At the G-20 summit, leaders agreed to a $1.1 trillion capital injection to be provided by the IMF and the World Bank so that they can provide emergency credit to countries in distress, particularly developing countries. Unlike what President Obama had wanted, however, no global “stimulus” spending will be forthcoming and European leaders resist more deficit spending. Why? The answer lies in entitlement reform.
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.
14 responses so far
1 barker13 // Apr 1, 2009 at 7:50 am
“President Obama has urged European leaders to spend big…”
If I may… please revise/insert: “President Obama has urged European leaders to BORROW big in order to spend big…”
This is a basic critique I offer in general; let’s not forget the BORROWING aspect of Obama and Congress’ SPENDING. Let’s not forget the INDEBTING of ourselves, our children, our grandchildren, and God knows how many future generation – assuming our country remains in recognizable existence for more than the next couple decades.
“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.”
Bravo! (And heck… she wasn’t even a Harvard Law Review Editor nor community activist!)
(No… to revise and extend my own remark… it’s not just Obama; most Senators and Congress(wo)men are economic illiterates as well. And certainly there’s plenty of blame to lay at the feet of George W. Bush and the RINO Congress’ of 2001-2006.)
“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 Frances auto-industry. Sarkozy is, however, holding firm on his plan to cut taxes on higher earners and implement other reforms to boost Frances economic vitality.”
Jeez… (*SIGH*)… did anyone think we’d ever see the day when conservatives would be calling upon U.S. leaders to follow the broad fiscal policies of a French government…???
Excellent essay, Mr. Reinhoudt. Thank you.
BILL
2 bloodstar // Apr 1, 2009 at 11:07 am
One of the biggest reasons European nations are objecting to spending is the free rider problem. Countries which don’t spend will gain disproportionately from any borrowing/spending by other countries in the EU. As such, there is a disincentive to increase spending and borrowing. In other words, they’d rather take the entire global economy down than be put at a competitive disadvantage.
3 WeymouthJones // Apr 2, 2009 at 1:12 am
I am glad that the Europeans are demanding that the Obama administration listen to those who are far more experienced with the management and miss-management of the welfare state. As a US Citizen and French Citizen who has had the opportunity to live locally in the US, the UK and France for many years each, I know that social democracy is very expensive has important side effects that limit growth. Most EU states understand that they can not spend their way to growth in order to pump-prime the economy. Nevertheless, despite the massive distribution into a social protection system, these EU countries are faced with daunting economic issues. Moreover, EU countries now how hard it is to borrow in this market – just ask yesterday’s tiger, Ireland or retiree-laden Italy how hard/expensive it is to raise a few billion today through a bond issuance.
An important point as well is to recognise that Europeans buy into the “right” to social protection for all in the same way as Americans buy into strong defense or oppose massively flag-burning. There is a consensus as a nation to have 40%-50% of one’s income removed for the “betterment” of the whole. The result is that one spends less, has fewer toys, owns a home later if at all and has far, far less individual debt. I do not believe that most AMericans are willing to really give up our vision of the “pursuit of happiness” so that so one else who does “work as hard” as me will be protected to. Inherently, Americans do not yet see wealth distribution as fair.
Please also examine the French experience under Franois Mitterrand, especially from 1981-1984, because Mitterrand’s presidency is the closest example to what America is experiencing and will experience with the Obama administration. In a word, France’s economy was castrated through the nationalisation of almost 40 of its largest companies. The management was replaced with political cronies and bureaucrats. A massive Keynesian push was begun while the rest of Europe was in austerity and the results were catastrophic in many areas. The Franc was devalued at least twice; the rich left the country; the economy plummeted into deep recession; unemployment got worse; budget deficit’s expanded and France’s economy vis–vis its peers lost major ground that it never really regained, especially vis–vis Germany. The only “class” that got ahead were the Socialists as a ruling power who got all the trappings of wealth and power through a clan system and massive taxation of the ordinary citizen. I wish it did not sound familiar, but it does look like that is what is happening on the Potamac.
4 barker13 // Apr 2, 2009 at 7:20 am
Re: WeymouthJones; 1:12 AM — Wow. One of the best posts ever!
