September 11, 2009

Capitalism and Socialism are Opposites, Not “Two Complementary, Good Ideas”

Filed under: Americans for Tax Reform,Health Care,Socialism — Tags: , , , , ,

The following was originally written for Americans for Tax Reform, where I am an intern:

Perhaps the most frustratingly incoherent part of Obama speech Wednesday was his repeated portrayal of the market and government planning as just two possible, non-exhaustive, mutually-reinforcing “solutions” to the current health care “crisis”.

There are those on the left who believe that the only way to fix the system is through a single-payer system like Canada’s — (applause) — where we would severely restrict the private insurance market and have the government provide coverage for everybody.  On the right, there are those who argue that we should end employer-based systems and leave individuals to buy health insurance on their own…. I have to say that there are arguments to be made for both these approaches.

Obama likes to present his plan as a sort of third way between government-run health care and the market, incorporating, as he said, “the best ideas of both parties together”. This is essentially nonsense. Our health care system cannot be made “more free market” and “more government-regulated” simultaneously.

The free market and government planning are exhaustive opposites. Every health care choice is either made freely by consumers selecting their most favored option, or it is chosen for them by government mandates. Under a market system, for example, consumers can either choose to buy health insurance through their employer or on the individual market. In a planned economy, by contrast, the government may order them to buy through their employer.

President Obama leaves little doubt as to which direction he will take our health care system:

Now, even if we provide these affordable options, there may be those — especially the young and the healthy — who still want to take the risk and go without coverage.  There may still be companies that refuse to do right by their workers by giving them coverage.

…

And that’s why under my plan, individuals will be required to carry basic health insurance — just as most states require you to carry auto insurance.  (Applause.)  Likewise — likewise, businesses will be required to either offer their workers health care, or chip in to help cover the cost of their workers.

…

But we can’t have large businesses and individuals who can afford coverage game the system by avoiding responsibility to themselves or their employees.  Improving our health care system only works if everybody does their part.

Obama’s plan, at its heart, requires that consumers be deprived of their free choice, so that the government can micromanage insurance premiums based on arbitrary notions of “just cost distributions”. This is, at its heart, socialism.

said Wallace Forman @ 5:54 PM. Comments (0)

August 22, 2009

No Health Care on Saturday?

Filed under: Americans for Tax Reform,Health Care,Socialism — Tags: , , , , , , , ,

This piece was originally posted on Americans for Tax Reform’s blog, where I am an Associate (intern).

“If you think about it, UPS and FedEx are doing just fine, right? No, they are. It’s the Post Office that’s always having problems.”

- President Obama, 8/11/09

Obama is right – the post office isn’t doing so well.  Recently, Postmaster General John Potter requested that Congress end Saturday mail delivery in order to cut costs. As a rule, government sponsored enterprises (GSEs) fail to operate efficiently. GSEs exist to fill political, rather than market, demands, and they may not offer a product at a price that anyone is really willing to pay. Because politicians will ensure that organizations like the post office continue to function, its directors have limited incentives to cut unnecessary costs or operate at a profit.

So what will happen when the public option realizes, like the post office, that it cannot, metaphorically speaking, pay for health care “every day of the week”? It could imitate the post office and simply shut down on Sunday and perhaps Saturday as well. No consumers would sign up for insurance that only offered a 6/7 chance of providing coverage.

But a plan so bad that no one would purchase it fails to satisfy the arbitrary political demand for substantial government interference in the market. A government determined to have a “viable” public alternative to the private market is left with a few options once their offering fails on its own merits. They can subsidize it openly and have taxpayers pay for “weekend health care”. They can subsidize it implicitly by outsourcing administrative functions to other branches of the government (as the government outsources Medicare funds collection to the IRS). Or it can tilt the market in the public option’s favor by granting it special tax status and immunity from certain types of regulations and by passing laws that require the private market to adopt the public offering’s more expensive methodology.

Or it can do all of the above. As Edward Hudgins explains, the post office is a vivid example of government interference in defense of its sponsored firm. Congress has favored the post office with direct subsidies, tax privileges, and bans against “first-class mail” delivery in inter- and intra-city markets. Despite this generous patronage, the US Postal Service is $6 billion in debt.

