POLITICS  OF    REDISTRIBUTION  AND  INEQUALITY  

GV4D4  Jonathan  Hopkin  

Department  of  Government  

LECTURE  2  

INEQUALITIES  AND  REDISTRIBUTION  IN  THE  ADVANCED  ECONOMIES  

MEASURING  EQUALITY  AND  INEQUALITY  

•  How  do  we  know  how  equally  income  is  distributed  in  a  society?  

•  Lots  of  data  available.  Growth  in  rigorous  data  collec@on,  esp.  for  advanced  countries,  over  last  30  years.  Sources:  official  tax  returns,  micro  surveys  of  household  income  and  assets  

•  Most  common  measure  of  inequality:  Gini  coefficient.  Higher  Gini  =  higher  inequality  

Gini  coefficients  of  income  equality,  OECD  countries,  mid-­‐2000s  

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Gini  coefficients  of  income  equality,  OECD  countries,  mid-­‐2000s  

 Note:  Countries  are  ranked,  from  leO  to  right,  in  increasing  order  in  the  Gini  coefficient.  The  income  concept  used  is  that  of  disposable  household  income  in  cash,  adjusted  for  household  size  with  an  elas@city  of  0.5.  Source:  OECD  income  distribu@on  ques@onnaire.      h,p://dx.doi.org/10.1787/420515624534      Published  in  OECD,  Growing  Unequal,  2008.  

•  Gini  measures  overall  inequality  –  doesn’t  tell  us  everything  about  the  distribu@on  

•  Could  be  driven  by  differences  between  rich  and  middle  or  between  poor  and  middle  (though  usually  both)  

•  Other  measures  –  compare  ra@os  of  different  parts  of  income  distribu@on:  

•  Divide  distribu@on  into  por@ons  quin@les  (fiOhs),  deciles  (tenths),  percen@les  (hundredths)  etc  

•  Compare  averages  of  por@ons,  eg  90/10  ra@o,  90/50  ra@o  

Income  levels  by  distribu@on  deciles,  OECD  mid-­‐2000  (US$,  PPP)  

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Income  levels  by  distribu@on  deciles,  OECD  mid-­‐2000  (US$,  PPP)  

•  Note:  The  data  refer  to  equivalised  household  disposable  income  of  people  at  different  points  of  the  distribu@on.  For  each  country,  the  bar  starts  at  the  average  income  of  the  first  decile  and  ends  at  the  average  income  of  the  10th  decile.  The  figure  also  shows  the  mean  income  over  the  en@re  popula@on  (shown  as  a  diamond).  Income  data  for  each  country  are  adjusted  for  infla@on  (when  they  refer  to  a  year  different  from  2005)  and  then  converted  into  US  dollars  based  on  PPP  rates  for  actual  consump@on  in  2005.  This  exchange  rate  expresses  the  costs  of  a  standard  basket  of  consumer  goods  and  services  purchased  on  the  market  or  provided  for  free  (or  at  subsidised  rates)  by  the  public  sector  in  different  countries.  Countries  are  ranked,  from  leO  to  right,  in  increasing  order  of  mean  equivalised  income.      Source:  OECD  income  distribu@on  ques@onnaire  and  other  OECD  databases.  Published  in  OECD,  Growing  Unequal,  2008    h,p://dx.doi.org/10.1787/420721018310    

•  Other  issues  •  Pre-­‐tax  and  post-­‐tax  income  inequality:  •  Pre-­‐tax/pre-­‐fisc/’market’  income  =  measures  income  before  taxes  paid  and  government  payments  received  

•  Post-­‐tax/post-­‐fisc/disposable  inequality  –  measure  income  aOer  taxes  deducted  and  govt  payments  

•  Unit  of  analysis  –  individuals  or  households?  •  Usually  households,  ‘equivalized’  –  ie  recalculate  as  if  every  household  a  ‘typical’  one  to  allow  comparison  

•  But  household  income  inequality  s@ll  affected  by  structure  of  households,  which  changes  over  @me  (eg  more  single  people,  more  dual  earners  etc)  

•  Why  does  inequality  vary?  

•  Why  should  we  care?  

•  Posi@ve  and  norma@ve  ques@ons.  Both  worth  answering  

•  Even  if  we  take  a  relaxed  view  of  inequality,  s@ll  interes@ng  to  ask  what  this  tells  us  about  how  capitalism  is  working,  and  whether  it  is  poli@cally  sustainable  

•  Many  influen@al  explana@ons  available  

•  Economists  tend  to  focus  on  globaliza@on  (capital/trade),  technological  change,  market  structures  

•  Poli@cal  scien@sts  and  sociologists  more  interested  in  how  poli@cal  and  social  ins@tu@ons  regulate  markets  and  redistribute  income  

•  The  ‘poli@cs’  of  inequality  

•  What  do  we  mean  by  ‘poli@cs’  

•  Poli@cal  par@es  and  poli@cal  ideas  •  Pagerns  of  worker  and  employer  representa@on/organiza@on  

•  Welfare  ins@tu@ons  and  tradi@ons  •  Redistribu@ve  fiscal  policy  •  Redistribu@ve  regula@on  •  Macroeconomic  policy  ins@tu@ons  

WHY  DO  REDISTRIBUTION  AND  EQUALITY  VARY  ACROSS  NATIONS?    

