The Crisis of 2008 and the Return of the State
The global financial crisis that began in 2007–2008 is generally described as the most serious crisis of capitalism since the crash of 1929. The comparison is in some ways justified, but essential differences remain. The most obvious of these is that the recent crisis has not led to a depression as devastating as the Great Depression of the 1930s. Between 1929 and 1935, production in the developed countries fell by a quarter, unemployment rose by the same amount, and the world did not entirely recover from the Depression until the onset of World War II. Fortunately, the current crisis has been significantly less cataclysmic. That is why it has been given a less alarming name: the Great Recession. To be sure, the leading developed economies in 2013 are not quite back to the level of output they had achieved in 2007, government finances are in pitiful condition, and prospects for growth look gloomy for the foreseeable future, especially in Europe, which is mired in an endless sovereign debt crisis (which is ironic, since Europe is also the continent with the highest capital/income ratio in the world). Yet even in the depths of the recession, in 2009, production did not fall by more than five percentage points in the wealthiest countries. This was enough to make it the most serious global recession since the end of World War II, but it is still a very different thing from the dramatic collapse of output and waves of bankruptcies of the 1930s. Furthermore, growth in the emerging countries quickly bounced back and is buoying global growth today.
The main reason why the crisis of 2008 did not trigger a crash as serious as the Great Depression is that this time the governments and central banks of the wealthy countries did not allow the financial system to collapse and agreed to create the liquidity necessary to avoid the waves of bank failures that led the world to the brink of the abyss in the 1930s. This pragmatic monetary and financial policy, poles apart from the “liquidationist” orthodoxy that reigned nearly everywhere after the 1929 crash, managed to avoid the worst. (Herbert Hoover, the US president in 1929, thought that limping businesses had to be “liquidated,” and until Franklin Roosevelt replaced Hoover in 1933, they were.) The pragmatic response to the crisis also reminded the world that central banks do not exist just to twiddle their thumbs and keep down inflation. In situations of total financial panic, they play an indispensable role as lender of last resort—indeed, they are the only public institution capable of averting a total collapse of the economy and society in an emergency. That said, central banks are not designed to solve all the world’s problems. The pragmatic policies adopted after the crisis of 2008 no doubt avoided the worst, but they did not really provide a durable response to the structural problems that made the crisis possible, including the crying lack of financial transparency and the rise of inequality. The crisis of 2008 was the first crisis of the globalized patrimonial capitalism of the twenty-first century. It is unlikely to be the last.
Many observers deplore the absence of any real “return of the state” to managing the economy. They point out that the Great Depression, as terrible as it was, at least deserves credit for bringing about radical changes in tax policy and government spending. Indeed, within a few years of his inauguration, Roosevelt increased the top marginal rate of the federal income tax to more than 80 percent on extremely high incomes, whereas the top rate under Hoover had been only 25 percent. By contrast, at the time of this writing, Washington is still wondering whether the Obama administration will be able in its second term to raise the top rate left by Bush (of around 35 percent) above what it was under Clinton in the 1990s (around 40 percent).
In Chapter 14 I will look at the question of confiscatory tax rates on incomes deemed to be indecent (and economically useless), which was in fact an impressive US innovation of the interwar years. To my mind, it deserves to be reconceived and revived, especially in the country that first thought of it.
To be sure, good economic and social policy requires more than just a high marginal tax rate on extremely high incomes. By its very nature, such a tax brings in almost nothing. A progressive tax on capital is a more suitable instrument for responding to the challenges of the twenty-first century than a progressive income tax, which was designed for the twentieth century (although the two tools can play complementary roles in the future). For now, however, it is important to dispel a possible misunderstanding.
The possibility of greater state intervention in the economy raises very different issues today than it did in the 1930s, for a simple reason: the influence of the state is much greater now than it was then, indeed, in many ways greater than it has ever been. That is why today’s crisis is both an indictment of the markets and a challenge to the role of government. Of course, the role of government has been constantly challenged since the 1970s, and the challenges will never end: once the government takes on the central role in economic and social life that it acquired in the decades after World War II, it is normal and legitimate for that role to be permanently questioned and debated. To some this may seem unjust, but it is inevitable and natural. Some people are baffled by the new role of government, and vehement if uncomprehending clashes between apparently irreconcilable positions are not uncommon. Some are outspoken in favor of an even greater role for the state, as if it no longer played any role at all, while still others call for the state to be dismantled at once, especially in the country where it is least present, the United States. There, groups affiliated with the Tea Party call for abolishing the Federal Reserve and returning to the gold standard. In Europe, the verbal clashes between “lazy Greeks” and “Nazi Germans” can be even more vitriolic. None of this helps to solve the real problems at hand. Both the antimarket and antistate camps are partly correct: new instruments are needed to regain control over a financial capitalism that has run amok, and at the same time the tax and transfer systems that are the heart of the modern social state are in constant need of reform and modernization, because they have achieved a level of complexity that makes them difficult to understand and threatens to undermine their social and economic efficacy.
