GV4D4

Capital in Britain, 1700-2010

Same pattern as above, yet with agricultural land falling in importance and housing and other forms of capital increasing in importance

How the Model Works

What happens? 1. The median voter has an incentive to vote for redistribution, which will make her better off. 2. Democracy will produce governments focused on redistributing from the more to the less productive. 3. This leads to constant growth of the state.

Institutional Perspective

Which institutions concern us? 1.Political parties and political ideas 2. Patterns of worker and employer representation/organization 3. Welfare institutions and traditions 4. Redistributive fiscal policy 5. Redistributive regulation 6. Macroeconomic policy institutions

Thomas Piketty, "Capital in the twenty-first century," Introduction

1. Mr Piketty begins in an introduction that proceeds in two parts. He first describes the intellectual tradition into which the book falls. The second, which is the basic outline of his theory, I will tackle in the next post. 2. The study of political economy emerged in the first decades of the Industrial Revolution, in the late 18th century, in Britain and France. The great thinkers of the era were attempting to understand the dramatic societal and economic changes of the day and to describe their mechanics in a way that would allow them to anticipate future developments. To a great extent they focused on distributional issues—and worried that distribution spelled serious trouble for the capitalist system. The Reverend Thomas Malthus, for instance, famously worried that overpopulation would drive down wages to subsistence level, leading to dangerous political upheaval. To short-circuit this possibility the compassionate reverend recommended that governments cut off assistance to the poor and limit their reproduction. 3. David Ricardo's 19th century analysis was more measured but nonetheless similar in its concern about the sustainability of the contemporary economic system. He focused his attention on the relative scarcity of factors of production, and the effect of scarcity on shares of national income. Output and population were rising fast, he noted, while land supplies remained fixed, suggesting that land prices might rise without bound. As a result, he speculated, land rents would come to eat up a steadily rising share of national income, threatening the capitalist system. 4. Ricardo was wrong in the long run—soaring agricultural productivity (which both he and Malthus failed to anticipate) meant that agricultural land was not the scarce factor for very long. But he was right in the short run, and the short run matters. A period of a few decades in which the price of a scarce resource soars can lead to enormous accumulation of wealth in the hands of relatively few owners of capital. That concentration can persist even after technological change eases the initial scarcity: a point Mr Piketty notes is relevant in thinking about soaring prices for urban property or natural resources. 5. And then there was Marx. He (along with Friedrich Engels) was the first of the great political economists to wrestle directly with the effects of industrial capitalism. Marx was reacting to the reality of industrial growth at the time: through the first century or so of industrialisation output grew steadily, but there was virtually no meaningful increase in real wages. In the "hungry 1840s", when the Communist Manifesto was published, capitalism seemed like an incredibly raw deal for workers. That had begun to change by the time Marx published the first volume of Capital, in 1867. But the emergence of steady wage growth did little to diminish concentrated wealth. 6. Marx saw capitalism as fundamentally flawed, containing the roots of its own destruction. As owners of capital gobbled up the gains from growth, they would accumulate still greater piles of capital—"infinite accumulation". This would either drive the return on capital down to nothing, leading the capitalists to destroy the system by battling it out with each other, or it would allow the capitalists to capture a rising share of national income (like Ricardo's landowners), leading the workers to revolt. But Marx also turned out to be mistaken. He did so in large part, says Mr Piketty, because of a lack of data, and because he and others failed to anticipate that rapid technological growth could reduce the relevance of past wealth accumulation. 7. This latter factor helps shape one of the main elements of Mr Piketty's theory of everything: that the rate of growth is hugely important in determining how long a shadow old wealth casts. If not exactly an equaliser, fast growth nonetheless puts a finger on the scale on the side of those without great wealth. 8. Now, this entire line of theoretical work was thrown into upheaval by the events of the period from 1914-1945. The chaos and policy shifts of the period wiped out much of the world's previously accumulated wealth and set the stage for a burst of rapid, broad-based growth. Meanwhile, economists were for the first time gathering detailed data on personal incomes. And so when Simon Kuznets began looking at inequality trends in the 1950s, the data suggested to him that in "advanced phases" of capitalist development inequality tended to fall. The idea that inequality rose and then fell as an economy developed became known as the Kuznets curve. For the first time hard data had been brought to bear on distributional questions, and the news seemed pretty good. Kuznets' view became the foundation from which modern economics approach distributional issues, despite the fact that it was based on a very limited period during which declining inequality could not remotely be considered the result of natural economic processes. 9. That, as Mr Piketty sees it, is where he comes in. For most of the 20th century the distribution of incomes was a minor issue within economics. Growth and management of the business cycle were the sexy economic issues. 10. That is now changing, based in part on the academic work Mr Piketty has done (much of which is accessible at the World Top Incomes Database). While emerging-market growth has narrowed global inequality, income inequality within countries, including many large emerging markets, has been rising. The return of the importance of scarce land, resources, and intellectual property has contributed to a resurgence in wealth accumulation. Distributional worries are back, and Mr Piketty argues that that is the natural state of affairs rather than an aberration. 11. "In a way", Mr Piketty writes, "we are in the same position at the beginning of the twenty-first century as our forebears were in the early nineteenth century: we are witnessing impressive changes in economies around the world, and it is very difficult to know how extensive they will turn out to be...". It can be frightening and disorienting to find oneself at such an economic juncture. We look back on Malthus' worrying with the smugness of hindsight. But those who read Malthus at the turn of the 19th century and concluded that industrialisation would result in political upheaval, misery, and war turned out to be right. It also led to quite a few good things. But the process of getting there has been anything but smooth, and distributional issues inevitably play a role when the march toward prosperity slows or beats a temporary retreat. 12. In the first half of Capital's introduction, Thomas Piketty lays out the intellectual background for the work. In the second he shares the main results of the book. The first is that levels of inequality represent the result of political choices, rather than deterministic technological or economic outcomes (a point reinforced by recent IMF research). Whether or not structural economic shifts generate rising or falling, low or high inequality is down to the structure of the political system and the way it chooses to accommodate those changes. "Skill-biased technological change" or "superstar economics" are incomplete explanations of rising inequality. They may actually leave out the more interesting half of the story. 13. The second result is that economies do not naturally evolve toward more equal distributions of resources as they mature. There are some forces pushing toward greater equality, like the spread of new technologies from rich areas to poor—what he calls "the principal force for convergence". And there are some forces pushing toward less equality, one of the most important of which is the ability of the rich to secure further economic and political benefits for themselves. Importantly, he notes, the equalising power of the diffusion of knowledge is closely linked to state policy: to investment in infrastructure, education, research, and a regulatory environment conducive to entrepreneurship and competition. It isn't a natural force for convergence at all, but must be actively cultivated (and may be resisted by those with wealth and power). 14. At the moment, Mr Piketty observes, the world is looking at two key dynamics pushing the world toward greater income divergence. One is soaring inequality in labour income. This trend is especially noticeable in America, where the top 10% of earners now captures close to 50% of national income, up from about 35% for the first three postwar decades. The second dynamic is the return of wealth. 15. Mr Piketty introduces a statistic that features prominently throughout the book: the ratio of private wealth in an economy to GDP. Across most rich countries this ratio was consistently high in the 19th century, tumbled during the interwar period, and has since rebounded back within shouting distance of 19th century highs. To explain this, Mr Piketty unveils a "fundamental force for divergence": r>g. 16. The r in r>g is the return on capital. It's worth mentioning now that capital in Capital is equivalent to wealth, and wealth means anything other than labour which generates income: land, financial assets, physical capital, and so on. (Human capital doesn't count, as that augments labour income.) R, then, is the income generated by that wealth (meaning rents, dividends, profits, and so on) as a share of total wealth. The g, on the other hand, is simply the growth rate of the economy. 17. If and when r>g, then, wealth grows faster than output, the ratio of wealth to output increases, and the share of capital income in total income rises. And there is an important corollary: a slowdown in overall economic growth is itself a force for greater concentrations of wealth. This relationship forms a critical part of the book's argument, though it is not necessarily intuitive: shouldn't lower g imply lower r? But we'll get to that. We should be clear, though, about what Mr Piketty is after: breaking much of modern economic history down into a few constituent forces that can be easily captured in statements like r>g. The value of his book will depend, in part, on how much we need to abstract away from the world to accept that r>g matters across times and places. The more reality you strip away from a model the easier it is to divine universal truths, and the less interesting the truths become. 18. It's worth mentioning that Mr Piketty very much wants to explain the real world. He closes the Introduction with an interesting discussion of his motivations, not easily summarised here, which includes the factoid that he left America to return to his native France because he found American economists too interested in theory and generally unconvincing. That's not particularly charitable—there are a lot of American economists working on a lot of different things! It is of a piece with the francophilia that suffuses the book, and which the author (rather unsuccessfully) argues has nothing to do with home-side bias. Nothing wrong with that, of course, but it is a recurrent and noticeable enough part of the book that it seems worth pointing out.

Thomas Piketty, "Capital in the twenty-first century," Chapter 10

1. THIS week the Financial Times columnist Martin Wolf gave us his review of Mr Piketty's book. It was glowing but had one main criticism: that "Capital" does not tell us why inequality matters. I don't believe I agree with that. It is in these chapters that Mr Piketty explains why we should be concerned about rising inequality. 2. As we have discussed several times, a key part of Mr Piketty's story is that the rate of return on capital, r, is greater than the rate of economic growth, g. Critics have suggested that this is at odds with economic theory, but Mr Piketty is not making a theoretical point; he is observing that, empirically, r has been greater than g throughout most of history. If the theory is inconsistent with that, then that is the theory's problem. 3. Mr Piketty does offer an intuition for why this should be so. If r is less than g, he writes, then incomes rise faster than the burden of debt, and people have an incentive to borrow and consume without bound, knowing that it will be trivial to repay the loans. But people can't borrow endlessly without pushing up the rate of return on capital to at least the level of the rate of growth. 4. In any event, the regularity r>g is a strong force for concentration of wealth. Because the distribution of wealth is always more unequal than the distribution of income, a dynamic in which wealth grows faster than income leads to ever greater concentration of resources in the hands of a few. National wealth grows relative to national income, capital income grows relative to labour income, and the rich get richer. 5. But so what? Mr Piketty's answer is that this state of affairs is simply not sustainable, and however it ends, it ends badly. It could be that the process will peter out on its own as massive accumulation of capital eventually pushes down the rate of return. But this process can take a very, very long time and result in intolerably high concentrations of wealth. Or it could be the case that the process stops when a relatively small group of individuals owns everything. Either way, the danger is that society rejects the injustice of these concentrations and reacts—perhaps violently. 6. The main problem is a meta-problem, in other words. Inequality matters because, like it or not, inequality matters. In most states of the world, inequality will tend to rise unless countered, by economic shocks or deliberate policy choices. Active concern over and management of inequality may help reduce the odds that society rejects as unjust the institutions underlying an economy, potentially in chaotic and violent fashion. 7. That doesn't seem like a particularly outlandish view of the world. Humans intuit that—whether one is born into a fortune or one earns it in the market—there is only so much credit one can take for great wealth. Birth is the ultimate lottery, and it is wrong for the stakes of that lottery to be excessively high. Given the economic realities that Mr Piketty describes, it is therefore inevitable that distributional concerns will arise and motivate policy. The strange thing—as Mr Piketty points out—is that we consider the return of distribution as a worry to be an unusual or unnatural thing.

Another Shocking Statistic

Market incomes more unequally distributed than net incomes

Thomas Piketty, "Capital in the twenty-first century," Chapter 13

1. AND now we come to Part 4, which focuses on the critical question of how to structure policy in the world Mr Piketty describes. As this section contains some of the book's weaker arguments, this seems like an appropriate place to end our discussion with a grand assessment of the work's biggest contributions and shortcomings. I'll start with the former. 2. So what are the book's main contributions? First and perhaps most important are the data. As impressive as "Capital" is, it may ultimately prove less influential and significant than the World Top Incomes Database, on which much of the book is based. That, and the data on the distribution and evolution of wealth, represent an enormous achievement and the basis for the narrative. It's worth pointing out again that Mr Piketty has been just one of many economists working to pull these figures together. Were it not for this effort, the ongoing discussion on inequality would not be as serious and relevant as it is. 3. Second, the book challenges conventional wisdom concerning the economic history of the rich world in several important ways. Once again, Mr Piketty is not alone in demonstrating, for instance, Simon Kuznets' view that inequality would rise and then fall as industrialisation proceeded, or that the shares of national income flowing to capital and labour are not constant. But Mr Piketty has given these ideas new prominence, and with them the view that the 20th century's dramatic compression of wealth and incomes was largely down to the one-off shock of the interwar era. Putting this all together, Mr Piketty's book goes a long way toward challenging the 20th-century orthodoxy that distribution is not particularly important. 4. Third, "Capital" provides a framework for thinking about how inequality might evolve in future. Mr Piketty's data give us a view of the past. He also gives us his thoughts on how things might unfold in future (albeit with plenty of caveats). But even if readers doubt his forecasts for the rate of return on capital or for economic growth, they will have a way to think about how key distributions will change, thanks to this book. Among pundits, policy discussions have already begun to reflect this: the distributional effects of possible policy changes are beginning to be discussed in terms of how the policy might shift r or g (or s, the savings rate, or other key variables). 5. And fourth, "Capital", by dint of its extraordinary success, has created a focal point for an important discussion. It is the right book at the right time, you might say. It has given the debate about inequality a boost, and it has provided that debate with a mechanical framework to help shape and deepen the discussion. It is undoubtedly an important book, which is why this newspaper has devoted so much space to its discussion. 6. Now, the shortcomings. 7. First, there have been criticisms of the book that Mr Piketty probably ought to have seen coming and addressed pre-emptively. Writing a book is hard, and the temptation is often to try to address every criticism a reader might possibly have. That can make for an unwieldy and less persuasive book. Given the success "Capital" has had, I'm reluctant to second-guess Mr Piketty, but it does seem as though it would have been worth dwelling a bit more on how his r relates to other interest rates. Although the secular stagnation discussion had not really got going when Mr Piketty was writing this book, interest rates on rich-world government bonds had fallen to historically low levels and looked like staying there for years to come. Given the thrust of his argument, that r is typically larger than g, the prospect of low rates for years to come ought to have merited some discussion. 8. Second, given the nature and potential severity of the problem he describes, the proposed solutions look pretty uninspiring. In Chapter 13, Mr Piketty briefly looks at the social welfare state and its prospects. Perhaps a much larger state would be a good thing at some point, he suggests, but not until bureaucracies can be reformed and shown capable of managing two-thirds or more of national output. In the meantime, he reckons, governments need to examine how they provide education for their citizens, and they should reform pensions. How? He writes, for instance, that, "One of the most important reforms the twenty-first century social state needs to make is to establish a unified retirement scheme based on individual accounts with equal rights for everyone, no matter how complex one's career path." Well, all right.

