(WSJ: Bernie Sanders Won the Debate)
The 20 candidates in the Democratic debates on June 26 & 27 accepted Sanders’s fundamental vision of Democratic Socialism.
Bernie Sanders’s June 12 speech at George Washington University proposing “a 21st Century Economic Bill of Rights (EBR)” to “a decent job that pays a living wage; quality health care; complete (higher) education; affordable housing; a clean environment; and a secure retirement” all “regardless of his or her income” started a competition among the current democratic candidates for the 2020 Democratic nomination with promises of free stuff. This new Democratic socialism makes two promises:
“It is free to the masses.”
“If you like your democratic system of government, you can keep it.”
This isn’t new and isn’t true.
The ideological Cold War between the socialist totalitarian countries and the capitalist social democracies ended with the economic and political bankruptcy of virtually all of the former. The latter expanded their welfare states by taxing the economic fruits of capitalism, contracting when going too far, with symptoms including declining investment and innovation and rising public deficits and debt burdens. The proposed EBR to expand the welfare state to socialist extremes while maintaining democracy will erode both living standards and liberty.
The Unintended Consequences of the Economic Bill of Rights
The market system is based upon individuals responding to incentives, mostly embodied in market prices. Contemporary economists have done Nobel-worthy research demonstrating that individuals don’t always respond rationally. But the EBR promising free or cheap stuff well below cost with wages and income determined well above productivity is incompatible with a market economy and individual liberty. It would severely distort work and consumption incentives: already declining labor force participation would collapse and productivity stagnation would worsen. Costs of health care, education and housing would rise. The Green New Deal environmental proposal would cost up to $100 trillion while providing negligible environmental benefit. Private household saving would shrink further with the right to a secure retirement.
States that raise income taxes on high net worth businesses and/or firms face an exodus of both. Individuals and firms similarly shift their tax residence outside the U.S. reducing U.S. domestic innovation. Trade deficits widen. The cost of the EBR exceeds the revenue from these types of taxes by orders of magnitude. The progressive states are already voting themselves into bankruptcy, anticipating a federal bailout.
Modern Monetary Theory: Old Fashioned Money Printing
To avoid the political consequences of massive middle class taxation, the Modern Monetary Theory (MMT) promoted by a Sanders campaign economic advisor proposes debt financing. Wall Street prognosticators forecast the end of the debt supercycle in 2011 and the collapse of the international monetary system in 2014, going code red. But the debt supercycle has continued, so proponents of the MMT assume that interest rates will remain low indefinitely so the cost can be financed with no long term consequence, whether bought by domestic or foreign creditors or the Federal Reserve.
They may be right about America’s creditors continuing to accept debt in the near term, but excessive debt always ends, suddenly and badly: the longer it goes on the bigger the bust. As the world’s reserve currency the debt can’t simply be inflated away. The consequences of a U.S. international default, no matter how delivered, would be catastrophic.
Democratic Socialism and Individual Freedom
The socialist EBR is the responsibility of the administrative state, which requires totalitarian political power to deliver. What, then, do democratic socialists mean by “democracy”?
The ancient Greek city-states began experimenting with democracy (literally, “people power” in Greek) about 2500 years ago, limited to males selected on merit. After about a century of experimentation, Greek philosophers concluded that democracy was a form of mob tyranny that undermined individual freedom and the rule of law. United States exceptionalism is rooted in the U.S. Constitution, an experiment in a representative federal republic held in check by a limited list of enumerated powers to protect individual freedoms and prevent mob rule.
The extension of voting rights to former slaves – and over a half century later to women– was overdue. The 14th Amendment was necessary to restrict the ability of Southern states from inhibiting their voting rights but has since been interpreted to give the federal government virtual total supremacy. The direct election of Senators in the 17th Amendment of 1912 further expanded populist democracy.
Marx promised democracy and universal suffrage. Trotsky promised a peoples democracy, as did Mao. The current progressive platform on voting rights; opposing voter registration, supporting immigration of dependents with voting rights rather than working rights, eliminating the Electoral College, reducing the voting age to 16 years old, registering prisoners, and drive-by voter registration would complete the transition from a representative republic to a peoples democracy.
Kevin Villani, chief economist at Freddie Mac from 1982 to 1985, is a principal of University Financial Associates. He has held senior government positions, has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.