This twofold task may seem insurmountable. It is in fact an enormous challenge, which our democratic societies will have to meet in the years ahead. But it will be impossible to convince a majority of citizens that our governing institutions (especially at the supranational level) need new tools unless the instruments already in place can be shown to be working properly. To clarify all this, I must first take a look backward and briefly discuss how taxation and government spending have evolved in the rich countries since the nineteenth century.
The Growth of the Social State in the Twentieth Century
The simplest way to measure the change in the government’s role in the economy and society is to look at the total amount of taxes relative to national income. Figure 13.1 shows the historical trajectory of four countries (the United States, Britain, France, and Sweden) that are fairly representative of what has happened in the rich countries.1 There are both striking similarities and important differences in the observed evolutions.
FIGURE 13.1. Tax revenues in rich countries, 1870–2010
Total tax revenues were less than 10 percent of national income in rich countries until 1900–1910; they represent between 30 percent and 55 percent of national income in 2000–2010.
Sources and series: see piketty.pse.ens.fr/capital21c.
The first similarity is that taxes consumed less than 10 percent of national income in all four countries during the nineteenth century and up to World War I. This reflects the fact that the state at that time had very little involvement in economic and social life. With 7–8 percent of national income, it is possible for a government to fulfill its central “regalian” functions (police, courts, army, foreign affairs, general administration, etc.) but not much more. After paying to maintain order, enforce property rights, and sustain the military (which often accounts for more than half of total expenditures), not much remained in the government’s coffers.2 States in this period also paid for some roads and other infr
astructure, as well as schools, universities, and hospitals, but most people had access only to fairly rudimentary educational and health services.3
Between 1920 and 1980, the share of national income that the wealthy countries chose to devote to social spending increased considerably. In just half a century, the share of taxes in national income increased by a factor of at least 3 or 4 (and in the Nordic countries more than 5). Between 1980 and 2010, however, the tax share stabilized everywhere. This stabilization took place at different levels in each country, however: just over 30 percent of national income in the United States, around 40 percent in Britain, and between 45 and 55 percent on the European continent (45 percent in Germany, 50 percent in France, and nearly 55 percent in Sweden).4 The differences between countries are significant.5 Nevertheless, the secular evolutions are closely matched, in particular the almost perfect stability observed in all four countries over the past three decades. Political changes and national peculiarities are also noticeable in Figure 13.1 (between Britain and France, for example).6 But their importance is on the whole rather limited compared with this common stabilization.7
In other words, all the rich countries, without exception, went in the twentieth century from an equilibrium in which less than a tenth of their national income was consumed by taxes to a new equilibrium in which the figure rose to between a third and a half.8 Several important points about this fundamental transformation call for further clarification.
First, it should be clear why the question of whether or not there has been a “return to the state” in the present crisis is misleading: the role of the government is greater than ever. In order to fully appreciate the state’s role in economic and social life, other indicators of course need to be considered. The state also intervenes by setting rules, not just by collecting taxes to pay its expenses. For example, the financial markets were much less tightly regulated after 1980 than before. The state also produces and owns capital: privatization of formerly state-owned industrial and financial assets over the past three decades has also reduced the state’s role in comparison with the three decades after World War II. Nevertheless, in terms of tax receipts and government outlays, the state has never played as important an economic role as it has in recent decades. No downward trend is evident, contrary to what is sometimes said. To be sure, in the face of an aging population, advances in medical technology, and constantly growing educational needs, the mere fact of having stabilized the tax bill as a percentage of national income is in itself no mean feat: cutting the government budget is always easier to promise in opposition than to achieve once in power. Nevertheless, the fact remains that taxes today claim nearly half of national income in most European countries, and no one seriously envisions an increase in the future comparable to that which occurred between 1930 and 1980. In the wake of the Depression, World War II, and postwar reconstruction, it was reasonable to think that the solution to the problems of capitalism was to expand the role of the state and increase social spending as much as necessary. Today’s choices are necessarily more complex. The state’s great leap forward has already taken place: there will be no second leap—not like the first one, in any event.
