Increased economic inequality over the past 40 years has aggravated political inequality as policymaking has been more responsive to the well-off. Importantly, the shift reflects structural economic factors rather than just income inequality.
Since the global financial crisis of 2008–09, the topic of inequality has been high on the agenda. A macroeconomic system characterized by market liberalization and increasing economic inequality, going back to the ‘neoliberal turn’ in the 1970s, was widely seen as having failed spectacularly. In the years after the crisis, this assessment then found its expression in protests such as Occupy Wall Street in the US and left-wing movements in southern Europe such as the Indignados in Spain. But discussion focused mostly on how economic inequality, usually measured through income inequality, has fed into the rise of populism discussed in the previous chapter.
By most measures, income inequality had been on a downward trend in the decades immediately after the Second World War. But this trend reversed in the early 1980s when income inequality widened sharply, particularly in the UK and the US but also in economies such as Germany, Italy and the Netherlands. The neoliberal turn, epitomized above all by the policies of Margaret Thatcher and Ronald Reagan in the UK and US respectively but later followed by many continental Western European economies, reversed some of the redistribution that had been enacted through post-war welfare states. Beyond welfare policy choices affecting inequality after taxes and transfers, these structural economic transformations affected pre-tax income inequality, for example through shifting labour market structures.
On one level, there is nothing inherently undemocratic about increased levels of economic inequality. Modern liberal democracies with universal suffrage are premised on political equality, with all citizens having the same right to vote and engage in the political process. A political choice that arises from this system for a given level of redistribution, and thus a given level of income inequality, would in theory be perfectly democratic. In Europe, where party financing is often organized through the state, economic inequality theoretically should also not influence democratic politics to the same extent as in the US. However, even in Europe, rising income inequality has produced unequal responsiveness in policymaking, with all the resulting implications for the functioning of democracy at both the national and EU level.
Income inequality and unequal responsiveness
In the history of representative democracies going back to the 18th century, the composition of parliament has never mirrored that of the wider population. Some marginalized groups such as women or ethnic minorities have gained more access to legislative institutions in Europe over the last decades, though they are still under-represented. But the reverse trend can be observed regarding the socio-economic background of lawmakers – that is, they have become less representative. Those from higher income and education levels increasingly dominate representative institutions, while people from lower social classes increasingly abstain from voting and other political activities.
In theory, this is not necessarily problematic. If lower-income groups still see their interests and preferences reflected in the actions of representative bodies, it should not matter if such groups do not participate themselves or are not represented by people from the same social background. However, in practice, poorer people make their voices heard less often on an individual basis in these contexts, and the organizations that used to speak for them have lost political power. In particular trade unions – associated in the past with the political mobilization of those with fewer resources – have seen declines in membership and organizational power across most rich democracies. Against the background of these trends, a large body of scientific evidence shows that economic inequality translates into political decision-making that favours the better-off.
Research into unequal responsiveness was initially conducted in the US. A pioneering study by Martin Gilens and Benjamin Page compared the opinions on policy proposals of different income groups with the outcomes of the policymaking process. It found that, when the policy preferences of lower- and middle-income groups diverged from those of the top-income groups, the latter won out. In the American context, researchers have often argued that the main explanation for this finding is the role of private money in elections: since public funding of parties and elections is negligible in the US, anyone running for office depends on large private donors to finance their campaign.
Many Europeans would like to believe that this is a specifically American problem and that their political systems are not biased in favour of the rich in the same way. After all, unlike in the US, in Europe political parties tend to rely on public money, which generally accounts for 60 to 80 percent of their funding. Although special interests in Europe clearly also sometimes seek to use their wealth and influence in the pursuit of political goals, the prominence of private party and campaign financing in US political life nonetheless intuitively seems to invite the assumption that European democracies – absent the same dependence on large donors – might represent rich and poor citizens more equitably.
