In the 1960s and 1970s, almost every European country went too far in expanding its entitlement programs in the quest to create a comprehensive welfare state. Enthused by years of vigorous economic growth, a healthy-looking demographic structure, and a spirit of the times that vigorously favored a pro-active social policy, Western European policymakers unwittingly set their countries’ entitlement programs on a collision course with reality. When the oil shock hit European economies in 1973, public finances across Western Europe were on the hook for enormous liabilities: as growth rates slowed and unemployment rose, public expenditures soared. Suddenly, what had seemed affordable under rosy assumptions was no longer affordable under the new economic constraints.

Unlike European leaders at the time, Congressional leaders today are contemplating a boost in public expenditures under truly grim economic circumstances: unlike European leaders in the late 1960s and 1970s, they will not be able to look back on the entitlement expansions under consideration and say “We reasonably thought the economy would remain in great shape and entitlements would remain affordable.” They are spending this country into crisis by writing checks the economy cannot cash, and they know it.

In Europe, as is well-known, policymakers overshot the mark. In later years, many political leaders have issued mea culpas for having “gone too far.” As Emile van Lennep, former secretary general of the OECD said in 1981: “In the industrialized democracies, we let the success of the 1960s go to our heads. In responding to the aspirations of our people, we allowed our economies to become overloaded, overregulated and insufficiently profitable. We overdid it.”

In 1981, Simone Veil, former French Health Minister who had become President of the European Parliament, warned that “We are at the limits of what we can pay… European ministers know the problem full well, but they have not started to alert public opinion.” From 1983 onwards, the gradual trimming of the welfare state became both a recognized necessity and a fiscal urgency throughout Western Europe.

Weil’s own country, France had been the last major European country to seek to achieve a “great society” by means of large increases in spending on social entitlement programs: with Mitterrand’s famed 1983 U-turn, that door closed as well as a result of inexorable economic constraints. By 1984, Mitterrand had stated publicly that “You can’t continue to crush with taxes and fees all those people who create wealth in France.” Speaking about his fellow countrymen, Mitterrand said that “The French are beginning to understand that it’s enterprise that creates wealth, that it’s enterprise that creates jobs, and that it’s enterprise that determines our standard of living and our place in the world.” In December of 1984, the Socialist-oriented French economist Laurent Joffrin told the New York Times correspondent John Vinocur that “What was socialist didn’t work, and what worked wasn’t socialist.”

In the Netherlands, the realization of having gone “too far” dawned on political leaders in the early 1980s. Louw de Graaf, the Minister of Social Affairs at the time tasked with curtailing entitlement programs, told Dutch newspaper De Volkskrant in a 2003 interview: “The awareness that we had overshot [in our social programs], that our system of social insurance was not resistant to crisis, only hit me [in 1983, when 35,000 people per month were losing their jobs]… I was even able to share my views of the situation in the [left-leaning] VARA-radio show ‘The Red Rooster’. Not with the anchors who grilled me, but in the eyes of audience members I saw that they understood why I was doing what I was doing.”

In Sweden, a consensus that big changes to the welfare state were needed formed around 1990, when the country was plunged into the worst economic crisis since the Great Depression. In 1987, Sweden’s Social-Democratic Finance Minister Kjell Olof Feldt had already urged his party to moderate its policies, declaring: “The very high level of progressive taxation just doesn’t work…The Social Democratic Party has to recognize that high taxes, which reduce efficiency and stimulate inflation, slow down growth and ultimately undermine social equity. That is a sophisticated argument. But I think we will get it through.”’ In the wake of the crisis, Feldt’s views became commonly accepted in his own party. In 1992, leading Swedish Social-Democrat Mona Sahlin declared: “We went too far in telling everyone ‘We will take care of you’ with always more wages, more vacation, more benefits…You have to teach people now to take responsibility for their families and their kids.”

In Germany, awareness of the unsustainability of social entitlements rose in the 1980s and reached its peak in the early 1990s. In 1993, Otmar Issing, head of the most influential financial institution in Europe at the time, the German Bundesbank, said that “Instead of resorting to fiscal and monetary panaceas which have long been obsolete, policy makers should concentrate on removing actual impediments to growth…We now have to pay for our failure to tackle the structural problems in `good’ years.” Peter-Ruediger Puf, chief economist of Daimler-Benz AG said that “We have arrived at a point where we have to tell employees that they have to begin insuring themselves. Self-responsibility is the watchword.”  Curt Engelhorn, Chairman of the Board of German pharma giant Boehringer Mannheim, was even more blunt: “For us it is simple: Return to a free-market economy.” The German preference for reform at high levels has endured, although it has not always translated into concrete policy changes: in August 2004, Social-Democratic German Chancellor Gerhard Schroeder told German broadcaster ARD that “If we don’t restructure the welfare state now it will go kaput.”

By the late 1980s, European policymakers viewed entitlement spending in a very different manner than in the 1960s and early 1970s. Their aspirations had been tempered by unpleasant economic realities.

