Welfare Spending And The Debt Crisis

Conservatives in the US and in Europe don't like the "welfare state". They like to blame all of our problems on social spending. This article looks at government spending as percent of GDP and finds that there is no relationship between it and the interest rates that investors demand for sovereign debt. Some of the states with the highest ratios of government spending to GDP have the lowest interest rates.

The nordic states also have high tax rates and they have high levels of compliance. It may be the case that social spending is not a problem as long as tax policy and compliance support the spending. You won't find conservatives making the case for high tax rates. The US has low tax rates and a low ratio of government spending to GDP relative to most countries in Europe. Budget deficits in the US are more closely related to tax policy, and military spending, than they are to social spending. The US also has a large trade deficit that contributes to its budget deficits. Unlike Italy and Greece, however, its trading partners are willing to fund its trade deficit at very low interest rates. It doesn't hurt to have one's currency used as the global reserve currency.