America

The Cost of Democratic Socialism


- February 19th, 2019
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A defining feature of the 20th century was the struggle between capitalism and three major types of socialism: Communism, national socialism, and fascism. All three types of socialisms, as well as Cuba and Venezuela today, failed to duplicate the accomplishments of capitalism in raising the standard of living. Yet, a supposed new brand of socialism, “democratic socialism,” is emerging in the United States. Democratic socialism has two objectives consistent with all other types of socialism: the top-down control of resource allocation and the top-down predetermined economic outcome. But democratic socialism also has one institution that is said to set it apart from its predecessors: democratic socialism supports democratic elections.

Unfortunately, the undeniable economic success of capitalism made it unlikely that voters would support democratic socialism at the ballot box on the basis of efficiency. Democratic socialists, the so-called progressives, instead found their rallying cry in income inequalities. They promise the equalization of incomes via a variety of redistributional policies such as extraordinary marginal tax rates on high incomes, government sponsored jobs, weakening of private property rights via regulations, and measures like Alexandria Ocasio-Cortez’s return-to-the-cave proposal, called the “Green New Deal.” (As a footnote: In the Critique of the Gotha Program, Marx and Engels criticized German socialists for advocating income equality).

Redistributional policies call for more administrative programs. Those programs require more bureaucrats and bigger budgets. More bureaucrats and bigger budgets increase the role of government in the economy. More government in the economy increases the transfer of resources from competitive economic markets to political markets. And this transfer of resources to political markets incentivizes people to vote for a living. Clearly, democratic socialists want to throw out the equality of opportunity in favor of the equality of outcome. Electing the progressives must have consequences.

To begin with, the redistribution of incomes in political markets is not one for one. High administrative costs of income transfers and bureaucratic hunger for bigger budgets and larger staffs make the losers lose more income than the winners win. Moreover, redistribution of income in political markets creates behavioral incentives affecting the size of GDP. Let us consider three so-affected groups of high-income earners.

Historically, entrepreneurship has been the backbone of American economic success. Entrepreneurship means the production of a new good, the opening of a new market, the discovery of a new source of supply, or new technologies (e.g., fracking). In capitalism, entrepreneurs appropriate the benefits from successful innovations and bear the risk of failure. The progressives undercut entrepreneurship by taxing “high” earnings while leaving the risk of failure the same. Predictably, entrepreneurs responsible for major contribution to our well-being, such as the founders of the Ford Motor Co., Texas Instruments, Xerox, IBM, Microsoft and Amazon, have not arisen in high taxing states of Europe.

American professional athletes earn multiple millions during their limited working-life span. For most American football players, it is six to eight years. Accepting the risk of serious bodily injury, they earn enough to choose between taking care of their lives after they stop playing or enjoying wine, women, and song while active players. Confiscatory taxes on high incomes would deny football players those choices. Denying them those choices increases the importance of injuries relative to after-tax gains. Some players might continue to play as if nothing happened. Some might try another sport. Some might continue to play but avoid hard-hitting, a major attraction of the game. Undeniably, the football game would change, and so would public interest in American football.

In 1970s, a relatively large group of “boat people” emigrated from Vietnam. They knew nothing about our institutions or culture. They were also seen as competitors by many Americans, especially in commercial fishing. Yet, the boat people ignored problems, worked long hours, saved money, and started their own businesses. Within one generation they became quite wealthy. By 2017, in “white privilege” America, the median household incomes of Asians and non-Hispanic whites was $81,000 and $68,000 respectively. Asians created their wealth with their bare hands. The income-equality seeking progressives want to penalize them for being too successful and to disincentivize their work ethic.

In general, many if not most high-income earners are hardworking individuals. Transferring incomes from those who earned them in economic markets to others via political markets would disincentivize their work efforts and reduce the production of new wealth. So, it is up to American voters to choose between the concept of social justice advocated by democratic socialists and the economic efficiency of American capitalism; that is, between the equality of outcome and the equality of opportunity. Is it worth giving up the benefits of entrepreneurship, the hard-hitting feature of the most popular game in America, and a chance for ethnic groups to enrich themselves through hard work?

Photo Credit: Win McNamee/Getty Images

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