Today, with U.S. finances headed towards a visible fiscal abyss, Congressmen are not braking but instead stepping on the gas. Unlike European policymakers, who were not adequately warned in the late 1960s and early 1970s that what they were creating would be financially unsustainable, U.S. policymakers have received warnings for years that the country is on an unsustainable fiscal path. Before the current wave of corporate and bank bailouts began,  in July 2007 the Congressional Budget Office sent a letter to Sen. Judd Gregg (R-NH) that contained the following warning: “the costs of failing to put the budget on a sustainable path are potentially very large: failing to address the fiscal gap ultimately puts at risk the nation’s long-term economic growth itself…” The CBO warned Gregg that the corporate tax rate might have to rise from 35% to 92%, and the top income tax rate from 35% to 92% in order to balance the budget if entitlement spending were not curtailed.

Those estimates were created before the current wave of spending on banks, car makers, stimulus and soon, healthcare, began. A new estimate by the CBO released this month paints a devastating picture of the future of U.S. finances. The more “optimistic” baseline scenario forecasts federal spending of 31.7% of GDP by 2050, with a debt at that time of 128% of GDP. The less optimistic “alternative fiscal scenario” forecasts spending of 42.2% by 2050, with a debt of 321%. In the less optimistic scenario, the U.S. federal debt rises to 716% by 2080. Of concern is that these estimates do not include healthcare plans presently under consideration!

The irony is this: at a time when European countries are doing what they can to put their fiscal house in order to prepare for a wave of retirements and an aging population in the decades ahead, the United States is racing in the opposite direction, doubling down on unaffordable entitlement expansions. Careful deliberation has gone out of style: “I want this done now,” the President told PBS this week, perhaps worried that careful evaluation of the plans presently under consideration will reveal their lack of quality and full lack of affordability. After the rushed passage of the flawed and ineffective (and, as it turns out, politically less and less popular) stimulus package, one would think that more deliberation of sweeping policy changes would be valued.

When we have so many documented examples of countries that went too far in expanding entitlement programs, why would policymakers be so careless as to make the U.S. the nth exhibit of bad fiscal behavior? When we have examples of countries with well-functioning healthcare systems, such as Switzerland,  that provide universal insurance in a smoothly functioning market, would we really choose to go down a path that is guaranteed to lead to an ever-increasing government role in healthcare and concomitant rationing?

It seems American policymakers have taken away all the wrong lessons from the European experience. And because policymakers have been warned again and again of what is to come, unlike European leaders in the late 1960s and early 1970s, current American leaders will have no excuse for their fiscal insouciance.

But Shorto does not describe in detail issues that are well worth talking about: welfare state overreach, the Dutch approach towards multiculturalism and the Dutch approach towards crime. All three are highly relevant to understanding a growing sense of disillusionment in Dutch society and a rising enthusiasm for emigration.

Let’s start with the generous welfare state. One would not think it from reading Shorto’s piece, but the Dutch welfare state brought the Netherlands to the brink of economic disaster in the 1980s. One can describe this, in effect, as an unintended overreach: when Dutch policymakers expanded entitlement programs in the 1960s, they did not expect these programs to grow as fast as they did in the 1970s and 1980s. Policymakers interviewed in their retirement years have expressed remorse for the ballooning of the Dutch welfare state, emphasizing that if they had known at the time what they know now they would have acted rather differently in formulating policy.

Exhibit A is the disability insurance program that led the Netherlands to become, in the memorable words of former Prime Minister Ruud Lubbers, “an ill country.” Policymakers decided to dramatically expand the scope and generosity of the disability insurance program in 1967. Dutch employees who suffered from short-term disability for a period of more than one year were eligible for a benefit of 80% of one’s previous wages for a period of unlimited duration. The definition of ‘disability’ in the new program was broad, giving the Dutch disability scheme a low-access threshold: common symptoms included back aches and mental fatigue related to stress at work. Disabled workers were entitled to 80% of their last-earned wages until the age of 65, when like all Dutchmen they became eligible for the general Dutch old age pension, the AOW.

As a result of the changes, the number of “disabled” workers soared from under 250,000 in 1965 to more than 750,000 in the 1980s and nearly 1 million in the early 1990s. The program functioned not only as a disability insurance program, but also as a program that suffered from frivolous claimants and rampant abuse, serving as a dumping ground for older workers who were laid off in the waves of re-structurings that altered the Dutch corporate landscape in the 1970s and 80s.

As the golden age of post-war economic growth abated, Dutch public finances deteriorated rapidly. Matters worsened further under the Prime Ministership of Joop den Uyl (1973-1977), whose sincerely held view was that the great society in the Netherlands would be realized through “the spreading of income, knowledge, and power”. By the early 1980s, exhausted by ever-increasing government spending and ever higher rates of unemployment, the Netherlands found itself in a deep economic crisis. Reformist Prime Minister Ruud Lubbers implemented a stark austerity package of spending cuts in order to get the Netherlands out of its rut. The Netherlands had become, as Lubbers would say in 1990, “an ill country”, enfeebled by its dependence on state programs and the abuse of the disability insurance system.

