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A Mixed Socialist-Capitalist Economic System Does Not Work, Either
Raymond Richman, 4/7/2014

One does not have to point to the fall of the Union of Soviet Socialist Republics or to the failure of Labor Party policies in the U.K. to justify the conclusion that governments are incapable of efficiently producing goods and services although there are some few exceptions, principally in areas that economists call “natural monopolies” for example. The problem that popularly elected governments have is that democratic politics interferes with the essential efficiency force, competition.

The history of the U.S. with financial institutions is especially egregious as have been its efforts to provide public housing, subsidize higher education, and promote alternative green energy sources. Indeed, Wagner’s law of increasing government explains why there is no limit to government inefficiency. Governments do not compete with themselves.

Government enterprises have had some success in the production of electric power when it is a natural monopoly especially in the distribution of energy but its subsidies to energy-producing enterprises has been a failure regardless of what criteria you want to apply. We prefer economic efficiency. That requires the measurement of social costs and benefits. Unfortunately, the measurement of social benefits and costs is a political calculation and subject to the same difficulties as we have with running government enterprises.

Under common law, people could seek legal redress from private enterprises that committed a nuisance (a social cost). Unfortunately they are not able to do so when governments create the nuisance. The only recourse is political. Government-approved and subsidized windmills that generate electricity are a good example. They are a public nuisance that can be replaced or eliminated only by a political process. That same political process is what enabled them to be built in the first place since they required huge public subsidies. The competitive market system would not have enabled them to be built because they are inefficient producers of electricity. Today, they could not sell the electricity they produce without a government mandate requiring energy distributors to buy their product regardless of cost.

The rest of the world also capitulated to environmentalist frenzy, but Spain ended the subsidies three years ago when it faced bankruptcy and Germany similarly announced this year that it was ending most of the subsidies.

Regardless of how you feel about green energy, as taxpayers you cannot be indifferent to the massive failures of other government interventions. Public housing has been wasteful beyond belief as the tearing down of public housing developments like Cabrini in Chicago, Pruitt-Igoe in St. Louis, and forty-year high rises recently in Pittsburgh. They have been replaced by garden type developments which cost more than middle class homes to build and maintain. That’s politics for you. The US Department of Housing and Urban Development is still being funded lavishly in spite of decades of such foolishness.

Other housing interventions like the Community Investment Act of 1977 had unintended consequences. The Act intended to ensure that black and poor neighborhoods were not discriminated against by the banks and put the Federal Reserve System in charge of administering the program. The Fed lowered the standards for making housing loans so much that it ended up contributing to the housing bubble that burst in 2006 ushering in the Great Recession from which we have not yet recovered. The huge number of subprime loans that defaulted is a convincing demonstration of the Fed's failure to resist politics.

Government intervention in higher education through its subsidized student loan program succeeded in raising tuition at the Ivy League and other private universities almost three times as fast as the cost of living, consigning millions of liberal arts graduates to debts they will never repay. Guess who will be stuck with the defaults.

Or take health insurance. The government’s Affordable Care Act is proving to be anything but affordable except for those receiving free medical care (Medicaid) or subsidized insurance -- families with household incomes of about $80,000 or less. Plus the government insisted that persons be insured against pre-existing conditions, be given free contraceptives and counseling, and ordered insurers to cover children (?) under 26, resulting in requiring that everyone who is unsubsidized pay huge additional premiums.

If this is what you want, keep insisting that government solve all your problems with socialist solutions.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]