Government offerings are a threat precisely because they respond to political, rather than market demand. Like the post office, they can only control costs by rationing. And like the post office, they can only ration after their competition has been regulated away. The government can cut health care on Saturday only after it has cut the rest of the private market. The twin arbitrary political demands of a public option ensure that we will be left with one meager, inefficiently delivered option. Why cater to politicians’ demands instead of actual consumer preferences?

Photo Credit: Davonteee

said Wallace Forman @ 12:02 PM. Comments (0)

August 13, 2009

More Historic uses of the Term “Socialism”

Filed under: Socialism — Tags: , , , , ,

Brian Doherty, in his book Radicals for Capitalism quotes Leonard Read, founder of the Foundation for Economic Education, as saying:

So far as I am concerned, I can see no hopes whatever for [MPS] to become a useful force in the fight for freedom… the philosophies range all the way from middle-of-the-roaders to one who is an out-and-out socialist.

This was, I believe, in 1949, after the first Mont Pelerin Society meeting.  The Mont Pelerin Society was intended to be a classically liberal organization.  It vaguely describes its own mission statement accordingly:

Its sole objective was to facilitate an exchange of ideas between like-minded scholars in the hope of strengthening the principles and practice of a free society and to study the workings, virtues, and defects of market-oriented economic systems.

Given the organization’s purpose, it is unlikely that any of the original MPS attendees were “socialist” in the sense that they supported complete government control of the means of production for the purpose of equalization of income.  More likely they merely supported, as Mises complained, government controlled redistribution and Hayekian programs to guarantee a “minimum standard of living”.

If so, this is more anecdotal evidence for what I assert is a more commonly used alternative definition of “socialism” – generally, programs of mandatory redistribution run by the government.

said Wallace Forman @ 12:33 PM. Comments (0)

July 26, 2009

Hayek Defines Socialism

Filed under: Socialism — Tags: , , , ,

From Hayek’s preface to the 1976 edition of The Road to Serfdom:

During the interval of time [since he had published the book in 1944] terminology has changed and for this reason what I say in the book may be misunderstood.  At the time I wrote, socialism meant unambiguously the nationalization of the means of production and the central economic planning which this made possible and necessary….  Socialism has come to mean chiefly the extensive redistribution of incomes through taxation and the institutions of the welfare state. In the latter kind of socialism the effects I discuss in this book are brought about more slowly, indirectly, and imperfectly.  I believe that the ultimate outcome tends to be very much the same….

Color me skeptical that the definition had simply “changed” in the 22 years – or in a mere 4 years, if Mises was indeed using it in the looser sense as early as 1948.  More likely, as Hayek drifted from more economic subjects (Brian Doherty pegs this at 1941 with the publicaion of The Pure Theory of Capital) to more liberal topics (The Road to Serfdom in 1944 and The Constitution of Liberty in 1960) he found himself engaging with a different group of people who used the term in a different way.

said Wallace Forman @ 12:48 PM. Comments (0)

July 25, 2009

Is Socialism Best Defined Down?

Filed under: Socialism — Tags: , , , , , ,

I’ve previously argued that the term “socialist” should not be slavishly confined to its dictionary definition (common ownership of the means of production to achieve more equally distributed wealth).  Conservatives and classical liberals use it casually to describe redistributivist philosophies.  Today, I stumbled on a story about Ludwig von Mises that I think underlines my point.   From a Reason interview of Milton Friedman:

Reason: But you knew Mises personally. Did you see the intolerance that you find in his method also in his personal behavior?

Friedman: No question. The story I remember best happened at the initial Mont Pelerin meeting when he got up and said, “You’re all a bunch of socialists.” We were discussing the distribution of income, and whether you should have progressive income taxes. Some of the people there were expressing the view that there could be a justification for it.

I’ve been reading about Mises in Brian Doherty’s Radicals for Capitalism.  A leading economist of the Austrian school, Mises famously argued in his book Socialism that socialism faced intractable difficulties.  Mises snorts at sloppy labeling in one of the prefaces to Socialism.

