Why was Steve Bannon in Rome recently? On this episode of the Capitalisn’t podcast, hosts Luigi Zingales and Kate Waldock look at the recent formation of Italy’s populist government and analyze the odds of a similar left-right coalition forming in the United States.
Fareed Zakaria: So why did I come all the way to Rome to interview Steve Bannon? Well, Italy’s politics were in absolute chaos this week, and Bannon has a lot to say about the subject.
Steve Bannon: We’re coming up on the 10th-year anniversary of the financial crisis. The fuse that was lit then, that eventually brought the Trump revolution, is the same thing that’s happened here in Italy.
Kate: Hi, this is Kate Waldock from Georgetown University.
Luigi: And this is Luigi Zingales at the University of Chicago.
Kate: You’re listening to Capitalisn’t, a podcast about what’s working in Capitalism today.
Luigi: And most importantly, what isn’t.
Fareed Zakaria: What a week to be in Italy. I was invited here to Rome by Steve Bannon, who has been an avid supporter of the populist movement here—a movement that has created even more political chaos than Italy usually has.
Kate: Luigi, you were just in Italy this past weekend, right? So are things absolutely wild over there?
Luigi: Yeah. I think things are pretty crazy, but there are a lot of people who are upset. A lot of people that are interested in what’s happening. And I think that what’s happening should be watched also from the United States, because it can be game-changing.
Kate: And I think they were being watched in the United States, right? As of the end of last week, the stock market had tanked, it was down, what, a couple percent? Mostly on news from Italy. There was a lot of volatility due to news from Italy, so I think people are actually paying attention over here.
Luigi: Yeah, but—it’s surprising, said from a financial economist—but I think that the biggest reason to watch Italy is not from a financial point of view, and there are plenty of reasons to watch it from a financial point of view, but from a political point of view.
Believe it or not, Italy is 20 years ahead of the United States. Unfortunately, 20 years ahead down the tube, but it’s 20 years ahead. And I think that you want to watch what’s happening there to understand what might happen here.
Kate: OK, so just to recap really quickly, we did an episode on Italy just about two months ago called “Worse than Brexit,” and on that episode, Luigi shared with us a little bit of insight into what’s going on in Italian politics today.
Luigi: Eventually, a coalition between these two parties, who are anti-establishment, the League and the Five Star, took place after a lot of problems, shenanigans, that I will skip, say for brevity, but I think that the important point is two parties that are kind of like Bernie Sanders and Steve Bannon getting together and form a government.
Kate: That’s insane.
Luigi: And this seems so crazy, in fact, you laugh, Kate, but I think it is not that crazy after all. And that’s what we would like to understand is why they got together, on what basis, and what does this imply for the rest of the world? Because, as we heard in the clip in the beginning of the podcast, Steve Bannon is in Rome, claiming that this is a victory of nationalists against the globalist elite. And is it, and is this the sign that things are changing? I think that’s what we want to discuss today.
Kate: I know you said for the sake of brevity, you don’t want to get too much into the details, but why were markets so spooked as of the end of last week?
Luigi: At some point in the negotiation for forming this coalition, the two parties converged on the name of an economic minister, who has positions that are quite anti-Euro. The president said that he did not want to appoint him as economic minister, because of the impact this will have on the market. This is at the borderline of the constitutional powers of the president. In our constitution, the president is a bit like the queen in England; the president appoints the prime minister and, under the suggestion of the prime minister, appoints the minister. He does have some power in saying no, but generally it is not for ideological reasons. If you appoint a crook as justice minister, I think the president has all the right to say no. If you appoint somebody who’s perfectly qualified to be, but has a different ideology, in principle, you’re not supposed to say no.
But I think the reality is, there was a lot of uncertainty whether one of the two parties in the coalition, particularly the League, wanted to be part of this coalition. My understanding is this tension with the president was used as an excuse to get out and then when they got out, the market was spooked even more. So, they realized that they’d better do something, otherwise the country can fall apart and they are blamed for this lack of government. I think, eventually, sanity prevailed and they did form a government.
Kate: Can you tell us more about how the League is like Trump’s party, and how the Five Star Movement is like Bernie Sanders’ party?
