RSS Feed MenuCongressional leaders and President Obama are ignoring the perils of overspending to which European countries succumbed in the 1970s. The recent actions and proposals of President Obama and Congressional leaders violate both fiscal responsibility and basic political restraint, and are setting the stage for a full-fledged public finance crisis.
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.
SFTor1 // Jul 22, 2009 at 11:33 pm
Jurgen, you weren’t even born in the 70s.
And in case you haven’t noticed, this is not the 70s.
SFTor1 // Jul 22, 2009 at 11:34 pm
Oh, forgot. This spending is not about entitlement programs. It is economic stimulus to get us out of the mess created by eight years under Bush and 16 years under a Republican Congress.
bannail // Jul 23, 2009 at 1:18 am
I don’t believe Europeans envy our health care, nor would they wish to dial it down to American style job-linked coverage. I understand the Republican dogma of ‘You should earn what you get.’ [and Thank God someone emphasizes this because us Dems won't.] But keeping a job is not always linked to how hard you’ve worked. It can be taken for purely recession/greed based reasons. A happier (read:more expensive) solution would surely be closer to the current situation of Europeans, who can drop $100 on a hospital visit, no?
mlindroo // Jul 23, 2009 at 6:47 am
> The irony is this: at a time when European countries are doing what they can to put their fiscal house
> in order to prepare for a wave of retirements and an aging population in the decades ahead, the United
> States is racing in the opposite direction, doubling down on unaffordable entitlement expansions.
I think you are comparing apples and oranges here, since the Western European countries already have more comprehensive, universal social “safety nets” in place since decades ago. So there is little need or room for “entitlement expansion”.
As for the U.S., I note that even libertarian-leaning THE ECONOMIST seems to be highly critical of the current U.S. health care system ( http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=13899647 ). “Comparisons with other rich countries and within the United States show that America’s health-care system is not only growing at an unsustainable pace, but also provides questionable value for money and dubious medical care. Three troubling symptoms stand out: uneven quality of care, inadequate coverage and soaring costs.”
MARCU$
sinz54 // Jul 23, 2009 at 9:44 am
sftor1 sez: ‘It is economic stimulus to get us out of the mess created by eight years under Bush and 16 years under a Republican Congress.”
WRONG.
If that were all it was, it would have all been designed to automatically sunset after the “mess” were over.
But it isn’t.
The health care measures and the cap-and-trade measures are PERMANENT. Cap-and-trade is designed to emulate the European model of fighting climate change, which the Europeans themselves admit has failed to meet their expected targets for CO2 reduction anyway.
What it’s all about, as you liberals well know, is to turn America into a left-wing country similar to, say, France.
I don’t want to live in a carbon copy of France.
I’m proud of the fact that we saved France’s butt in multiple wars, from WW1 to the Balkans crisis. Proving that we are the more successful and more dynamic of the two.
sinz54 // Jul 23, 2009 at 9:46 am
sftor1 writes: “Jurgen, you weren’t even born in the 70s.”
But I was born in the 1950s.
And yes, this decade is starting to look a lot like the 1970s, with economic stagnation and a naively idealistic President who actually thinks he can negotiate with Iran.
I figure that hyperinflation is going to rear its ugly head as soon as the economy begins moving again. That will complete the picture.
Carter was a one-term President. If I’m right about hyperinflation by 2011 or 2012, Obama will be too.
mlindroo // Jul 23, 2009 at 12:47 pm
> What it’s all about, as you liberals well know, is to turn America into a
> left-wing country similar to, say, France.
> I don’t want to live in a carbon copy of France.
Sinz, you’re usually a smart guy, but this statement of yours is just BS and you know it.
*Every* European Union country is unique (and so is Canada too, BTW): I strongly oppose the frequent conservative demonization of some of the world’s wealthiest and most successful countries….capitalist democracies, all. And for the most part NATO members as well.
