Exam Paper Revision

The exam is in three parts. Pay very close attention to specific wording of the questions.

Part 1 is titled “key concepts”. This section of the exam should take no more than 15/20 mins. Answer all questions.

  • You will be asked to define 12 core concepts related to the political economy of inequality.

Part 2 is titled “short responses”. It has three questions. It should take no more than 30 mins. Answer all questions.

  • First, you will be asked to describe the structural transformation of capital over time.
  • Second, you will be asked to describe trends in wealth inequality.
  • Third, you will be asked to describe trends in income inequality.

Part 3 is titled “short essays”. It has two questions. You must both of these questions. This section should take no more than 55/60 mins.

Under absolutely no circumstances should you try and learn-off essays. This is NOT your Leaving Cert. It is a formative exam to assess your analytic reasoning, knowledge and understanding of the course, whilst providing you with an opportunity to showcase your creative and critical thinking skills.

Don’t stress over the exams. Try to enjoy the learning process!



Lecture 24. Summary: The Political Economy of Inequality


In the rich market economies of the world, the incomes of the wealthiest are rising, whilst the incomes of the majority are stagnating. The outcome is growing wealth and income inequality.

None of this is in empirical dispute. What is in dispute is trying to explain why (i.e. the causal mechanism) and whether it is justified or not (normative legitimacy)?

Economic history

Piketty wants to put the issue of inequality into a broader historical context. To do this, he traces the evolution of capital from the agrarian societies in the 18th century, through to the industrial revolutions of the 19th century, the inter war years, and into the second half of the 20th century.

There are three conclusions from this comparative historical analysis on the political economy of distribution:

  • Inequalities of wealth and income are influenced by a whole host of institutions; political, economic, cultural and normative factors.
    • Although he doesn’t analyse these in any detail. This is where a comparative politics perspective becomes useful.
  • Markets when left to their own devices produce a high degree of inequality because the rate of return on capital always exceeds economic and income growth (R>G).
    • But not all markets are the same. There are multiple models of capitalist development.
  • On the basis of this inequality (R>G), wealth tends to accumulate and concentrate at the very top of the income distribution.
    • This is a story about the rich 1%.

To tame the worst effects of market inequalities requires active political intervention.


Democracies throughout the 20th century have pursued various public policy interventions to tame market inequalities: minimum wages, progressive taxation, capital controls, social programs, collective bargaining, trade unions, rent controls and financial/banking regulations.

A central finding in the study of political economy is that institutions, and their underlying political coalitions, shape market outcomes, and these vary significantly between nation-states.

These institutions are usually associated with the functions of the labour market and/or the social state. But since the 1980’s the political institutions that tended to create more egalitarian market outcomes have been gradually eroding (for a whole variety of reasons associated globalisation), with the implication that market inequalities within countries are increasing.


The benefits of global market liberalization has been defended by large parts of the economic profession (and financial markets interests). Over the past twenty years policymakers have tended to support and implement those policies that enable markets to get back to their competitive “natural tendencies”.

For critics, these natural competitive market tendencies logically lead to the inequality R>G, and undermine the meritocratic principles of democratic societies.

When competitive markets are left to their own devices, capital-wealth accumulates and concentrates at the top, with the implication that inheritance ends up mattering more than hard work.

This is the core normative critique underpinning Piketty. It suggests that markets when left to their own devices leads to a “rentier” society not a meritocratic society. It suggests that a rising tide does not lift all votes, and that the explicit hand of politics is needed to steer economies toward socially beneficial outcomes.


Lets unpack the concept of wealth, which is used interchangeably with the concept of “capital” in the book.

The first question to ask is where does capital-wealth come from? There are two sources: inheritance and income (theft also matters).

Income can be broken down into two sources: income from labour (wages, bonuses and salaries) and income arising from owning capital (rent, assets, interest, bonds, stocks, dividends).

Wealth that accrues from either of these forms of income can be consumed, saved or invested. Most people barely earn enough income to cover their living expenses. They have no wealth.

Capital only becomes true wealth when it is not immediately consumed i.e. when it accumulates in a savings account, re-invested in financial stocks and bonds, owned in real and/or commercial estate, machinery, buildings or land.

Most capital-wealth is held in either housing or financial assets. The purpose of owning capital is to yield an income.

Capital/income ratio

Capital can be public and/or private. In any given society, total wealth equals public+private capital (minus debt). In all market democracies today, capital is almost entirely privately owned.

For Piketty, the best way to analyze the importance of capital in a society (i.e. capitalism) is to measure the amount of wealth (stock) as it relates to income (flow). Dividing the total capital stock by national income gives us the capital/income ratio (β).

Capital/income ratios are important because they provide us with a comparable quantitative measure to analyze capitalist development across time (history) and space (country).

In most countries we find that, on average, national wealth is 6-7 times national income. The capital/income is 600-700%.

But capital/income ratios tell us very little about the actual distribution of capital in a society i.e. who owns the wealth at an individual or household level.

Most people own nothing at all. In the US and Europe, 50% of the population own less than 5% of the wealth. Wealth is more unequally distributed than labour-income.

The R>G inequality

Before Piketty analyses the precise distribution of income and wealth in Europe and the USA he proposes a theoretical mechanism to analyze the evolution of capitalism:

  • When the rate of return on capital (r) is equal to economic and income growth (g) then the capital/income ratio remains stable.
  • When the rate of return on capital (r) exceeds economic growth (g) then the capital/income ratio grows. Wealth accumulates.

This is precisely what we observe in the USA and Europe since 1980. R>G leads to rising capital/income ratios. For Piketty, this suggests ‘private capital is back’.

On the basis of this historical analysis Piketty finds that on average, in the long-run, economic growth averages 1-2%, whereas the rate of return on capital is 4-5%.

R>G is the logical outcome of what happens when markets are left to their own devices.

It was only during the fiscal revolutions associated with the birth of the social state in the 20th century did the inequality R>G go into reverse. This was the period of an emergent middle class.


Theoretically, a high capital/income ratio does not imply a high degree of inequality. All capital-wealth, in theory, could be distributed equally or held publicly. But this is not the case.

As we have seen throughout this course, in the USA the top decile own 72% of all wealth, whereas the bottom 50% own nothing.

Be sure to study the distribution tables before your exam!!!

Why does R>G lead to inequality?

But why does the mechanism R>G lead to increased concentration of wealth at the top of the income distribution? There are two reasons.

  • First, wage inequality. Most people only earn enough to cover their living costs. They cannot save or invest. The higher your wage-income the more more you can consume whilst investing and saving. The wealthiest (0.1%) tend to invest in financial assets. The capital-income from these assets tends to accumulate and reap a high yield/interest rate.
  • Second, inheritance. The largest fortunes in market economies are usually inherited not earned. Bill Gates is a very very rare phenomenon, and not representative of a general trend.

Why did inequality decline in the 20th century?

