A key point we make in our introductory essay in BALANCE is that the ratio of U.S government debt to GDP departed from its historical pattern – rising in wartime, falling in peacetime – with rise of the welfare state and burgeoning deficits from unfunded ‘entitlement’ spending. A common reaction we have gotten to our core conclusion that different budget rules of the game are needed to right the fiscal ship is a crisp: At least it’s not so bad as in Europe.
Not so fast. Total government spending relative to GDP in the United States is close to levels in Spain or even Sweden.
But we’re ahead of Europe on pro-growth policy to help manage the burden of debt, right? Again, be careful. Newly elected French President Francois Hollande proposed large tax increases on high-income individuals, a corporate tax increase, and subsidies to government-favored industries – an anti-growth, fiscally damaging brew, to be sure. But U.S. President Barack Obama proposed large tax hikes on high-income individuals, a minimum tax on corporations, and subsidies for manufacturing as a government-favored industry.