Mythbusting, Euro Crisis Edition

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JONATHAN COHN NOVEMBER 11, 2011

Mythbusting, Euro Crisis Edition

Republicans and their conservative allies are convinced that Europe’s economic troubles validate their ideological beliefs – in particular, the idea that large social welfare states are doomed to failure. Paul Krugman doesn’t agree:

It’s true that all European countries have more generous social benefits — including universal health care — and higher government spending than America does. But the nations now in crisis don’t have bigger welfare states than the nations doing well — if anything, the correlation runs the other way. Sweden, with its famously high benefits, is a star performer, one of the few countries whose G.D.P. is now higher than it was before the crisis. Meanwhile, before the crisis, “social expenditure” — spending on welfare-state programs — was lower, as a percentage of national income, in all of the nations now in trouble than in Germany, let alone Sweden.

As you might expect, I agree with Krugman. And I’d go even farther. Conservatives have been complaining about the supposed inefficiency of large welfare states for a very long time. But in the last few years, respected economists like Jeff Sachs and Joseph Stiglitz have been pointing out that the data suggests otherwise. The countries with the most generous welfare states in Europe are the Scandinavian ones, where the overall tax burden exceeds 50 percent – in other words, more than half of all income goes back to the government. Yet these have thrived economically.

This isn’t coincidental, the economists argue. On the contrary, the generous welfare states that these taxes support guarantee economic security and the provision of essential services – not just health care but also quality day care – that make people less anxious about economic volatility. That, in turn, allows the government to pursue free trade and other policies that allow for a more fluid economy. Here's Stiglitz, from a speech he gave back in 2007:

Globalization necessitates people responding to change or moving from job-to-job. And in the Swedish model, they responded by providing for active labor policies and systems of social insurance that facilitate people moving from job-to-job and provide them with security. One of the aspects of success in a modern economy is willingness to undertake risk. And they would argue that because they have greater security, people are more willing to take risk. They’ve managed their macro economy to have full employment. But not only full employment at low, but full employment at high wages.

And so they have addressed a lot of the problems of insecurity, not perfectly but far better I think than the United States. And the result is, at least in many of the countries of Scandinavia, a much greater willingness to embrace change, the kinds of change that one needs in a dynamic economy.

The danger in making this argument, as Ross Douthat has pointed out, is that analogies between Scandinavia and the U.S. start to break down once you think about the differences between the countries. The Scandinavians are more homogenous and, obviously, smaller than we are. That has implications for policy and politics. But as a general rule, the Scandinavian example shows that the welfare state per se is not incompatible with a dynamic economy. On the contrary, the two can actually reinforce one another.

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posted in: jonathan cohn, politics, germany, joseph stiglitz, paul krugman

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