83: Tariffs for Sale and Identity Politics

Episode Summary

Executive Summary: The episode examines why tariffs persist despite economists’ preference for free trade, framing trade policy as the result of political demand from voters and industries and supply from politicians seeking votes and money. Grossman explains median-voter and lobbying models, the empirics of “protection for sale,” and a newer identity-based explanation for the recent backlash against trade liberalization.

Main Topics: Why political economy is needed for trade policy (Priority: 5/5): The discussion starts from the gap between welfare-maximizing trade theory and the tariffs actually observed, motivating models that include voters, firms, lobbyists, and politicians. Demand for protectionism (Priority: 5/5): Voters support tariffs when trade helps their income or job prospects and doesn’t raise consumer prices too much; trade preferences vary by industry and skill level. Median voter theory (Priority: 4/5): A first-wave political economy model predicts policy will reflect the preferences of the median voter rather than the average voter, because income, skills, and capital are unevenly distributed. Lobbying and 'Protection for Sale' (Priority: 5/5): Grossman describes models in which industries buy influence through campaign contributions, producing tariff patterns tied to industry characteristics and the tradeoff between political support and voter harm. Export interests and trade liberalization (Priority: 4/5): Trade liberalization is partly explained by export-oriented industries mobilizing to obtain foreign market access through domestic political bargaining and trade negotiations. Identity politics and the backlash against trade (Priority: 5/5): Grossman’s newer work suggests changing social identities, widening inequality, and racial/ethnic cleavages may help explain the recent anti-trade reversal better than standard economic models. Limits of standard economics (Priority: 3/5): The hosts and Grossman debate whether economics should incorporate sociology and social psychology; Grossman argues that ignoring identity leaves out a major part of the story.

Key Arguments: Political economy is needed because real-world trade policy diverges from textbook welfare-optimal policy. Voters are motivated by personal income and job effects, not the national average welfare outcome. Trade preferences differ by industry and occupation, and by skill level; lower-skilled workers tend to favor protection more than higher-skilled workers. The median voter in most countries is not the average voter because ownership of skills and capital is skewed toward the top. Simple median-voter models can explain why protection exists, but they are too crude to predict which industries are protected. Political economy expanded from electoral competition to include campaign contributions and the role of organized interests. In the 'Protection for Sale' framework, tariffs reflect a bargain: industries pay for influence, and politicians choose policies that maximize political returns while minimizing voter backlash. Empirical studies generally find the predicted cross-industry pattern of protection, though the implied importance of campaign contributions may be smaller than the original theory suggested. Trade liberalization was historically aided by export interests that sought foreign market access and used domestic politics and trade agreements to push for opening. The recent backlash against trade may be better explained by identity shifts—especially racial and ethnic identity—than by standard income-based models. As inequality widens and social comparison intensifies, people may identify less with elites and more with in-groups defined by race, ethnicity, or region, changing policy preferences quickly.

Data Points: Number of key dimensions in trade policy: many / multidimensional - Used to argue against simple one-dimensional median voter models because tariffs vary by sector (steel, textiles, etc.). Time horizon of research: couple of decades old - Refers to the classic lobbying and median-voter literature being discussed. Empirical studies: literally dozens - Grossman says many studies have tested the 'Protection for Sale' predictions in the U.S. and elsewhere. Trade policy shifts: very sudden and very rapid - Describes the recent reversal/backlash in trade politics that standard models struggle to explain. Economic comparison: rich country like the U.S. - Used to explain why skilled workers in the U.S. are more supportive of open trade. Political geography: Rust Belt - Referenced as import-competing industries whose workers may be re-sorting their identities in response to economic and social change.

Pivotal Quotes: "Why do we see the policies we actually see out there." — Jean Grossman: Explaining why political economy is necessary beyond textbook welfare analysis of trade policy. "Scratch my back, and I'll scratch your back." — Jean Grossman: Summarizing the core logic of lobbying and influence politics in the 'Protection for Sale' model. "As soon as we reached a stage where we had this great recession where people really focused on the fact that they're not getting better off, maybe they're getting worse off, suddenly we start to think about who to blame." — Jean Grossman: Describing how inequality and economic distress can activate identity-based trade preferences and political backlash.

Implications: Trade policy is shaped by more than efficiency: voter self-interest, organized lobbying, and identity politics all matter. Expect continued pressure for protection in sectors with concentrated losses, and more research blending economics with sociology and psychology.