personal (or “personalist”) rule. Between 2000 and 2010, 75 per cent of transformations of democracies into dictatorships ended thus. Examples are Russia under Mr Putin, Venezuela under Hugo Chávez, and Turkey under Recep Tayyip Erdogan.

A crucial question is what one means by “authoritarian”. The answer is: the absence of democracy. Democracy, in turn, means a system in which free and fair elections determine who holds power. Thus the state must allow free expression of opinion, a free media, impartial execution of election law, a universal adult franchise and the right of political competitors to obtain the resources they need. Today, elections confer legitimacy. For this reason, many authoritarians offer “pseudo-democracy”, but not the reality. Elections in such countries are a form of theatre. Everybody knows the leader will not let himself be defeated. Such a regime is not just a bit different from a democracy: it is an entirely different animal.

Historically, the number of authoritarian regimes peaked in 1980 and then fell sharply, reaching a trough in the middle of the last decade. Since then, however, democracy has been in slow retreat. Moreover, notes Prof Frantz, autocracy is no longer just a phenomenon of developing countries, thus “many of the democracies that currently appear to be on the verge of transitioning to dictatorship lie in Europe”. There has also has been a marked shift over time in the form of authoritarianism. The Chinese party-state is a rarity. The number of military dictatorships has declined sharply. But the number of pseudo-democratic personal dictatorships is on the rise.

Features of these personal dictatorships include: a narrow inner circle of trusted people; installation of loyalists in positions of power; promotion of members of the family; creation of a new political movement; use of referendums as a way of justifying decisions; and the creation of new security services loyal to the leader. A characteristic of these strongmen is that they start out as populists. The latter argue that they alone, once armed with extraordinary powers, can solve the country’s problems. They assert that the traditional elite is corrupt and incompetent. They insist that experts, judges and the media are to be distrusted. Voters should trust, instead, in the intuition of the leader, a living embodiment of the people. Such arguments also justify the repression of “enemies of the people”, making genuine democracy imposible.

Rodrigo Duterte of the Philippines is on the path from populism to dictatorship, as is Viktor Orban of Hungary. His “illiberal democracy” is a euphemism for authoritarianism. I would be surprised if Jair Bolsonaro did not follow this path in Brazil. As for Mr Trump, he, too, is a rightwing populist with authoritarian traits. But he is hemmed in by US institutions. Yet institutions are always only as good as the people who run them. Many of those are enablers.

The autocracies we are seeing today have important differences from those of the fascist parties in Italy or Germany of the early and mid-20th century. They demand acquiescence more than enthusiastic participation. They are manipulative more than incontinently brutal. As Martin Gurri suggests in The Revolt of the Public and the Crisis of Authority in the New Millennium, this shift is partly connected to the fall of the old mass media. The new media are far less good at disseminating a single propaganda message than the old ones were. But they are magnificent at spreading doubt. By destroying the authority of experts, elites and “old media”, new media open the way to political entrepreneurs gifted at exploiting resentments and undermining the notion of truth.

The good news is that so far these Pied Pipers have not managed to lead any of the established high-income democracies into autocracy. The machinery of democracy survives, as the midterm elections in the US proved. Nevertheless, in many countries, populists with authoritarian tendencies are on the edge of power. For this, the failures of existing governing and commercial elites — their indifference to the fate of large parts of the population, their greed and incompetence, demonstrated so clearly by the unexpected financial crises in the US and Europe — are heavily to blame. Cynical politicians, able to lie as easily as they breathe, make progress in populations already cynical about those in charge. Their supporters may or may not believe that the new leader has the answers. But they have become convinced that the old ones do not. The difficulties into which Emmanuel Macron has fallen in France suggests this powerful dynamic remains fully in place.

Yet these new autocracies do not offer solutions: Mr Putin has led Russia into continued economic decline. Mr Trump’s promise to “Make America Great Again” is a fraud. By undermining independent institutions, such leaders will in the end make their countries poorer and their people less free.

Those lucky enough to live in law-governed democracies must dedicate themselves to making them work better. That is now a challenging task. But it is also the only way to ensure that these political systems are passed on intact — ideally, healthier — to the generations that follow. Davos people, please note: this is your clear responsibility.

The Xi Jinping Slowdown

China’s weakest growth in 30 years shows the logic of a trade deal.

By The Editorial Board

China's President Xi Jinping on January 2.
China's President Xi Jinping on January 2. Photo: mark schiefelbein/Agence France-Presse/Getty Images

The logic behind a U.S.-China trade deal grew even more persuasive with Monday’s report that the Chinese economy grew by 6.6% last year, its slowest rate since 1990.

Fourth-quarter growth was even slower at 6.4%, and the real growth rate may be lower still given the unreliability of China’s official statistics. Cement production is down, business confidence is faltering, the unemployment rate ticked up to 4.9%, and consumer spending has weakened.

President Trump’s tariffs are only part of the economic explanation. Chinese President Xi Jinping’s decision to slow the pace of economic reform has made the economy more vulnerable to such an outside shock. China’s growth has been built in part on dangerous levels of debt, an unsustainable internal migration from poor rural areas to cities, and state-owned enterprises that distort business decisions to goose official GDP data.

China’s economists know all this, and Mr. Xi has talked about addressing the problems. But he has shrunk from the political challenge and reinforced statism more than any Chinese leader since Deng Xiaoping’s reforms began in the late 1970s. Mr. Xi’s aggressive mercantalism, favoring Chinese firms at the expense of foreign products and companies, has also soured many on the China market.

Beijing has policy tools to moderate a slowdown. The central bank is adding funds to the banking system to spur lending and the government is considering tax cuts for businesses and individuals. But the best move Mr. Xi could make for growth, short- and long-term, would be a far-reaching trade deal that used U.S. pressure to improve transparency and competition across China’s economy. China has resumed buying U.S. soybeans and withdrawn its retaliatory tariffs on U.S. cars, among other signs that it wants a trade deal with the U.S.

Mr. Trump also needs a trade deal to keep the U.S. economic expansion going as he runs for re-election. China’s growth is fragile, and the trick for Mr. Trump is to use that to win concessions without triggering an all-out trade war and potential recession.

Morality and Money Management

Following his recent death, Vanguard Group founder Jack Bogle was widely and generously eulogized – and justifiably so. But if everyone followed Bogle’s investment strategy, market prices would turn into nonsense and would provide no direction to economic activity.

Robert J. Shiller  

john c bogle

NEW HAVEN – The death on January 16 of Jack Bogle, the founder of the investment company Vanguard Group, was met with a slew of flattering obituaries. Of course, obituaries often praise their subjects. But Bogle’s seemed more laudatory than usual. And I think there is a reason: Bogle was an unusually morally directed man.

Of course, we cannot judge his success by his personal wealth. When Bogle established Vanguard in 1975, he set it up as a nonprofit. The company has no outside shareholders; all profits are reflected in lower fees, not dividends.

By metrics other than founder wealth, the Vanguard Group is a huge success. It invests for 20 million people in 170 countries. It has $4.9 trillion in assets under management. It may be the world’s most significant investment company.

But this does not mean that we must agree with everything Bogle said, or malign others who are not nonprofit. His is not the only way to be moral.

Bogle’s morality was rooted in his conviction that trying to beat the market is futile. This was reflected in his 2007 book The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. His investment strategy is “the only way,” and the opening paragraph of the tenth-anniversary edition sums it up:

“Successful investing is all about common sense. As Warren Buffett, the Oracle of Omaha, has said, it is simple but it is not easy. Simple arithmetic suggests, and history confirms, that the winning strategy for investing in stocks is to own all of the nation’s publicly held businesses at very low cost.”

This means that one should simply invest in an index fund that represents the whole market and then call it a day. But it is a little odd to be quoting Buffett in support of such a strategy, given that the Oracle of Omaha owes his fame (and his moniker) entirely to his ability to outperform the market.