Top 1% income share, Continental Europe and Japan

Decreasing inequality

Capital share in rich countries, 1975-2010

Went up in all places

Wealth Inequality in the UK

1. Bottom half of households owned less than 10% of the wealth 2. The wealthiest tenth of households owned more than 40% of the wealth

Thomas Piketty, "Capital in the twenty-first century," Chapter 16

1. Chapter 16 deals with the question of the public debt. The developed world is indebted at levels not seen since the 1945, hence Piketty's consideration of various methods to reduce these debts. Selling or privatizing all public assets, although roughly sufficient to pay all outstanding public debt, is quickly dismissed: these assets are not easy to sell and governments would have to pay to use these assets once they are privatized. The fees may be as high as the heavy interest they have to pay right now on outstanding debts. A blunter approach is to simply repudiate the public debt. This allows for the keeping of public assets but, ultimately, economic consequences of this measure are difficult to predict. A prolonged dose of austerity is also among the worst solutions in Piketty's view. It is considered unjust and inefficient, although the reason of its unjustness and inefficiency are not clearly stated. 2. Historically, inflation is how most large public debts were reduced. But inflation is hard to control once set in place. Artificially induced inflation may trigger an inflationary spiral. Most importantly, much of the beneficial effects of inflation disappear once it becomes permanent and expected. 3. The "most just and efficient solution" to reduce public debt, for Piketty, is a tax on capital (541). For instance, the public debt of European countries could be reduced to 20 percent of the GDP in 10 years by applying an exceptional tax: "10 percent on wealth between 1 and 5 million and 20 percent above 5 million" (544). I will not say much about this recommendation besides, obviously, raising the same concerns I have raised above. Given that such a measure is hardly feasible in the short to medium term, what should be done about the public debt in the meantime? One may also wonder how economic inequality is to be dealt with if the bulk of capital taxation is used to reduce the public debt. 4. Various topics are discussed in the rest of the chapter: what is the role of central banks, what are appropriate monetary policies in a multi-state monetary zone like Europe, what is the ideal level of capital accumulation (see also note #7), what should be done in regard to climate change, and so on. An overarching argument for the remainder of the chapter is difficult to identify here, but three main ideas can be extracted. These ideas also run throughout Part Four. 5. First, just and efficient fiscal solutions must involve more inter-state and international co-ordination and co-operation. To deal with inflation and public indebtedness in Europe, for instance, European states should pool their debts and create a Eurozone budgetary parliament. 6. Second, there should be more democratic control of the economy. Piketty points out many times that economic models or calculations can hardly give us all the answers. Ultimately, it is up to people to decide collectively on the level of capital accumulation, capital concentration, income concentration, public indebtment, etc. that they are willing to tolerate. But this will be possible only if, third, there is more economic transparency. The effectiveness of a fiscal policy like a tax depends on the communication of banking information. More importantly, economic transparency is essential for democratic governance and participation. If we want people to collectively decide upon the type of society they want to live in, they must know what this society looks like from an economic perspective. 7. In concluding this review, I will hazard a prediction of my own: as time passes by, more and more people may take issue with specific elements of Piketty's book. But whether or not one endorses his views, one will hardly be able to say anything about capital accumulation and economic inequality without positioning oneself in relation to his work. This is the sign of an important and valuable contribution on the topic.

More Statistics

1. Child wellbeing is better in more equal countries 2. Mental illness is more common in more unequal societies 3. Inequality is related to lower social mobility 4. Inequality is even related to height!

LONG-RUN INEQUALITY: PIKETTY'S CAPITAL 2

1. Growth a function of population growth as well as productivity. Western population decline -> low growth 2. Capital very unequally distributed, therefore r > g means greater inequality of capital, and hence also income 3. Less of a share of income available for 'labour' (ie wage earners, people without capital)

Anthony B. Atkinson, "Inequality: What Can Be Done?" Chapter 1

1. "Inequality" begins with a clear statement of the harm done by rising income gaps: they unfairly punish those who suffer bad luck. They undermine economic growth and social cohesion. Perhaps most importantly, inequality in economic resources translates directly into inequality in personal opportunity. Wealth generates comfort even when it isn't being spent; the rich enjoy the fact that they are insured against future hardship or could use their wealth in future to satisfy personal or professional goals. 2. The book then turns to the data and describes a familiar distributional picture. Inequality across rich countries was high before the two world wars of the 20th century. It fell to striking lows after 1945 and then began growing again around 1980 (see chart). Rising income inequality is a feature of most rich countries, especially America and Britain, and parts of the emerging world, including China. Sir Anthony is not interested in outlining any fundamental economic rules. Instead he carefully walks the reader through the ways that different forces have pushed incomes apart historically. 3. In America, for instance, incomes at the top of the scale began pulling away from the rest quite soon after 1945. Yet household inequality—taking account of taxes and transfers—did not rise until what Mr Atkinson calls the "Inequality Turn" around 1980. Several factors contributed to this, including changes for women and work. After the second world war, when female labour-force participation grew rapidly, high-earning men tended to marry low-earning women; the rising numbers of working women reduced household inequality. From the 1980s on, by contrast, men and women tended to marry those who earned like themselves—rich paired with rich; rising female participation in the workforce exacerbated inequality.

Kimberly Morgan, "The Religious Foundations of Work-Family Policies in Western Europe"

1. A key insight of the volume, in my view, comes from Kimberly Morgan's essay on work-family policies. 2. In the religiously homogeneous (i.e., Lutheran) Nordic countries, there was basically a church-state fusion and early secularization. Church influence was sidelined and there was little religious contestation. 3. The second model appeared where Catholics were dominant and Protestants a minority. In these nations (France, Italy, Belgium) the basic division was between clerical and anticlerical forces. Major political conflicts were organized around who — church or state — would control welfare programs and, especially, education of the young. In Austria, Germany, and the Netherlands, in contrast, the main result was "accommodation" of religious forces and religious parties gained the upper hand. Secular "republican" liberals committed to individualism played a lesser role 4. We can trace the origins of contemporary policies for working mothers to religious conflicts and cleavages of the late 19th century. These divisions shaped both party systems and early public policies for children and families, creating a tradition of active state involvement in children's education and family affairs in some countries - and institutions that sustained policy-making activism in these areas - versus passive familialism and a lack of such supportive institutions in others. In the Nordic countries, secularism also contributed to the individualized treatment of women in social benefits and law. Such changes would come later, and incompletely, to continental Europe, where religion endured as a more important political and social force. Nonetheless, in countries such as France and Belgium, where anticlerical forces challenged the hegemony of the Catholic Church, the state expanded its responsibility for children's education and family well-being, and later proved pragmatic, rather than moralizing, on the issue of working mothers. In much of the rest of continental Europe, in contrast, public policy would discourage mothers from working while their children were young, an approach that has deep historic roots and has proven slow to change.

WHAT IS CAPITAL?

1. Adam Smith: "That part of a man's stock which he expects to afford him revenue is called his capital." 2. In economics, capital goods, real capital, or capital assets are already-produced durable goods or any non-financial asset that is used in production of goods or services. 3. Ownership of these assets has money value 4. Land and real estate key factors of production 5. Also includes machinery, or even knowledge

Thomas Piketty, "Capital in the twenty-first century," Chapter 15

1. And then in Chapter 15 he lays out his primary recommendation: a progressive global tax on capital. This, he freely admits, is a "utopian idea" which is unlikely to be adopted anytime soon. It is nonetheless a useful thing to talk about, he reckons, if only as a reference point for other policy proposals. He describes what a capital tax might look like, and he argues that alternatives (like communism, protectionism or capital controls) would be much more costly. 2. And that's the gist of it. But surely there should be more. If the threat to society is that r is growing by more than g, then why not outline proposals to dramatically expand capital ownership? Why not propose a universal basic income: an inheritance, effectively, for everyone? The space allocated to Part 4 feels wasted. 3. And that brings us to the third shortcoming, which strikes me as the biggest. The economics gets a serious treatment in this book, but the politics does not. That's somewhat ironic; Mr Piketty winds down his conclusion by saying that economics should focus less on its aspirations to be a science and return to its roots, to political economy. But theories of political economy should be theories of politics. And there is no r>g for politics in this book. 4. There are nods towards the importance of the interdependence between the political and economic. He notes that epoch-ending political shifts, like the French and American revolutions, were motivated in large part by fiscal questions. Similarly, he observes that progressive income taxation tended to emerge alongside the development of democracy and the expansion of the franchise. (Though, he also admits, the fiscal demands of the first world war deserve most credit for adoption of meaningful income taxation across the rich world.) And he discusses how concern about rising inequality (often among elites) helped motivate rising tax rates in America in the early 20th century. 5. But the ending the book deserved was another look back at the data, to see whether patterns in the interaction between wealth concentration and political shifts could be detected and described. That's not Mr Piketty's area of expertise, necessarily, but neither is most of the stuff in Part 4. And this really is the critical question. If the most likely outcome of the trends Mr Piketty describes is that somewhere down the line a left-of-centre government is elected and passes higher top income-tax rates, higher estate-tax rates and pension reforms, and that defuses the crisis, well, that puts the rest of the book in perspective. If the most likely outcome is revolution, well, that does too. And while it would be absurd to expect Mr Piketty to say definitely whether one possibility or another is bound to occur, I don't think it's asking too much, given the ambition of the rest of the book, to think we ought to be given some sense of his view on how social and political movements generally evolve in response to widening inequality, and how that evolution tends to be reflected in policy. What good is it to suggest utopian ideas about how to fix these problems without at least gesturing toward the political mechanisms needed to bring them about? 6. For my part, I would say I generally think Mr Piketty's analysis is on the mark, with a few exceptions related to my particular view of how labour markets have been evolving. But "Capital" was critical to me in forming that view. I think the really fascinating dynamic in this book is the substitutability between labour and capital, something Mr Piketty mentions but does not devote an especially long amount of time to. But the stories we might tell in which capital becomes a dominant, potentially malign force are those in which many of the world's workers can only hold off the automation of their work by accepting ever lower levels of compensation. But that's my hobby horse and not his, and I don't fault him for not devoting masses of pages to it.

Notes on the Trends Observed

1. As capital accumulates, it grows bigger in relation to national income 2. Returns to capital becoming greater share of total income 3. Owners of capital receive greater and greater share of total income 4. Capital tends to be unequally distributed (more than income), and therefore greater share for capital means more unequal distribution generally

Peter A. Hall, David Soskice, "Varieties of capitalism: the institutional foundations of comparative advantage"

1. At the core of the VoC perspective is the importance of "system coordination", and the idea of "institutional complementarities". In simplest terms, institutional subsystems - which govern capital and labour - mould capitalist models, and when present in the "right" form, mutually reinforce each other. The VoC approach posits that the presence of "correctly calibrated" sub-systems (i.e., financial system, labour market, training system, and inter-firm relations) increases the performance, or the so-called "comparative institutional advantage" of the firm. Taken from the economic concept of comparative advantage in trade, the basic idea is that the institutional structure of particular political economy provides firms with advantages for engaging in specific types of activities. The presence of comparative institutional advantage enhances the survival chances of the system as a whole, producing specific adjustment paths to pressures for change. 2. The core insight of the VoC approach is portrayed in terms of two major types of capitalist models distinguished by the degree to which a political economy is, or is not, "coordinated". The coordinated market economy (or CME) - dependent on non-market relations, collaboration, credible commitments and deliberative calculation on the part of firms - is diametrically opposed along all of these dimensions to the liberal market economy (or LME), whose essence is described in terms of arms-length, competitive relations, competition and formal contracting, and the operation of supply and demand in line with price signalling 3. VoC argues that institutional complementarities deliver different kinds of firm behaviour and investment patterns. Hence, in the LMEs, fluid labour markets fit well with easy access to stock market capital and the profit imperative, making LME firms the "radical innovators" they have proven to be in recent years, in sectors ranging from bio-technology through semi-conductors, software, and advertising to corporate finance. The logic of LME dynamics revolves around the centrality of "switchable assets", i.e., assets whose value can be realised if diverted to multiple purposes. In the CMEs, by contrast, long-term employment strategies, rule-bound behaviour and durable ties between firms and banks underpinning patient capital provision predispose firms to be "incremental innovators" in capital goods industries, machine tools and equipment of all kinds. In contrast to the LME, the logic of the CME revolves around "specific or co-specific assets", i.e., assets whose value depends on the active co-operation of others

INEQUALITY OVER TIME

Inequality first falls, then rises over the 20th century. Why?

Gini coefficients of income equality, OECD countries, mid-2010s

1. Considerable variation in income distribution - eg compare Nth Europe with America (Also variation over time) 2. Variety of other measures possible (eg ratios of average incomes at different points in income scale, often divided into percentiles, deciles, or quintiles). But tend to give similar results 3. Note: Countries are ranked, from left to right, in increasing order in the Gini coefficient. The income concept used is that of disposable household income in cash, adjusted for household size with an elasticity of 0.5. Source: OECD income distribution questionnaire. 4. US most unequal OECD country

Some Key Terms

1. Considerable variation in market income distribution, but also in disposable income distribution and in the difference between the two. This difference is what we call 'redistribution' 2. 'Redistribution' - how government action changes the distribution of income delivered by the market 3. 'Predistribution' - how government action changes the way markets distribute income

Criticisms

1. Data very approximate for the past 2. 'Capital' = 'wealth'? 3. If capital grows, greater competition for investment opportunities should depress r 4. Ignores the politics of redistribution 5. Ignores the politics of property rights 6. Little attention to process of financialization 7. Debate about data 'errors' largely specious though (see FT's Chris Giles, and Piketty's response)

Two broad (and contrasting) approaches

1. Economics: structural feature of capitalism: tendency of capital to accumulate -> inequality 2. Politics: democracy gives political power to the poor, -> pressure for redistribution -> equality

Adam Bonica, Nolan McCarty, Keith T. Poole, Howard Rosenthal, "Why Hasn't Democracy Slowed Rising Inequality?"

1. Economists may be inclined to downplay the role of politics and public policy in generating and perpetuating inequality. Of course, economic shifts like globalization, technological shifts like information and communications technology, and social changes like the greater propensity of high-income earners to marry each other can lead to increases in inequality. But these changes are not orthogonal to political decisions that are taken — or decisions not taken. 2. For example, Piketty and Saez (2003) suggest that sharp changes in income inequality have been driven by destruction of assets in economic depressions and wars and by changes in fiscal policy. The economic policies that abet and respond to depressions are the subject of political processes, while "war is the continuation of politics by other means" (von Clausewitz 1832 [2009]). Open immigration policies, as argued by some economists like Borjas (1999), may increase inequality. The influence of globalization reflects political decisions about the free movement of goods and services. Globalization of financial services allows the wealthy to benefit from tax avoidance strategies by moving funds abroad or not bringing them home, depending on the policies embedded in the US tax code and the enforcement vigor of the IRS. The pace of technological development is intertwined with public policies related to innovation and intellectual property, and the applications of technology are intertwined with how, often slower-moving, regulatory agencies struggle to keep pace. The complexity in derivatives that emerged, with its disastrous consequences for the global economy, required both explicit acquiescence by the government in the form of legislation such as the Commodity Futures Modernization Act of 2000 and implicit acquiescence in the failure to exercise supervision. The deregulation and lack-of-regulation of the financial sector in the 1990s and early 2000s helped to shape the practices and compensation in that industry. 3. Thus, our general argument is that politics and public policy need to be considered explicitly in any discussion of the causes and consequence of inequality. The feedback from politics can also arise as a result of laws that were frozen in place, or that were never enacted. Top marginal tax rates in the United States declined sharply from the 1960s through the 1980s, but since then have fluctuated only mildly. US spending programs are increasingly focused on the elderly rather than on broader assistance to those of working age or those with low incomes. Overall, the kinds of government policies that could have ameliorated the sharp rise in inequality have been immobilized by a combination of greater polarization, lack of voter participation, feedback from high-income campaign contributors, and political institutions that must overcome a series of key pivots before making significant changes.

