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Unequal Gains, Prolonged Pain: A Model of Protectionist Overshooting and Escalation

Emily Blanchard and Gerald Willmann

No 13160, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 with the 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: Dynamic Political Economy; education; Endogenous Tari; Human Capital; Overlapping Generations; Overshooting; populism; protectionism (search for similar items in EconPapers)
JEL-codes: D7 E6 F5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-mac
Date: 2018-09
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