Vienna Federal Court Building, completed in 1839 (architect: Johann Fischer)
Levying hefty taxes on the top one per cent of a society ought to be the most natural thing for politicians seeking to please the masses. Yet most of today’s populist governments are more concerned with immigration and nationalist pride than with the top rate of income tax. This is a sign of the corrupting influence of inequality on democracy. It might be supposed that the more democratic a country’s institutions, the less inequality it should support. Rising inequality means that resources are concentrated in the hands of few and these should be ever more easily outvoted by the majority who are left with a shrinking share of national income. But studies of the relation between democracy and levels of inequality point in conflicting directions. They conclude that democracies raise more taxes than non-democracies, but this does not translate into lower levels of inequality necessarily. One possible reason for this disconnect is that people do not care much about inequality and therefore do not expect their politicians to do something about it. Yet when asked in surveys two thirds of Europeans express concern about current levels of inequality. Nevertheless, it is a fact that political agendas in Europe have become less focused on redistribution even as inequality has risen. Though both inequality and public concern about it are increasing, politicians seem less interested in tackling the problem. On the contrary, instead of increasing pressure on politicians to remedy unfair income distributions, rising inequality boosts the power of the rich, thus enabling them to counter the popular will. Research in political science shows that today’s rich wield outsize influence in Western democracies. The relation between concentrated wealth and political power of the rich is scarcely limited to political campaign spending or to the USA. The rich have many means to shape public opinion: financing nominally apolitical think-tanks or buying media outlets, for example. Although their power may sometimes be used to influence the result of a particular vote, it is often deployed more subtly to shape public narratives about which problems deserve attention. Matters related to “social order”, such as crime and immigration, are found in bills brought before European parliaments and issues such as economic justice are crowded out. This can be attributed to the “negative agenda power” of the rich. As their wealth increases, they have a greater ability to press politicians to emphasise some topics and ignore others. The evidence that concentrated wealth contributes to concentrated power is troubling. It suggests that reducing inequality becomes less likely even as it becomes more urgent. It implies that a vicious cycle of rising inequality is developing together with a loss of democratic accountability. From a historical perspective inequality inevitably rises until checked by disasters like wars or revolutions. Let’s hope that Europe’s one per cent is not all-powerful and uniform in its determination to keep distributional policies off the agenda. In functioning Western democracies political leaders might well find that redistribution can be a winner at the ballot box.
Democracy and global capitalism is the contemporary form of an economic system, taken on by China as well. It is a western-based system which became a global one. Democracy is based on national elections while capitalism insists on free global movement of capital, labour, goods and services. This produces the current clashes. You cannot have all three systems at the same time: national sovereignty, liberal democracy and globalised capitalism. A symbiosis of some form of market economy and Western European democracy was a successful model in Europe in the past. As long as the winnings of the system are shared out more or less evenly, democracy becomes easy to handle. In this way the two systems go together, which is evidenced in Western Europe in the 2nd half of the 20th century. For much of the 19th and 20th centuries the rise in average incomes per head in today’s high-income countries outpaced that in the rest of the world. One’s position in the global distribution of income came increasingly to depend not on what one did but on where one did it. Branko Milanovic calls this advantage of being British rather than, say, Kenyan “citizenship rent”. In recent times, this rent has fallen, but only a little. Today, one’s living standard depends a little more on what one does and a little less on where one does it. Today globalised capitalism erodes citizenship rent. The citizens get angry at their elites for promoting global capitalism and they get angry at the rising corruption of their elites. Now there are clearly situations where capitalism and democracy don’t go together any more. A dramatic rise in inequality and democracy that turns into plutocracy can be seen. One always has to remember as a warning signal that today’s full suffrage, equal voting rights states are only 100 years old.
