We can understand why President Barack Obama and the Democratic Congress do not want to call their attempts to socialize America’s economy “socialism.” Government efforts to control economies in the past have been disasters. Still, this administration is using a grab-bag approach in its attempt to take control. But it will face the same insurmountable problems as did socialisms of the past, and the American people will suffer.
Consider the three brands of socialism from the past century.
First there was the communism or “scientific socialism” of Marx and Lenin in which the government owned all property and controlled all aspects of the economy.
Without private property rights and market incentives, there was little motivation to do one’s best and no place for true entrepreneurs. The Russians had a saying: “We pretend to work and they pretend to pay us.”
The Russians had a saying: “We pretend to work and they pretend to pay us.”
Planners—the dictators of the proletariat—attempted to allocate all the inputs of production—energy, raw materials, industrial equipment—in order to produce the right mix of food, capital goods, infrastructure, and consumer products to make an economically strong “nation” though not necessarily prosperous subjects. How many tons of coal produced by which mines must be shipped in what quantities in how many train cars to which industrial facilities to produce how many tons of steel or megawatts of electricity? Micromanaging an economy through millions of such decisions was an impossible task.
Without market prices to indicate the real supply, demand, and best uses of the factors of production, the planners literally just made up the numbers.
The system was a disaster. It kept millions impoverished and eventually collapsed.
Under the second type of socialism, corporatism, pioneered by Benito Mussolini in Italy, much property stayed nominally in private hands. But individuals did not have the right to use their property as they saw fit. The system was not democratic; citizens were only important as members of groups—farmers, merchants, industrial workers—not as individuals.
Appointed ministers with various portfolios in a Grand Council of Fascism would dicker about levels of production, wages, prices, and the like. Decisions of how to “harmonize” all these interests were made by the prime minister—Il Duce. The owners of productive property and enterprises were informed of the will of the state and knew they had to obey or face demonization, intimidation, or worse.
This form of central planning did not work either. Planning by political elites simply produced economic hardships and the elites had to use heavy-handed tactics to quell dissent.
A third type of socialism was taken up in many European countries after World War II. Central planners would restrict themselves to owning and controlling the “commanding heights” of the economy—transportation, finance, raw materials, heavy industry—which they saw as fundamental to economic growth, while leaving most other economic matters to the choices of individuals and smaller enterprises. Welfare state benefits such as health care and unemployment insurance would provide a safety net for all.
Democratic socialism didn’t work well either. Interest groups, especially labor unions, could get their way through massive demonstrations or crippling strikes. The parts of the economy owned and controlled by governments became costly and inefficient. Rather than providing platforms for growth, they were drags on the economy. Job creation and productivity stagnated. By the 1980s Margaret Thatcher was undoing Euro-socialism in Britain, and Continental leaders were borrowing policies from Ronald Reagan.
Today, Obama and the Democrats will not call what they’re doing “socialism.” But they are using a grab-bag approach to taking over the economy. Consider the Obama approach.
Bush lent $17.4 billion in TARP funds to General Motors and Chrysler.
Step One: Hook ‘em with money. It started in 2008 with President George W. Bush’s $700 billion Troubled Assets Relief Program (TARP) to bail out banks holding bad home mortgage loans. There were no actual plans for how to use the money or what strings to attach. Government officials initially didn’t take actually voting seats on banks board but they let it be known that Washington would be calling the shots. But the bucks were so big that few troubled banks could resist the handouts.
In December, departing from the specified purpose of TARP, Bush decided to lend $17.4 billion of those funds to General Motors and Chrysler. TARP became a kind of all-purpose slush fund. Obama’s $787 billion stimulus package, signed into law in February, provided even more bait.
Step Two: Reel ‘em in. The 2009 stimulus package imposed new rules on entities taking handouts, including limits on employee pay and bonuses, golden parachutes, and the size of stockholder dividends. It also set new requirements for government representation on banks' boards of directors. Now that the banks are seeing what strings are attached, a number of them actually want to give back their TARP funds to avoid these regulations.
