Just the beginning.

Photographer: Scott Olson/Getty Images

Trump's Debt to the Financial Crisis

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
Read More.
a | A

Do we have the 2008 financial crisis to thank for Donald Trump's election as U.S. president? More than a century of human experience suggests it's a real possibility.

Trump's surprise victory has prompted a lot of worrying about the wave of antiestablishment -- and often xenophobic -- sentiment that seems to be rolling across the developed world, affecting countries ranging from Greece to Britain to the U.S. It also adds relevance to a paper in which three German economists -- Manuel Funke, Moritz Schularick and Cristoph Trebesch -- sought to put these political upheavals into historical context.  

The researchers collected 140 years of data from 20 advanced countries on various economic and political indicators, including voting patterns, the makeup of legislative bodies and protest activity. They then crunched the numbers to get a sense of how economic events play out on the social level -- and specifically whether the repercussions of recessions caused by financial crises differ from those of regular recessions.

The results are striking: Financial recessions are followed by a much larger surge in protests and support for antiestablishment parties -- particularly on the far right. Looking just at the data since World War II, the share of votes won by far-right candidates tends to be about 37 percent higher in the fifth year after a financial crisis. Here's a comparison to the aftermath of normal recessions:

Far-Right Vote Share After Recessions
 
Source: "Going to extremes: Politics after financial crises, 1870–2014"
Note: For years 1 through 3, the difference between "Financial" and "Normal" doesn't have a high level of statistical significance: If there were actually no difference, there would be a greater-than-10-percent chance of estimating the difference shown in the chart.

Also, the frequency of street protests rises, on average, by about 30 percent:

Street Protests After Recessions
 
Source: "Going to extremes: Politics after financial crises, 1870–2014"
Note: For years 1 and 2, the difference between "Financial" and "Normal" doesn't have a high level of statistical significance: If there were actually no difference, there would be a greater-than-10-percent chance of estimating the difference shown in the chart.

Although the effect tends to fade after the fifth year, there's ample reason to believe that the crisis-related recession of 2007-2009 had an impact persistent enough to help Trump's antiestablishment campaign. For one, the crisis was unusually deep and prolonged. Also, the schedule of presidential elections meant that much of the dissatisfaction couldn’t be expressed until this year.

So why do financial recessions have such uniquely powerful consequences? One explanation is that they discredit elites: People might perceive a normal economic slump as an inevitable event, while a financial crisis -- with its accompanying bailouts -- undermines faith in the whole system and the policy makers who manage it. As Schularick put it in an interview: "It's not just a financial collapse; it's also a form of intellectual bankruptcy."

What’s ironic is that U.S. voters have responded by installing a president who wants to dismantle the 2010 Dodd-Frank Act, which was intended to prevent further financial disasters. If Trump replaces the legislation (or parts of it) with something more effective, such as a regime focused on sharply higher capital requirements for banks, that might not be so bad. If not, the next cycle of crisis, disillusionment and revolt might not be far away.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net