The Economic Realities of Democratic Socialism

Somebody has to pay for it
August 26, 2018 Updated: August 26, 2018

It is amazing what 25 years can do to a political party’s platform.

On Jan. 27, 1996, then-President Bill Clinton proclaimed that “the era of big government is over, but we can’t go back to a time when our citizens were just left to fend for themselves.” He added: “So, again … I asked Congress to join with me to make the cuts we agree on. Let’s give the American people the balanced budget they deserve with a modest tax cut and the lower interest rates and brighter hope for the future it will bring.”

Compare Clinton’s message with that of today’s Democratic Socialist darlings, Bernie Sanders and Alexandria Ocasio-Cortez. Sanders’s signature program is “Medicare for All,” a plan that moves all responsibility for health care spending on America onto the federal budget. As he explained, “The time has come also to say that we need to expand Medicare to cover every man, woman, and child as a single-payer, national health care program.”

True to form, Ocasio-Cortez recently supported other Sanders’ favorites, such as an expansion of Social Security benefits, 12 weeks of paid family leave, free college education along with a federal bailout of all student loan debt, a guaranteed-jobs program, and large infrastructure projects.

It may sound silly, yet their vision of a massive expansion of government unquestionably appeals to many Democratic voters, a majority of whom say they prefer socialism to capitalism. The Democratic Party of the 90s is so different from the one which today aspires to take over the country that it would take thousands of words to cover the issue. But one area where it is easy to see the difference is on spending.

Goodbye, Fiscal Restraint

Now, one limitation to this exercise is that we aren’t comparing apples to apples, because the Clinton numbers are actual spending figures while the Sanders/Ocasio-Cortez ones are merely aspirational. Clinton ran on a big-government takeover of health care, which he didn’t get. It means that a score of his campaign proposal would have looked much worse than his actual numbers did. It is nonetheless informative.

During his two terms in the Oval Office, Clinton reduced government spending as a share of GDP to 17.6 percent of GDP in fiscal year 2001 from 20.3 percent in fiscal 1994. Inflation-adjusted spending grew by 12.7 percent over eight years—it grew by 22.9 percent under Reagan and 100 percent under Bush. Thanks to a growing economy and a somewhat fiscally responsible Republican Congress, Clinton’s budget was balanced at the end of his second term.

Now, the Democratic Socialists never talk about how much their agenda will cost. However, some scholars have volunteered to do the work for them. My colleague Charles Blahous has written a remarkable paper that scores Sanders’s “Medicare for All” proposal. Granting Sanders every one of his rosy assumptions, he finds that the plan would cost at the very least a stunning $32.6 trillion over 10 years and would add 12.7 percent of GDP to federal spending by 2031.

More damning is the dramatic impact that such a plan would have on the supply and quality of health care in the country if Sanders got the 40 percent cut to health care providers’ private insurance reimbursement rates his plan requires. The plan is so bad that even The Washington Post editorialized against it.

Tens of Trillions

Brian Riedl at the Manhattan Institute has scored the entire plan: free college, all paid-for health care and the rest. He finds that the Sanders/Ocasio-Cortez dream agenda would boost federal spending by $42.5 trillion over the next decade. And that’s on top of the additional $12.4 trillion that the federal government is projected to increase spending by without any new socialist plans over that same period.

The debt-to-GDP ratio would skyrocket to 239 percent in 2028 and almost 500 percent in 2048—that’s three times larger than the current Congressional Budget Office projections. Spending as a share of GDP would soar past 40 percent of GDP—more than twice the average since 1965—and reach 50 percent by 2048. In other words, Sanders and Ocasio-Cortez make Clinton look like libertarian economist Murray Rothbard.

They also make former President Barack Obama look like Ronald Reagan. Riedl calculates how much additional taxes would be required to make this socialist dream come through. He assumes, generously, that the Democratic Socialist plan would cut projected spending from $42.5 trillion to $34 trillion.

But to pay for even the $34 trillion would require assessing a 100 percent tax rate on all corporate profits and a 100 percent tax rate on all wage incomes above the thresholds of $92,000 for single or $150,000 for married couples. But even these new levels of taxes wouldn’t pay a cent of our current projected debt accumulation, they would just “fund” the new socialist dreams.

And all of the above unrealistically assumes that Americans don’t change their behavior when taxation becomes confiscatory. Aggregate labor-supply data, such as the differences in hours worked among countries with different levels of taxes, suggest that people, in fact, do change their behavior when faced with higher tax rates and just reduce their output.

Nobel laureate Ed Prescott, in his famous 2004 paper “Why Do Americans Work So Much More Than Europeans?” shows that workers spend considerably more hours working when marginal tax rates on their incomes are lower. So basically, over time, people will reduce the number of hours they work, economic growth slows down, and less revenue is collected. As Prescott’s work shows, the effect is even stronger as government benefits grow.

And then, there’s the long run. As a response to President Obama’s goal of jacking up the top marginal tax rate dramatically during his presidency, economic research showed an interesting point: Higher taxes might not dissuade today’s rich people from working, but these higher rates would damp the incentives of younger people to invest in education and career choices that would improve their prospects of becoming the richer people of tomorrow. These negative economic consequences obviously reduce the chances of robust economic growth.

The bottom line is that none of us can afford the true budgetary costs of the Democrat Socialist dream. And that’s just the financial costs. It says nothing about the stifling of innovation, of entrepreneurship, and of labor under such plan. It’s amazing what 25 years can do to a political party’s ideology.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University and a senior fellow at the American Institute of Economic Research. This article was first published by AIER.org

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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