Capitalist markets generate high levels of inequality. This is not in dispute. But why then did we witness a rapid decline in wealth and income inequality from 1950 to the 1980’s?

  • In the 18th century most capital-wealth was agrarian. Large landowners owned 90% of all wealth in European societies. There was no such thing as progressive taxation. Most fortunes were associated with inherited land or government bonds. In this period, capital/income ratios were rising because of the inequality R>G.
  • In the 19th century capital was increasingly invested into industry not land. In Europe, most private capital was bound up with industrial assets and those foreign assets accrued through colonization. This was not the case in the USA. In this period, although the composition of capital change dramatically, the capital/income ratios continue to rise because of the inequality R>G. A rising tide did not lift all boats.
  • From 1914 through to the interwar years, private capital experienced massive external shocks. Capital/income ratios declined because of physical destruction, government debt, inflation, the introduction of top income taxes, rent control and a whole raft of capital regulations. Post-war societies gave birth to democratic capitalism,
  • From WW2 until the 1980’s there was a balance between private and public capital (mixed market economies), which gave birth to qualitatively distinct national varieties of capitalism. This was the birth of the democratic state, where revenue and expenditure shifted toward providing income transfers (pensions and unemployment protection) and public services (healthcare and education) to all citizens. Labour and wages became more important than inheritance. Trade unions and collective bargaining were strong.
  • In the 20th century economic growth exceeded or balanced capital-income growth. This was the period of a “rising tide lifting all boats”, associated with the Kuznets curve.

In summary, the decline in inequality took the shock of two world wars, followed by a revolution in the fiscal policies associated with the democratic welfare social state.

There was nothing “natural” about this market process. It was the outcome of distributional “class” politics.

The rise of ‘neoliberalism’.

With rising economic and income growth, associated with the period of mass manufacturing/productivity growth, which made possible strong wage growth (and taxes), democratically elected governments could fund an expansion of social services, whilst implementing public policies aimed at re-shaping market inequalities.

These, in addition to macroeconomic polices aimed at full employment, meant that the quality of life for those lower down the income distribution rapidly improved.

  • From the 1980’s most countries were exposed to international financial globalization. There was a shift back to private capital, particularly financial capital. In response to the oil crisis, stagflation and overburdened welfare states, in a period of declining economic growth, the Keynesian demand management ‘consensus’ came to and end.
  • Public policies and institutions shifted toward “the market”, particularly in international capital markets. The middle classes, particularly in the US, did not continue to experience rising income. Economic growth slowed down, the structure of the labour market rapidly changed, whilst the capital incomes of those owning financial assets soared i.e. R>G.
  • The accumulation of capital-income ratios has meant inheritance has re-emerged as an important factor in determining who owns wealth, and who does not. Further, public opinion and has become much more tolerant of inequalities (probably because they are perceived as a just outcome of individual merit and talent).

This graph useful summarises the story of financial globalisation over the past two decades:


Distribution tables

Piketty uses distribution tables to track this historical change in wealth and income distribution from the 18th-21st century. These are distinct measures from the Gini coefficient. T7.3

What these tables suggest is that it is increasingly important to observe those changes in the top decile and top centile of the income distribution, as this is where most of the radical changes in the politics of distribution have taken place.

Most of the income and wealth gains since 1980 have accrued to the top 0.1 percent of the population.

Why does this matter?

Piketty does not get into a normative discussion on questions of fairness or social justice.

He argues out that even if you think differences in wage income and capital accumulation are justified, it is hard to legitimate a situation where inheritance matters more than merit.

He also warns us about the dangers to democracy in a society completely dominated by private capital, particularly when the latter is concentrated in the hands of the top 1 percent.

He also highlights the distributive implications (and irony) of austerity and public debt in European societies rich in private wealth.

His solution to stem the rise of economic inequality, and to avoid the worst effects of R>G, is to impose a coordinated and progressive global wealth tax (including corporate profit).


The conditions under which a coordinated wealth-capital tax is possible is a question for political science. It requires international cooperation to overcome collective action problems.

The most likely place it could occur is in the EU. But such cooperation is undermined by growing tax competition between nation-states.

This capital tax should be used, according to Piketty, to pay off the public debt of those sovereign states who stepped in to save the financial sector from collapse.

He also argues that it should be used to raise revenue to invest in education and public infrastructure.

In the absence of international cooperation to regulate global capital in the 21st century Piketty anticipates a rise in support for nationalist, right wing, and anti-european political parties.

This brings us to the end of our lecture series. Best of luck in the exams, and the rest of your studies. At least in university, the price of success is hard work!

Slides: Lecture 24

Lecture 23: The Comparative Politics of Inequality


Dani Rodrik argues that a delicate balance exists between democracy and processes of international economic integration. This is often described as the global political trilemma, which suggests that there is a political tradeoff between deep international economic integration, the nation-state and strong democratic accountability.

We can only have two of these. If we want democracy and globalization we have to give up the nation-state. If we want democracy and the nation-state we have to give up globalization. If we want the nation-state and globalization we have to give up democracy.


The starting point of Rodrik’s argument is that open markets succeed only when they are embedded within social, legal and political institutions, which provide them legitimacy by ensuring that the benefits of capitalism are broadly shared.

This is similar to the idea of ’embedded liberalism’, associated with John Ruggie, and the idea of the ‘double-movement’, associated with Karl Polayni.

Different societies have different preferences in terms of how they structure the institutions required to ensure a balanced relationship between competitive markets and social rights  (and what we have described in this course as different national models of capitalism).

Democratic pressures are likely to lead to a variety of different institutions across different territories. For example, French citizens tend to accept higher levels of taxation than Americans. What explains the difference in policy preferences toward redistribution among middle income voters?

The diversity of capitalist democracies inhibits the ideal concept of total global integration of national markets. National markets raise transaction costs across national jurisdictions. It also leads to competition between democratic states, for example, reducing corporate tax rates, to attract investment.

Consequently, a world which is fully responsive to democratic preferences of citizens will be unable to achieve full globalization.

Full global market integration requires global democratic governance, which is not likely to happen, given the commitment to national sovereignty.

The globalisation paradox

This is the core argument of the book The Globalization Paradox: Democracy and the Future of the World Economy. The following 5 steps, outlined by Dani Rodrik illustrate the point:

  1. Markets require a wide range of non-market institutions (of regulation, stabilisation, social protection and legitimation) in order to work well and remain legitimate.
  2. These institutions vary by nation-state, in the sense that ultimate goals such as efficiency or equity can be achieved under a variety of designs and blueprints.
  3. Different democratic societies, organised around their own distinct histories, have very different needs and preferences regarding the shape that market-supporting and market-correcting institutions can take.
  4. A world that is sufficiently responsive to democratic preferences will therefore be one of institutional diversity and heterogeneity rather than institutional harmonisation and convergence.
  5. Since institutional diversity (such as the European Union) inhibits the true global integration of markets by raising transaction costs across jurisdictional boundaries, a world that is sufficiently responsive to democratic preferences will also be one that falls short of full globalization.

