Precursors For The Contemporary Literature
According to data from the Luxembourg Income Study the reduction in the poverty rate in the United States as a result of taxation and transfers was 13 per cent in 1994 whereas the comparable figure for Sweden was 82 per cent. There are two standard approaches to explaining this variance, which frame much of the current debate (even as the literature has moved beyond the original formulations). One is Meltzer and Richard’s (1981) model of redistribution, which has been the workhorse in the political economy for two decades (see also Romer 1975). The model is built on the intuitively simple idea that since the median voter tends to have below-average income (assuming a typical right-skewed distribution of income) he or she has an interest in redistribution.With a proportional tax and flat rate benefit, and assuming that there are efficiency costs of taxation, Downs’s median voter theorem can be applied to predict the extent of redistribution. The equilibrium is reached when the benefit to the median voter of additional spending is exactly outweighed by the efficiency costs of such spending. This implies two key comparative statics: spending is higher (a) the greater the skew in the distribution of income, and (b) the greater the number of poor people who vote. The latter suggests that an expansion of the franchise to the poor, or higher voter turnout among the poor, will shift the decisive voter to the left and therefore raise support for redistribution. Assuming that the median voter’s policy preference is implemented, democratization will therefore lead to redistribution. There is some support for this proposition (see Rodrik 1999 on democracy and Franzese 2002, ch.
2 on turnout), although the evidence is contested (see Ross 2005). The first implication—that inegalitarian societies redistribute more than egalitarian ones—has been soundly rejected by the data (see Bénabou 1996; Perotti 1996; Lindert 1996; Alesina and Glaeser 2004; Moene and Wallerstein 2001). Indeed, the pattern among democracies appears to be precisely the opposite. As noted in the example above, a country with a flat income structure such as Sweden redistributes much more than a country like the USA with a very inegalitarian distribution of income. Sometimes referred to as the “Robin Hood paradox,” this is a puzzle that informs much contemporary scholarship. The other main approach to the study of capitalism and democracy focuses on the role of political power, especially the organizational and political strength of labor. If capitalism is about class conflict, then the organization and relative political strength of classes should affect policies and economic outcomes. There are two variants of the approach.
Power resources theory focuses on the size and structure of the welfare state, explaining it as a function of the historical strength of the political left, mediated by alliances with the middle classes (Korpi 1983, 1989; Esping-Andersen 1990; Huber and Stephens 2001). Neo-corporatist theory focuses on the organization of labor and its relationship to the state—especially the degree of centralization of unions and their incorporation into public decision-making processes (Schmitter 1979; Goldthorpe 1984; Cameron 1984; Katzenstein 1985). Both variants have come under attack for not paying sufficient attention to the role of employers. Research by Martin (1995), Swenson (2002), and Mares (2003), for example, suggests that employers did not simply oppose social policies, but in fact played a proactive role in the early formation of such policies. Also, if the welfare state is built on the shoulders of employers, we should expect investment and economic performance to suffer. But the remarkable fact is that there is no observed relationship between government spending, investment, and national income across advanced democracies (Lindert 1996). Or if there is one, it is so weak that it does not appear to have imposed much of a constraint on governments’ ability to spend and regulate labor markets.
The neo-corporatist variant is more satisfactory in this respect because it suggests how encompassing unions may choose wage restraint, which leads to higher profits and investment. But this cannot be the whole story since corporatist arrangements were dismantled in the 1980s, often led by export-oriented employers who presumably care deeply about wage restraint (Pontusson and Swenson 1996; Iversen 1996). A more fundamental question is why conflict should be organized around class and not, say, around sector or occupational group. When people make investments in specific assets, which may be physical or human capital, their interests will be tied up with those investments rather than the collective interest broader class to which they belong (Frieden 1991; Iversen 2005). There is also no systematic account of how distributive conflict between different groups of wage earners gets worked out politically. Dividing a pie invites the formation of redistributive coalitions, and such coalitions cannot be modeled as simply a function of interests. This is clearly also a problem for the Meltzer–Richard model where the median voter is assumed to be king..
