Socialism as parochial presentism

The left likes to see itself as the bastion of moral circle expansion. Today’s Republican party has been doing everything it can to reaffirm this view. After all, who needs enemies when you have politicians that are passionately in favor of both protectionism and the torture of billions of animals? But long before the right’s derangement, the left was successful at marketing socialism as political altruism - an ideology that “takes care of those who need to be taken care of”. The public perceives the left as advocating for expanding the moral circle by empathizing with the poor, disabled, and immigrants, while libertarians and conservatives appear to demand that society leave them alone.

In our last podcast episode,

Regan Arntz-Gray

and I responded to Freddie DeBoer’s case for socialism, which we think is at least honest, in so far as it acknowledges the progress achieved under capitalism, arguing instead that wealthy countries like the United States should now switch gears. His core thesis is that once a nation becomes prosperous enough in aggregate, they should focus on reducing variance within their society instead of trying to become even more prosperous. The emotional appeal of this argument is something like this - “Cmon, rich people, give up some extra cool stuff you don’t need so poor people can lead a half decent life”.

It’s probably true that wealth has diminishing returns for human welfare (though the evidence on this is not nearly as unambiguous as people on the left make it out to be) at the individual level beyond some arbitrarily high threshold. Unfortunately, this is a red herring. The counterfactual world in which you get to fund all your favorite social programs is one in which you also significantly increase taxes on the middle class (look across the Atlantic), something Freddie acknowledges. It’s not just the middle class (and the rich) that socialism takes from. I’d argue it also takes from two other groups that socialists pretend don’t exist: future people and people in the developing world. Here’s a claim more grounded in reality: Socialism, at its best, is about preferencing the perceived immediate needs of some people living today over other people living today, people in other countries AND over future people.

The Disconnect Between Ideal and Practical Socialism

Socialism in practice differs greatly from its ideal form and what is politically feasible or plausible in the near future. An optimally designed plan to minimize this article's length would likely argue for higher taxes on the rich and middle class, increased cash transfers, and phasing out most existing welfare programs. This approach would be the least distortionary and most cost-effective form of socialism, but it remains a political fantasy in American politics today, for reasons that aren't flattering to the project of socialism itself.

In so far as tax and spending fall within the remit of the state, these decisions cannot realistically be immune from political considerations. Politicians will use it to favor constituencies (and fund programs) that offer the highest political return. To be clear, this is not unique to the left. One is hard pressed to find Republicans today who would favor desperately needed reforms in social security, since perpetuating wealth transfers to rich boomers continues to be in their electoral interest. Once a social program is implemented, mustering political will to roll it back is a herculean task. The interests of the new bureaucracy becomes one more force for perpetuation of the status quo. Only one program from the 1935 Social Security Act has ever been repealed - the Aid to Families with Dependent Children Act repealed in 1996.. 

Spending is often easier to increase than to cut or replace. When one political class benefits from a spending program, politicians may find it simpler to appease another political class by allocating more funds to them as well. This path of least resistance is particularly tempting for a country that prints the world's reserve currency. The can is kicked down the road, seemingly offending no one, until the day arrives when taxes must be raised, more money printed, or debt obligations defaulted on. These blunt instruments ensure that those who lobbied for or received increased spending do not bear the full consequences of their actions. Printing money or raising taxes makes it harder for the middle class to build wealth, while across-the-board tax hikes have the same effect. Defaulting on debt obligations in the future significantly reduces the living standards of future generations and hampers their ability to defend themselves or borrow during emergencies.

Put another way, the political process is an excellent way of externalizing the costs of spending. If you meet a socialist, ask them a simple question: In a system where people can vote to spend money that will most likely be paid for by other people, are they likely to vote to spend just the socially optimal amount of money? Basic game theoretic analysis reveals a fatal flaw in socialism, which is why they despise the whole field of public choice.

Socialism as parochial presentism - Effects on the Middle Class

Freddie concedes that anything we can reasonably call socialism would require more than just looting the rich - tax increases on the largest segment of the population - the middle class. In fact, even the term “middle class” is misleading. If you take a closer look at the tax system of a country like Sweden, you’ll see two glaring differences compared to the United States: first, all income above SEK 598,000 (US$ 55,000) is taxed at the rate of ~52 percent. 15% of Swedes pay this rate. Second, a value added tax of 25% is slapped onto all goods and services with no exemptions. The City Journal of the Manhattan Institute lays out the implications neatly:

America’s income taxes are highly progressive. The top-earning 20 percent of families pay 92 percent of all federal income taxes and 75 percent of total federal taxes. The Internal Revenue Service reports that the typical middle-income American family earning $70,000 pays an effective federal income tax rate of just 2 percent, and a total tax rate of roughly 12 percent when including payroll and state income taxes. Families earning $100,000 pay an average federal income tax rate of 5.5 percent and roughly 18 percent overall.

