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ECONOMICS: “How Socialism Becomes Capitalism”

My latest article on why the political debate about “Capitalism”​ vs. “Socialism”​ is wrong, useless, and dangerously distracting. We’re at a crisis-point and need more sophisticated, nuanced discussions about economic success in the highly-competitive 21st Century.
On my last couple of visits to the USA, I have been shocked by how many people I met are working three jobs to make ends meet. Everywhere I went, there were “Help wanted” signs, but for low-paying jobs, with short hours and no benefits. On a previous visit in 2012, after a summer of traveling around the Mid-west, I had an even more shocking realization that it took me all summer to put together. Something seemed really different about the country I had moved away from. It took me a while, but I finally figured it out: There was now a very visible white-underclass. All of this is part of the post-2008 American Economy. Yes, unemployment is low-but that is made irrelevant by the fact that wages and benefits are even lower. Getting a job is not the challenge; it’s paying for rent, education, the baby-sitter, and health-care that is the problem.This is why the false choice of Reaganomics/Free-Market Capitalism vs. Socialism is a useless way to frame the economic debate in the 21st Century. When the stock market goes up or corporations make a big profit, that does not mean the money is getting to the average American on “Main Street.” Quite the opposite, it means the money is headed from Wall Street directly back to Wall Street. It’s a circular loop that cuts out the vast majority of Americans. The 51% or so of Americans who do have money in the stock market (mostly through pensions), have very small amounts invested. Nearly 40% of the stock market belongs to the top 1%. And while the stock market seems to be booming, that does not mean that the average American city or state pension is well-funded or ready for the largest generation (the Baby Boomers) to suddenly retire in the coming 15 years. The state, local, and national government are, in fact, not ready for this at all.And in this Capitalism-on-Steroids system, when big farming or large banking institutions fail, they get socialist bail-outs called “subsidies,” “bail-outs” and are labeled “too big to fail.” There’s an incredibly strong, reliable socialist-safety net… for corporations. Wealthy-Americans are hard-core socialists when the free government money is aimed at the 1%. But for the working mother who is a waitress, or the twenty-three year old paying $600 a month in student-loans; bankruptcy, bail-outs, and subsidies are viewed as socialist and as programs that reward the poor with an underserved entitlement that the more fortunate should not pay for. Why student loans are charged 8%+ interest rates, while bailed-out banks and car companies from the economic crisis of 2008 were charged 1%, is never fully explained by anyone. This is why Capitalism’s “survival of the fittest” is starting to ring hollow even in Trump country. It’s become very clear that being born with a silver spoon in your mouth, really does give a person significant advantages in every key area of life (health, wealth, education, housing, the criminal justice system) etc.Things have gotten so imbalanced, that Google is trying to give a token $1 billion dollar gifts to the city of San Francisco to bring down housing prices. Housing prices are so astronomical in San Francisco, that the tiny, two-bedroom house I grew up in–which now looks like a meth-lab, is worth about $600,000; and that’s in the suburb of Marin. The annual meeting of the wealthy elite this past January in Davos, Switzerland focused on the danger of wealth-inequality. The rich corporations and individual billionaires around the world are starting to realize that extreme wealth balances don’t end up well for the rich either! They create social upheaval aimed directly at the rich. The ultra-wealthy have overplayed their hand and Davos, Google, and the rest of the elite are slowly waking up to the need to make dramatic adjustments.

You know it’s getting bad when Bernie Sanders gets a standing ovation from a Fox News audience and Billionaire Hedge Fund Manager Ray Dalio starts talking about Modern Monetary Theory (MMT); (which argues that the U.S. can solve its enormous debt and entitlement crisis by taking on more massive debt because it is the world’s fiat currency and can get away with it). MMT might be a disastrous idea, but Dalio and Alexandria Ocasio Cortez are not idiots for trying to come up with such out-of-the-box solutions. Both the billionaire Dalio and Liberal Democrat former-bartender Cortez are correctly reading the situation. We do have 2 economies: One that is making enormous gains for corporations and wealthy individuals, and another that remains flat or moving downward for the vast majority of Americans. Unfortunately most of our politicians, news outlets, and people’s Facebook posts report on the economy as if it’s 1978. Our politics talks about economics in a Cold War Capitalism vs. Socialism framework that is totally out of date. As usual, our political discourse is about 20 years behind the actual issues and trends.

How Bad Is It?