To gain a better understanding of what is at stake behind these figures, I want to describe in somewhat greater detail what this historic increase in government tax revenues was used for: the construction of a “social state.”9 In the nineteenth century, governments were content to fulfill their “regalian” missions. Today these same functions command a little less than one-tenth of national income. The growing tax bite enabled governments to take on ever broader social functions, which now consume between a quarter and a third of national income, depending on the country. This can be broken down initially into two roughly equal halves: one half goes to health and education, the other to replacement incomes and transfer payments.10
Spending on education and health consumes 10–15 percent of national income in all the developed countries today.11 There are significant differences between countries, however. Primary and secondary education are almost entirely free for everyone in all the rich countries, but higher education can be quite expensive, especially in the United States and to a lesser extent in Britain. Public health insurance is universal (that is, open to the entire population) in most countries in Europe, including Britain.12 In the United States, however, it is reserved for the poor and elderly (which does not prevent it from being very costly).13 In all the developed countries, public spending covers much of the cost of education and health services: about three-quarters in Europe and half in the United States. The goal is to give equal access to these basic goods: every child should have access to education, regardless of his or her parents’ income, and everyone should have access to health care, even, indeed especially, when circumstances are difficult.
Replacement incomes and transfer payments generally consume 10–15 (or even 20) percent of national income in most of the rich countries today. Unlike public spending on education and health, which may be regarded as transfers in kind, replacement income and transfer payments form part of household disposable income: the government takes in large sums in taxes and social insurance contributions and then pays them out to other households in the form of replacement income (pensions and unemployment compensation) and transfer payments (family allowances, guaranteed income, etc.), so that the total disposable income of all households in the aggregate remains unchanged.14
In practice, pensions account for the lion’s share (two-thirds to three-quarters) of total replacement income and transfer payments. Here, too, there are significant differences between countries. In continental Europe, pensions alone often consume 12–13 percent of national income (with Italy and France at the top, ahead of Germany and Sweden). In the United States and Britain, the public pension system is much more drastically capped for those at the middle and top of the income hierarchy (the replacement rate, that is, the amount of the pension in proportion to the wage earned prior to retirement, falls rather quickly for those who earned above the average wage), and pensions consume only 6–7 percent of national income.15 These are very large sums in all cases: in all the rich countries, public pensions are the main source of income for at least two-thirds of retirees (and generally three-quarters). Despite the defects of these public pensions systems and the challenges they now face, the fact is that without them it would have been impossible to eradicate poverty among the elderly, which was endemic as recently as the 1950s. Along with access to education and health, public pensions constitute the third social revolution that the fiscal revolution of the twentieth century made possible.
Compared with pension outlays, payments for unemployment insurance are much smaller (typically 1–2 percent of national income), reflecting the fact that people spend less time in unemployment than in retirement. The replacement income is nevertheless useful when needed. Finally, income support outlays are even smaller (less than 1 percent of national income), almost insignificant when measured against total government spending. Yet this type of spending is often the most vigorously challenged: beneficiaries are suspected of wanting to live their lives on the dole, even though the proportion of the population relying on welfare payments is generally far smaller than for other government programs, because the stigma attached to welfare (and in many cases the complexity of the process) dissuades many who are entitled to benefits from asking for them.16 Welfare benefits are questioned not only in Europe but also in the United States (where the unemployed black single mother is often singled out for criticism by opponents of the US “welfare state”).17 In both cases, the sums involved are in fact only a very small part of state social spending.
All told, if we add up state spending on health and education (10–15 percent of national income) and replacement and transfer payments (another 10–15 or perhaps as high as 20 percent of national income), we come up with total social spending (broadly speaking) of 25–35 percent of national income, which accounts for nearly all of the increa
se in government revenues in the wealthy countries in the twentieth century. In other words, the growth of the fiscal state over the last century basically reflects the constitution of a social state.
Modern Redistribution: A Logic of Rights
To sum up: modern redistribution does not consist in transferring income from the rich to the poor, at least not in so explicit a way. It consists rather in financing public services and replacement incomes that are more or less equal for everyone, especially in the areas of health, education, and pensions. In the latter case, the principle of equality often takes the form of a quasi proportionality between replacement income and lifetime earnings.18 For education and health, there is real equality of access for everyone regardless of income (or parents’ income), at least in principle. Modern redistribution is built around a logic of rights and a principle of equal access to a certain number of goods deemed to be fundamental.
At a relatively abstract level, it is possible to find justifications for this rights-based approach in various national political and philosophical traditions. The US Declaration of Independence (1776) asserts that everyone has an equal right to the pursuit of happiness.19 In a sense, our modern belief in fundamental rights to education and health can be linked to this assertion, even though it took quite a while to get there. Article 1 of the Declaration of the Rights of Man and the Citizen (1789) also proclaims that “men are born free and remain free and equal in rights.” This is followed immediately, however, by the statement that “social distinctions can be based only on common utility.” This is an important addition: the second sentence alludes to the existence of very real inequalities, even though the first asserts the principle of absolute equality. Indeed, this is the central tension of any rights-based approach: how far do equal rights extend? Do they simply guarantee the right to enter into free contract—the equality of the market, which at the time of the French Revolution actually seemed quite revolutionary? And if one includes equal rights to an education, to health care, and to a pension, as the twentieth-century social state proposed, should one also include rights to culture, housing, and travel?
Capital in the Twenty-First Century Page 55