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Overview
The spread of market-oriented reforms has been one of the major political and economic trends of the late twentieth and early twenty-first centuries. Governments have, to varying degrees, adopted policies that have led to deregulation: the liberalization of trade; the privatization of state entities; and low-rate, broad-base taxes. Yet some countries embraced these policies more than others.
Johan Christensen examines one major contributor to this disparity: the entrenchment of U.S.-trained, neoclassical economists in political institutions the world over. While previous studies have highlighted the role of political parties and production regimes, Christensen uses comparative case studies of New Zealand, Ireland, Norway, and Denmark to show how the influence of economists affected the extent to which each nation adopted market-oriented tax policies. He finds that, in countries where economic experts held powerful positions, neoclassical economics broke through with greater force. Drawing on revealing interviews with 80 policy elites, he examines the specific ways in which economists shaped reforms, relying on an activist approach to policymaking and the perceived utility of their science to drive change.
Product Details
| ISBN-13: | 9781503601857 |
|---|---|
| Publisher: | Stanford University Press |
| Publication date: | 04/11/2017 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 232 |
| File size: | 3 MB |
About the Author
Read an Excerpt
The Power of Economist within the State
By Johan Christensen
STANFORD UNIVERSITY PRESS
Copyright © 2017 Board of Trustees of the Leland Stanford Junior UniversityAll rights reserved.
ISBN: 978-1-5036-0185-7
CHAPTER 1
Economists and Market-Conforming Reform
IRELAND had already undone itself before the global recession did. In 2007 — a year before the onset of the international financial crisis — the Irish property bubble burst, and real estate prices that had been growing rapidly for two decades started to plummet. So did the tax receipts from property transactions, which suffered a drop of 36 percent in 2008. The loss of tax revenue marked the beginning of the Irish fiscal and economic crisis. The meltdown that followed was of historical proportions. Between 2007 and 2010, GDP (gross domestic product) fell by 12 percent, unemployment tripled — from less than 5 percent to almost 14 percent — and a generous bank bailout produced a sovereign debt crisis that forced the Irish government to accept a rescue package from the European Union (EU) and the International Monetary Fund (IMF). The country once known as the "Celtic Tiger" — renowned for its remarkable economic growth from the mid-1990s onwards — was reduced to one of the "P.I.I.G.S.," (Portugal, Ireland, Italy, Greece, and Spain), figuring alongside the debt-ridden economies of Southern Europe.
Ireland's spectacular boom and bust were intimately linked to the tax policies pursued by Irish governments. Usually the story is cast in market-oriented terms: Irish policy makers used a very low corporate tax rate to attract foreign direct investments and cut taxes on labor to create incentives for enterprise and growth. Yet, a closer look at the Irish case shows that this narrative is misleading. The tax policies pursued by Irish governments from 1980 onwards were not attuned for the most part to market principles; they ran directly counter to them. Whereas conformity to markets implied level playing fields and taxation that was neutral with respect to economic behavior, Irish tax policy was geared toward directing and influencing — economists would say "distorting" — the economic choices of households, businesses, and investors. The most striking evidence of this was the Irish property boom, which was driven partly by a wide array of specific tax breaks for investments in the construction of everything from hotels and seaside resorts to multistory car parks and sports clinics. In fact, the tax policies of Irish governments bore a strong resemblance to the interventionist tax schemes that were popular around the world in the 1960s and 1970s.
The Irish tax regime was profoundly different from the policies of another small Anglo-Saxon country on the other side of the globe. New Zealand, to many observers, was the textbook case for the use of market principles in public policies. In the 1980s, it went further than any other advanced economy in lowering tax rates and eliminating exemptions, deductions, and loopholes from the tax code. In stark contrast to Ireland, the governing principle in New Zealand was that the tax system should influence economic choices as little as possible. This principle was applied with remarkable rigor. For instance, New Zealand was the only developed country without tax incentives for private retirement savings and without any exemptions from its value-added tax.
The differences in tax policy among the Scandinavian countries were equally puzzling. Despite its social democratic credentials, Norway adopted a major market-oriented reform of taxation in 1992. Though more moderate in scope than in New Zealand, the reform lowered the top statutory tax rate on labor considerably and introduced a system that was neutral with respect to a number of economic decisions. At the same time, the Norwegian tax system retained features that ran counter to market principles, in particular a very favorable tax regime for housing. Denmark, on the other hand, resisted market-conforming tax policies for a very long time. Despite a series of policy revisions in the 1980s and 1990s, Denmark maintained remarkably high marginal tax rates on labor and high and uneven rates on different types of capital income. As recently as in 2009, a Danish worker on just above average wages paid 63 percent of the last krone she earned in total taxes on labor — that is, 12 percentage points more than in Norway and almost twice as much as in New Zealand.
These brief presentations raise a general question of interest to students of political economy, public policy, and economic sociology alike: Why do some advanced capitalist countries go further than others in adopting market- conforming policies? Why do some states seek to achieve economic growth through policies that emphasize economic efficiency and level playing fields while others pursue prosperity by stimulating specific economic sectors and activities?