Shorto’s article describes the “consensual” Dutch culture in mostly positive terms, and Dutch interviewees in his article present their system as a model to emulate. I would argue that the economic consensus model in the Netherlands is quite recent in historical terms, and that even today, it contains a fair amount of conflict.

There is little that was inevitable about the Wassenaar Accord of 1982: at that time, today’s famed Dutch consensus model was almost unimaginable. Lodewijk de Waal, one of the most influential Dutch trade union leaders in recent years, advised European trade unions in 1997 to strike a more consensual pose towards national governments, but admitted: “in 1982, I was not in favor of the deal at all, I was of the opinion that the rich should pay for the crisis.”

In 1982 the Dutch state, under the leadership of Lubbers, took matters into its own hands and forced labor unions and employers’ federations to craft and agree upon an austerity package. Eventually, the social partners reached an agreement (the famed Wassenaar agreement), but it was reached only under the figurative barrel of a gun.

Labor unions promised wage restraint in exchange for a softening of certain austerity measures: the result, years later, was a sharp rise in employment and an improvement in public finance. Yet it was the Dutch state, fed up with the “social partners” that forced these social partners to come to an agreement: social “consensus” was pushed aside because its economic costs had become simply too great to bear for the public sphere.

Well into the 1980s, political economists doubted that the Netherlands would be able to reform its welfare state: as recently as 1986 the high dependency on entitlement spending and high rate of unemployment led Swedish sociologist Göran Therborn to call the country where he worked, the Netherlands, “perhaps the most spectacular employment failure in the advanced capitalist world” (Visser and Hemerijck 1997).

Today, the Dutch welfare state has been significantly pared back: the number of disability insurance recipients has dropped substantially, and even the state’s role in the healthcare sector has been greatly pared back. A healthcare system that formerly relied on central government planning is being transformed into a system that relies on consumer choice, competition among insurance companies and individual responsibility. These changes are worth noting, but they came about only after extremely difficult struggles that took decades.

Unfortunately, the welfare state has helped decimate Dutch civil society: again, this has been an unintended consequence of government growth. It is not yet possible to know if the Netherlands’ civil society will re-cover from the blows it has incurred. In 2003, Theo Schuyt, Professor of Philanthropy at the Free University of Amsterdam, wrote:

The pumping of money over the courses of many years into employment opportunity projects, in anti-poverty policies and urban policy has made societal organizations entirely dependent on government financing. With the making available of government funds, the involvement of citizens, companies, funds, and churches has crumbled. The many billions invested had—probably for that reason—no clear effect, according to the verdict of the General Accounting Office on the anti-poverty- and urban policies that have been implemented. The coalition cabinets of the 1990s have helped kill the famed ‘civil society’ of which their leaders spoke and speak so much… the Netherlands has the largest subsidized non-profit sector in the world, but is at the bottom where philanthropic revenues are concerned…

The fiscal price tag of the Dutch welfare state remains high, even now that it has been pared back: Shorto mentions the 52% income tax rate, but the Dutch taxman lurks in unexpected places. New vehicles sold in the Netherlands, for example, are hit with a 40% “vehicle tax” in addition to the 19% value added tax that is added to cars as well as many consumer goods sold in the country. Dutch gasoline costs more than $6 a gallon, of which roughly 70% goes to the government in the form of various taxes including the VAT. The highest estate tax rate (that some people really do pay) is 68%: for the sake of reason this rate will be reduced to 50% in the years ahead.

Increasingly, however, cultural issues, not economic ones, are salient in Dutch politics. In his article, Shorto mentions issues surrounding the multi-cultural society fairly briefly. Dutch society is historically segmented, or divided into “pillars”: Protestants, Catholics, socialists and liberals have historically lived side by side, but in their own separate sphere, with each group having its own newspapers, TV broadcasting corporation, labor unions, schools, etc. with relatively little interaction with other groups. “Toleration” may be better described as “peacefully living apart.”

The immigration of large numbers of persons adhering to different cultural norms and values has posed a challenge that Dutch policymakers have not yet successfully tackled. Torn between permissive multiculturalism and universalist values, between respect for women’s rights and religious freedom, Dutch policymakers have too often sacrificed the tolerant ideals of their country and culture in the name of multiculturalism. Dissident voices are ruled out of order and successfully demonized (Pim Fortuyn), killed (Theo van Gogh) or face such severe threats to their security that they are forced to emigrate, as in the case of Somali-born politician Ayaan Hirsi Ali, who violated the Dutch norms of “consensus” by insisting on publicly discussing female genital mutilation; honor violence; honor killings; and forced marriages.

Shorto hints too briefly at the problems involved in “politics of consensus”: all too often in the Netherlands, this means that the most aggressive elements in society win. Those who speak up—such as Hirsi Ali—are blamed for stirring up discontent. Blame is often attributed to them, not to those who commit the criminal acts.

This brings us to the third issue, the Dutch approach towards crime. The Dutch approach towards crime is not often discussed abroad (except for lenient Dutch laws concerning marijuana possession) but it illustrates the perils of viewing men as being inherently good-hearted.

