The Europeanization of America
Would it really be so bad?
In 1944, the Austrian economist F.A. Hayek published an extraordinarily influential book, The Road to Serfdom. In it, he argued that liberalism eventually leads to totalitarianism; that is, once a nation has embarked on the creation of a welfare state, there is no natural limit to the size of government until it controls everything, socialism becomes pervasive and political freedom evaporates.
It is an argument that made sense at the time Hayek made it. Liberals were indeed soft on communism in those days and engaged in a massive expansion of government throughout Europe. In England, where Hayek was living when he wrote his book, much private industry was being nationalized, cradle-to-grave welfare programs were being instituted and many of those advocating such measures were not shy about pointing to the Soviet Union as a model to follow.
Since Hayek's book appeared, it has been an article of faith among American conservatives and libertarians that every expansion of government is a step on the slippery slope to totalitarianism. National health insurance today, the gulag tomorrow, many of those on the right genuinely believe, often citing Hayek in support.
Consequently, it is axiomatic that Europe, which is much further along the road to a welfare state than the U.S., is also further along the road to socialism and totalitarianism. Thus it is a grave insult among conservatives for one to be accused of wanting to Europeanize the American economy. It is only a small step removed from being called a communist or Marxist. The difference is only one of degree.
I am often accused of wanting to Europeanize America these days--my friend Larry Kudlow always says so--because I think the magnitude of our fiscal problem is so large that a significant tax increase is inevitable, and that the magnitude of that tax increase is so great that we will eventually need a value-added tax because it will be impossible to get enough revenue through the income tax. Raising income tax rates enough to plug our fiscal hole would be much too debilitating, economically.
In the conservative mind, the VAT, which is embedded in the prices of goods, is the foundation upon which the European welfare state rests. Without its enormous revenue-raising capacity the Europeans never could have financed their welfare states. In short, without the VAT there would be no welfare state in Europe, government would be smaller and the threat of totalitarianism would be much less, conservatives reckon.
By advocating a VAT, I am, in effect, advocating totalitarianism, many of my friends believe. If we institute a VAT it will be like pouring gasoline on the fire of big government. It will get bigger overnight. The only thing holding this country back from having a welfare state as large as Europe's, conservatives argue, is the low level of taxation that most Americans are loath to abandon. Thus in their own minds, conservatives believe that holding the line on taxes, no matter how large the deficit, is the essential prerequisite for the preservation of liberty.
The only problem with this analysis is that it has no factual basis whatsoever. If Hayek were even remotely correct, all of Europe would be one huge gulag by this time. At the very least, Europe would be mired in poverty, growth nonexistent and freedom hanging on by the thinnest of threads.
Of course, that is not the case at all. According to Freedom House, virtually every country in Europe has just as much political freedom as we do. Even organizations like the Cato Institute and the Heritage Foundation, which seem to think that the tax burden is the single most important measure of freedom, concede that many European countries with tax burdens that would be considered confiscatory by all conservatives and probably most Americans are in fact just about as free as we are.
For example, according to the Heritage Foundation's rankings the United States has a freedom score of 80.7 (out of 100), but Denmark, where taxes consume 49.1% of the gross domestic product (versus 28% here, according to the Organization for Economic Cooperation and Development), has a ranking of 79.6. If the Danes weren't so heavily penalized for their high taxes, they would actually rank well above us. The same is true of the United Kingdom, the Netherlands and many other heavily taxed European countries that rank higher than us in terms of monetary freedom, financial freedom, investment freedom and other measures calculated by Heritage.
Nor is Europe some pit of poverty. While it is true that most European countries have a lower GDP per capita than the U.S., it is not true that they have grown more slowly. According to economist Angus Maddison, between 1990 and 2006 the following countries all had higher growth rates of per capita GDP than we did: Austria, Denmark, Finland, Greece, Ireland, the Netherlands, Norway, Spain, Sweden and the U.K. And even those that grew less mostly grew only a little less than we did. The 30 nations of Europe for which Maddison calculated growth rates grew 28.02% while the U.S. grew 29.31%. Interestingly, the nation with the slowest growth was Switzerland, the one with the lowest taxes among major European countries.
Americans generally believe that the overall quality of life is better here than in Europe, but this belief is based more on chauvinism than reality. According to a new book, The Narcissism of Minor Differencesby UCLA historian Peter Baldwin, there is no significant difference overall in the quality of life in Europe and here. While the U.S. ranks higher in some ways, many European countries rank significantly higher in others.
According to Baldwin, among the ways most Europeans are better off than most Americans: Europeans have more leisure time (paid vacations, public holidays); more hospitals per capita; lower infant mortality; higher life expectancy; lower rates of obesity; lower murder and incarceration rates; lower poverty rates; better restaurants; and greater income equality. The U.S. scores higher in areas such as lower taxes; less state control of industry; less labor regulation; higher wages as a share of GDP; fewer suicides; lower incidence of stomach cancer and stroke mortality; higher breast cancer survival rates; lower percentage of the population on disability; more living space; more people with college educations; more patents; more charity, volunteer work and participation in civic organizations; more blood donations; and higher religiosity.
Baldwin might also have noted that business profits and investment are higher in Europe than the U.S., according to the European Union. Manufacturing productivity is higher in many European countries, including Sweden, according to the Bureau of Labor Statistics. Income mobility is higher in many European countries, according to the Brookings Institution. And when it comes to taxes, 70% of EU countries have cut their top income tax rates since 2000 and every EU country save one has a corporate tax rate lower than ours.
Presumably, we are mostly better off in ways we think are important and Europeans in ways they consider important. Trying to draw a conclusion about who is better off on balance is impossible because it involves comparing interpersonal values. Perhaps the only thing that really matters is whether people are happy or not. On this score, there are many Europeans who are, in general, happier than we are, according to an OECD study. Based on survey data the people in these European countries are generally happier than Americans: Denmark, Ireland, Switzerland and the Netherlands. Those in Austria, Luxembourg, Norway, Sweden, France and Belgium seem to be about equally as happy as we are. Among wealthy countries, the Germans and Italians appear to be considerably less happy, for some reason.
I don't mean to imply that Europeanization is unambiguously good; only that it's not unambiguously bad, as virtually all conservatives believe. There are many ways I think we could learn from the Europeans and they from us. One way we can learn from them is how to have a tax system that raises considerably more revenue as a share of the economy than ours does without killing the goose that lays the golden eggs.
At a minimum, I think it's safe to say that Hayek was wrong about the inevitability of totalitarianism arising from growth in the size of government. The collapse of communism is proof enough of that. Nor does it appear that the welfare state necessarily erodes freedom or places a crippling burden on the economy. As Columbia University economist Jeffrey Sachs recently wrote, "In strong and vibrant democracies, a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness."