Where did this populist wave come from? – A review of The Retreat of Western Liberalism by Edward Luce

I recently read this new book from the FT’s Washington-based Chief U.S. commentator but I must admit I approached it with a fair degree of skepticism as I was half-expecting it to be yet another book from yet another journalist about the inevitability of Brexit and the election of President Trump from the very same people who were happy to declare to whoever would listen that neither event could happen. However, I have a lot of respect for Mr. Luce’s commentaries in the FT and thought “why not give it a shot?”. Well, I am glad I did not judge this book by its cover! The author did a great job of discussing the historical roots of the recent wave of populism and its most recent macroeconomic drivers, while also making an attempt to proffer some policy / political prescriptions for treating the ailments for which populism is merely a symptom.

Many commentators have noted the drift all across the western world of the working class populations away from traditional parties of the left into nationalist movements. This ranges from the move of the blue collar American male from the Democratic party into becoming Trump voters to the hemorrhaging by Labour of its traditional working class Northern England voting bloc to UKIP and the loss by the French socialists of core working class voters to Marine Le Pen’s Front National. When did the traditional parties of the “working man” start losing their close links and solidarity with the working class and why did this happen? In a sense the working man’s party became cerebral and the author made a convincing case for tracing the genesis to the student movements of the late 1960s on both sides of the Atlantic and in one year in particular: 1968. This year marked the iconic street battles between students protesting the Vietnam war (i.e., “the hipsters”) and the Chicago police (“the hard hats”) at the sidelines of that year’s Democratic National Convention. In the author’s view, while the hard hats section of the Democratic Party won the battle that year - they got Herbert Humphrey elected, the hipsters won the war as they succeeded in picking their candidate in 1972 with the emergence of the “peace candidate” George McGovern. In the exact same year that American college students were making their mark on their country’s party of the left, their counterparts in Paris (the “Soixante-huitards”) were making their mark in their own country and nudging France’s traditional parties of the left towards more embrace of liberal social values as opposed to their historical focus on the class struggle. The author did a great job of describing the process of disengagement of traditional leftist parties from the working class sensibilities and labour movements that birthed them.

This drifting apart of blue collar workers from the traditional parties of the left may not have been sufficient to spark the populist movements across the western world if it was not coinciding with a profound change that has been happening in western societies (at least the Anglo-Saxon ones) over the past couple of decades. In the author’s words, “since the late 1970s, Western governments of right and left have been privatizing risk”. I personally consider this sentence to be the most important in the entire book as I think it probably explains a large part of the anxieties that is driving the embrace of populism. This privatization of risk is so pervasive that we often don’t think of the various profound manifestations of this trend. I can easily think of one seldom discussed example of this and it is pensions. A couple of decades ago most workers in a western company were part of a defined benefit scheme: i.e., they had pensions that guaranteed them a certain monthly payout in their retirement years. These payouts were often linked to their final working year income and was going to be paid out for as long as they lived. There were of course risks involved in this arrangement: the investment returns on the pot of money set aside may be insufficient to meet the liabilities (financial markets do have a habit of fluctuating!) or pensioners may live for longer than the actuaries predicted when they advised on how much money should be set aside (there’s a fancy term for this: “longevity risk”). What happened is that these risks were borne by employers and not employees and this situation created financial difficulties for many companies. This situation, among other reasons, led to the vast majority of companies moving from a guaranteed payout in retirement (i.e., a “defined benefit”) to one in which employers make contractual payments to an employee while s/he is in its service without being on the hook for the employer’s pension years (i.e., a “defined contribution”). Companies provide support and investment platforms for their employees to invest for retirement but ultimately, the risk of sufficient funds for retirement is the employee’s to bear. There are pros and cons for this arrangement but it’s instructive to note that for most of the workers in formal employment in the western world, the risk of ensuring adequate retirement funds has shifted from a corporate risk to one that is now private to the individual. If companies with teams of actuaries, treasury staff and all sort of expertise largely did a questionable job of managing retirement funds, what are the odds that the Average Joe will do a great job of setting aside adequate funds and investing these funds prudently to address a myriad of risks including cost of living inflation and longevity risk. Pensions represent just one example of many instances in which risk has become increasingly privatized over the past couple of decades – the “gig economy” is another as is the increasing prevalence of out-of-pocket payment for healthcare. The author contends that this privatization of risk has made the median contemporary westerner more exposed to the impact of arbitrary misfortune than his / her parents and that in some respects western society seems to be reverting to resemble the days before the social safety net revolutions of the early 20^th century. I’m not sure that things have gone that far but the man has a point.

So what is the way forward? The author makes a case for stronger social safety nets across western societies, saying “I believe that protecting society’s weakest from arbitrary misfortune is the ultimate test of our civilizational worth”. However, there are no silver bullets and the author was honest in admitting that some of the well-intentioned ideas suggested may have unintended consequences. For example, the Universal Basic Income (“UBI”), a system that pays everyone in a society a minimum amount of money, has its advantages but also has serious drawbacks. How would a UBI be designed to ensure that the incentive to work remains? What about the potential for UBI to make western societies even more attractive to migrants and serve as a powerful magnet that is likely to exacerbate the migrant wave that is proving very challenging for European politics and societies to manage at the moment.

On the whole, this is a very accessible book (of c.200 pages) that is a great addition to the topical debate of populism in western societies.