The Soviet era joke “we pretend to work and they pretend to pay us” has been replaced by the Biden joke “they pay us more not to work so we don’t.” Democrats’ complete denial that the refusal to accept job openings is in any way related to their pay to stay home policies is comical. To admit such spending is not only unnecessary but counterproductive represents an existential threat to their Party’s agenda, but to ignore their denial that incentives matter will end in tragedy.
Democratic Socialism isn’t Socialism, It’s a Rent-Seeking Extortion Racket
Socialists promised “to each…” but repressed consumer demand with queues lasting years and often decades. Democratic socialists aren’t socialists in that they don’t promise to work or produce anything. Sopranos’ aficionados recall the high paying “no-show” and the “no-work” union jobs – sitting at the construction site in lawn chairs smoking, drinking and playing cards while laughing at the actual exhausted workers. Since incentives don’t matter, democratic socialists believe they can provide higher paying jobs just like the mafia with no loss of production. And, like the mafia’s benevolent political acts such as delivering Thanksgiving turkeys, capitalists will still deliver the goods for them.
Rent-seeking (living off the work of others, generally payback for political bribery and protection) appeared free to the young Bernie Sanders for a few weeks, until his commune threw him out. What do democratic socialists propose in place of a hundred million deaths from Stalin’s Soviet Gulag and Mao’s Great Leap Forward and the scenes of mafia beatings, sometimes fatal, to extort business? They promise to squeeze “big business” with taxes, regulation and threats to match socialist demand with capitalist supply.
The Party’s “Democracy” Isn’t Greek “Demos”, It’s Crony Capitalist
About 2.5 millennia ago when the city state Athens first experimented with “democracy,” the City was 40% slaves, 40% immigrants, about 12% female (the men were killed in wars) the middle aged (>18) male voters could all simultaneously fit in the stadium and be heard before heading off to the state owned brothels. Politicians were held accountable (just ask Socrates).
When adopted by nation states, virtually all democracies devolved into faux democratic crony capitalism: the more powerful the state the more crony corrupt: hence the easy transition for recent dictatorships, e.g., Russia and China. Adopting the mafia’s model of protection rackets, they create false risks and magnify real ones.
Founded as and still de jure the first representative republic built upon the foundation of a competitive market system where capitalist greed counter-intuitively served the public interest, the US maintains the pretense of American exceptionalism. But Crony capitalism in the US ballooned during the Wars, particularly the Cold War as Soviet military strength and ambitions were elevated to a “crisis” giving rise to the military-industrial-congressional complex (Ike’s original uncensored version). That led to the election of President Kennedy on the false claim of a “missile gap,” But the big bonanza for US crony capitalism was LBJ’s Great Society, extending the sphere of socialist state distribution to healthcare, education, food (the Dept of HEW) and housing (the Dept of HUD – not to be confused with the earlier Paul Newman movie).
The public interest – if any – provides camouflage for the distribution of money to politicians and political constituencies: the crony capitalists who finance elections and the protected constituencies that deliver the necessary votes (one way or another). Hence the “bang for the buck” public interest objective is replaced by the incentive to maximize politically targeted spending while avoiding accountability for the consequences. Accountability for the financing is deflected with (usually false) promises to tax only the rich, debt, and inflation. Following the Soviet and mafia model, money is collected by the center and distributed down, cutting the connection between cost and accountability to the voters. Any damage due to incentive distortions is brushed off as an “unintended consequence.”
The Democratic Party’s Coalition of Rent-Seekers and Crony Capitalists
Progressive government promises protection from personal “crises” related to sex, race, employment, environment, equity, health and education (but not crime). All the recipients of public protection and largess, unionized and all public employees, the education establishment, welfare state dependents, etc. support it, as does the media to signal its virtue. “Wall Street” primarily supports Democrats and progressive causes because the rhetoric raises more in campaign contributions than taxes, their lobbyists extracting protection and other special favors at the expense of smaller and foreign firms, taxpayers and consumers. That’s why hammers cost taxpayers $500.
Over expanding rent seeking and hence over taxing the productive sector is the primary reason why nations fail, a lesson previously learned by the mafia. Yet after announcing “the days of big government are over” President Clinton doubled down, promising at least five million owner-occupied houses to people who couldn’t afford them. With an unaffordable budget price tag of trillions of dollars he resorted to “off balance sheet financing,” a euphemism for using the carrot and stick tools of extortionists – tax and regulatory incentive distortions and legal threats and favors to get “government sponsored” – i.e., implicitly or explicitly insured and/or guaranteed commercial banks and mortgage agencies – to provide “affordable” mortgages. This socialist demand without socialist supply inflated the bubble in house prices to five times the prior record with no net additional houses. When it burst many lost their homes and much of the US and international financial industry became technically insolvent, the subsequent opaque “Wall Street Bailout” costing taxpayers trillions of dollars and global society tens of trillions with continuing reverberations.
