The wrong road.

THE great economist F. A. Hayek said in his masterpiece The Road to Serfdom that post-World War II Europe had been seduced by the temptations of socialism. By adopting cradle-to-grave welfare programs, Hayek predicted, Europe would suffer from economic stagnation, and his warning proved correct. By the 1970s, Old Europe--principally France, Germany, Italy, Spain, and Sweden--was allowing the government to consume half of its economic output, compared with about a one-third share in the U.S. Today, the European Union is economically comatose, with sky-high tax rates on individuals and businesses, double-digit unemployment, economic growth at half the U.S. rate, and widespread disinvestment from a once-economically mighty continent.

For all these reasons, U.S. policymakers should take a close look at a new study by the Congressional Budget Office that suggests we are moving in the direction of the Euro-losers. The CBO calculates that, given our current spending trends, the federal government's take of national output will rise from 20 percent today to 30 percent in 2025, and then to 34 percent by 2040. When we add to this the 12 percent of our national output that is presently consumed by state and local governments, about half of everything we produce in 2040 will be swallowed up by government.

Here's the really depressing part: In making this projection, the CBO did not take into account the possibility that Congress will approve a new series of nanny-state programs--national health care, federal daycare centers, and ever greater government involvement in education, energy, and transportation policy. Rather, the CBO's projections assume we will simply stay on autopilot, in which case hyperinflationary costs of government will arise mostly as a result of runaway spending on health care, retirement programs, and other entitlement expenditures. One of the driving forces behind the CBO's gloomy forecast is the Medicare prescription-drug benefit, which will cost taxpayers trillions of dollars over the next 30 years, and whose long-term unfunded liability the CBO calculates to be infinite.

This burst of government spending in future decades will come at a heavy economic price. A 2004 analysis by the American Council for Capital Formation discovered a strong negative correlation between government spending and economic performance in industrialized nations. The accompanying table summarizes the findings.

The nations of New Europe, like Latvia and Estonia, understand firsthand the corrosive effects of socialism, and have turned a cold shoulder to its seductive policies. Instead, they are privatizing government assets (including their pension programs), adopting flat taxes, deregulating key industries, and dismantling unaffordable welfare-state programs. They are rejecting the policies of the European Union and adopting the American economic model of laissez faire at precisely the time we are turning away from that model. If we hope to avoid the road to serfdom, we'll have to make Hayek required reading in Congress.

MORE GOVERNMENT,
LESS GROWTH

  GOVERNMENT      AVERAGE ANNUAL
SHARE OF GDP IN   ECONOMIC GROWTH
     1999         RATE 1990-2001

  33% or less          5.2%
  34% to 43%           2.6%
 44% or higher         2.2.%

SOURCE: AMERICAN COUNCIL FOR CAPITAL FORMATION