Eurozone Debt Crisis: The United States Is Next

June 3, 2013

The welfare state is defined as a state devoted to taking charge of the welfare of the public. Welfare state functions cover social protection, health and education, says Pierre Lemieux, a research fellow at the Independent Institute.

  • These functions make up 57 percent of total U.S. government expenditures compared to 63 percent for the typical Eurozone country.
  • In this sense, the American welfare state is only about 10 percent smaller than the European welfare state.

Many authors who have studied the situation, from the right or from the left, agree that the difference between the American and the European welfare states is overestimated.

  • Social Security and Medicare account for three-fifths of federal welfare state expenditures and for one-third of all welfare-state expenditures in the country.
  • In a recent book, economists Laurence Kotlikoff and Scott Burns argue that the benefits granted to the elderly are a "Ponzi scheme." This does not help make the American welfare state appear to be or actually be more sustainable than its European cousin.

Another relevant fact is that taxes are lower in the United States than in most other countries. Virtually all government revenues are taxes or ultimately come from taxes, so the global tax rate of a country can be measured by the ratio of total government revenues to gross domestic product (which is also national income). According to Organization for Economic Cooperation and Development (OECD) data, in 2007 this ratio was 34 percent in the United States compared to 42 percent in the OECD and 44 percent in the 10 Eurozone countries. The global tax rate is thus 23 percent lower in America than in the Eurozone.

The American welfare state is 30 percent smaller than its European cousin, and if the gap in the global tax rate is not much lower (that is, 23 percent), we would expect the American welfare state to develop the same sort of problems as the European one.

  • In 2007, total gross public debt in America was already very close to the average for the Eurozone -- 67 percent versus 72 percent.
  • It was even higher than in the Eurozone if we take the countries' unweighted average, which was 56 percent.

The American and European welfare states show only a difference of degree, and since the American economy is being Europeanized, we should expect a similar debt crisis in the United States. That crisis will develop when investors realize the magnitude of the U.S. public debt problem.

Source: Pierre Lemieux, "American and European Welfare States: Similar Causes, Similar Effects," Cato Institute, Spring/Summer 2013.

 

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