It’s Welfare Politics vs. Growth Economics : Economy: The world’s leading democracies must make some hard choices because they can no longer guarantee prosperity and security to all.

The good news for the “economic summit”--convening in Italy this weekend--is that the major industrial countries have embarked on a modest recovery. After a two-year slump, Europe’s economy seems to be growing at a 2 1/2% to 3% annual rate. Japan shows faint signs of recovery, and the U.S. expansion continues. The bad news is that a normal recovery won’t cure the deeper problems of these rich democracies. All face a collision between welfare politics and growth economics.

Almost no one wants unfettered free markets; but rigid markets suffocate economic growth. Politics specializes in distributing benefits and protecting people against hardship. By contrast, strong economic growth requires that people take risks and adapt to change. The democratic dilemma is that voters everywhere expect their governments to deliver both prosperity and security. This is a hard, often impossible, feat.

Europe, where joblessness is now approaching 12%, has coped least well. Consider:

* In France, the combination of a high minimum wage and steep payroll taxes makes it nearly twice as costly for companies to hire low-skilled workers as in the United States.

* In Italy, companies can hire only from state employment agencies and must hire 15% of workers from a list of “disabled” and another 12% from a list of “disadvantaged”.

* Payroll taxes--to finance unemployment, health, disability and pension programs--are as high as 30% to 50% of wages. (The U.S. rate is 15.3%.) There are also big mandated labor costs. France requires seven weeks of paid time off.

* By U.S. standards, unemployment benefits are high and last much longer. In some countries (Spain, Denmark), workers receive about 70% of lost wages; In the United States, the rate is about 25%.

* In the Netherlands, disability laws are so generous and lax that one-seventh of the labor force receives disability payments, though the Dutch are no less healthy than anyone else.

Social justice is not advanced by foolish economics. If you make it too expensive to hire people, companies won’t. If you pay people not to work, they won’t. The damage is not done by any one policy; it is the collective impact of many costly policies. In Europe, there has been little net private job creation in two decades.

In Japan, the problem is different. Export-led growth is no longer workable, because Japan’s huge trade surpluses have pushed up the yen’s value--and made Japanese cars, machinery and electronics more expensive. In 1994, Japanese exports will grow only 1%. The imbalance in foreign-exchange markets (as exporters change dollars for yen) raises the yen’s value. This will continue until Japan increases its imports by stronger domestic spending and more open markets.

There’s the rub. Domestic spending is hobbled. A cumbersome distribution system raises consumer prices. Inefficient farmers produce expensive foods and oppose imports. Cartels collude on prices and restrict imports. Zoning laws raise land values and impede housing construction. These practices dampen domestic spending but enhance the well-being of strong vested interests. Japan’s brand of welfare politics protects these privileges. The effect is to subvert economic expansion.

There are lessons for the United States--and they are mostly ignored. The Clinton Administration acts as if it can enact a new tax here and a new program there without having any effect on the economy. It proposes a massive new payroll tax in the form of mandated employer-paid health insurance. The spirit in Congress is similar. There’s little recognition that, as in Europe and Japan, the rising burdens of government may accumulate over time and slowly sap the economy’s vitality.

What unites the leaders of the seven major nations at the summit (the United States, Japan, Germany, France, Britain, Italy and Canada) is a reluctance to face these problems. But the danger of avoiding them is creating a vicious circle of slowing growth and rising political conflict. As growth falters, the cost of government welfare rises. This increases tax rates or budget deficits, which further impedes growth. Governments are then torn between breaking promises (by withdrawing benefits) and suffocating their economies (by maintaining existing policies).

Europe is already caught in this trap. Governments are striving to reduce budget deficits and spur economic growth by trimming some welfare benefits. But the cutbacks are small and unpopular, precisely because people are so used to being protected. Sweden recently lengthened the waiting period for “sick” benefits by a day. Absenteeism dropped sharply.

What leaders in Europe, Japan and the United States should do (but aren’t) is to use the economic recovery to eliminate the least justifiable government spending and regulations. These changes are hard now, but they will be much harder later. The welfare state has become too much a part of the social fabric of too many nations. But someone has to save the welfare state from itself. If its excesses aren’t curbed, it will become its own worst enemy.