- The Washington Times - Wednesday, February 22, 2012


Europe’s leaders on Tuesday decided to give another very expensive band-aid to Greece. The latest bailout will cost $170 billion and enable Greeks to borrow from one set of creditors to pay off another, while other private creditors agree to take a haircut.

After spending all that money, Greece will be left with a ratio of debt to gross domestic product (GDP) of 160 percent. The country is no better off than it was before, nor is the European Union on any sounder financial footing as the continent’s debt crisis and recession drag on for another month.

The most unlikely of sources - the World Bank - blames the lack of growth on Europe’s big government and onerous welfare states. A study released in January explained that European bureaucracies are larger than almost anywhere else in the world. In 2011, the governments of the Western European nations spent 13 percent more of their GDP than Australia, Canada, New Zealand, the United States and Japan, none of which can be accused of having an overly small government.

The report found that government expenditures beyond 40 percent of GDP harmed economic growth. In the case of Europe, an increase of 10 percent in initial government spending results in a GDP decline of 0.6 to 0.9 percent every year. Similarly, large government revenues also tend to reduce growth. In 2010, seven Western European governments consumed over one-half of the GDP, including France and Denmark.

The World Bank study also shows that southern European nations have not only increased their spending on the public sectors rapidly over the last decade, they do not tax these benefits, unlike in the north. This further exacerbates the fiscal problems the countries in the south now face.

That large governments and the welfare states which accompany them act as a drag on economic growth should come as no surprise. High taxes are a burden on private-sector enterprise. Europe is slightly protected from this effect because their tax system has lower corporate rates and relies more on indirect levies. As the government expands in the United States, business will be hit with the double-whammy of an unfriendly tax regime and the burden of a large bureaucracy.

As taxes increase, entrepreneurs have less money in their pockets. This lowers their incentive to start a new business or expand operations or create new jobs. The result is, as the World Bank study concluded, slower economic growth.

A welfare state, by its very nature, is redistributionist, creating winners and losers. The people who get the government transfers have an incentive to lobby the government, and elected officials have incentives to dole out special favors to curry votes. These favors are paid for by raising taxes or by borrowing (that is, raising taxes in the future). In either case, we end up with slower growth and weaker civil society. Neither is a desirable option. A restrained government, as envisioned by the Founders, remains the best path.

Nita Ghei is a contributing Opinion writer for The Washington Times.

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