The book addresses this broad query by looking at one of the main areas of market-oriented reform from 1980 onwards. Taxation was at the center of efforts to restructure the economic systems of advanced economies in this period due to its critical role in financing the activities of the state and its impact on the workings of the economy. The tax reforms enacted by Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States were powerful symbols of the broader movement toward a greater role for markets in public policy. Market-conforming tax policies, as I conceptualize them, entailed the reduction of marginal tax rates, the removal of tax breaks and more uniform taxation of different types of income and assets — all changes that were meant to stimulate the free operation of markets and an efficient allocation of resources. (See the following pages for a more extended discussion of the concept.) Both technical and highly politicized, the field of taxation provides fertile terrain for exploring the politics behind the turn to the market in public policy. This book offers an in-depth account of the driving forces behind market- conforming policies based on a comparative analysis of the actors and institutions that formed tax policy across a carefully selected set of small, developed countries — New Zealand, Ireland, Norway, and Denmark — over the period from 1980 to 2010.
Whereas previous scholarship has pointed to political parties, production regimes, and political institutions as determinants of the adoption of market-conforming policies, this book highlights the role of economic experts within the state. The core argument of the book is that the varying degree of market-oriented reform to an important extent reflected the historical institutionalization of economic expertise in state bureaucracies. Market-oriented policies were adopted in some places and not in others not only because of differences in governing parties, economic structures, or legislative institutions but also because the institutional entrenchment of the experts that advocated neoclassical economic ideas varied dramatically across countries. Economic knowledge had a potentially profound impact on the adoption of market-conforming policies, I argue, yet this impact depended crucially on the position established by economic experts inside the state.
This argument points to the interaction between professional groups and administrative institutions as determinant of public policies. Highly trained experts often occupy strategic positions within government bureaucracies from which they may pursue professionally defined policy agendas, and they possess knowledge resources that they can leverage vis-à-vis elected politicians. At the same time, professional groups penetrate state bureaucracies to different degrees. The position of experts varies across both countries and organizations, depending not only on functional tasks but also on political-administrative struggles over the proper role of different forms of knowledge in managing the affairs of the state. This book thus puts forward a contingent argument about the institutional role and policy impact of a specific form of professional knowledge, namely economic expertise. This argument joins a growing literature about the role of the economics profession in the diffusion of market-oriented policies.
Economists and the Turn toward the Market in Public Policies
The worldwide liberalization of economic policies has been one of the defining political-economic trends of the late twentieth and early twenty-first centuries (see, for example, Simmons, Dobbin, and Garrett 2006). Governments around the globe have adopted a wide array of reforms aimed at achieving economic gains by allowing markets to operate more freely. These policies include the deregulation of product markets, labor markets, and financial markets; the liberalization of trade; the corporatization and privatization of state entities; and low-rate, broad-base tax reform.
A growing body of literature sees the "ubiquitous rise of economists" as one of the principal drivers behind these reforms (Markoff and Montecinos 1993; Bockman and Eyal 2002; Fourcade Gourinchas and Babb 2002; Babb 2004; Fourcade 2006, 2009; Chwieroth 2009; Reay 2012). This mostly sociological literature highlights that economics has become a "global profession" within which ideas and practices spread rapidly across national borders (Fourcade 2006). The transnational economics discipline has been characterized by an "overwhelming domination of U.S.-based scholars, scholarship, and institutions" (Fourcade 2009: 256). The field has been led by a small group of top American economics departments including MIT, Chicago, Harvard, Yale, Berkeley, Stanford, and Princeton (Chwieroth 2007: 11–12). From the 1950s onwards, these institutions led the way in what is often described as a "paradigm shift" from Keynesian to neoclassical economics. This included the emergence of monetarism, "rational expectations" and microfoundations in macroeconomic theory, as well as new economic theory in fields such as taxation, labor, and finance.
With the advent of neoclassical economics, the substantive focus of the discipline shifted from the demand side toward the supply side of the economy and from macroeconomic issues toward microeconomic questions. Moreover, formal modeling based on sophisticated mathematics emerged as the dominant and unifying methodological approach (Colander 2000; Fourcade 2009: ch. 2). To be sure, this paradigm shift was neither sudden nor complete, and substantive differences over policy remained (cf. Campbell and Pedersen 2014). Yet, modern neoclassical economics is widely regarded as "the most coherent and well-bounded scholarly enterprise in the social scientific field" (Fourcade 2009: 3), with broad consensus around basic assumptions and methodological techniques (see, for example, Reay 2012 on the "flexible unity of economics").
