How do changes in the inequality of income affect political support for welfare policy? Starting with the economic models of Romer (1975), Roberts (1977), and Meltzer and Richard (1981), the conventional view is that increased inequality in pretax earnings leads to greater political demand for redistributive policies. The logic is simple and compelling. If the majority of the electorate receives a below-average income and if an increase in inequality causes above-average incomes to rise and below-average incomes to fall, then it is reasonable to think that demands for public policies to reduce the gap between rich and poor will increase.

The argument of Romer (1975) and Meltzer and Richard (1981) is best illustrated by comparing two hypothetical lognormal income distributions with the same mean but different levels of inequality as shown in Figure 1. As the figure shows, the greater the variance of a distribution like the lognormal distribution that is skewed to the right, the greater the gap between median and mean income. In the models of Romer (1975), Roberts (1977), and Meltzer and Richard (1981), political competition drives the level of welfare spending toward the ideal point of the median income voter. The greater the gap between the pretax earnings of the median income voter and average (mean) income, the greater is the level of spending preferred by the median income voter and the higher is the equilibrium level of welfare spending.

Part II begins by developing a rational model of retrospective voting in which voters extract signals about the competency of incumbent politicians from movements in the retrospective economy. Given this model of individual-level economic voting, we can explore how the quality of the competency signal that voters extract from the observed economy may vary across different contexts and, hence, induce different amounts of economic voting. Chapter 5 develops a selection model of the economic vote that first describes the competency signals that voters extract from macro-economic outcomes. We then explain how the quality of these competency signals condition the economic vote. Contexts in which the quality of these competency signals are high should generate more economic voting.

We argue in this chapter that political contexts can be distinguished in terms of the number of elected versus nonelected decision makers that are shaping political and economic policy making. And our theory suggests that the ratio of these elected to nonelected decision makers can condition the magnitude of these competency signals. As the ratio of decisions by nonelected decision makers to those by elected decision makers rises, the overall competency signal will decline and vice versa.

Chapter 6 provides empirical evidence that voters, indeed, are attentive to fluctuations in the macro-economy and are equipped to undertake the competency-signal-extraction task implied by our theory.

The previous section explored the conditions under which rational voters can extract signals about incumbent competence from movements in the economy. The theory pointed to specific economic contexts that should condition the strength of the competency signal and, consequentially, the importance of the economy in the vote choice. Furthermore, our empirical analysis was largely consistent with those implications. We now propose to explore two aspects of economic voting that were not developed in the model in Chapter 5.

First, in Chapter 8, we generalize the model in Chapter 5 – where only one party was responsible for economic decision making – to multiparty contexts in which policy-making authority may be shared among many – or even all – parties (including opposition parties). We show that in political contexts in which policy-making authority is widely shared, the rational voter's ability to extract an informative signal about the competence of any one party declines. Chapter 9 explores empirically how variations in the distribution of policy-making responsibility among parties currently in government affect the economic vote.

The model developed in Chapter 3 assumed two parties competing for total control of executive authority. Chapter 8 generalizes this model of rational economic voting to contexts in which there are multi-parties (rather than simply two) competing for election and where executive authority is shared (rather than controlled by a single party). This multiparty competition and shared executive authority necessarily introduces incentives for strategic voting.

In this chapter, we explain what we mean by phrases such as “there is more economic voting in one election than in another” or “one party has a greater economic vote than another.” We begin this task with a discussion of our conceptual framework for understanding voting in general and then tackle economic voting specifically. Once our concepts are clear, we then move on to measurement issues and ultimately describe our empirical strategy for mapping the variation in economic voting across countries and over time.

A CONCEPTUAL MODEL OF VOTING

We will take the act of voting to be a discrete choice. Discrete-choice situations suppose that a decision maker chooses from a finite set of alternatives that are mutually exclusive and exhaustive. In democratic elections, vote choices can be represented by this structure. Voters are allowed to choose one party or candidate, to abstain, or to cast a blank ballot; and these alternatives are limited to those who are on the ballot at the time of voting. Given this structure, we also assume that whatever cognitive processes the individual may use to make this choice, the overall process of decision can be represented in the following way:

1. Each alternative in the choice set has some “value” to the individual, and this value is a function of variables that vary over alternatives, as well as variables that do not vary over alternatives but are characteristics of the individual making the choice. For example, a variable that would vary over alternatives is the voter's perception of her ideological distance from each candidate. In contrast, the voter's subjective assessment of the economy would not vary over alternatives.

2. […]

As our friends, families, and colleagues will attest – and bemoan – this book has taken almost eight years to complete. The ultimate product has little in common with the initial idea that we intended to explore, which was examining the extent to which the impact of the “real” economy on political behavior is mediated by its representation in the electronic and print media. We got side-tracked with the question of whether there was, in fact, an economic vote and whether it varied across contexts in any significant fashion. And then we decided we needed to come up with a theory to explain this contextual variation.

Our treatment of the economic vote in this book is a significant departure from much of the comparative economic voting literature. One of its novel aspects is that it takes seriously the importance of writing down a rigorous theoretical model of the vote decision and of precisely how context conditions the importance of economic evaluations in the voter's preference function.

