24th Mar 2019


Greece shows the dangers of big government

Thirty years after Margaret Thatcher came to power in the UK and 20 years after the fall of the Berlin Wall, economic freedom has decreased in half the world's major economies last year. Governments are intensely chasing banks, tax havens, hedge funds and corporations.

New regulations, increased public spending and protectionist measures are rife in the policy agendas of the Western world. Is ever increasing government the new trend, a reverse of the past decades of economic freedom?

Read and decide

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  • Greece now has to do in weeks or months what should have been done over decades (Photo: John D. Carnessiotis, Athens, Greece)

Where would that lead us? Probably to Greece. Setting the statistics cheating aside, what they have done is to expand public systems far beyond what they could pay for. And as more people become dependent on the system, it becomes more difficult to change.

Big government is back

Why is big government back? The stimulus response to the crisis is a major step, building debt, which has to be paid for by future taxes. The demographic development and consumer demands will lead to a massive cost increase in several public systems for decades to come.

Actually, the so-called Anglo-Saxon countries - supposedly the freest major economies - had already begun to expand government before the crisis. Public spending in the US increased between 2000 and 2008 from 35 to 39 percent of GDP, and in the UK from 37 to 47 percent.

Costs for health care and elderly care are rising, as well as pensions. In Japan, Italy and Spain, costs for pensions will explode. Even the United States seems to be unable to avoid a rise in public expenditure, due to so-called entitlements, to today's French or German levels.

The Greek pensions system is one of the least sustainable in the industrialised world. People now generally retire at 55, which the government has promised to raise to 63. Facing this demographic development, it would require a huge reform effort to make it work.

Big government is harmful

Greece shows why big government is harmful. There are strong arguments against expanding it further. First, there is no sign that the stimulus packages improved long term growth. Huge amounts of the tax-payer's money were wasted, increasing debt, which will increase future tax burdens.

Second, the past quarter-century of increased economic freedom has been an unprecedented success. Global GDP per capita rose by 50 percent, extreme poverty was cut in half and more people than ever enjoy western-style living standards.

Third, economic freedom is strongly correlated with other important aims, such as environmental protection, social progress and indicators of quality of life.

Fourth, despite the crisis, the results of liberalisation remain. Since 1990, GDP per capita has increased by 64 percent in the US and 47 percent in the UK - but only by 35 per cent in France, 23 percent in Germany and 16 percent in Japan.

And finally, if there is one lesson Europeans should have learned, it is to avoid big government. Since Central and Eastern Europe abandoned the command economies, their living standards improved more than anyone dared to imagine in 1989.

Greece displays all the big government problems. Debt is much bigger than GDP. And they didn't use the boost from euro entry to reform. On the contrary, tens of thousands of new employees were added to the public sector.

Several European countries responded to the crisis by continuing free-market reforms, especially in Central and Eastern Europe, but also Sweden, for example. Their success will put more pressure on the countries that chose the fraught path of big government.

In the end, facing the economic power of the Bric countries (Brazil, Russia, India and China), even reluctant reformers like EU President Herman van Rompuy see reform as a matter of survival. Europe has reformed during the past two decades, and must continue to do so.

The stimulus should be rolled back, but the main challenge arises in the long term, and includes the US and Japan too. To avoid exploding costs in health care, elderly care and pensions, public expenditures must be transformed into private expenditures.

This is the only way to avoid ever bigger government, with all its problems. And it would actually bring many benefits. People would be allowed more choice, suppliers would compete, and that should improve quality as well as efficiency.

Transforming the welfare state

Transforming the welfare state into a welfare society may not be easy or quick, which is exactly why the debate about how to do it must take place now. Politicians may fear public opinion and prefer to wait. But we have already waited far too long.

Greece now has to do in weeks or months what should have been done over decades. This means that the reforms may be less thought-through and are certainly not well-enough explained to ordinary people.

Any major financial aid from the EU to Greece might be seen as a sign that reform is not needed, and that the policies of big government and big debt can continue. That must be avoided, or the EU would make a rather destructive contribution to European policy agendas.

For the rest of us to avoid Greek tragedies, we have to plan for long-term substantial reforms for smaller government now.

Stefan Folster is chief economist at the Confederation of Swedish Enterprise. Johnny Munkhammar is research director at European Enterprise Institute. They have published the book: Yes, Europe can! (European Enterprise Institute)

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