U.S., Canada, go in opposite ways: As government swells in the States, it's shrinking somewhat up north

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Appeared in the Orange County Register

The Obama administration, in the view of many pundits, seems determined to achieve a Europeanization of the United States. A more accurate description would be Canadianization, with a key qualification. The Canada that Obama wants to replicate is pre-1995, and therein lies a lesson.

The administration and congressional Democrats are pushing a more activist government and thus a more statist economy. The principal measure of statism is the percentage of an economy consumed by direct government spending. This is the share of the economy directly controlled by the state.

According to the Organization for Economic Cooperation and Development, U.S. all-government spending has been increasing since 2001 and reached almost 39 percent of the economy in 2008. Canadian all-government spending peaked at 53 percent of the economy in 1992 and then precipitously declined to just under 40 percent in 2008.

Consider the Democrats' stimulus package and the president's proposals for expanded government health care, education, energy and transportation, and increased redistribution of income. These leave little doubt that the size and scope of government in the United States will increase. Shockingly for many Americans, it is more likely than not that the U.S. will soon have a government proportionately larger than Canada's.

Another important measure of statism is the degree to which the government borrows money in the financial markets (i.e. debt). Government borrowing means it is competing with private companies for capital and resources, which would otherwise be deployed in the private sector to expand commerce, create new businesses, and a myriad of other productive activities.

Unfortunately, the U.S. federal government for almost a decade has demonstrated a near-absolute inability to tackle its borrowing addiction. The current and expected future deficits are reaching nightmare proportions, and the added spending proposed by President Barack Obama means it may be almost impossible for the government to balance its books regardless of the state of the economy. For instance, U.S. federal public debt is expected to increase from 41 percent of GDP in 2008 to an astounding 82 percent by 2019.

On the other hand, within four years, Canada went from a financial disaster to the best-performing G-7 country. Canada balanced its financial books almost exclusively through a 25-percent reduction in the size of government rather than tax increases. This path was chosen by a left-of-center government, prompted by the realization that tax rates, competitiveness and investment matter. The federal government, for instance, reduced program spending by 10 percent over a two-year period. Fiscal prudence on the part of the government also led to reductions in debt; from 71 percent of GDP in 1995 to 31 percent by 2008.

Another measure of statism is the degree of centralization. Statist countries by their nature and design centralize the allocation of resources and regulation of the economy. Contrary to what many Americans assume, Canada has actually decentralized over the past 15 years.

Currently, 41 percent of government spending in Canada, including transfers, is done by the central government. Interestingly, the federal government in Canada has no role either financially or regulatory in K-12 education, left entirely to the provinces. It's also worth noting that Canada generally does better than the U.S. in both innovation in the delivery of education and international testing.

Contrary to what many Americans assume, the United States is already highly centralized; Washington controls 62 percent of all government spending. President Obama plans to increase, rather than decrease, Washington's dominance. Such centralization, coupled with other elements of statism, will prevent the very innovation, experimentation and competition at the state level that the Founders envisioned when they crafted the Constitution.

Canada, by contrast, has pursued a marked reduction in the size and scope of government and benefited from the resulting improvements in the economy. In other words, Canada seems to have learned the lesson of statism. The United States needs to learn this lesson, sooner rather than later.

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