The Entitlements of U.S. Decline

Biden says his plans will make America great again. Ask Europe how that has turned out 

WSJ editorial.

"Democrats are scrambling to find an argument, any argument, that sells their $5 trillion spending plan to a skeptical public. The latest, and startling, attempt is President Biden’s claim that all of his new entitlements will, well, make America greater.

“To oppose these investments is to be complicit in America’s decline,” Mr. Biden said Tuesday, adding that “other countries are speeding up and America is falling behind.” Got that, Senators Joe Manchin and Kyrsten Sinema ? You’re complicit in the country’s looming failure.

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You have to admire the audacity of pitching higher taxes and more social welfare as the path to national revival, especially when the global evidence is the opposite. The result of Mr. Biden’s expanded entitlements is likely to be reduced incentives to work and invest, slower economic growth, lower living standards, and less fiscal space for essential public goods like national defense.

That’s the lesson from Europe’s cradle-to-grave welfare states, which Bernie Sanders explicitly pitches as models. Most have older populations than the U.S., but this alone doesn’t account for their lower labor participation rates and much higher structural unemployment. European jobless rates tend to be much higher than in the U.S., especially for the young. In 2019 labor participation was 62.6% in the U.S. versus 49.7% in Italy, 55% in France, 57.7% in Spain, 59.3% in Portugal and 61.3% in Germany.  

Europe’s lower rates of labor participation have contributed to slower growth. While the U.S. economy was slow to recover from the 2008-09 recession amid the Obama policy uncertainty, U.S. GDP growth still averaged 2.3% from 2010 to 2019, surpassing Italy (0.27%), Portugal (0.86%), Spain (1.07%), France (1.42%) and Germany (1.97%).

Democrats say more generous family leave will encourage more women to work and expand the workforce. But Italy offers 22 weeks of maternity leave at 80% of previous earnings. France provides 16 weeks at 90%, and Spain 16 weeks at 100%. Higher payroll taxes to finance these generous benefits have instead reduced the incentive to hire.

Europe’s little-discussed secret is that its cradle-to-grave welfare states are financed by the middle class via value-added and payroll taxes. The combined employer-employee social security tax rate is 36% in Spain, 40% in Italy and 65% in France. Value-added taxes in most European economies are around 20%. There simply aren’t enough rich to finance their entitlements.

Democrats in Washington know this, which is why they are resorting to budget gimmicks to disguise $5 trillion in spending into the 10-year budget window. They plan to pay for a few years of spending with 10 years of tax increases on businesses and affluent individuals, but this still only gets them $2.1 trillion in estimated new revenue.

Europe’s vast entitlements also mean less money for security and the military. Only nine or so European countries meet their NATO pledge to spend 2% or more of GDP on defense, and only Greece spends more than 3% as the U.S. does. Germany spends a paltry 1.56%.

The U.S. was able to defeat the Soviet empire in the 1980s because a booming economy spun off enough revenue to rebuild the military. Mr. Biden is proposing to shrink defense in real terms, and his welfare-spending wedge will grow rapidly. There will be no Reagan-like military buildup as China rises.

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The irony is that some European governments have tried to reform their tax and welfare systems to become more competitive. Germany and Sweden over two decades reformed their welfare and labor policies. Their labor participation and GDP growth have exceeded the rest of Europe’s. Germany’s labor participation rose to 61.3% in 2019 from 58.1% in 2000.

During the 1970s and 80s, Sweden’s tax burden rose to the world’s highest as its welfare system became much more generous. The result: Swedes’ after-tax real incomes stagnated while government debt ballooned. From 1976 to 1995, GDP growth in Sweden was about half the average of developed countries and a third lower than Europe’s large economies.

Sweden’s decline prompted tax and spending reforms in the early 1990s that increased labor productivity, private job growth and incomes. The rate of disposable income growth increased four-fold from 1996 to 2011. Sweden’s average GDP growth from 2010 to 2019 (2.6%) has far surpassed that of most European countries.

Other European governments are also pushing welfare-state reforms. French President Emmanuel Macron has passed pension reform and cut the corporate tax rate to 26.5% from 33% in 2017; smaller firms pay 15%. Greece is pulling out of its debt trap with Prime Minister Kyriakos Mitsotakis’s tax, pension and regulatory reforms. The corporate rate is 22%, while Mr. Biden wants to take America’s combined federal-state average well above 30%.

Mr. Biden on Tuesday also argued the U.S. needs to spend more on green energy and manufacturing to compete with China. But Beijing’s industrial policy has resulted in misallocated capital and economic distortions, as its current debt difficulties show. Since when is China supposed to be an economic model?

America escaped from its 1970s decline by returning to its historic model of liberating private initiative and enterprise. Mr. Biden’s plan would empower the government, pile burdens on the private economy, and erode upward mobility by encouraging people not to work. That’s the real recipe for decline."