Nordic nations do not let middle-income families off as easily. A full-time worker earning the U.S. federal minimum wage of $7.25 would pay an astonishing 33.7 percent in income and payroll taxes in Sweden. Tax rates also rise steeply: in Scandinavia, the top income tax rate kicks in at an average 160 percent of each country’s average wage, or roughly the equivalent of $96,000 in the United States. In Sweden, the typical full-time worker earning a national-average income of $49,800 (adjusted in American dollars) would thus pay 17 percent in income tax, plus 24 percent in payroll tax. Incorporating the sales tax and excise duties pushes the effective tax rate to 52 percent. A higher-earning Swede making $100,000 would face an effective tax rate (including sales taxes) of 60 percent.

Income distributions have fat tails so just taxing the rich punitively will get you some of the way, more so in a higher variance distribution like that of the US. But to finance a meaningfully higher level of spending, you have to raise tax rates across almost the entire tax base. As a result, most parts of the distribution have higher disposable income in the US. While Swedes enjoy benefits like free education and higher unemployment benefits, large swaths of the American middle class have more freedom to choose the goods and services they deem important. The trade-off is not pro-poor vs. anti-poor; it is between a state that narrows the distribution and presumes to know what is best for the population and one that taxes mostly the rich to provide a lower level of social safety for the elderly and disabled.

Socialism as parochial presentism - Effects on Innovation and Developing Countries

If you digest this, you should have a strong prior that taxing large swathes of the population heavily will have some detrimental effect on their incentive to work and innovate. Frankly, pointing to Nordic countries being innovative or productive is a lazy throwaway line and does not count as evidence. Nordic countries have lower corporate taxes and a fairly deregulated economy. They also have a relatively homogenous, high-trust society with high quality institutions. Nobody sane is arguing that tax policy and levels of spending are mono causally responsible for productivity. The fact that Nordic countries exists tell us virtually nothing about the potential effects of moving America in a more socialist direction.

Moreover, America should be particular cautious about moving in this direction. Holding the national budget constant, moving towards a more socialist America (higher tax revenue and higher spending as % of GDP) is positive for consumption and negative for savings and investment. Higher tax rates mean businesses and households have less capital to save and invest which is compensated for by higher consumption through government spending. This means lower levels of capital available to finance businesses and innovation, both domestically and globally. In so far as socialism also hampers innovation, we have to price in the effects of this globally. The US is one among the world's seven countries that produce most of the world's innovation, and we don't capture most of these benefits, which accrue to people globally in the form of knowledge spillovers. 

Socialists don’t like to admit that socialism is nationalistic and anti-cosmopolitan by default. It is the idea that resources be forcefully redistributed to people within a country than make it available to people globally that are either happy to pay for them or that are far poorer than people within your country. 

Socialism as parochial presentism - Effects on Future Generations

Socialists have to acknowledge that in so far as socialism is even mildly detrimental to growth rates, it will have an impact on the welfare of future generations. The difference between a 1% growth rate and a 2% growth rate compounded over a 100 years amounts to a difference of 167% in per capita GDP - roughly the relative difference between Germany and Russia. Is it fair for us to decide politically that future people will be fine with the lower end of that range? Freddie offers a clue into how he thinks about the future:

But I will say this: I’ve never met anyone who doesn’t agree with the system of universal abundance in Star Trek, given the conditions in Star Trek. This isn’t a joke: I mean that, if you present people with a society where technological progress is so advanced that abundance for everyone is possible, even the most ardent capitalist will concede that it would be immoral to perpetuate a system that did not allow for the distribution of abundance to everyone. But then, Star Trek is Star Trek. The compelling questions are, what level of abundance is sufficient to prompt this moral imperative, and how do we know when we’vee gotten there?

This Star Trek thought experiment reveals a flawed understanding of economic progress. In a world of abundance, with almost infinite supply at near-zero marginal cost, there would be no need for redistribution. Capitalism has already dramatically reduced the cost of essentials like food, clothing, and painkillers, making them accessible to virtually everyone in the developed world. The Star Trek utopia is only possible if we continue this process for an ever-expanding range of goods and services. Even in such a world, scarcity and problem-solving would persist, prompting calls for redistributing the benefits of progress.

