Youthful Infatuation with the Climate Mystery

 The climate gurus and the virtuous young are trying to lead us somewhere. I just wish I knew where.

[Drawing by Kate Greenaway, 1888, illustration for Robert Browning's The Pied Piper of Hamelin]

The Economics of Socialism: A Primer for Young Adults

A young friend recently asked me for my opinion of socialism. She and I both admit that the theory sounds so appealing to idealistic youth. She told me she thinks it isn't realistic, but she doesn't have the necessary ammunition to use in debates. So here are some thoughts about socialism:

Underlying premises

Humans are a social species, and most people are instinctively caring. 

Source: Neuroscience News

We are empathetic towards animals and people who seem to be suffering. On a family level, we usually try to help a relative who has special needs. Some go above and beyond and create charitable nonprofits with a mission to help others. Take the examples of the Red Cross, the Salvation Army, or the many churches that organize activities to help locals. 

Also, most people also have an innate sense of fairness and of the universality of basic human rights. For example, every person should have an equal right to life, to a maximum of liberty, to be able to speak one’s mind, to worship freely, to own things and land, and to be treated equally under the law. 

At the same time, God, or Nature if one is not religious, has made each of us distinct from one another. We are not equal. We do not all have the same talents or strengths or weaknesses. We do the jobs that we can do, and we earn our living as best we can. 

Obviously, some people can do or create things that provide tremendous benefits for everyone. Steve Jobs or Sam Walton come to mind. As a result, our free society and the market economy give them more income than the rest of us. "Equity," i.e. equal income (as it is interpreted today), is not natural. And this seems acceptable when everyone has a job and things are going well. However, sometimes things get tough, and people begin to feel that rich people are way too rich. (This has an economic explanation, but that will be for another day.)

The socialist proposal

For those reasons, when a politician comes along spreading the notion that we should all be "equal" in lifestyle, and that government can create programs to take care of the needy, to make life more comfortable for the less talented, and to spread around the wealth more "equitably," we tend to feel that it might be a good idea. Plus it seems logical that government should be able to centralize charitable efforts and therefore be more efficient. In fact, this sounds pretty great.

The problems

As it happens, however, there are several problems with this notion:

1.  Forced taxation without verification: Unlike nonprofits, which can survive only if they receive enough voluntary donations from a generous but discriminating public, governments can force taxpayers to contribute. And this is true no matter how well or poorly run the government programs are. 

Furthermore, the distribution centers required by national programs are dispersed all over the country, and the financing and management are not easily visible. This means that the taxpayer has no real way to verify whether any particular government program is well run or even successful without a great deal of effort. With private and sometimes locally run nonprofits, donors can watch the finances and judge the results to help them decide whether to give or not. But taxpayers do not have that facility. As a result, government programs:

a. tend to become bloated, wasteful, and inefficient;

b. very often cause more harm than good (see examples below); and

c. distort the financial equilibrium of the economic relationships surrounding the activity. Example: Medicare establishes the prices of certain medical interventions and drugs at lower than market level. This in turn encourages hospitals and doctors to increase their prices for private payers, such as insurance companies and individuals without insurance, just to make up the difference. (This partly explains the high cost of medical care and drugs in the US.)

2.  Lost charitable-giving incentive: Potential donors to private charities, believing they have already “contributed” to these government programs, decide to reduce their giving to charities, and the charities reduce their activities, either for lack of money or of “customers.”

3.  Psychological damage to beneficiaries: Receivers of benefits come to believe that they deserve help from the government and that what they receive is not charity. Often they begin to doubt their own capacity to improve their lot in life. Example: Benefits for unwed mothers encourage some parents not to marry, often leaving the mother with most of the personal and financial care of their children. It might be quite normal for such a mother to begin to believe that she doesn’t deserve to have a faithful husband, a father figure for her children and family co-caretaker, and that she cannot provide for her children without the help of government handouts.

