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About this book

Contemporary democracies vary greatly in how much income inequality they tolerate. Some, like the United States and the United Kingdom, have seen high and rising levels for decades, while others, such as the Nordic countries, are much more equal.

This comprehensive text draws on a wealth of cutting-edge theories and empirical data to examine the political and economic causes and consequences of income inequality around the globe. It is organized around a set of key questions, including:

• Is there something morally wrong with inequality?
• Is inequality good or bad for economic growth?
• How does inequality affect political participation and engagement?
• Who decides in the politics of inequality?

Systematic and accessible, this is the perfect book for students with an interest in the connections between politics and inequality.

Table of Contents

Chapter 1. What is the politics of inequality?

Inequality is a fundamental feature of all human societies. Without some degree of economic inequality, it is difficult to imagine how modern democracies could function. In pre-historic communities, kinship ties and moral norms might have been enough for everybody to make an effort, but in today’s world, monetary rewards are necessary. Yet, while some inequality is unavoidable, too much inequality can have consequences that many will find unacceptable. High inequality is associated with deteriorating health outcomes, reduced social mobility and lack of democratic participation.
Carsten Jensen, Kees van Kersbergen

Chapter 2. Is there something morally wrong with inequality?

The main purpose of this chapter is to spell out the primary argument or controversy that lies at the heart of the politics of inequality. It can be portrayed as follows. For some, a certain degree of inequality is a natural phenomenon, and not much can (and therefore should) be done about it. Moreover, some level of inequality is to be valued positively, because it is associated with good things: it is an incentive for people to work hard and it stimulates economic growth. Redistributive policies are bad to the extent that they are necessarily ineffective, slow down economic growth and hence harm total societal prosperity. Therefore, everybody (including the poor) will ultimately be better off, at least in an economic sense, if politics allows an appropriate level of inequality (however defined). Still, even those who view inequality as a natural phenomenon recognize that too much of it may have harmful consequences that demand political action, among them rising crime, political unrest and disorder.
Carsten Jensen, Kees van Kersbergen

Chapter 3. Why should we care about inequality?

Our discussion in Chapter 2 suggests that it is difficult, if not impossible, to find a convincing answer to the question of why inequality should be considered to be bad in and of itself. Maybe it is, maybe it is not. It will probably be equally difficult to defend the position that equality is intrinsically good because it avoids unfairness, protects impartiality, sustains self-respect, shows equal respect, nurtures fraternity and prevents domination (Hausman and Waldron 2011). Maybe it does, maybe it does not. As argued, we are agnostic about the issue. But, even if we were to come to the conclusion that we should not care about inequality as such, we still could have good reasons to care about inequality because of its bad consequences. ‘The surprising persistence of a very vague, unfocused discourse about “inequality” in standards of living as bad may stem from inadequate attention to the absolute value of social states for persons. A consequentialist perspective may help here, as it obliges one to focus on what really matters for individuals about inequality’ (Picavet 2013: 496). It is this line of reasoning that we follow. We care about inequality because it greatly matters to people. We are able to reject some forms or degrees of inequality as bad because we can show that they have bad outcomes, not least in the eyes of the people most directly affected by inequality.
Carsten Jensen, Kees van Kersbergen

Chapter 4. How to measure inequality?

A necessary prerequisite for talking about economic inequality in any serious way is to know how to measure it. If we do not know that, we cannot begin to understand whether or not inequality is rising, let alone what causes such change. As will become apparent later, this is not an issue with marginal consequences, but can have real implications for the conclusions drawn. In this chapter, we therefore go into detail about how economic inequality is measured, and the advantages and disadvantages of different measurement choices. We do so by first asking what economic phenomena we could and should study. Is it inequality before or after governments have clawed in taxes and handed out social benefits? Is it inequality in the yearly earnings of citizens or, rather, in their accumulated wealth? Is it inequality of individuals or entire households?
Carsten Jensen, Kees van Kersbergen

Chapter 5. What are the empirical patterns?

