Democracy and Macroeconomic Policy

Abstract

A growing literature concludes that modern democracies have not adopted policies that benefit the majority to the extent predicted by social conflict theory. The most prominent reason is that globalization ties the hands of policymakers, making it hard for them to redistribute. Yet while progressive taxation has declined, we find that redistributive spending is higher in many democracies than would be expected by today's high levels of capital mobility. We also find that democratic countries that tend to appeal to the majority of the population, which we proxy for with the adoption of their own constitution after transition, use redistributive macroeconomic policies as an endrun around fiscal constraints. While popular democracies adopt flexible exchange rates that give them monetary autonomy, exhibit higher levels of inflationary finance, and incur more foreign debt, elite-biased democracies are more restrained. The latter also have smaller governments and engage in lower levels of redistributive spending.