Luigi: I think, for American listeners, the League is relatively easy to explain because, in spite of its historical origin, today it’s very much like a Trump party. In fact, the leader of the League, Salvini, was one of the Western leaders to endorse Trump. They are anti-immigrant. They are very much pro-business, especially pro-small business. They are in favor of cutting taxes; they even proposed a flat personal income tax, which really is not that flat, but at least they claim it is that way. They are really kind of a Trump party, I would say even a Bannon party, because Trump is the combination, in my view, of a populist root and a plutocratic side. I don’t think there is any plutocratic element in the League; it is only the populist side.
Kate: What about the Five Star Movement? How are they like Bernie supporters?
Luigi: The Five Start Movement is, in my view, the most interesting because, first of all, they didn’t exist 10 years ago. And in 10 years, they went from being nobody to express the prime minister. They did that without being supported by any big business, by any big donors, by anybody, and having all the establishment, all the media against them. In a sense, it’s a bit of a miracle. Imagine that you have Jon Stewart hooking up with a Silicon Valley genius—
Kate: Elon Musk.
Luigi: —yeah, maybe Elon Musk, and forming a party together and really going grassroots. Because they start so grassroots and so in a non-ideological way, they are, first of all, not a strong ideological party and trying to express what ordinary people care about. One thing, they are very pro-environment. Which is quite unique in the Italian environment. They are pro-universal basic income. And they are very strongly anti-corruption and anti-establishment. So in that sense, they might resemble a lot to Bernie Sanders’ party. On the other hand, they are, I wouldn’t say anti-immigration in general, but they are worried about the consequences of the way immigration took place in Italy. That is one of the points of connection with the League. They’re not exactly a Bernie Sanders party, but I would say they are pretty close to a Bernie Sanders party also in the way they finance themselves, which is very diffused. Not having strong donors supporting it.
Kate: So now that the League and the Five Star Movement have come together to form this coalition government, what are some of the policies they’re proposing?
Luigi: In a move that is unprecedented in Italian politics, they actually spent almost a month creating a contract between the two parties to discipline what they’re going to do in government. It’s a bit like what Angela Merkel did with the Social Democrats in Germany, and this is fairly usual in other countries. In Italy, it’s unique. However, this document contains mostly how they’re going to spend the money, not how they’re going to raise the money. Which, of course, creates some problems, given that Italy does not have the flexibility of running such large deficits, given the amount of debt it already has. The characterizing element of this is some form of a flat tax, even if the word flat, as I said a second ago, is not precisely right. But some form of fiscal reform that will lower the burden of taxation on individuals and on small corporations.
Second, some form of welfare. Again, it’s not exactly universal basic income because they’re going to make it conditional on searching for a job. But it’s going in a direction of increasing welfare in Italy, which is quite underdeveloped. And then they have a number of initiatives that are much more on the justice side. For example, in Italy, there is this absurdity of having a very short statute of limitations. If you commit a crime, and your lawyer is good enough to drag trial with all the excuses, you end up being acquitted because of the statute of limitations. This law was introduced by Berlusconi many years ago in order to get out of a number of trials. But of course, it not only got Berlusconi off the hook, it got a lot of other people off the hook. In fact, it’s a fairly common idea today in Italy that you can get away committing crimes, especially when it comes to financial crimes, without paying for them.
Last but not least, they want to renegotiate many things in Europe. The most important one is the way immigrants are handled. There is an agreement called the Dublin Agreement that basically gives all the responsibility of accepting and nurturing and supporting the immigrants in the countries that first received them. And then, it makes it difficult for them to relocate those within the European Union. Because most of the immigrants now are coming from Libya, Italy is the country with this enormous amount of immigration, and we don’t have the resources to handle them properly, and the other countries don’t want to accept them. So we are not the country of destination of most of the immigrants, but we are the country that is burdened the most.
Kate: So there seems to be a lot going on in Italy, but I would say that this is hardly new, right? We had Brexit. We had Marine Le Pen in France. We had the populist elections of Orban in Hungary. And then we recently had populist elections in Slovenia. So it seems like Italy is just part of a bigger movement across all of Europe.
