Friday, February 5, 2016

Bernie Sanders and the Fraud of Democratic Socialism

Bernie Sanders and the Fraud of Democratic Socialism

With his recent strong showing in the Iowa caucus, Senator Bernie Sanders now deserves to have his policy ideas examined seriously by admirers and critics alike.

Sanders has policy positions on dozens of important issues but two stand out: One, Sanders is a self-described “democratic socialist” and two, he has argued repeatedly that the rich don’t pay their fair share of taxes. Presumably, in a Sanders Administration, there would be more “socialism” and higher taxes on the “rich”.

What is democratic socialism? From my training in economics, socialists believe that free-market capitalism is a failed system and that it should be replaced by government ownership of the means of production. This means that all important decisions concerning the production of output and the direction of investment should be made by the State. The “democracy” part of the definition implies that democratic institutions such as a constitution and elections would be preserved.

Does Bernie Sanders really believe that democratic socialism makes sense? Probably not, for a number of reasons. First, many economists accept that socialism fails in both theory and practice; it is not a coherent economic system. It fails in theory because if all of the “means of production” are nationalized, there would be no intelligent way for government planners to decide which factor combinations are the cheapest or which outputs and investments would tend to maximize consumer welfare. The economy would literally be at sea without a rudder.

To see why this is so, we must understand that under free-market capitalism, prices and profit incentives guide resources into uses that consumers prefer relative to alternatives. But in socialism, where the crucial factors of production (such as capital and land) are owned by the State, there are no meaningful price signals or profit and loss incentives to ensure that scarce resources are used efficiently and not wasted. And this so-called economic calculation problem is not made any easier by arguing that the government would be “democratic” or that it’s intentions are to help the poor.

Second, socialism (or near socialism) in practice has been an economic disaster wherever it’s been seriously tried. Most of the socialist experiments (Cuba, 1960-2016) have ended up confiscating wealth, wasting capital, destroying incentives, and impoverishing the great bulk of the population. And don’t believe for a minute that it’s a lack of democracy that has doomed socialism or the so-called Cuban experiment. No way. It’s the rejection of private property, of the free market price system, and of open competition between business organizations that have made socialism unworkable.

Sanders is NOT a democratic socialist (although why he insists on that label is troubling) but is, instead, a “social democrat.” Social democrats or progressives accept (grudgingly) the basic institutions of capitalism (the price system, stock markets, etc.) but want numerous social programs for the unemployed and poor and want increased regulation of large corporations and banks. Fine, but notice that there is nothing terribly radical about any of those ideas; they have been around for decades. Hillary and Bernie may quibble loudly about health care reform but it’s a debate well within the progressive mainstream of the Democratic party.

The Sanders view that the rich should pay their “fair share” of taxes might inspire a more radical agenda if we just could determine what Bernie means by “fair share.” (I suspect it simply means more taxes.) According to 2013 IRS data, individuals with adjusted gross income (AGI) of $250,000 or more filled just 2.4% of all tax returns yet they paid 48.9 % of all taxes; their average tax rate was 25.6%. By contrast, people with incomes of $50,000 or less paid just 6.2% of all taxes and their average tax rate was just 4.2%. Since the average federal tax rate on the “rich” is already 6 times the average tax rate on the (relatively) poor, one wonders what theory of fairness Bernie Sanders has in mind.