Does Anyone Really Know What Socialism Is? (Ep. 408) - Freakonomics Freakonomics
"SACHS: There are two concepts that I think should be distinguished at the start of any sensible discussion. One is the concept of a mixed economy, which means that an economy has a market system, including private ownership and trade, market functions, and supply and demand. But it also has government — government that may run the schools or may provide for healthcare or the police and the fire department and so on. That’s a mixed economy.A socialist economy, in the traditional usage of economics and in political history — though it’s a term that has been used for all sorts of things — generally means an economy organized around social ownership, which might mean state ownership, or it could mean a cooperative ownership, or in some views it has meant worker ownership, or in other interpretations, citizens’ ownership. But the idea is that it’s some kind of social ownership of the means of production.
DUBNER: When you talk about, let’s say, a Nordic economy — Norway, let’s just pick as a socialist democracy, what component of that economy is socialist?
SACHS: Well, the Nordic economies are not socialist democracies. They call themselves social democracies. That’s a very big difference. They do not call themselves socialist, in general, because most of the production, most of the businesses in the economy, are private, corporate ownership. But what they do, which is quite different from the United States, is that they collect far more in total tax revenues, and then use those additional revenues to provide far more public services than the United States provides...
And where in the U.S. would Sachs like to see more government?
SACHS: So top of the list would be Medicare for All or a single-payer health system. And I would say to somebody who said that “that’s socialistic,” that that is exactly what was said about Medicare, and why Medicare was so strenuously opposed...
If you’d like a prime example of the confusion around the word “socialism,” here’s one for you: Sachs says that even Bernie Sanders is using it wrong...
SACHS: What Bernie Sanders is talking about is social democracy that is what we see in operation, not only in the Nordic countries incidentally but in Germany, in the Netherlands, in most of Western Europe... the term “socialist” is used often as a pejorative for a mixed economy with more government than the U.S. has. In other words, if Bernie Sanders says, “We need Medicare for All,” Trump’s answer is, “That’s socialism like Venezuela.”
DUBNER: So, since we’re on the nomenclature, what do you call Venezuela?
SACHS: Oh, a typical Latin American populist mess, which I’ve seen for many decades and have been involved many times in trying to help clean up...
The U.S. has most people paying relatively low taxes, which leaves less money available for the more generous programs that many Democrats would like to see. Which is why Bernie Sanders and Elizabeth Warren and others have been calling for raising much more tax money, but primarily from the very wealthy. In Norway, the tax burden is more equally shared. And then those taxes are aggressively reallocated.
SALVANES: Since you’re reallocating taxes, you also need to trust that it’s being used for something useful. So I think that to create institutions that are trustworthy is probably the most important thing. So in a Nordic country, trust is extremely high...
Economists tend to have mixed feelings about unions, pointing out their inefficiencies and inflexibilities. James Robinson, who has spent decades researching why certain states and societies prosper, has come to a more nuanced understanding.
ROBINSON: You can’t think of unions just from an economic point of view. Unions have all sorts of political consequences in society that may be even more important. U.S. companies use their market power to repress wages, you know? Unions can play a powerful role in pushing back against that. An economist might say, “Well, we should be using fiscal instruments — taxes, transfers — to redistribute.” But that means that the state has to be very involved in that process.So what happens if you’re in a society where the social contract doesn’t really allow that? Well, then you have to use other instruments. And I think the Scandinavians were clever — by equalizing the pre-tax distribution of income, you know, the state actually had to do a lot less. That could be very politically important, especially in a place like the U.S., where people are antagonistic towards the government doing more...
SALVANES: So in many countries, including the U.S. and the U.K. especially, you have seen an increase in inequality. If you go back to the 1930s, you will see that the income inequality in Norway was as high as in the U.S. today. Norway today is half of that. Income inequality decreased, but also social mobility increased. If you look at the cohort born in the early 30s, you see that income mobility was as low as in the U.S. today. Your parents meant a lot for your own income or your position and over 10, 15 birth cohorts, this completely changed. So it was a very fast development.
In his research, Salvanes has found that in Norway, parents’ income has almost no effect on their children’s income — a remarkable fact, and uncommon in most places around the world. But that doesn’t mean the Norwegian economic model is flawless. One disturbing trend, tied to the oil industry, is a diminished demand for education...
Another problem Norway faces — and this what a lot of Americans are afraid of when you start talking about “socialism” or even “social democracies” — is that strong universal benefits, including generous unemployment payments, can diminish the incentive to work hard.
SALVANES: The government in the new budget said that we are going to cut back on some of the support, especially for young people. Because it turned out that young people in their 20s on support, they were sort of paid better than people at the same age working. So that is a big concern...
ROBINSON: After the financial crisis in the United States, there was a lot of discussion of, “Oh, the U.S. has the wrong model. The U.S. should just be like Sweden. Look at Sweden. There should be more redistribution.” We pointed out that’s a sort of fallacy in economic theory... It’s a much more cutthroat society. Why? Why is it like that? Well, because that creates enormous incentives to innovate and people are just very ambitious and entrepreneurial and there’s much less social insurance and the stakes are very high. And that doesn’t just benefit the U.S. It also benefits Sweden, because all of that technology and innovation spills over to everybody in the world. You create ideas. Those ideas spread everywhere. So in some sense, the Swedes can have this very harmonious redistributive society because they’re free-riding off the cutthroat society. So the U.S. is kind of stuck there, because if you actually went to a model with more redistribution, then the whole world rate of economic growth would slow down...
The economist Casey Mulligan, also of the University of Chicago, recently did a very rough analysis of the economic impact of Bernie Sanders’s agenda if it were implemented exactly as Sanders has claimed during his campaign — an assumption that Mulligan says makes this more of an “academic exercise” and “not a very good forecast.” Still, Mulligan’s analysis considered Sanders’s proposals for universal healthcare, “free public college, free childcare … a full transformation of the energy sector” and more. Mulligan’s verdict? “Senator Sanders’ agenda … would reduce real G.D.P. and consumption by 24 percent. Real wages would fall more than 50 percent after taxes. Employment and hours would fall 16 percent combined. There would be less total healthcare, less childcare, less energy available to households, and less value added in the university sector. The stock market would likely fall more than 50 percent.”
Jeffrey Sachs didn't get the memo that US sanctions - even on under 30 officials - are the reason why Venezuela is so messed up