Bogle’s statement is best interpreted as applying to his audience of individual retail investors. Because the market portfolio is the average investment for all investors, the average investor can do no better than the average for the market. But the excitement of the market causes people to lose sight of that. As Bogle puts it in his book: “The stock market is a giant distraction from the business of investing.”

He is right about the distraction. People look for excitement, and the stock market is one game they can play. People will gamble anyway, if not in the stock market, then in a casino. On the other hand, it is no doubt better overall if people learn lessons about business and real economic activity, rather than card-counting tricks. There may be rough rides for some, but the hurly burly of the stock market is also a sign of a vibrant economy.

Advising people simply to hold the market is advising them to free-ride on the wisdom of others who do not follow such a strategy. If everyone followed Bogle’s advice, market prices would turn into nonsense and would provide no direction to economic activity.

I remember exactly when I began to appreciate the complexity of the moral issues money management entails: October 8, 2009. I received a phone call from the eminent MIT economist Paul Samuelson, who had been my teacher when I was a graduate student in the early 1970s. He was 94 years old at the time, and two months later he died. I was so impressed by the call that I took notes on it in my diary.

Samuelson was responding to my recent publications advocating expanded insurance, futures, and options markets to mitigate the financial risks – for example, those related to housing prices and occupational incomes – that ordinary people face. He said that these markets could, if pitched to the general population, turn into “casino markets,” with people using them to gamble, rather than to protect themselves.

He then brought up the example of Bogle, who “gave up a billion dollars for a concept,” Samuelson said. “He could easily have cashed this in,” but he didn’t. “The miracle that was Vanguard came from Bogle’s principles.”

I thought he was right. In the long run, markets reward principled people. But there is still need for an expanded set of risk markets, because these markets can – and do – carry out useful functions, including risk management, incentivization, and orienting business.

The problem is that attention to these markets requires intelligent and hard-working people to help others in their investing. Theirs is not a zero-sum game, for they help direct resources to better uses. And these people must be paid. Even Vanguard, which now has a number of different index funds, hires investment managers and charges a management fee, albeit a low one.

Not every fund needs a low fee. We live in a world where constant and rapid change and innovation require more attention, and attention is costly. While many financial managers are at times unscrupulous, a higher management fee is not always a sign that something is wrong.

But Bogle is still a hero of mine, because he provided an honest product and was motivated by a sincere desire to help people. And he should be a hero to all, because he showed that markets eventually recognize integrity.

Robert J. Shiller, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance, the third edition of which was published in January 2015, and, most recently, Phishing for Phools: The Economics of Manipulation and Deception, co-authored with George Akerlof.

This Is New: Governments Ramp Up Borrowing IN ANTICIPATION Of A Slowdown

by John Rubino

The business cycle has its stages, and they’re usually both predictable and logical. For example, governments tend to generate a lot of tax revenue late in an expansion as more people get jobs and start paying income taxes and rising stock prices generate big capital gains. Meanwhile, less has to be spent on social safety net programs because everyone is working. Combine higher tax revenues with lower spending and you get shrinking deficits.

But not this time. Government borrowing soared around the world in 2018, even as economic growth, employment and stock prices peaked. Why the change? Well, apparently governments have decided – for the first time since the inception of the business cycle – to preemptively attack the next recession.

The US, as everyone by now knows, has returned to crisis-era trillion dollar deficits even as the unemployment rate hovers around 4% and stock prices hit records. That’s historically unusual to put it mildly.

