The United Socialist States Of America

The United States of America is now a de facto socialist nation.

That may seem like hyperbole, but there’s more than enough evidence to suggest that it’s true. Look at the definition of socialism from that font of all knowledge: Wikipedia:

Socialism refers to a broad set of economic theories of social organization advocating public or state ownership and administration of the means of production and distribution of goods, and a society characterized by equality for all individuals, with a fair or egalitarian method of compensation.

Let’s assume that definition is roughly accurate. Does the U.S. fall under that definition?

Well, we now have a system in which the government has a controlling interest in several major sectors of the U.S. economy. Whether the banking system is officially nationalized or not is largely irrelevant—it has already been de facto nationalized. The U.S. government now has effective control over all of AIGs operations, right up to the the amount that it may pay its workers. At least for a huge swath of the financial sector, the government has effective control.

Now, President Obama has set his sights on the auto industry, essentially firing GM’s president. The fact that the President just ordered an official of a private company to step down should be deeply troubling to all. What if President Bush had demanded that the Democratic president of a major arms manufacturer resign? The left would have been in an uproar. Regardless of Wagoner’s competency, to have the President of the United States order a private company to fire an employee should not happen in our system. The government is now calling the shots at GM. This isn’t forced nationalization, but like AIG, GM and Chrysler are now de facto state-run enterprises.

The government now controls the means of production in two huge swaths of two major industries. Even if we have not arrived at full-scale socialism yet, we are at the very least perilously close.

Economist Arnold Kling calls the current state of affairs “Progressive Socialism“—although it is really another version of state socialism. Socialism doesn’t require the government to own all the means of production (as does Communism), but merely to have effective control over the economy. Right now, the Obama Administration is effectively in the driver’s seat of the U.S. economy. Looking at the markets, it’s quite clear that the aimless direction that Obama is taking us is destroying trillions of dollars of actual value.

The Fall of Capitalism, The End of Freedom

Why should we care? The reason why the advent of American state socialism is such a problem is because political freedom and economic freedom are really two sides to the the same coin. As Janet Daley notes in The Telegraph an attack on capitalism is ultimately an attack on human freedom itself:

When we make the case for capitalism, we are defending the political principle of freedom, not arguing for one kind of rigid economic organisation over another. The debate is being hopelessly muddied by those late converts to free enterprise – politicians like Mr Brown who believe that markets should only survive if they can be made to serve Left-wing purposes.

Capitalism is premised on individual agency. Socialism is premised on the power of the state. The second we give government—which has the legal ability to use force—all of our economic power, what do we really have left? In essence, socialism is really a more “enlightened” form of feudalism in which the serfs trade their freedom for the protection of the elites.

The United State should not fall into the trap of socialism. Socialism is not a workable economic model. The larger and more diverse the nation, the more quickly socialism fails. Industrious and homogenous Sweden can ride out the problems of strong government control longer than could the large and diverse United States. If we continue down this road, our economic collapse will only get worse.

The United States has become a de facto socialist state, and the crisis on Wall Street is a reaction to this untenable and unsustainable trend. If we want to preserve our quality of life, we cannot have our economy being run by the same Washington apparatchiks who have caused this crisis in the first place. Obama’s shift of the U.S. economy to a more centralized and socialized one will lead this country ever closer to disaster.

Socialism 2.0

Former Clinton-era Secretary of Labor Robert Reich argues in the TPMCafe that the bailout culture is “lemon socialism”:

America has embraced Lemon Socialism.

The federal government — that is, you and I and every other taxpayer — has taken ownership of giant home mortgagors Fannie and Freddie, which are by now basket cases. We’ve also put hundreds of millions into Wall Street banks, which are still flowing red ink and seem everyday to be in worse shape. We’ve bailed out the giant insurer AIG, which is failing. We’ve given GM and Chrysler the first installments of what are likely to turn into big bailouts. It’s hard to find anyone who will place a big bet on the future of these two. …

Put it all together and at this rate, the government — that is, taxpayers — will own much of the housing, auto, and financial sectors of the economy, those sectors that are failing fastest.