We hope our readers will appreciate that this has been an ambitious project both in our effort at developing a theory of the economic vote and in our determination to assemble and analyze the appropriate data for testing these theoretical hypotheses. We could not have accomplished these tasks without generous support from a number of funding institutions and academic institutions. Most importantly, we benefited from a National Science Foundation grant (#SBR-0215633) that enabled us to undertake the ambitious data collection and analysis.

INTRODUCTION

In Chapter 3, we highlighted the extent to which economic voting varies from one context to the next. For example, Figure 3.2 from Chapter 3 suggested that in 1985, economic evaluations in the Netherlands had a rather significant impact on vote choice but, ten years later, economic assessments had no effect on the Dutch vote decision. In this chapter, we begin building our explanation for this kind of variation in economic voting. As we discussed in Chapter 2, modeling vote choice is equivalent to properly specifying the voter's value function for each alternative in her choice set (i.e., each party or candidate). The question then becomes: What should these value functions that produce economic voting look like? And how will their parameters vary in different political and economic contexts to produce variation in the economic vote?

THE COMPETENCY MODEL WITH TWO-PARTY COMPETITION FOR A UNIFIED EXECUTIVE

We begin to answer these questions with a theoretical model of economic voting in which the previous economy enters the voter's value function for parties modified by a competency signal. Alesina and Rosenthal (1995) and Persson and Tabellini (1990) have suggested two closely related formal models both with rational, expected utility maximizing voters who maximize their utility by conditioning their electoral choice on the retrospective performance of the economy. The models differ in their assumptions about the information available to voters when they form their expectations about what economic policies politicians will pursue.

Few features of economic, social, or political life in industrialized democracies differ as much as the relative size of the trade union movement. The current density of union membership in the labor force ranges over almost the entire spectrum from above 90% in Sweden to under 20% in the United States (Goldfield 1987, 16). The level of unionization varies far more than such other characteristics of the labor force as the sectoral distribution of workers, the share of wages in GNP, rates of unemployment, or even the size of the public sector. Unionization rates vary more than such other forms of popular mobilization as electoral turnout or the share of the vote received by parties bearing communist, socialist, social democratic, or labor labels.

The economic effects of high levels of unionization are ambiguous. Unions that are large relative to the economy may simultaneously have more power in the labor market and more of an incentive to moderate their wage demands. A union that covers only a small fraction of an industry's work force, for example, can gain wage increases partly at the expense of employment among nonunion members, provided that union members have specialized skills not readily available elsewhere. In contrast, an industrial union covering the entire work force would be concerned with employment in all job categories. Bigger unions are not necessarily more militant unions (Cameron 1984; Olson 1982, chap. 4).

Our explanation for contextual variation in economic voting assumes that voters know how much of the variation in random shocks to the economy is due to the competence of the government rather than the influences of nonelectorally dependent exogenous factors. By making this assumption, we were able to derive hypotheses about the way in which variation in the competency signal (and therefore voters' beliefs about this signal) likely impacts economic voting across countries and over time. Furthermore, in elaborating the meaning of the competency signal and thinking about what drives variation in it, we suggest a broad set of political and economic contexts that might systematically condition the magnitude of the signal (e.g., those that impact the relative number or importance of electorally versus nonelectorally dependent decision makers in economic policy making).

This chapter considers whether it is even reasonable to assume that voters have sensible beliefs about the variance in competence shocks to the economy. Or even about the total variation in shocks to the economy. Skepticism abounds in this respect and with good reason. Early efforts by Alesina and Rosenthal (1995) to demonstrate that fluctuations in the U.S. macro-economy might plausibly inform voters about incumbent competency suggested they did not. And even if they did, should we expect the typical voter to pay attention to and have informed beliefs about these signals?

Introduction

Social democracy is, in essence, a series of political and economic compromises. Early social democrats were forced to compromise between their Marxist program and their commitment to abide by the rules of electoral competition that rendered the implementation of the Marxist program politically infeasible. Later, social democrats were forced to compromise between promoting the interests of their core constituency of manual workers in manufacturing, transportation, construction, and mining and the need to obtain support from much broader groups if they were to obtain a majority. Finally, social democracy represents a compromise between egalitarian goals and the need to promote economic growth and employment in a market economy driven by private investment.

Compromises are frequently unpopular. At the crest of left-wing mobilization in Europe and North America during the late 1960s and early 1970s, social democratic parties were denounced for having joined forces with their supposed class enemies in opposition to growing rank-and-file militancy. Defenders of social democracy on the Left responded by arguing that the apparent loss of social democracy's revolutionary aspirations was temporary. In the long run, a number of scholars argued, social democracy will be credited with creating the conditions that make the final transition from capitalism to socialism possible.

Today, the pendulum has swung the other way, and predictions of a radicalization of social democracy appear to be little more than wishful thinking. In the current climate, social democracy is charged with being already too radical for the good of the economy.