In practice, however, unequal responsiveness seems to be just as bad in Europe as in the US. Research shows that in Europe, too, policymaking is strongly biased in favour of the political demands and preferences of the affluent. When the less well-off in European democracies support a policy opposed by those at the other end of the income distribution, or vice versa, the lower-income group almost always loses out. Representational inequality along class lines and unequal responsiveness are common to a number of institutionally diverse European democracies – including Germany, Sweden and Spain. However, the fact that unequal responsiveness is a problem for democracy in Europe has so far not been widely discussed, as the debate has centred on the rise of populism.
Explanations of unequal responsiveness
If political financing does not explain the unequal responsiveness of democratic systems, what does? An obvious explanation would be that in the periods studied, governments were dominated by centre-right or liberal parties, traditionally associated with policies beneficial to the middle classes or the rich. However, a recent study lends only partial support to this argument: it shows that the pattern of decisions beneficial to higher-income groups is somewhat less pronounced under left-leaning governments in Germany, the Netherlands and Sweden, but that even under left-leaning governments there is still significant bias in favour of high-income citizens.
Another possible explanation for the unequal responsiveness of European democracies is a sense of apathy among lower-income citizens that goes beyond abstention at elections. Not only is election turnout lower among such groups, but increasingly they are less active in other political activities such as party membership or petitioning. This makes it more likely that such groups will be ignored by elected politicians, who tend to listen to constituents who make their voices heard. Similarly, parliamentarians might not listen enough to groups – such as those in lower income brackets – that are not from backgrounds similar to their own. Although European parliaments do not tend to be ‘millionaire clubs’ like the US Congress, their members still tend to be from higher social classes – in particular, from groups with higher educational levels. There has never been full descriptive representation, whereby political representatives are a perfect reflection of the electorate, but across developed economies there is now a significant disconnect between the socio-economic background of the population and that of its democratic representatives. Across the OECD, the average share of national legislators from working-class occupations (prior to entering office) is 5 per cent, compared with a share of 58 per cent in the general population.
Recent research supports the idea that this vast under-representation results in policymaking that fails to reflect or address the concerns of lower social classes. Parliamentarians with working-class backgrounds tend to have more left-leaning preferences on economic issues, have more contact with trade unions and other workers’ organizations while in office, and vote more often for economically progressive policies. This is the case even when party affiliation is controlled for. Since trade union membership in the past often served as a springboard for elevating workers into political positions, the trend of decreasing unionization along with the decoupling of unions from leftist parties in recent decades blocks an important route into politics for members of this cohort.
Across the OECD, the average share of national legislators from working-class occupations (prior to entering office) is 5 per cent, compared with a share of 58 per cent in the general population.
Structural explanations – in particular, the role of business in policymaking – may also help explain unequal responsiveness. Interest groups’ influence on political decision-making goes beyond financial donations, extending to different forms of lobbying or the exertion of structural power. However, these channels of influence are hard to measure empirically. Another potential structural factor is the way in which the EU’s fiscal rules and capital markets limit the fiscal space of governments to pursue redistributive policies. But there is little empirical research on this subject either. One recent study on Germany finds that policy responsiveness does vary systematically in accordance with budget constraints, and that progressive or redistributive fiscal measures are somewhat less likely when government finances are under pressure, but the effect is limited.
Structural economic shifts
The research on unequal responsiveness discussed in the previous section tends to focus on measures of income inequality, or proxies such as employment status or occupation. However, while most data does indeed suggest that income gaps have widened since the early 1980s, it does not show a significant increase in post-tax income inequality in most countries since around 2000. In contrast, wealth inequality, which started to increase around the same time as income inequality, has continued to increase since then and can be seen as a proxy for deeper, structural economic change. According to the OECD, ‘wealth is very unequally distributed’ in developed economies, with over half of all household wealth owned by just 10 per cent of households. This has led to public anger about the so-called ‘one per cent’ of society that accounts for a disproportionate share of asset ownership.
There is little in the way of research on whether this increase in wealth inequality has produced unequal policy responsiveness. This is likely in part due to a lack of data, as wealth in some cases is taxed less than income. But wealth inequality is related to the problems in democracy in Europe in other ways. It can be seen as indicative of a major structural shift during the past four decades, when the perceived failure of the post-war Keynesian model in the 1970s and the associated economic policy shifts in the 1980s, followed by the turn towards hyperglobalization from the 1990s, changed how developed economies functioned.