He’s right. With the Obama Administration seriously considering the nationalization of a large swath of the banking industry, the government is rapidly heading for a new kind of socialism. Call it “socialism 2.0”, in which the government takes failing industries and buys them out in order to artificially prop up a faltering economy. Injecting capital in a frozen market is not a bad idea. Nationalizing failing industries is not. What the Bush Administration did and the Obama Administration is continuing amounts to little more than throwing good money after bad.

US Debt to GDP Chart
US Debt to GDP Chart

Our economic problem is structural. We have too much debt. This chart says it all: America’s level of debt has simply skyrocketed. That is not only personal debt (mortgages, credit cards), that is government debt (Social Security liabilities, Medicare, government bonds). The current strategy has been to prop up that unsustainable level of debt. In the case of President Obama’s “stimulus” package, the effect is to dramatically increase federal debt in the hopes that we can spend our way out of recession.

The short version is that our strategy is to massively increase our debt to solve the problems created by our massive debt. That hardly seems like the most sane strategy.

If the United States were another country (say Argentina) and we were seeking IMF aid, we’d immediately be put on an austerity plan. Government spending would have to be cut to get the level of debt down. Nationalizing industries would be completely out of the question. Inflation would have to be kept in check to ensure that it didn’t spiral out of control.

The IMF has put other countries on such plans before, with the approval of the U.S. government. Now is a time for a taste of our own medicine. As hard is it is for some to imagine cutting government spending in a recession, we’ve made others do exactly that before. A problem caused by an unsustainable level of spending is not going to get better by spending even more. Getting our government under control is crucial to the long-term success of this country.

Reich is ultimately right on his point: we’re trying a half-assed form of socialism that will simply not work. By incentivizing failure at the same time we punish success with high corporate tax rates, the government is sending exactly the wrong signals. What this country needs is a stronger business climate, and that won’t come about unless there’s a shakeup in the business world.

Every dollar that goes to GM is a dollar that props up a failing regime. If we are to have a 21st Century economy, we cannot be in the business of making sure nobody fails. The process of “creative destruction” is crucial to a healthy economy. Socialism 2.0 is unlikely to be any more successful than Socialism 1.0 was—and until policymakers in Washington realize that, our economic problems are likely to only get worse.

Black Monday

The financial services bailout bill just failed to pass the House with a bipartisan rejection

The bailout bill was a turd sandwich, but it was a necessary one to keep the markets from going into an absolute freefall. Which, coincidentally, is what’s going to happen now that the bailout is unlikely to happen.

I can understand the class warfare motives for the rejection, but when companies can’t get the money they need to make payroll, the people who were demanding Congress do nothing will face the consequences.

We are looking at a quadruple-digit drop in the Dow and a major credit contraction./p pHow bad could this get? I get the sinking feeling that we will soon find out.

UPDATE: The Dow plummeted 778 points today, the worst single-day drop in history. Yes, people don’t like the idea of bailing out large corporations. If that’s their position, then they should not be surprised when those large corporations can’t afford to pay them their payrolls.

I don’t much like economic hyperbole, but this time it’s true: we could be staring into the maw of a crippling economic depression. It won’t necessarily be like the Great Depression, but it could be the worse downturn in most of our memories. If Obama gets elected and follows his policy instincts, it will probably get worse.

Oh, You Have GOT To Be Kidding…

The Fed is going to bail out AIG.

Scratch pretty much everything I’ve written—apparently the price of failure is now a nice government bailout. This is a phenomenally bad precedent, even if it saves the markets some short-term pain.

UPDATE: Jim Cramer was pushing for an AIG bailout tonight. If AIG had gone down, would the financial markets have gone down with it? Would the Dow have dropped another 1,000 points? Perhaps.

The problem is that by buying AIG, the damage is still going to be done, it’s just the taxpayers and AIG shareholders who end up holding the bag. Perhaps that’s the best that can happen here, but that doesn’t mean that anyone should like it. The U.S. government should not be in the business of bailing out insolvent corporations. That creates a major problem with moral hazard that can’t be ignored.

What we’ll get out of this (regardless of who wins in November) is more regulation—and not necessarily better regulations. We’re still capitalizing profits and socializing risks, and that’s exactly what got us into this mess.

Saving AIG might have saved the Dow from crashing below 10,000—or it might have set the stage for more problems in the future. Sometimes avoiding short-term pain produces long-term sickness.