Long-run relationships, economic shocks and political disagreement - The political economy of populism and polarization

Why do agents react to economic shocks privileging their identities and distrust of elites over their economic interests? This dissertation argues that this paradox can be explained by the logic of democratic representation. In a democracy, citizens delegate their economic interests to elites and institutions and forge a \emph{long-run relationship} with them. It shows that three factors -trust, identity and economic aspirations- regulate this relationship, and the fact that conflicts are processed within it can explain two puzzles: a) why economic disagreements arise while economic conditions remain unchanged and b) why economic shocks result in polarization or populism.

Firstly, it looks at the link between living standards and anti-establishment politics after financial crises. It pools 250 opinion and spending surveys and shows that unfulfilled economic aspirations undermine the trust in elites and institutions. Citizens protect their economic interests making their trust contingent on their economic aspirations. Financial crises undermine their well-being, and the ensuing decline in trust can interact with pre-existing political identities, and polarize politics along lines apparently unrelated to economic deprivations.

Secondly, it examines the link between affective polarization and economic expectations looking at 27 European countries since 1993. It identifies partisan bias looking at how citizens react to cabinet shifts. It shows that citizens with identical fundamentals but different identities update their subjective expectations in opposite directions. It argues that partisan bias is driven by affective polarization: the polarization of elites increases the hostility towards opponents, and citizens express it through their subjective expectations. However, bias does not push citizens to act against their economic self-interest. I reject alternative explanations about the source of bias including (a) lack of information (b) disagreements over the expected effects of government policy or its competence.

These findings suggest that democracy can transform the experience of citizens of economic antagonisms into conflicts with elites or about identity. However, trust and identities do not diminish the impact of economic factors, it only makes it more complex.