The US Wants to Be More Like Europe

Europe

The welfare economy has produced very high public spending figures in European countries. Almost everything has to be solved by the state. In the first stage this spending was funded by increasing taxes. This dislocated the costs of European industry.

The high fiscal cost, combined with the fact that the industrial and services companies had to take care of increasing demands for “welfare” granted by the state, among which we can mention long holidays, a shorter working week and paid leaves of absence for many different causes. Finally, the welfare economy insisted on an increasing labor rigidity with high exit barriers for jobs, which led to its counterpart — high barriers to getting a job — since companies did not want to be imprisoned by unmanageable costs.

As the competitiveness of European companies lost ground in a very productive world, many European factories relocated to developing countries, like China, Brazil and India. That reduced the base of tax collection while the state took on many new responsibilities. The tax shares could not increase more, so they resorted to getting into debt.

The public debt rose much higher than the maximum acceptable limits that the same European countries had set in Maastricht to 60 percent of the gross national product. Finally there was no way to repay those debts, and this was first obvious in the less competitive countries. The suspension of payments and bailouts appeared and still a definitive answer to the problem has not been found; what is worse, a robust competitiveness strategy has not been found for the European countries for the next 10 years. There are studies for “Europe 2020 and 2030” chaired by Felipe Gonzalez, but nothing has been implemented yet.

Europe has lost agility, has gotten older and is full of debts. Still many of those countries’ leaders want more of the same, and it is because of that, that exiting the crisis will take them a lot of time.

The U.S.

With recent U.S. administrations, the tendency to be like Europe has been accentuated more each time. The state can do anything, and it is necessary to apply the term “welfare economy” to the U.S. as well. It’s not a recent tendency, but one that has become accentuated in recent years.

On the U.S., M. Bordo, C. Goldin and E. White in “Defining Moment” (1998) say that Social Security, Medicare, welfare, unemployment insurance, agriculture regulation, the banking industry and finances were all part of the same scheme. This outline, according to them, is based on laws passed in the ’30s.

Nevertheless, at that time, the increase could be justified by the necessity of finding a way out of the big crisis that started in 1929. This is so because spending went down in 1945 to an almost pre-crisis level. It is since 1950 that they have been trying to imitate Europe in the spending of the so-called “welfare economy,” although initially at a small scale and with extraordinary acceleration later since the middle of the ’50s until the ’80s.

Since the 1980s, U.S. leaders have been able to cut down on that spending, but they maintain it at a high level compared to historical figures. To be able to appreciate this evolution, they have taken into account the figures of U.S. civil public spending, for which the total spending did not include military expenses and debt interest; calculations were made by said authors.

It shows a strong increase in civil expenses in the beginning of the current administration that are explained by the subprime crisis and other ideological components, which could even further increase this type of expenditure in the next years. The taxes in the U.S. are already too high, and public debt has reached the ceiling authorized by the Congress several times; the next will be in May 2013. The U.S. debt has stopped being AAA in order to become AA, which is good, but not as safe as before. China will be the country with the world’s largest gross national product, surpassing the U.S. in 2019 to 2020, and global leadership will be shared.

The Western world — the U.S. and Europe — should re-examine their evolution, looking into the future to establish a strategy to correct the detours that are going to happen and get back on the track that led them to become the world’s largest economy. Today they are declining comparatively. Without a doubt, they can do it. We should be on the lookout for those tendencies, so as not to repeat the same mistakes that hinder the evolution of the world’s powers.