Populists abhor restraints on the political executive. Since they claim to represent ‘the people’ writ large, they regard limits on their exercise of power as necessarily undermining the popular will. Such constraints can only serve the ‘enemies of the people’—minorities and foreigners (for right-wing populists) or financial elites (in the case of left-wing populists).

This is a dangerous approach to politics, because it allows a majority to ride roughshod over the rights of minorities. Without separation of powers, an independent judiciary or free media—which all populist autocrats, from Vladimir Putin and Recep Tayyip Erdoğan to Viktor Orbán and Donald Trump detest—democracy degenerates into the tyranny of whoever happens to be in power.

Periodic elections under populist rule become a smokescreen. In the absence of the rule of law and basic civil liberties, populist regimes can prolong their rule by manipulating the media and the judiciary at will.

Populists’ aversion to institutional restraints extends to the economy, where exercising full control ‘in the people’s interest’ implies that no obstacles should be placed in their way by autonomous regulatory agencies, independent central banks or global trade rules. But while populism in the political domain is almost always harmful, economic populism can sometimes be justified.

Start with why restraints on economic policy may be desirable in the first place. Economists tend to have a soft spot for such restraints, because policymaking that is fully responsive to the push and pull of domestic politics can generate highly inefficient outcomes. In particular, economic policy is often subject to the problem of what economists call time-inconsistency: short-term interests frequently undermine the pursuit of policies that are far more desirable in the long term.

A canonical example is discretionary monetary policy. Politicians who have the power to print money at will may generate ‘surprise inflation’ to boost output and employment in the short run—say, before an election. But this backfires, because firms and households adjust their inflation expectations. In the end, discretionary monetary policy results only in higher inflation without yielding any output or employment gains. The solution is an independent central bank, insulated from politics, operating solely on its mandate to maintain price stability.

The costs of macroeconomic populism are familiar from Latin America. As Jeffrey D. Sachs ^[1], Sebastián Edwards ^[2], and Rüdiger Dornbusch ^[3] argued years ago, unsustainable monetary and fiscal policies were the bane of the region until economic orthodoxy began to prevail in the 1990s. Populist policies periodically produced painful economic crises, which hurt the poor the most. To break this cycle, the region turned to fiscal rules and technocratic finance ministers.

Another example is official treatment of foreign investors. Once a foreign firm makes its investment, it essentially becomes captive to the host government’s whims. Promises that were made to attract the firm are easily forgotten, replaced by policies that squeeze it to the benefit of the national budget or domestic companies.

But investors are not stupid, and, fearing this outcome, they invest elsewhere. Governments’ need to establish their credibility has thus given rise to trade agreements with so-called investor-state dispute settlement clauses, allowing the firm to sue the government in international tribunals.

These are examples of restraints on economic policy that take the form of delegation to autonomous agencies, technocrats or external rules. As described, they serve the valuable function of preventing those in power from shooting themselves in the foot by pursuing short-sighted policies.

But there are other scenarios as well, in which the consequences of restraints on economic policy may be less salutary. In particular, restraints may be instituted by special interests or elites themselves, to cement permanent control over policymaking. In such cases, delegation to autonomous agencies or signing on to global rules does not serve society, but only a narrow caste of ‘insiders’.

Part of today’s populist backlash is rooted in the belief, not entirely unjustified, that this scenario describes much economic policymaking in recent decades. Multinational corporations and investors have increasingly shaped the agenda of international trade negotiations, resulting in global regimes that disproportionately benefit capital at the expense of labour. Stringent patent rules and international investor tribunals are prime examples. So is the capture of autonomous agencies by the industries they are supposed to regulate. Banks and other financial institutions have been especially successful at getting their way and instituting rules that give them free rein.

Independent central banks played a critical role in bringing inflation down in the 1980s and 1990s. But in the current low-inflation environment, their exclusive focus on price stability imparts a deflationary bias to economic policy and is in tension with employment generation and growth.

Such ‘liberal technocracy’ may be at its apogee in the European Union, where economic rules and regulations are designed at considerable remove from democratic deliberation at the national level. And in virtually every member state, this political gap—the EU’s so-called democratic deficit—has given rise to populist, Euroskeptical political parties.

In such cases, relaxing the constraints on economic policy and returning policymaking autonomy to elected governments may well be desirable. Exceptional times require the freedom to experiment in economic policy. Franklin D. Roosevelt’s New Deal provides an apt historical example. FDR’s reforms required that he remove the economic shackles imposed by conservative judges and financial interests at home and by the gold standard abroad.

We should constantly be wary of populism that stifles political pluralism and undermines liberal democratic norms. Political populism is a menace to be avoided at all costs. Economic populism, by contrast, is occasionally necessary. Indeed, at such times, it may be the only way to forestall its much more dangerous political cousin.