James Q. Wilson, America’s pre-eminent criminologist, recently wrote a piece in the Los Angeles Times titled “Do the Time, Lower the Crime.” In the Netherlands, a similar piece by a pre-eminent Dutch criminologist would be almost unthinkable. Guided by experts, Dutch public policy remains almost entirely geared towards the full rehabilitation of criminals, even the clinically insane. The belief remains strong that men are inherently good and can be rehabilitated. The few voices in the political arena calling for tougher sentencing guidelines are often accused of being vindictive souls, vacuous simpletons or plain demagogues.

Even against a growing tide of public dissatisfaction, Dutch judges remain reluctant to sentence those guilty of crimes to hard time. According to the Dutch Prosecutor’s Office, in 2006, 10 defendants found guilty of murder were sentenced to mandatory community service with no hard time, while 54 defendants found guilty of rape were sentenced to mandatory community service with no hard time. Such sentences give pause to think: they raise questions of judicial fairness and of common sense on the part of Dutch judges.

Similarly, in 183 cases of attempted manslaughter, defendants were sentenced to mandatory community service (and no hard time). Many cases involving common violence and aggression in the streets involve culprits who laugh at the low sentences handed to them by judges: they wear the jail-free penalties as a badge of pride, and do not view them as a deterrent of any kind.

Dutch judges remain far more lenient in their sentencing than official guidelines instruct them to be: when criticized for excessive leniency, Dutch judges respond with irritation that the independence of their profession is under attack. This cultural remoteness is a reminder of the perils of elites standing too far removed from the society in which they wield influence. In my view it is time for Dutch judges to consider that they are at risk of becoming the weakest link in the increasingly difficult fight against crime in the Netherlands.

Indicative of the Dutch approach towards crime is the treatment of clinically insane criminals. These criminals are often sentenced to stays in psychiatric hospitals where the goal, with only rare exceptions, is their full re-integration into normal society. As part of this, psychiatric patients often go on accompanied visits, where some succeed in escaping from their guards. When these psychiatric patients escape their guards, they often stop taking their medication and can become extremely dangerous.

In 2005, 73 such psychiatric patients escaped: in 2004, 100 did. One patient who escaped in July of 2005 killed a man during his escape (an anecdote, to be true, but an important one). Recently, a 22-year-old man in psychiatric detention succeeded in escaping twice. After not returning to the psychiatric clinic from an unsupervised trial visit, he was arrested by police in Amsterdam-West when he was about to commit a robbery. The judge that saw him following the incident ruled there was insufficient evidence to keep him in jail, at which point police were supposed to return him to the psychiatric clinic, but let him go free because of an administrative error. He has not yet been found.

What is one to make of policies and cases such as these? It is my fear that the faith in the goodness of man that began to dominate Dutch public policy in the late 1960s and 1970s has led to extreme difficulties in combating crime in the present. The gentle approach towards criminals who have been found guilty contributes to a growing belief among Dutch citizens that the public sphere is simply “out of touch” with normal society and incapable of successfully tackling crime.

Dutch policy is often un-orthodox: the permissive liberties of Amsterdam contrast with the conservative Calvinist Dutch countryside that retains its own “Bible Belt” and high rates of Church attendance. A thorough commitment to secular values in the public sphere belies the full public funding of Christian (and now Islamic) schools on an equal footing with secular public schools. Permissive laws regarding marijuana possession belie a relatively low rate of marijuana consumption. A vibrant feminist movement contrasts with the rising number of cases involving honor violence and forced marriages in the Netherlands.

Whatever the precise circumstances, the realities of Dutch society and the Dutch welfare state are considerably more complex, in my view, than the excessively optimistic portrayal offered by Mr. Shorto. Precisely because the Netherlands remains so distinctive and complex, however, it is a country well-worth researching. In so doing we are likely to find both lessons and warnings that can be applied to U.S. public policy.

Resisting calls to spend more in order to “stimulate” the economy out of its downturn, German Chancellor Angela Merkel said this past weekend: “I will not let anyone tell me that we must spend more money…We must look at the causes of this crisis. It happened because we were living beyond our means…We cannot repeat this mistake.” Germany has set aside about 4% of GDP for stimulus so far and has resisted increasing that to the extraordinary American level of about 8% of GDP.

French President Nicolas Sarkozy, meanwhile, has defied left-wing strikers by refusing to spend more on stimulus than he has consented to so far: just $17 billion in new spending of which $8 billion will go towards France’s auto-industry. Sarkozy is, however, holding firm on his plan to cut taxes on higher earners and implement other reforms to boost France’s economic vitality.

President Obama remains a popular figure in Europe: so why are European leaders vocally resisting his lead, and that of the Democrat-controlled Congress, in spending the big bucks to stimulate the economy?

The answer can be found in a difficult process that has pre-occupied continental European leaders for almost twenty-five years: entitlement reform. Since the mid-1980s, most European countries have eschewed easy spending policies in favor of austere budget-cutting. This process has been politically and socially difficult and it has carried a significant human cost: it has nevertheless been pursued by leaders from the left and the right out of necessity. European leaders are not willing to interrupt this difficult, multi-decade process for the sake of temporary political expediency.