Markets and government are complements not opposites. The market works best when the social state is strong.

To illustrate the argument, consider the Eurozone crisis, and the institutional design of the EMU.

National governments (nation-state) have to satisfy two very different constituencies in adjusting to the crisis: international markets and domestic electorates. If governments prioritize international markets they lose the capacity to be responsive to the democratic preferences of citizens (such as not bailing out the banks).

The anti-water-charges protest in Ireland is, arguably, a manifestation of this democratic tension, and reflects what we previously described as the fiscal crisis of the state in contemporary capitalism.

The global political trilemma is even more pronounced in the EMU. Why?

European integration 

Eurozone member-states have delegated macroeconomic tools to an international organization (monetary policy), whilst fiscal and social welfare policy remains at the national level.

The Eurozone needs a banking and fiscal union to deal with the international financial crisis. But there are inter-country conflicts among national electorates on both of these issues. German citizens don’t want to spend their taxes on other countries and the Irish don’t want to give up their corporate tax rates. The nation-state prevails.

Consequently democratic preferences of citizens within nation-states are clashing with the functional needs for more European integration.

There is strong resistance (among electorates) to shifting more power to the European federal level (i.e. giving up the nation-state). The consequence is that neither the nation-state nor the EU has the capacity to solve the crisis, perhaps with the exception of the ECB. International markets reign.

What are the implications of this observation for the globalization paradox?

Democracy is compatible with national sovereignty only if we restrict European economic integration. If we push for more European economic integration while retaining the nation-state, we must jettison democracy. And if we want democracy along with European integration, we must shove the nation-state aside and strive for a federal state of Europe.

Revision (Piketty) 

  • Wealth (everything that can sold on a market, net of debt). Valued at market prices (which fluctuate)
  • Wealth/income ratios (β). These fell over the period 1910-1950. They have since increased, especially in Europe.
  • Income share of wealth owners has consequently increased.
  • Concentration of wealth. Big decrease from 1914-1950. Becoming more concentrated again.
  • Return to 19th century patrimonial society. In low growth economies the wealthy elite living off inheritance, saving more.
  • Labour income. This is a bigger source of income inequality in the USA. This is related to the rise of super managers and executive pay.

Problems of causality – wealth

  • Why has β increased?
  • H1: low growth and over-accumulation of capital (volume effect)
  • R>G means that the wealthy can enjoy high levels of consumption whilst accumulating wealth (high savings). Return to 19th century.
  • H2: Higher asset prices (price effect)
  • Housing now constitutes 60% of national wealth in Europe. This is based on capital gains not real investment.
  • Piketty has under-estimated the importance of housing-wealth.
  • Wealth inequalities are increasing related to housing.

Problems of causality – wages

  • Why has labour income inequality increased (USA)?
  • H1: lower taxes on the rich incentivise super-executives to bargain for higher pay (Piketty).
  • H2: weaker organized labour and different egalitarian norms as to what constitutes fair pay.
  • To explain the dynamics in the middle of the distribution we need to analyze comparative political institutions.
  • Housing and labour market politics missing in Piketty.

This is a story about the 1%

  • R>G focuses on the wealthy and top incomes.
  • It does not tell us much about rising poverty and the changing nature of working class politics. Nor does it tell us much about the home-owning middle classes.
  • There has been a very rapid rise in low income households (measured in terms of market income).
  • From 1945-1980, capital was tamed by democracy.
  • From 1980 to present, democracy has been tamed by capital.

Piketty needs an institutional analysis 

  • The post 1970 shift from the ‘Keynesianism’ to the ‘Neoliberalism’ requires a comparative political analysis.
  • Globalization has affected OECD countries differently. Not all countries have experienced US-style inequalities.
  • Role of ideas, interests and institutions.
  • Comparative political economists focus on institutions:
  • Technology regimes
  • Capital market regimes
  • Labour market regimes
  • Electoral politics
  • Ask yourself: how have these changed over time?

The Keynesian social state

  • Technology regime: Fordist mode of production. Huge demand semi-skilled labour. Full employment.
  • Labour market: strong trade unions, broad collective bargaining coverage, wage compression among low to middle income earners, focus on vocational training.
  • The labour market led to low levels of market income inequality.
  • Electoral politics: in majoritarian systems (UK, USA) democratic politics reinforced market egalitarianism.
  • The median voter supported strong redistributive policies. Governments have to capture the median voter to win elections.

The neoliberal regulatory state 

  • Technology regime: ICT revolution. Global supply chains. Capital liberalization. Knowledge based economy.
  • Labour market: massive decline in unionization and collective bargaining coverage, growing skills differentials, wage divergence. Rising poverty.
  • Labour markets are no longer egalitarian. More fiscal pressure on the state to compensate for rising market income inequality.
  • Electoral politics: much higher fragmentation of the electorate and re-emergence of identity politics?

Comparative politics 

  • In majoritarian electoral systems (UK, USA) political parties now compete for a very different median voter.
  • The asset-owning (housing) middle class are less supportive of redistributive public policies (particularly higher taxes).
  • In proportional electoral systems (IE, NL, DL) the median voter has also shifted. But it’s harder to ignore the poor.
  • To explain why some countries are more unequal than others requires explaining the variation in median income voting preferences. Lower market income inequalities lead to more cohesive redistributive coalitions (and higher taxes).
  • Put simply: Nordic countries are less class divided societies whereby egalitarian labour markets and the welfare state reinforce each other.


  • How do these electoral dynamics play out in the new politics of austerity in the aftermath of the crisis?
  • Who are the winners and losers of globalization
  • What is the interaction between socio-economic and socio-cultural cleavages among the electorate?
  • Demand: preferences and attitudes
  • Supply: new political parties
  • Task for next 7 days: read the Financial Times every day. Identify and make a note of articles that relate to what we have discussed in this lecture.

Slides: lecture-23

Lecture 21/22: Ruling the Void: the Hollowing of Western Democracy?

Last week we argued that when public debt increases political choice over fiscal policy declines. Governments change but the policy regime remains the same.

More precisely, in a world global capital markets, austerity, and monetary union, the capacity of political parties to represent and respond to citizens interests declines.

The state has two constituencies: markets (investors, creditors, debt servicing, interest rates, claims to assets) and voters (citizens, public opinion, elections, services, social rights).

In a context of a sovereign debt crisis and austerity the external demands placed on governments increase. Representativeness and democratic choice declines.

But if elections and a change in parties in government makes no difference to policy outcomes, then surely democracy is incapacitated?

The outcome is a legitimation crisis, whereby political parties in governments rule as technocratic managers, rather than representative agents of the electorate.

