Inequality Aversion, Populism, and the Backlash against Globalization (joint with Lubos Pastor)

Abstract:

Our theory connects the recent rise of populism in western democracies to the growing income inequality.  In our heterogeneous-agent complete-markets model, voters dislike within-country inequality, especially the high consumption of the “elites”.  Economic growth exacerbates inequality due to heterogeneity in risk aversion.  In response to the rising inequality, rich-country voters optimally elect a populist promising to end globalization.  The backlash against globalization is an inevitable by-product of growth; it cannot be precluded by redistribution.  Countries with more inequality, higher financial development, and current account deficits are more vulnerable to populism, both in the model and in the data.   Evidence on who voted for Brexit and Trump in 2016 also provides some support for the model.