Sunday, March 28, 2010

The new four-letter word – Socialism.

Okay, so Socialism isn’t a four-letter word – but maybe I got your attention. I hate to be the first one to pass along this information to some of you – but we live in a socialist country here in the good old USA. Now I really have your attention.
As in my other postings – the bottom line of this one is to ask why name-calling and concept-hurling replace real discussion and analysis. I discuss four issues that could be dealt with in a straightforward way and should comprise the elements of a real discussion.

Most people on this planet, including those of us in the USA, live in a mixed economic system. The mix involves varying degrees of capitalism and socialism – generally meaning that economic decisions involving production, distribution of income, and allocation are partly based on interactions among private actors in markets (capitalism) and partly by government (socialism). China might have a Communist political system with one party, but for 20 or more years it has been slowly privatizing and liberalizing in many ways so as to move decisions from the government to private persons and companies. Much of industry remains in China’s government control and its economic system is more socialized than the USA, but it is a mixed system. The USA is mostly a capitalist system but it has very evident and significant government control.

So what is going on with the four-letter word thing? – you are socialist – nah nah nah nah. No I am not – nah nah nah nah.

The issue is that recent political events suggest a movement towards a more socialized economic system in the USA. Thus the balance of market/government is changing in the USA. So it is much easier to call each other names than it is to use logic and facts to support/defend a movement in the mix in one direction or the other.

Clearly it is more interesting than it sounds on the surface. There always has been and always will be a desire to make sure that the less fortunate are not left behind in the wake of free market outcomes. The extension is that there is no theoretical formula which spells out what less fortunate means. Even poverty has no empirical and universally agreed upon numerical threshold. Thus, there will always be those who believe that economic outcomes of the marketplace could be improved by reallocating some of the benefits to those who did less well. Since this does not happen automatically under capitalism, there is a role for the political process and government. And notice that what passes as politically acceptable changes over time. Three hundred years ago, government did very little for people. Upshot – the demand for redistribution should be expected to change over time.

That sounds good. Most moral philosophies would support helping one’s neighbor. So the question is mostly – when is enough enough? And that is where the fun starts. I like the phrase – don’t throw the baby out with the dirty bath water. This colorfully gives rise to the idea of intentionally doing a good thing (getting rid of the dirty bath water) without negative unintended consequences (also throwing out the baby). So how do we minimize the unintended consequences? The first issue has to do with making sure the government interventions are effective – that is, they not only redistribute the income but they try to remediate problems that might prevent people from doing better on their own. In this regard we often hear the dictum, “Don’t give a man a fish – teach him how to fish.” The second issue concerns disincentive effects of the policies on those who earn and produce the most. Clearly if the policies induce the most productive elements of society to produce less, income might be more equal but the average income of society will be lower. Finally, the third issue revolves around the use of debt to attain income distribution goals. Clearly someone has to pay. How much of today’s income redistribution should be paid for by our children?

I fear I may have angered one particular group and I want to say one more thing to them. There are people alive today who witnessed personally or heard/read about their family members and/or friends being harmed by socialist political regimes – past or present. My mother was a refuge from Hungary. There is a point at which my economic discussion and the three issues above lose relevance – when economic socialism turns into dictatorial political socialism. So I should add a fourth issue to the above paragraph that asks whether or not increasing economic socialism could lead to ruthless dictatorial regimes. If the answer to that is YES, then that would trump the first three.

I am sure I left something critical out – and that’s why we have room for comments.


  1. Build a fire for a man and he is warm for the night; set a man on fire and he is warm for the rest of his life.

  2. François-Marie Arouet, perhaps better known by the pen name Voltaire, is famous for the comment "if you would speak with me, first define your terms". I have a problem with the fuzzy confusing an economic system, socialism, with a political system, dictatorship. There is no reason socialism can not exist in a democratic system (Sweden comes to mind) or that non socialist economic systems can not exist under a dictatorship. The same is true for communism.

    I see little to be gained by detailing some of the historical problems that occurred under socialistic dictatorships. Rather I would like to see comments addressing the pluses and minuses of socialism as an economic system.

