Dispatch March 2008

The End of the American Exception

Economically speaking, America could soon be more European than Europe

That the United States stands apart is something Americans and Europeans have agreed on for a long time. It goes back to Tocqueville, like most things. Many of the differences of character and culture he noted in the first half of the 19th century are still there, no doubt, but some more recent contrasts are looking questionable. Since 1945, American exceptionalism has been asserted with particular confidence—but gradually diminishing validity—in economic affairs. America is to Europe as private enterprise is to the public good, as selfish individualism is to social partnership, as "compensation" is to work-life balance. Modern America has limited government, weak unions, high-powered incentives, capitalism red in tooth and claw. Post-war Europe has tax-and-spend, transport strikes, six-week vacations, and the welfare state. Or so, on both sides of the Atlantic, we fondly imagine.

Living in the U.S. for several years after decades as a restless Brit, I continue to be struck by two things. First, this idea of rival economic paradigms appeals to both audiences: Neither would have it any other way. This may be why the notion persists so tenaciously, despite not being true. That is the second thing. Caricatures are well and good, but this one is just too much. In economic matters, America is far more like Europe, and Europe more like America, than either cares to admit. Moreover, the differences continue to shrink, and the pace of convergence seems about to accelerate. We will see whether the idea of America as the land of uncushioned capitalism—the timid and work-shy need not apply—will outlast a faster approach to the European norm.

The Democrats' promise of comprehensive health reform—something the country finally seems to want—is what prompts this line of thought. Over the past ten years, it seems, many Americans have come to think it wrong that a country as rich as theirs fails to guarantee access to health care. For much longer, almost all Europeans have thought it both incomprehensible and shameful. This is America's biggest social-policy exception (unless you count capital punishment as social policy). And it is marked for abolition.

Universal health care, if it happens, will be an enormous change in its own right, of course, but also one with further implications. It is going to push taxes up—in the end, possibly way up. The plans lately under discussion have not been properly costed, but figures of $50 billion to $75 billion a year in extra spending—the sorts of numbers bruited for the Democrats' proposals—are optimistic. Beyond the initial outlay, whatever that proves to be, is the likelihood that people will gradually migrate (at their own initiative, or more likely at their employers') from private insurance schemes to the new (and presumably subsidized) public alternatives. Everything depends on how the system is managed, but it is easy to foresee, in the fullness of time, a far bigger increase in the cost to taxpayers than the current plans envisage. And if American health care coverage and financing get more European, American taxes will have to as well.

"Europe" is a gross simplification, so think about Britain—which continental Europe regards as a mid-Atlantic offshoot of the United States—and, say, the Netherlands. U.S. taxes are 27 percent of national income, British taxes are 37 percent, and the Netherlands' are 39 percent. Recall that America spends fully 10 percentage points of national income more than Britain on health care, public and private combined. Suppose the bulk of the existing costs of U.S. health care eventually migrated to the public sector, and nothing else changed, American taxes would have to approach or exceed British and Dutch levels.

That is a worst-case scenario, no doubt, for believers in "vive la différence" And health spending, however important, is still only one category of social spending. America will continue to spend less on other social programs than is usual in Europe, you might think. In fact, the differences are exaggerated. Roughly speaking, Britain and the Netherlands spend about 10 percentage points more of their national incomes on taxpayer-financed social spending. But if you allow for the higher taxes that Europeans pay on their benefits, and for cash-like tax reliefs that the United States freely uses to advance social goals, the difference shrinks by nearly half. This, to repeat, is before the Democrats have done their health reform. And it is before they have taken up any of their other proposals to improve the country's safety net, through more comprehensive trade adjustment assistance and other kinds of help for displaced workers, or to expand other social programs.

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