The Welfare State’s Damaging Impact on Europe, Part I by Dan Mitchell

At the risk of being repetitive, I’ve been arguing (and arguing, and arguing) that the United States should not turn its medium-sized welfare state into a European-style, large-sized welfare state.

Simply stated, that’s a route to economic anemia.

If you don’t believe me, look at this shocking chart, which compares European stagnation to American growth over the past 15 years.

The chart comes from a report in the Wall Street Journal. Here are some excerpts from that article.

Europeans are facing a new economic reality… They are becoming poorer. …Private consumption has declined by about 1% in the 20-nation eurozone since the end of 2019 after adjusting for inflation… In the U.S., where households enjoy a strong labor market and rising incomes, it has increased by nearly 9%. …Adjusted for inflation and purchasing power, wages have declined by about 3% since 2019 in Germany, by 3.5% in Italy and Spain and by 6% in Greece. Real wages in the U.S. have increased by about 6% over the same period… The eurozone economy grew about 6% over the past 15 years, measured in dollars, compared with 82% for the U.S. …Weak growth and rising interest rates are straining Europe’s generous welfare states… given rising borrowing costs, economists expect taxes to increase, adding pressure on consumers. Taxes in Europe are already high relative to those in other wealthy countries, equivalent to around 40-45% of GDP compared with 27% in the U.S. American workers take home almost three-quarters of their paychecks, including income taxes and Social Security taxes, while French and German workers keep just half.

The last line in the above excerpt merits special attention.

Big government in Europe is very bad for workers, who earn less income. But, to make matters worse, taxes consume a bigger chunk of their smaller incomes.

And the income gap is growing every years, as illustrated by this chart from the article.

Note, by the way, that Greek wages have dropped by nearly $10,000 since 2008. That is partly a consequence of that nation’s fiscal crisis.

As I’ve warned, the same thing is about to happen to Italy.

P.S. And if we don’t reform entitlements in the United States, we’ll eventually suffer the same fate (though politicians will first spend a couple of decades raising taxes and repeating Greece’s mistakes).