This chapter outlines the main cross-country and temporal variation in economic inequality. It is the political causes and consequences of this variation that the rest of the book is concerned with, so we spend some time mapping the details. For starters, some countries are much more unequal than others, but, contrary to the impression one regularly gets from the public debate, it is not simply a matter of ‘the United States versus the rest’. Many countries exhibit a high level of inequality, including some that are not traditionally associated with American-style capitalism. Other interesting observations relate to the trends in inequality over time. The first decades after World War II signalled a period of exceptionally low levels of inequality across all Western democracies, although cross-country difference still existed. Since then, dramatic changes have occurred. Some countries have witnessed large increases in inequality, while others have stayed more or less as they were. It is the combination of this cross-country and over-time variation that we need to account for if we wish to understand the politics of inequality.
Carsten Jensen, Kees van Kersbergen

6. Does inequality matter for growth?

There is no such thing as a free lunch, so if you want equality, you have to accept the damage that it does to the drive and energy of society. This is because people who live in unequal societies have more to fight for, and therefore make a greater effort to be successful in life, whereas people in more equal societies are sheltered from their own bad decisions and laziness. To ensure a vibrant and growing economy, it is, consequently, necessary to make sure that equality does not get out of hand or, if it has already done so, to scale it back. In a nutshell, this is the equality–efficiency trade-off. To many, this type of reasoning about the relationship between growth and inequality sounds intuitively correct. However, as we will explain in this chapter, the most balanced conclusion is that there is no correlation between the inequalities that are observed in rich democracies and economic growth. The reason is not that inequality and growth are unrelated, but that there is more than one road to economic development: one that entails high levels of inequality and another that involves low levels. These different paths are explored in Chapter 7.
Carsten Jensen, Kees van Kersbergen

Chapter 7. What are the roads to riches?

How is it possible for some countries to maintain fairly equal income distributions without having to suffer any severe economic consequences? The answer lies in the fact that growth can be achieved in different ways, and that a high level of inequality is a necessary by-product in only some of these. History shows, as we saw in the last chapter, that it has been possible in several European countries to combine decent growth (that is, as good as elsewhere) with decent equality (that is, much better than elsewhere). This chapter explores how that is doable. We begin by introducing the New Institutional Economics. The New Institutional Economics is the intellectual backdrop for much of the research into different types of market economies and how these generate growth and inequality. Today’s market economies differ on at least three dimensions: first, the form and extent of their human capital formation; second, the way in which wages are decided; and third, the business environment more broadly. In combination, these three dimensions demarcate three types of market economies – the social, the liberal and the statist – each of which performs distinctly in terms of both growth and inequality. This chapter explores these different market economies in detail.
Carsten Jensen, Kees van Kersbergen

Chapter 8. Does the welfare state reduce inequality?

Many people spontaneously associate the welfare state with equality, reasoning that the welfare state implies redistribution and that redistribution means more equality. At first sight, this seems to make perfect sense. In fact, one of the earliest students of the welfare state, Harold L. Wilensky, tellingly titled his book The Welfare State and Equality and concluded that ‘taxes and benefits taken together have a highly egalitarian effect on income distribution’ (1975: 94, original emphasis). A whole generation of researchers then empirically tried to document the intuition that the bigger the welfare state (in terms of public social spending), the more egalitarian the income distribution tended to be (for a review of this early literature, see Esping-Andersen and Van Kersbergen 1992). In this chapter, we first present an overview of public social spending data and show that, compared with people’s intuition, the picture turns out to be much more complicated. There does not seem to be a clear and strong (negative) relationship between the size of the welfare state and inequality. We turn to the theory of welfare state institutions to explain why this is the case. We find that the main reason is that there is no such thing as the welfare state that can be measured with spending data. There are different kinds of welfare states, whose different qualities have systematically different social consequences (Esping-Andersen 1990). We also explain that the different kinds of welfare states are closely associated with the different kinds of market economies discussed in Chapter 7.
Carsten Jensen, Kees van Kersbergen

Chapter 9. Does economic inequality lead to political inequality?