The problem… slowly but surely (and heck… to be honest, not all that slowly!) the American character is reverting to a European model; worse, demographically speaking, we’re not so much moving towards a traditional Western European social democratic model, but rather, we’re being flooded with “new” Americans who bring their Mexican, Central, and South American ideological/social baggage with them.
It’s bad enough to think of the U.S. becoming more like France, Germany, the U.K., or Scandinavia, but think of how much worse off we’re going to be the more we’re dragged towards the Latin American socialist model.
(*SIGH*)
Frankly, I fear we’ve passed the tipping point.
If we could have built upon the Reagan/Gingrich model (ideal) of conservatism the country could have been turned around, but now… after the Bush/DeLay/Lott years and the tarnishing of the GOP brand and the rise of Obama… I fear we’re caught in a downward spiral that will within 20-40 years see the U.S. split with no one remaining segment truly able to identify itself as “Leader of the Free World” and perhaps not even “superpower.”
I mean, Weymouth… it’s not like the American People – especially the younger generations – are suddenly going to get smarter, more involved, do the heavy lifting optimized by actual participation that a functioning free market capitalist democracy requires.
The American People have let America down – that’s the bottom line. And the less “American” we become in terms of traditional “WASP” ideals we become… the faster our descent into the European/Latin American model.
BILL
5 sinz54 // Apr 2, 2009 at 8:12 am
barker13: What evidence is there that Latin Americans who immigrate to America bring their “social baggage” with them? Mexicans don’t come to America to take siestas. They come to America because they’re willing to take low-wage jobs and work their butts off. In their work ethic, they’re more American than some native-born Americans.
The argument that immigrants bring undesirable “cultural baggage” was once used against the so-called “peddler Jews” from Eastern Europe and against the Chinese who came to work on the Transcontinental Railroad. And in those cases, it was just as wrong–and just as bigoted.
I would gladly lift ALL immigration quotas, and allow anyone to come to America provided they work to become American citizens, and swear allegiance to our Constitution. That’s the way it was in 1789, the way our Founding Fathers wanted it. As conservatives who uphold the “original intent of the Framers,” let’s remember that the Framers never wrote any immigration quotas into the Constitution.
6 dendup // Apr 2, 2009 at 1:35 pm
For a conservative critique of Huntington
http://www.heritage.org/Research/Thought/fp22.cfm
The section on Tradionalists lays out a bit more coherently barker13’s points.
Personally, I find the whole “forests of Germany” thing a bit bizarre and kind of a dead end for conservatives outside of Germany, and for them, well, they already tried it.
Each tribe has its narrative weaving together lineage and virture. The founding fathers found inspiration in the Iroquois system of gov’t. Surely we can look with a broader view as well.
7 WeymouthJones // Apr 2, 2009 at 11:29 pm
My comments were focused on macro-economic policy and what delivers growth better: investment or government. Immigration is always a challenging subject because assimilation is not as important as it once was to those who immigrate. Immigration, IMO, is not really the root of the economic crisis we are in. In can be a real booby trap if you step on the mine that the opposition places before you.
Huntington is also books like Political Order in Changing Societies which I would recommend on understanding how different nations have chosen democratic or totalitarian states.
I think that Administration is fascinated with social-democracy because it has often been a talisman held before academics in US Universities. Social Democracy was essentially a bargain between the European ruling elite and the “people” after WWI because the ruling party had sent millions to their deaths and the only way to stop a red wave was to buy the masses off with scalable/managable economic redistribution. The US has never been faced with such a threat.
I have lived and still pay taxes in three countries that have varying levels of social democracy – most of my breathren from the Ivy League have never “gone local” because they would never give up the power and money that the US affords them. Once Americans realise that their choices in life will shrink, that they essentially will only own one car and it will not be that fancy and you can not leverage yourself, they will completely freak out!!! Obama power structure will never suffer from the results of this because they are “made” already and have been for some time. Politicians are the lowest common denominator of professional career choices because they want power and wealth but are afraid to gain these things in an honest way – in the market or in business. They need to be called out on that.
8 Bulldoglover100 // Apr 3, 2009 at 6:59 am
Actually a fancy way to fib here. This is not what was said, it has been distorted to further the political desires of Jurgen. IF one wants to educate theirself on the actual facts regarding the G20 they can do so at many sites on the net that reported it acuratly.