But most revealing were the provisions in the stimulus package for huge federal expenditures for health care entitlements and education. In past decades the federal government has increased its control of local schools and everyone’s medical care through its funding with regulatory strings attached. Now Obama is poised to place these as well as other sectors under tight federal control through this method: pass out huge, irresistible amounts of cash and then, like a Mafia loan shark owed a huge debt by a business owner, demand control.
Step Three: Make ‘em dance. Consider events in recent weeks. Obama apparently didn’t like GM CEO Rick Wagoner. Or at least we know that auto union boss Ron Gettelfinger didn’t like Wagoner and that the Democrats and unions are strong political allies. So the word went out from Washington that GM had to dump Wagoner as a condition to get more handouts, and that’s what happened.
Citigroup, which has been a principal recipient of bank bailout funds, has recently nominated four new board members at the insistence of the Obama administration. Treasury Secretary Tim Geithner warns of more such moves to come.
In Atlas Shrugged , Ayn Rand portrays a country ruled by pull-peddling politicians and government “advisors” who intimidate entrepreneurs into following their whims. Something similar appears to be happening today as the Obama administration seeks to gain control of the economy, not just through the democratic process of passing laws, as bad as those laws might be, but through political intimidation.
AIG received $182 billion from the Feds, for giving out $165 million in bonuses for its top employees.
Step Four: Club ‘em if needed. Consider the outrage faced by AIG, which received $182 billion from the Feds, for giving out $165 million in contractually obligated bonuses for its top employees. The emotionally volatile and politically pandering Rep. Barney Frank demanded the names of those who received the bonuses be made public even as AIG employees were receiving death threats.
Congress at first considered placing a 90 percent tax on those bonuses, never mind the Constitution’s ban on “any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contact.” And never mind that it was the Obama administration and its strong supporter Sen. Chris Dodd who specifically exempted such bonuses from federal control.
The Obama administration and Democrats in Congress are taking lessons from Mussolini. Let’s remember that Democrats also have proposed censoring talk radio and eliminating the need for secret ballots in elections to determine whether workplaces unionize. Here we see the government’s the iron fist on display.
To the extent that Obama and the Democrats succeed in reaching their political goals, they will face the same problems as did socialists in the past.
Like the Soviets, they will want to micromanage the economy, and it won’t work. For example, in light of the AIG bonuses, Barney Frank has introduced a “Pay for Performance Act” that would control all employee salaries at companies that have received government bailout funds. Does he think he can succeed in setting “fair” wages that don’t destroy market incentives where Lenin, Stalin, and Khrushchev failed?
Watch for a revival in years to come of the Democrats’ 1980s “comparable worth” proposals to set “fair” wages nationwide, a feminist version of Marx’s labor theory of value.
Interest group political battles are unavoidable in mixed economies, with disputes usually settled by deals between politicians—some more and some less pro-freedom. Now both Congress and the White House are in the hands of the more anti-freedom Democratic Party, which represents and is the mouth piece for groups seeking special privileges and handouts. Further, people from all walks of life now shuffle to Washington for a piece of the pie. Obama, who claims to want to “transcend” our differences, is likely to face the need to “harmonize” all these interests. Il Duce must be chuckling in his grave.
The Obama administration seems to think that today’s “commanding heights” of the economy are banks, education, health care, and “green” industries and products. Does it think the results of a government takeover of whole sectors will be any different than they were in Europe? Is it intentionally ignoring the fact that the more the federal government has intervened in health care the higher the costs have gone? And does it recognize that the more it has removed control of education from the hands of parents, the more difficult it has become for them to hold school administrators accountable for poor results?
Obama and the Democratic Congress have their own unique ways of seizing economic decision-making from individual Americans and putting it in government hands. But history shows us that when political power rather than individual production and free exchange determine who gets what, the results are wealth destruction and social conflict.
Knowing our enemies is the first step to stopping them. Let’s hope history can give our fellow citizens a wake-up call and give us insights we can use to protect our fragile freedom.
Edward Hudgins is research director at the Heartland Institute and former director of advocacy and senior scholar at The Atlas Society.