Introduction: Motivation, the Explanandum, and a Road Map

Through the 1970s into the 1980s, economic conditions deteriorated and public debt and transfers grew dramatically, though variably across countries, increasingly reducing democratic governments' fiscal-policy options and efficacy in fulfilling their commitments to macroeconomic management. With fiscal utility narrowing, and with the Bretton Woods collapse having removed fixed-exchange-rate constraints, governments turned toward monetary policy to combat at least the inflation part of stagflation. Concurrently, the rational-expectations revolution in economic theory (Lucas 1976, 1981) suggested that they could do so at little real cost, provided monetary authorities had sufficient conservative credibility (Barro and Gordon 1983a,b). Policy makers, however far they credited these theories (Hall 1989), seized upon them to justify shifting policy-emphases toward heavy reliance on antiinflation monetary policy, trying to rebuild broad postwar coalitions behind public macroeconomic management for putative efficiency, which stagflation and seeming Keynesian policy failure had weakened. Right parties turned first, easily restructuring their support coalitions behind this new conservative orthodoxy (Hibbs 1987). The left soon followed, caught between high transfers sapping fiscal efficacy (Chapter 2), high debts constraining fiscal maneuverability (Chapter 3), and high capital mobility and flexible exchange rates diminishing Keynesian policy efficacy (Alesina et al. 1994; Garrett 1995, 1998a,b,c, 2000; Garrett and Lange 1991, 1995; Clark 2000; Clark et al. 1998; Clark and Hallerberg 1999; Oatley 1999). They too restructured economic-policy platforms and coalitions, endorsing some macroeconomic, minimally monetary, conservative orthodoxy, and adding an emphasis on public investment, especially in human capital (Boix 1998).

The most striking and strikingly common features of the postwar history of macroeconomic policy in developed democracies were the sharp upward trends in transfer payments and attendant increases in total fiscal activity, the dramatically rising public debt–to-GDP ratios since the stagflationary 1970s, and the strong shifts toward antiinflationary monetary policies and institutions that followed. Policy and outcome differences, however, were at least as notable. Transfers share of GDP nearly septupled in the Netherlands while less than doubling in Germany. Irish, Italian, and Belgian government debt rocketed past 100% of GDP, while remaining more subdued in the United Kingdom and generally declining in Australia. Inflation, drifting higher through the 1960s and spiking twice in the 1970s, eventually subsided everywhere, but at differing paces and to differing degrees, while the unemployment costs of that policy shift varied even more radically.

This book applies and extends modern political-economic theory to explain the commonalities and differences in this evolution of macroeconomic policies and outcomes across 21± developed democracies over the 50± years since World War II. Through this explanation, the book elaborates a theoretical view of comparative political economy in which similar policy-making challenges and universal tensions between the allocations of political and economic resources in liberal-market democracies induce different policies and outcomes because the domestic and international political-economic institutions, interest structures, and conditions within which public and private actors operate and to which they respond differ across countries and over time.

This comparative, historical study of the democratic political economy of macroeconomic policy making offered both three separate studies of the transfers, debt, and monetary policies that underlay governments' postwar commitments to political regulation of the economy and a broader set of arguments on the politics and economics of governments' evolving attempts to fulfill those commitments. This concluding chapter also follows these two paths. First, it coordinates some of the findings that emerged repeatedly in various forms throughout Chapters 2–4, commenting on their collective implications for comparative-historical study of the democratic political-economy of macroeconomic policy making. Second, after summarizing the book's results, it returns to the larger questions raised in Chapter 1 to consider very tentatively some potential implications of those results for the continued viability and utility of the democratic commitments.

Concluding Themes

Four motifs in Chapters 2–4 merit reemphasis; in order of increasing generality and brevity of their treatment here: strategic electoral and partisan policy making, the highly interactive effects of institutions and structure on such strategic actors, the varying information available across those actors for their expectations formation that undergirds such strategic actions, and the centrality of theoretically informed measurement and specification to theoretically informing empirical work.

Strategic Electoral and Partisan Policy Making

Theories of electoral and partisan effects on economic policy have long, venerable intellectual histories, perhaps representing the cornerstones of modern macro political-economy.