This is the core research finding of the book “Ruling the Void: the Hallowing out of Western Democracy“, by the late Prof Peter Mair. The book opens with the following quote:

The age of party democracy has passed. Although the parties themselves remain, they have become so disconnected from the wider society, and pursue a form of competition that is so lacking in  meaning, that they no longer seem capable of sustaining democracy in its present form

This premise is then backed up with a litany of empirical data on declining voter turnout and party membership in western parliamentary democracies since 1945

See this data: http://www.idea.int/data-tools

Why has voter turnout declined? Why are swathes of the electorate abandoning the centrist political parties across Europe?

One hypothesis is that this rejection of political parties (not quite the rejection of politics) is a direct outcome of the inability of political parties to offer distinct policy choices and “represent” citizens in government.

Declining voter turnout and party membership is a universal trend throughout the western world, whilst declining voter turnout correlates directly with rising income inequality.

Political parties were traditionally considered intermediate agents between voters and political institutions of the state.

The classic role of the political party was to act as the “voice of the people“, to translate voters’ interests into public policy, and to compete for control of the executive of the state.

For Mair, since the 1980’s, there has been a gradual withdrawal of party elites from civil society towards the realm of government and the state.

“Responsible government” has gradually become more important than “responsive government”, with the implication that a “governing class” has emerged to act as “managers of the state”.

Mair attributes this “hallowing out of democracy” to two interrelated causal factors: individualization and globalization (included in the latter is “Europeanization”). Both of which are intimately connected to the decline of mass parties.

  • Individualisation refers to the process of segmentation and liberalization of social collectivities that previously structured the growth of mass parties i.e. the church, trade unions, sporting associations and farming groups.

This is a complex process and interlinked with the changing structure of labour markets and employment. Social democratic or left parties are arguably most affected.

  • Globalisation refers to the declining ability of government to autonomously shape national public policies.

Under these constraints politicians shift decision-making to non-majoritarian institutions, like regulatory agencies, central banks and the EU, who are insulated from the redistributive pressures of majoritarian politics.

The constraint associated with being a ‘responsible’ member of international organizations such as the EMU or the WTO is particularly challenging for small open economies and parliamentary democracies, such as Ireland.

During the Euro crisis this tension could be observed directly, when national elections were replaced by what Wolfgang Streeck calls a “political system of depoliticized expert governance, specifically designed to exclude popular democracy and redistributive politics”.

Depending on your normative preference, this shift toward economic managerialism can be considered positively in the sense of “building state-technocratic capacity”, or negatively, in the sense of “the hallowing out of democracy”.

From a political science perspective, what is more interesting is the political consequence of this de-politicisnation, particularly for distributive politics. In a democracy, citizens will always demand some form of representation. They will never be content with only technocratic management.

The question, therefore, is whether political parties are capable of achieving both? Can they be both representative agents and responsible governors?

For Mair, the answer is no, not unless they are willing to give up their “responsibility” to capitalist markets and international organisations. Dani Rodrik agrees.

But if the politics of representation (and political opposition) declines it should not be surprising if anti-politics and Euro skepticism emerges as a replacement.

This re-politicisation of representative and popular government can be observed right across Europe in the aftermath of the crisis. But it varies by country.

In Spain, the shift is toward the left, with the emergence of Podemos, whilst in most northern European countries and the USA, the shift appears to be heading towards populist right-wing politics, such as UKIP in the UK, Font National in France or AfD in Germany.

But surely political parties in government are not completely decapitated, and can at least minimally respond and represent public opinion?

To answer this question, we need to analyze what is public opinion?

According to the latest Eurobarometer poll, the four main concerns of European citizens are: their economic situation, unemployment, public finances and immigration.

Discuss: are political parties capable of offering distinct policy choices to tackle these problems, whilst simultaneously being accountable to the external demands of international markets?

Lecture 20: The Debt Crisis and the Euro Trilemma

The central issue is simple: democracy and the public authorities must be enabled to regain control of, and effectively, regulate 21st century globalised financial capitalism. A single currency with 19 different public debts on which the markets can freely speculate, and 19 tax and benefit systems in unbridled rivalry with each other, is not working, and will never work. The eurozone countries have chosen to share their monetary sovereignty, and hence to give up the weapon of unilateral devaluation, but without developing new common economic, fiscal and budgetary instruments. This no man’s land is the worst of all worlds. 



The proximate cause of the Euro crisis is a banking collapse. The ultimate cause, however, can be traced to structural imbalances that emerged form joining together distinct national models of capitalism into a single currency, without a fiscal state or a banking union.

For a brief explanation as to how the European Council works, see this video. For an explanation of the Euro Summit (meetings of heads of state of the Euro area), see this link.

To understand the policy response to the Euro crisis it is useful to consider the interactive effect of interests, institutions and ideas. 

The banking crisis in Europe has cost almost $4 trillion. By the end of 2009 German banks, alone, had lent $720 billion to Greece, Ireland, Italy, Portugal and Spain . French banks had lent $493 billion.

Collectively, Eurozone banks were exposed to $727 billion in Spain, $402 billion in Ireland, and $206 billion in Greece.

European bank exposure

Explaining the response

Why then has the policy response to the euro-financial crisis almost entirely focused on budget deficits/public debt?

To answer this question we need to examine how the supranational decision-making process of the EMU interacts with the domestic politics of its member-states.

In political economy, comparative responses to international crises are usually attributed to variation in domestic producer group/electoral coalitions.

National governments negotiate international treaties in the interest of those sectors of the economy that give them comparative advantage.

We can think about how to explain the policy response to the Euro crisis in terms of ideas (epistemic elites) and interests (political coalitions).

Economic ideas

Economic ideas are not just instruction sheets for what governments should do. They are a power resource that enshrine very different conceptions of how the burden of adjustment should be distributed.

They are never purely technical decisions.

Initially, when the international financial crisis hit, the governing ‘neoliberal idea’ of free efficient self-correcting financial markets was discredited. Policymakers in most countries pursued an immediate Keynesian response. Since 2012, we’ve seen a rapid rise in economic nationalism.

Brazil, China, USA, and Spain lined up to stimulate their economies. But this Keynesian reprieve barely lasted 12 months. Why?

In the Euro area, and at international summits, Germany led the charge against stimulus and called for a return to fiscal austerity and structural reform as a policy solution to the crisis.

The new idea was ‘growth enhancing fiscal consolidation’.

Where does this idea come from?

The German ordoliberal idea is built around an instruction sheet that suggests the job of government is not to correct market failures but to set and enforce rules.

Nation-states provide safety nets, ensure that cartels do not develop, limit unproductive speculation, impose strong budgetary discipline, and ensure a politics of order and stability.

Policy failures by government not markets make crises.

The export-led German economy has been successful with this instruction sheet. But can all countries follow it?

The policy response to the crisis assumes that if all Euro countries follow the same instruction sheet (government stability, fiscal austerity and structural reform of the labour market) they will converge.

The problem is that most countries do not have the domestic institutions to make this export-led instruction sheet work.

On the contrary, a “comparative political economy” framework suggests that countries will increasingly diverge from one another.