4.  Abusive taxation: Taxes must rise to cover the government programs. Taxpayers begin to resent the forced and excessive taxation, especially when their total tax burden rises above 17-20 percent, statisticians have found. As a result, they find ways to hide their income, move it offshore, or perhaps simply decide to earn less. As a result, no additional taxes are collected, and everyone’s standard of living decreases as less work is done across the nation.

5.  Conflict of interest: Even without increased tax revenue, governments do bring in lots of money, and because they don’t have to watch their expenses or make a profit like an ordinary company, they start increasing the number of employees and creating lots more agencies to handle all the additional duties we have given them. Congress votes themselves and their employees raises and extra benefits that most companies couldn't afford. After all, they don’t have a “bottom line” to prevent them from overspending our money, and in the case of the federal government, no balanced-budget requirement forces expense control. As a result, the nation (i.e. the collective "we") starts to go into debt.

6.  Corruption: Politicians realize they have become powerful and can manage huge sums of money, sometimes in favor of their own constituents, which in turn helps with reelection. This encourages corruption. You have perhaps heard the dictum: Power corrupts; absolute power corrupts absolutely. This dangerous combination of power and money starts to attract unsavory types who crave power. Some can become so powerful they start to act like little dictators. (Andrew Cuomo is a good example.)

These are some of the unintended consequences of excessive government size and control. The charitable actions could be better and more efficiently performed by smaller, more localized groups, but the more the federal government tries to interfere, the greater the unintended consequences. It can get so bad that the whole country suffers. 

The French case in point

For example, in the 1970s the French people voted for a socialist government that put in place a number of seemingly helpful redistributive programs. These included, among other things, the imposition on companies of strict employment contracts with expensive conditions for letting employees go; generous unemployment benefits; healthcare for everyone; and free education up to the university level for everyone who can pass a certain test. (Sound familiar? This is what Bernie Sanders, Kamala Harris, and Alexandria Ocasio-Cortez want for America.)

Rigid employment contracts

What has been the result? Companies, handicapped by the strict terms of the employment contracts, hire fewer employees. Small entrepreneurs may no longer risk opening a business at all because it’s too expensive. Employees who are hired must work harder. The labor market becomes imbalanced, now favoring employers over employees because there are more people looking for work. In France today, hundreds sometimes apply for one position. Since candidates are desperate, this means that employers can offer lower wages and make people work harder. This is exactly the opposite consequence from what was intended, isn’t it?

Generous unemployment benefits

French unemployment hasn’t gone below 6 percent since the 1970s when they began their socialist experiment. Today it’s at 8 percent, and it has been up to 11 percent and more. Some even say that governments have an incentive to fudge those numbers as well – I can attest to the fact that many potential unemployed are either in some kind of useless training program (a "stage de formation") or are still in school well beyond their scholastic aptitude. See below for the official statistics since 1968. (The word “ans” means age. The graph shows total unemployment [red] and unemployment according to age group. The blue one is 15-24 year-olds.)

French Unemployment

And another thing: Generous unemployment benefits encourage recipients to hold off looking for work as long as they can. It’s such a painful process and so many people apply for the few open jobs that the chances of finding work are low. "Why bother? I’ll just wait until my benefits run out. And anyway, I paid into the system so I deserve to take advantage of it.” 

And for those who still can’t find a job after a year or more of inactivity, there is something called the “Revenu de solidarité active.” This translates to “Active Solidarity Income” and resembles “Universal Basic Income,” another great-sounding but counterproductive idea of BS, KH, and AOC, which the current US government would love to put in place.

Universal healthcare

Healthcare for everyone sounds wonderful. But what actually happens is that people start going to the doctor or the emergency room for anything and everything. Sometimes they don’t have to lay out any money at all, or at worst a small percentage of a very low fee. Everyone knows that lower prices mean more buyers. All one has to do is to offer something for free to find out how many takers will appear out of nowhere. (Strangely enough, even one penny seems to make all the difference in the world! I know this from an experiment I once did on Craigslist.)

On the other side, the government budget for healthcare has become underfunded because of the above, and also due to poor management (see higher above). Plus the socialist French government decided to limit the number of medical students. Today, this means not enough doctors, and very poor pay. 