THE POLITICS OF INEQUALITY

1. Economists tend to focus on structural features of the economy to explain the income distribution: role of capital, globalization (capital/trade), technological change, market structures, demographics, growth 2. Political scientists and sociologists more interested in how political and social institutions regulate markets and redistribute income 3. The 'politics' of inequality

Jacob Hacker, Paul Pierson, "Winner-Take-All Politics: Public Policy, Political Organization, and the Precipitous Rise of Top Incomes in the United States"

1. Explaining the remarkable rise of winner-take-all requires a true political economy—that is, a perspective that sees modern capitalism and modern electoral democracies as deeply interconnected. On the one side, government profoundly influences the economy through an extensive range of policies that shape and reshape markets. On the other side, economic actors—especially when capable of sustained collective action on behalf of shared material interests—have a massive and ongoing impact on how political authority is exercised. 2. Recent economic accounts have missed the first side of this relationship. Conceptualizing government's role in an excessively narrow way, they have attributed highly concentrated gains to impersonal technological forces. While this interpretation has some basis, neither the American experience nor comparative evidence suggests it can bear the weight that economists have placed on it. 3. Recent political accounts have missed the second side of this relationship. Conceptualizing politics and policy in excessively narrow ways, they have sought to sustain an explanatory focus on the median voter. Yet once the hyperconcentration of gains is recognized, and the policy dynamics more clearly outlined, appeals to the median voter look less and less like a plausible line of argument and more and more like a kind of deus ex machina. 4. Perhaps surprisingly, the limits of these accounts flow from a similar source. Too many economists and political scientists have treated the American political economy as an atomized space, and focused their analysis on individual actors, from voters and politicians to workers and consumers. But the American political economy is an organized space, with extensive government policies shaping markets, and increasingly powerful groups who favor winner-take-all outcomes playing a critical role in politics. Finding allies in both political parties, organized groups with a long view have successfully pushed new initiatives onto the American political agenda and exploited the opportunities created by American political institutions to transform U.S. public policy—through new enactments and pervasive policy drift. In the process, they have fundamentally reshaped the relative economic standing and absolute well-being of millions of ordinary Americans. Politics and governance have been central to the rise of winner-take-all inequality.

Thomas Piketty, "Capital in the twenty-first century," Chapter 1

1. FIRST on the agenda, a bit of housekeeping: Capital is now available for sale. Second on the agenda, this week's discussion, which is a look at Part 1, "Income and Capital", beginning with the first Chapter. I don't anticipate devoting a post to each chapter of the book, since that would keep us here a while, but in the early stages it's worth doing, to keep the posts at a manageable length. 2. Mr Piketty begins Part 1, Chapter 1 by defining terms. It's a useful exercise, but for our purposes the only thing worth calling out is the definition of capital itself, which he treats as equivalent to wealth, and which he considers to be sources of value that can be traded (so "human capital" doesn't count). He recognises that there is a difference between appropriatable wealth (like land or natural resources) and accumulatable wealth (like financial or industrial capital). There are times when it's useful to distinguish between the two, he notes, and times when it isn't necessary. Mr Piketty writes that in most of the rich world wealth is split nearly evenly between residential capital (housing mostly) and productive capital. A useful rule of thumb. 3. He then defines an important statistic for the book, β, or the ratio of capital in an economy to national income. It is a measure of the importance of capital in a society, and in Part 2 he describes why and how it varies across times and countries. And this all leads up to what he calls, rather grandly, the "first fundamental law of capitalism": α = r * β. This is basically an accounting identity that defines capital's share of income (α) as the rate of return on capital multiplied by the capital stock. Which makes it a useful way to calculate a quick and dirty rate of return, assuming you know the capital share of income and wealth as a share of output. 4. At this point I should mention another interesting habit of Mr Piketty's which some readers may find annoying, but I which I found quite endearing: his penchant for illustrating 19th century trends with examples from contemporary fiction. It turns out to be quite a useful device, as it happens, because many of the writers at the time (like Jane Austen, for instance) lingered over the details of characters' estates and took for granted (and understood that readers took for granted) that so much wealth was associated with x annual income, implying y rate of return. It's especially fun later when he discusses changes in the macroeconomic framework (toward systematic inflation, for instance) and identifies corresponding changes in the obsessions of contemporary writers. But I digress. 5. So does Mr Piketty. He wanders into a history of national accounts in order to make the point that figures like GDP are social constructs—which is true but somewhat tangential. He then discusses global inequality; real income per person ranges from about 150 euros per month in the poorest regions (like sub-Saharan Africa) to 3,000 euros per month in the richest. The geographical distribution of global output has been changing, of course. Europe's share peaked on the eve of the first world war, America's in the 1950s. 6. It does matter that he mentions this, I should say, since one classic method for deflecting expressions of concern about inequality is to point out that at a global level inequality has, at least recently, been falling. And Mr Piketty does have an interesting story to tell about global convergence. Those countries that have successfully completed much of the economic catch-up process have typically been economies that self-financed industrialisation on the back of high domestic savings rates. But in other regions, like Africa, a large share of industrial capital is foreign-owned. That may be due to the fact that domestic institutions, including the financial sector, are weak. But foreign ownership can also perpetuate institutional weakness, he writes, since it creates a strong incentive for governments to break contracts and expropriate foreign capital. 7. Mr Piketty uses this to argue that while there are gains from openness, those gains are almost entirely down to the transfer of knowledge, rather than the efficiency benefits of free trade and capital flows. The latter are mostly real, he suggests, but are generally modest. Or to put it somewhat differently: access to global goods and capital markets is useful to the extent that it facilitates an improvement in an economy's technological capabilities. 8. That's excessively pessimistic on openness for my taste. Maybe openness mostly entails foreign ownership that undermines institutional strength and delays convergence (counterpoint: maybe it doesn't!), but cutting the poor off from goods markets has historically been a good way to keep them poorer than they need to be and to reinforce cronyist regimes. 9. That said, Mr Piketty's emphasis on the importance of the diffusion of knowledge in influencing income distributions (across time, and both across and within countries) is dead on.

DEMOCRACY AND THE GROWTH OF THE STATE

1. Fall and rise in capital share and inequality also coincides with trends in the size of the state and redistributive effort the public sector makes. 2. Goes a long way to explaining variations in inequality. 3. (Data from Tanzi/Schuknecht, Public Spending in 20th Century)

LONG-RUN INEQUALITY: PIKETTY'S CAPITAL

1. For Piketty, inequality trends a function of structural features of capitalism 2. Economic output distributed between factors of production: land, capital, and labour 3. Capital tends to grow as a share of national income because r > g, ie rate of return on capital is higher than economic growth

Criticism of Piketty

1. For Piketty, rising inequality is about the rise in the total share of capital, and decline of labour share 2. Less attention paid to the politics of the capital/labour relationship, and the political foundations of capitalism 3. Evolution of capital share deeply affected by political events, eg world wars, revolutions, rise of political movements such as communism

What do we mean by 'politics'?

1. Formal political institutions (constitutions, electoral rules) 2. Political parties and political ideas 3. Patterns of worker and employer representation/organization 4. Redistribution (fiscal policy - tax and spend) 5. Welfare institutions and traditions 6. 'Pre'distribution (regulation - market rules) 7. Macroeconomic policy institutions

Trends in Government Expenditures

1. From late 19th century, tendency for state expenditure to increase as proportion of GDP 2. Welfare capitalism the dominant form of social and economic organization in the advanced democracies in the 20th century 3. Democratic states raise large revenues and use the money in ways that change the distribution of income and wealth.

PIKETTY'S CAPITAL: KEY CONCEPTS

1. Growth - increase in output/income of an economy - value of goods and services produced 2. Factors of production - inputs: what is used in the production process in order to produce output 3. Capital, labour, land 4. Income from production distributed among them

Key Issues

1. Growth of the state, at least in terms of its role in consuming national income, one of the most significant developments of industrial age. 2. What is the relationship between the growth of markets, the changing balance of power between labour and capital, and the emergence of political democracy? 3. How can we understand and explain how inequality declined in the mid-20th century, and then rose again after the 1970s?

Effects of Inequality

1. Higher inequality also associated with lower economic growth in some studies. 2. Inequality can have negative macro-social effects (eg Wilkinson/Pickett 2009, The Spirit Level) 3. Spirit Level books sparks big debate. US economists also increasingly discussing consequences of inequality for the economy 4. Life expectancy in rich countries is no longer related to GDP per capita 5. Life expectancy is strongly related to income within countries

Measuring Equality And Inequality

1. How do we know how equally income is distributed in a society? 2. Lots of data available. Growth in rigorous data collection, esp. for advanced countries, over last 30 years. Sources: official tax returns, micro surveys of household income and assets 3. Most common measure of inequality: Gini coefficient. Higher Gini = higher inequality

Thomas Piketty, "Capital in the twenty-first century," Chapter 7

1. IN PART 3 Mr Piketty turns to the heart of the matter: inequality and the concentration of wealth and income. The first three chapters of the section are generally focused on trends in the concentration of income. Here is a summary for you. For a time in the mid-20th century, hard work was the surest way to obtain a good living. For most of the modern era before that, it wasn't; only rarely did the fruits of one's labour elevate him to the ranks of the elite, which was instead populated mostly by the idle rich. (America outside the South was an exception, but became less of one over the course of the 19th century.) Then the dramatic changes of the interwar era reset the clock. 2. This reset has much less to do with rising worker productivity or bargaining power than to the blows dealt to the very rich in the interwar period. Extremely unequal societies used to be built upon extreme concentrations of wealth, which allowed a small class of people to live on capital income alone. In the interwar period, the rentiers were "euthanised", in Mr Piketty's phrase; they were not merely overtaken by the working rich. 3. Mr Piketty devotes much of the real estate in these chapters to a detailed walk through the data, explaining which factors contributed to shifts in income distributions over the course of the last century. The French income distribution was highly compressed by the interwar years, but inequality began to grow rapidly in the postwar era, thanks to rapid recovery and a greater focus on rebuilding than on distributional issues. That trend toward rising inequality was snuffed out by the political changes of the late 1960s, but inequality began growing again from the early 1990s. 4. Indeed, the broad point is that almost everywhere in the world that data on top incomes is available—including emerging markets—inequality hit something of a nadir in the 1960s or 1970s but has since begun rising again. But the rise is most pronounced in anglophone economies, and it is basically unprecedented in America, which is blazing new territory. Basically unique among rich economies, America has returned to and actually surpassed the levels of income concentration experienced at the beginning of the 20th century. Strikingly, it has done this through a remarkable increase in labour-income inequality. 4. In discussing the American experience, Mr Piketty makes two points that have sparked some argument in recent weeks. The first concerns secular stagnation. Here's your secular stagnation and crisis, according to Mr Piketty: in 1980, roughly one-third of national labour income went to the top 10%. Over the next three decades that share rose by 15 full percentage points. That represents an enormous shift in purchasing power to those with much less propensity to spend, and that, in turn, means that adequate demand became ever harder to generate in the absence of borrowing by those more likely to consume the marginal dollar. In terms of magnitudes, this shift in incomes is significantly larger than the contemporaneous rise in America's current-account deficit. As Mr Piketty sees things, inequality is a bigger factor in stagnation than global imbalances. 5. The source of controversy is that one manifestation of inadequate demand as a result of excess saving is a falling—or even negative—real interest rate. And if the real interest rate is falling, critics argue, then how can Mr Piketty's r be greater than g, the growth rate, thereby raising the value of wealth to income in the economy? 6. But this glosses over the rate of return we are interested in. The short-term real interest rate on risk-free debt has been near or below zero for much of the past decade. The long-term real interest rate on risk-free debt has been falling for a couple of decades, and it has been low enough to dip below the economy's actual or potential real growth rate since about 2005. But Mr Piketty is not interested in the risk-free rate. His rate of return on capital is the sum of all income derived from wealth each year (which includes profits, rents, dividends, royalties, and so on) as a share of national wealth. As he notes in earlier chapters, the historical r was an amalgam of different returns on different sorts of investment carrying different levels of risk; the return on agricultural land in Europe was different from that on government bonds, and both were lower than the return on riskier investments in industry or ventures abroad. While it is true that putting one's money in American government debt has rarely paid less, it is not at all true that the wealthy are unable to wring real capital incomes larger than the rate of growth out of their fortunes. 7. The second contentious point relates to the discussion of the sources of American inequality. Over the long run, Mr Piketty says, the supply and demand for skills is critical in determining the distribution of labour income. Over shorter horizons and smaller margins policies like the minimum wage matter. But to explain the extraordinary performance of the incomes of America's top 1% requires a different story. Recourse to "superstar" explanations gets you only so far, since other similar economies, including Britain, have experienced a rising top income share but nothing remotely as dramatic as that in America. Mr Piketty reckons that one needs to turn to norms at the very top. Productivities are hard to assess among top executives, and salaries are often determined by sympathetic boards or supervisors or peers, who at any rate share similar ideas about what top executives are worth. In America, this peer group votes itself massive raises that would be considered obscene in other advanced economies. 8. That may not be right. But Mr Piketty notes that if America's current income gaps reflect actual productivity differences, then the dispersion in productivity at the top and bottom of the spectrum is greater in modern America than in apartheid South Africa. And it is hard to believe that could be the case.

