Can We Avoid Becoming Europe?

Heritage Foundation

The Treasury Department announced yesterday that the federal deficit for April soared to $82.69 billion, more than twice the $40 billion deficit that Wall Street economists had predicted. An April deficit is rare for the federal government (there has been a surplus in 43 out of the past 56 years) and the announcement marked a record 19th consecutive month that the Treasury has posted a shortfall. Like those who said there was no housing bubble, some on the left who crave an ever larger federal government are still saying that Americans have nothing to worry about. That we can borrow and spend forever. But many in the center left are beginning to wonder if emulating Europe, as President Barack Obama's policies are pushing us to today, is such a wise policy.

The Washington Post reported on its front page that the bailout of Greece was forcing "European governments [to] rewrite a post-World War II social contract that has been generous to workers and retirees but has become increasingly unaffordable for an aging population." And a New York Times headline blared In Greek Debt Crisis, Some See Parallels to U.S. with David Leonhardt reporting: "The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today."

To put it simply: European economic growth simply has not risen fast enough to support European government spending. The economic literature clearly establishes that a large and growing government is not conducive to better economic performance. Just take a look at this chart comparing Gross Domestic Product (GDP) purchasing power parity (PPP) per capita numbers for European countries compared to U.S. States. For two generations after post-war reconstruction, Europe and America have moved in different economic directions. The American model favored growth, income and vibrancy; the European model was said to favor fairness, equality and stability. Germany may be the economic powerhouse of Europe that is bailing out Greece, but the average residents of 45 U.S. states are richer than the average German.

If we want to avoid Europe's fate, we must drastically cut federal spending. Since World War II, federal spending has generally remained between 18 and 22 percent of GDP. During the Bush Administration, spending increased from 18.4 to 20.9 percent of GDP. But under President Barack Obama's policies, federal spending reached 24.7 percent of GDP in 2009 — the highest level in American history outside of World War II. And President Obama's budgets will only make the problem worse. Before the recession, federal spending totaled $24,000 per U.S. household. President Obama would hike it to $36,000 per household by 2020 — an inflation-adjusted $12,000-per-household expansion of government. Commenting on President Obama’s budget, Rep. Paul Ryan (R-WI) tells National Review Online: "This budget presents a choice of two futures. ... This budget is about more than specific programs or policies. It is really about the American idea, and whether we want to move towards a European-style welfare state."

There is another way. Simply bringing real federal spending back to the inflation adjusted $21,000 per household average that prevailed in the 1980s and 1990s would balance the budget by 2012 without raising a single tax on anyone. Even returning spending to the pre-recession level of 20 percent of GDP would eliminate two-thirds of the projected 2019 budget deficit without raising taxes.