Luigi: There is definitely a common element in all these movements. However, what I think makes Italy somewhat unique is it has two populist movements. A more right-wing one and a more left-wing one. What makes it extraordinary is that these two movements decided to form an alliance and, at the moment, they’re running the county. While Trump won an election, first of all, the coalition that led Trump to election is not just a populist coalition, there is a populist part and there is a traditional Republican part. And there is definitely no element of left-wing populism in the Trump administration. This is the first contrast between populists and, if you want, globalists. Even in England, where you had Brexit, the Theresa May government is struggling, but you cannot say that it’s completely an anti-globalist government, while I think that the government that is forming today in Italy is of that type.
Kate: So why is this happening in Italy first?
Luigi: I think this is the result of two factors. One, the very poor economic conditions of Italy. Per capita income is lower than 20 years ago. We had two crises, one after the other, very costly. And we have a very high level of unemployment, especially in the south of Italy. The second is, Italy has 20 years of Berlusconi, more or less, on its back. And 20 years in which the televisions and the main media were somewhat influenced by one description of the world. What happened in the last government, while in principle this government was of the Democratic Party, it had the explicit or implicit support of Berlusconi. So there was kind of an alliance between the elites of left and right that naturally led to a counter-alliance of the people who felt left behind, whether they were ideologically more on the left, or ideologically more on the right.
Kate: Do you see a parallel between Berlusconi in Italy 20 years ago, versus Trump in the United States now?
Luigi: I think I see a parallel between what’s happening and the feeling that people have in the United States today, and the feelings of Italy because it is true that there is a lot of left and right ideology based on civil rights and abortion and religious beliefs, but very little difference in terms of economic discourse. Both the Bush administration and the Clinton administration are very much in the pocket of business. I think that this is exactly what Italians feel about the political environment, that whether it’s left or right, it doesn’t really make a difference because at the end of the day, they play the same strategy, the same policies with a little bit more politically correctness on top, but that’s not what changes the life of somebody who’s unemployed. Whether you are more politically correct doesn’t change his future.
Kate: But I don’t think it’s fair to say, “Oh, there are some cultural differences between the US and Italy, but at the end of the day there’s this unifying theme in economic circumstances.” Because those cultural differences, I think, are huge, whereas the unifying economic circumstances between discontent in the US and discontent in Italy are actually quite big. We didn’t realize two recessions. Our unemployment rate right now is back down to 4 percent. Growth since the financial crisis has been higher than growth in Italy. So we haven’t had it as bad as you had it in Italy.
Luigi: I think you are absolutely right, and that’s the reason why you don’t have such a strong coalition, yet. But imagine things get worse, I think that’s a distinct possibility. Second, I think there is much more variety within the United States than within Italy. There’s a lot of geographical variety in Italy, but I think in terms of growth, it’s true that on average the United States grew. It’s also true that if you look at the median income in the United States, it did not grow for 40 years. So while it’s true that the average income is growing, I’m not so sure that the median American feels that.
Kate: So then you think that this is an epidemic for all of Western societies. That there has been a slowdown in median incomes and, what? You think that this will inevitably lead to the convergence of these populist movements between the right and the left in all Western countries?
Luigi: I think it’s a distinct possibility we need to be worried about because I think that this convergence arises from the convergence of interests on the other side. The fact that, at the end of the day, leaving abortion and gay rights aside, there is not that much of a difference between Bush and Hillary Clinton. So, if they are all too similar, I think that on the other side, people are saying, “Why are we left behind?” The answer is, because of the influence that corporations tend to have, investors in general tend to have on US policies. But also, in the world policies. I think that what is stunning to me, you take the biggest leaders of left-wing movements across the world and they all end up becoming rich catering to large corporations. From Tony Blair, who goes around giving speeches for millions, to Bill Clinton himself, to Schröder, who was the leader of the SPD in Germany, to Matteo Renzi, who is still in parliament, is the former prime minister, goes around giving paid speeches all over the world.
If these are the leaders of the left, I think there is room for a new left. And I understand, this takes a realignment. This does not happen overnight. But let me tell you this funny story: In 2007, I think, Beppe Grillo, who is the founder of the Five Star Movement, wanted to run in the Democratic primary. The guy in the Democratic primary said, “We don’t let you run, go found your own party.” And he did, and now he won the election. That’s a pretty good story, but that is what it takes to realign. I think that if the Democratic Party pushes out everybody with different ideas, maybe there will be another party coming. Another party with some of the characteristics of the left, but not others. What is amazing is, in the world of social media, this is more possible than it was in the past. As the Trump election shows, having all the established media against you is almost like a badge of honor. In the past, it was a kiss of death. Today, it might be worn as a badge of honor and might bring you to the White House.