Classic  explana@ons  for  rise  of  redistribu@on  

•  Democracy  –  early/late  democra@zers  •  Strength  of  organized  labour  (trade  unions,  par@es)  •  Strength  of  (organized)  business  •  Economic  openness  (country  size)  •  War  and  its  variable  effects  

WHY  DO  REDISTRIBUTION  AND  EQUALITY  VARY  ACROSS  NATIONS?    

Varie@es  of  democracy:  

•  Cons@tu@ons  •  Electoral  systems  •  Cleavages:  religion  •  Cleavages:  ethnic  frac@onaliza@on  •  Idea@onal  varia@on  –  different  ideologies  stronger  in  different  countries  (Weber)  

DEMOCRACY  AND  REDISTRIBUTION  

•    Why  does  democracy  lead  to  redistribu@on?  

Meltzer/Richard  model:  

•  Government  taxes  to  redistribute  •  The  median  voter  has  below  average  income  

•  Builds  on  and  refines  famous  ‘Downsian’  model  of  electoral  compe@@on.  

•  Downs  posits  a  two-­‐party  system  (already  a  contrivance,  outside  the  Anglo-­‐American  context)  

•  If  electorate  is  distributed  along  a  single  issue  dimension,  and  is  normally  distributed,  par@es  will  converge  in  a  bagle  for  the  ‘median  voter’.  

•  A  normal  distribu@on,  with  the  x  axis  implying  a  leO-­‐right  scale,  would  look  like  this…    

Le<  -­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐Centre-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐Right  

Downsian  party  compe@@on  

•  Most  voters  are  located  in  the  centre  of  the  distribu@on,  very  few  voters  are  located  at  the  ‘extremes’  of  leO  and  right.  

•  Par@es  adopt  moderate  posi@ons  to  agract  the  median  voter,  which  will  deliver  a  majority.  

•  Poli@cs  inherently  balanced,  and  elec@ons  produce  representa@ve  government  (most  voters  are  located  close  to  the  median  voter).  

•  No  systema@c  bias  in  this  model.  

The  problem  is  that  income  isn’t  normally  distributed…  

•  What  happens?  

•  The  median  voter  has  an  incen@ve  to  vote  for  redistribu@on,  which  will  make  her  beger  off.  

•  Democracy  will  produce  governments  focused  on  redistribu@ng  from  the  more  to  the  less  produc@ve.  

•  Constant  growth  of  the  state.  

•  Meltzer,  Allan  H.,  and  Scog  F.  Richard.  "Why  Government  Grows  (and  Grows)  in  a  Democracy."    

•  Government  growth  can  only  be  coherently  explained  in  terms  of  the  ‘difference  between  the  distribu@on  of  votes  and  the  distribu@on  of  income’.  

Market incomes distributed much more unequally than net incomes Inequality (Gini coefficient) of market income and disposable (net) income

in the OECD area, working-age persons, late 2000s

•  Does  this  always  happen?  Some  governments  redistribute  more  than  others;  redistribu@on  changes  over  @me  (recently  in  decline)  

•  In  spite  of  the  numerical  superiority  of  the  poor  majority,  capitalism  remains  intact,  and  huge  dispari@es  of  income  and  –  especially  –  wealth,  remain.  

•  Przeworski  and  Sprague,  Paper  Stones.  A  History  of  Electoral  Socialism  

•  In  fact,  redistribu@on  varies  across  democracies.  

•  What  kind  of  ins@tu@onal  dynamics  do  Meltzer/Richard  ignore?  

•  Need  to  consider  ins@tu@ons  and  collec@ve  behaviour.  

ELECTORAL  SYSTEMS  AND  REDISTRIBUTION  

•  In  a  democracy,  equal  votes  for  all  ci@zens.  But,  electoral  rules  determine  how  votes  translate  into  power  

•  Electoral  system  another  key  variable:  

•  ‘Majoritarian'  or  'plurality'  electoral  systems  -­‐  like  First  Past  the  Post  (FPTP)  in  Britain  

•  PR  =  ‘propor@onal  representa@on’  –  systems  which  allocate  representa@on  in  propor@on  to  party  vote  share.  

•  In  majoritarian  systems,  ‘winner  takes  all’  logic  –  no  incen@ve  to  share  power  with  weaker  groups.  