Although a great deal of Michael Wallerstein's work concerns the inequality of income, wages, and wealth, very few of his papers contain significant normative claims beyond those of economic efficiency. Of course, the fact that Wallerstein eschewed any substantive normative discussions in his work does not imply that he held no views on the fairness or otherwise of particular patterns of wage and income inequality; far from it. Rather it reflects his belief that, before any compelling normative case can be made regarding any given distributions of income or wealth, it is necessary to understand as deeply as possible exactly how such distributions come about. And while there are a great many reasons offered in the literature for levels and changes in income inequality, Wallerstein focused on exploring how political-economic institutions influence and support particular distributions of income.

In the early 1980s, the ratio of wages earned by those in the 50th percentile of the wage distribution to those in the 10th percentile was 1.96 in the US, 1.64 in France, and 1.31 in Sweden. By the late 1990s, the ratios were 2.1, 1.59, and 1.39, respectively. Over the same period, evidence from a set of eighteen OECD countries (including the US, France, and Sweden) indicates, first, a strong negative correlation between pretax income inequality and government spending on “safety net” insurance against loss of income and, second, a negligible relationship between pretax income inequality and any purely redistributive government spending in favor of the poor.

The analyses of the 163 surveys described in the previous chapter generate a wealth of data: a total of 678 economic vote measures for 113 political parties in eighteen countries over a twenty-two–year period. As we pointed out in the Introduction, the theoretical and empirical focus of this book is on explaining contextual variation in the economic vote, as defined in the previous chapter. Before proceeding to these efforts, we address two particularly critical empirical tasks in this chapter. First, is there a significant and pervasive economic vote in advanced democracies? Second, is there significant contextual variation in the economic vote that is sufficiently interesting to justify a book-length treatment?

The first question we posed is not simply rhetorical. There is considerable skepticism as to the importance of economic voting (a recent statement is Cheibub and Przeworski, 1999). If, as some would argue, economic voting were apparent in only a small number of countries or elections, or if it were wildly inconsistent in direction and magnitude, then there would be little reason to try to understand how contextual factors might affect it. Part of this skepticism concerns the importance of economic evaluations relative to other influences on the vote. Again, if economic evaluations have a much weaker influence on the vote than other factors, then our time would be better spent studying contextual variation in those factors. Readers can probably anticipate the answers to these questions.

Introduction

There are large differences in the distribution of wages and salaries across advanced industrial societies and, in some countries, significant change over time in the recent past. In the United States, a worker who somehow managed to rise from the 10th decile of the wage distribution to the 90th decile would have received a pretax wage gain of 440 percent in 1990. To accomplish the same feat in 1980 would have taken a wage gain of only 380 percent. Both figures are in sharp contrast to the 98 percent increase that a Norwegian worker would obtain in going from the 10th to the 90th decile in the wage distribution in 1990. While countries may differ even more in the distribution of income from capital or transfer payments, the preponderance of labor earnings in total income is such that differences in the distribution of wages and salaries account for most of the cross-national variation in measures of the distribution of income among the nonelderly.

In the United States, the growth of wage inequality since 1980 blunted the usual impact of economic growth on poverty alleviation. The prolonged economic expansion that began in 1982 had little effect on the proportion of the US population with incomes below the poverty line until the mid 1990s, in sharp contrast to the significant declines in poverty that occurred during earlier economic expansions in the postwar period (Blank 1997).

Social democracy, it is often said, is nice but pricey. Whatever its merits in the rich countries of Western Europe, social democracy is frequently dismissed as an infeasible model for developing countries. Based on generosity towards the poor and protection against market competition, the argument goes, social democracy is only possible in consensual, homogeneous, and affluent societies with an extraordinary commitment to equality. In Third World countries that are conflict-ridden, heterogeneous, and poor, does the social democratic model have any relevance?

In this article we offer an agnostic view of the feasibility of the social democratic model of development in the Third World. First, we argue that consensus, homogeneity, and affluence are products of the social democratic model, not prerequisites. Second, we claim that the central social democratic policy in terms of economic development is the policy of wage compression attained through highly centralized wage-setting institutions.

Capitalism is a system in which many scarce resources are owned privately, and decisions about allocating them are a private prerogative. Democracy is a system through which people as citizens may express preferences about allocating resources that they do not privately own. Hence the perennial question of political theory and of practical politics concerns the competence of these two systems with regard to each other. Is it possible for governments to control a capitalist economy? In particular, is it possible to steer the economy against the interests and preferences of those who control productive wealth?

The central and only distinctive claim of Marxist political theory is that under capitalism all governments must respect and protect the essential claims of those who own the productive wealth of society. Capitalists are endowed with public power, power which no formal institutions can overcome (Luxemburg 1970; Pashukanis 1951). People may have political rights, they may vote, and governments may pursue popular mandates. But the effective capacity of any government to attain whatever are its goals is circumscribed by the public power of capital. The nature of political forces that come into office does not alter these limits, it is claimed, for they are structural – a characteristic of the system, not of the occupants of governmental positions nor of the winners of elections.

During the past 20 years Marxists have developed several theories to explain why all governments in capitalist societies are bound to act in the interests of capitalists.