(Bloomberg Opinion) -- “Socialism” is no longer a dirty word. In 2016, presidential candidate Bernie Sanders mounted a popular campaign while proudly identifying as a socialist. And in recent years, young people have been responding more positively to the word than their elders:
Nor is this just a case of catchy labels. Huge government programs like single-payer health care and a federal job guarantee are being discussed, and taken seriously, at the national level. In California, an activist movement is advancing the idea that affordable housing can only be created by the government.
Meanwhile, on the right, the idea of major government intervention is also making a comeback. The president of the U.S. is throwing decades of economic orthodoxy out the window, launching a trade war against seemingly every other country, threatening to cut off trade with U.S. allies, and contemplating large-scale subsidies to keep unprofitable businesses running.
This marks a dramatic change. During the 1980s, 1990s and 2000s, most policy ideas called for minor tweaks rather than dramatic interventions, and there seemed to be a consensus that a neoliberal system of free markets and smart, targeted government programs was the way to go. Now, whether it’s because of the aftershocks of the Great Recession, or deep social divisions in Western societies, or the fading of the Cold War from memory, there is once more a thirst for large-scale government rearrangement of the economy.
There are still many who want to resist this trend and preserve the neoliberal approach. But what arguments can they used to make their case? The cautionary tale represented by the Soviet Union, Mao’s China, and other 20th-century communist regimes is nothing but a story in a history book to most millennials. Other mostly unsuccessful interventions like the U.S.’s Smoot-Hawley tariffs, Britain’s post-WWII nationalizations or India’s License Raj are also receding in the rearview mirror. Venezuela is a recent example of a socialist disaster, but it’s a small, distant, resource-dependent country that might not be prominent in young Americans’ minds, and people also may not think Latin America is all that comparable to the U.S.
What’s more, it’s not at all clear that big government intervention is always, or even usually, a bad thing. As Matt Bruenig of the People’s Policy Project has pointed out, Singapore’s government owns 90 percent of the country’s land, yet Singapore is richer per-capita than the U.S. Countries with universal health care systems like Canada and Japan have delivered excellent health outcomes at much lower costs than the U.S.’s hybrid system. China, which still retains some aspects of a command economy, has enjoyed the most remarkable run of economic growth in world history (albeit from a low base). Even in the U.S., Social Security and Medicare -- two very big, transformative interventions -- have made great strides in reducing poverty among the elderly, and remain very popular.
So opponents of big interventions can’t just point at Venezuela and call it a day. Better arguments are needed. Unfortunately, most of the detailed arguments against socialist and protectionist policies are very dated. This is because most of them are based on simple economic theory, which itself is very outmoded at the moment.
Basic economics gives a lot of apparent reasons to support the free market. If you draw a supply-and-demand graph, as every student learns to do in their introductory econ course, you can easily show that interventions like price controls or supply restrictions moves the market away from its efficient equilibrium -- in the model, that is. If you want to get a bit more sophisticated, you can prove the First Welfare Theorem, or the idea that in a highly idealized market, free-market outcomes are efficient.
But what if these theories just don’t apply to the world in which we live? The supply-and-demand theory has struggled to explain why minimum wage hikes haven’t displaced workers from their jobs. And it’s simple to write down a long list of reasons why the First Welfare Theorem doesn’t apply. The real world is a thicket of market failures and conflicting policies that make simple, classic economic theory a weak rebuttal to the dreams of socialists and protectionists.
Does this mean that economists, and economics pundits, are powerless to resist the calls for large government intervention? No -- it just means the arguments have to change. In this highly empirical age, arguments against socialism or protectionism need to be based on data. Instead of dishing out theories to show why state-owned enterprises are inefficient, show evidence that they are. Instead of drawing a graph to show why tariffs are bad, cite some empirical studies. Instead of merely asserting that regulation is harmful, show some examples. Economists can help by doing more of this research -- not just evaluations of current big interventions from around the world, but historical studies of countries like the USSR -- and by publicizing the results.
But relying more on empirics to challenge big ideas also means accepting that some big ideas might really work. Empiricism is a harsh master -- if national health care or government land ownership is an effective policy, then that truth will make itself apparent, no matter how much free-marketers would wish it to be otherwise.
Evidence will help protect society against the failures of big government, but it will also help find the reasons why big government sometimes succeeds.
To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net
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