The Agenda

Economics 21 on the Myth of Big Government Europe

My colleagues at Economics 21 have an excellent post reminding readers that there are more similarities between the fiscal trajectory of the United States and the core European economies than there are differences, as is made clear when we make appropriate adjustments:

Based solely on government outlays, the U.S. government is about 8 percentage points (or about 16%) smaller than that of the euro zone. However, this is not really an apples-to-apples comparison because it does not include the disparate accounting for health insurance premiums. In the euro zone, health insurance premiums are generally financed directly through taxation; in the U.S. employer-sponsored health insurance premiums are deducted from pay checks or contributed directly by employers. The net effect is to leave after-tax income lower to pay for health insurance.

Once accounting for the 5.6% of GDP (estimated from National Health Expenditures data) in employer-sponsored premium payments – but not out-of-pocket health expenditures or other private health care spending – total U.S. spending is nearly 47% of GDP. This is just 2 percentage points (or about 5%) less than for the euro zone. If one includes the $1 trillion annually in tax expenditures –government spending that counts as reduced revenue rather than government outlays – total government spending is already greater than in Europe. Even leaving aside tax expenditures, two percent of GDP is not a terribly big gap. Given the 20% increase in Federal spending since 2007, it is certainly not difficult to imagine an Obama Administration closing this gap (or exceeding it) by the middle of this decade.

We need to stop congratulating ourselves on having a state substantially smaller than the other advanced market economies because it’s simply not true. Those of us who want a smaller and more efficient public sector have to understand that the political challenge if considerable because the true reach of the public sector is larger than is commonly understood.


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