Working Paper: CEPR ID: DP13160
Authors: Emily Blanchard; Gerald Willmann
Abstract: We develop a model of democratic political responses to macroeconomic shocks in the short and long run. We show that when economic adjustment is slower than potential political change, exogenous changes in the global marketplace can trigger populist surges in favor of distortionary economic policies. Applied to trade policy, our model demonstrates that an exogenous terms-of-trade improvement or skill-biased technological change will lead to a spike in protectionism that blunts the younger generation's incentive to acquire education. In the long run, the initial surge in protectionism will gradually diminish if and only if education enables less-skilled workers to catch up withthe overall economy. The more unequal the initial distribution of human capital, the greater and longer-lasting the protectionist backlash will be: unequal gains, prolonged pain. Evidence on key data markers suggested by the model exhibits patterns consistent with recent populist support for Brexit and Trump.
Keywords: populism; protectionism; overshooting; dynamic political economy; human capital; education; overlapping generations; endogenous tariffs
JEL Codes: F5; D7; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic shocks (F69) | Protectionism (F52) |
| Protectionism (F52) | Investment in education (I26) |
| Economic shocks (F69) | Political outcomes (D72) |
| Political outcomes (D72) | Trade policy (F13) |
| Initial inequality (C29) | Protectionism (F52) |
| Educational advancements (I29) | Diminished protectionism (F13) |
| Protectionism (F52) | Long-term efficiency costs (D61) |
| Median voter’s preferences (D79) | Trade policy (F13) |