One of the most remarkable facts about welfare spending in advanced democracies is its rapid and almost uninterrupted expansion since the 1950s. Figure 5.1 illustrates this expansion for two broad categories of spending: government consumption of services and government transfers, both expressed as shares of GDP. Although the very rapid expansion beginning in the mid-1960s slowed down in the 1980s, and the fiscal retrenchment associated with the reining in of public deficits in the late 1980s seems to have caused a temporary reduction in public consumption, there are no signs of any broad-scale retrenchment. This continued growth of the welfare state presents an intriguing puzzle for political economy since the traditional blue-collar working class, the supposed pillar of the welfare state, has everywhere declined during the past four decades (cf. Piven 1991).

One of the solutions to this puzzle proposed in the literature is that growing exposure to the international economy has increased labor market insecurities and propelled demands for social protection. Thus, Cameron (1978) and Katzenstein (1985), and more recently Garrett (1998) and Rodrik (1998), argue that even though integration into the international economy promises large potential welfare gains, such integration comes at the cost of exposure to the ups and downs of global markets and reduced capacity for governments to counteract these cycles. The way governments solve this dilemma, so the argument goes, is to accept high trade exposure while simultaneously adopting comprehensive social programs to compensate people for increased levels of risk (see also Ruggie 1983).