The USA and the Myth of Small Government
Jacob Funk Kirkegaard | Peterson Institute | January 2009
The long proclaimed transatlantic divide
between bloated European welfare states and a lean US government is mythical at best. A
closer look at the facts shows that the social expenditures of the United Sates
and Europe are very similar on healthcare and
education. The Reagan revolution and subsequent "small government" are
illusions, and indeed the only significant difference between the US and Europe is that US private expenditure on
healthcare is significantly larger.
Total
government social expenditures in the areas of healthcare and education on both
sides of the Atlantic are very similar - 47.4 percent of GDP in the United States
and an average of 50 percent among EU-14 and eurozone countries. US
expenditures on education were just below 5 percent of GDP, similar to European
counterparts. Furthermore, US
public expenditure on healthcare is on par with the European average - about 7
percent. However, private US
expenditure on healthcare is three times greater than the European average,
causing the US
to spend a total of 50 percent more on healthcare than the EU-14 average.
Analyzing net social expenditures (after taxes) is even more revealing, for
while gross public social expenditure in the US (16 percent) is significantly
lower than gross public social expenditure in Europe, net public expenditure
(after taxes) is very similar. This is a result of costly tax breaks and
subsidies implemented in the US,
which cause net public social expenditure to actually exceed gross expenditure.
Finally, when totaling both net public and net private social expenditure in
the areas of healthcare and education, the United
States actually spends more percent of nominal GDP
(26.4%) than any European country, except France
and Germany,
and more than the EU-13, which averages 25 percent.
In
short, "when one follows the money rather than the rhetoric, the perceived
differences between the total resources allocated to social expenditures in the
United States and Europe prove to be illusory." Thus, while pursuing social
expenditure reform, the US
debate should not focus on whether or not to spend more money or less - big
government vs. small - but rather on how to more effectively utilize the
already sizeable social-allocated resources.
This summary was prepared by the Atlantic Community editorial team from "Did Reagan Rule in Vain: A Closer Look at True Expenditure Levels in the United States and Europe" published here by the Peterson Institute for International Economics, January 2009.