Thomas Piketty, "Capital in the twenty-first century," Chapter 8

1. IN PART 3 Mr Piketty turns to the heart of the matter: inequality and the concentration of wealth and income. The first three chapters of the section are generally focused on trends in the concentration of income. Here is a summary for you. For a time in the mid-20th century, hard work was the surest way to obtain a good living. For most of the modern era before that, it wasn't; only rarely did the fruits of one's labour elevate him to the ranks of the elite, which was instead populated mostly by the idle rich. (America outside the South was an exception, but became less of one over the course of the 19th century.) Then the dramatic changes of the interwar era reset the clock. 2. This reset has much less to do with rising worker productivity or bargaining power than to the blows dealt to the very rich in the interwar period. Extremely unequal societies used to be built upon extreme concentrations of wealth, which allowed a small class of people to live on capital income alone. In the interwar period, the rentiers were "euthanised", in Mr Piketty's phrase; they were not merely overtaken by the working rich. 3. Mr Piketty devotes much of the real estate in these chapters to a detailed walk through the data, explaining which factors contributed to shifts in income distributions over the course of the last century. The French income distribution was highly compressed by the interwar years, but inequality began to grow rapidly in the postwar era, thanks to rapid recovery and a greater focus on rebuilding than on distributional issues. That trend toward rising inequality was snuffed out by the political changes of the late 1960s, but inequality began growing again from the early 1990s. 4. Indeed, the broad point is that almost everywhere in the world that data on top incomes is available—including emerging markets—inequality hit something of a nadir in the 1960s or 1970s but has since begun rising again. But the rise is most pronounced in anglophone economies, and it is basically unprecedented in America, which is blazing new territory. Basically unique among rich economies, America has returned to and actually surpassed the levels of income concentration experienced at the beginning of the 20th century. Strikingly, it has done this through a remarkable increase in labour-income inequality. 4. In discussing the American experience, Mr Piketty makes two points that have sparked some argument in recent weeks. The first concerns secular stagnation. Here's your secular stagnation and crisis, according to Mr Piketty: in 1980, roughly one-third of national labour income went to the top 10%. Over the next three decades that share rose by 15 full percentage points. That represents an enormous shift in purchasing power to those with much less propensity to spend, and that, in turn, means that adequate demand became ever harder to generate in the absence of borrowing by those more likely to consume the marginal dollar. In terms of magnitudes, this shift in incomes is significantly larger than the contemporaneous rise in America's current-account deficit. As Mr Piketty sees things, inequality is a bigger factor in stagnation than global imbalances. 5. The source of controversy is that one manifestation of inadequate demand as a result of excess saving is a falling—or even negative—real interest rate. And if the real interest rate is falling, critics argue, then how can Mr Piketty's r be greater than g, the growth rate, thereby raising the value of wealth to income in the economy? 6. But this glosses over the rate of return we are interested in. The short-term real interest rate on risk-free debt has been near or below zero for much of the past decade. The long-term real interest rate on risk-free debt has been falling for a couple of decades, and it has been low enough to dip below the economy's actual or potential real growth rate since about 2005. But Mr Piketty is not interested in the risk-free rate. His rate of return on capital is the sum of all income derived from wealth each year (which includes profits, rents, dividends, royalties, and so on) as a share of national wealth. As he notes in earlier chapters, the historical r was an amalgam of different returns on different sorts of investment carrying different levels of risk; the return on agricultural land in Europe was different from that on government bonds, and both were lower than the return on riskier investments in industry or ventures abroad. While it is true that putting one's money in American government debt has rarely paid less, it is not at all true that the wealthy are unable to wring real capital incomes larger than the rate of growth out of their fortunes. 7. The second contentious point relates to the discussion of the sources of American inequality. Over the long run, Mr Piketty says, the supply and demand for skills is critical in determining the distribution of labour income. Over shorter horizons and smaller margins policies like the minimum wage matter. But to explain the extraordinary performance of the incomes of America's top 1% requires a different story. Recourse to "superstar" explanations gets you only so far, since other similar economies, including Britain, have experienced a rising top income share but nothing remotely as dramatic as that in America. Mr Piketty reckons that one needs to turn to norms at the very top. Productivities are hard to assess among top executives, and salaries are often determined by sympathetic boards or supervisors or peers, who at any rate share similar ideas about what top executives are worth. In America, this peer group votes itself massive raises that would be considered obscene in other advanced economies. 8. That may not be right. But Mr Piketty notes that if America's current income gaps reflect actual productivity differences, then the dispersion in productivity at the top and bottom of the spectrum is greater in modern America than in apartheid South Africa. And it is hard to believe that could be the case.

Thomas Piketty, "Capital in the twenty-first century," Chapter 9

1. IN PART 3 Mr Piketty turns to the heart of the matter: inequality and the concentration of wealth and income. The first three chapters of the section are generally focused on trends in the concentration of income. Here is a summary for you. For a time in the mid-20th century, hard work was the surest way to obtain a good living. For most of the modern era before that, it wasn't; only rarely did the fruits of one's labour elevate him to the ranks of the elite, which was instead populated mostly by the idle rich. (America outside the South was an exception, but became less of one over the course of the 19th century.) Then the dramatic changes of the interwar era reset the clock. 2. This reset has much less to do with rising worker productivity or bargaining power than to the blows dealt to the very rich in the interwar period. Extremely unequal societies used to be built upon extreme concentrations of wealth, which allowed a small class of people to live on capital income alone. In the interwar period, the rentiers were "euthanised", in Mr Piketty's phrase; they were not merely overtaken by the working rich. 3. Mr Piketty devotes much of the real estate in these chapters to a detailed walk through the data, explaining which factors contributed to shifts in income distributions over the course of the last century. The French income distribution was highly compressed by the interwar years, but inequality began to grow rapidly in the postwar era, thanks to rapid recovery and a greater focus on rebuilding than on distributional issues. That trend toward rising inequality was snuffed out by the political changes of the late 1960s, but inequality began growing again from the early 1990s. 4. Indeed, the broad point is that almost everywhere in the world that data on top incomes is available—including emerging markets—inequality hit something of a nadir in the 1960s or 1970s but has since begun rising again. But the rise is most pronounced in anglophone economies, and it is basically unprecedented in America, which is blazing new territory. Basically unique among rich economies, America has returned to and actually surpassed the levels of income concentration experienced at the beginning of the 20th century. Strikingly, it has done this through a remarkable increase in labour-income inequality. 4. In discussing the American experience, Mr Piketty makes two points that have sparked some argument in recent weeks. The first concerns secular stagnation. Here's your secular stagnation and crisis, according to Mr Piketty: in 1980, roughly one-third of national labour income went to the top 10%. Over the next three decades that share rose by 15 full percentage points. That represents an enormous shift in purchasing power to those with much less propensity to spend, and that, in turn, means that adequate demand became ever harder to generate in the absence of borrowing by those more likely to consume the marginal dollar. In terms of magnitudes, this shift in incomes is significantly larger than the contemporaneous rise in America's current-account deficit. As Mr Piketty sees things, inequality is a bigger factor in stagnation than global imbalances. 5. The source of controversy is that one manifestation of inadequate demand as a result of excess saving is a falling—or even negative—real interest rate. And if the real interest rate is falling, critics argue, then how can Mr Piketty's r be greater than g, the growth rate, thereby raising the value of wealth to income in the economy? 6. But this glosses over the rate of return we are interested in. The short-term real interest rate on risk-free debt has been near or below zero for much of the past decade. The long-term real interest rate on risk-free debt has been falling for a couple of decades, and it has been low enough to dip below the economy's actual or potential real growth rate since about 2005. But Mr Piketty is not interested in the risk-free rate. His rate of return on capital is the sum of all income derived from wealth each year (which includes profits, rents, dividends, royalties, and so on) as a share of national wealth. As he notes in earlier chapters, the historical r was an amalgam of different returns on different sorts of investment carrying different levels of risk; the return on agricultural land in Europe was different from that on government bonds, and both were lower than the return on riskier investments in industry or ventures abroad. While it is true that putting one's money in American government debt has rarely paid less, it is not at all true that the wealthy are unable to wring real capital incomes larger than the rate of growth out of their fortunes. 7. The second contentious point relates to the discussion of the sources of American inequality. Over the long run, Mr Piketty says, the supply and demand for skills is critical in determining the distribution of labour income. Over shorter horizons and smaller margins policies like the minimum wage matter. But to explain the extraordinary performance of the incomes of America's top 1% requires a different story. Recourse to "superstar" explanations gets you only so far, since other similar economies, including Britain, have experienced a rising top income share but nothing remotely as dramatic as that in America. Mr Piketty reckons that one needs to turn to norms at the very top. Productivities are hard to assess among top executives, and salaries are often determined by sympathetic boards or supervisors or peers, who at any rate share similar ideas about what top executives are worth. In America, this peer group votes itself massive raises that would be considered obscene in other advanced economies. 8. That may not be right. But Mr Piketty notes that if America's current income gaps reflect actual productivity differences, then the dispersion in productivity at the top and bottom of the spectrum is greater in modern America than in apartheid South Africa. And it is hard to believe that could be the case.

Anthony B. Atkinson, "Inequality: What Can Be Done?" Chapter 11

1. In brief, these calculations suggest that a revenue-neutral version of the proposals could achieve a salient reduction in overall inequality, in overall poverty, and in child poverty. With a Gini coefficient reduced from 32 per cent to around 28 per cent, the UK would be on the way to becoming more like a middle-of-the-road OECD country, rather than keeping company with high-inequality countries such as the US. The proposals could reduce significantly the number of people living in families dependent on means-tested benefits. The UK government has chosen to go down the route of Universal Credit, preserving means-testing, but here I have shown that there are alternatives. 2. But this would only be a step towards lower inequality. The calculations provide a warning of the limits of what can be achieved by conventional redistribution through taxes and benefits. They underline the importance of the proposals that seek to render incomes less unequal before taxes and transfers. Securing full employment, with a fairer distribution of pay, and a more egalitarian ownership of capital are essential elements in any strategy to reduce inequality.

Gøsta Esping-Andersen, "The three worlds of welfare capitalism," Chapter 2

1. In chapter 2, he ingeniously operationalizes "de-commodification" -the liberation of personal livelihood reliance on the market (p.22)-in terms of such facets of public pension, sickness, and unemployment benefits as their "income replacement rates" and duration of "coverage." He characterizes it as "the mainspring of modem social policy" (p. 35) and the "Politics of Socialism" (p. 44) 2. In addressing the issue of welfare regimes the author attempts to define and measure a welfare state. Esping-Andersen uses three major criteria to define a welfare state. The first criterion is the concept of de-commodification, that is, the level at which one can live without reliance on the market. Within the concept of a welfare state, de-commodification represents welfare programs which guarantee income to people who are out of work for various reasons.

Questions Raised by the Trends

1. In particular, how is income inequality possible in a democracy? 2. Wealthy elites feared democracy in the 19th century, concerned that the poor masses would vote to confiscate their wealth. 3. But recently many countries have seen concentration of wealth return to similar levels. Is this sustainable?

Wealth Surveys

1. In surveys, most people prefer a more equal distribution of wealth 2. Their ideal wealth distribution doesn't match reality, and the reality is far more bleak than they imagine it to be

Anthony B. Atkinson, "Inequality: What Can Be Done?" Chapter 2

1. In the beginning of Part 1, Atkinson charts the course of inequality in the distribution of household incomes in the 20th century, especially but not exclusively in the UK and the USA (45-81). Inequality, measured by the Gini coefficient, declined between the World Wars and remained low (in comparison to the peak before WW2) up until the 1980s. From here came the 'Inequality Turn', with steadily rising inequality in the UK and the USA as well as a number of other European countries. While the trend is the same, there are a number of differences between countries. For example, since the 1980s, overall inequality in the UK has increased much more than it has in the USA. 2. Why did inequality remain relatively low in the decades after WW2? While the USA saw wider pay differentials after the war, this did not lead to a rise in inequality in household incomes because the influence of the pay differentials were offset by government transfers. Overall inequality in the UK and other European countries, such as Denmark, actually declined in post-war decades in part because of government transfers and progressive taxation. Wages and capital incomes were also less unequally distributed, due to the bargaining power of trade unions and to national income policies that limited individual pay increases. Reasons why inequality has increased immensely in the last few decades include explicit policy decisions to cut social transfers and top rates of income tax. There has also been a widening of pay differentials and a lack of the earlier instruments in place to curb these widening differentials, such as income policies. In contrast to the US and many of the European countries, inequality has declined significantly in Latin America in recent years, due to, among other factors, progressive redistribution and increased social assistance.

Alfonso Alexandre, "Comparative political economy and international migration"

1. In this article, we have presented a number of approaches linking the comparative analysis of national political economies with immigration flows and immigration policies. In spite of the diversity of areas covered, we have argued that they can be connected by a number of common concepts, namely liberalization, segmentation, substitution and complementarity. To conclude, we emphasize the need to better integrate migration and comparative capitalisms research and outline a number of possible research agendas tying together the themes discussed above 2. First, research on comparative capitalism would benefit greatly from an expansion of its focus to include labour immigration because it often constitutes a 'hidden' substitute to many policies considered important in the literature. Immigration policy can be analysed as an economic policy that shapes the labour supply just like active labour market policies or vocational education and training. As such, the regulation of immigration should be integrated into models of capitalist diversity. This would, for example, provide better insights into the mechanisms of skill production, especially in countries where immigration is a significant source of labour. Moreover, it would also help introduce a transnational dimension and overcome the risk of 'methodological nationalism' that often underpins comparative political economy (Wimmer and Schiller, 2003): immigration highlights how policies in one country can shape institutions in another country. Related to this, comparative insights can also shed light on the differential impact of immigration on labour markets. A large body of research on the economic impact of immigration is based on evidence from the USA—the 'welfare magnet' hypothesis is a case in point—and often ignores the important institutional differences between labour markets in Europe and North America. 3. Secondly, we have highlighted the effects of high levels of labour immigration on collective bargaining, welfare states and skills systems. An important underlying question that still needs to be explored is how immigration has reshaped the partisan and class coalitions supporting modern political economies. Migration potentially augments the mismatch between the constituency performing activities in the market (constituted by an increasing share of disenfranchised migrants) and the one exerting political rights (mostly restricted to natives). This challenges many of the core assumptions of political economy analysis, which emphasize the interactions between democracy (a system of decision-making based on votes) and capitalism (a system of exchange based on resources) (Iversen, 2006). Indeed, one important insight from political economy research is how groups that were dominated in the market were able to use politics to redistribute resources and regulate markets (Korpi 1983; Esping-Andersen 1992; Boix, 2003). The fact that a significant proportion of low-income workers nowadays are immigrants raises important questions about the capacity of low income groups to seek state intervention in markets. This influence is arguably mediated by citizenship laws: where access to citizenship is easier, immigration may empower the left. The 'ethnic vote' (African-American, Hispanics and Asians) has for instance given a presidential majority to Barack Obama in 2008 and 2012, while John McCain and Mitt Romney commanded clear majorities among whites, whose share of the electorate has declined from 89% in 1976 to 72% in 2012.4 In other countries where access to citizenship is more restrictive, left parties are deprived from an important constituency, and spurred to appeal to 'socio-cultural professionals' with different economic preferences. Meanwhile, the native white working class has been presented as the core base of support of anti-immigration parties in Europe (Kriesi et al., 2008), and of Donald Trump's presidential bid in the 2016 US general election. 4. Thirdly, an important agenda for future immigration research is the assessment of the impact of labour market and welfare institutions on immigration. While a number of authors have addressed how welfare and labour market arrangements may attract migrants in a small number of cases, we lack systematic cross-national evidence on how the institutional characteristics of welfare states and industrial relation systems act as magnets or deterrents for migration flows. One major problem in carrying out this agenda so far has been the lack of reliable data to control for the restrictiveness of immigration policy across countries and across time. The recent development of immigration policy restrictiveness indicators should now make this possible (see Bjerre et al., 2014; Beine et al., 2014). Since a growing number of governments are seeking to restrict access to welfare in order to reduce immigration, it is important to have systematic comparative evidence to engage with the popular 'welfare magnet' hypothesis. It is necessary to go beyond social spending as an indicator of welfare generosity, and differentiate between welfare schemes. Spending per se says little about how accessible welfare might be for migrants. Generous unemployment benefits or family benefits are perhaps more likely to function as immigration 'magnets' than pension benefits. 4. Finally, drawing on the idea that immigration often responds to mismatches between the native labour supply and available jobs, it would be important to assess the impact of labour market reforms not directly related to immigration (e.g. welfare retrenchment or changes in employment protection) on migrant flows. This would shed light on the mechanisms of complementarity and substitution between immigration policy and other areas of economic policy, such as trade, welfare and labour market regulation. Immigration studies, for their part, are often not explicit enough about the socio-economic context in which immigration takes place (as opposed to integration regimes). Taking into account institutional diversity should therefore be a fruitful way to understand how immigration shapes and is shaped by capitalism.

