What is going on? Is the US moving from capitalism to socialism because of Bernie Sanders and his acolyte Alexandria Ocasio-Cortez? And what about going all the way back to 18th century mercantilism the Trump administration seems to favor?
As I have written in a previous post, the American economic system is anything but pure and unfettered capitalism. It’s a hybrid of capitalism and elements of socialism. That was settled some 80 plus years ago with the New Deal legislation of the FDR administrations. We got Social Security as well as the National Housing Act that made home financing affordable through government sponsored agencies that are still with us. We also got a host of regulatory agencies that regulate trade, commerce, and the capital markets. Nixon added the Environmental Protection Agency, and Johnson bested him with the Medicare, Medicaid and other safety net programs. G. W. Bush expanded Medicare to cover drugs and Obama added the Affordable Care Act. Since the late 1940s the employer-sponsored health insurance has been subsidized by not collecting taxes on that part of labor compensation. Bailing out the Savings and Loan Associations industry in the 1980s and later the whole financial system along with GM and Chrysler in 2008-2009 brought the hybridization of our economic system to even a higher level. And, surprise, surprise, we also have a sort of basic income in the form of the Earned Income Tax Credit to assist lower-income people.
In addition, the government is in the business of producing basic and applied research and supporting numerous research centers. It is thanks to government involvement in space exploration (NASA) that a private industry of rockets and satellites has sprung up. The internet with its transformative innovative extensions was also funded by the government in its nascent stages.
The above programs reflect the pragmatic view that for all its advantages and benefits capitalism needs oversight and assistance from government. Private initiative is not willing or capable to meet all society’s needs and markets can fail or inflict harm without some regulation. Not every American is fully aware of the hybrid nature of our system but overwhelming majorities are happy with these programs, especially Social Security, Medicare and Medicaid. Not only that. We now have a new political reality. Socialism is no longer a dirty word. Although Americans favor capitalism by a wide margin, they are warming up to socialism. An August 2018 Gallup poll showed that 51% of Americans ages 18-29 are positive about socialism vs. 45% who are positive about capitalism. Interestingly, the one thing both Democrats and Republicans associate mostly with socialism is that it promotes fairness (Sept. 2018 Gallup poll).
The fact that Americans understand socialism as a fairness-enhancing system has to do a lot with how capitalism has been abused to benefit the few. Capitalism is quite a flexible system that comes in several versions. Over the past 30 years, the version of capitalism favored by conservative thinking in the US is what I like to call paternalistic capitalism. Democrats call it trickle-down economics whereas Republicans give it a respectable spin by calling it supply-side economics. It can be summed up as follows: A society is made up of job creators and investors on one side and all the rest on the other. Job creators need to have freedom from regulations and labor restrictions (like labor protection laws and unions) and above all pay low taxes. When these conditions are met, the job creators will hire workers, produce and sell a lot of stuff, and even pay good wages. If, under this arrangement, the business/investor class gains disproportionately more is of secondary importance as long as all others also get something. Therefore, the proponents of this arrangement view it to be a win-win solution. Except that it doesn’t work like that. The record shows that absent regulations, workers and consumers are often abused and tax relief to the wealthy and businesses does not necessarily translate into investment in factories and R&D or into higher wages.
The idea that the economic well-being of a society primarily depends on the financial strength and enterprising initiatives of existing and aspiring job creators is just an economic dogma reflecting the political choice and power of one group. It doesn’t even accord with true capitalism. A sustainable economy needs both the demand side and the supply side to operate efficiently. The paternalistic version of capitalism instead espouses that government policies should systematically be geared toward privileging the supply side by all means. Exhibit A of this dogma is the 2017 tax law. With the economy near full employment at that time a tax stimulus was hardly needed. What was sold as a tax reform instead turned out to be a tax bonanza to already very well-off people and to corporations.
The second reason why capitalism is losing the people’s faith is the increasing income and wealth inequality. The success of an economic system is not judged only by its ability to produce wealth but also by its fairness in distributing wealth. Psychological experiments show that humans are not merely content to gain something from some arrangement. They also want to feel they are treated fairly. It is understandable then why Americans feel that the type of capitalism they experience does not work fairly for all and, hence, they perceive socialism to be fairer.
However, as we worry too much about the intrusion of socialism, Mssrs. Navarro, Lighthizer, and Trump are working hard to turn us back to 18th century mercantilism. Mercantilistic policies favored exports and restricted imports in order to produce positive trade balances that augment the gold reserves of the country. France stuck too long to this policy and eventually lost out to England. Likewise, the current administration’s fixation on bilateral trade balances risks ignoring other vital developments that will matter more for the well-being and global standing of the US.
Coming back to the mix of capitalism and socialism, or the roles of private and public sectors, we need to recognize that we face a complex and uncharted future of serious challenges. Technological advancements, Artificial Intelligence, environmental sustainability, climate change, and biotechnology are some of them. We have no idea how efficiently and fairly the private sector can handle these challenges. Our success in navigating these and other challenges will depend on how smartly we use our private and government resources to solve human problems and not on the degree of purity of our economic system.
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