Soon after this fiasco Democrat President Obama toyed with nationalizing the US healthcare system, but in the face of political opposition followed the same approach in healthcare: tax and incentive distortions to meet socialist demand with private market supply. Healthcare supply didn’t change much but costs skyrocketed as a result of the ironically named “Affordable Care Act.” Insurance coverage expanded due not only to the typical carrots and sticks but the seemingly unconstitutional guarantee of an explicit insurer bailout.
These programs failed in different ways for the same reason: politicians promise something for nothing. For failures as big as a global financial crisis, it takes more than the control of the administrative state and captive anti-capitalist media to cover up: it takes a political commission with a majority, chairmanship and control of the $10’s of millions to distribute to erudite academics ignorant of the deeply embedded political distortions of the incentive system to provide an aura of credibility. Following a long tradition, the “market failure” conclusion (and in this case the legislation supposedly implementing the Financial Crisis Inquiry Commission final Report recommendations) were written by the primary political perpetrators in advance.
The Sanders/Biden Legacy Plan: Go Big, Go for Broke, Go Broke
Tony Soprano’s childhood friend couldn’t raise money commercially for his successful sporting goods store because he was addicted to gambling. Tony lent him the money, knowing he would gamble and keep doubling down until by night’s end Tony owned the store (and the car and college fund). Watching the looting and liquidation of his life’s work, he asked Tony “You are my friend. You knew what I would do. Why did you lend me the money?” Tony responded: “You knew that’s what I do.”
The Sanders/Biden Plan is to go big, proposing to spend $6-$7 trillion. It’s still subject to ongoing negotiations, but as a benchmark it includes a $1.9 trillion Rescue Plan, $2.3 trillion Jobs Plan and a $1.8 trillion Families Plan according to the NYTimes. Taking into account the direct costs and indirect costs due to market distortions, the total cost of financing the Plan is by one estimate over $17 trillion. If hyperinflation results, the funding costs would be much greater. They are clearly going for broke, promising “investment returns” many times their historical norm.
Infrastructure, $1.3 trillion: Some of it is needed, politically popular and historically where government had the most bank for the buck. Approximately $50 billion is for repairing existing roads and bridges, $10 billion on transit projects for high-poverty areas, $20 billion in rural broadband and infrastructure and $100 billion to modernize the school system, among other proposals.
But the proposed approach is guaranteed to fail. Only about 2% of all infrastructure is federal, 13% of all public infrastructure. At best the federal bang for the buck is conservatively 50% or less relative to comparable countries for federal infrastructure. The Soviet Union had a savings and investment rate multiples that of the US, as does China today. The US historical comparative advantage was the market discipline imposed on investment decisions reflecting the productivity of capital. Adopting the Soviet/Chinese system of federal funding for state and local or private projects squanders this comparative advantage, further undermined by the Democrats’ demand for earmarks.
The most visible evidence of Obama/Biden stimulus were the nationally posted signs touting their program. The California bullet train to nowhere starting construction with Obama/Biden stimulus funds is the model for proposed High Speed Rail as the Federal train to nowhere. These white elephants are why the Trump Plan proposed 85%-90% private funding (without earmarks).
However problematic, this “infrastructure” plan is intended as public interest camouflage for the (mostly counterproductive) social, racial and environmental agenda:
- Climate change, $2 trillion: The good news is that it is only a down payment on the $100 trillion Green New Deal.
- Another $1.9 trillion in pandemic relief: Those currently working may well decide not to.
- Higher Education, $750 billion: The baby boom need peaked a half century ago. In spite of dramatically lower requirements, only 6 in 10 graduate in 6 years. This top-heavy system should have been retrenching in favor of (non-government) employer skills decades ago.
- Child and Eldercare, $775 billion: This is essentially the forced unionization of family caregivers that Progressives have pushed at the state level.
- Healthcare, $750 billion: Obamacare was supposed to make this affordable without a massive expansion? This further undercuts incentive for rational healthcare choices.
- Buy American, $700 billion: What happened to the benefits of free trade?
- Housing, $600 Billion: Tax credits to first time buyers will go to the middle and upper middle class. Low income renters don’t pay tax. Lobbyists will steer most to new construction, two to four times as costly as housing vouchers that give renters more freedom of choice.
- Racial equality, $30 billion: This sounds cheap relative to other promises, but will likely widen the economic divide and deepen racial animosity.
When asked “how did you go broke,” Hemingway replied: “slowly at first, then all at once.” That’s a safe bet.
Kevin Villani, Chief Economist at Freddie Mac from 1982 to 1985, has held senior government positions, has been affiliated with ten 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.