This is a guest post by Bernd Hayo and Florian Neumeier from Philipps-University Marburg, Germany. It is based on their forthcoming paper in Economics and Politics
Within the last decade, many industrial countries have experienced three crises: a financial crisis, an economic crisis in the form of a major recession, and a sovereign debt crisis. Some observers even believe that the still ongoing sovereign debt crisis in Europe endangers the survival of the euro area and seriously undermines European integration. Although financial and economic crises contributed to the poor state of public finances, in many countries, public finances were stretched to the breaking point even before the outbreak of the crisis. Thus, they were unable to bail out financial institutions and stabilise the business cycle without significantly raising investors’ concern over the possibility of substantial default risk.
Although many major economic reforms appear to be unthinkable without the commitment of political leaders and, consequently, are strongly associated with their names (consider, for instance, US President Roosevelt’s New Deal as well as the supply-side oriented economic policies initiated by US President Reagan referred to as Reagonomics or, more recently, Japan’s Prime Minister Shinzo Abe’s macroeoconomic experiment, often called Abenomics), the economics literature has rather neglected the role of heads of governments for countries’ economic and fiscal performances. In an article recently published in Economics & Politics, we aim at shedding some light on this issue. Utilising data on 21 OECD countries over the period 1980‒2008, we empirically investigate whether there is a systematic link between the socioeconomic backgrounds of those countries’ presidents and prime ministers and their fiscal policy stance. Our main interest lies in the association between political leaders’ socioeconomic status before taking up politics–that is, their relative standing in society as indicated by the level of formal education, income, and social capital–and the fiscal deficits during their incumbencies.
Our findings reveal that heads of governments from lower socioeconomic backgrounds are more likely to run larger budget deficits than leaders who were affiliated with the upper class before their political career. This difference appears to be of notable size: the tenures of lower-status leaders are associated with a deficit-to-GDP ratio which is roughly 1.6 percentage points higher than that of high-status leaders. Over time, this effect increases to almost 12 percentage points. Moreover, we find that in political systems characterised by stronger constraints on policy-makers in the form of checks and balances or government fractionalisation, the impact of political leaders’ socioeconomic status on fiscal deficit declines. However, it continues to be statistically significant and economically relevant.
The argument we offer to explain the relationship between political leaders’ socioeconomic background and fiscal deficit builds on a long tradition of social science research. According to sociology, a person’s thinking and acting is steered by a system of lasting, transposable dispositions, also called habitus. These dispositions are a reflection of the social experiences a person gathers and the life conditions she is exposed to and become manifest in particular patterns of appraisal and practice. In status-conscious societies, status discrepancies serve as the foundation for social categorisation, as they provide an effective tool for labelling people. Depending on their status, individuals are assigned to classes (e.g., the upper class or lower class), which inevitably affects their life conditions and self-images—i.e., people usually perceive themselves to be of a particular rank and thereby identify with a specific social class. Due to that, people of similar status meet similar fates and gather similar experiences, which is why these dispositions happen to be homogenous for members of the same social class, constituting a class habitus.
Based on this reasoning, we hypothesise that the policy stance of heads of government reflects the habitus of the social class in which they were socialised. Our empirical evidence suggests that low-status individuals are more inclined to support public debt incurrence. There are two explanations for this state of affairs. First, attitudes toward public indebtedness depend on the individual’s personal economic situation: people are less reluctant to live at the expense of future generations if they are relatively worse off. Second, the propensity toward public debt incurrence is likely affected by persons’ degree of future orientation, as running a public deficit can also serve as a way to enjoy welfare gains from public goods and services and postpone the burden associated with rising tax rates or cuts in government spending for the future. Status, in turn, is found to be inversely related to a person’s orientation toward the future as well as the willingness to delay gratification.
Can we trust these findings? In a related study (Hayo and Neumeier, 2014), we employ a similar theoretical and empirical framework but utilise observations on the German states (Länder) and their prime ministers. In contrast to the OECD countries, in this sample of states within a federation, there is a much greater degree of homogeneity across the various cross-sectional units. But again, we find robust evidence for the influence of leader’s social status in line with the results reported for OECD countries above.
Finally, a political leader’s socioeconomic status may not only affect her propensity to rely on deficit financing. In Hayo and Neumeier (2012), we show that the status of heads of governments also exerts an influence on the size and composition of public spending. Our findings suggest that political leaders who were socialised in the lower class conduct policies that support a levelling of status-related social inequalities. This implies increasing expenditure on budget components such as social security, education, and health care, which are prominent dimensions of social deprivation. This result is consistent with the notion that individual behaviour exhibits a social rivalry motive, implying that members of the upper class seek distinction from low ranks in order to enhance and secure their privileged and prestigious position, whereas people of low status strive for status advancement and a levelling of status-related differences between classes.
Hayo, B. and Neumeier, F. (2012), Leaders’ Impact on Public Spending Priorities: The Case of the German Laender, Kyklos 65, 480‒511.
Hayo, B. and Neumeier, F. (2014), Political Leaders’ Socioeconomic Background and Fiscal Performance in Germany, European Journal of Political Economy 34, 184‒205.
Hayo, B. and Neumeier, F., Political Leaders’ Socioeconomic Background and Public Budget Deficits: Evidence from OECD Countries, forthcoming in: Economics & Politics.