-The average American cannot handle an unexpected $500 bill

-The average American only has about $120,000 saved for retirement at a time when people are living into their 80’s and 90’s. That covers about one year of retirement.

-The stock market is on an unprecedented hot-streak, but that money is being hoarded by corporations through stock buy-backs and CEO salaries.

-Many jobs are being lost due to automation. [This always happens, but what makes this different is that technology is not just replacing rote, service jobs or hard labor jobs. Today’s Artificial Intelligence can replace journalists, lawyers, and other high-skilled, white-collar labor. These are also machines that can learn and teach themselves new skills].

-In most places, 30% of American’s money goes into housing with just about every market being currently over-priced. Australia, Canada, and the UK are even in worse shape. Some of our key global cities are becoming unlivable for any normal person with normal wages.

-The number one concern of Americans is paying for health-care. Few are prepared, and advances in health care mean many elderly (and their children who have to take care of them in old age) are looking at living longer, but paying astronomical prices for medical services and convalescent care.

-College has gone up 500% over the price of inflation since 1987 while professor wages have dropped and the hiring of under-qualified and poorly paid adjunct professors is the norm. Public school teachers’ salaries are abysmally low for the service they provide for the country.

-The US had a $4 trillion national debt when Reagan left office. It is now $22 trillion with Trump adding an unnecessary billion in the last few months to cover losses over an unnecessary trade war (socialism for farmers). $19 Trillion was the point of no return where it’s not possible to pay it back (heading into Greece territory).

-Think of the amount of money each family rich or poor has to spend on technological upgrades, computers, phones etc. In many cases, these are not optional. This is what is required to do your work, do your banking, and stay in contact in a globalized world. It’s a large added expense that no one had in 1980.

-Due to the internet, the rich are able to see a lot more clearly what the rich have that they do not (a great recipe for revolution and populism).

-While 50% of Americans own stock, most own only a little bit of stock and get wiped out during the market crashes every 7-9 years or through fees. The stock market investors that truly win are the ones with large amounts of money and who can afford financial and tax specialists. That’s where the big gains are.

We’ve seen this before. When Roosevelt ushered in the New Deal (1933-1936), it was not because he was a pink, socialist, communist who believed in big government. It was because the United States had to create a government-supported socialist safety net to saveCapitalism. At the time, it was not at all clear that American Capitalism was better than Russian Socialism. Russia was making great advances and seeing raised living-standards while the average American was broke or in serious trouble. Roosevelt saved capitalism by making the “socialist” adjustment. And lo’ and behold; it did not turn us into Communists.

Neither did an extremely high tax rate. The period after World War II was the fastest period of economic growth in US history and established the Middle Class. Tax rates were also very high. Elvis paid 95% in taxes and was happy to do it. Republicans like Eisenhower expected tax levels to be high and that’s what helped to recover from the extreme imbalance of the 50 year rich-poor imbalance that led to the Great Depression.

Forty-years of being told that taxes slow growth and “all big government is bad” (except if it bails out large corporations), has left us with a class of downwardly-mobile Americans who believe any kind of safety-net is equivalent to Socialism killing Capitalism. Not only are they wrong, but I predict that these very same, big-government haters will be the first to demand big-government solutions when they find out their stock and pensions were not what they thought they would be as they retire. These hard-core Capitalists will end their lives as hard-core Socialists looking for big government to preserve their living standard. The boomers will return to the hippie-commune from where they came, before this is all over.

When the economy tanks in the next couple of years (not “if, ” but when), everyone will turn to government for the solution. Capitalism will go under the scrutiny that Marxism did after the Soviet Union collapsed in 1991. Our way of discussing American’s economy is going to have to get a lot more sophisticated than just “Capitalism vs. Socialism” arguments. Countries that succeed in the 21st Century will value 1) an entrepreneurial environment 2) corporate responsibility 3) taxes 4) unions, and 5) government involvement–especially in infrastructure and education. That’s the only way the United States can compete with the hungrier, rising nations of the developing world.

Countries like Singapore, Switzerland, China, and the Scandinavian countries are ahead of the curve. They see that it is not one thing or the other. It’s a constant-changing hybrid. There’s no room for outdated, cliche, ideological soundbites. Meanwhile, in the US, our political and economic discussions seem to be stuck in 1980. The longer it takes for us to mature our discussion and make it more nuanced; the longer it will take for the US to economically recover.

Patrick Nachtigall

Patrick Nachtigall

 

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