One may argue that for most of us in the Western world, life is already pretty good and that there aren't many more discoveries or improvements to be excited about. This resonates with quite a few people, likely because they primarily think of progress and growth as synonymous with producing more "stuff." Do we really need more buildings or even faster airplanes? Do we really need to be able to buy more furniture? Once again, this is a fundamental misunderstanding of what economic activity entails.

Economics is not about "stuff," it's about value. Value is ascertained by humans based on how some good or service adds to their subjective experience (or that of people they love and care about). This doesn't imply that people always spend in proportion to their inherent preferences. In fact, people may consume lots of "stuff" that is detrimental to their well-being. At the same time, they also consume experiences and services that enhance their subjective experience. Markets are a mechanism to solve problems that people want solved – better entertainment, better baseline well-being, painkillers with fewer side effects, medical procedures that slow down hedonic adaptation, longer lives, and the list goes on.

So the question we should ask people like Freddie is the following: It's likely that in 100 years, we could have a society in which humans experience much less pain, have mental health drugs that actually work, live longer and healthier lives, have access to meat that doesn't involve torturing billions of animals, and have fewer alcoholics or people in need of institutionalization. That will become "normal" for people in that future. Some future Freddie would think it's a travesty that some people in that society don't have those "basics." What will present Freddie tell that future Freddie? That we decided that today's standard of welfare would be enough for them, just because it seemed enough for us?

Conclusion

As you might have noticed, one problem that plagues the debate of socialism vs capitalism is that we can’t conduct randomized experiments.

Bryan Caplan

explains:

Part of the problem is practical: Researchers can’t treat countries like guinea pigs.  There is no way to get a sample of forty poor countries, randomly assign some to laissez-faire and others to socialism, then measure their prosperity gap ten years later.  You can’t even get a sample of two countries to submit to such experimentation.  True, you could call West Germany versus East Germany, North Korea versus South Korea, or mainland China versus Hong Kong “natural experiments on markets versus government.”  But top journals these days will never let you get away with that.  The sample is too small, the randomization too questionable, and the question too big.  Way too big.

The sample size might be small but natural experiments from Korea, Germany and China -two of which control for geography, culture and genetics - all tell the same story; and basic economic theory can explain why markets allocate resources better and lead to more long term prosperity. After partition, the story of India and Pakistan tell a similar story. Pakistan set up a much more pro market system than India (which adopted a centrally planned socialist system) and grew much faster for the first few decades after partition. India only began outpacing Pakistan after it started on the path on liberalization in the 90s. Socialism has also left us with a graveyard of cautionary tales to pick from, even if one is disinclined to draw causal inferences from them. All this leaves us with the following as the only reasonable prior: Markets are better than collectivist policies at allocating resources, creating wealth and improving human welfare.

In fact, we have no reason to think that we are somewhere near the optimal level of markets and capitalism. As

Richard Hanania

explains in one of his recent pieces, these natural experiments tell us that capitalist states have done better than similar socialist states. But since most of these market economies also made concessions in the form of welfare programs and some amount of central planning, we have no reason to believe that the purely capitalist counterfactual wouldn’t produce even more prosperity.

Admittedly, Freddie doesn’t dispute much of this. But he insists that we should now switch gears. He doesn’t give us any particularly compelling reason why now is the best time to do this. It’s only fair that we ask for some evidence, if he’s asking us to turn our prosperity engine around, which is exactly what Russ Roberts did in this conversation with Freddie:

I think the bigger challenge for your worldview, which I want you to defend is -  People that have embraced your view fully… it hasn’t turned out so well historically. The most dramatic small scale examples would be the Kibbutzim in Israel. They still exist and some of them are socialist but most of them weren’t palatable to the people inside.. They got older and they left..The cultures, the societies that have socialism fully have had a major problem with the phenomenon we’re talking about - effort. Cuba, North Korea, Soviet Union have had trouble with effort. How do you respond to that?”

For those who share your views, I would encourage people to do these kind of things at much smaller levels. Still give them the opportunity to vote with their feet…which is what happened in Israel as it evolved into a different society… What do you think of this idea of doing at a smaller scale?

The next time someone comes waving the socialist flag, tell them that before they get to run this experiment with all of us and our collective futures, we need some evidence. What better way to gather evidence than to round up some comrades, buy some cheap land and demonstrate to all of us that the individual is just another dumb construct standing in the way of collective utopia.