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The end of Socialism but not the end of Social Welfare

di - 3 Dicembre 2012
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Socialism – public ownership of all (or most) productive assets – failed whenever it was tried. Only two avowed socialist states remain – Cuba and North Korea. Cuba is dragging itself slowly toward some private ownership. Literally no one admires North Korea.
For reasons that Freidrich Hayek and some other founders of this society understood well, most socialist states were authoritarian and non-democratic. India and Britain are obvious exceptions.
Both tried so-called democratic socialism. Both eventually increased free market arrangements.
Growth rose and poverty declined markedly.
Only capitalism achieves growth in living standards and personal freedom. Freedom depends on ownership of physical and human capital because capital permits people to become one’s own boss.
But freedom and capitalist development require the rule of law. Rule of law mandates that all citizens are equal before the law and to the extent possible all are treated the same.
Hayek claimed that the rule of law contributed greatly to the success of British and U.S. capitalism.
Socialist countries rarely observe the rule of law. They work to apply someone’s idea of a utopian society. What they believe is good and right replaces the rule of law with decrees that allegedly achieves conformity to the socialist ideal.
In contrast, capitalism adapts to many different cultures. Capitalism in Japan differs from capitalism in Western Europe, as these differ from U.S. capitalism or state capitalism in China and elsewhere. In free societies, people choose the rules under which they choose to live. In socialist societies, rulers impose their utopian vision.
The postwar years began with a widely shared belief that socialism would be the arrangement chosen in most countries. Even Joseph Schumpeter drew that conclusion. The founders of the Mont Pelerin Society dissented. They were a small minority, but they understood that freedom was valuable to people in a way that rigid socialist orthodoxies never could duplicate. And they understood that free men and women could achieve sustained growth. The attraction socialism once had weakened as the Soviet Union failed to achieve either growth or freedom. With the decision by authoritarian China and domestic India to expand private ownership and adopt liberalizing measures, all but a few, small countries abandoned socialist orthodoxy.
This defeat or rejection of socialism should not be misunderstood. One of the main appeals of socialism was its advocacy of an egalitarian distribution of wealth, income and influence. Hostility toward capitalism always highlights inequality and recessions or business cycles. As many could see, and a few like Djilas wrote, socialism did not eliminate income differences. It transferred power influence and high income to a “new class.” And to the extent that measures of income inequality showed less dispersion, the price paid in income levels and freedom was high. People in East Germany, North Korea, and China compared their fate to residents of West Germany, South Korea, and the Chinese Diaspora including Hong Kong, Singapore, and Taiwan. The famous German wall restricted emigration not immigration. No one chose to move east.
Political pressure for redistribution remained. The social democratic welfare state offered grants and subsidies that redistributed wealth and income and increased the reported unemployment rate. After climbing to within 80 percent of the per capita income in the United States, on average, Germany, France and Italy began to pay some costs of the welfare state. From 1980 to 2005, these countries averaged one percent slower growth than the U.S. After 25 years, a gap of 25 percent was almost entered explained by lower employment rates.
No country, democratic or authoritarian, accepts the distribution of income ground out by the market. All modify the market outcome, most of them by taxing and transferring from high incomes to low. The politics of the social democratic, welfare states can only reduce transfers and costly redistribution in a crisis.
You may be wondering how this introduction to the failed policies for recovery in the EU and the U.S. I contend that failure reflects the dominant influence of social welfare redistribution over recoveries. In the United States, President Obama’s principal economic adviser, Lawrence Summers, said in 2009 that policy actions should be “timely, targeted, and temporary.” The so-called stimulus policies that the U.S. adopted gave temporary relief to public employees, teachers and police and subsidized investment in solar power, batteries, electric automobiles, and insulation.
The results show that the subsidized autos did not sell well, that the main subsidized producers of solar panels failed, and error, corruption, and political favoritism reduced effectiveness. A detailed study of the nearly $900 billion called stimulus offers some examples. (Grabell, 2012)
In Illinois, inspectors failed to detect a gas leak from a newly installed furnace that could have seriously injured the home’s residents. Contractors billed for labor that wasn’t done and materials that weren’t installed. Fourteen of fifteen homes visited failed inspection. In New Jersey, auditors identified twelve households that were approved for free repairs despite having income of more than $100,000. Agencies bought $1,500 GPS systems and underpaid their workers. The state’s system of eligible applicants contained the Social Security numbers of 168 dead people. A nonprofit in Waukesha, Wisconsin got stimulus money despite having spent weatherization funds on Christmas decorations, gift cards for employees, and a parking ticket. An audit found that one employee’s husband received new windows from the agency, charging it $10,000—more than ten times the average cost. West Virginia had to take over one agency’s weatherization program after finding “shoddy work, falsified reports, credit car abuses, and missing inventory”. An inspection of a Houston nonprofit found that work was so sloppy that contractors had to go back and repair thirty-three of the fifty-three homes reviewed. Investigators in California found untrained workers. And Delaware suspended its entire program for nearly a year after a scathing report documented problems with nearly every aspect of the program, leading the Department of Energy to freeze its funds.

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