Wrong Turn

Even as European leftists move right, American ones move further left.

By Jurgen Reinhoudt
Wednesday, August 1, 2007 12:01 a.m.

In Europe, reforms are in vogue. Though many special interests are fiercely resisting change, it is striking to see just how many European Social Democrats have come to recognize the need for structural reforms to welfare states.

Witness Gerhard Schröder, the center-left former chancellor of Germany: in 2003, he called for a "change of mentality" in his own party, the SPD, as well as in German society as a whole. "Much will have to be changed to keep our welfare and social security at least at its current level," he added, as he argued in favor of reforms that would trim entitlements, and cut taxes. The chairman of the SPD, Franz Müntefering, supported Mr. Schroeder by saying that "we believe that things must be rearranged and restarted in Germany in this decade." Not long thereafter, Mr., Schroeder took the lead in making German labor laws more flexible.

In France, Socialist former prime minister Lionel Jospin shocked the left several years ago: When asked on TV what he was going to do to help laid-off factory workers beyond the public assistance already on the books, he said that "the state cannot do everything." It was not so much the truth of the statement that came as a shock; it was that a leader of the French left would say it so candidly. Throughout his tenure, Mr. Jospin privatized numerous state-owned companies, including Air France, even as he criticized capitalism.

Labour former British prime minister Tony Blair became famous for his "Third Way" philosophy, which he said moved "beyond an old left preoccupied by state control, high taxation and producer interests."

And in Italy, on July 20, center-left prime minister Romano Prodi announced a deal raising the retirement age to 61 from 57. Though the deal was a somewhat watered-down version of the pension reform plan originally passed by his center-right predecessor, Silvio Berlusconi, it shows that the Italian left is aware that structural reforms are urgently needed.


In many countries the left has been willing to discard or, at the very least, publicly reconsider old big-government approaches in order to reinvigorate economic growth and general prosperity.

In the United States, by contrast, those most committed to the welfare state tend to talk about trimming entitlements the least. This is particularly true of politicians aspiring to the highest office of the land.

Yet the statistics--affirmed by center-left and center-right experts alike--are unequivocal. The United States is facing a tremendous fiscal shortfall in the decades ahead. In addition to Medicare, Social Security and Medicaid will have to be dealt with. The total entitlement shortfall is expected to surpass $50 trillion, and there are no politically easy solutions.

Under reasonable calculations of higher spending, according to the Congressional Budget Office, Federal spending as a percentage of gross domestic product will rise to 35% in 2050 from about 20% today to pay for the additional entitlement spending. But that is excluding state and local spending, which takes up about 11% of GDP.

Thus, under a reasonable scenario, by 2050, the federal, state and local governments in the U.S. will spend 46% of GDP, not that far from what France spends today (54%).

To avoid getting there, benefits for entitlement recipients may have to be trimmed, contributions of wealthy retirees to certain programs may have to rise, private Social Security accounts could be permitted, and benefits may have to be dependent on one's income or total assets. There are many possible pieces of a comprehensive solution, yet they are not being discussed in political circles.

Far from tackling the looming fiscal crisis, presidential candidates are busy marketing expensive new plans to voters. The health-care plan of John Edwards would "cost the federal government some $120 billion a year," $1.2 trillion over a 10-year period, for the foreseeable future. And that's not including $15 billion a year in proposed antipoverty measures. No word on how the existing entitlement shortfall will be dealt with.

Similarly, Sen. Barack Obama's health-care proposals would cost "$65 billion a year," roughly $650 billion over a 10-year period, "though other health experts think it would be higher." No credible word yet on how the existing entitlement shortfall can be managed.

There is another problem: Estimates of new entitlement programs inevitably understate the actual cost, either for political reasons (to ease passage) or out of innocent miscalculations, as happened with Medicare. In 1966, its first year of existence, Medicare cost $3 billion a year: the House Ways and Means Committee predicted it would cost $12 billion in 1990, taking inflation into account. But instead of costing $12 billion in 1990, Medicare cost $107 billion. And it is set to cost $488 billion in fiscal 2008.

Or consider the new prescription drug benefit for seniors, estimated to cost about roughly $1 trillion from 2007 to 2016: the costs of that program are set to rise significantly thereafter as more baby-boomers retire. Originally, the White House estimated the plan to cost $400 billion over a 10-year period; it ended up costing substantially more.


While proposals for new entitlements may be politically easy, they are fiscally reckless. Candidates who promise expansive new entitlement spending are effectively writing checks the American economy cannot cash. They will take us to the place where Europe is today: a place where existing entitlements are unaffordable. Yet what matters is not so much the specific measures being considered, but the broader mindset from which they originate. It is in this context that comparing the European political mindset to the American political mindset is useful.

In 2005, the liberal Washington Post columnist Sebastian Mallaby criticized the opposition of many Democrats to the possibility of investing in private Social Security accounts by saying that "a party that refuses to acknowledge the urgency of entitlement reform is a party of ostriches." He's right--and the label applies to many leaders in both parties.

Presidential candidates ought to learn from Europe's lessons. Even if it is politically painful, we should not race to the place that Europe is trying to get away from.