But it pales next to what’s happening in China. From Doug Noland’s Credit Bubble Bulletin:

January 15 – Bloomberg: “China’s credit growth exceeded expectations in December, with the second acceleration in a row indicating the government and central bank’s efforts to spur lending are having an effect. Aggregate financing was 1.59 trillion ($235 billion) in December, the People’s Bank of China said on Tuesday. That compares with an estimated 1.3 trillion yuan in a Bloomberg survey.” 
January 15 – South China Morning Post (Amanda Lee): “China’s banks extended a record 16.17 trillion yuan (US$2.4 trillion) in net new loans last year…, as policymakers pushed lenders to fund cash-strapped firms to prop up the slowing economy. The new figure, well above the previous record of 13.53 trillion yuan in 2017, is an indication that the bank has been moderately aggressive in using monetary policy to stimulate the economy, which slowed sharply as a result of the trade war with the US. Outstanding yuan loans were up 13.5% at the end of 2018 from a year earlier… In addition, debt issued by private enterprises increased by 70% year-on-year from November to December last year, indicating that the central bank’s efforts to support the private sector are working.” 
There’s a strong consensus view that Beijing has things under control. Reality: China in 2019 faces a ticking Credit time bomb. Bank loans were up 13.5% over the past year and were 28% higher over two years, a precarious late-cycle inflation of Bank Credit. Ominously paralleling late-cycle U.S. mortgage finance Bubble excess, China’s Consumer Loans expanded 18.2% over the past year, 44% in two years, 77% in three years and 141% in five years. China’s industrial sector has slowed, while inflated consumer spending is indicating initial signs of an overdue pullback. Calamitous woes commence with the bursting of China’s historic housing/apartment Bubble.  
Typically – and as experienced in the U.S. with problems erupting in subprime – nervous lenders and a tightening of mortgage Credit mark an inflection point followed by self-reinforcing downturns in housing prices, transactions and mortgage Credit. Yet there is nothing remotely typical when it comes to China’s Bubble. Instead of caution, lenders have looked to residential lending as a preferred (versus business) means of achieving government-dictated lending targets. Failing to learn from the dreadful U.S. experience, Beijing has used an inflating housing Bubble to compensate for structural economic shortcomings (i.e. manufacturing over-capacity). This is precariously prolonging “Terminal Phase” excess.

To sum up, China built way too many factories and now has decided to pay for the related costs by inflating a housing bubble. That doesn’t sound very smart.

But China’s screw-up is just one in a very big crowd. Noland points out that the other emerging market economies are doing something similar:

January 16 – Financial Times (Jonathan Wheatley): “Emerging-market companies have gorged on debt. Slower global growth and higher funding costs will make servicing that debt harder, just as the amount coming due this year reaches a record high. The result?  
Less investment for growth and yet more borrowing. These are some of the concerns raised by the Institute of International Finance… as it published its quarterly Global Debt Monitor… The world is ‘pushing at the boundaries of comfortably sustainable debt,’ says Sonja Gibbs, managing director at the IIF. ‘Higher debt levels [in emerging markets] really divert resources from more productive areas. This increasingly worries us.’ Of particular concern is the non-financial corporate sector in emerging markets (EMs), where debts are equal to 93.6% of GDP. That is more than among the same group in developed markets, at 91.1% of GDP.” 
January 16 – Barron’s (Reshma Kapadia): “A record $3.9 trillion of emerging market bonds and syndicated loans comes due through the end of 2020. Most of the redemptions in 2019 will be outside of the financial sector, mainly from large corporate borrowers in China, Turkey, and South Africa. The question will be if they can refinance the debt…”

So here we are, ten years into an expansion (which is four years longer than the average one) and governments are not only taking on massive new debts themselves but tricking/cajoling their companies and consumers into doing the same. This will (if cause and effect still matter) do several things:

1) It will make year-ahead growth higher than it would otherwise have been, and combine with the probable resolution of the US/China trade war to give the expansion a brief second wind.
2) It will further tighten labor markets, raising wages and pushing overall inflation up a point or two, which in turn will boost/support interest rates.
3) Higher-than-otherwise interest rates (or simple debt-related exhaustion) will bring the long-awaited recession. And societies around the world will realize they’ve already borrowed all that anyone will lend them, leaving them with very few remaining weapons to fight a deflationary crash.

In other words, the current debt binge is the culmination of a decade of can-kicking in which new credit has filled the gaps created by past mistakes. There’s a limit to how far this can go, and the recession of 2020 might reveal it.