The International Sources of Domestic Inequality – Revisiting the Globalisation Debate

The retrenchment debate asked whether the welfare state was cut back or not after 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 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. 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 remarkable 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. The objective of this paper is to provide an analysis of the extent and changing form (increasing share for top-income earners and increase in poverty rates) of income inequality and to use this to reevaluate the globalization and retrenchment debates. 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. 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 some difference, globalization will be shown to have significantly constrained governments in their egalitarian aspirations.