Chapters 6, 7 and 8 asked how the economy and the welfare state relate to inequality. Although inequality influences how both the economy and the welfare state work, our focus was mostly on how inequality is caused and shaped by the structure of the economy and welfare state arrangements. The overarching argument of the two chapters was that the degree to which the economy and the welfare state create inequality is fundamentally a political decision. In that sense, both chapters were concerned with how politics affects inequality. This and the next chapter, on the other hand, take a more sustained look at how inequality affects politics. The key question that we want to know the answer to is whether economic inequality leads to political inequality. Political inequality occurs when the preferences of some citizens systematically are given more weight in the political process than those of other citizens. In this book, we are, of course, especially interested in whether or not those with more economic resources have a greater say than those with fewer. For many people, such political inequality is normatively wrong, because it seems to fly in the face of our intuition about how democracy ought to work. In the words of Almond and Verba (1963: 180), ‘[d]emocracy is a political system in which ordinary citizens exercise control over elites’. This highlights how democracy requires that ordinary people control the elite, not the other way around. Just as importantly, political inequalities may help explain why economic inequalities persist or widen. If those with most to win from pro-rich policies also disproportionately influence policy-making, it is easy to imagine that there will be a bias towards keeping or expanding these kinds of policies. In this way, economic inequalities may create political inequalities that, in turn, maintain or increase the existing economic inequalities, and so on.
Carsten Jensen, Kees van Kersbergen

Chapter 10. Who decides in the politics of inequality?

At its heart, politics is about the power to decide over society’s resources. In the formulation of Lasswell (1936), politics is about who should get what, when, how. Redistribution of income and wealth from the rich to the poor is, in this sense, all about politics. There is no unbiased, or neutral, way of organizing the tax system, the labour market or the welfare state. Conflicts are everywhere. How high should the top marginal tax rate on income be? What about corporate tax rates? What balance should be struck between the ability of companies to hire and fire and the job security of employees? Should the welfare state be arranged to facilitate the needs of the poor and marginalized, or to the advantage of the middle class? Policies benefitting some groups in society will inevitably leave other groups worse off, at least in the short run. In Chapter 9, we studied the input into the political system, i.e. the preferences of the citizens and their participation in legal demonstrations, associations and elections. It was clear that economic status matters a lot for both preferences and the likelihood that these preferences will be articulated. So, already at the early stages of the political process, biases exist. Yet, there is a long way to go from articulated public preferences to policies regulating things such as taxes or employment protection. In this chapter, we want to know how democracies make decisions about inequality and redistribution. We begin by presenting the most straightforward and analytically elegant explanation, the so-called Meltzer-Richard model (Meltzer and Richard 1981). The model rests on the assumption that the median voter decides how much redistribution there should be in a country. The political process is biased towards the preferences of the median voter, and the median voter wants more redistribution as long as mean income is higher than the median voter’s own income.
Carsten Jensen, Kees van Kersbergen

Chapter 11. What future for the politics of inequality?

This book started out by highlighting a great puzzle: why do modernday capitalist democracies host such wildly different levels of inequality? Given that we are dealing with countries that share the same basic economic and political features – they are capitalist market economies and representative democracies – the first expectation should be that inequality is roughly similar everywhere. But it is not. Because economic inequality negatively affects health, reduces social mobility, and is bad for political participation in democratic processes, understanding the source of this cross-country variation in inequality is important. The core solution to the puzzle lies in appreciating that both the market economy and democracy come in different forms. Market economies can be liberal, statist or social – or some combination of these – but all are capitalist. Companies compete against each other on the market to maximize the individual company’s profit. The decision to hire and (more conditionally) fire workers rests with the employer. The physical and structural capital used in production is overwhelmingly owned by private actors such as companies, banks and stockholders. Employees depend on the labour market because they need to sell their human capital (labour power, skills) to employers. These key characteristics produce the power asymmetries between employers and employees characteristic of capitalism in all its varieties. Moreover, they create substantial market inequalities, because physical and structural capital owners earn rent from their assets, and some wage earners receive higher pay than other wage earners. This holds true for all capitalist market societies, and yet there are big differences between the liberal, statist and social market economies in the extent to which they reinforce or moderate power asymmetry and market inequality.
Carsten Jensen, Kees van Kersbergen
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