Indeed, the persistent budget crunch that many Western European welfare states have faced for decades is a vivid warning of what may happen in the United States if entitlement programs are not reformed soon. Looking at Western European countries, it’s easy to forget that as recently as the 1960s, levels of public spending in Western European countries were similar to those in the United States: about 30% of GDP on average.

What has changed since 1960 to make the contrast in public spending between the two sides of the Atlantic so dramatic? Europe’s welfare states sharply boosted spending as a percentage of GDP in the 1970s and 1980s: in many cases this was not the result of fiscally irresponsible governments (although there were some) or the result of new entitlement programs (although there were some). Rather, the boost in spending often reflected the delayed costs of entitlement programs that had been adopted by previous European governments under rosy economic assumptions.

Figure 1: Government spending in Western European countries was similar to that of the United States in 1960. Between 1960 and 1980, government spending as a percentage of GDP soared in most European countries while it rose only slightly in the United States (Source: Tanzi & Schuknecht 2000).

To the extent there was any reform of entitlement programs in European countries in the 1970s and 1980s this was for the most part a reactive process, not a pro-active one. As President of Business Europe Ernest-Antoine Sellière stated recently: “Unfortunately, governments tend to reform as a last resort, yet this is highly detrimental.”

Today, European leaders are doing their best to put their fiscal balance sheets in order. What is striking is that so many austerity measures have been implemented by left-of-center European leaders. Often, only they have enjoyed the legitimacy to administer the tough medicine welfare states need to regain economic vitality, particularly in countries where labor unions are powerful political players.

Upon taking office in 1983, left-of-center Portuguese Prime Minister Mario Soares declared: “This government will be austere, uncompromising, and unpopular if that is what is required to achieve economic recovery.”

In Sweden in 1992, Mona Sahlin, a leading Social-Democrat, issued a remarkable mea culpa: “We went too far in telling everyone ‘We will take care of you’ with always more wages, more vacation, more benefits…You have to teach people now to take responsibility for their families and their kids.”

In Italy in 1992, Socialist Prime Minister Giuliano Amato announced budget cuts of $75 billion, mostly in pensions and public healthcare, as he stated publicly: “The state can no longer guarantee everything to everybody.”

In France, the Socialist government of Lionel Jospin that governed from 1997 to 2002 surprised many with the strength of its privatization program, even floating shares of France Telecom and Air France—politically sensitive companies—on the Paris stock exchange. Asked on TV in September 1999 what he was going to do about the 2,000 layoffs announced by tire maker Michelin, Jospin said : “I don’t believe that one should expect everything from the state or the government.”

In 2003, Gerhard Schröder, Germany’s left-of-center Chancellor, called for a “change of mentality” in his own party, the SPD, and in German society as a whole. “Much will have to be changed to keep our welfare and social security at least at its current level,” he stressed, as he argued in favor of reforms that would trim entitlements, and cut taxes. The Chairman of the SPD, Franz Muntefering, supported the tough medicine administered by Schröder (Merkel’s predecessor) by saying: “we believe that things must be rearranged and restarted in Germany in this decade.”

In July 2006, then-Prime Minister Romano Prodi of Italy and his minister for economic development Pierluigi Bersani strongly defended an economic liberalization law then under consideration. After a meeting with Confesercenti, an association of small business owners, the left-of-center Prodi defended the measures by saying: ’Protests are always understandable, but the more I examine the decision taken the more I see that they are in the general interest…This maneuver by the government will allow Italy to lose 10 kilos of fat and gain 5 kilos of muscle.”

American policymakers, however, have not been very good at all at implementing austerity measures in recent decades, particularly outright spending cuts. On the campaign trail, President Obama publicly voiced a commitment to entitlement reform, but it now seems that his Administration favors a significant expansion of entitlements rather than a reduction of their future growth.

Over the next several decades, the U.S. faces an estimated $50 trillion shortfall stemming from existing budgetary commitments to the Social Security, Medicaid and Medicare entitlement programs. Of these three programs, the shortfalls affecting Medicare are by far the most severe. The three entitlement programs normally grow on auto-pilot: Congress does not change their appropriations through the political process on an annual basis.

Whereas European policymakers in the late 1970s and 1980s could say with reasonable justification that they were caught off guard by rapidly deteriorating public deficits and rising rates of spending, by now U.S. policymakers have received warnings for years that entitlement reform is a necessity: these policymakers will not be able to proclaim ignorance of the urgency of entitlement reform in coming years.

Figure 2: U.S. federal pending projections issued by the Congressional Budget Office in December of 2007 are grim: the “alternative” scenario discounts budgetary gimmicks and is a more realistic set of projections than the “baseline” estimates. These projections do not include spending on the troubled assets and stimulus packages passed in 2008 or 2009, nor do they include bold new spending programs eyed by the Obama Administration.

