Toward Europe?

Michael Barone
Posted: Nov 28, 2005 12:05 AM

Will the United States become more or less like continental Europe? That's one way to frame the central question of domestic policy. In Europe much higher percentages of gross domestic product are absorbed by government; welfare state protections and restrictions on labor markets are greater, health-care and pension provisions are dominated by the central government. The result, say advocates of the European model, is greater leisure and greater protection against risk. The result, say advocates of the American model, is economic stagnation and high unemployment. Over the last 25 years, the number of jobs has increased by 57 million in the United States. The figure for Europe is 4 million. Unemployment is around 5 percent in the United States. In France and Germany it tops 10 percent.

 Given those numbers, Americans, through the workings of the political marketplace, are not likely to choose the European model. But certain features of our society -- the aging of our population, the increasing percentage of gdp any affluent society will spend on health care -- move us in a European direction, unless some effort is made to counter that trend. One question to ask, as we approach the end of the fifth year of the Bush administration, is to what extent it has countered that trend.

 Taxes -- The Bush tax cuts have reduced government's share of gdp, but they are temporary, and Congress has just balked at extending them. One reason is that the Republican Congress has not held down spending correspondingly. Another is that Democrats no longer see political risk in raising taxes -- it was not a liability in the 2005 Virginia election, for example. Yet Democrats have a political interest in preventing the Alternative Minimum Tax from becoming the norm for high-income families in Blue states. This is an issue that will be fought out in continuing trench warfare.

 Pensions. Democrats' unanimous opposition, the qualms of House Republicans and the response to Hurricane Katrina have combined to defeat George W. Bush's attempt to introduce individual investment accounts to Social Security. The result is that, as the number of elderly grows, an increasing percentage of gdp will have to go to public pensions: We go some distance toward Europe. Democrats today like that result, and Republicans are prepared to live with it. But when Bill Clinton was president, he was on the verge to backing some investment component in Social Security in 1999. The political stars were in alignment -- lame duck Democratic president, Republican Congress. But Clinton drew back, in deference to the liberal Democrats who backed him staunchly during impeachment. A chance to get off the European trajectory was missed, perhaps for a generation.

 Private pensions are another matter. Hugely generous, European-style private pension plans are being taken over by government and cut back as airlines, steel companies and auto supplier Delphi have gone into bankrupty; General Motors may follow. But the private sector as a whole has moved decisively away from guaranteed, company-financed defined benefit pensions to employee-controlled defined contribution pensions. Here we don't seem to be going Europe's way.

 Health care -- The key here is that we do not have one health care finance system, but many. That's why the architects of the Clinton health-care plan were unable to produce a politically acceptable one-size-fits-all plan in 1993-94. The Bush administration has increased government spending vastly with its Medicare prescription drug plan, but it has also introduced and promoted market-based mechanisms, like health-savings accounts, which give individuals incentives to hold down unnecessary costs. These have been fought by Democrats who want government provision, in which costs will be held down, if at all, by bureaucratic ukase. Understanding how this battle is going requires a knowledge of how our many health-care finance systems are operating -- something beyond my pay grade. We may be moving toward the European model in some ways and away from it in others.

 Politics -- The Bush administration came into office with plans to get us off the European trajectory, and has had partial success. At the moment, it seems inclined to let the Republican Congress set the course on domestic policy, which means letting the workings of regulated private markets in pensions and health care determine our direction. Democrats would like to move us some distance toward Europe, but how far they neither say nor, so far as I can tell, know. The Bush years have not produced a crisp decision to get off the European trajectory. But they have produced some significant movement in that direction, notwithstanding narrow Republican congressional majorities and harsh partisan divisions.