"Why hasn’t democracy saved us from inequality?"

Why hasn’t democracy saved us from inequality?

By Kenneth Scheve and David Stasavage at the Washington Post
http://www.washingtonpost.com/blogs/monkey-cage/wp/2014/04/07/why-hasnt-democracy-saved-us-from-inequality/

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When was the last time a 700-page tome of economic history outranked the ”10 Day Detox Diet” on the Amazon top sales list? After receiving widespread attention in his native France, Thomas Piketty’s ”Capital in the Twenty-First Century” has received even greater attention on this side of the Atlantic, and deservedly so. It offers a stark and depressing picture for those who believe that some combination of democratic politics and economic growth can protect us from rampant inequality. If Piketty is right, then we are instead faced with an infernal logic of r>g, that is, in most cases at most times the rate of return on capital (“r”) exceeds the rate of economic growth (“g”), and this dictates increasing inequality of wealth. Since wealth inequalities are transmitted over time, the conclusions are also negative for anyone interested in equal opportunity.

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The first possibility recently considered by Bonica, McCarty, Poole, and Rosenthal is that the rich can buy the policies they want even in a democracy. This is a story that is told most often for the United States, where the role of private funds in public campaigns is so important. Precisely because it is cross-national, Piketty’s empirical evidence raises questions about this explanation. The logic of r>g, combined with low taxes on capital, operates in many countries where private money plays a limited official role in politics. So, in order to be convincing one would have to formulate an argument about the informal power of the rich in any democracy, and not just in one like the United States.

The second possibility is that democracy has done little to save us from r>g because people do not fully understand how inequality is generated. They may also remain intentionally overly optimistic about the chances of getting ahead. “Belief in a Just World” arguments of the sort considered by Benabou and Tirole are often used to explain why the average American is more likely than the average European to say that effort, as opposed to luck, is the key determinant of economic success, even if intergenerational income mobility is not higher in the United States than in Europe. The evidence also poses problems for this second explanation. The logic of r>g, combined with low taxes on capital, is not a specifically American phenomenon.

The third possibility is that trying to prevent the r>g trap is self-defeating. Taxes on wealth and income may limit growth. Also, globalization and capital mobility may make it impossible to heavily tax wealth and high incomes. A problem with this explanation is that even when many democracies did tax the rich heavily during the middle decades of the 20th century, there were concerns expressed about taxation harming growth, but governments such as the United States and United Kingdom did it anyway. Also, contemporary economic research seems to provide little evidence to validate the belief that taxes would hurt growth to the extent so often feared. Finally, if globalization seems a plausible explanation for low taxes on capital, it is less compelling for the case of high-income earners. Especially in large countries, such as the United States, these individuals tend not to be as mobile, and, as Piketty argues, policy coordination between countries could address this problem.

The fourth possibility is that democracies sometimes tax the rich heavily, but whether this happens depends on changing notions of fairness in taxation. Over the last two centuries, as we have shown, the strongest political support for heavy taxation of the rich has been during mass mobilization for war. If the wealthy appeared to have a privileged position by staying at home and potentially earning war profits, then basic fairness dictated that they should be taxed — and taxed heavily. During the First World War this was often referred to as the “conscription of wealth.” If labor could be conscripted, then why should capital not suffer the same fate? Today, Piketty is in effect calling for a new conscription of wealth. The question for him and those who support his analysis is how one might support this same conclusion on the same grounds of basic fairness without war or certainly without wars fought with mass mobilized armies. The future of progressive taxation will depend on showing not just that it is necessary to curb inequality, but also that without it the rich would not be doing their fair share.



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