The work environment for nurses and other hospital personnel has become insufferable, with many hours of overtime, sometimes unpaid. The collective result is a worsening quality of care, difficulty finding employees, and a limitation on the services and facilities. I have noticed a substantial reduction in the quality of care in France since I first arrived in the 1970s. It may seem cheaper, but in the longer run the system is visibly self-destructing and eventually will fail.

Free college education

And what about education? Just as in the US, public school teaching quality has diminished substantially. Nationalized curriculums and unionized teachers have produced a real tragedy in the quality of education in both countries. To improve the statistics (but not the quality), the nationalized tests have gotten easier. Almost all French teenagers pass the “bac” exam permitting them to go to college. 

Although in the US many students go into debt (which is another tragedy with a different economic cause), in France university schooling is free. On the other hand, there are so many students that the universities are overcrowded. And many students (similar to the US) end up quitting in frustration after a year or two. They have not gotten any alternative training, so they have basically wasted those years of their life. Or they graduate with degrees and high expectations that don’t guarantee them a job. Although French students don’t go into debt themselves (unless they or their parents need it to pay for food and lodging), the government (i.e. the people) accumulates the debt instead. 

The financing trap

To finance all of these goodies, taxes are incredibly high in France, both on income and on anything and everything else. Examples: almost everyone pays income tax, but also a 20 percent tax on many things they buy; there are huge taxes on gasoline, which almost triple the price at the pump (as of today, $2.95/gal US versus $8.05/gal France); taxes on one’s real property exist just as in the US, but also another tax just for living in a home (called a “taxe d’habitation”); payroll taxes increase the employer’s payout over 150 percent and lower the employee’s take-home pay by about a third; and on and on. 

Typical French payroll statement in 2016:

Gross salary €1,660.67 + overtime €237.19 = €1,897.86

Taxes paid by employer over and above gross €565.58

Taxes paid by employee from gross €378.23 + €19.63 = €397.86

Net salary of employee €1,500

Total cost to employer €2,463.44

Ratio employer cost to net salary = €2,463.44 / €1,500 = 1.642

Source

Eventually, this situation must come to a crisis. And indeed, there have been more and more frequent protests by ordinary people whose standard of living is decreasing, some of whom can no longer afford to pay for the necessities of life. These protests stopped a bit with the virus, but they will start up again as soon as people are more comfortable about going out, especially after the end of the summer vacation period. (Did you hear about the French “yellow vest” protestors in 2019?)

The paradox

You would think the French people would wake up and see the source of the problem, but many of them cling to their fantasy about socialistic redistribution schemes. There are a number of political parties, but only a few would attempt to change the generous fundamentals, and these parties are not popular. It is a situation that will come to a very bad denouement within the next decade or two, in my opinion. 

Clearly, every country that tries a high degree of socialism must eventually either fall into poverty and civil unrest, or liberate the economy from its chains. Some Scandinavian countries have been able to turn back, such as Sweden and Denmark. Others like Venezuela – which used to be a very rich country – have fallen to the bottom of the heap and now experience extensive poverty, lack everything including basic necessities like toilet paper and food, and are approaching civil collapse.

Impossible dream or Machiavellian ruse?

Why don’t people see these obvious signs of failure? Socialism has never been successful anywhere in the world, and without exception the more a country adopts it, the worse off things become. I think it is simply because people vote with their emotions – from their gut – and don’t take the time to study reality. Plus they are easily cowed and then stirred up by ambitious politicians – a sort of maddening of the crowd. And finally, the emotions can run very strong and very deep, almost as if changing one’s mind is dishonorable, or would mean rejection by one's peers, or even might be fatal.

As for the politicians, I must believe that they are innocently enamored of their fantastical but naive beliefs. Otherwise, the alternative is that they know the truth but prefer to advocate for personal gain, civil unrest, and social collapse, figuring “après moi, le déluge” (“after I’m gone, let the flood waters rise”) as Louis XV is supposed to have said a few years before the French Revolution.