Kate: I think another key difference between the US and Italy is we don’t have Brussels. We don’t have the EU and the ECB taking the other side against us. There’s no overarching governing body that we feel like is disenfranchising us, whereas I feel like anti-eurozone or anti-Euro sentiment in Italy is what’s bringing a lot of these parties together.
Luigi: Wait a second, you have Washington. The ultimate swamp, right? All the reaction that there is in Europe against Brussels is the typical reaction that people have here against centralized government and against a government in Washington that is competently dominated by vested interests, and not responsive to the needs of the people. I don’t think that there is any difference in that dimension.
Kate: No, but that’s not a fair comparison because Washington would be like ... anger against Washington would be like anger in the Five Star Movement against the establishment within Italy. I see that comparison. But there is also this anger against a broader party of other countries in which Italy feels disenfranchised.
Luigi: I think you are right in the issue that you can play on some ethnic differences in Europe you cannot play in the United States. People in Colorado might feel that Washington is a swamp and that Washington is taking away powers and money from them, but they don’t feel that people in Washington are necessarily different from who they are. And people in Washington don’t make fun of people in Colorado.
What we have seen, especially in recent weeks, we’ve seen the German magazines and newspapers making fun of Italy using the worst stereotypes on the face of earth. Something that probably, in the United States, will disqualify you to speak in Parliament. These were not fringe magazines or newspapers, these were the mainstream media. Even some mainstream politicians. There was one politician that said, “Financial markets will eventually teach Italians how they should vote.” Which is clearly a very anti-democratic thing to say. They don’t even resign when they say these things. Sometimes they apologize, sometimes not. I think that that is really the difference. There is more ethnic fractionalization within Europe than there is within the United States.
Kate: Speaking of fractionalization, this brings me to my last point which I think distinguishes the US from Italy, which is that we have a different history. We have a unique and sad relationship with slavery that still persists and is very dominant in our culture today. We have things like Black Lives Matter and we also have a lot of movements around police brutality towards young black men. I don’t think that that is as strong of an element of the debate in Italy as it is here in the US. I also think that there are other social issues that are much more absent in Europe. For example, gun control. That’s a huge issue in the US. That’s very fundamental to the divide between the left and the right and it’s not at all present in Italy. Even though you might say that gun control is a relatively minor issue compared to economic growth, I think in the minds of most Americans, it’s something that no one is willing to compromise on, and it’s something that will always keep the parties apart.
Luigi: I think you’re right. Of course, every country is different, and the importance of the legacy of slavery in the United States is a tremendous legacy that other countries in Europe don’t have. Even if, now, they do have racial issues because the number of immigrants has increased quite a bit. The issue of gun control is a big dividing issue, so it is possible that the coalition will never form. However, I think that there is an element of truth in the tension between a group of people, let’s call them globalists, that are benefiting tremendously from globalization—and let’s be fair, we are part of that—and a group of people who are left out.
What we need to think is how to fix the problem before this coalition is forming, because I think it would be very divisive.
Kate: I think the solution to how we can prevent a left-right populist coalition in the United States has to stem from a deep and true understanding of what the cause of all this resentment is. There’s some people who claim that these populist movements are coming about as a result of the financial crisis and the inability of Western democracies to heal from the financial crisis. And then there are others who think the roots are much deeper and that they stem from the rise of globalization and technology that started taking place in the ’70s and ’80s. I’m more in the camp of people who think that populism is the result of globalization and technology, and I think that the only solution to these challenges, the challenges that they pose to Western democracies, is to increase the quality of our education so that we’re more competitive.
At the end of the day, though, maybe none of this matters. Maybe Trump is going to implode in a violent Tweetstorm and maybe the coalition between the League and the Five Star Movement in Italy is going to fall apart because ideologically, they’re actually pretty different. So who’s to say that the remedy isn’t going to be that these current governing parties in the US and Italy just fail one day?
Luigi: It’s entirely possible, but I think we should watch this experiment with interest because, if it succeeds, it might change the way we look at politics, also in the United States.