An important channel for the diffusion of market-oriented policies has been the growing role of economists trained in U.S.-style neoclassical theory both in international organizations like the IMF (Evans and Finnemore 2001; Chwieroth 2009) and in national governments — especially in developing countries such as Chile (Montecinos 1998), Mexico (Centeno 1997; Babb 2004), and the Eastern European states (Bockman and Eyal 2002) but also in developed economies like Australia (Pusey 1991) and Italy (Quaglia 2005). Yet, as Marion Fourcade has pointed out, the ascent of the economics profession has varied greatly across states: "Economic knowledge gets entrenched with different force across countries, in different places and institutions, and for different purposes, and its very substance can also differ in subtle ways" (Fourcade 2009: 261). Moreover, she links the varying role of economists to national differences in the political-administrative order, that is, in the "organization and exercise of 'government'" (247).
My argument builds on this literature by stressing the role of economists in bringing about market-oriented reform and the importance of administrative institutions in shaping the role of economic experts. But it also makes two novel contributions. First, it makes the link between the role of neoclassical economists as agents of market-oriented reform at the end of the twentieth century and the buildup of economic expertise in government bureaucracies during the Keynesian era. As I will show, the institutional position and authority granted to Keynesian economists in the postwar decades was crucial for the later adoption of neoclassical economic perspectives within the state. Ironically, the ties established between government ministries and the economics discipline during the Keynesian era later served as channels for the diffusion of new economic ideas that prescribed market-oriented reform.
Second, I extend the discussion about the influence of economists into the realm of public administration. For all its emphasis on the power of economic "technocrats," the sociological literature has paid surprisingly little attention to the issue of how economists influence policy through public bureaucracies. Although this literature suggests several sources of policy power for economic experts, it says little about how economists act in the policy process and about the ideas and norms that underpin their administrative behavior. I address these issues by drawing on insights from the state and bureaucracy literatures. As laid out in detail later in the chapter, I argue that the particular expertise, ideology, and norms of neoclassical economists shaped their administrative behavior in ways that were conducive to greater influence in policy making. This argument sheds new light on the question, raised by academics and casual observers alike, of why economists have become so influential in the formulation of contemporary public policies.
Market-Conforming Tax Policies
The broad shift from state interventionism toward social and economic policies that emphasize the role of markets has been given many labels, including "neoliberal," "Washington consensus," "free-market," "market friendly," and "market conforming." Although there is clearly much overlap among these concepts, I prefer to use the more specific term market conforming to describe the policies investigated in this book. By market-conforming policies I mean policies that conform to the free operation of markets and that aim to ensure an efficient allocation of resources. Conformity to markets in public policy implies that governments, instead of intervening directly in the economic choices of businesses and individuals, rely on market mechanisms to achieve economic goals. Significantly, this does not mean that states retreat from economic management but rather that they "enlist" the market in governing the economy (Krippner 2007; Schmidt and Woll 2013). Indeed, it is often shown that the deregulation of markets is accompanied by the introduction of new sets of rules to ensure that the freer markets operate properly (for example, Vogel 1996).
In the field of taxation, market-conforming or market-based policies are usually identified with the lowering of tax rates, the broadening of tax bases, and the removal of tax distortions to economic behavior (Steinmo 1993, 2003; Swank 1998, 2006; Boix 1998). In line with this understanding, I operationalize market-conforming tax policies as consisting of three elements: the reduction of marginal tax rates, the broadening of tax bases through the removal of deductions and exemptions, and more uniform taxation of different types of income and assets. One could object that market-conforming policies also involve lowering the overall level of taxation to reduce the role of the state in the economy. However, I maintain that limiting the size of government is a separate issue that should not be conflated with the orientation toward the market in public policy. Market-conforming taxation is not about reducing the level of revenue but rather about collecting a given amount of revenue in a way that entails the fewest possible distortions to the allocation of resources.
An advantage of this more restricted definition of market-conforming tax policies is that it distinguishes between tax reforms that combined reduced rates with the removal of tax deductions and the closing of loopholes — such as the 1986 U.S. Tax Reform Act — and reforms that cut rates at the same time as expanding tax breaks — such as the 1981 U.S. Economic Recovery Tax Act. As tax experts Joel Slemrod and Jon Bakija point out, the "underlying philosophies [of these reforms] were vastly different and in some ways contradictory" (Slemrod and Bakija 2004: 24). Whereas the former type of reforms was aimed at generating efficiency, the latter type was at odds with notions about an efficient allocation of resources. This distinction is obscured in some important studies of tax reform, such as Monica Prasad's comparative analysis of free-market reforms in the United States, the UK, France, and Germany (Prasad 2006). The definition employed in the present study allows us to separate the two, with only the first type of reforms being classified as market conforming.
(Continues...)
Excerpted from The Power of Economist within the State by Johan Christensen. Copyright © 2017 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of STANFORD UNIVERSITY PRESS.
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Table of Contents
1. Economists and Market-Conforming Reform2. The New Economics and Politics of Taxation
3. New Zealand: Plotting a Market-Oriented Revolution
4. Ireland: Populist Politics in a Generalist System
5. Norway: Economic Experts in the Social-Democratic State
6. Denmark: Equality before Efficiency, Politicians before Experts
7. The Power of Economists within the State