MARCU$
DFL // Jul 23, 2009 at 1:09 pm
What we are in is a slow-motion socio-economic implosion throughout the West. Think of the mix. Escalating entitlement payments due to the aging of the Baby Boomers. Low birth rates. The recent economic collapse. The de-industrialization of society and the continued rise of the therapeutic society. The collapse of morals. The rise of China and, to a lesser extent, India. Massive Third World immigration, most immigrants being not only relatively low in skills but more likely to take from the government than give in taxes. The future does not look pleasant. Perhaps the West needs a collapse so that a much different paradigm forms.
dacookson // Jul 23, 2009 at 1:11 pm
Cap and trade is nonsense but blame financiers for that. They want it because it makes money and has little impact on carbon emissions. Cap and trade is making a lot of people a lot of money in Europe. Stimulus spending is a reaction to Bush policy but healthcare is different. I think sinz’s remarks about ’saving France’s butt’ are insulting but typical. I think most people should be able to realise that France’s geography, not least being right next to Germany, put it at a disadvantage compared to the US in those two conflicts but apparently not. The Presidents during and up to those wars were also conservative. It is also governed presently by a conservatives as are most other European nations.
I remember howls of outrage from business and conservatives when the minimum wage was introduced in the UK. It was going to decimate small businesses and ruin the economy. Nothing happened. If you picked up Germany’s or France’s healthcare system of the shelf and ran it in the US, in 5 years you’ll wonder how you ever managed without it. You shouldn’t overspend, that’s obvious, but what choice to Democrats have when they know every Republican administration seems to empty the kitty to make it impossible. With the amount gone on the bailout, which could have been avoided with proper regulation and oversight, as well as the money wasted in the war efforts, the US could have had the best, universal, completely free healthcare in the world. Why does patriotic US conservatism mean screw the little guy and every man for himself? The US was largely built by Europeans bringing ideas and practices over from Europe and making it work in the new continent. So why assume that they stopped having good ideas?
barker13 // Jul 23, 2009 at 2:19 pm
Re: Dacookson // Jul 23, 2009 at 1:11 pm –
“If you picked up Germany’s or France’s healthcare system of the shelf and ran it in the US, in 5 years you’ll wonder how you ever managed without it.”
So you say. (*SHRUG*)
Let’s stick to France for the moment; there’s is the system most of us regulars here at NM seem most familiar with in the sense of considering it a possible model to emulate.
(Agreed? We “know” more about the UK and Canadians systems, but few of us with trade ours for either of theirs.)
Over on another thread (same topic- health insurance/care reform) I shared some facts concerning Massachusett’s Commonwealth Care which I got from the July, 18 issue of National Journal.
Another article from the same source comes in handy with regard to this thread. The article is titled, “French Lessons on Health Care,” and the author is FT columnist and noted pundit Clive Crook.
http://www.nationaljournal.com/njmagazine/wealthofnations.php
Excerpting –
What is the answer? The main thing is pay — above all, doctors’ pay. A physician in France is typically paid about a third of what his counterpart in the United States receives. A French doctor’s salary, in some cases, would barely be sufficient in the United States to cover his or her medical liability insurance, to say nothing of paying down the enormous debt accumulated while training.
The success of the French system does not establish the superiority of public insurance. It establishes the superiority of a system that, as much by historical accident as by design, has kept doctors’ pay very low. This, in turn, requires a medical-liability regime that minimizes litigation (so much for patients’ rights in that sense) and guarantees essentially free training for medical professionals.
The idea that France’s system could be grafted onto the American setup is most misleading. To be sure, in organizational terms, it could be. Structurally, the two countries’ systems are not that different. The French scheme is like Medicare on a much larger scale — with all the virtues and drawbacks of that system. But plug American rates of pay into that design and the impressive cost advantage vanishes.