The stresses between national status and a globalised world are natural and are visible everywhere. Nine areas of stresses can be identified. First of all, the globalisation of capitalism: On the move from national capitalism to globalisation a loss of sovereignty is unavoidable. The threat of exit of capital, companies and the rich endangers all nation states. As this exit becomes more credible the states don’t tax capital, companies and the rich any more to prevent this exodus. Therefore the pressure and tax burden is on the people who don’t have the exit option. At the same time supranational organisations that don’t belong to any state are growing fast.
Next, inequality between economies is increasing which leads to rising national inequality. We can see an emergence of massive national inequality in recent years in the West, e.g. the USA, together with a corruption of the political process via funding. Highly unequal societies tend to become undemocratic because their democratic system becomes extremely fragile. Furthermore the impact of immigration constitutes another stress in today’s economies. In the 1st age of globalisation at the end of the 19th and the beginning of the20th century there was a very rapid growth of world trade and mass migration. This created the same stresses as today and the backlash came in the first half of the 20th century with World War I, the Great Depression and World War II. Today staggering global inequalities push mass migration and immigration reinforces globalisation. In the context of democracy the question has to be raised: who are the citizens? In the 20th century the US closed down its borders in reaction to mass migration. Today it can be predicted that mass migration will continue to rise dramatically. So how will nation states and Western democracies react?
Another stress is financial crises which will not cease. The huge political costs linked to tackling these continuous financial crises due to the fact how the losses are shared causes mistrust of the populace in elites. Those that share the losses did not share the gains and that’s, among other facts, why populism is on the rise as it was in 1929. Economic stagnation in the wake of financial crises is hampering economic development in Europe. The slow-down in productivity and growth, a chronic weakness in investment, the tendency to fall back into recession and negative interest rates are signs of this tendency. After eight years of zero interest rates in the US, they were raised to 0.25 in 2016 and were then seen as much too high, a sign of permanent chronic stagnation. What’s more the aging process in Western societies is alarming. The great feature of the 2nd half of the 20th century in the West was the age of the welfare state and general suffrage. This led to a massive shift in transfer to health, education and pension payments in the West. Many politicians and economist believe that his system can’t be further expanded in the 21st century. There are political limits to raising taxes further and the fiscal pressure has become a permanent feature. Slow growth rates, high dependency ratios and the old outweighing the young are warning signals that “the past will swallow up the future”.
The concentration of media ownership in the West causes another troubling stress for democracy. Western democracies are gradually turning into plutocracies, which signify the rule or power of wealth or the wealthy. With the new technologies the costless spread of “non-information” is on the rise. This phenomenon is also called the “post-factual society”, where elections are decided by fake news for example. Another stress is the rise of “authoritarian capitalism” as in China. The successful market economies in the 20th century were all democracies, but the economic rise of China challenged this theory because China has reverted to a capitalist economic system, yet is definitely authoritarian. Finally there is an urgent need to provide public goods globally. This distribution of public goods, such as necessary resources, has to be democratically legitimate and no state can deliver this on its own. We need efficient supranational regimes to achieve that but this would further weaken sovereignty and a weakened national sovereignty takes away power from democratically elected institutions. The financialisation of the economies has gone too far and it is obvious that global regulation is necessary but won’t be realised in the near future due to strong resistance of powerful lobby groups. Rising inequalities are directly linked to this excessive financialisation. In future a more equal distribution of income has to be achieved and the erosion of the legitimate taxation has to be battled on a global level by achieving a sustained taxation of companies, capital and the wealthy world-wide.
The ballot or the wallet. As inequality grows, so does the political influence of the rich, The Economist, July 21st 2018
Piketty, Thomas, Capital in the 21st Century, 2014
Zucman, Gabriel & Saez, Emmanuel, Wealth Inequality in the US since 1913. Evidence from Capitalised Income Tax Date, 2014
Milanovic, Branko , Global Inequality, 2016
Wolf, Martin, The Shifts and the Shocks: What We’ve Learned – And Have Still to Learn – from the Financial Crisis, 2016