The Rise of Populism and the Fall of Economies

Recent election cycles in the U.S. and Europe have seen the ascendance of political parties whose platforms are significantly shaped by populist initiatives. Underlining many such initiatives is a preoccupation with immigration. Earlier today the Wall Street Journal reported that 40% of Brexit supporters indicated that immigration was their primary reason for backing the Leave campaign. Although the U.K. is not party to the Schengen agreement, which enables passport-free travel across member states, eurosceptics have found a strong source of support among those fearful of spillover from the ongoing migrant crisis. In the U.S., wage stagnation and a preoccupation with terrorism have fueled proposals to further curb immigration, deport undocumented workers and institute travel bans on the basis of religious identification.

The potential economic impact of these populist initiatives is real. As we indicated in an earlier post, Morgan Stanley forecasts a -15% drop in European equities and a -7.8% drop in the Sterling if Britons opt for a Brexit. Furthermore, a new report from the Economist Intelligence Unit estimates that a Brexit would prompt the U.K. economy to shrink by 1% in 2017 and 6% by 2020 relative to a non-Brexit baseline. Unemployment would also spike as economic uncertainty prompts businesses to postpone investment and consumers to spend less while waiting out the Brexit fallout. It’s not difficult to imagine the economic fallout on the Continent if the current migrant crisis leads to the reinstatement of national border controls, curbing the free, efficient flow of goods among states.

Meanwhile in the U.S., Moody’s estimates that retaliatory trade wars with Mexico and China would cost the U.S. between 4 – 7 million jobs and would likely culminate in a recession. On the issue of immigration, the Brookings Institute has pointed out that immigrant demographics reflect a desire on behalf of immigrants to join the U.S. workforce; immigrants tend to be younger than their native-born counterparts and constitute a growing share of the U.S. labor force. Indeed, immigrant share of the U.S. labor force has grown from 4.9% in 1970 to 16.4% in 2010. Given the significance of immigrants in the U.S. labor force, investors are concerned about the economic impact of cutting off the source of workforce growth. The American Action Forum (AAF), a conservative think tank not generally predisposed to criticism of GOP policy proposals, recently reviewed the prospective impact of hardline stances on immigration. The AAF concluded that such proposals would result in a loss of 4 – 6.8 million private sector jobs and would decrease private industry output by $382BN – $623BN. Additionally, the AAF concludes that enforcement measures to identify and deport undocumented workers could cost between $400BN – $600BN and would disproportionately affect industries that depend on these workers, including agriculture, construction and leisure/hospitality. Finally, the AAF concludes that these measures would reduce real GDP by approximately $1TN.

As politicians sharpen their rhetoric in the near-term, investors would do well to hold them accountable for the long-term impact of their policy proposals.

June 16, 2016