It is also worth remembering that, despite this secret ingredient of paying its doctors so little by American standards, the French system is in chronic financial difficulty — as you would expect, in fact, because of fee-for-service and the other dysfunctional aspects that its approach has in common with America’s. The costs are covered through a high payroll tax, which employers and workers share; but all of it, in the final analysis, is drawn from wages. Constant upward pressure on costs translates into constant upward pressure on taxes, which then meets the same political resistance one sees in the United States. Meanwhile, paying for everything through a tax on labor most likely contributes to France’s chronic high unemployment.
==========
Hey… read the entire expose – that’s why I provided the link.
There’s PLENTY to like about the French system. No one’s denying that. All I’m pointing out is that ALL is not all is wine and roses with the French system and “transferring” it here wouldn’t be quite as easy and seamless as some would hope.
BILL
dacookson // Jul 23, 2009 at 3:30 pm
It’s an interesting article Bill and thanks for posting it. It’s true there are problems in transposing the two systems. There’s a few things I’d say. Firstly American health spending is already significantly higher than France so what the author says is that the cost benefits would vanish because of wages. But it still means you’re probably paying much the same but getting universal coverage instead. It strikes me that there are a number of people who are overpaid in a somewhat exploitative system so some will lose out but the nation will reap the economic benefits of having a more healthy workforce. It’s also worth noting that the UK has pretty good pay, better than France, but has a free system, article here. The systems can’t just be easily transposed and other reforms would probably need to take place in education costs for example, but it’s well within the ability of the US to deal with those problems over time without coming out the other end as homosexual communists driving one of these.
The second is that chronic high French unemployment is a myth. The French include students and other groups in their stats that other countries do not. I heard an interview by Jerome Guillet, article here, claiming that if you took out the top 0.1% of earners from GDP, growth in France is higher than the UK and US, benefiting the middle class. It’s worth reading.
barker13 // Jul 23, 2009 at 5:16 pm
Re: Dacookson // Jul 23, 2009 at 3:30 pm –
Right back at you; thanks for posting the links you did.
The April ‘07 Le Monde article is particularly interesting. It sounds to me like you should move to France, Dacook! (*GRIN*)
Seriously… the piece was interesting. Still, as I’m sure you noted, it was effectively a piece of anti-Sarkozy campaign literature – a shot across the bow of the Sarkozy campaign’s portrayal of the economic situation in France at the time.
I’d be interested in getting reading a critical review of the piece by someone qualified to do so. Quite frankly I don’t have the requisite knowledge of the nuts and bolts of the French economic system to “argue” with what I read or the conclusions.
Dacook. We’re going back and forth in good faith, right? (*SMILE*) Did you scroll down the comments attached to the article in question? Go back to the article… start scrolling… right around the middle you’ll find a post titled, “France is inded in decline,” submitted by skovgaard on Fri May 4th, 2007 at 08:32:04 PM EST.
As previously noted, I’m not an expert on France. (*SMILE*) I do know about the “‘68′ers” though and am familiar with the social/intellectual stratification of the French civil service and the linkage between “the Academy” and government and business as well. (Skull & Bones has nothing on these cats!) (*GRIN*) (Hell… the Brits are pikers at putting the “C” into “Class” when it comes to the way the French civil service moves their folks up the ladder…)
Anyway… bottom line… between the two of us we’ve hopefully exposed our fellow posters to interesting and useful information that might impact the way they think about issues such as the proper role of government, how much is too much, how much isn’t enough, etc.
BILL
VA Shepherd // Jul 23, 2009 at 11:12 pm
Otto must have the night off tonight. You can alway count on good old Otto to chime in for the left…I hope he’s all right!
SFTor1 // Jul 24, 2009 at 12:03 am
sinz, we have health care for profit in the United States. The fiduciary responsibility of the corporation is diametrically opposed to the Hippocratic Oath, hence our problems. Health care is a national and economic asset, if you care to think about it for even a second. But it is a cost center and needs to be run as such. It is indeed permanent, as disease and injury are with us permanently. We don’t have to look only to France for health care ideas. Japan seems to be doing pretty well too. And we can save money by using the best ideas from those countries and others—permanently.
ottovbvs // Jul 24, 2009 at 8:36 am
VA Shepherd // Jul 23, 2009 at 11:12 pm
“Otto must have the night off tonight. You can alway count on good old Otto to chime in for the left…I hope he’s all right!”