More on the Trends

1. So, lots of variation over time and space, lots to explain. 2. Many influential explanations available: globalization (capital/trade), technological change, market structures, secular growth of capital (r > g) 3. Our interest largely in the political dimension: how do political and social institutions redistribute income in different ways?

Inequalities and redistribution

1.This course seeks to explain why some societies are more (economically) unequal than others, even at similar levels of economic development. 2. We are particularly interested in the political dimension of inequality - how do political and social institutions intervene in the distribution of resources? And to what effect?

Gøsta Esping-Andersen, "The three worlds of welfare capitalism," Chapter 1

1. In this seminal work, Esping-Andersen reconceptualizes the welfare state from the perspective of welfare state consequences for citizen dependence upon markets, for labor market operations, and for stratification systems. He does so hoping to focus on "the principles for which historical actors have willingly united and struggled" (p. 52). He identifies distinct conservative, liberal, and social democratic "policy regimes." Conservative regimes (German, Italian, and the like) respond to developmental and socialistic threats by means of social policies that reinforce a traditional hierarchy of sectoral, occupational, and other status groupings in a manner that cements middle-class loyalties to their "welfare state." Liberal regimes such as United States and Canada tie the middle class and the poor to the market as the source for anything more than a harsh minimum of welfare. Social democratic regimes such as Sweden and Norway institutionalize a "universalistic" welfare state that benefits both the traditional working and new white-collar classes. Crucially, the conservative and socialist regimes provide broader and deeper constituencies for safeguarding welfare state commitments than do liberal regimes. 2. In chapter 1, Esping-Andersen introduces the above ideas and a synopsis. Then in the remainder of Part 1 he consolidates his conceptualization of regime dimensions and types and specifies empirical archetypes.

Meltzer/Richard's simple model

1. Individuals want to maximize income and minimize effort 2. Government taxes to redistribute 3. The median voter determines how governs 4. The median voter has below average income

WHY DEMOCRACY LEADS TO REDISTRIBUTION

1. Meltzer, Allan H., and Scott F. Richard. "Why Government Grows (and Grows) in a Democracy." 2. Government growth can only be coherently explained in terms of the 'difference between the distribution of votes and the distribution of income'.

Anthony B. Atkinson, "Inequality: What Can Be Done?" Chapter 10

1. Much of this chapter has been concerned with issues that are at heart political rather than economic. Policy has to be made within an economic context, and in the currently globalised world there are many constraints. But I have argued in this chapter that these constraints leave room for choice. It is not the case that "there is no alternative." Countries are themselves partly responsible for the terms on which they engage with the world economy. The impact on the extent of inequality depends on domestic policy, and this is one of the reasons we have seen larger increases of inequality in some countries than in others, even though they are faced with similar external challenges. 2. National governments are individually more constrained, particularly those in the Eurozone. Action to reduce inequality by countries acting in conjunction is likely to be more effective. For this reason, I believe it is imperative that the EU should prioritise measures to ensure achievement of the Europe 2020 target for reducing poverty and social exclusion. At a world level, the post-2015 Development Summit is of great importance. But the primary locus of policy-making remains national governments, and whether we move in the future towards less inequality is very much under the control of national policy-makers.

Thomas Piketty, "Capital in the twenty-first century," Chapter 5

1. NOW we arrive at the Second Fundamental Law of Capitalism. Ready? Here it is: β=s/g. Or, the ratio of capital to income is equal to the savings rate divided by the growth rate of the economy. So if you have an economy that saves 10% of its income and grows at 2%, then in the long run it will have a ratio of wealth to income of about 5 to 1. And we get a look at some of the dynamics Mr Piketty has in mind. Rising savings mean a larger stock of wealth to income, as does a slower growth rate. Indeed, the growth rate is hugely important here. If growth halves, from 2% per year to 1%, then according to Mr Piketty the stock of wealth will double to ten times national income (over the long run). The faster an economy grows the less large past accumulations of wealth loom. 2. This law is more like a rule of thumb; over long horizons wealth approaches the ratio of s to g, but all sorts of thing can disturb its path. And if there is some sort of fundamental shift in the economy, its impact on the dominance of capital may not be felt in full for decades. Mr Piketty also offers a pretty consequential caveat: if economies are reliant on scarce resources, or if asset prices tend to grow much faster than consumer prices, wealth can grow much larger much faster than this law implies. 3. So, there you get a sense of the recent trend as well as the effect on variations around the trend of asset-price booms. This trend provides the context for Mr Piketty's view of the relationship between growth and capital. Over the last 40 years the rich world has experienced a slowdown in both contributors to growth—population and technological progress—and that accounts for most of the broad, shared upward trend in wealth accumulation. It's not the whole of it. As Mr Piketty notes, growth in private wealth has been boosted by declines in public wealth, via privatisation of public assets and a shift to deficit financing. But it's most of it. 4. Surveying long-run trends Mr Piketty reckons that wealth as a share of national income is trending back toward the levels last seen prior to the first world war, and will, across most of the world, come to rest between 600% and 700% of national income. But, he notes, levels of capital in high saving, low growth economies may end up rising much higher. Investors in those economies are likely to begin accumulating large net foreign asset positions (another throwback to the world before the first world war). 5. Having discussed trends in the stock of capital, Mr Piketty turns to a discussion of the return on those stocks. This return is critical, because it governs the share of income in an economy flowing to capital rather than labour. And the rate of return is principally determined by two things: the stock of capital (declining marginal utility applies, so returns fall as the stock of capital rises), and technology, which determines how useful capital is. 6. Mr Piketty writes a long and useful description of the historical battle within economics over whether the capital and labour shares in national income are constant. In fact they appear not to be (something that will come as no surprise to our regular readers). Indeed, over the very long run, he writes, the elasticity of substitution between labour and capital appears to be greater than one. What does that mean? Well, additions to the stock of capital would tend to reduce the return to capital, as mentioned above. But based on that alone we can't conclude anything about whether a larger capital stock leads to a larger or smaller income share for capital. The critical question is whether the drop in the return to capital is big enough to offset the effect of the rise in the stock. If a small rise in the stock of capital leads to a big drop in the rate of return (perhaps because technological progress is slow and there is nothing at all useful for new capital to do) then accumulation of new wealth reduces the labour share, and we get an elasticity of less than one. This was the way economies behaved in pre-industrial, primarily agricultural society. 7. But if a big rise in the stock of capital leads to a relatively small decline in the return to capital (perhaps because technological developments mean there are always new ways to deploy capital), then more wealth means more a larger income share for capital. This, Mr Piketty reckons, describes the world in which we live now. From the 1970s on, the stock of capital has been rising steadily. And so, too, has capital's share of income. 8. There are two broad questions raised by these chapters that I think loom particularly large. One is what the path for capital accumulation and capital income looks like in a world of slow demographic growth and steady (or perhaps reasonably rapid) technological growth. Mr Piketty focuses on the demographic side of things, which argues in favour of rising wealth. He mentions the possibility that technological progress may increase the demand for human capital, which will augment the labour income share and push against the demographic trend. Indeed, this is one interpretation of the rise in wages and stabilisation of the capital share in the late 19th century, after long decades in which the benefits of industrialisation overwhelmingly flowed to capital. 9. Regular readers will anticipate my concern: that technological progress will in fact push in the same direction as demographic change, by magnificently expanding the array of tasks capital is capable of doing. In that world, labour could only retain its seat at the table by accepting tumbling wages. Whether labour hangs on in such fashion or is brushed aside through automation, the implications for labour earnings are grim. 10. The second big question is: in this world of rising capital stocks and income shares, what is the scarce factor, which is able to capture the benefits of economic growth? Not financial capital, that's for sure. Intellectual property is a better candidate; think of the entrepreneurs behind Instagram, capable of realising a vast fortune on the back of a fairly straightforward idea. 11. Where do the rich, powerful, and productive work and play? For the most part, they do it in a handful of very expensive, very well-educated, very cosmopolitan global cities. People in those cities have access to social networks and consumption amenities that cannot be had at any price in other locations. Such cities may be the ultimate scarce factor and the owners of land in those cities the ultimate beneficiaries of these broad trends. 12. The important observation for Piketty's argument is that, in all three countries, and elsewhere as well, the wealth-income ratio has been increasing since 1950, and is almost back to nineteenth-century levels. 13. In the 18th and 19th centuries western European society was highly unequal. Private wealth dwarfed national income and was concentrated in the hands of the rich families who sat atop a relatively rigid class structure. This system persisted even as industrialisation slowly contributed to rising wages for workers. Only the chaos of the first and second world wars and the Depression disrupted this pattern. High taxes, inflation, bankruptcies and the growth of sprawling welfare states caused wealth to shrink dramatically, and ushered in a period in which both income and wealth were distributed in relatively egalitarian fashion. But the shocks of the early 20th century have faded and wealth is now reasserting itself. On many measures, Piketty reckons, the importance of wealth in modern economies is approaching levels last seen before the first world war.

Thomas Piketty, "Capital in the twenty-first century," Chapter 2

1. One of Capital's primary themes is that economic states we conventionally view as the norm are in fact historical abberations. Mr Piketty launches his book by saying that the natural tendancy of economies to become more equal as they mature is a myth, built on the unusually compressed distributions of incomes and wealth that prevailed in the middle of the last century. That period was actually an oddity that resulted from the unique historical circumstances of the tumultuous early 20th century; most of the time inequality is the norm rather than the exception. 2. In Chapter 2 Mr Piketty extends this revisionism to ideas about growth. The middle of the last century was unusual in its growth rates as well as in the distribution of income; the good times most of us see as our due as residents of rich economies were in fact a fleeting anomaly. Most readers will not be surprised to hear that growth prior to the Industrial Revolution was extremely slow. Mr Piketty argues that even within the industrial era growth has typically been slower than was generally the case in the postwar boom decades. 3. The growth analysis in Capital is built on a division of growth into two components: population growth and per capita growth. While that's as defensible a method of growth accounting as any other, it's worth remembering that the strict division is artificial; in practice, population growth rates and productivity growth rates influence each other. We will discuss later whether Mr Piketty relies too heavily on an inappropriately rigid distinction between the two. 4. But here's the broad point: over the last 300 years, economic growth has been roughly half attributable to growth in population and half attributable to growth in productivity. That is important, because the world is on the downslope of the great demographic convulsion of the past few centuries. Population growth rates soared from 1700 to the middle of last century, when global population growth peaked at an annual rate of 1.9%. But population growth rates are now falling and are expected to return to very low, pre-industrial rates by the end of this century. 5. Similarly, the rate of growth of per capital income also appears to be near what is likely to be a peak. In the 18th century output per person grew imperceptibly faster than in the long centuries of almost no growth before. In the century to the first world war growth sped up to about 0.9% per year on average (across the world as a whole), and in the century to 2012 growth averaged 1.6%. In the very recent past rapid emerging-market catch-up pushed the global rate of per capita growth above 2%, but that seems unlikely to be sustained. Mr Piketty sees forecasts from economists like Robert Gordon, who thinks a return to pre-industrial rates of per capita growth may be ahead, as too dire. He nonetheless thinks that global per capita growth will converge toward 1% by the end of the century. 6. Taking the two trends together an interesting picture emerges. In the long centuries leading up to Industrial Revolution total economic growth averaged no more than 0.2% per year. But global growth rates soared to an average of as much as 4% per year over the past 60 years. Yet a subtle deceleration has begun, which will ultimately bring global growth back to something like 1.2% by the end of the century. 7. Why does this matter? Because, Mr Piketty says, of the power of cumulative growth. At growth rates of 0.2% per year the economy expands by just 6% per generation, and by only 22% per century. In effect, society recreates itself almost unchanged, generation after generation. Culture, society, and class structures are stagnant over long periods of time. At 3.5% annual growth, by contrast, each generation has an economy 2.8 times larger than the last, and a century means a 31-fold increase in economic output. That means dramatic social change and the constant replacement of the old with the new. That was the world of the middle of last century. 8. And in between? At a growth rate of 1.2% each generation enjoys economic output about 50% larger than the previous, and a century leads to a three-fold increase in output. That is not nothing. Over the course of a millenium the resulting change is unimaginably significant. But at human timescales the permanence of society—its rigidity—is in many ways more similar to that of the pre-industrial era than the relatively recent past. 9. Growth is important for lots of reasons, but it is important for Mr Piketty's purposes because it governs the length of the shadow cast by the past on the present. As growth rates fall, that shadow will lengthen, strengthening the economic and social importance of past wealth and status. 10. But is that right? Is growth actually about to fall dramatically? And can we be sure that slowing growth in this modern era will have anything like the same economic and social effects of low growth rates in the pre-industrial era? We'll move on to Mr Piketty's evidence next week.

