Economics

The American Economy Is Already Too Far Left for Comfort — or Prosperity

Outside the New York Stock Exchange in 2015 (Carlo Allegri/Reuters)
Americans already are living in a socialist society.

It was inevitable that Karl Marx would become a Marxist — at least according to the precepts of that ideology. He was brought up in an environment in which savings had been destroyed by inflation and a failure to keep up with the Industrial Revolution was impoverishing local people. Today we profess to live under capitalism, yet state spending represents 40 percent of GDP, while much of the rest of the economy is distorted by state-determined ultra-low interest rates and state-imposed regulations. Overall, only a modest percentage of decisions are determined by a willing buyer–willing seller price mechanism, while the rest are determined directly or indirectly by government. That may not be socialism in the most precise sense of the word, but, in some respects, it is uncomfortably close to it.

Marx was born in 1818, in the former Electoral Bishopric of Trier of the Holy Roman Empire (the bishopric had expired in 1803). The former Holy Roman Empire missed out on the early Industrial Revolution because of its remnants of serfdom, feudal land-ownership laws, and myriad local tolls and tariffs, eliminated only by the “Zollverein” customs union of 1833. Local workmen in Marx’s area were increasingly uncompetitive against British steam-powered industries, so their wages were forced downward, and their livelihoods disappeared. Furthermore, many middle-class savings had been wiped out by the collapse of Austrian-issued paper money in 1811 (a collapse documented in grim detail by Marx himself as an adult). Overall, it is no surprise Marx found “capitalism” unattractive.

The obsolete economic structures and monetary folly of Marx’s childhood environment prevented capitalism from functioning properly, yet at that time it worked very well in Britain and the new United States. In those countries, land was freely held, governments were small, and tariffs were applied only at international borders. Consequently, first in Britain and then in the United States, capitalism was able to exploit the Industrial Revolution. This brought continual productivity and living-standards improvements, even for working men and women, which led to the abundance of today.

We are now in a situation similar to that of Marx’s childhood, in an economy that purports to be capitalist (or in Marx’s era, proto-capitalist) but does not work with the efficiency of a true capitalist economy. First, the state sector is unimaginably larger than in Marx’s day, around 40 percent of GDP in the United States, when federal, state, and local governments are included, even if that number is smaller than many other economies elsewhere in the West. In America’s state sector, decisions are made not on a free-market, willing buyer–willing seller basis, but through bureaucratic fiat or political pull. Unsurprisingly, this leads to corruption, inefficiency, and waste. Huge sectors of the economy, many of which might be private, such as education, defense, and much of health care, are dominated by government and not subject to proper market disciplines.

Second, even in the other 60 percent of the economy, the most important price, that of money, is set by government fiat. That caused trouble in 1929–32, after the Federal Reserve had set interest rates too low during the boom, then failed to allow for mass bank failures during the subsequent downturn. Today, the Fed forces interest rates toward zero, even when inflation is still in positive territory, thus producing a negative real cost of money. That distorts decision-making in the nominally private economy; the most crucial price in that economy, that of money, is being set by government fiat, not by the market.

With interest rates forced down to levels below the rate of inflation, asset prices and share prices are forced upward, and deals that will ultimately prove value-destroying are entered into because of the available cheap finance. This is something that we have gotten used to over the past decade, and as a result, U.S. productivity growth since 2011 has run far below historic levels, except for a brief period in 2018–19 when the Fed allowed interest rates to rise toward a more natural level. Unproductive real estate dots the landscape, especially in city centers. “Zombie” companies such as Boeing, with neither profits nor equity, survive because of their ability to secure debt financing. Plentiful private-equity and junk-bond finance allow unprofitable start-ups to carry on for decades without sorting themselves out. At the other end of the corporate lifespan, senescent retailers such as Sears, Macy’s, and J.C. Penney stick around by being passed from one private-equity owner to another. It’s hard to see how this activity adds to the productivity and efficiency of the economy.

But even beyond the huge government sector and the distortions caused by the Fed, there is a third factor preventing capitalism from working properly: excessive regulation. Any company in the energy sector, for example, faces a playing field whose tilt changes markedly according to whether there is a Democrat or Republican administration in Washington. Any company in the health-care or finance sectors is subjected to regulations of frightening complexity, which benefit the largest players (who know best how to navigate them) and add hugely to consumers’ costs. In health care, for example, hospitals are compelled to treat the indigent in their emergency rooms without receiving government compensation for doing so; in turn, the hospitals publish “posted” (and not infrequently grotesque) price schedules that apply only to those unfortunate patients who do not have health insurance, and are discounted by two-thirds or three-quarters for Medicare, Medicaid, or the big insurance companies.

Marx had an even more ambitious (and thus even worse) vision of socialism. But, if we use socialism as a shorthand for describing the overriding of market mechanisms by government diktats in an overwhelming percentage of the economy, the U.S. economy is indeed, in those terms, primarily socialist. Two things are thus unsurprising. First, as government’s size grows, interest-rate distortions and regulation have increased, and the nominally “capitalist” economy has come to work less and less well. Second, today’s young people, like Marx, see few advantages to this “capitalist” system and believe that some new system would work better. They are right, but the new system that would work better is true small-government, sound-money, light-regulation capitalism, as Britain had in the decades that produced the Industrial Revolution. Alas, such a system is not on offer.

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