The Econ 101 of Populist Policies and the new January 2027 Congress

 I asked Chat GPT to supply a list of populist policies the U.S Congress might vote for and Trump wouldn’t veto.

I also asked the AI to give a similar list for populist revenue raising strategies;

Finally, I asked my robot about how this bundle of policies would affect the deficit

Suppose that in January 2027, you are teaching Econ 101 to young university students. How will you explain the populist push in the U.S? How will you prospectively analyze the likely consequences of this bundle of policies? What supply and demand model will you use? How will you discuss the complex interlinkages in the economy?

Will you wimp out and say; “Americans want a “Free Lunch” and the Congress panders to the voters”. Will you then say that there is “no Free lunch” and we will eventually pay the price for ignoring the core ideas of microeconomics?

Will you sketch out the equity/efficiency tradeoff and say that the American people are willing to sacrifice some growth in order to have a more fair distribution of income?

In hindsight, is the puzzle why the Congress wasn’t always a populist Congress? Was it the fear of the Soviet Union that drove us to pro-growth policies because only a strong macro-economy can support a great military effort?

As the Frictions and market distortions now being introduced by the Congress increase in size and complexity, how will general equilibrium economists model the costs of Frictions? How can we know what would be the nation’s economic growth rate if we embraced the bundle of strategies presented in Free to Choose. As America systematically rejects free market ideas, what do we lose?

Has there been research on the cycles of populism? When does populism lose its appeal? When a new young charismatic Milton Friedman emerges? Or there is a financial crisis?

I asked my robot and it supplied a “B+” answer;

THE following text is written by Chat GPT

When does populism lose its appeal?

• When its supporters experience visible losses. Inflation, unemployment, shortages, financial instability, or cuts to promised benefits matter more an abstract warnings about debt.

• When the populist becomes the establishment. Once in office, the movement must compromise, administer programs, and accept responsibility. Its claim that outsiders or elites are responsible becomes less credible—although effective populists continually invent new enemies.

• When the governing coalition splits. Farmers may like subsidies but dislike tariffs; workers may like protection but dislike inflation; business owners may like deregulation but dislike policy uncertainty.

• When a mainstream alternative addresses the underlying grievance. Simply defending institutions is rarely enough. A successful replacement must offer economic security, competence, and a plausible explanation of who gains and loses.

• When institutions preserve genuine electoral competition. Populists who capture courts, media, election administration, or public spending can survive poor performance much longer.

Dornbusch and Edwards describe the classic Latin American macroeconomic sequence: initial redistribution and rapid growth, emerging bottlenecks, accelerating inflation and capital flight, and finally crisis and austerity—often leaving the intended beneficiaries worse off. NBER A modern cross-country study finds that, after 15 years of populist government, GDP per capita is approximately 10% below a constructed nonpopulist counterfactual. But economic failure does not automatically remove the government because populists can weaken accountability and redirect blame. American Economic Association

Does a financial crisis end populism?

Usually, a financial crisis creates populism rather than cures it.

Research covering 20 advanced economies since 1870 finds that financial crises increase polarization and raise the far-right vote by about 30% relative to its previous level. Ordinary recessions do not produce the same political effect. Financial crises are especially combustible because voters perceive that politically connected creditors are rescued while ordinary debtors bear the adjustment. CEPR

The key question is who receives the blame:

• If an established technocratic government presides over the crisis, outsiders and populists benefit.

• If a populist government clearly caused inflation or financial collapse, it may lose power.

• If the populist can blame banks, foreigners, immigrants, the central bank, or a hostile legislature, the crisis may strengthen rather than weaken it.

• The incumbent populist can fall while voters choose a different populist promising a new culprit and a different remedy.

Does populism end when a new Milton Friedman appears?

A charismatic intellectual can matter—but Friedman alone would not be sufficient. Peter Hall’s work on policy paradigms suggests that major change requires three elements:

1. Accumulating anomalies: The existing program repeatedly fails to explain or solve inflation, stagnation, or fiscal stress.

2. A developed alternative: Economists and policy organizations already possess a coherent replacement program.

3. A political carrier: A leader such as Thatcher or Reagan translates the intellectual framework into language voters understand. JSTOR

Friedman’s influence was therefore not simply charisma. Monetarism had been developed over decades, promoted through universities and policy networks, and was available when 1970s stagflation discredited the prevailing framework.

A modern “young Friedman” would need to do more than preach fiscal discipline. He or she would need to explain how market-oriented reform improves the lives of farmers, noncollege workers, renters, and younger families. A program that says only “the deficit is too large” will lose to populism. A successful alternative would need to combine:

• fiscal discipline;

• abundant housing and energy;

• competition rather than corporate protection;

• wage growth and geographic mobility;

• a credible safety net;

• and rules preventing politically connected firms from capturing government.

My bottom line is that populism declines when observable policy failure coincides with a credible replacement coalition. A crisis supplies the opening, and an intellectual entrepreneur can supply the new ideas—but neither guarantees that the replacement will be liberal, market-oriented, or democratic. The same crisis can instead produce an even more radical populism.