Does European-style welfare state spending lead to weak economies?

This week we’ve been talking about socialism in my GOV 110 “Introduction to Politics” class. Tomorrow the topic is social democracy in Europe. Social democracy is interesting because it’s the only real “socialism” left to speak of in the world. Over the last two decades it’s become more or less identical to liberal democracy with a slightly larger welfare state and public ownership of some of the utilities and transportation sectors. (There’s not much “social” left about “socialism” anymore, compared to what it was this last century.)

Specifically, we’ll be examining the claim (made by some), that large public welfare-state spending on social services is responsible for the debt crisis in Greece, Italy, Portugal, and Spain. I plan to offer the following as evidence to examine this hypothesis:

This charts the size of the welfare state as a % of GDP in the various industrialized democracies compared to the relative strength of their economy, as measured by real GDP growth in 2011. If anything, there is an ever so slight relationship between a larger welfare state and lower GDP growth. Take out the outliers (Greece, Turkey), however, and there’s no clear correlation between the size of the welfare state and strength of the domestic economy.

Thus, there’s not much empirical evidence to support the claim (made by some) that “socialist” European “entitlement societies” are associated with weak economies. Economic growth in the U.S. where social spending is 17% of GDP is about the same as it is in France where social spending is 32% of GDP.

Indeed, according to many experts, the European debt crisis was brought on by largely the same things that caused the recession over here in the United States: low interest rates, excessive borrowing, and imprudent speculation. If anything, it suggests that a lack of government regulation rather than the over-use of government regulation seemed to cause our recent global economic woes.

But then, I’m not an economist, so take this for what it’s worth.


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