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Austerity Measures in Europe and the US

Who Wears The Pain Of Adjustment?

July 4, 2013 | by MAX RASHBROOKE

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Dysfunctional politics in Europe and the United States can stand in the way of attempts to make the top 1% bear the brunt of austerity measures, argues Max Rashbrooke.

In recent weeks and months, four different countries have given us four very different answers to a vital global question. That question is, should the rich be made to shoulder more of the burden of the painful budget adjustments being made while the world economy continues to stagnate? In many cases, the answer tells us something about the state and health of that country's democracy.

The drama has been played out most visibly in the United States, as Democrats and Republicans argued over how to deal with their 'fiscal cliff'. In terms of who ultimately bore the burden, the deal struck might be deemed to be a tie. Those earning over US$400,000 a year saw their tax rate revert from 35% to the 1990s-era rate of 39.5%. However, Social Security taxes will rise from 4.2% to 6.2% on the first $113,000 of income for all workers, an effect felt most strongly at the bottom.

The balance of power in American politics might have hinted at a bigger burden on the already rich. However, as the Bertelsmann Foundation’s Sustainable Governance Indicators (SGI) point out in their analysis of US electoral processes, money plays a powerful role in determining who gets heard. Something like $6 billion was spent in the last election campaign, and the influence of the high-spending 'super-PAC’ campaign groups is well known.

In addition, Princeton University academic Larry Bartels has shown that the way US politicians vote is closely aligned with the opinions of their wealthy constituents – whereas the opinions of their middle-class and poorer constituents have very little influence. In other words, the distribution of the pain of adjustment may say something about the dysfunction of US politics.

In 2020, Low and Middle Income Families in the UK will be Worse off than in 2008

If the US result was a tie, Britain and France have aimed at more distinct results – in theory, at least. In the UK, Chancellor George Osborne has cut, not raised, the top tax rate, from 50% to 45%, while reducing benefits for many families. The Labour Party claims average families will be £900 a year worse off as a result of the changes, while the Resolution Foundation think tank has found that low and middle income families will be worse off in 2020 than they were in 2008.

While the UK government has reduced taxes for the poorest households, and taken tentative steps to stop tax avoidance by the rich, it has done little, according to a report by One Society, to address Britain's large income gaps, even as it grapples with huge government debt.

Across the Channel, the new French president, Francois Hollande, has made tackling inequality his centrepiece policy. He has, for instance, placed a €450,000 cap on executive pay at the 52 companies where the French government has a majority stake. However, his wider drive to make the rich bear more of the pain of adjustment has not been wildly successful.

Some of its problems are internal: a proposed new 75% tax rate for top earners was struck down by the courts because it was badly worded, while revelations about the offshore bank account of Hollande’s former tax czar have engulfed his government in scandal.

However, much of the dissatisfaction with Hollande, which ultimately may stymie his attempts to change the balance of pain, stems from a much wider malaise in French society. Unemployment continues to rise, and factories close, as the economy stagnates. The public finances remain in a poor state. All of these are long-term problems, even if Hollande's inability to deal with them is at the root of his increasing unpopularity.

As the SGI France report notes the public demand for fundamental political, economic and social reforms is on the rise. At the same time, the government’s capacity to undergo systemic reform appears beleaguered. This state of affairs has persisted under governments of different stripes, and appears largely unchanged even after several years of Nicolas Sarkozy’s right-wing reforms. As with the US, fundamental problems of the health of the country's democracy seem to be limiting the ability of a current government to do what it thinks right.

Public Anger over Bank Bonuses Triggers Reforms in Switzerland and the EU

Both Britain and France, of course, have something to say about the European Union's initiative to crack down on bank bonuses. The EU has agreed to limit bonuses to a year's salary – or two years' salary if shareholders agree. To no-one's great surprise, Britain opposes the measure, while France supports it. While the measure is not so nakedly aimed at making the wealthy pay more, it does come in response to public anger over soaring bank bonuses.

It is also part of a wider initiative on bank regulation, known as the Capital Requirements Directive, designed to make sure the financial sector, not the general public, bears the risk (and cost burden) of another global financial crisis. While there are questions about whether the EU is a genuinely democratic institution – given the continuing weakness of the directly elected European Parliament vis-à-vis the other parts of its institutional machinery – on this issue it does appear to be answering to public demands just as well as, if not better than, some of its member countries.

Another European country taking action on top pay, although for different reasons, is Switzerland. In a recent referendum, the Swiss voted to put various curbs on top salaries in the private sector, backing measures that included giving shareholders a binding vote on executive pay, a ban on payments made when executives join or leave a company (so-called golden hellos and golden handshakes), and a ban on bonuses linked to the buying and selling of firms.

These reforms, rather than being economically driven in an immediate sense, have stemmed – somewhat like the EU changes – from public moral discomfort, in this case over a proposed €58,5 million payment to an outgoing company chairman. But while Switzerland may not be facing the same economic problems as other countries, anger over executive pay does have a financial tinge to it, in the sense that large bonuses were seen as having encouraged the risky investments that nearly felled the Swiss banking giant UBS.

And there are signs that the Swiss may go even further, with the centre-left Social Democrats said to be pushing for a referendum on limiting a company's executive pay to 12 times that of its lowest paid workers.

Democracy can be a Counterweight to Vested Interests

These referenda are just two among many in a country that makes an unusually wide use of such direct voting measures. Of course, the use of these measures does not guarantee a perfect democracy: Switzerland has in recent years experienced a surge in the popularity of far-right parties that encourage xenophobic and racist sentiments.

However, the fact remains that the frequent use of referenda does habituate the Swiss to informed debate over public issues. And it is perhaps significant that the measures against executive pay were passed in a country famed for providing a discrete hiding place for great wealth. In other words, a stronger democracy can be a counterweight to vested interests – business groups campaigned heavily against the Swiss referendum – and allow a nation to examine itself with greater frankness, as a means towards a more sustainable future.

Max Rashbrooke is a journalist and author working in Wellington, New Zealand, where he writes about politics, finance and social issues.

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