My own definition of Socialism, as a policy which aims at constructing a society in which the means of production are socialized, is in agreement with all that scientists have written on the subject. I submit that one must be historically blind not to see that this and nothing else is what has stood for Socialism for the past hundred years, and that it is in this sense that the great socialist movement was and is socialistic. But why quarrel over the wording of it! If anyone likes to call a social ideal which retains private ownership in the means of production socialistic, why, let him! A man may call a cat a dog and the sun the moon if it pleases him. But such a reversal of the usual terminology, which everyone understands, does no good and only creates misunderstandings.

Assuming Friedman’s recollection was accurate, why did Mises (in circa 1948?) commit the error he criticized in 1932?  I think Socialism may partly answer the question itself.   A commonly owned system of production, Mises explained in the book, faces crippling knowledge problems.  All decisions on what to produce must be made by central (governmental) planners.  But planners have no way of knowing the best way to use any given set of inputs.  Because of dispersed knowledge about production, there is no guarantee that it will pick an efficient manufacturing scheme.  And because tastes vary, there is no objectively identifiable target basket of goods to aim for.  Without access to inherently subjective consumer preferences, planners cannot meaningfully choose between apples and oranges, much less between guns and butter.  In order to gain access to this knowledge, we need markets and private property.  Consumers reveal their true preference – in a way no census could capture – by the very actions of buying and selling on the market.

Many view the collapse of the Soviet Union as evidence that Mises was correct.  But, as Brian Doherty explains, this may miss the point:

To Mises, the so-called socialist economies never achieved a true functioning socialism, which was not possible to begin with.  The Soviet Union and other communist countries suffered from a particularly virulent form of interventionist state capitalism larded with hampered merkets.

If pure socialism is truly “impossible”, then to reserve the word for complete instances of its academic sense is to kill it.  Progressives who realize how toxic the term has become would no doubt be comfortable with this.  But conservatives and classical liberals use it in another commonly understood way outside of the university.  As with Mises at the Mont Pelerin meeting, the word describes redistributivist policies that aim at better equalizing income.  Pedantically discarding this more common meaning, which everyone uses, does no good and only confines our rhetorical lexicon.

said Wallace Forman @ 6:36 PM. Comments (2)

February 6, 2009

The Quick Lurch Toward Socialism

Filed under: Socialism — Tags: , , , , ,

Conservatives have been criticized for unfairly imputing socialist sympathies or policies to President Obama, but our new president has now demonstrated that he is more than ready to embrace at least symbolic socialist policies.  President Obama recently signed into law executive pay-limits for financial companies receiving future TARP loans in reaction to “shameful” bonuses received on Wall Street.  The government may soon set wages for those at the top – perhaps for those at the bottom tomorrow?

In case you were wondering what the new, hopeful, changed socialism would look like, well now you know.  It is a political Frankenstein -  just like the old socialism.   The President, shackled to an unpopular and embarrassing stimulus plan, tries to divert attention with banal demagoguery against greedy executives.  Claiming that $18.4 Billion in bonuses represents an “unacceptable” figure (How does he figure this?  What amount of bonuses would be economically efficient?), the administration has decided that it will cap the salaries (Does this even relate to bonuses?) for executives of future companies accepting bridge loans at $500,000.

They have pulled from thin air a meaningless number.  Government has no way of determining what efficient or “appropriate” wages for these critical positions are.  Nor do Treasury officials seem to be making any claim to have done so.  But the administration does know what is good for its own health: running heedlessly ahead of populist furor in order to secure a percentage point or two more in the next opinion poll.  We should fear our government’s willingness to impose aimlessly punitive numbers on the private sector and, moreover, how quickly it has done so.

Fortunately, this socialism is still only symbolic.  It is unclear if the price ceiling rules affect any companies at this point, or if they ever will.  Perhaps we will be lucky, and the measure will defeat itself by simply driving companies out of the bailout queue.  But the line between the public and private seems less of a barrier each day, and President Obama’s stimulus plan will soon give the economy a very real, trillion-dollar shove toward – and perhaps across - that line.

said Wallace Forman @ 8:05 AM. Comments (0)

October 21, 2008

Obama’s Redistributive Healthcare Plan

Filed under: Health Care — Tags: , , ,

It’s already clear that Obama’s tax plan is redistributive.  How about his healthcare plan? 