Jonathan Hopkin, Kate Alexander Shaw, "Organized Combat or Structural Advantage? The Politics of Inequality and the Winner-Take-All Economy in the United Kingdom"

1. Our account of the rise of Britain's WTA economy resonates with much of what Hacker and Pierson argue for the United States. In Britain as in the United States, burgeoning inequality is primarily a story of runaway income growth for those at the very top of the income distribution. And as in the United States, those changes can be seen to originate not in the impersonal workings of a globalized economy, but in the political choices of successive governments. However, we find that the British case exposes the limitations of an explanation based primarily on organized combat. That certain groups have an interest in favorable policy outcomes (whether via enactments or drift) does not necessarily mean that they successfully mobilized to secure them. In Britain, with its politically insulated executive and much less professionalized lobbying industry, organized combat is a less convincing explanation of policy shifts that favor wealthy elites. 2. We suggest that the emergence of a WTA economy in Britain is better understood in terms of the interaction of political ideas and structural economic advantage. The liberalizations of the 1980s were implemented by an ideologically motivated elite that was ahead of the domestic business lobby in its commitment to free markets. The organizational changes instigated in that period fundamentally altered the shape of Britain's political economy, granting a privileged position to the financial services industry, which grew rapidly as a result. WTA politics survived and prospered even after the political defeat of the Conservatives, in part because egalitarian counterweights had been largely removed, leaving the center-left to devise a policy model based on limited redistribution from (some of) the winners that reduced poverty while tolerating inequality. These changes were inspired by a broad political and ideological project rather than by any specific exercise of interest group power, while the financialization of the economy placed increasing obstacles in the way of government action to equalize the distribution of income gains. Under Labour, the furtherance of a WTA economy involved the adoption of a set of market liberal ideas that allowed left politicians to surrender in the face of the structural power of finance, and the consequent growth in inequality, in the British economy. Those intellectual commitments largely survived the financial crisis of 2008-09, even as the power of the banking sector to lobby should have been at its lowest ebb. 3. There is little evidence to suggest that these developments were decisively shaped by the elite, pro-wealthy politics that Hacker and Pierson insightfully portrayed in the United States. In the British case, rather than the relentless organized combat characteristic of the United States, policymakers have been constrained by broader structural features of the political economy, in which the super-wealthy hold such blackmail power that they often barely need to flex their political muscles. Politicians respond to those constraints by adopting ideational positions that frame a finance-driven WTA economy as a good thing, and in doing so create a feedback loop that channels further gains to the top of the distribution with relatively little political friction. This suggests that Hacker and Pierson's WTA thesis could benefit from a greater focus on both the broader structural constraints on redistribution and equality resulting from the pro-market transformations of the 1980s, and on the ideas that germinated those transformations and continue to protect their legacy. Wealthy elites' superior ability to fight for their interests may explain part of the accelerating gains at the top of the income distribution, but the British case suggests that very often high earners can get their way even without heavy investments in organized combat. WTA income growth in the United Kingdom revolved around the expansion of the financial services industry, but this expansion was politically underpinned by the revenues it provided to fiscally constrained governments and the wealth effect of rising asset prices for households further down the income scale. In effect, Labour had to feed the beast of the financial industry in order to free up resources for public sector expansion and limited redistribution, because they were unable to win elections with a classic social democratic program of greater social spending. Signing up to the pro-finance agenda resolved Labour's political dilemma, for a time, obviating the need for the financial elite to lobby hard to defend its interests. 4. The primary focus of this article is the comparison between the United Kingdom and United States, as a means by which the causal chains at work in WTA politics can be more clearly discerned. As usual, such comparisons introduce simplification, in particular by treating nations as independent cases in ways that can obscure their interdependence. The financialization of the British economy was influenced in important ways by parallel changes in the United States, via the transmission of neoliberal thinking and through the imperatives of international competition. The well-known links between the Thatcher and Reagan projects provided the intellectual background to financialization, opening up the possibility that Britain's WTA trends were partly the result of lobbying overspill from the other side of the Atlantic. That is, however, beyond the scope of this article (and indeed outside the scope of Hacker and Pierson's original argument). At the same time, the realities of global competition helped to sharpen both governments' incentives to preserve comparative advantage in finance with WTA-friendly policy. Once again, this fact points to the importance of structural advantage, buttressed by a favorable intellectual climate.

CAPITAL AND INCOME

1. Piketty measures capital in terms of its relationship to income, ie how much is stock of capital worth compared with output of economy (generally measured annually) Assumes capital = wealth 2. 'Capital-income ratio' - value of capital in terms of annual output 3. Ratio of 600% means capital is worth 6 years of output

Here we focus on two explanations for the rise and fall of government-led redistribution

1. Political change - democracy leads to redistribution (Meltzer/Richard, Carles Boix) 2. Ideational change - different theories of the world, different ideologies - Keynes vs Friedman/Hayek (Peter Hall, Mark Blyth)

Some Facts

1. Population growth drives economic growth, which reduces inequality 2. r > g leads to higher capital/labor ratio 3. Piketty assumes capital has a high rate of return, no matter how much of it there is 4. If you have more capital, you have more income, which in turn leads to more capital 5. People at the top tend to have more capital

Anthony B. Atkinson, "Inequality: What Can Be Done?" Chapter 4

1. Sir Anthony dwells on one class of contributory factors above all others: the subtle (and not-so-subtle) ways the rich are able to influence government policy in order to protect their wealth. When governments prioritise low inflation over low unemployment, or low taxes over investment in infrastructure or education, they are responding to the preferences of the rich. 2. Rising top incomes (and stagnant low ones) are partly caused by long-running trends like globalisation and technological change. But people should not take those trends, or their consequences, as given, he argues. Government plays an important role in shaping the direction of technological change; autonomous vehicles, which may eliminate millions of jobs for less-skilled workers, owe critical technologies to research sponsored by the American government. A government in which workers' voices rang louder might, instead, have directed research funding into factory technologies that complement the skills of blue-collar workers. 3. The state should be conscious of its role in the innovation process, Sir Anthony says, and take account of its effects on income distribution. In particular, it ought to invest in human capital—in education and training—and emphasise the advantages of human interaction in the administration of public services. The ability to file tax returns online is a boon to the rich, but the need to file benefit applications online may be a burden to the poor. Employing people to help the poor understand what they need to do to obtain benefits, for example, would mitigate the unbalanced effect of technology in two ways, he says: by reducing the socially isolating effect of technology on those applying for benefits, and by creating public-sector jobs.

Trends in Inequality

1. So we can see there is variation across countries. 2. What about variation over time? 3. Income inequality fell in most western democracies after the 1930s, then rose again from the 1980s/90s 4. But trends vary across different rich countries

Capital/Wealth Inequality

10th decile in the US has the vast majority of wealth in the country. The other wealth-owning deciles, 5th-9th, have almost nothing in comparison

Top income shares of pre-tax income, 2010

1. So, what are we to make of this, the totality of daa? 2. Inequality within advanced nations usually lower than within poorer countries. Global inequality much greater than within-country inequality. 3. But even within rich countries, inequality has powerful effects. Differences in income associated with health and life expectancy, educational attainment, even height and weight 4. Proportion of pre-tax income accruing to those at the top has been increasing 5. In US, 46% of pre-tax income in 2010 went to the top 10%; top 1% got 17% 6. UK close to the US in terms of income inequality 7. Top 10% of earners in Sweden take home 20% less of national income than their counterparts in the US, and the US is not that different from Sweden

WHY THE GROWTH OF THE STATE?

1. Social forces: organized labour (Esping-Andersen), demands of business (Isabella Mares, Peter Swenson) 2. Needs of an industrial economy Hal Wilensky - 'Logic of Industrialism' 3. Trade, globalization (David Cameron - no, not that one - , Dani Rodrik) 4. Deindustrialization (Torben Iversen) 5. War (Marc Eisner)

Thomas Piketty, "Capital in the twenty-first century," Chapter 11

1. THIS week the Financial Times columnist Martin Wolf gave us his review of Mr Piketty's book. It was glowing but had one main criticism: that "Capital" does not tell us why inequality matters. I don't believe I agree with that. It is in these chapters that Mr Piketty explains why we should be concerned about rising inequality. 2. As we have discussed several times, a key part of Mr Piketty's story is that the rate of return on capital, r, is greater than the rate of economic growth, g. Critics have suggested that this is at odds with economic theory, but Mr Piketty is not making a theoretical point; he is observing that, empirically, r has been greater than g throughout most of history. If the theory is inconsistent with that, then that is the theory's problem. 3. Mr Piketty does offer an intuition for why this should be so. If r is less than g, he writes, then incomes rise faster than the burden of debt, and people have an incentive to borrow and consume without bound, knowing that it will be trivial to repay the loans. But people can't borrow endlessly without pushing up the rate of return on capital to at least the level of the rate of growth. 4. In any event, the regularity r>g is a strong force for concentration of wealth. Because the distribution of wealth is always more unequal than the distribution of income, a dynamic in which wealth grows faster than income leads to ever greater concentration of resources in the hands of a few. National wealth grows relative to national income, capital income grows relative to labour income, and the rich get richer. 5. But so what? Mr Piketty's answer is that this state of affairs is simply not sustainable, and however it ends, it ends badly. It could be that the process will peter out on its own as massive accumulation of capital eventually pushes down the rate of return. But this process can take a very, very long time and result in intolerably high concentrations of wealth. Or it could be the case that the process stops when a relatively small group of individuals owns everything. Either way, the danger is that society rejects the injustice of these concentrations and reacts—perhaps violently. 6. The main problem is a meta-problem, in other words. Inequality matters because, like it or not, inequality matters. In most states of the world, inequality will tend to rise unless countered, by economic shocks or deliberate policy choices. Active concern over and management of inequality may help reduce the odds that society rejects as unjust the institutions underlying an economy, potentially in chaotic and violent fashion. 7. That doesn't seem like a particularly outlandish view of the world. Humans intuit that—whether one is born into a fortune or one earns it in the market—there is only so much credit one can take for great wealth. Birth is the ultimate lottery, and it is wrong for the stakes of that lottery to be excessively high. Given the economic realities that Mr Piketty describes, it is therefore inevitable that distributional concerns will arise and motivate policy. The strange thing—as Mr Piketty points out—is that we consider the return of distribution as a worry to be an unusual or unnatural thing.

Thomas Piketty, "Capital in the twenty-first century," Chapter 12

1. THIS week the Financial Times columnist Martin Wolf gave us his review of Mr Piketty's book. It was glowing but had one main criticism: that "Capital" does not tell us why inequality matters. I don't believe I agree with that. It is in these chapters that Mr Piketty explains why we should be concerned about rising inequality. 2. As we have discussed several times, a key part of Mr Piketty's story is that the rate of return on capital, r, is greater than the rate of economic growth, g. Critics have suggested that this is at odds with economic theory, but Mr Piketty is not making a theoretical point; he is observing that, empirically, r has been greater than g throughout most of history. If the theory is inconsistent with that, then that is the theory's problem. 3. Mr Piketty does offer an intuition for why this should be so. If r is less than g, he writes, then incomes rise faster than the burden of debt, and people have an incentive to borrow and consume without bound, knowing that it will be trivial to repay the loans. But people can't borrow endlessly without pushing up the rate of return on capital to at least the level of the rate of growth. 4. In any event, the regularity r>g is a strong force for concentration of wealth. Because the distribution of wealth is always more unequal than the distribution of income, a dynamic in which wealth grows faster than income leads to ever greater concentration of resources in the hands of a few. National wealth grows relative to national income, capital income grows relative to labour income, and the rich get richer. 5. But so what? Mr Piketty's answer is that this state of affairs is simply not sustainable, and however it ends, it ends badly. It could be that the process will peter out on its own as massive accumulation of capital eventually pushes down the rate of return. But this process can take a very, very long time and result in intolerably high concentrations of wealth. Or it could be the case that the process stops when a relatively small group of individuals owns everything. Either way, the danger is that society rejects the injustice of these concentrations and reacts—perhaps violently. 6. The main problem is a meta-problem, in other words. Inequality matters because, like it or not, inequality matters. In most states of the world, inequality will tend to rise unless countered, by economic shocks or deliberate policy choices. Active concern over and management of inequality may help reduce the odds that society rejects as unjust the institutions underlying an economy, potentially in chaotic and violent fashion. 7. That doesn't seem like a particularly outlandish view of the world. Humans intuit that—whether one is born into a fortune or one earns it in the market—there is only so much credit one can take for great wealth. Birth is the ultimate lottery, and it is wrong for the stakes of that lottery to be excessively high. Given the economic realities that Mr Piketty describes, it is therefore inevitable that distributional concerns will arise and motivate policy. The strange thing—as Mr Piketty points out—is that we consider the return of distribution as a worry to be an unusual or unnatural thing.

Gini Coefficient

1. The Gini index is a measurement of the income distribution of a country's residents. This number, which ranges between 0 and 1 and is based on residents' net income, helps define the gap between the rich and the poor, with 0 representing perfect equality and 1 representing perfect inequality. It is typically expressed as a percentage, referred to as the Gini coefficient. 2. The Gini coefficient is often represented graphically as the area between the Lorenz curve and a line of equality. The Lorenz curve is also a graphical representation of income distribution, plotting cumulative income shares relative to cumulative population shares. For example, the chart would could show that the poorest 80% of the population takes in 50% of total income. The Lorenz curve and Gini coefficient can also be altered to reflect wealth rather than income, though wealth is often more difficult to measure than income.

Julia Lynch, "The Age of Welfare: Patronage, Citizenship, and Generational Justice in Social Policy"

1. The argument presented here highlights two features of welfare states that have until now received very little attention in the literature on comparative social policy: the structure of welfare-state programs, and the use that politicians make of such programs in their competitive battles with one another. With this new analytical leverage, we can reconsider some of the classic explanatory paradigms that have been offered to explain why welfare states in highly industrialized countries vary on a variety of dimensions. 2. The explanation for why welfare states differ in their age-orientation is perhaps most surprising because it has so little to do with the politics of age. The political power of age-based political actors and the ideologies they are presumed to carry with them about what is a just distribution across the life-course play far less of a role in determining the age of welfare than expected. This suggests two important lessons. First, a demand-driven explanation for the age-orientation of social policies is not satisfying. The age-orientation of the welfare state cannot be read simply as the revealed preference of powerful demographic groups. Politicians help invent the demand for such welfare-state policies as family allowances, unemployment benefits, and old-age pensions, as surely as they provide for the supply of these welfare goods. 3. Second, the unintended consequences of institutional rigidities probably play a larger role in structuring welfare-state outcomes than much of the previous literature recognizes. Policy "drift" allows old institutions and structures to generate new outcomes as the context within which they operate changes (see Hacker forthcoming). The age-orientation of welfare states is an outgrowth of early choices about welfare-state structures, choices that were made without concern for the shape of the labor market, public finance, family structures, or demographic trends one hundred years hence. It seems likely that other attributes of welfare states that are also affected by the institutional form of social policies - attributes like aggregate social spending or the extent to which welfare states "decommodify" workers - may also rely more than previously recognized on the unintended consequences of earlier policy decisions. 5. If this is true, then neither the age-orientation of welfare states nor some of these other characteristics of welfare states that interest scholars should be interpreted purely as offshoots of the standard configurations of ideological or power-resources variables (Left and/or Christian Democratic power, more or less redistributive ideologies). To focus on preexisting institutions and on the prevailing political rules of the game forces us to consider the resources that specific contexts of competition confer on (or deny to) politicians, as well as these actors' ideologies and goals. Even when politicians are ideologically committed to particular policy goals, they may eventually press for other, sub-optimal policy solutions. Left-leaning political actors in Italy, for example, repeatedly chose not to pursue the generous universal social benefits that they had once advocated because the political strategies of Center and Right politicians made other, second-best solutions preferable. This is not to deny the importance of power resources, or of purposive action on the part of politicians and other policymakers - both of which have undeniably contributed to the shape of welfare states as we know them today, not least through the initial choice of occupational or citizenship-based program designs. But all politicians must do their work within specific contexts, only some of which permit them to choose policies that are optimal from the standpoint of their ideological or organizational commitments. 6. This finding illuminates an important but often overlooked characteristic of the roughly one-half of polities in the advanced industrialized countries where programmatic political competition is not the norm. Patronage-based political competition, even when it is the preferred style of a minority of politicians, sends out ripples that affect the entire polity. This is because particularistic behavior on the part of ruling politicians informs not only their own strategies, but also the strategies and even policy preferences of opposition politicians. The clearest example from this work is the clientelist manipulation of the tax system in Italy, which contributed to Left politicians' and unions leaders' decision to abandon the project of building a universalistic welfare state. 7. The results of particularistic political competition for the capacity of welfare states to perform arguably their most important function - caring for vulnerable outsiders - are pernicious. In this account, the quality of political life emerges as key determinant of the quality of social benefits, echoing T. H. Marshall's (1950) linkage of political and social citizenship. Where programmatic party competition prevails, new social programs can come forward to meet the emerging social needs of adults and children struggling to balance work and caring responsibilities in a changing labor market - and can constrain the otherwise powerful budgetary expansionism of social benefits for protected core workers and pensioners. In settings where patronage prevails, however, benefits are concentrated on a relatively small group of privileged, aging insiders, while the growing mass of outsiders is left to fend for itself

