Reflections on Socialism

September 14, 2009

The two areas of the Obama agenda being watched most closely by markets are health care and financial sector regulatory reform.  Each of these proposed initiatives has met considerable popular and congressional  inertia and outright resistance.  Along with explosive growth in the federal deficit, the two debates were emotionally charged with accusations that Obama is taking the nation down the primrose path to socialism.  Once that epithet entered the lexicon, serious legislative give-and-take was in trouble.

America’s founding fathers understood that Britain’s monarchial rule had to be replaced with some form of government. An anarchic vacuum wouldn’t do.  The 1777 Articles of Confederation and Perpetual Union proved unworkably weak, so a need to forge a stronger “and more perfect” federal union gave birth to a second constitution in 1787, which even before explaining how government would be organized and what different components of the government are allowed or forbidden to do, stipulates that government has responsibilities for promoting the general welfare as well as providing for the common defense.  The complaint of socialism interestingly is never hurled at Washington when the nation considers going to war or when it fights crime.

Free enterprise cannot function without enforceable rules of law and agreed-upon procedures for modifying those guidelines.  But as every student of economics learns, that is not a sufficient function for the public sector in a capitalist society.  Some activities produce costs that are not shouldered by the producer, and some services can be enjoyed whether or not one pays for them.  To promote the general welfare, the government at times has to take on participatory functions and not strictly be an arbiter of disputes.

The Bush43 and Obama administrations reacted to the seizure of financial markets much more aggressively than the initial counter-attack against the Great Depression.  We do not know how this business cycle will unfold ultimately, but the story has thus far not paralleled 1929-1932, even though the financial market breakdown was more serious this time.  Yes, budget deficits have soared in the United States and elsewhere, but they would be even larger if governments had stayed on the sideline and watched free-falling downward spiral of economic activity accelerate.  Whether one labels the aggressive stimulus socialist misses the point.  The results look desirable and thankfully so.

The burden of proof in the debate over health care ought to be on those who would resist a change to include a public option or something comparable.  The problem is not just that health care costs have soared, it’s that the results of spending ever-more national resources on health care is not improving the level of care in a comparable way.  People in thirty-six other nations have a higher life expectancy than Americans.  Forty nations have a lower rate of infant mortality.  Yet the United States devotes far more of its GDP to this particular sector than other countries, a share that has more than doubled since Nixon became president and which will be almost one-fifth by 2017 on present trends.  What differentiates health care in the United States from the service in other countries is not so much the time delay for an appointment or how long one sits in a waiting room, but rather the disconnection between the cost of a patient’s care and the out-of-pocket expense for the patient.  Healthcare has been modified since the 1970’s but always in ways that left this key characteristic intact.  And until the disconnection is modified, health care will comprise an ever-expanding share of GDP, soon over 20% and beyond a third later this century.  The system will collapse under its own weight before reaching 50%, but the higher it goes before circumstances force politicians to act, the greater and more irreparable will be the damage to the economy’s health.

A parallel in the delayed response to health care and global warming highlights a shortcoming of democracy.  An aggressive response in each case needs to be made before a majority of the population experiences a problem in their lives, but decision-making is governed by the will of the majority and inevitably will arrive later than the optimal solution and perhaps too late to avert catastrophic consequences.

With the benefit of hindsight, the growth of financial services since the early 1980’s was significantly excessive.  The sector’s expansion and the profits of the industry far outpaced total activity norms in the U.S. economy and was promoted by deregulation.  Banking serves an intermediary purpose for the rest of the economy, allocating financial risk between savers and investors.  The razzmatazz products and computer-generated trading schemes purportedly were going to reduce risk to anybody in a substantial way.  Deep business downturns were thought to be much less likely.  Capital was said to be flowing more efficiently and effectively.  In fact, a series of financial crises, bursting bubbles if you will, occurred over the past 25 years, culminating in the Great Recession and a hangover laden with a more concentrated industry than ever.  Too big to fail has entered the popular lexicon.  And yet, one year after the bankruptcy of Lehman Brothers sent the crisis into a high state of intensification, the momentum for financial market regulatory reform is considerably weaker than such was last winter.

The socialism label again prevents an honest debate.  Reform imposed by government is perceived as bureaucratic interference by another name and therefore intrinsically bad.  Never mind that the existing system failed to police its own abuses, triggering a severe and synchronized global downturn that stabilized sooner than feared only because of the substantial policy stimulus offered by most governments.  Never mind that the existing system is very different from what existed in the 1980’s because of successful industry lobbying that dismantled many previous safeguards.

The corollary to “if it ain’t broke, don’t fix it” is that it’s insane to do the same thing repeatedly and to expect different outcomes.  Allowing health care and the financial systems to evolve endogenously despite a demonstrated tendency not to improve when that happens risks producing a more severe economic accident in the future than what transpired after mid-2007.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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