What is the Obama platform on this issue?  You can read what his campaign website describes as the full plan here.

The platform promises to do a lot of different things.  I have no particular expertise in healthcare policy, so I won’t attempt to comment on all of them.  I just want to point out two general ways in which Obama’s plan makes America’s healthcare significantly more redistributive, or, as we are saying nowadays, “socialist“.

First, Obama openly promises to expand government-subsidized and government-provided healthcare.  In point 6 of the second section of his plan, he promises to expand SCHIP and Medicaid.  These are unambiguously redistributive welfare programs that provide healthcare funds to low income individuals (Medicaid) or low and middle-income children (SCHIP).  In point 4 of the first section of his plan, he promises to subsidize the costs of catastrophic illness.  Because the costs of catastrophic illness are evenly distributed (let’s imagine) among the various income brackets, but the funds come disproportionately from the higher income brackets (because of income taxation), government catastrophic coverage will certainly redistribute and might fairly be called socialism.

Second, Obama’s creation of government insurance that covers pre-existing conditions creates a massive loophole and accomplishes an underhanded establishment of universal (socialist) healthcare.  How does it do this?  In three steps:

  • The plan assumes the creation of a new public healthcare policy.  I can’t find an actual explanation of the new public insurance policy that will be offered anywhere in the Obama healthcare platform (perhaps the document is intentionally vague?), but numerous sections assume it, perhaps most importantly, point 2 of the second section:

    Through the Exchange, any American will have the opportunity to
    enroll in the new public plan or an approved private plan…

  • The Obama platform requires private insurers to provide coverage to pre-existing conditions in point 1 of the second section. Because the platform does not explain the new public plan, it is unclear whether it will also cover pre-existing conditions.  It seems a fair assumption that it would; it is unlikely that Obama would offer a public plan that was less comprehensive than private plans could legally be.
  • The plan would almost certainly be government-subsidized.  Subscribers to the public plan would not be paying as much in premiums, altogether, as they would be receiving from it in insurance payments. Again, Obama does not describe the plan explicitly, so it is impossible to be sure, but on at least two occasions he describes the plan in such a way as to suggest it will be subsidized (though the words subsidy and subsidize never appear in the platform).  The new public policy would be funded by fines of certain businesses:

    The Obama-Biden plan provides new affordable health insurance options by… requiring all large employers to contribute towards health coverage for their employees or towards the cost of the public plan…

    And the new plan is referred to as a “federally supported” one and grouped together with Medicare and Medicaid:

    …federally supported health plans, including Medicare, Medicaid,
    SCHIP and the new public plan…

    In any event, the mere supposition that the public plan would be “affordable” would demand that there be some sort of subsidy, as I discuss below.

So how do these three steps create de facto universalized healthcare?  By creating a free rider problem and patching it over with subsidies.

By covering pre-existing conditions, the public plan removes most of the incentive Americans have to actually buy health insurance.  If you can sign up for public insurance once you get sick, you have little reason to sign up while still healthy.  Rather, you have a strong disincentive, because you would have to pay a monthly insurance premium, a premium that buys you nothing that you couldn’t sign up for later.

If people approached the system (economically) rationally, they would not sign up unless they were sick.  If all the policy holders were sick, the average cost to the insurer (the United States) would become very high because there would be no healthy policy holders to help pay the bills of the unhealthy.  The insurer (the United States) could get money to pay these costs in two different ways.  It could get it from the policy holders (a premium), or it could get it from the citizens of the United States (a tax).

Barack Obama’s goal in setting up the public plan seems to be to offer an “affordable alternative” to private healthcare plans – or at least, sentiments about the unaffordability of the private system litter his proposal, and it is a fair inference that he means his own plan to be cheaper.

Thus, Obama is precluded from raising the funds for healthcare through premiums.  Premiums for a policy held only by sick people must be higher than premiums for a policy held by a mix of healthy and sick people.  His public plan will have to be supported by a massive subsidy – and a subsidy implies a tax.

