Democracy and Retrenchment: Income Stagnation and the Surprising Appeal of Spending Cuts

About this Session


Fri. 08.04. 11:15



Speaker: Tim Vandlas, Co-Author: David Weisstanner

What is the effect of income stagnation on the welfare state? To answer this question, we develop a simple political economy model linking income stagnation to greater political support for welfare state retrenchment via three distinct mechanisms: (1) an altruistic mechanism, where stagnation reduces altruistic motives for welfare state redistribution; (2) an insurance as “luxury good” mechanism, where stagnation decreases the relative perceived gains from insurance; and (3) a subjective cost of taxation mechanism, where stagnation heightens the relative costs of taxation. To test our argument, we combine novel data on the evolution of income to existing datasets at the micro level on individual preferences and electoral behaviour on the one hand and at the macro level on welfare state retrenchment on the other hand. Our micro-level empirical analyses are consistent with our expectations. First, individuals facing stagnant or lower incomes support spending cuts and tax cuts to a greater extent. Second, individuals penalize government for retrenchment when their incomes are growing but reward them if their incomes are stagnating. Thus, governments have electoral incentives to implement spending cuts when incomes stagnate. In turn, at the macro level, fixed effect regressions reveal that retrenchment is more pronounced in countries experiencing lower income growth. Taken together, our findings link the literature on income stagnation to comparative political economy studies of changing welfare states. In contrast to accounts focusing on the level of income and risk, this article helps us make sense of the puzzle why governments find it politically attractive to retrench their welfare states, not despite but because of difficult economic times. Income stagnation does not only undermine the fiscal sustainability of welfare states, it also saps its political foundation.