A model for scrimping – in Europe?

Throw your Euro-stereotypes out the window: Last weekend, a Greek government which has cut public-sector pay and lowered pensions won a clear victory in local elections. Despite strikes and violence, despite the fact that Greece’s debt is still growing and more cuts are coming, there will be a Socialist mayor of Athens for the first time in 24 years. (And yes, in Greece the Socialists favor budget cuts and the conservatives oppose them.)

Nor are the Greeks alone. Last month, voters reelected a Latvian government that cut public sector workers’ pay by 50 percent. The British government coalition, which is also trying to eliminate benefits and cut spending, remains strangely popular, too. Although – contrary to my previous observation – London witnessed its first continental-style, anti-austerity riot last week, too, there wasn’t much general enthusiasm for the protesters. Some of their leaders wound up denouncing the riots, and they haven’t hurt the government’s poll numbers yet either.

It’s too much to call it a pattern, and it may well not be a permanent change: I’m sure there are plenty of European politicians who won’t survive their next encounter with voters. But there is something in the air. It almost seems as if at least a few Europeans have actually drawn some lessons from the recent recession and accompanying turbulence in the bond markets. They have realized, or are about to realize, that their state sectors are too big. They are about to discover that their public spending, which seemed justified in good economic times, has to be cut. The middle-class even knows in its heart of hearts that its subsidies, whether for mortgages, university tuition, or even health care, can’t last. Some voters even know that their pay-as-you go pension systems aren’t sustainable in the long term either.

I’ve described this mood swing before, but two American economists, Douglas Besharov and Douglas Call, recently substantiated it in the Wilson Quarterly. They write that most developed countries in Europe and Asia – not some, most – are moving, “however hesitantly,” toward market-based government pension and health-care systems, at least for the middle class. Most now fund future pensions with investment funds and stock holdings, either instead of or in addition to pay-as-you-go plans. Even countries historically suspicious of the free market, such as Italy, Sweden and Poland, now use such schemes.

Though, as Besharov and Call write, the corrections and austerity budgets “aren’t anywhere close to correcting the immense long-term imbalances these economies face,” they represent a change of direction. Perhaps because the dollar isn’t – yet – under international pressure, the United States has taken the opposite road. President Obama is trying to try to spend his way back into growth; Americans of all stripes still consider “privatization” of Social Security anathema; and even President Bush now regrets wasting the start of his second term on the patently hopeless cause of Social Security reform, which was unpopular even in his own party.

Our recent foray into health-care reform took us in the opposite direction from the rest of the developed world, too – not that we were really doing anything so different to start with. As Besharov and Call also note, Americans are wrong to think they currently enjoy “private” or “free-market” medicine. Even when it is not directly state-funded through Medicare or Medicaid, American health care is paid for by employers. And those employers, in turn, get a tax cut for providing health care to employees – in other words, a subsidy.

The result: Unlike, say, the Swiss, who pay for about 30 percent of their medical care themselves, or the Slovaks, who pay 26 percent, Americans pay only 13 percent. The rest comes from those subsidized employee programs or directly from the government. There are relatively few market mechanisms at work in our system, an absence that may explain, in part, why U.S. medicine is so expensive. And while we’re on this subject, I can’t help but note that the U.S. Postal Service lost $8.5 billion in the past year and may well go bankrupt next year. Why, in this age of multiple courier services, cheap phone calls and e-mail, is the U.S. Postal Service still a government-owned company? Germany privatized its postal service in 1995.

We remain, of course, the greatest propagandists for liberty and free markets. Our politicians – even Obama – can be eloquent in the defense of these ideals. But we haven’t practiced what we preach for a long time, much longer than we generally recognize. Americans may be from Mars and Europeans from Venus, but would we reelect a president who cut government wages in half? I find it hard to imagine.

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