The Sources of Domestic Inequality – Revisiting the Retrenchment and Globalization Debates

The retrenchment debate asked whether the welfare state was cut back or not when neoconservative and neoliberal parties came to power. The Globalization debate asked whether economic globalization undermined the welfare state. While both debates of the 1990s and 2000s could not be settled, the majority view in political science is that there is no retrenchment and that globalization does not harm the welfare state. In this paper I argue, first, that contrary to the majority view, both questions can be answered in the affirmative if one focuses on the goals of welfare states, rather than their means. Second, and more importantly, I show that a full explanation of this outcome requires an analysis of policy changes beyond the welfare state in a narrow sense.

On the first point: The retrenchment and globalization debates largely centered on indicators of financial means: aggregate social spending, overall tax revenue, or (individual) replacement rates. By and large, these measures are remarkably constant over time. If one switches, however, to consider the main goal of modern welfare states, the attainment of substantive equality of citizens, then it becomes clear that the welfare state is indeed under serious stress. Income inequality has grown in virtually all rich democracies. On the basis of an account of the extent and changing form (increasing share for top-income earners and increase in poverty rates) of income inequality over the last two decades I will reevaluate the findings of the globalization and retrenchment debates.

Second, I argue that the outcome of increasing inequality despite a constant size of the welfare state can only be fully explained with policy changes outside the realm of the welfare state in a narrow sense. This will be demonstrated in three case studies of prototypical Western European countries (England, Germany, Sweden) tracing the development and relative importance of various policy changes with distributive impacts. Most importantly, tax policy and financial deregulation will be shown to have had significant adverse effects on income equality. In both domains, while politics and institutions certainly made a difference, globalization will be shown to have significantly constrained governments in their egalitarian aspirations.