At the G20 summit in 2010 the international ideational climate radically changed. Jean Claude Trichet, the then President of the ECB wrote in the Financial Times:

Stimulate no more – it is now time for all to tighten

Soon afterwards, the German finance minister Wolfgang Schäuble published an opinion piece in the FT where he outlined what would become the Euro strategic discourse until today:

Europe needs expansionary fiscal consolidation

The ECB followed with their June 2010 monthly bulletin, and called for:

Growth friendly fiscal consolidation


In 2010 – Greece received European financial assistance (110 billion) in return for a 20 percent cut in public sector pay, pension cuts and structural reform.  In 2011, an additional 110 billion was provided with a 20 percent cut in spending required in return.

In 2010- Ireland received European financial assistance (60 billion) in return for a 24 percent cut in public spending.

In 2011 – Portugal received financial assistance (78 billion) in return for a 25 percent cut in public spending + structural reforms.


Politics in hard times

Fiscal adjustments in the Euro periphery have been shaped by both international constraints (EMU) and domestic politics.

At the European level the policy response is negotiated through the European Council.

The response has not been to build common fiscal institutions as a complement to monetary union. The response is to impose stricter fiscal rules on each member-state.

Democratic choices have been constrained in favor of maintaining the nation-state and preserving the single currency.

The Euro trilemma 

This is the new Euro trilemma, outlined by the economic historian, Prof Kevin O’Rourke, and depicted in the figure below.

EU Trillemma

The first choice facing national governments in the context of increased European integration is between prioritizing national policies or shared polices.

Where policies are nationally determined (as is the case for wages, social welfare, pensions, and taxation) there is the risk that one nation-state can impose a cost another nation-state.

Alternatively policies can be jointly coordinated between member-states i.e. policies that are ‘Europeanized’ (as is the case in agriculture and monetary policy).

Discuss: should economic, fiscal and banking policy be coordinated at the Eurozone level?


If we accept more European integration is necessary to preserve the currency then member-states face the dilemma as to how to legitimize their economic decisions.

Economic policies can be delegated to non-political technocratic institutions such as the ECB and the EU Commission.

If this leads to welfare enhancing outcomes (stronger growth and employment) then such decision-making can legitimized on the basis of ‘outputs’.

Alternatively, economic decision-making  can be delegated to democratically elected representatives who are accountable to their national electorates.

In some cases, it makes economic sense to delegate decision-making to technocratic institutions with non-negotiable rules. For example, banking regulations in the Euro area.


But the electorate in most nation-states want to hold their national executives to account for decisions (and shared policies) taken at the European level i.e. input legitimacy.

Member-states (and electorates) then face a choice whether economic policy and political decision-making should be determined by intergovernmental means or federal procedures.

If the intergovernmental process prevails, then the European Council gets priority. This means decisions will be shaped by the bargained interests of national executives in the Council.

If the federal process prevails, then the EU parliament (or the creation of a Euro budgetary parliament) would determine economic policies, as suggested by the Lisbon treaty.

Presently the Euro area is stuck somewhere between these two modes of governance. Decisions are taken in the Eurogroup, which has no formal legislative legitimacy.


European integration is legitimated and accountable to public opinion through national executives (via the EU Council), which tends to give priority to the interests of larger member-states.

The implication is that national policy discourses (Germany versus Greece) rather than European wide policy discourses tend to prevail.

Ask yourself: is decision-making in the European council, the Euro group and Eurozone summits sufficient to legitimate the present trajectory of European economic integration?

Thomas Piketty suggests that this is not sustainable and has called for a new European manifesto that includes a Eurozone budgetary parliament. Do you agree?

Lecture slides Lecture 21

Lecture 19: Austerity and the New Politics of Public Debt


Public debt is a question of the distribution of wealth, between public and private actors. It is an indispensable component of sovereignty, and national politics. As we discussed last week, there are only two ways for the democratic nation-state to fund itself (health, education, social security): taxation and public debt.

Europe has the highest amount of private wealth (measured in terms of the capital/income ratio) in the world and the greatest difficulty in resolving its public debt crisis. What explains this strange paradox?

The world is rich but the governments of the world are poor. In this lecture, we will discuss the new politics of public debt and austerity as a distributional (not a technical) problem.

The Eurozone 

In 2008, the Eurozone experienced a ‘sovereign debt’ crisis. Public debt now averages around one year of national income in most member-states (approximately 90 per cent of GDP).

But this varies significantly between member-states of the Eurozone. See the graph below.

Publiuc debt

Most of the increase in sovereign public debt since the “financial crisis” in 2008 was an outcome of the sovereign nation-state “bailing out” the private-banking sector, and the collapsed tax revenues associated with the recession (declining economic growth).

This sovereign debt problem only turned into a crisis in the EMU. Why? The EMU is a radical experiment in trying to manage a single currency without a state.

A stateless currency

The EMU does not have federal fiscal or budgetary union capable of absorbing asymmetric shocks. The cost of adjustment is bourn by citizens/workers/nation-states.

The absence of shock absorption at the European level was radically exposed during the crisis. Banking and fiscal policy were nationalized whilst monetary policy was Europeanized.

The cost of the collapse in the banking sector in Ireland/Germany is paid by national taxpayers not the federal currency union. Banks may be global in life but they are national in death.

In the absence of a functioning central bank, capable of acting as a lender of last resort, financial markets panicked.

The interest rate charged on ten year bond yields skyrocketed, and some countries were priced out of international markets, with the implication that they had to seek a loan from the ‘Troika’.

It is the interest rate rather than the size of the public debt that matters.

But why did some countries experience a crisis and not others?

The origins of the crisis

The origins of the sovereign debt crisis in Europe are both domestic and international, and ultimately related to capital-flows.

From 1999, all EMU member-states transferred monetary sovereignty to the European Central Bank (ECB). This was created as the most independent central bank in the world and modeled in the tradition of the German Bundesbank.

The European Treaties specify that the ECB’s  primary mandate is price stability, not economic growth, maximizing employment or financial market stability.

Up until 2008, everything seemed fine in the stateless currency. Interest rates converged. Households, firms and governments could borrow cheaply. When the crisis erupted in 2008, these capital flows went into reverse, and those countries (primarily banks and households) who borrowed cheaply, found it difficult top pay back the debt.

The convergence in financial markets (single interest rate) was assumed to equal economic and political convergence among different European countries.

But the political foundations of national economies continued to diverge. Portugal did not become Austria. Italy did not become Germany.

National models of capitalism 

These structural differences between member-states would not be a problem in a political federal union i.e. between California and Delaware in the USA. But it is a problem in the EMU.

Capital flowed from richer core member-states (Germany) to poorer peripheral member-states (Greece) fueling asset price bubbles in Spain and Ireland, and public debt in Greece.

Up until 2008, most trade was internal to the Euro area, which became, in effect, a semi-closed trading bloc.

Regan & Johnston

Source: Johnston & Regan (2014)

Macroeconomic imbalances

Prior to the monetary union, these national varieties of capitalism could co-exist, without producing imbalances between each other, because each member-state had macroeconomic tools to adjust their economies when confronted with an economic shock.

