Share |

Revisiting The Myth of Big Government Europe

e21 | July 10, 2012

It is common for free-market commentators to lament our country’s descent into European-style socialism. The most astute of them note instead that we’re in truth already there. In Monday’s Wall Street Journal, AEI President Arthur Brooks makes that point in a column with the provocative title “America Already is Europe.”

I'm often asked if I think America is trending toward becoming a European-style social democracy. My answer is: "No, because we already are a European-style social democracy." From the progressivity of our tax code, to the percentage of GDP devoted to government, to the extent of the regulatory burden on business, most of Europe's got nothing on us.

In 1938—the year my organization, the American Enterprise Institute, was founded—total government spending at all levels was about 15% of GDP. By 2010 it was 36%. The political right can crow all it wants about how America is a "conservative country," unlike, say, Spain—a country governed by the Spanish Socialist Workers Party for most of the past 30 years. But at 36%, U.S. government spending relative to GDP is very close to Spain's. And our debt-to-GDP ratio is 103%; Spain's is 68%.

e21 published a more comprehensive look at this issue back in February. US government spending levels are remarkably similar to those of “big government” European countries with only very small adjustments required to have a more apples-to-apples comparison. Read the whole thing to find the helpful charts.

There is a sense among many commentators that the United States is “becoming” more like Europe in that the government is growing beyond thresholds that could be reasonably financed by the private sector. Putting aside the merits of this view, the general description of the U.S. as “moving towards” Europe makes the distance left to be traveled seem farther than it really is. The graphic below, constructed from the International Monetary Fund (IMF) World Economic Outlook (WEO) data, compares the combined government-to-GDP ratio of the 17 countries that use the euro currency to the combined government-to-GDP ratio of the U.S.

Total government spending in the U.S. is also roughly equivalent to supposedly socialist economies like Sweden (Sweden is a member of the European Union, but not the 17-nation euro zone) and traditionally statist economies like Canada. The graph below compares total Swedish and Canadian government outlays as a share of GDP to total U.S. government spending in 2009 (the last year for which official data are available). If total U.S. spending remains at 2009 levels, by 2016 it will be 10% (or 4 percentage points) above Canada’s spending. It is important to note that this total excludes health insurance expenditures. Were employer-sponsored premiums included, total U.S. government spending plus employer-sponsored health premiums would be about 11 percentage points (25%) greater than Canada’s equivalent spending in 2016. Perhaps even more surprising, government spending plus health insurance would put total U.S. spending above Sweden’s projected 46% of GDP in 2016. Despite perceptions of Sweden as a socialist society, the IMF projects that between 1993 and 2016, the Swedes will have shrunk their government by 32% as a share of their economy. Recent research finds that once adjusting for tax subsidies and tax progressivity, U.S. government spending is comparable to Sweden in areas like total social welfare expenditure.

The similarities don’t stop there. The 2012 edition of the Index of Economic Freedom, co-published by The Heritage Foundation and The Wall Street Journal, underscores the false dichotomy between the United States and “big government” Europe. The Index ranks countries from most to least economically free and their scores rely heavily on metrics like government spending levels and taxation rates. The United States is ranked as the 10th most economically free country, but we barely beat Denmark in 11th place. Finland and Sweden, two other Nordic model welfare states, place 17th and 21st respectively.

Policymakers in the United States shouldn’t look to Europe as a fiscal cautionary tale. Our problems are just as serious, our debts are just as large, and our government is just as big.

e21 Projects & Partnerships