In particular, financialization – that is, the increasing influence of financial markets, financial institutions and financial elites over economic policy and economic outcomes – has led to the emergence of different economic dynamics. There have been many attempts to define the phenomenon, from associating it with the neoliberal era discussed above to classifying this form of economic organization as ‘rentier capitalism’, wherein a small elite owns key resources from financial assets to real estate. Regardless of the label, this has resulted in economic policymaking with a bias towards inflating or supporting the value of these assets. Throughout most Western European economies, capital’s share of national income has increased, by definition at the expense of the share attributed to labour, suggesting that new and increasing inequalities are being driven by structural economic factors.
In other words, the problem goes beyond the so-called ‘one per cent’ on which much media attention is focused. Public debates around wealth inequality often emphasize the large share of wealth owned by a small number of individuals (particularly in the American context), but from a political perspective this analysis is too narrow. The reality is that much of the increase in wealth, and by extension the widening in wealth inequality, has been driven by housing markets. This means there is a much wider potential electorate predisposed to support policies beneficial to asset owners – in fact, a majority of Europeans now live in owner-occupied housing.
Class position, with its consequent political implications, is arguably no longer determined by income but by wealth. Political contestation is no longer over the redistribution of income but over ownership of assets of various kinds, with a special role for real estate. The value of these assets has been supported by a large coalition of actors, ranging from asset-owning voters to democratically elected politicians and non-majoritarian institutions such as central banks (the latter in part guided by mandates focusing on low inflation) – what Yakov Feygin calls the ‘deflationary bloc’ in reference to this coalition’s preference for low inflation and low interest rates to support asset prices. Not only is this coalition large enough to dominate policymaking, in part thanks to several decades of policy aimed at boosting home ownership across developed economies, it has also managed to entrench its policy preferences in institutions removed from democratic control. Inflation-targeting central banks are a prime example of this.
Just as policymaking by governments is tilted towards the better-off, the current monetary policy regime, with its focus on price stability, works in favour of asset owners. Under the dominant prevailing model, central banks are meant to secure price stability by steering short-term interest rates. In the face of inflationary pressures, a central bank faces a choice: raise rates or allow inflation to take its course. This dilemma is constructed to make it look as if raising interest rates to head off ‘dangerous’ inflation is in the best interests of everyone in society. But in reality the situation only looks this way because of the structure of the choice. If price stability is secured by raising interest rates, private finance wins because it achieves price stability and predictability while workers lose out due to higher borrowing costs and unemployment. Meanwhile, the latter also lose if central banks do not intervene, as higher inflation then undermines consumers’ purchasing power. Contemporary practice thus puts policymakers into a ‘choice architecture’ that all but guarantees they will support the interests of the same specific group.
Just as policymaking by governments is tilted towards the better-off, the current monetary policy regime, with its focus on price stability, works in favour of asset owners.
Other economic policy choices over the past four decades have changed politics in similar ways. First, shifting labour market structures, including increasingly flexible labour markets, have created new political fault lines over issues such as employment status, not just within countries but also between eurozone member states, while the decline of trade union membership has reduced the coordinated bargaining power of labour. Second, the ownership of listed companies has shifted from households to asset managers – what Benjamin Braun calls ‘asset manager capitalism’. This has concentrated support for boosting asset prices over other political objectives – in other words, it has further strengthened the ‘deflationary bloc’.
In short, there has been a transformation of European economies in terms of income inequality, asset ownership, labour market institutions and the role of central banks. This transformation has in turn impacted the functioning of democracy and has probably created new forms of political inequality. However, addressing these problems requires more than a set of technical fixes. Although many policy prescriptions have been put forward in recent years, these have often failed to engage with how the widening in inequality has transformed politics. With this in mind, Chapter 4 focuses on the question of how policy is made, and in particular how policymaking has been depoliticized.
