Authored by Veronique de Rugy via The American Institute for Economic Research,
A lot of attention and ink are being poured these days in trying to explain to a generation of voters why socialism always fails. Not only does socialism always fail to deliver the economic goods; it is also a source of massive oppression and pain.
I get why so many are devoting such amounts of energy to this task. First, the likes of Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez and few others have made the notion of socialism acceptable in some circles and even hip. Also, according to a poll from August, for the first time since Gallup has asked the question, more Democrats approve of socialism than of capitalism.
However, if all we do is talk about how Venezuela is a hellhole and Cuba is a terrible place, I fear that we might end up being the modern equivalent of Don Quixote fighting the windmill.
The Cuban Model
There is a ton of work still to do to help younger Americans understand how Venezuela and Cuba ended up being such horrible places (in some cases, we even have to explain that yes, indeed, these are horrible places). Until Venezuela was in the news on a regular basis because of the approach of its people toward starvation, as well as the expropriation and daily tyranny from Chavez-Maduro regime, there were plenty of intellectuals praising the system. And let’s not forget the praises or lack of condemnation for the oppressive regime that is Cuba coming from many world leaders after Fidel Castro finally died.
So yes, there is a lot of work to be done. However, if that’s all we do in response to AOC and Sanders promising Americans that a socialist regime will produce a world where everyone works less, earns more, gets free healthcare and schooling, and receives generous subsidies from the government even when one decides not to work, no one tempted by socialism will listen.
The Swedish Model
That’s because when Sanders and his ilk talk about socialism, they aren’t talking about expropriating property rights, nationalizing all businesses, or eliminating all but one - the state’s - television channel. They aren’t talking about Venezuela or Cuba. Instead, they are talking about Denmark and Sweden.
It is true that Sanders and his people fail apparently don’t to understand that socialism exists on a spectrum. On one side you have the dictatorships, while on the other side you have the social democracies. Both sides of the spectrum use oppression and compulsory taxation to achieve their goals. But the degree to which they do so varies a great deal.
This variation in socialist methods gives rise also to variation in the legitimacy of different degrees of socialism. No one seriously ever thinks of French president Emmanuel Macron as a despot (even though his own people happen to call him tyrannical on a regular basis) in spite of the gigantic size of the French state and the enormous amount of taxes extracted by the regime. One side allows elections, the other side either forbids them or makes a mockery of the concept.
Yet, it is also true that all varieties of socialism fail to achieve their goals for the same reason: all varieties attempt, to one degree or another, to substitute the decisions of government planners for those of private citizens interacting in competitive markets.
And in doing so, all varieties of socialism suffer from the insurmountable knowledge problem, as beautifully demonstrated by the late economist Don Lavoie in his book 1985 book, National Economic Planning: What is Left?
That said, there is still a vast difference between Venezuela and Denmark in term of how much of the economy planners try to control and, as a result, how much of the economy planners destroy. I worry that if we keep talking as if today’s American Democrats envision controls as extensive as exist in Venezuela, those of us who warn of the dangers that lurk in the schemes of Sanders and AOC won’t get through.
The French Model
In addition to this difficulty is the fact that while they claim that they are talking about Nordic countries, what Sanders and AOC actually have in mind is a regime more like that of France. When Sweden and Denmark each had in place a regime closer to what Sanders is talking about, the results were so bad that each of these countries put in place pretty dramatic free-marketreforms. These two countries are by no means libertarian paradises, but thanks large spending cuts and lower taxes, they aren’t the hot mess that they once were.
France is, though, such a mess. That’s because there is one aspect in particular that the AOCs and Sanderses of the world fail to mention to their followers when they talk about their socialist dream: all of the goodies that they believe the American people are entitled to receive in fact come at a great cost -–and so the only way to pay for these goodies is with oppressive and regressive taxes (i.e., taxes heaped on to the backs of the middle class and the poor).
France was once a role model for what big government can do for its people. But it has become an embarrassing example since “The Gilets Jaunes” took to the streets to demonstrate against the insane amount of taxes they pay. These guys aren’t upper class. They are the people who have until now supported the policies that are inevitable when you have the government providing so many services and involved so deeply in so much of the economy.
Talking about taxes, the WSJ had a good summary of the situation:
The Organization for Economic Cooperation and Development (OECD) released its annual Revenue Statistics report this week, and France topped the charts, with a tax take equal to 46.2% of GDP in 2017. That’s more than Denmark (46%), Sweden (44%) and Germany (37.5%), and far more than the OECD average (34.2%) or the U.S. (27.1%, which includes all levels of government).
France doesn’t collect that revenue in the ways you might think. Despite the stereotype of heavy European income taxes on the rich, Paris relies disproportionately on social-insurance, payroll and property taxes. Social taxes account for 37% of French revenue; the OECD average is 26%. Payroll and property taxes contribute 3% and 9%, compared to the OECD averages of 1% and 6%.
As a reminder, the payroll tax is very regressive; it consumes a larger share of low and middle class earners than rich people. In addition:
Then Europe adds a regressive consumption tax, the value-added tax. In France, VAT and other consumption taxes make up 24% of revenue, and that’s on the low side compared to an OECD average of 33%. Consumption taxes often fall hardest on the poor and middle class, who devote a greater proportion of their income to consumption.
To be sure, the spending is also more regressive in France in that the biggest share goes to the middle and low-income earners. But it is a stupid system in which you tax one group to redistribute to that same group.
Add one more increase to an already high (and regressive) gas tax in France to the existing 214 taxes and duties and the people went nuts. They have been protesting continuously since November 17th, 2018. I don’t condone the violence, but I understand why the protestors are so furious.
Regimentation in Labor
Their anger is further fueled by the very rigid labor market. France has all sorts of labor regulations on the books: some preventing firms from firing workers and, hence, creating a disincentive to hire workers in the first place. Other regulations, such as the minimum wage, that make the cost of employing people so high that employers don’t employ people. It is also not surprising that so many fast food restaurants in France have replaced employees with robots.
Like other countries, the French also have all sorts of “generous” family friendly laws that end up backfiring and penalizing female employment. The French government is also very generous to those people who don’t work. All of these policies make the lives of lower and middle-class people harder, unemployment is high (24.5 percent for young French people) and economic growth has been anemic for decades.
The bottom line is this. All those people in America who currently fall for the socialism soup that AOC and Sanders are selling need to realize that if their dream came to pass, they, not the rich – not the bankers and politicians – will be ones suffering the most from the high taxes, high unemployment, and slow growth that go hand in hand with the level of public spending they want.
Everyone would suffer, of course. But those who will be screwed the most are definitely those at the bottom.