Jonas Pontusson, "Once Again a Model: Nordic Social Democracy in a Globalized world"

1. The basic aim of this chapter is in a sense to rescue social democracy from the economic travails of continental Europe by reinstating the Nordic countries as the main exemplars of the social democratic approach to managing capitalism. The reasons why the Nordic countries have figured so prominently in discussions of social democracy hardly need to be rehearsed. In a nutshell, unions and social democratic parties have historically been stronger and more influential in the Nordic countries than in any other liberal democracies. Social democratic parties governed Sweden, Denmark, and Norway more or less continuously from the 1930s into the 1970s and remain major contenders for government power in all the Nordic countries, including Finland. As commonly noted in the existing literature, moreover, even center right parties in the Nordic countries have to a large extent embraced social democratic policy priorities. All of this is well established. The "news" that my discussion builds on is that the Nordic countries again became economic success stories over the period stretching from the mid- 1990s until the onset of the global economic crisis in 2008. Not only did the Nordic countries experience more rapid growth than just about any other OECD economies in this period (except Ireland), they also appear to have adjusted successfully to changes in the global economy by shifting into more knowledge- intensive services and manufacturing. The question becomes whether there is something social democratic about the recent success of the Nordic economies. If the answer to that question is yes, then it becomes plausible to argue that social democracy represents a realistic alternative to market liberalism, worthy of examination and perhaps emulation by progressive political forces outside the Nordic area. 2. The chapter consists of three parts. In the first part, I delineate what is distinctively social democratic about the four Nordic countries by identifying policies (and policy outcomes) on which these countries differ from Germany and other "social market economies" in continental Europe. Building on several existing typologies, I use the term "social market economies" (SMEs) to encompass France as well as Germany and its smaller next- door neighbors: Austria, Switzerland, Belgium, and the Netherlands. In essence I consider policies that the Nordic countries have in common to be core social democratic policies provided that they also distinguish the Nordic countries from continental SMEs and that they can be traced to social democratic initiatives. This exercise yields the following broad features of what I will refer to as the "social democratic policy regime": universalism in the design of social insurance schemes, direct public provision of social services, solidaristic wage bargaining, active labor market policies, policies to promote female employment and gender equality in the labor market, and finally, high levels of investment in public education and policies to equalize educational opportunity. Throughout the following discussion I emphasize complementarities among these policies. I also emphasize that these policies were designed to promote labor mobility and productivity as well as to redistribute income and equalize opportunity. 3. In the second part of the chapter I address the institutional conditions for the success of social democratic policies by engaging with the varieties- of capitalism literature. Contrary to what this literature seems to imply, I do not believe that the economic benefits of social democratic policies are contingent on the persistence of "patient capital" and manufacturing systems that rely on the kinds of skills acquired by workers through vocational training along German lines. I argue that social democratic policies have benefits for a wide range of business activities and that more footloose or short- term investors should be able to recognize these benefits. At the same time, I argue that the effective implementation of core components of the social democratic policy regime depends on the participation of organized business and above all on the existence of encompassing and cohesive unions. 4. In the third part I contrast the economic performance of the Nordic countries since 1995 with that of continental SMEs. Here my core arguments are that the welfare states of the Nordic countries facilitated the adoption of deregulatory reforms that contributed to economic growth and restructuring and that the egalitarianism of these countries, particularly in the realm of education, has also contributed directly to their economic success. In addition to developing these arguments, I present data showing that the growing gap between labor- market "insiders" and "outsiders" is first and foremost a continental phenomenon. This and other dualist trends have been much less pronounced in the Nordic countries.

Thomas Piketty, "Capital in the twenty-first century," Chapter 3

1. The data then exhibit a clear pattern. In France and Great Britain, national capital stood fairly steadily at about seven times national income from 1700 to 1910, then fell sharply from 1910 to 1950, presumably as a result of wars and depression, reaching a low of 2.5 in Britain and a bit less than 3 in France. The capital-income ratio then began to climb in both countries, and reached slightly more than 5 in Britain and slightly less than 6 in France by 2010. 2. WE ARE picking up the pace a bit now, tackling two chapters at a stroke. In Chapters 3 and 4 Mr Piketty describes the evolution of capital over time and across the large economies of North America and Europe. There is a lot of interesting detail, but the broad picture is relatively straightfoward. As of the early 19th century wealth consisted mostly of agricultural land holdings. Over time the importance of such land fell to almost nothing while housing and other domestic capital (including commercial real estate and industrial capital) became dominant. As we have already discussed, stocks of capital relative to national income were high during industrialisation, fell dramatically in Europe from 1914 to 1950, rebounded over the past 60 years and are now approaching prewar levels. What's more, capital has never been as important in North America as in Europe, thanks to the low cost of abundant land and the face that North American economies basically started afresh (roughly) two centuries ago. 3. National capital, as Mr Piketty has it, is the sum total of wealth in the economy, which he presents as a share of national income. One can divide that up into public and private wealth, and the distribution between the two can move around without necessarily changing the total. So for instance, in the early 19th century the British government racks up enormous debts fighting wars, which ultimately rise to about 200% of national income. But during this period national capital relative to national income doesn't much change. What does change is the distribution between private and public; public capital falls as the government borrows from wealthy Britons, and there is a corresponding rise in private capital. 4. The trend in the decades after the second world war is quite different. National capital is rising during this period, from the postwar nadir. But private capital is not; indeed, it actually falls a bit relative to national income from the 1950s to the 1970s. Public capital, by contrast, rises sharply. There are two things going on here. First, the government's net asset position is improving as it inflates away its debt, and secondly the government is creating a rather large public sector. The point is that government policy can influence the level of national capital, but also its distribution and its salience. And the distribution and salience matter tremendously for how policy is made and how the benefits of growth are shared. 5. The British case is again instructive. Britain has had two dramatic public-debt peaks in its modern history, in the early 19th century and the mid-20th. But between these two eras there is a major shift in the nature of public debt—from a tool of private wealth to benefactor of the poor—which is rooted in the return to lending to the government. Changes in that return are driven mostly by a shift in the behaviour of inflation—and one begins to get a sense of the interrelationship between the interests of rich and poor on matters of public finance and inflation. 6. Britain addressed its debt very differently in these two periods. The debt of the 19th century was managed down over the course of a century, by running surpluses larger than the state's education budget in an essentially inflation-free environment. This is the world of the rentier, of a rich elite collecting a reliable and substantial real income from their holdings of government debt. This is an era, Mr Piketty notes, in which Marxists looked with suspicion upon government borrowing, which they saw as a means to funnel resources to the rich. 7. By contrast, the debts of the interwar period were wiped away remarkably quickly, thanks largely to financial repression and inflation—that is, through sharply negative returns to bondholders ("the euthanasia of the rentier"). Public borrowing, meanwhile, became an important mechanism for macroeconomic management, designed to limit economic hardship among working people. 8. Inflation, Mr Piketty notes, is a crude method for getting rid of debt. Over the course of the 20th century, the ranks of creditors came to include plenty of non-rich individuals, both through direct saving and via large pension funds. It is not surprising that support for disinflation in the 1980s ran well beyond the elite. But one might also note that the end of inflation coincided with an acceleration in the rise of national capital, with growing inequality and with rising indebtedness. It is interesting to consider how class power structures influence inflation, and how inflation influences class power structures, and how both influence the distribution of economic pain and gain. 9. The rentier has not exactly returned to modern Britain; George Osborne is working to return the government to surpluses, but he has not pressed the Bank of England to ring inflation out of the system. Power structures and political choices have been somewhat different in Europe and America. But each case illustrates one of Mr Piketty's key themes: that the demotion of distribution as a critical economic issue was a mistake. Debt has a way of making that clear; or in Mr Piketty's phrase: "Debt is the vehicle of important internal redistributions when it is repaid as well as when it is not."

Philip Manow, Kees Van Kersbergen, "Religion and the Western Welfare State: The Theoretical Context"

1. The evidence presented in the contributions to this volume challenges the conventional wisdom of the comparative welfare state literature. In it, the role of religion and religious cleavages, of parties of religious defense, and of the legacies of fierce state-church conflicts tended to be neglected. Where addressed at all, the influence of religion was perceived as largely restricted to political Catholicism, and here most of the emphasis was put on the influence of Catholic social doctrine. The contributions to this volume acknowledge the importance of social doctrines, but stress the role of parties of religious defense more generally. The following chapters focus on the role that parties have played as those central political actors that translated religious concerns into the realm of modern democratic politics, and - even more important - as those actors that represent different societal interests and therefore backed different types of cross-class compromises embodied in different redistributive regimes 2. With this, we do not mean to say that we see the impact of religion on modern welfare state development restricted to work through this party political and electoral channel. As one important 'transmitting' channel, parties were never simple porte-paroles of religious doctrines (or other ideologies), but above all interested in maximizing votes, seats, or office. Parties usually need to attract specific electoral groups and have to satisfy specific societal interests if they are to be elected. Welfare state regimes can then be explained as formulas of political compromise between different electoral and societal groups, a compromise between farmers' and workers' interests in Scandinavia, and both an interparty and intraparty compromise between workers and the Catholic middle class on Europe's continent. Yet, to understand which kind of political class compromises were struck in the different European countries, we need to analyze systematically the presence or absence of different societal cleavage lines. This perspective directs attention to the different logics of redistributive politics in different party system settings - something we hope to analyze in some more detail in future work. 3. Our reassessment of the impact of religion on western welfare state development is an invitation for a renewed debate on the causal sequences behind the different institutional setups of contemporary welfare states. Contributions to the volume show that the threefold categorization between Social Democratic, Conservative, and Liberal welfare states hides rather than elucidates the causal factors in the development of the various welfare state regimes as we know them today. Taking into account the role of religion in welfare state development allows us to better understand some of the important features of various welfare states that in mainstream analyses are either treated as anomalies, remain only poorly explained, or are simply ignored. Among these features are, for instance, the 'women friendliness' of the French and Belgian welfare states (Morgan's contribution), the liberal character of the Swiss welfare state (Obinger's contribution), the 'belated' generosity of the Dutch welfare state (van Kersbergen's contribution), or the strong role of voluntary organizations in the United States (Quadagno and Rohlinger's contribution) versus a highly organized church-run third sector in continental Europe. 4. Although we focus on the impact of religion on the welfare state, the findings of our book may also contribute to the debate on the reverse causal arrow that focuses on the impact of the welfare state on religiosity. The central message of this evolving literature is that public policies affect religiosity to the extent that a large welfare state has a negative impact on religious activity and overall religiosity. Particularly intriguing is the finding that 'religious social mobilization and political involvement are more likely in countries with less extensive welfare systems and, conversely, that the expansion of state-sponsored social welfare will diminish, though not eliminate, the role religion will play in politics' (Gill and Lundsgaarde 2004: 401). We also accept this literature's rejection of the crude modernization perspective on secularization, just as we have amended the modernization account of welfare state emergence and development. Although we cannot elaborate on this here, we feel that further research on this issue will benefit from the position we defend here by better specifying both the independent and dependent variables. Operationalizing the welfare state as the independent variable in terms of social spending probably fails to specify its impact very well. Taking more seriously the well-established criticism of the spending variable and including the qualitative regime specification are likely to improve the explanation of the cross-national variation in the welfare state's impact on religiosity. Similarly (e.g., as Norris and Inglehart 2004 do), distinguishing between Catholicism and Protestantism and between Protestantism's variants along the lines we propose in this book would specify the dependent variable much better. Our understanding of the link between the welfare state and religiosity would benefit from applying the insights we develop here for the reverse causal story. 5. To conclude, the main problem that gave occasion to this book is that comparative research on religion and the welfare state has been incomplete because it has fairly exclusively, but mistakenly, focused on the role of political Catholicism in the development of social protection systems, wrongly interpreted or simply ignored the role of Protestantism, failed to differentiate between different strands of Protestantism, and put an undue emphasis on the impact of religious ideas on welfare state institutions. This volume corrects this view, fills a gap in the literature on religion and the welfare state, and introduces an adapted model of political class coalitions that takes into account societal cleavage structures to show how contrasting church-state constellations and conflicts in the north, center, and south of Europe; variation in the party-political representation of those cleavages; and differences in the social and political teachings of Catholicism, Lutheranism, and reformed Protestantism have led to different coalitions between lower and middle classes, which became manifest in the distinct institutional paths of welfare state development in the West.

Guiding Questions

1. The paradox of democracy: 2. Equal political rights 3. Unequal economic distribution 4. How does democratic politics shape the income distribution? 5. Why do voters accept unequal shares? 6. Why does inequality and redistributive politics vary across time and space?

Top 10% income share, United States

1. The shape of the Brooklyn Bridge between 1930 and 2010 i.e. feel after 1930s, then trended upwards after 1970s 2. US pattern is atypical of rich democracies 3. OECD countries diverge after the 1960s

Thomas Piketty, "Capital in the twenty-first century," Chapter 4

1. The trajectory in the United States was slightly different: it started at just above 3 in 1770, climbed to 5 in 1910, fell slightly in 1920, recovered to a high between 5 and 5.5 in 1930, fell to below 4 in 1950, and was back to 4.5 in 2010. 2. The wealth-income ratio in the United States has always been lower than in Europe. The main reason in the early years was that land values bulked less in the wide open spaces of North America. There was of course much more land, but it was very cheap. Into the twentieth century and onward, however, the lower capital-income ratio in the United States probably reflects the higher level of productivity: a given amount of capital could support a larger production of output than in Europe. It is no surprise that the two world wars caused much less destruction and dissipation of capital in the United States than in Britain and France.

