Some Democratic Economics: If We Pay the Piper, Whose Tune Will He Play?

At first sight, the affair is a simple illustration of what happens when lawmakers can legislate about the money taxpayers must pay them. The 626 MEPs (Members of the European Parliament) elected by the voters of 15 member states of the Union each get a “basic” salary equal to what they would get if they were members of the parliaments of their home countries. Thus a Spanish MEP earns a “basic” salary of about 36.000 euros a year, a British one about 70.000, a German 100.000 and an Italian a bit over 110.000 euros. MEPs from some of the new member countries joining on May 1 2004 will under present rules have to make do with as little as 6.000 euros a year.

These salaries are “basic”. They are richly supplemented by a rule on expenses which is an open invitation to fiddling. At French insistence, the seat of the Parliament is in Strasbourg while the committee work is mostly done in Brussels and ll MEPs to Luxemburg as well. An assiduous MEP is therefore theoretically travelling all the time between these cities and his home town, though many are far from assiduous. They could also have a wide variety of other expenses that may or may not be necessary to incur in order properly to represent the people. They can claim any and all of these regardless of whether they have incurred them: no vouchers are required. The result is that an MEP can make up to 40.000 euros a year “profit”—that is to say, steal 40.000 euros—by padding his expense account.

There are honest MEPs who do not steal. That the majority do is proven by the fact that for 25 years all attempts by the honest ones to reform the expense account system have been voted down by a majority. Such brazen insistence on their right to fiddle, and oblige taxpayers to put up with the fiddle, has gradually led to the European Parliament falling into disrepute. Polls indicate that at the elections next June, vote participation will average no higher than 25 per cent and may be as low as 18 per cent in Britain. There is clearly a tendency for the EU parliament sinking into utter irrelevance, and in the long run there is a threat to the 626 jobs that provide those luscious perks.

To face this threat and to launder their reputation, last December a majority of MEPs have finally agreed to a deal introducing properly substantiated expense accounts. In exchange, MEPs were all to have the same “basic” annual salary of about 110.000 euros, subject to a most favourable tax rate. In addition, they were to get a “special” lump sum allowance of 43.000 euros, a daily attendance fee of 257 euros and no less than 144.000 euros a year for secretarial and office costs. The deal was vetoed in January by the Council of Ministers as being “bad P.R.” ahead of the elections, and may or may not be resuscitated in the near future. If eventually it is concluded on anything like these terms, it will be proof that in representative democracy, he who pays the piper does not necessarily call the tune, for the piper may have powers to extort the pay without having to play the paymaster’s tune.

However, it is not really the sums extorted that matter from an economic point of view. In underdeveloped countries, they are indeed very large if we include the proceeds of outright corruption. In a place like Kenya, Nigeria and perhaps above all in Angola, they may run into high single digit percentages of GDP. But in Western Europe and in the United States, the amount the political class as a whole pays itself both in “legally” provided incomes and in illicit graft over and above the total amount the same people could probably earn in private life is a negligible fraction of national income.The popular (and populist) belief that we are poorer than we need be because politicians are thieves and steal our money, is naive. Democratic economics very likely make us poorer, but it does so in a more roundabout way, and not because politicians are more dishonest than most other people,—though they very likely are.

In 1906, the French National Assembly voted a law raising the salary of deputies at a stroke by 67 per cent. Prior to this watershed law, politics was mostly the domain of “notables” with private incomes and professional men, such as lawyers and journalists, who practised it part-time. After the law, there was a sea change. The composition of the Assembly changed radically, in came the schoolteachers, and the part-time amateur was replaced by a new breed of professional politician fully maintained by the taxpayer. However, with universal suffrage, he was not chosen and installed in hi seat by the taxpayer, but by voters in general, whether they paid much tax or little or none.

Setting pay so that politics as a career is opened up to men and women without private means is by all accounts a step towards greater democracy. If lawmakers as a class have no vested interest in inequalities of income and wealth, the chances are that they will make laws that promote greater equality because in an electorate with one-man-one-vote and secret ballot, there is a natural majority in favour of making an unequal distribution more equal, for any majority will gain more by taking from the rich than from the poor. The result of legislation generated by the democratic process is more progressive taxation, greater welfare entitlements and a larger share of GDP absorbed in government spending than would otherwise be the case. Politicians who would oppose this trend run a high risk of being voted out of office and being replaced by others who are no more dishonest but are better at attracting the majority vote,—which it is the politician’s business to seek if democracy is to be competitive.

However, attaching an adequate income to elective office is not enough. The politician must not depend on particular interests for his campaign financing and for the running expenses of his party. In the United States, he does so depend. The largest sources of money for presidential and congressional campaigns are called AT&T, the public employees’ unions, Microsoft, Philip Morris, the American Bar Association and so forth. Federal contributions are hardly material.; in the perspective of a presidential campaign costing from $100 to $200 million, and congressional districts costing tens of millions to win or lose, federal aid is of little interest. In Britain, both campaign and party financing is wholly non-state.

As opposed to the Anglo-American systems, in Continental Europe there are widespread attempts severely to limit private financing of elections and parties. In France, a 1994 law places an outright ban on campaign financing by private business , while contributions by individuals are limited to 4600 euros per donor. A 10.200 euros limit per individual donor is fixed by the 1999 German law on party financing. In both countries, there is a complicated system of subsidies paid to candidates and parties according to votes gained, with a ceiling of 57 million euros to any one party and a threshold of 5 per cent of the total vote in Germany. In France, the state subsidy is sufficient to keep even no-hope candidates and splinter parties in reasonable comfort from one election to the next. Large parties do trade the odd favour to some private interest against under-the-table contributions, but do not strictly need to in order to get by. These state-financed systems are, in brief, as independent of moneyed interests as one can expect in real life. Significantly, they are legislated by the legislators for the legislators. The piper has emancipated himself from the money that pays him.

The effect of moving towards a more perfect, more completely democratic political system where politicians are not beholden to particular interests, stares us in the face. The economics of democracy reveals one reason why government policies in much of Continental Europe are more egalitarian, more welfarist and more statist than in the Anglo-American world, and why the latter is economically more successful than the former. Many other reasons may also be acting in the same direction, but it would be a delusion to forget that democracy, whatever its merits, is no recipe for the growth of riches.