Shame on you Jurgen, try telling people the truth even when it isn’t what you want. People will respect you more if you do.
9 barker13 // Apr 3, 2009 at 9:36 am
Re: Dendup; 1:35 PM — Thanks for following up on my advice to Sinz to do a bit of research. (*SMILE*)
And fine… you choose to provide a link to a critique of Huntington. As I wrote, “I’m not claiming all studies agree,” nor, as I also wrote, is this “a black or white issue.”
I have my views. You have yours. Sinz has his (or hers?)… (*SMILE*) My point was – and is – that I wasn’t just talking out my butt… that there’s plenty of evidence I can point to buttressing my view. I leave it to others to sift through the evidence… but the key to doing this in a reasonable and rational manner is to actually do the sifting.
(*CHUCKLE*)
Oh… and yes… I freely cop to my BLOG POSTS in the COMMENTS SECTION rarely being as… er… coherent… as Dr. Ceaser’s Heritage Foundation white papers.
(*WINK*)
That said, Dendup, reading Ceaser’s piece without first being familiar (having read) Huntington’s hypothesis, research, analysis, and conclusions as outlined by… er… Huntington…
(*HUGE FRIGG’N GRIN*)
Well… you get the point.
(*CHUCKLE*)
I’m more than willing to take this thread off course a bit and discuss Ceaser’s critique with you, but before we do…
SINZ…??? YOU THERE, BUD…??? Any thoughts…???
BILL
10 barker13 // Apr 3, 2009 at 9:46 am
Re: WeymouthJones; 11:29 PM –
“…assimilation is not as important as it once was to those who immigrate. Immigration, IMO…”
Fair enough. But to a nationalist such as myself, assimilation is extremely important as connected to my view of the national interest.
(BTW… not sure if we’re really disagreeing here; we seem to simply be placing emphasis upon key points.)
(BTW #2… excellent post!)
(*WINK*)
BILL
11 Realist // Apr 3, 2009 at 6:22 pm
Remember when people thought the Euro was going to replace the dollar as the global standard? Ha ha.
12 barker13 // Apr 4, 2009 at 7:37 am
Re: Realist; 6:22 PM — What’s your point…??? Seriously… I’m not quite sure what to make of your post.
http://treasury.worldbank.org/Services/Capital+Markets/News+for+Investors/WorldBankissuesitsFirstEuro-denominatedBenchmarkGlobalBond.html
http://www.euractiv.com/en/euro/euro-replace-dollar-world-reserve-currency/article-171351
http://zambianchronicle.com/2007/09/19/greenspan-says-euro-could-replace-dollar/
http://economistsview.typepad.com/economistsview/2007/07/will-the-euro-r.html?cid=151841043
…and so on and so on and so on…
Realist, you ARE aware that the Euro as paper currency is less than a decade old… right? And already commodities (say oil) which used to be strictly dollar denominated are now joint denominated.
(*SHRUG*)
You do realize that the Bush administration’s goal regarding the dollar (which they succeeded at) was to lower it and that Obama’s policies are an even more proactive, aggressive, deliberate attack on the dollar (which will lead to stagflation by mid-2010 at the latest)… don’t you?
Again… what was your point in your 6:22 PM post?
(Just curious.)
BILL
13 Avg. Joe // Apr 4, 2009 at 11:00 pm
To Ms. Merkel: Thank you for not bowing to the Village Idiot of the United States, and for holding your ground. I’m sorry you have to endure this stupidity, but it seems that there are a lot of celebrity types here in the US that were able to get this moron into office. Thanks for being the voice of reason when it comes to spending programs. be careful to not get Germany into the same mess Obama is creating for us in the US. Don’t worry, we’ll be rid of this rookie soon enough.
14 1horamenos // Apr 7, 2009 at 5:42 am
In general, I agree with Angela Merkel. What we are trying in the European Union is to maintain the welfare state spending as little as possible. And we proved we can do it. In Spain we had budget surplus without having to remove any social services like healthcare, education or universities. And we hope to have it back when this crisis ends.
Greetings!
PD: Sorry for my english.
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