The Thinking Man’s Guide to Bernie’s Socialism

There are good reasons why Bernie Sanders’ version of socialism is catching fire with a segment of the electorate.  One explanation is that Barack Obama’s much ballyhooed healthcare plan (“the big ****in’ deal” as Joe Biden called it) has turned out to be helpful to many fewer people than expected and more costly to many more than believed.  If clever American entitlement engineering doesn’t work, then why not go for the real deal Canadian or British style?  We also might note that while President Obama has not made great strides in terms of socialism, he has certainly put a friendly face on that kind of thinking throughout his two terms in the White House.  His worldview fits more comfortably in that frame than it does in the portrayal of “rugged individualism” that has often inspired Americans.  We used to applaud Horatio Alger’s rags to riches stories, but today the author’s name is mostly a byword for a cruel hoax.

The young, in particular, are interested because they are struggling with a deck that seems to be stacked against them.  Compare Generation X vs. today’s group on education.  My state school tuition was a little over $1000 a year in the late 1980’s.  Their rate is about 10 times that, far more than the typical inflation for other items.  They get out of school with debt.  In addition to their own monetary baggage, they enter into a political community hampered by tremendous leverage of its own assets.  Many states are virtually arrested by their wrong-headed pension deals with state employees (which are full of moral hazard, but that’s another article).  Those obligations grow to unmanageable levels.  And to the extent that the crisis states could have obviated the obligations by prioritizing funding, they instead assumed unreasonable rates of return and increased benefits, thereby worsening the problem.  In addition, the national debt has exploded to approximately $20 trillion.  Social Security is not on a sound footing thanks to regular raiding of the trust fund and a bad funding mechanism.

What are Americans to do?  Bernie Sanders emerges with a seemingly simple answer in the Willie Stark style.  He proposes to take the accumulated cream of American wealth and then to spread it out nice and thin so everybody gets a taste.  He’ll do that with taxes concentrated on the fat cats.  In so doing, he will pay for our underfunded obligations, solve the problem of student debt for higher education, force businesses to pay a wage dictated by politics, and create new entitlements to make life better for everyone.  Attractive though it may seem, there are some serious problems with his answer.

Before I get to the critique of Bernie’s viewpoint, I want to be clear about something.  His socialism is definitely of the half-hearted variety.  Strong socialism would mean government ownership of the means of production.  Britain has some of that and has had more of it in the past.  The state owns the apparatus of health care, for example.  Before Margaret Thatcher, the state also owned industries such as coal production.  To my knowledge, Bernie Sanders does not yearn for the state to own production.  If anything, I think the left has learned that actually owning and running things is a big hassle and entails getting blamed when things are done poorly.  Instead, he simply wants to tax business at a very high rate and tell it what to do whenever the government would like to dictate, such as with wages, labor conditions, maternity/paternity leave, etc.  This model fits with what is often called either democratic socialism or social democracy.

Now, why do I think Bernie’s approach is a bad idea?  There are several problems.  I do not propose to give an exhaustive account, but I will offer a number of cautions.

My first critique relates to democratic socialism’s methodology.  The old socialists had to actually run factories, manage workforces, and deliver goods the public wanted and needed.  Generally speaking, they were not very good at that job.  The variety, quality, accessibility, and desirability of goods they produced was poor.  You need only speak to the clients of those systems to know that.  The social democrats seek to solve that problem by permitting private business, while exerting control over it in an ideological fashion.  We already do this to some degree with our extensive regulatory state.  But Sanders proposes a much higher degree of regulation.  Such a relationship encourages the state to be largely unaccountable.  It is permitted to impose whatever costs it wishes, while simultaneously having essentially no responsibility to actually deliver the goods.  The result is the exertion of power in a wishful and largely infantile fashion.  Give me what I want and you worry about the consequences that follow.

More deeply, I question the easy assumption that the state has a right to act in this fashion.  One of the reasons I am passionate about teaching politics is that I am eager to convince students to think about whether such exercises of power are really legitimate.  Okay, let’s imagine that I have a business located within a society and which produces a product which has value.  What is it about that situation that gives the government the right to place a nearly unlimited potential set of demands upon me?  I look back to the HHS mandate, which has sought to provide contraception to all female employees by simply requiring employers to provide it.  Here’s a novel idea for the state:  why don’t you impose the taxes directly upon the public and then pay for the contraception yourself?

It makes little sense to say that simply because a business operates within a community it should have to meet the many conditions government would seek to impose upon it.  May we demand a business not generate adverse costs for the community, such as pollution?  Absolutely.  But let’s scale back to the individual worker level.  May we insist the enterprise serve a nutritious lunch that follows some version of the dietary pyramid?  No.  Why?  Because employees are adult human beings who do all kinds of things such as make contracts, purchase automobiles, raise children, etc.  They can provide for themselves with the income they make by creating value for their employer.  Certainly, they can figure out their own lunch situation (and contraception habits, too).  The same applies to many other aspects of life.  Would we like to simply dictate that some person or organization with money and resources provide for our needs?  Sure.  But that’s not really a free, adult way of doing things.

