The Myth That Entitlements Destroy a Nation's Growth, Busted in 1 Chart

By Matthew O'Brien

The euro crisis is supposed to be the death knell of cradle-to-the-grave government. But the reality is the only thing the euro crisis might be the death knell of is the euro. None of Europe's biggest welfare states are in trouble.


Let's look at some data. The chart below compares average social spending with adjusted per capita GDP growth since 2000. (Note: The y-axis shows social spending as a percentage of GDP; the x-axis shows percentage growth. Data is from the OECD and IMF). See if you can make out any kind of discernible relationship here.

SocSpendvsGDP.png


I know this picture is worth 1,000 words, but here are four more. There is no pattern.

Okay, here are some more words. You might be wondering just how the per capita GDP growth figures are adjusted. If not, feel free to skip to the next paragraph. The adjustment tries to control for how wealthy each country is. In plain English, we'd expect poorer countries to grow faster than richer countries. It's what economists call convergence. Taking the purchasing power parity GDP per capita figures for each country and using a simple convergence multiplier, we can estimate how much faster (or slower) each country "should" grow compared to the United States.

It hasn't exactly been a good decade for growth anywhere in the rich world. But it hasn't been any worse for countries with big welfare states versus countries with small welfare states. Yes, 
social programs can affect growth. But so do other things. Like monetary policy. Or smart taxes. And that most ineffable of qualities, a strong entrepreneurial culture. Which, ironically, might be strengthened by some elements of the social safety net.

You don't need to sacrifice economic security for economic growth. Other countries manage both just fine. Actually, the U.S. is in better shape than most other rich countries because our demographic crunch is much less ... crunchy? Our society is still growing, if aging.

Hear that sound? It's the death knell of the death knell of the welfare state.



This article available online at:

http://www.theatlantic.com/business/archive/2012/07/the-myth-that-entitlements-destroy-a-nations-growth-busted-in-1-chart/259645/