•  In  PR,  more  groups  have  a  say,  encourages  more  nego@a@on  (veto  power  for  many  groups)  

•  Many  scholars  have  argued  for  a  strong  effect  of  electoral  system  on  redistribu@on  

•  In  PR,  need  to  integrate  wider  variety  of  groups  into  decision-­‐making  encourages  sharing  of  proceeds  of  economic  ac@vity  

•  FPTP  (majoritarian)  rules  tend  to  over-­‐represent  some  par@es  and  under-­‐represent  others.  

•  In  PR,  small  par@es  able  to  win  seats  in  parliament,  large  par@es  denied  inflated  majori@es:  forced  to  seek  alliances  in  order  to  form  government  coali@ons.    

•  This  means  all  groups,  not  just  the  poor,  able  to  demand  favourable  policies.  

•  In  FPTP,  par@es  can  govern  with  less  than  majority  vote  share.  

•  PR  -­‐  a  more  inclusive  system  –  benefits  most  vulnerable  social  groups,  

•   They  are  least  able  to  defend  their  interests  in  more  compe@@ve  ins@tu@onal  environments.  

•  More  representa@on  more  ‘democra@c’?  Allows  all  groups  to  demand  their  share.  

•  If  people  more  represented,  democracy  effects  iden@fied  by  Meltzer/Richard  more  powerful?  

•  Ul@mately  depends  on  ability  of  median  voter  to  mobilize  majority  support  for  redistribu@on.  

•  Empirically,  clear  correla@on:  Welfare  states  stronger  in  PR  democracies  (Stephens,  Swank)  

•  In  UK,  US,  Canada,  NZ  (-­‐>  1990s)  and  Australia,  majoritarian  electoral  rules  associated  with  hardline  neoliberalism  (eg  Thatcher,  Reagan).  

•  In  con@nental  Europe,  home  of  the  'social  market  economy',  PR  is  the  norm.    

•  But,  some  excep@ons  -­‐  Ireland  has  PR  and  ligle  redistribu@on,  France  has  a  two-­‐round  majoritarian  system  and  extensive  welfare  

EXPLAINING  REDISTRIBUTION?  

•  Does  the  electoral  system  really  explain  these  effects?  

•  Lots  of  other  things  going  on:  mul@collinearity  of  relevant  variables  makes  understanding  causality  difficult.  

•  Endogeneity:  electoral  system  may  be  a  result  of  redistribu@on  

•  Spurious  correla@on:  electoral  system  and  redistribu@on  may  be  both  caused  by  a  third  variables.  

•  Not  just  rules,  but  social,  cultural,  historical  factors.  

•  In  any  case,  empirically  and  historically  electoral  systems  are  part  of  a  broader  collec@on  of  ins@tu@ons  pushing  poli@cal  systems  in  a  par@cular  direc@on.  

•  Majoritarian  ins@tu@ons  concentrate  power  around  the  representa@ves  of  the  most  powerful  groups,  while  consensus  ins@tu@ons  disperse  it,  allowing  minori@es  the  chance  to  influence,  or  even  veto,  policy  decisions.  

•  USA  a  test  case:  

•  Consensus  democracy  in  some  respects:  federalism,  bicameralism,  cons@tu@onalism,  separa@on  of  powers  

•  But,  majoritarian  in  others:  FPTP  electoral  system.  

•  Which  makes  the  difference?  

•  Redistribu@ve  poli@cs  not  only  about  poor  seeking  redistribu@on  from  rich  –  also  movement  in  opposite  direc@on  

•  Lobbying,  corrup@on,  campaign  finance  

•  Market  regula@on  can  redistribute  from  consumers  to  producers  –  protec@onism  

•  Inequality  of  access  to  electoral  resources  

•  How  capable  are  voters  of  assessing  the  effects  of  policy?  

•  Powerful  corporate  interests  can  buy  propaganda;  demobilized  voters  are  ‘cogni@ve  misers’  –  no  incen@ve  to  gather  informa@on  

•  Well  financed  campaigns  can  overturn  redistribu@ve  dynamics  of  elec@ons  

•  Voters’  weak  understanding  of  policy  (Bartels)  

Turkeys  vo@ng  for  Christmas?  

CONCLUSIONS  

•  So,  basic  models  of  electoral  models  predict  amount  of  redistribu@on  and  inequality  

•  Refinements  of  models  needed  to  capture  real  varia@ons  between  countries  

•  Electoral  systems  and  party  systems  ‘endogenous’  to  other  variables  that  may  be  causally  ‘prior’  

•  Other  ins@tu@ons  -­‐  history,  culture,  religion?  

Core  ques@ons:    Why  study  inequality?  

 How  should  we  measure  inequality?  

 Why  do  democracies  redistribute  more?  

 Why  do  some  democracies  redistribute  more  than  others?    What  does  rising  inequality  tell  us  about  the  way  democracy  works?