This is no longer the case.

In the absence of exchange rate adjustments (improving competitiveness by changing the price of currency), member-states must implement ‘internal devaluations’ i.e. austerity.

Eurozone rules

In agreeing to join the European monetary union all member-states agreed that they cannot have a public-debt to GDP ratio of more than 60 per cent or budget-fiscal deficits that exceed 3 per cent. Note: these rules were first broken by Germany, France, Italy and Greece.

Other than these rules, the EMU did not generate the capacity at European level to deal with asymmetric economic shocks. It was an unprecedented experiment in regional cooperation: creating a currency union without a state, and without a finance ministry.

Fragile union

When the US subprime mortgage crisis spread to Europe, regional banks in some countries collapsed, economic growth declined, property bubbles burst and government revenue declined.

In the absence of a central banking capable of acting as a lender of last resort, financial markets panicked, creating a sovereign debt crisis.

Government bond yields increased sharply. Interest rates diverged. Peripheral member-states of the Euro area were priced out of the markets and had to resort to an EU-IMF loan, with strict conditionalities.

Bond yields

No lender of last resort

The important point to note is that the fiscal and sovereign debt crisis in the euro area was a consequence not a cause of the global economic/financial crisis.

The sovereign debt crisis could have been avoided if the ECB had the capacity to act as a lender of last resort. But the ECB does not have this mandate.

The ECB eventually resolved the sovereign debt debt crisis when Mario Draghi issued a press release in 2012 signaling that he would “do all that is necessary to save the Euro”.

But the damage had already been done. Investment in peripheral member-states collapsed, unemployment skyrocketed, and trust in the EU evaporated.

Who pays?

The question of who pays for this financial-banking collapse in the EMU reveals the tense relationship between capitalism and democracy; markets and citizens; investors and taxpayers. It is, therefore, a fascinating case study to tease out the core theme of our module.

It also reveals the limitations of the nation-state in governing global markets. The electoral response, as we now observe, is a rise in populist nationalism.

Rather than tax wealth and capital, governments must borrow from those who hold wealth and capital in the form of government issued bonds. A marginal increase in the interest rate can effectively make sovereign democratic states insolvent.

For Piketty there are three ways to tackle sovereign debt problem in Europe (i.e. who pays):

  • taxes on capital
  • inflation
  • austerity

Inflation was the main strategy, historically, in how nation-states dealt with public debt. In Europe today, the strategy is austerity, or internal devaluation.  But what exactly does this mean?


It means reducing public expenditure and increasing taxes, whilst trying to reduce wage and labour costs, as a mechanism to reduce public debt and budget deficits.

In theory, European governments could reduce all public debt by privatizing public assets.

This means the government would pay rent to private actors who own schools, hospitals and police stations rather than pay interest on public debt to fund these public services.

This is not likely to happen. But it underpins a lot of the criticism of the introduction of water charges in Ireland.


Piketty suggests that a progressive tax on capital-wealth (not just bank deposits but all assets including shares) is the optimal strategy to deal with public debt.

He hypothesises that a once off annual capital-wealth tax at a rate of 0 per cent on up to 1 million, 10 percent between 1 and 5 million, and 20 percent above 5 million would reduce public debt by 20 percent of GDP.

Alternatively, the same rates of 0, 1, and 2 percent over 10 years would yield the same result.

In distributing the burden of adjustment for the banking collapse governments have decided to not tax capital-wealth.

Why do European governments not tax capital to deal with the public debt crisis, as suggested by Piketty, among others?

This would require nation-states giving up more fiscal sovereignty to European policymakers, which the electorate don’t want.

Neither the nation-state nor Europe has the problem solving capacity to implement such a strategy.


What about inflation as a strategy to reduce public debt?

An inflation rate of 5 percent per annum would allow governments to reduce their debt by more than 15 percent.

It was this type of inflation that allowed Germany to embark on its post-war reconstruction without creating a sovereign debt crisis (in addition to massive financial assistance from the USA).

If there is no inflation, and no tax on capital, and a growth rate of 2 percent per annum, then the only choice is to cut spending and wages.

But this austere strategy will take countries such as Greece over 20 years to reduce their debt to GDP ratio by 20 percentage points.

It is highly questionable whether such a strategy can be pursued within a democracy.


Public debt and fiscal policy are distributional dilemmas not technical problems.

For example, the Irish government spends more on debt interest re-payment as a percent of it’s GDP than it does on its universities.

Public debt is another person’s private wealth. It is a form of redistribution between the public and private.

Net private wealth in Europe is equal to 600 percent of GDP. The public sector (government) is in net debt. They must tax citizens and borrow from those who own capital-wealth to fund public services and provide social rights to their citizens.

There is no ‘technical’ solution to these distributive dilemmas. It is a political economy problem that reflects an in-built tension between capitalist markets and the democratic state.

Lecture slides: lecture-19

Lecture 18: Trump, Inheritance and the Inequality of Wealth


Should democratic societies be concerned about the economic and political power of inherited wealth?

In market democracies, the assumed equality of rights of all citizens contrasts sharply with the real inequality of living conditions among people. The normative justification of this inequality rests upon the assumption of merit.

Figure 11.11 illustrates why Piketty is concerned about inheritance. This has a tendency to undermine merit. In 1893 Durkheim assumed that liberal democracies would abolish inheritance and property at death.



The graph shows that for those born around 1970-1980, 12-15 percent of individuals will inherit the equivalent of what the bottom 50 percent of the population earn in a lifetime.

Piketty suggests that inheritance and rent are problematic in a democracy but inevitable in a market economy. Why? Because in a context of R>G inheritance will predominate over savings.

When Mario Draghi took over as president of the European Central Bank (ECB) his proposal to resolve the Euro crisis was to “fight against rents” in Europe. What he meant by this was the fight against monopolies.

For economists the term ‘rent’ is pejorative and assumed to equal the lack of competition, particularly in the non-traded services sector: real-estate, taxis, hairdressers, pharmacists.

But historically ‘rent’ was a term that was used to describe any income that was earned from owning a capital asset.

What is Piketty getting at here? 

For Piketty ‘rent and inheritance’ are not an imperfection in the market. Rather they are the logical consequence of capital accumulation.

He is highlighting that market and economic rationality have nothing to do with democratic rationality. Democracy and social justice require specific institutions of their own, and these cannot be justified in terms of market competition.

When universal suffrage was instituted in the 19th century (and property voting abolished) it ended the legal domination of politics by the wealthy.

But it did not abolish the economic forces capable of producing a society of rentiers. That is, a society of rich inherited elites.

Global inequality 

Let’s move on to examine why this matters at a global level.

Financial globalization and the inequality of R>G leads to a greater concentration of capital ownership. This automatically contributes to a structural divergence in the ownership of capital, particularly at the very top.