………..A night at the theater in nyc and a very expensive dinner with she who must be obeyed…….Reinhoudt is spinning……….basically the Europeans have healthcare systems that cost 7- 10% of GDP…….there are different models but even when the paying side of the system is ostensibly to a large extent private as in France, the govt is in total control of them in reality………. they cover everyone and by and large work very efficiently……I’ve been treated in two of them…….sure they have cost problems but on nothing like the scale we do ……..and no serious politician would ever suggest eliminating or substantially changing them……..he’s also exaggerating grossly the American budgetary problems which are entirely fixable……..the CBO numbers he quotes are totally worthless…….government expenditures reaching 42% of GDP by 2050……that’s 41 years away………govt economists couldn’t predict that the US economy was in serious trouble 18 months before it fell off a cliff!……..this is for the birds.
ottovbvs // Jul 24, 2009 at 10:44 am
………….BTW Mr Reinhoudt should read some Max Weber since he’s German presumably……As he pointed out about 100 years ago the story of modernity is the bringing of more and more activities under the rule of rationality…….a theory that has been confirmed by events if ever one has…….even dating is becoming rationalized……it’s ultimately why much of today’s conservative canon particularly the religious and social bits are doomed……..likewise the US healthcare system in 2009 doesn’t pass the rationality test…….many parts of it have been rationalised but overall it’s totally irrational if the aim is to provide a cost effective system of healthcare with access for all .
dacookson // Jul 24, 2009 at 11:49 am
I won’t be moving to France I think Bill. There’s lots of things that annoy my anglo-saxon sensibilities. I can’t get my head around the shop opening hours, or waiting for 20 minutes in the line at a supermarket while a bunch of people pay for two items with a card, each transaction requiring a phonecall, but I don’t think you can argue that it’s a country struggling economically in a markedly different way to the rest of the western world. That’s the just the way they like it, although things are changing. There’s no doubt there are things that need to change but equally there are some things that don’t.
I read the comment you mentioned and followed the link to his website which had a long and somewhat justified rant at the EU. I’m not living in France but I know that even during the ‘boom’, people in Britain were making some of the same complaints. The 68ers aren’t the real problem, the whole generation is. Social mobility is suffering everywhere because the post war generations have the good jobs and are living longer. Basically I’m not saying France is utopia because it clearly isn’t but I think the numbers seem to prove you can have certain social programmes and regulations without taking a hit on growth or quality of life.
ottovbvs // Jul 24, 2009 at 1:02 pm
dacookson // Jul 24, 2009 at 11:49 am
” That’s the just the way they like it,”
……….And that’s one of the reasons why I like it……..And I’ve never had to wait 20 minutes at Carrefour as you describe…….Actually France is one of the most well run countries in the world…..if you strip out all the asset bubble growth numbers of the last eight years their growth was basically the same as ours……and they have been the least affected western economy by the bubble bursting……..there are also studies showing the US to be a less socially mobile country than the US…….I lived in France for four years and Britain about eight at two separate times……Both great…..both societies have neuroses of various sorts but nowhere near as bad as here and they are much more sceptical and basically happy I suppose(compare the atmosphere in an English pub with an American bar in middle America) or so it seemed to me
ottovbvs // Jul 24, 2009 at 1:04 pm
a less socially mobile country than the US……oops France I meant
barker13 // Jul 24, 2009 at 1:15 pm
Re: Dacookson // Jul 24, 2009 at 11:49 am –
“I won’t be moving to France…”
Suit yourself! (*GRIN*) (I hear the baguettes are to DIE for though!)
“I’m not saying France is utopia…”
I know. We both realize there is no “utopia” for the average person. (Give me a few hundred million dollars though and I’ll be able to create my own personal utopia anywhere in the world – from the richest country to the poorest.) (*WINK*)
BILL