In addition to the problem of allowing the government to simply impose the will of a public with potentially bottomless appetites upon the productive sector, there is the issue of taxation.  Ideally, taxation should apply as broadly as possible at as low a rate as possible.  The only time you’d want to tax goods or services differently would be in an attempt to stifle them.  For example, high taxes on smoking tobacco, alcohol, or goods from another country might all be designed to curb our consumption of those things.  If you fail, at least you get the money!  The eager consumers of Bernie’s socialism have it in their minds that they will continue to pay very little, while the fortunes of the dodgy and suspect CEO’s of the world offer an endless bounty that may be tapped to cover all needs.  They’ll drop an extra private jet from the fleet and the rest of us will have health care!  What wise king wouldn’t promote such a deal?

Somehow, the American left has developed the idea that both great progress and a moral statement can be made by placing high taxes on wealthy persons and businesses.  The difficulties with that approach are almost too many to catalog.  But consider a few.  For one thing, there isn’t enough money in the honey pot.  There are some spectacular fortunes out there, but once you start dividing them up by the hundreds of millions and consider the negative impact on incentives, you realize that Margaret Thatcher is correct to say that you eventually run out of other people’s money.

But also take into account that individuals and businesses are mobile.  They can move.  This is why the high tax dreams of so many “progressive” mayors often fail.  The big money moves outside the city limits.  The same can happen with a state or even a nation.  Corporate inversions are turning American companies into Irish ones, for example, with substantial benefit in terms of lower taxation.  What policymakers like Bernie Sanders need to understand is that taxation is a price like any other price.  If people or organizations are not willing to pay it, then they will pay a lower price offered by another provider.  Nations, in reality, are just like states, cities, and even businesses.  They provide value at a certain rate.  If that price is too high, then people and organizations go shopping.  Pay close attention because I have just explained why some countries have to build walls to keep their people in, rather than building them to keep people out.

Take a moment to consider the “moral” victory of a 35% corporate tax.  It seems obvious that we could stop the corporate inversions tomorrow if we were to impose a 25% tax instead of a 35% one.  But somehow there is something morally significant about the 35% rate.  It is as if the businesses are being punished for doing something bad and must not be allowed to escape that punishment.  If the issue were really about helping to pay the bills of the government, it seems one would prefer the rate that will actually bring more revenue instead of encouraging avoidance.  Remember, tax rates are prices.  If you can’t find people willing to pay your price for a product (in this case, government), then you have to control your costs and reduce the price.  Put government services on sale and you might find more takers willing to pay for them.

There is an answer to the problem I have raised.  One might object that companies should be more patriotic (an unusual claim from the left, but still!) and therefore should not shop around for the best deal when it comes to taxation.  There is a further problem in that today’s corporations compete internationally.   If tax policy threatens to make a corporation less competitive than some of its peers, it will either lose business or find a way to adapt.  Corporate inversions are a way to adapt.  Even a company people on the left would consider “enlightened,” such as Apple Computer run by Tim Cook, operates in such a way as to protect its revenue for investment rather than confiscation.  If Bernie Sanders were to win and have his way in policy, he would have to figure out how to confine our companies to the U.S. and then to protect them from international competition.  That’s a pretty tall order and one that is unlikely to have good results.

But what about the Scandinavian countries with their purportedly wonderful experience with socialism?  I think there are a couple of things to say there.  First, the enhanced welfare states of the Nordic countries owe something (as do all of our welfare programs) to an earlier time in which we were demographically blessed.  We had a post WWII abundance of children to sustain a population of elderly that was much smaller.  When the math is on your side and you have a very large young, healthy, and working population, then you can afford to provide more for those who need it.  Unfortunately, if you look at something like social security, we are coming to a place of having two people working for each beneficiary as opposed to a time when you might have more like 10-12 people working for each beneficiary.  Second, and following the first, the Scandinavian countries are no longer pursuing democratic socialism with the vigor they once did.  The reason is simple sustainability and affordability.  Finally, though not conclusively, the Scandinavian countries face the same issue the rest of us do, which is international competition.  The reality is that the old model may have been a demographic blip.  There is a sense in which Bernie Sanders’ view of the Nordic nations may be trapped in an earlier time, which would not be surprising given his age.  I’m 45 and I think music stopped in the late 1980’s.  He may be suffering from the same thing with regard to public policy.

There are other reasons available to combat Bernie Sanders’ brand of social democracy, but I think the ones I have offered help to make the evaluation of it a bit more sober.  The reality is that his policy is more of an anesthesia to ease the pain of modern life as opposed to a tonic designed to improve our prognosis.  What we need to do is to make it easy to do business, easy to work, easy to pay taxes, and easy to collect them.  We also need to figure where it makes sense to have government spend and where it doesn’t.  It’s no accident that things individuals pay for themselves, such as technology and elective medical procedures (like LASIK), continue to get better and cheaper, while those the government subsidizes like education and health care, become incredibly expensive and without the rate of improvement.

Bernie Sanders is right that there is a problem.  If he weren’t, there wouldn’t be so many people listening to him.  But his solutions are outdated and have a mixed track record at best.