One way to observe this (the impact of the R>G inequality among the top centile) is to examine global wealth rankings (ranking of billionaires) and global wealth reports.

Both of these rankings illustrate that the rate of return on the largest fortunes has grown significantly faster than average wealth. See the latest Crédit Suisse report here.

Global wealth

Global inequality of wealth in the early 2010’s is comparable in magnitude to that observed in Europe in 1900-1910.

The top 0.1 percent own 20 percent of global wealth, the top 1 percent own 50 percent of global wealth and the top 10 percent own between 80-90 percent of wealth.

If the top 0.1 percent (4.5 million people) enjoy a 6 percent return on their wealth, while average global wealth grows at 2 percent a year, then after 30 years their share of global capital will increase to 60 percent.

Do multi-billionaires?

Global tax

Piketty suggests that this type of market regime is not compatible with democracy, and therefore it requires some sort of political intervention, hence his proposal for a global wealth tax.

Other mechanisms to redistribute include: inflation, expropriation, nationalization.

The unequal returns to different types of capital assets (which is heavily dependent upon the initial portfolio size) and the fact that the highest fortunes grow faster than the rest, amplifies the inequality R>G.

All large fortunes, whether inherited or entrepreneurial in origin, grow at extremely high rates.

Once a fortune is established, the capital grows according to a dynamic of its own. Money reproduces itself.

But more importantly, inherited wealth accounts for more than half the total amount of the largest fortunes worldwide.

Hence the entrepreneurial argument does not justify all inequalities of wealth. Fortunes can grow far beyond any rational justification in terms of social utility. This is Piketty’s justification for a progressive annual tax on capital-wealth.

To quote him directly:

Every fortune is partially justified yet potential excessive. Outright theft is rare, as is absolute merit. The advantage of a progressive tax on capital is that it exposes large fortunes to democratic control.

University endowments 

Another way to observe whether greater the endowment of capital, the greater the return, is to examine the capital endowment of US universities. Table 12.2 reports the findings.

The average real rate of return was 8.2%. The higher rate of return is the outcome of sophisticated investment strategies.

Most of these top universities invest in high yield assets such as private equity funds, foreign stocks, derivatives, real estate, natural resources and raw materials. They tend not to invest in US government bonds.

These large returns on capital endowments largely account for the prosperity of the most prestigious US universities.

Should the US government tax these institutions higher and redistribute to poorer colleges? Or should the let billionaires build their own universities?

Sovereign wealth funds 

Consider now the case of sovereign wealth funds and petroleum states. Unlike US universities we don’t know what the investment strategies of these funds are.

The Norwegian sovereign wealth fund is worth about 700 billion. 60 percent of money earned from Norwegian oil was reinvested into the fund, while 40 percent went to government public services and expenses.

The financial reports of the next two biggest sovereign wealth funds, Abu Dhabi Investment Authority and Saudi Arabia, are more opaque.

Abu Dhabi boasts an average return of 7 percent, whilst Saudi Arabia is approximately 2-3 percent. This is because Saudi Arabia primarily invests in US Treasury bonds.

At a global level, sovereign wealth funds hold total investments that equal $5.3 trillion, of which $3.2 trillion belongs to petroleum exporting states. This is the same as the fortune of all the worlds billionaires.

Petro states

As oil becomes more scare and its price increases, the inequality R>G would imply that the share of global capital going to petro-states could reach 10-20 percent.

This would not bode well for democracy, as it implies growing economic dependence on oil-producing states.

Their populations are often tiny but their investments are huge. Can we imagine a democracy blocking sovereign wealth funds from buying up real estate or other assets in a country?


A large portion of the global capital stock is accumulating in Asia, particularly China.

In borderless capital-markets, inward Chinese investment is causing some political tension. See figure 12.5.

The big difference between China and the small Arab oil-producing states is that Asian populations are huge. Most of their future investment is likely to be spent on their own domestic populations.

The total real estate and financial assets, net of debt, owned by European households is 70 trillion whereas the sovereign wealth fund in China is less than 3 trillion. Rich countries are being taken over by domestic oligarchs not China.


Wealth in most western democratic countries is private and cannot be mobilized by governments for public purposes. The Chinese recommended to the EU to mobilize private capital to solve the Greek debt crisis.

But the EU cannot regulate, tax or mobilize the capital and income it generates within it’s member-states. Small states compete with each other to reduce capital taxation at the very moment when public expenditure is increasing.

Cautious estimates suggest that unreported financial assets held in tax havens amount to nearly 10 percent of global GDP. Most of this belongs to residents of rich countries.

To overcome these contradictions Piketty proposes a global tax on capital wealth, particularly within the European Union.

Is this feasible?


Is Piketty (among many other scholars) right to be concerned that domestic wealthy oligarchs are in a position to distort democracy?

The slides: lecture-18

Lecture 17: The Fiscal Crisis of the Social State in the 21st Century


We have now analyzed the distribution of wealth and income inequalities in Europe since the 18th century. Inequalities of wealth are close to regaining or even surpassing their historic highs of the 19th century.

Keep in mind these two tables, which depict the trends in inequalities of total wealth (ownership of capital) and the inequalities of total income (labour + capital income) in Scandinavia, Western Europe and the USA. Note the magnitudes of difference.


This begs the question – what is the role for government and the democratic state in shaping the politics of distribution in the 21st century? How do nation-states (democratically elected government) resolve the endemic conflict between private capitalist markets and democratic social rights?

Market competition or social rights?

Increasingly governments have to satisfy two different constituencies: markets and voters. This friction is reflected in two competing principles of resource allocation: markets and social rights. Governments can either tax (citizens, firms and consumers) or borrow (debt financed expenditure) to fund (pay for) public services.

To give an example of the new constraints facing the democratic state consider the following: in the aftermath of the great depression the US President, Herbert Hoover, raised the top marginal income tax rate to 80 per cent. In the aftermath of the great recession, the Obama administration struggled to increase it beyond 35 per cent.

The financial crisis revealed the importance of central banks (public institutions) and the social state (public welfare)  in mitigating the worst effects of the financial market. Absent government and central bank intervention, economies would have entirely collapsed.

But effective economic and social policy is not just about the level of income and capital taxation. The capacity to raise tax revenue is the fundamental characteristic of how contemporary democracies manage capitalist markets. Weak states struggle to raise revenue and provide services.

The constraints placed on the public finances in the aftermath of the international financial crisis was not an outcome of market imperfection. For Wolfgang Streeck it reflects a continuous and ongoing transformation of that fragile post-war creation that we now call democratic capitalism (a relatively recent creation in the long history of capitalist development).

The fiscal state

The role of the state in the economy has been constantly evolving, particularly since end of World War II.

But contrary to many of the assumptions of “neoliberalism” the state is not in retreat. The state is just as involved in shaping economic and market outcomes today as it was in the 1970’s. What has changed is the function of the state. Much like capital, the structure of the state has fundamentally changed over time.

