How democracies are gamed for power and profit: an addendum to Piketty

June 3

Joshua Tucker: As part of our continuing collaboration with political science journals, the following is a guest post from political scientist Mike Albertus of the University of Chicago and Victor Menaldo of the University of Washington based on their recent publication at the British Journal of Political Science, “Gaming Democracy: Elite Dominance during Transition and the Prospects for Redistribution.” The article will be made available for free (ungated) for the next 12 months here.

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Though the rich and the poor don’t seem to agree on much these days, there is one fact that everyone acknowledges: Inequality seems to be getting worse. Most of the economic gains in recent decades have been concentrated among the top 10 percent of the income distribution — or, more precisely, among the top 1, if not 0.01, percent. Many of us are familiar with the reasons behind this trend: increasing returns to technology, education, and capital arbitrage, alongside the decline of labor unions and the stagnation of the minimum wage in real terms. Thomas Piketty recently synthesized these views while adding a twist: Capitalism is basically hardwired to exacerbate inequality (and despite the questions and critiques that have emerged recently about the quality and accuracy of his data, his basic conclusions seem to hold).

In a recent article in the British Journal of Political Science (BJPS), we argue that these explanations are, to a degree, missing the forest for the trees. We find that some countries adopt policies that systematically tend to favor the majority of the population and thus reduce inequality, whereas others instead create policies that favor elites and the wealthy more broadly. The chief determinant of this broad difference – and therefore the presence of factors such as labor unions and the ultimate returns to capital – is political institutions.

Democracy can, under the right conditions, be the great equalizer. We find that democratization induces greater redistribution when transition occurs in the wake of revolution or, alternatively, when elites are unable to impose a constitution that persists after transition. In short, this occurs when elites are weak on the eve of democratization. If, by contrast, economic elites are strong on the eve of democratization, this result reverses. Less redistributive policies that allow inequality to grow ensue. We measure redistribution in three ways: as progressive social spending (on education, health, and housing); spending on welfare and social insurance (on unemployment and disability insurance, health insurance and pensions, and welfare transfers); and taxes on income, profits, and capital gains, which proxies for the progressivity of the tax structure because the tax rates on these tax bases either increase with income or only apply to citizens at the upper end of the income distribution.

Thomas Piketty’s “Capital in the Twenty-First Century” offers a different take. Because the rate of return to capital tends to exceed the rate of growth in an economy, and thus the returns to labor income (itself tied to productivity), inequality should be high everywhere where capitalism is practiced. One exception is the period from WWI until shortly after WWII, when capital was destroyed in droves by the great wars, which were financed by high tax rates on income and capital, and inflation vitiated the real value of debt.

Despite the media frenzy around this book, there might not be a Piketty law of capitalist motion after all. There are several reasons that one can garner from our article; all derive from his focus on highly developed economies, which may not be representative of most cases. The political and economic systems of countries such as France and the United States reflect exceptional circumstances such as early industrialization, which conspired to place them far ahead of the rest of the world on the development curve.

This is relevant because many countries may not only have differing rates of return on capital and labor income, but may also use systematically different policy instruments to redistribute. It is perfectly conceivable that a country can tighten the screws on the capital account, limiting investors’ exit option, and allowing it to tax capital. Well-known examples include Venezuela and Argentina. Also, in more agricultural economies, land can be expropriated from large landowners and redistributed to the landless. For example, Peru systematically routed large landowners to drive income inequality down precipitously during the 1970s. Finally, governments can turn to clever policies such as conditional cash transfers that reward poor families for educating their children. Mexico and Brazil have been successful at reducing inequality through this vehicle. The same is true of Indonesia.

The upshot is that capitalism need not churn inexorably toward spiraling inequality. Indeed, we find that in democracies where elites have little say in writing the social contract, redistribution is more likely. Piketty is therefore correct about broad tendencies toward inequality, but for a different reason: most countries inherit elite biases from former periods of autocratic rule that hobble their capacity to counteract increasing inequality. In our BJPS article we find that, more often than not, constitutions under democracy that are inherited from dictatorship shape the rules of the political game in such a way that rightwing parties are likely to be more represented, the political system is more prone to gridlock, the military is more powerful, and local governments lack autonomy.

Indeed, since 1800, only 29 percent of new democracies began with a constitution that they created themselves or inherited from a past episode of democratic rule in their country. Prominent examples after World War II include Greece, Argentina, the Philippines, and Mongolia. A total of 71 percent of new democracies inherited a constitution that was designed under dictatorship and where outgoing elites dominated the transition process. Chile, Turkey, South Africa, Indonesia, and Thailand illustrate this more common scenario.

Data and Figure: Mike Albertus and Victor Menaldo/The Monkey Cage
Data and Figure: Mike Albertus and Victor Menaldo/The Monkey Cage
Data and Table: Mike Albertus and Victor Menaldo/The Monkey Cage
Data and Table: Mike Albertus and Victor Menaldo/The Monkey Cage

Many democracies, then, are flawed in ways that fundamentally prevent them from addressing inequalities. Elites are endowed with huge advantages that they can marshal under elected rule to shape the rules of the game and public policy. Before democratization, they accumulate wealth, connections, and specialized knowledge about the economy and political system. While these advantages are often codified in a constitution imposed by outgoing elites on a new democracy before exiting, they are enforced by the lingering influence of elites over countries’ political, economic, and cultural institutions.

These forms of elite influence can choke off egalitarian policies even in well-established democracies such as the United States and Great Britain that democratized gradually and were never quite able to tame the disproportionate power of elites. Recent work by Gilens and Page makes this point abundantly clear – even going so far as suggesting that the United States looks more like an oligarchy in democratic clothing.

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