4 - Economic Policy

Summary

Chapter 3 demonstrated that the increasing globalization of markets in the 1966–1990 period did not precipitate a secular decline in the power of the left and organized labor in the industrialized democracies. This says nothing, of course, about the consequences of partisan politics for the economy during this period. Most importantly, it is commonly assumed that nominally “leftist” parties have only been able to remain politically competitive in the era of global markets by abandoning their traditional commitments to interventionist economic policies (Kitschelt 1994). I argued in Chapter 2, however, that the political incentives for left-wing parties to pursue interventionist economic policies should have increased with market integration – to ameliorate the economic dislocations and insecurities associated with globalization.

This chapter tests these contending hypotheses against a range of economic policy indicators for the period 1966 to 1990 – ranging from broad fiscal and monetary policy stances to the major components of government spending and the structure of taxation. I begin with over-time plots and bivariate correlations to give readers a feel for basic trends in the data. The analysis then moves on to more precise econometric tests that isolate the effects of domestic political conditions and market integration on economic policy.

The data and analyses provide strong support for my argument with respect to most facets of fiscal policy, where the relationship between left-labor power and redistributive and interventionist government policy increased – rather than decreased – both with heightened exposure to trade and with greater capital mobility. At the same time, however, my analysis also shows that market integration did exert some constraining influence on the left's policy agenda.