The President of the San Francisco Federal Reserve Bank, Janet Yellen, has said that when looking ahead five, ten or fifty years, “we begin to look at numbers that are truly staggering and frightening…the growth of the federal budget is explosive.” She elaborated: “The federal budget deficit is not sustainable…I’m concerned that the people take it as a given they have Social Security, Medicare and support from Medicaid to pay for nursing home care…A lot of people are not well prepared for retirement.’ ”

Current Federal Reserve Chairman Ben Bernanke told Congress in January of 2007: “We are experiencing what seems likely to be the calm before the storm… spending on entitlement programs will begin to climb quickly during the next decade…” In February of the same year, Bernanke added that “if early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost.”

In August 2007, then-Comptroller-General of the United States David Walker drew parallels with the decline of Rome and said bluntly: “Long-range simulations from my agency are chilling… much of government today is on autopilot, based on social conditions and spending priorities that date back decades…by 2040 our government could be doing little          more than sending out Social Security checks and paying interest on our massive national debt…there are striking similarities between America’s current situation and that of another great power from the past: Rome.” Walker later told a concerned Financial Times writer that he meant what he said and that “he had mentioned some of the issues before but now wanted to ‘turn up the volume’…I’m trying to sound an alarm and issue a wake-up call.”

With all of these warnings, one would expect American policy makers to act pro-actively, to take actions while problems are still manageable. But instead, they seem to be dodging a politically sensitive issue. The current Democratic-controlled Congress is adding severely to America’s financial liabilities: after spending trillions on bank asset relief packages, auto bailouts and a highly flawed stimulus measure, many remain firmly committed to spending an additional $600 billion or more as a “down payment” on healthcare reform.

The stimulus package poses a risk to future fiscal stability: one reason for which a number of U.S. governors (Jindal of Louisiana, Palin of Alaska and others) have rejected parts of the stimulus package is because it would create a permanent increase in spending at the state level that would be extremely difficult to reverse in future years.

Many policy makers are reluctant to oppose well-organized groups of Social Security and Medicare recipients. The recent eligibility expansion of government health insurance for children (SCHIP) to families of four with an annual income of $66,000 highlights just how much the current Congress has forsaken fiscal discipline and rationality for the sake of easy voting on the basis of raw emotions.

Members of both parties seem to share the view of progressive economist Paul Krugman, who writes:

“I’m all for looking ahead. But most of this is just wrong-headed, on multiple levels. Let me start with the easiest piece: why the distant future of Medicare is something we really should ignore…the main reason medical costs keep rising is that the range of things medicine can do keeps increasing…. Long-run projections assume, perhaps correctly, that this trend will continue… But does it make any sense to worry now about how to pay for all that? Intergenerational responsibility is a fine thing, but I can’t see why the cost of medical treatments that have not yet been invented, applied to people who have not yet been born, should play any role in shaping today’s policy” [emphasis added].

Anyone who is familiar with the experience of Western European welfare states in recent decades reads Krugman’s words in disbelief: there is every reason to be pro-active in tackling entitlement reform.

Many Republicans did not lead on the issue of entitlement reform when they were in control of Congress: they often avoided making tough choices and in some ways worsened coming shortfalls. On the pressing issue of Medicare reform, Republicans voted narrowly in 2003 to add a new prescription drug component to the program: titled Medicare Part D, the benefit will cost trillions over future decades.

The desire of the current Democrat-controlled Congress for more spending seems insatiable, and the feeling remains strong in Congress that America’s most pressing needs can somehow be “fixed” by spending of additional trillions.

The experience of European countries ought to tell us otherwise–expanding entitlements is a deeply harmful process that can create severe budgetary turmoil and economic harm to future generations. The grim CBO projections don’t even capture the most recent rounds of spending in its projections on future U.S. spending and deficits.

The U.S. is almost unique among industrialized countries in that it is in a position to avoid the mistakes made by many Western European countries, in part because American youthful demographics are more favorable than Europe’s older composition. The U.S. will only succeed in doing so, however, if its policy makers act with far more determination than European policy makers did in the 1970s and 1980s to stem the tide.

In future years, when they regain political power, conservatives will likely face the difficult task of reforming entitlements while minimizing the social fallout of the citizens who have come to view them as acquired rights. All the more reason to take Western Europe’s lessons on public spending growth seriously: at the moment, it seems that even with plentiful European evidence of the dangers of too much public spending, American policy makers are unwilling to change course, willing to repeat the mistakes of Western European countries while the leaders of these very countries argue in favor of a different course.

The stakes in the debate are high: no issue is more important to the future of the conservative movement in the U.S. than healthcare reform. The U.S. healthcare system as it currently exists is gravely distorted, having empowered the government and large employers while sidelining the consumer and discouraging disruptive innovation. The few conservatives who continue to defend the current U.S. healthcare system in the name of free markets should cease doing so: they are defending a system that is not a free-market system.

The best healthcare system, from a conservative perspective, is that of Switzerland: it beats the U.S. system in terms of its performance, efficiency, universal coverage, and consumer empowerment. Although the Swiss system is not perfect, in empowering consumers and providing universal health insurance through market mechanisms, it merits serious consideration. In this article, I will review the British, French, Dutch and Swiss healthcare systems in an attempt to see what conservatives can learn from their successes and failures.