    I will start the ball rolling by quoting Maggie Thatcher who said "the problem with socialism is that sooner or later you run out of other peoples money to spend".

    Maggie's comment probably evolved from Alexis de Tocqueville's thesis that the problem with the American democratic system of government was that sooner or later people would vote themselves benefits paid for by others.

    What worries me more than "creeping socialism" is that America is reaching the point where less than 1/2 the population is for practical purposes not paying taxes, but that portion of the population is reaping govt supplied benefits paid for by others taxes.

    Whatever one may think of the current govt in China (and many other Far East govts as well); it is interesting to note that that area of the world is producing more new "super rich peeps" than any other area of the world. What do you guys think is the reason for this?

  3. There is no question that the current administration & Congress is moving the country toward a European social democracy (to avoid using Larry's four-letter words.) Witness: deeper government involvement in private industry, relative shift of spending away from defense toward social programs, more direct government control of health care services, higher tax rates (as earlier discussed by Larry) and the likelihood of a future VAT, uncontrolled deficit spending, plus the energy "rationing" proposals.

    Nothing necessarily wrong with European Social Democracy (for them) but is it right for the USA? What are the cultural ramifications of a course set in this direction? Are "Tea Parties" just the beginning?

    Seems to me that European-style Social Democracy is the antithesis of the American "spirit" of "can-do," "get-ahead," and personal initiative. This imposed cultural change is part of what generates the polarized debates.

  4. Thanks for the comments guys. Let's hope some others jump in. Seems to me it is a relevant topic. Is it possible for informed interested people to discuss this in a rational and useful manner? You guys started us off on the right foot. It is very possible to have a strong case (for or against) these changes in the market/government mix. There is nothing wrong with concluding one way or the other. It will be nice to see these conclusions based on analysis without resorting to name-calling...

  5. Hi Larry!

    Ok, I'm hooked. My first comment is that a lot of folks (especially Independents) are coming to the realization that elections do actually matter for something in this country.

    While the liberal left has moved the chains further on health care "reform", they still fell well short of their single payer goal. But they've set things in motion that they believe will eventually progress to that end.

    Here's hoping that this won't happen. I'm a personal freedoms sort of fellow and don't care for the prospect of getting the government's permission to receive medical care.

    What about the potentiality of higher taxes AND higher inflation in the medium term outlook?

  6. John -- thanks for joining the fray. Nice to hear from you. I agree with you that the current reform bill is just a first step in many minds. First step or not, the journals are already talking about a new value-added tax for the USA. Several countries have already instituted inflation oriented monetary policies. So you are on the right track. That means that 2010 could be a year in which we hear a lot more about the tradeoffs between income redistribution and taxes/inflation. It won't be a calm year but it will provide some opportunities for us to gab a lot more! I look forward to it. Feel free to forward the blog location to your buddies.

  7. Larry,

    Got to admit that I am in John's camp. I do believe now that people understand that elections do matter.

    Though we do now not yet have a single payer system it is clearly coming. What will happen is that companies will not be able to afford healthcare benefits for their employees. Just listen the reports coming from AT&T, 3M, etc. Once the new requirements kick, the costs will go even higher. Having managed healtcare for over 40,000 covered lives for 14 years, I can tell the cost for a company to provide the same level of benefits for an employee with rise at a rate that far exceeds what it would have been without the bill. The same thing will happen with the insurance companies even with their new found base of customers. The administration will then demonize this group and rant about how they can not be trusted. How greedy and uncaring they are and there you have it. Government stepping in to save the day. Single payer system. Enough for one day. Have a good one.

  8. Bob, that's a good forecast. I can't disagree with your logic. I wonder what our other friends think? It seems to me that some of those who supported the legislation hoped that this version would reduce or control costs so that over time firms would be saddled with less cost pressure. Right now the critics don't agree that will happen. Companies you mention and others are already in retrenchment mode. But when the so-called cost reduction parts of healthcare are supposed to kick in, is there any probability that they will work? To me, that's where the discussion should be. How and when will the new bill reduce cost pressure? By how much will costs be impacted? Before the election year is over I hope we hear more about these questions.