Journal Article

Unequal gains, prolonged pain: A model of protectionist overshooting and escalation

Authors

  • Emily Blanchard
  • Gerald Willmann
Publication Date

We develop a model of democratic responses to macroeconomic shocks, and show that when economic adjustment is slower than potential political change, economic shocks can trigger populist surges. Applied to trade policy, we show that unexpected changes in world prices or skill biased technological change can induce a surge in economic nationalism and trade protection. Over time, the initial protectionist surge will gradually diminish if and only if educational gains enable less-skilled workers to catch up with the overall economy. The more unequal the initial distribution of the returns to human capital, the greater and longer-lasting the protectionist backlash will be: unequal gains, prolonged pain. Key data markers suggested by the model exhibit patterns consistent with recent surges in protectionism in the US and UK.

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Info

JEL Classification
F5, D7, E6
DOI
10.1016/j.jinteco.2021.103559

Key Words

  • Populism
  • Protectionism
  • Overshooting
  • Dynamic political economy
  • Human capital
  • Education
  • Overlapping generations
  • Endogenous tariffs

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