First, a look at one of Europe’s more troubled healthcare systems, the British National Health Service. A true single-payer system, the British NHS ought to serve as a warning to Americans, not as an inspiration. If universal health insurance is what you want, adopting a single-payer system along British lines is not the best way to go about it. In the 2008 Report “Why the NHS is the Sick Man of Europe”, Civitas Health Policy Director James Gubb writes that whereas “in 2001 public spending on the NHS stood at £46.0bn, it is now £90.7bn, a massive increase of nearly 100 per cent in cash terms and around 70 per cent in real terms.” What happened to all this money is not quite clear: waiting lists, albeit reduced from their record peaks, continue to loom large, and many British healthcare debates continue to focus on the rationing of procedures, cancer drugs, and surgeries. Popular targets of rationing are smokers and the obese. There is little “disruptive innovation” in the British system, and there are not enough market mechanisms to weed out inefficiency. Horror stories proliferate. This system is one that ought not to be emulated: it serves as a warning.

Across the channel lies the far more decentralized French healthcare system. While France’s system of government and education are highly centralized, its healthcare system is not. Unlike the British system, the French healthcare system is not a single-payer system. And unlike the British NHS, France’s national health insurance system was never designed to be the producer and provider of healthcare. The growth of the French national health insurance system illustrates this: it grew in a haphazard manner from its creation for low-income workers in 1928 to its extension to all commercial and industrial workers and their families in 1945, to farmers and agricultural workers in 1961, to independent professionals in 1966 and to the remaining uninsured population (1%) in 2000 (see Rodwin 2003).

Writing in the New England Journal of Medicine in 2004, Victor Rodwin and Claude Le Pen comment that “French policymakers typically view their NHI system as a realistic compromise between Britain’s National Health Service, which they believe requires too much rationing and offers insufficient choice, and the mosaic of subsystems in the United States.” The French system, they write, “is structured as a market-based economic system with extensive organizational diversity and individual choice. Most physicians in private practice tenaciously support the present arrangements, embracing the principles enshrined in “la médecine libérale’…”

Co-payments and private supplementary insurance are routine in France and have helped make consumers more discerning in healthcare usage. Health outcomes are, for the most part, quite good.

What’s not to like, then? For one, the role of the French state in healthcare is on the rise with a turn towards “a kind of state-led managed care” in a bid to contain costs. Moreover, despite considerable flexibility, the French healthcare market is quite restricted in certain areas: price competition among local health insurance funds and selective contracting between these funds and health care providers, for example, are not allowed. The French healthcare system is insufficiently consumer-driven, and in part because of this chronic budget deficits have plagued the system for years. Physicians are insufficiently compensated: every year there is a renewed tug of war to secure adequate funding for physicians’ reimbursements and the system as a whole. To sum up: the French system is not necessarily a model to emulate, but the next time you hear someone claim that France has a “government-run” healthcare system that explains its successful performance, think againÑthe French have a dynamic, pluralistic healthcare system, and that explains a large part of its successful healthcare delivery.

Next, in rising order of preference, is the Netherlands. The Netherlands used to have a healthcare system with a large degree of centralized control, focused to a large extent on the rationing of procedures. Rising problems in the late 1980s sowed the seeds of reform, and in 2006, the Dutch implemented a complete overhaul of their healthcare system. This breakÑrightly described as revolutionaryÑwas preceded by calls for strong market-based reform by major stakeholders: Bartholomee (2006) writes that “many health insurers and provider organizations developed a pro-market attitude and called for a drastic reform after years of increasing government interference in health care”.

Under the new system, write Knottnerus and ten Velden, Dutch public health insurers were either privatized or merged with private health insurers. All citizens are now required to purchase a basic package of essential health care services, along with “own-risk coverage” (essentially an annual deductible) of Û150 each year. Lower-income households are subsidized by the government to enable them to purchase health insurance. As part of the drive for healthy competition, the premium for the basic insurance package is set by competing insurance companies that are forced to accept all applicants without screening out those with prior conditions. A risk-equalization fund has been developed by the government to mitigate the costs for insurance companies.

Dutch health care providers have far more incentives to provide quality care under the new system, and hospitals have a greater motivation to compete in offering high-end services for all patients. Patients, moreover, are offered incentives by their insurers to live a healthy lifestyle and shed extra pounds: the Wall Street Journal’s Gautam Naik reported in 2007 on the case of 45-year-old diabetic Rianne Boel. Ms. Boel’s insurance company offered to pay her back $676 for her gym membership, provided she lost 7.5% of her weight (22 pounds) in 15 months. She changed her diet and began to exercise vigorously, meeting her weight loss goal and receiving the funds: in case she succeeds in losing more pounds, she may gain the upper hand in her battle with diabetes, which her insurance company says would save them about $1,200 per year in insulin costs. Under the pre-2006 Dutch healthcare system, these types of incentives were simply inconceivable.