A plan with these characteristics becomes de facto univeral healthcare.  You don’t have to pay for it (or you pay very little, i.e. only when sick – but one could think of this as almost a high deductible), it is funded by taxpayer money, and it is available to all citizens.  Because the taxpayer money will likely come from the payroll tax, there will necessarily be a redistribution of wealth from rich to poor.  True, it’s a messy system, and leaves open plenty of ways for irrational actors to punish themselves if they don’t understand how to game the system (i.e. if they are responsible and buy healthcare while healthy), but it is nonetheless universal.

I’m unsure whether or not Obama realizes the significance of the free rider problem in this plan.  My guess is that he is aware.  He probably views it as a politically feasible way of tacitly enacting a universal system.  I oppose universalized healthcare in any case, but it is particularly to Obama’s discredit that he would surreptitiously advance it through a misunderstood free rider problem.

UPDATE: As a final note, consider that Obama’s healthcare plan would do much to socialize insurance in the academic sense of the word.  It is unclear whether private insurance carriers will be able to compete with the public plan.  We can take as given that the public plan will be as cheap or cheaper than current insurance plans (given Obama’s stated intention of providing an “affordable” alternative).  Surely private insurers won’t have access to the same subsidies as the government, so they won’t be able to compete in pricing.  At the same time, their costs will be driven up by the loss of healthy customers – their break-even premium will be higher than in today’s market, while Obama promises insurance with a cheaper premium.  It is more than feasible that ObamaCare would drive a large part of the insurance industry out of the market, leaving it firmly in the government’s hands.

UPDATE II:  Oops.  I originally misidentified the economic problem as moral hazard, when it is actually a free rider problem.  This doesn’t change the analysis, just the terminology.  Moral hazard is a different, more traditional problem caused by insurance.

Also, I have more about Obama’s healthcare plan here.

said Wallace Forman @ 3:48 PM. Comments (0)

October 20, 2008

What does Socialism Mean?

Filed under: Socialism — Tags: ,

Well let’s check at www.dictionary.com.

The first few definitions run something like this (from the Random House definition):

1. a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.

My sense is that this definition is used often in economic or academic circles, in which socialism is the antonym of capitalism, the privatized or free-market controlled means of production and distribution.  This is the definition that Ilya Somin uses when he talks about socialism on the Volokh Conspiracy.

But this doesn’t seem to be the sense in which some conservatives today use the term.

Here’s another definition from dictionary.com (Webster’s):

A theory or system of social reform which contemplates a complete reconstruction of society, with a more just and equitable distribution of property and labor

The words “just” and “equitable” are certainly contentious, but the definition at least captures the sentiment that socialism isn’t just concerned with who controls industry. Control of industry is a means to the ends of creating an “equitable” distribution of goods, more even than would exist in the free market.

Since socialism as state control of resources, as Ilya Somin notes above, has become a largely discredited method of achieving class equity, the significance of the proper definition has diminished. Outside academia, the word socialism lost its unuseful connotations of state control, but retained its association with class redistribution of wealth.

It seems to me that in modern usage, the word socialism is meant to describe government policies that distribute resources and wealth from richer to poorer people as a matter of distributive justice.  In the United States, the word is used this way by conservatives, especially, who intend a pejorative connotation.  Again from Webster’s:

The general tendency is to regard as socialistic any interference undertaken by society on behalf of the poor

This is fine.  Language is a constantly shifting thing, and words have always adopted their meaning from societal consensus, not their definitions in archaic texts by centuries-dead German revolutionaries.  It is useful to have a word that specifies policies that fight class inequality as an injustice in of itself, or that redistribute income and goods out of convictions about class justice.  No other word usefully fills this spot – redistributionism is too technical, liberalism and progressivism too vague and all-encompassing.

And in any event, the distinction between a government which controls industry directly, and one that effectually controls all wealth in society, to distribute as it wills, is a thin one indeed.

So, let’s call it socialism, because we already do.

Why am I posting this?  Well, I’m going to be calling Obama a socialist.  I just want to be clear that I prefer the term in its commonly-understood definition, even when its academic one is also appropriate.

said Wallace Forman @ 11:37 AM. Comments (0)