Friday, 12 April 2013

Grease that rusty guillotine

Dominique Moïsi compares François Hollande with Louis XVI and warns that if he (Hollande) does not learn his history lessons he will have to face the consequences. That's great. By that I don't mean the apparently imminent execution of Hollande but the fact that this is finally a historical comparison that does not involve Heinrich Brüning or the rise of fascism in the 30s. But there are some points that remain unclear in Moïsi's argument. I have done some comparisons of 18th history with the present myself. That kind of long term comparison is often tempting, sometimes illuminating, but always tricky because of huge differences in the historical context.

Moïsi's main point is that the 'Ancien regime ... fell ... when the privileges of the aristocracy were no longer perceived as the counterpart to services rendered to society' and that we are seeing a similar situation today. This, he thinks, is the sign of deep crisis of the political system. 

The first question that I would like to ask Moïsi is how deep he thinks the political crisis is today in comparison to the late 18th century. My impression is that if growth rates were to pick up again from tomorrow we would see the talk about a political crisis in France disappear rather quickly. Before the French Revolution there were a few bad harvests, but most historians would agree that even with extraordinary harvests the Ancien Régime would not have survived because its structural problems were to big. 

This leads to the question of whether there are any structural problems today that are comparable to those under the Ancien Régime. Moïsi seems to think so, but does not really spell out what he means. So let me give this a shot:

The main obstacle to resolving the debt crisis of the French state were the fiscal priviliges of the aristocracy and the church. Their near complete exemption from taxation meant that a substantial part of revenues could not be taxed. Taxation on the revenues that could be taxed therefore became oppressive. In the words of Michael Kwass the Ancien Régime was a 'welfare state for the rich'. But government revenue still remained too low to provide for the increasing expenses, mainly for warfare. This was clear to most contemporaries but the political structure of the Ancien Regime meant that this could not be changed. Those who were unhappy with the status quo had not political power and those who had political power were quite happy to leave things as they were. Political elites used their political power to protect their economic privileges, thereby undermining the stability of the whole system. Of course the collapse of the Ancien Régime was not only a fiscal matter, but it was one of the central problem. 

What about today? Are there similar structural problems that prevent a solution of the current debt crisis? I would say yes but in a roundabout way. In most industrialised countries, the policies of the last decades have led to shift of the tax burden from the rich to the poor. At the same time, wealth and incomes have been redistributed from in the opposite direction. There may be some effect of this shift on overall government revenue. This may be a similarity to the Ancien Régiem. But I would argue that this development resulted mainly in a shift of the tax burden that left overall government revenues intact. The real problem lies in an other effect of growing inequality: domestic demand is depressed and growth remains sluggish. Over the last decades the solution in many economies was increasing private debt but this creates problems of its own of which we are now well aware. So, I would agree that the fiscal policies put into place by today's political elites in the interest of economic elites let to the current crisis. But the mechanism is more complex than in the 18th century. 

However, as perceptive readers will have spotted, there's a missing link in this argument. In the 18th century economic and political elites were to a large degree congruent. It's easy to see why the Duke of Orleans would and could oppose fiscal reform. He was both an extremely wealthy man and the brother of the king. But today's political elite is--which a few notable exceptions--not part of the economic elite. It is therefore much more difficult to explain why policies that benefit the economic elite are put in place. Is it because politicians are slaves to the ideas of defunct economists? Hayek and Friedman in this case? But this merely begs the question of why they're not slaves to defunct economists with different views. Or do party donations play a role in shifting political power from the masses the elite? More questions than I can answer in one blog post. But worthwhile thinking about. 

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