Maybe We Should Take Socialism Seriously

(Bloomberg Opinion) -- When President Donald Trump’s Council of Economic Advisers released a 55-page report called “The Opportunity Costs of Socialism,” many economists scoffed. But the report is important, because it shows that big, systemic economic issues are again being considered. And it provides an interesting jumping-off point for those important discussions.

Two decades ago, it seemed as if capitalism had decisively won the battle of ideas. The collapse of the Soviet Union and the grinding poverty of Mao’s China and communist Vietnam and North Korea clearly demonstrated that the most extreme versions of socialism were disastrous. But even in non-communist countries, attempts at regulation, nationalization and redistribution suffered big setbacks. The License Raj, a system of heavy-handed business regulations in India, was repealed, and the country’s growth leapt ahead. Privatizations and other market-oriented reforms in the U.K. helped the British economy make up ground it had lost. Sweden made its fiscal system much less progressive, and North European countries deeply reformed their labor market regulations.

But as inequality of income and wealth steadily rise in countries like the U.S., and as populism and political discontent roil nations across the globe, some are beginning to question the consensus that emerged at the end of the Cold War. Polls show an increasing number of young Americans responding favorably to the word “socialism”:

Maybe We Should Take Socialism Seriously

Openly socialist candidates are starting to win a few elections in the U.S., and calls to end capitalism are starting to appear in the mainstream news media with increasing frequency.

The CEA’s new report should be seen in this light. It’s an indication that both socialism’s proponents and its opponents have begun to take the idea seriously again. With the world troubled not just by inequality but also by productivity stagnation and the threat of climate change, it’s time to ask whether there are big systemic improvements that could be made.

The CEA report shows just how long it has been since such a discussion was held. A key explanation of socialism is taken from “Free to Choose,” a 1980 book by Milton and Rose Friedman. The economics profession has shifted decidedly to the left since those days, but most economists now concern themselves with highly specific topics rather than the grand sweep of political-economic systems. The people spending their time thinking about socialism, capitalism and other really big ideas are now more likely to be the writers of Teen Vogue or activists on Twitter. Let’s hope the CEA report will prod more economists, who tend to have more empirical knowledge and theoretical depth, to think bigger.

But although it’s an important conversation starter, the report doesn’t do a good job of comprehensively debunking socialism in all its forms. Some of the examples it invokes are particularly inapplicable to the modern day, and it overlooks much of the evidence in favor of an expanded role for government.

For instance, the report highlights collectivized agriculture as a prominent example of a socialist failure. Collectivized farming is indeed a disastrous policy, failing essentially everywhere it has been tried, and leading to widespread famine and death. But modern-day socialists in Western countries are — wisely — not calling for this. Instead, the industries they want to nationalize are health care and (possibly) finance.

Socialized health insurance exists in many countries — for example, France, Canada, and Japan. The costs and benefits of government health insurance systems don’t have to be assumed — they can be observed. The U.S., with its unique hybrid of public and private insurance, pays much more than other rich countries for the exact same medical services — and achieves similar health outcomes. Meanwhile, the U.S. biggest government health insurance system, Medicare, holds down prices much more effectively than its private counterparts:

Maybe We Should Take Socialism Seriously

So when it comes to health insurance, socialism doesn’t look too bad. Economists have realized for many decades that this might be the case, thanks to the unique information problems, incomplete markets and moral considerations involved in the health-care industry.

The CEA report discusses the idea of government health care, and dismisses it as too costly. Its argument rests on what’s known as a neoclassical growth model, which concludes that high income taxes — which would be required to pay for national health insurance — do a great deal to discourage work. But using this type of model to estimate the effect of taxes has proven misleading in the past — it tends to overstate the negative impact of taxes much more than economists actually observe.

The report is also noteworthy for what it leaves out. Despite liberalization of many economies around the world since the 1970s, public social spending has increased in rich countries:

Maybe We Should Take Socialism Seriously

Across developed and developing countries, there’s a strong correlation between per-capita economic growth and government spending — the richer a country is, the more of its GDP gets spent by government.

This doesn’t mean that government spending is what makes countries get rich. Instead, it suggests that as countries become wealthier, people demand more from their governments — health care, child care, education and other services that improve their lives. The CEA report essentially argues that this increased social spending is counterproductive, and that if rich countries gave it up, they’d be even richer. Such arguments have been made for decades, and developed nations show no sign of giving up their health-care systems. If anything, support for universal health care has been rising in the U.S. as well:

Maybe We Should Take Socialism Seriously

So while the CEA report is helpful in some respects — reopening the debate about socialism, and warning against collective agriculture and communist revolutions — it doesn’t do a great job of rebutting the centerpiece of the modern-day American socialist agenda. Convincing Americans to abandon the idea of government health insurance, and of increased social spending in general, will be an uphill battle for the Trump administration.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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