But, some problems with their model

1. Theoretically - model ignores institutional dynamics 2. Empirically - growth in state does not prevent inequality persisting. 3. 'Robin Hood paradox' - more unequal countries redistribute less 4. At the very least, redistribution and inequality vary across equally democratic countries, and over the history of democratic countries

A Few Pointers

1. There are shared trends, but also divergence 2. In both France and the US, inequality falls in the first half of the 20th century 3. Around late 1970s, inequality begins a consistent rise in the US, yet in France broadly stable 4. What does this tell us about the validity of different explanations for inequality? Economics vs politics

Jonas Pontusson, Damian Raess, "How (and Why) Is This Time Different? The Politics of Economic Crisis in Western Europe and the United States"

1. This article compares government responses to the Great Recession of 2008-2009 with government responses to recessions and other economic challenges in the period 1974-1982. We focus on five countries: France, Germany, Sweden, the United Kingdom, and the United States. Across these countries, we observe two broad shifts in crisis responses. First, governments have in the recent period eschewed heterodox crisis policies and relied more exclusively on fiscal stimulus. Second, tax cuts have become a more important component of fiscal stimulus while spending cuts have featured more prominently in governments' efforts to consolidate their fiscal position. We argue that crisis responses reflect the interests and power of domestic actors as well as external constraints and the nature of the economic problems at hand. 2. It is commonplace in comparative political economy to linkKeynesianism to the postwar expansion of the welfare state, full employment, and strong unions, and to argue that the Long Recession of 1974-1982 marked the end of the "Keynesian era" (e.g., Skidelsky 1979, Scharpf 1991). Our discussion suggests that this metanarrative needs to be corrected. There is a liberal as well as a social variant of Keynesianism. Whereas social Keynesianism emphasizes public spending and redistributive measures to sustain long-term prosperity, liberal Keynesianism focuses on demand stimulation during economic downturns and favors tax cuts over spending increases. As illustrated by the experience of the Great Recession, liberal Keynesianism is far from dead. To the contrary, welfare-state retrenchment and political-economic liberalization across the advanced capitalist countries over the past 15-20 years have rendered liberal Keynesianism the modal response to economic crisis. 3. As social Keynesianism is less "market-conforming" than liberal Keynesianism, it might be said to have an affinity with the heterodox crisis responses that various governments entertained, and sometimes implemented, during the 1970s and early 1980s. It is also commonplace in the comparative political-economy literature to conceive these heterodox crisis responses as an expression of the strength of labor and the Left in the 1970s. Our discussion suggests that this metanarrative needs to be corrected as well. Although European socialists and left-wing social democrats pushed for more interventionist economic strategies, the main political force behind the protectionist measures and industrial policy initiatives of the 1970s was an essentially defensive coalition of labor and business in declining industrial sectors. 4. The current recovery is precarious, and hard times are likely to persist into the foreseeable future. In such a scenario, liberal Keynesianism becomes a less viable governing formula, opening up the possibility of a return to more protectionist crisis responses but also the possibility of political realignments that might favor new, more progressive policy initiatives of a social Keynesian complexion.

Lucio Baccaro, Chris Howell, "A Common Neoliberal Trajectory: The Transformation of Industrial Relations in Advanced Capitalism"

1. This article has argued that a common imperative of liberalization is changing the landscape of industrial relations along a similar trajectory. This does not mean that countries have necessarily converged in institutional form—there is still variety in the institutional physiognomy of national industrial relations systems—but that, even when this did not happen, existing (nonconvergent or even divergent) institutional forms have modified their functions in a convergent direction. That common direction in the form and functioning of industrial relations institutions is toward greater employer discretion. Liberalization as institutional deregulation is predominant in three of the countries in our sample: France, Germany, and the United Kingdom. In the other countries, Ireland, Italy, and Sweden, liberalization has primarily manifested itself as institutional conversion: centralized bargaining, once the linchpin of an alternative, redistributive and egalitarian, model of negotiated capitalism, has been reshaped to fit the common imperative of liberalization. 2. We have not examined the causal factors underlying the common trajectory, and the reasons why liberalization manifests itself more as institutional conversion than institutional deregulation in some countries and vice versa in others. To return to Eubulides from Miletus and the example of the balding men, we would be happy to have established one simple fact, which is by no means the common knowledge in the field, that is, that all "men" in question are losing hair, and to leave determination of the causes of baldness and of the different ways they comb their remaining hair to future research. However, a brief comment is in order with regard to causes. 3. As a distinguished tradition from Marx to (most recently) Streeck has emphasized, capitalism is inherently dynamic and unruly, never at rest, and certainly not well captured by notions of stable equilibria, path dependence, coordination problems, and neat institutional regulation. One can nonetheless point to a comparatively brief period following the Depression and Second World War when a combination of changed needs on the part of the dominant Fordist element of capital and a new balance of class forces, built largely on the weight of the industrial labor force, produced a temporary and fragile class compromise. The industrial relations systems of advanced capitalist countries that became formalized during this period reflected that compromise and served to limit employer discretion in substantial and important ways. That class compromise collapsed as changes in production strategies, an acceleration in the process of economic restructuring following from the deindustrialization and financialization of capitalist economies, and enhanced competitive pressures resulting from heightened international economic integration and greater capital flows across national borders, combined to simultaneously change the interests and relative power of class actors and to create a new set of urgent problems for state actors 4. To a certain extent the breakdown of the Fordist class compromise, and the institutional transformation that has followed, reflects deindustrialization, and the reduced centrality to the economy as a whole of the manufacturing sector, which served as the point of origin of these distinct national industrial relations systems. But more profoundly, the capitalism that has emerged has put a far higher premium than before—for the manufacturing sector as much as for the now dominant service sector—on flexibility and the ability of employers to respond rapidly and in a differentiated manner. This is what Harvey nicely terms "flexible accumulation," and it is this that makes the expansion of employer discretion a universal feature of the current period. These changes in the character of contemporary capitalism have manifested themselves in different ways across our cases, and to be sure their severity and scope have varied. But the common result has been to make the attachment of class actors to existing industrial relations institutions much weaker, to create pressures for institutional reconstruction, and to provoke broad reform projects on the part of states. 5. What has then followed has not been an automatic or lockstep reconstruction of industrial relations institutions. Institutional change requires political action and is more often than not accompanied by conflict. The parameters of political struggle vary wildly from country to country. That is one reason why profound changes in the economic environment have not necessarily generated a frontal assault on existing industrial relations institutions, though there is evidence of some of this in our cases. Nevertheless, our evidence indicates that, whatever the precise mechanism of change, industrial relations have been transformed in a similar neoliberal direction, toward greatly enhanced employer discretion. 6. This argument in turn raises questions about the centrality accorded to institutional analysis in explaining the functioning of capitalist political economies. Institutions matter, certainly, but their causal primacy is less important than scholars have suggested. More important seems to be the force field within which institutions operate: the economic and class drivers that shape how institutions function. This is of particular importance within industrial relations where the class cleavage remains predominant, and thus changes in the relative organizational and mobilizational capacity, and in the perceived interests, of class actors are likely to overwhelm the mediating ability of institutions and facilitate either their reconstruction or their reengineering

INTRODUCTION

1. This session introduces some basic findings about the evolution of inequality, and the rise of the welfare state, and in the 20th century. 2. It also assesses some of the best known theoretical accounts of changing levels of inequality over this period. 3. Economic and political explanations

The Piketty Phenomenon

1. We now have new historical data to help understand time trends in inequality 2. Thomas Piketty, Capital in the 21st Century 3. Amazon's 157th bestselling book

Mark Blyth, "Austerity: the history of a dangerous idea," Chapter 6

1. We therefore survey austerity's natural history along three avenues. First, we examine the cases that used to make us think austerity was a very dangerous idea: the United States, the United Kingdom, Sweden, Germany, Japan, and France on and off the gold standard during the 1920s and 1930s. These are the cases where austerity as policy reached its limits and either broke down or broke the society it was being imposed upon. The natural histories of these episodes demonstrate quite clearly that economies do not "self-heal" once "the bust" has run its course. Austerity was tried, and tried again—its application was not wanting—and it simply didn't work. In fact, its repeated application made things worse, not better, and it was only when states stopped pursuing austerity that they began to recover. We examine why this was the case and spell out the lessons that period holds for austerity policy, especially in the Eurozone, today. 2. The second part of the chapter has two targets. The first section hones in on the positive cases highlighted by Alesina, Giavazzi, and others as examples of successful expansionary austerity because they form the countercase to the lessons learned from the 1930s: Denmark, Ireland, Australia and Sweden. I then juxtapose the experiences of these countries to the current state of the Eurozone to stress that even if these cases are granted positive status, which as we shall see is dubious at best, the conditions that made these cases possible are simply absent in Europe at the moment, especially the PIIGS. This makes the argument for expansionary austerity, at best, possible as a very special case, but wholly inappropriate as the general case. 3. The second and final section, to play-off Star Wars for a moment, analyzes the "new hope" for austerity champions: Romania, Estonia, Bulgaria, Latvia, and Lithuania (REBLL). The REBLL countries have been most recently held up by the IMF and the EU as proof that austerity is possible and that they can serve as a useful model for others—namely, Western and Southern Europe—to emulate. Actually, they prove neither point. The REBLL's conditions of action and their unique economic and political structures make the lessons of these cases even less transportable to the rest of the world than those of Western Europe in the 1980s. The countries of the REBLL alliance have indeed managed, in some cases, to maintain their exchange rates through the crisis—by choosing to suffer massive deflation, migration, and unemployment—and they have indeed bounced back. But we must ask if the candle was worth the game? The answer is no. Austerity's natural history contains some positive cases to be sure, even if they are massively outnumbered by negative cases. They do not, however, contain many positive or transportable lessons, which makes them, to complete the Star Wars analogy, even more like the REBLL alliance: you can indeed, against all the odds, blow up the Debt Star—but only in very specific circumstances and only at enormous cost to those involved.

Core questions

1. Why do some economies produce more inequality than others? 2. Why do some societies redistribute more than others? 3. What is the relationship between democratic institutions and redistribution? 4. How do the institutions of redistribution change over time? 5. How is the crisis changing the politics of inequality?

Top 1% income share, Anglo countries

All saw rising inequality

Income Inequality in the US, 1910-2010

Inequality rises to an extremely high point in the 1930s before becoming extremely low between 1940 and 1980 then skyrocketing again

Top 10% income share, United States and Europe

Divergent outcomes

Capital/Income Ratio in Europe, 1870-2010

Falls from high level in 1870 to low level in the 1920s before it rises again but not quite to the high level of the 1870s

The capital/income ratio in Europe, 1870-2010

Fell from a high level, and is rising again

Top 1% income share, Nth and Sth Europe

Fell in the time period

LECTURE 2

GROWING THE STATE, SHRINKING CAPITAL: DEMOCRACY, REDISTRIBUTION AND INEQUALITY

Capital Share in Rich Countries, 1975-2010

Generally increasing

Income Inequality in France, 1910-2010

High income inequality before 1940 after which it remains roughly the same, with a small increase after 1980

A Shocking Statistic

In 2007-09 the area with the highest life expectancy for males was Kensington and Chelsea (84.4 years). The area with the lowest male life expectancy was Glasgow City (71.1 years), 13.3 years lower than Kensington and Chelsea. For females, Kensington and Chelsea also had the highest life expectancy at birth (89.0 years), 11.5 years higher than Glasgow City, the area with the lowest figure (77.5 years).

Thomas Piketty, "Capital in the twenty-first century," Chapter 14

In Chapter 14, he turns to income taxes. He states, interestingly, that progressive taxation is important in maintaining political support for globalisation. He observes that it was famously tax-antagonistic America that first toyed with top rates above 70%, first on income and then on estates. He argues that higher top tax rates were not particularly detrimental to growth. The main effect of their reduction was to encourage executives to bargain harder for big rises in pay packages, leading to soaring top incomes but not necessarily to faster growth. As a result, he says, higher top rates would be welcome, but he is not optimistic on this score; the egalitarian spirit and pressures of war that drove initial rises in top tax rates have faded.

Mark Blyth, "Austerity: the history of a dangerous idea," Chapter 1

In sum, when those at the bottom are expected to pay disproportionately for a problem created by those at the top, and when those at the top actively eschew any responsibility for that problem by blaming the state for their mistakes, not only will squeezing the bottom not produce enough revenue to fix things, it will produce an even more polarized and politicized society in which the conditions for a sustainable politics of dealing with more debt and less growth are undermined. Populism, nationalism, and calls for the return of "God and gold" in equal doses are what unequal austerity generates, and no one, not even those at the top, benefits. In such an unequal and austere world, those who start at the bottom of the income distribution will stay at the bottom, and without the possibility of progression, the "betterment of one's condition" as Adam Smith put it, the only possible movement is a violent one. Despite what Mrs. Thatcher reportedly once said, not only is there something called society, we all live in it, rich and poor alike, for better and for worse.

Anthony B. Atkinson, "Inequality: What Can Be Done?" Introduction

Nothing of merit here

Anthony B. Atkinson, "Inequality: What Can Be Done?" Chapter 5

Sir Anthony believes that the responsibility of the state goes well beyond investing in training. He outlines 15 proposals that would boost egalitarianism, including setting a minimum wage and a suggested maximum at a multiple of the minimum. He would reinvent social security as a basic "participation income" paid to all those deemed to be contributing to society (through work in the market or public service). And he would provide guaranteed employment, in the public sector if necessary, to those who want it. He reckons that if willing workers can be given useful tasks (like guiding the poor through benefit applications), then it should not matter whether the employment provides skills valued by the private sector—or indeed, whether the worker ever goes on to take a non-public job.

The capital-labor split in France,

Split remained fairly small until 1880 at which point capital started significantly more than labor

The capital-labor split in Britain, 1770-2010

Split remained fairly small until 1910 at which point capital started significantly more than labor

Thomas Piketty, "Capital in the twenty-first century," Chapter 6

The important observation for Piketty's argument is that, in all three countries, and elsewhere as well, the wealth-income ratio has been increasing since 1950, and is almost back to nineteenth-century levels. He projects this increase to continue into the current century, with weighty consequences that will be discussed as we go on.

Anthony B. Atkinson, "Inequality: What Can Be Done?" Chapter 9

The short summary is that there is no smoking gun. It is possible that some of the proposed measures to reduce inequality will have negative effects on the size of the cake—that cannot be ruled out. But there is no general presumption that this will happen, or that the rate of growth will be harmed. The a priori view that there is an inevitable conflict between equity and efficiency is not borne out by an examination of the underlying assumptions. The standard economic analysis of the impact of the welfare state ignores the safeguards that are built into the institutional design of social protection and is typically based on models of economic behaviour that ignore the potential positive contribution of the welfare state to economic performance. Redistribution has to be financed, but the analysis of the effect of higher taxes, like that of higher benefits, is more complex than suggested by simple textbook models. Moreover, the proposals have positive incentive effects. The increased minimum wage could increase labour-market attachment and investment in skills; the proposals to help small savers could encourage wealth accumulation; and the capital endowment would expand the opportunities for young people.

Patrick Emmenegger, Silja Häusermann, Bruno Palier, Martin Seeleib-Kaiser, "How we Grow Unequal"

This chapter introduces the concept of dualization. Poverty, inequality, and social exclusion are back on the political agenda in many rich democracies of Western Europe and North America, not only as a consequence of the Great Recession that hit the global economy in 2008. It argues that the translation of structural pressures into policies and outcomes has to be understood as a political process. Dualization is a political process that is characterized by the differential treatment of insiders and outsiders and that can take the form of newly created institutional dualisms or the deepening of existing institutional dualisms (policy output). Thereby, changes in the labor market are translated into the social policy realm, where new distinctions arise or old institutional distinctions are re-activated. Feedback effects and vicious circles are likely to strengthen this effect because weak labor attachment and social exclusion are associated with weaker political representation.