Introduction: Motivation, the Explanandum, and a Road Map

Almost every developed democracy has at least doubled since World War II the share of its GDP allocated to tax-and-transfer (T&T) systems (see Figure 1.4). Notwithstanding this large and fairly common upward trend, however, much variation remains. For example, eight countries amassed T&T over 20% of GDP by 1995, while five had T&T closer to 10%; and, whereas Dutch T&T more than sextupled before growth abated, German T&T less than doubled in the same time. This chapter applies the cycle of political economy approach to comparative democratic policy making introduced in Chapter 1 and diagramed in Figure 1.22 to guide theoretical and empirical exploration of these commonalities and differences. The total variance in Figure 1.4 can be segregated into three parts to explain: crosscountry postwar-average differences, a shared cross–time path, and variation unique to country-time (i.e., the remainder).

Figure 1.5 plotted transfers (% of GDP) averages and variation by country. The wide differences across countries' postwar averages shown there covers 42.9% (±) of the total variation, and differences in postwar variation of T&T experiences within countries are also large. For example, Dutch and Belgian T&T averaged well over twice Japanese T&T, and a plus-or-minus standard deviation range around the Dutch mean quadruples (±) corresponding Australian and German ranges. Similarly, Figure 1.6 plotted T&T by year, highlighting the shared time path and variation about it.

Introduction: Motivation, the Explanandum, and a Road Map

As Chapter 1 noted, high and/or swiftly rising public-debt-to-GDP ratios (henceforth: debt) have become major political issues recently in many developed democracies. As shown in Chapter 2, much of the impetus for this recent debt growth originates in the different allocation of political and economic influence in capitalist democracy, which fostered transfers growth, which drove total-spending growth, which, finally, governments typically partially debt-financed. Figures 1.7–9 plotted the historical record of the resulting public-debt accumulation (gross consolidated-central-government debt for 21 OECD countries from 1948 to 1997).

Figure 1.7 revealed the relatively common experience of falling debt since World War II through 1972± and the dramatic reversal thereafter. Debt more than doubled in under 20 years in many countries, and in some it now tops 100% of GDP. The widespread and rising public concerns over these debt trends and levels and the number of theories emerging to explain them are thus hardly surprising. Beyond these commonalities, however, lie large differences across countries and over time in the level and variation of debt.

Cross-national differences in postwar average debt (Figure 1.8) constitute 55% of the total postwar variation in developed democracies' debts. Belgian and Irish debt, for example, averaged over five times German and Swiss debt, whereas New Zealand and the United Kingdom debt averaged about twice that of Norway. Countries' debt ranges also varied greatly over the period; interextrema ranges in Australia, Italy, Japan, Belgium, and Canada, for example, dwarf those in Switzerland, Denmark, Germany, and France.

Overview

The most striking features of the postwar history of macroeconomic policy in developed democracies are the dramatic and considerably common upward trend of transfer payments, the attendant increase in total fiscal activity, the sharp post-oil-crisis rise in public debt, and the strong shift toward antiinflationary monetary policy that followed. Upon closer examination, however, the differences in policies and outcomes across countries and over time are at least as striking.

For example, the average share of gross domestic product (GDP) devoted to transfer payments in 21 developed democracies more than tripled from 6% (±) to 20% (±) from the 1950s to the 1990s, yet transfers septupled in the Netherlands while less than doubling in Germany. Driven heavily by this transfers growth, the 21-country average of total fiscal activity, government revenues plus expenditures as a share of GDP, almost doubled from 40% to 70% in the same period. This growth eventually spurred public debt accumulation, but, again, debt burdens exploded in some places while remaining far more moderate in others. The average debt-to-GDP ratio fell from 38% in the 1950s to 25% in the mid-1970s before rising to 63% by the mid-1990s, yet debt rocketed past 100% of GDP in Belgium, Ireland, and Italy while remaining much more moderate in the United Kingdom and mostly declining in Australia over this period. Finally, as rising transfer and debt liabilities reduced fiscal efficacy and maneuverability, governments commonly turned to monetary and other institutional “reforms” aiming to restrain inflation.