On the one hand, nation-states require new supranational forms of governance to manage global financial markets (think about the European Union), whilst on the other, the domestic social state is in constant need of modernisation (changing tax and spend policies to reflect new realities/problems).

The simplest way to measure the role of the state in the economy (and society) is to look at the total amount of taxes relative to national income. Figure 13.1 shows the trajectory for Sweden, France, Britain and the USA.

Prior to WW1 the state had no real role in economic and social life. With taxes equivalent to 7-8 per cent of national income, the state could just about manage those “regal” functions of managing a police force and an army. The state existed to maintain social order and defend property rights.

Between 1920-1980 the share of national income that rich countries began to devote to social spending grew substantially. It increased by more than a factor of 5 in Nordic countries. But between 1980-2010 the tax share stabilized almost everywhere.

The fiscal revolution, which gave birth to the democratic social state, during the 20th century, is over.

The social state

Tax revenue has stabilized at around 30 per cent in the USA, 35 per cent in Ireland, 40 per cent in the UK, 45 per cent in Germany, 50 per cent in France and almost 55 per cent in Sweden.

This growing tax bill (revenue generation) has enabled the state to take on broader public service functions, which now consume between a third and a quarter of all government expenditure, depending on the country.

One half of this goes on health and education, whilst the other half goes on replacement incomes and transfer payments. Hence, for the most part, the social state is constituted by expenditure in healthcare, education, eldercare and social protection.

Politics is not just about elections. It is about making public policy. Policy regimes vary significantly between countries: neoliberal (USA), social (Scandinavia) and coordinated (Germany) market economies are not the same. They all manage the implicit tension between capitalism and democracy in different ways.

Trying to explain these differences (in terms of public policy outcomes) is a core part of the study “comparative” political economy. See this recent book, the politics of advanced capitalism.

Social rights

Public spending on health and education consumes around 10-15 per cent of national income in most capitalist democracies today.

Primary and secondary education are almost entirely free for everyone in the rich democracies of the world (although some countries, like Ireland, heavily subsidize private education as well).

Public health (either via insurance or direct provision) is universal in most European countries (although some countries, like Ireland, heavily rely on private provision too).

Childcare provision is also universal in most European countries (with some exceptions, such as Ireland).

Replacement income and transfer payments also consume almost 15 percent of national income in European countries (primarily because of high unemployment in the aftermath of the crisis).

In most developed democracies, the government taxes (workers, firms, consumers) and then spends this in terms of income replacement to households that cannot work (pensions, unemployment compensation, family, disability and children’s allowance), or in terms of social investment/services (health, education, research/development, childcare).

Pensions are the biggest component of “income replacement” in most countries. Think of this as a consumption replacement. But for most countries, services are the biggest expenditure.

The growth of the “fiscal state” over the last century reflects the constitution of the “social state”. This, in turn, reflects the democratic demand that citizens place on government, and often articulated in terms of social rights: education, healthcare, pensions (and in some countries, housing).

Modern redistribution

Modern redistribution is not primarily about transferring income from the rich to the poor but financing public services and replacement incomes for the elderly (and in periods of economic stagnation, the unemployed). It is built around a logic of democratic rights not market competition.

Democratic questions pertaining to social rights will never be answered by abstract principles and mathematical formulas.

The only way to deal with questions of social rights, and what the state should and should not provide, is through democratic deliberation. Further, there are very few examples in history where social rights were won without conflict and political confrontation.

The political institutions that govern democratic debate will, therefore, play a crucial role in shaping the politics and discourse of what constitutes fair distribution. Ideology clearly plays an important role here. Ideological attitudes toward the “state” are probably most divisive in the USA.

This is not just about comparative differences in electoral and political party rules (majoritarian and proportional systems of representation) but the variation in the relative power resources of interest groups and the persuasive capacity of different social actors to shape the terms of the debate.

See Jacob Hacker & Paul Piersons (2016) book “American Amnesia: How the War on Government Led us to Forget What made America Prosper“.


The revolution in the public financing of the social state is not likely to be reversed in any rich democratic country. That is, it’s hard to imagine a political party winning a democratic election, and form a government, on a platform to end public provision of health, education, eldercare, childcare and social protection.

There are certainly huge constraints on expenditure and taxation, particularly as it pertains to pensions, but no country is likely to cut social spending back to less than 20 percent of national income. This would require ending public service provision, and ending public sector employment.

On the contrary, there is huge fiscal pressure on the state to expand and to invest in new forms of social investment such as higher education; research/development; transport; housing; vocational training; water; childcare; sustainable energy; digital communications; broadband and a whole host of other new types of infrastructural investment.

This political and societal pressure to expand and invest, however, confronts the financial market pressure to consolidate public finances, and reduce expenditure i.e. austerity.Governments everywhere are trying to reduce their public debt burdens through cuts to expenditure and tax increases.

The implication is that the capacity of the state to engage in new forms of discretionary expenditure/investment is in decline.

Furthermore, the expansion of the state during the past 50 years was dependent upon one crucial condition that cannot be guaranteed: strong economic and productivity growth. Absent strong economic growth, governments, by definition, cannot raise revenue, as tax expenditures fall. Growth has slowed down almost everywhere.

Hence, for many the crisis of economic growth is the crisis of advanced capitalism, as it makes it increasingly difficult for governments to commit to continue to pay for what citizens expect as a social right. Future debates about the fiscal state are likely to revolve around issues of economic growth, structural reform, public sector modernisation and the consolidation of social spending.

It is in this context that the ability of large MNCs to avoid paying tax, through exploiting cross-national tax competition laws, has become politicised. In the EU, the ability of nation-states within the same Union to use corporate tax laws to attract module capital, is perceived as leading to a race to the bottom.


The demand to reform the social state and improve the quality of public services is a very legitimate concern. Taxpayers tend to support public financing when they receive better quality services, and when they have higher levels of trust in government.

To tease out this fiscal crisis of the state discuss the following questions:

  • Should access to higher education be free?
  • Does it make a difference that it does not impact upon social mobility?
  • What about the right to retirement, does everyone have a right to a pension?
  • Who should pay for all this?
    • That is, who should pay the tax to fund these services/investment?

Lecture slides: lecture-16

Week 8: Revision of Core Concepts and Key Questions

Please define and discuss the significance of the following concepts within your reading groups:

  • Economic growth
  • National income
    • Labour income
    • Capital income
  • Capital (wealth)
  • Capital/income ratio (β)
  • Top decile
  • Top centile
  • Taxation

What is the difference between:

  • Private capital
  • Public capital

What has been the main structural transformation of capital since the 19th century?

Describe the trends in the:

  • Ownership of capital/wealth
  • Inequalities of income

What is the significance of R>G for the study of wealth inequality?

  • Which explains rising income inequality in the USA?

What explains the comeback of private capital since the 1970’s?

  • What institutions shape labour income inequality?
  • What institutions shape capital-wealth inequality?

Is rising income and wealth inequality compatible with democracy?