The federal government spends an enormous amount of money.
Measured as a share of national economic output, budgetary outlays
are near a peacetime high, consuming almost 21 percent of gross
domestic product (GDP). Whether it is measured in nominal
dollars, in inflation-adjusted (real) dollars, or on a per
household basis, federal spending in America is at record
Moreover, this is just the calm before the storm. Left on
autopilot, the burden of federal spending will increase
dramatically because of both demographic forces and reckless
policy choices, such as the creation of a new prescription drug
entitlement. In a worst-case scenario, the Congressional
Budget Office (CBO) estimates that government outlays could consume
as much as 55.8 percent of GDP by 2050. Even a more optimistic
scenario shows that the burden of federal spending will still
nearly double, climbing to more than 37 percent of GDP.
Cautionary Lessons from Europe
Many European nations have already allowed the burden of
government to climb to these levels. Government spending consumes
more than 50 percent of GDP in France and Sweden and more than 45
percent in Germany and Italy. These nations provide useful lessons
about the economic consequences of bigger government, and these
lessons suggest strongly that America is on the wrong track.
Even a cursory review of European economic performance shows that
excessive government has serious adverse effects: slower growth,
higher unemployment, lower living standards, and a bleak future.
Per capita economic output in the U.S. in 2003 was $39,700,
almost 40 percent higher than the $28,700 average for EU-15
Over the past 10 years, the U.S. economy has grown at an average
annual rate of 3.3 percent in real terms, 50 percent faster than
the EU-15's growth rate of 2.2 percent.
A comparative study by Timbro, a Swedish think tank, found that
European Union countries would rank with the very poorest American
states in terms of living standards, roughly equal to Arkansas and
Montana and only slightly ahead of West Virginia and Mississippi,
the two poorest states.
In August 2006, unemployment in the European Union was 8.0
percent, including a 7.9 percent unemployment rate in the group of
nations that use the euro. The U.S. unemployment rate in the same
month was only 4.7 percent.
A study by Eurochambres estimated how long it would take Europe
to catch up to America, assuming no more growth in the U.S. It
would take Europe 18 years to reach U.S. income levels, 14
years to reach U.S. levels of productivity per employee, 24 years
to reach U.S. levels of research and development investment, and 26
years to reach U.S. employment levels.
In 1980, foreign direct investment in the United States totaled
$127 billion, according to the Bureau of Economic Analysis. Today,
it totals more than $1.7 trillion. In 1980, there was $90 billion
of foreign portfolio investment (just counting holdings of
government and private securities) in the United States.
Today, there is more than $4.6 trillion. Much of that money-capital
that finances new investment-comes from Europe and at least
partly reflects the more market-oriented policy environment in
the United States.
Americans enjoy more leisure than Europeans because they can
afford to purchase labor and goods that reduce the amount of time
spent working at home. According to one German study, "overall
working time is very similar on both sides of the Atlantic.
Americans spend more time on market work but Germans invest more in
household production." The report further notes that "these
differences in the allocation of time can be explained by
differences in the tax-wedge and wage differentials."
A special competitiveness panel of the European Commission
acknowledged that "many young scientists continue to leave Europe
on graduating, notably for the U.S. Too few of the brightest and
best from elsewhere in the world choose to live and work in
One of the most important lessons to be learned is that GDP is
linked to policy. For instance, the CBO's long-run forecasts assume
that inflation-adjusted GDP will grow by about 2 percent
annually, regardless of whether government consumes 21 percent
of economic output or 56 percent of economic output. The dismal
performance of the European economies shows that this is a deeply
flawed assumption and indicates that America's future is at even
greater risk than the CBO estimates suggest.
If the United States is saddled with a French-sized government,
it will inevitably suffer from French-style economic stagnation.
This means higher unemployment, lower living standards, and a
loss of upward mobility. The economic malaise in Europe is tragic,
but the dark cloud could have a silver lining if policymakers learn
the right lesson and protect Americans from that fate by reducing
the burden of government-both today and in the future.
Daniel J. Mitchell,
Ph.D., is McKenna Senior Research Fellow in the
Thomas A. Roe Institute for Economic Policy Studies at The Heritage