Waiting lists for all sorts of surgical procedures and surgeriesÑendemic under the pre-2006 Dutch systemÑhave been greatly reduced as a result of the abolition of the 1971 Hospital Planning Act and of relaxations on the use of specialized clinics. These clinics are often more effective and flexible in delivering healthcare services than conventional, do-it-all hospitals.

Is the Dutch system today ripe for export to the U.S.? No. For one, although the system is far more consumer-driven than the pre-2006 scheme, the government still looms large, and constrains the system too much. The government remains wary of for-profit hospitals and for-profit private clinics. Competition remains inadequate: this year, hospitals will have the latitude to negotiate on the basis of price and quality with insurance companies for 30% of services, up from 20% in 2008. While this is a big change from the pre-2006 system, it still leaves 70% of services outside of negotiations for the time being.

From the Dutch reforms, we can take away at least two lessons: a true government-run system is not worth emulating (the Dutch ditched it in 2006), while placing consumers front and center of the systemÑprovided the poor receive financial support to purchase health insurance in a competitive health insurance marketÑleads to positive health incentives and positive health outcomes.

We come, then, to the Swiss system. It is a system that deserves the attention of every American interested in market-based health reform. Regina Herzlinger, McPherson Professor of Business Administration at Harvard and the “godmother of consumer-driven healthcare”, wrote in late 2008:

“The country of Switzerland has universal coverage, costs that are 40% lower than ours and that inflate at lower rates, and an excellent health care system in terms of outcomes and resources. The key to their success is that the Swiss system is consumer-driven: consumers buy their own health insurance from more than 90 private health insurance firms. If they cannot afford it, the cantons subsidize it. If they are sick, they pay no more for their health insurance than the well (the Swiss insurers risk-adjust each other). Consumer oversight insures value for the money better than oversight by governments and employers.”

For conservatives, who generally favor market-driven solutions, the Swiss system has achieved a great deal on the demand side, by placing the consumer front and center and getting employers out of the way. Whereas in the U.S., health insurance is commonly tied to employers, and whereas many Americans find it unaffordable to purchase individual health insurance policies (in part due to heavy state regulations), in Switzerland the whole health insurance market revolves around individual insurance policies. Swiss citizens can choose from one of hundreds of reasonably priced, competing insurance plans from dozens of competing health insurers. They may choose a high-deductible plan, a low-deductible plan, or an HMO plan.

Many insurance plans offer rebates for certain lifestyle choices: in many cases, non-smokers can receive a steep discount on their premium, which is a far more humane practice than, say, rationing government health services to punish smokers and the obese. And because health insurance is a contract between individuals and health insurance companies, Swiss citizens can switch jobs or start their own business without it having an adverse impact on their health insurance (the opposite of what happens in the U.S., where loss of employment can jeopardize health insurance when COBRA runs out).

It should come as no surprise that the Swiss system is far more consumer-driven than the American system. In a 2004 piece for the Journal of the American Medical Association on the Swiss healthcare system that elicited spirited responses, Herzlinger revealed some remarkable statistics. In 2000, the U.S. government paid for 44.5% of healthcare expenses, whereas in Switzerland, the government paid for just 25.4%. Whereas consumers in the U.S. paid for just 23.3% of expenses, consumers in Switzerland paid for a whopping 68.2% of healthcare expenses. Employers, meanwhile, paid for just 6.4% of healthcare expenses in Switzerland, but 32.2% under the severely distorted American system.

The Swiss system, then, has some real merits. So what’s not to like? For one, it has too much regulation: Herzlinger writes that the Swiss government has put in place onerous minimum benefit packages while micro-managing prices. Both practices are nefarious, but a more serious flaw lies in the supply side of the Swiss system. As Herzlinger emphasizes, the Swiss government micromanages medical care suppliers, not only dictating medical care prices but also specifying the bundles of care for which it will pay, similar to the deeply flawed Medicare reimbursement system in the U.S. that reimburses the cost of procedures instead of rewarding healthy outcomes period.

Then, there is information. A true consumer-driven system would feature easily available, standardized performance metrics on healthcare providers and physicians so that consumers can easily compare performance of physicians and hospitals. Much like in the United States, however, there is an absence of reliable health performance measures in Switzerland. Swiss consumers cannot easily find information on, say, the rate of bacterial infections in a certain hospital or the rate of botched hip replacement surgeries of a certain surgeon. Swiss consumers rely, for the most part, on widely published surveys of satisfaction of patients treated in certain hospitals.

As successful as the Swiss system is, its system would be truly path-breaking if its deficiencies were successfully addressed. The most dangerous thing that U.S. policymakers could do is adopt the most intrusive practices of the best European healthcare systems without adopting the concomitant free-market aspects embedded in those systems. As Americans debate how best to reform their healthcare system, the British, French, Dutch and Swiss systems offer a number of lessons: most important is that the more consumer-oriented a system, the more likely it is to deliver effective care.. In order to create a consumer-driven healthcare system, Americans ought not to adopt the Swiss or Dutch system lock, stock and barrelÑrather, they ought to adopt those policies that work best and discard the rest. A single-payer system is not the best way to go, however.