Real Risks: Hurting Those We Are Trying to Help

We’ve all heard that when something sounds too good to be true, it usually is. Yet the promise of getting something for nothing can be compelling enough that we often act in ways that are detrimental in the long run. Moreover, we may make decisions based on perception rather than facts. This can lead to actions that fail to meet our needs and objectives or are harmful to our future. Plus, many seek instant gratification, often at the expense of their long-term well-being.

The promise of universal basic income (UBI), a social policy that guarantees a fixed, unconditional income from the government for everyone, free college tuition and free health care are all very appealing, especially to many younger Americans.

The problem is that “free” isn’t really free. Policies that provide so-called free college, free wages and free health care can negatively impact all us in the long run — most of all these youths. As with many things, the people these benefits are supposed to help are the ones who will be most hurt. Aside from the psychological impact of never really accomplishing anything, these policies can make our economy suffer and even fail.

We must get away from semantics, politics and labels and focus on the real problems that these “free programs” address.

A Fuzzy Understanding of Capitalism and Socialism

Many younger Americans find the socialist policy appealing without understanding what socialism really is.

Kate S. Rourke, in her article “You Owe Me: Examining a Generation of Entitlement,” says, “Children in the most recent generation of adults born between 1982 and 1995, known as ‘Generation Y,’ were raised to believe that it is their right to have everything given to them more than any other previous generation.” Socialism plays right into this mindset, especially the fuzzy, idealized, quite-unrealistic socialism being put forward today: “We all get our free lunch!” There is a sense that the government will provide these “free lunches” without any true sense of how they will get paid, other than “The rich must pay.”

Millennials are simply not that alarmed by the idea of socialism. For instance, a national Reason-Rupe survey found that 53 percent of 18- to 29-year-olds view socialism favorably, compared to only a quarter of Americans over 55. At the same time, however, Millennials don’t like the idea of the government running things.

So what do millennials think socialism is? In that survey, respondents were asked to use their own words to describe socialism. Millennials who viewed socialism favorably were more likely to think of it as just people being kind or “being together,” as one millennial put it. Others thought of socialism as just a more generous social safety net where “the government pays for our own needs,” as another explained it. Some thought it referred to social media like Twitter and Facebook.

One definition of socialism is “a political and economic theory of social organization that advocates that the means of production, distribution and exchange should be owned or regulated by the community as a whole.”

Americans’ often fuzzy understanding of socialism can skew research results. A Harvard study revealed millennials’ apparent disregard for capitalism and favorable attitude toward capitalism but acknowledged, “It is more likely that the results are less a repudiation of capitalism and more a rejection of the ‘status quo,’ which is a strange mix of cronyism, capitalism and socialism.”

In the study, millennials did not indicate support for capitalism but do not view the government as a solution, either. Only 27 percent answered that they believed the government should do more to regulate the economy, and only 26 percent responded that government spending can increase economic growth.

Bernie Sanders Has Led the Way

That sentiment aligns with the way Bernie Sanders, independent U.S. senator from Vermont, presents socialism — as just a generous social safety net. This narrative says government is a benevolent caretaker and pays for everybody’s needs (from everybody’s pockets).

In a speech he delivered at Georgetown University, Sanders said democratic socialism “means that we create a government that works for all of us, not just powerful special interests. It means that economic rights must be an essential part of what America stands for.”

Ironically, when you start to dig a little deeper, many who claim to support socialism do not actually like the true definition of it — the idea of government running businesses. If socialism is framed as government running Uber, Amazon, Facebook, Google, Apple, etc., it does not go over well. The Reason-Rupe study mentioned earlier notes that millennial preferences may not be so different from older generations once terms are defined.

Socialism Has a Poor Track Record

In my opinion, we must move away from labels and perceptions and look at the facts. We have seen over and over that excessive government spending and an expectation of “free” services can lead to economic ruin. Moreover, as counter intuitive as it is, lower tax rates can lead to higher tax revenues as people are incentivized to grow their businesses . Clearly, at some point, taxes will decrease if rates are too low; however, history has proven that that lower tax rates and less government regulation will lead to more economic prosperity and lower unemployment. Paying a guaranteed income to everyone will disincentivize many from working and will require higher tax revenue.

History has repeated itself many times in this regard. Whether it’s the USSR, China, Cuba, Vietnam, the former East Germany, North Korea, Laos, Nicaragua, Zimbabwe, Cambodia, Venezuela or any of the other failed experiments in socialism, it has never worked anywhere. About socialism, an article in Investor’s Business Daily says, “It’s led only to misery, deprivation, government control and a loss of basic human rights.”

Let’s look at just a few examples of countries in which socialist policies have been enacted.

Cuba- According to Investopedia, Cuba is one of the most prominent socialist nations, having a mostly state-run economy, a national health-care program, government-paid (free) education at all levels, subsidized housing, utilities, entertainment and even subsidized food programs. These subsidies compensate for the low salaries of Cuban workers. According to Cuba’s National Office of Statistics Wages in Cuba averaged just $223.92 per year from 2008 to 2015 versus $60,200 in the United States (Wikipedia 8/12/18)

But state-run subsidies became insufficient to support the numerous social programs. Despite the enormous aid received from the unified Soviet Union (before it split), there were high poverty levels, a widening gap of rich and poor, and a massive burden on social programs. So today, Cuba is moving toward a parallel financial system — one that operates on the usual social programs in common sectors while operating as a free-market economy in the tourism, export and international business sectors.

Greece – Stephen Moore is the Distinguished Visiting Fellow for Project for Economic Growth at The Heritage Foundation. He noted in 2015, when Greece was formally in default on its loans and facing more IMF and EU loans coming due, that “Greece was about to slide into fiscal oblivion.” He stated, “This is the natural and unavoidable consequence of socialism everywhere it has been tried. Financial collapse.” Unemployment— youth unemployment in particular — remains one of the biggest struggles in Greece. In 2016, 47.3 percent of the Greek population under age 25 was out of work. That’s nearly half the population and more than two times the average rate across the euro zone. This situation is largely the result of large government pensions and benefits and declining tax revenue. Ironically, lower taxes on the wealthy generally increase tax revenue.

Sweden – Prior to the first socialist democratic government, Sweden had the highest growth rate of all countries in Europe. From the late 19th century until about 1970, they were very much pro markets, economic freedom and minimal government involvement. Then Sweden’s socialist government from 1970 to 1991 attempted socialism, and it failed dismally. In fact, Sweden recorded the lowest growth rate in Western Europe.

Then, after 1991, the government introduced market reform, tax cuts and welfare cuts, which resulted in massive growth, allowing the country to have the second-highest growth rate in Europe, with only the UK being higher during this period. A Rational Standard article states, “Prosperity grows during economic freedom, and is hurt when moving away from this freedom.”

Venezuela – The International Monetary Fund predicts that by the end of 2018, the annual inflation rate in Venezuela will reach 1 million percent. That means that a candy bar that cost $1 today would cost $10,000 at the end of the year. An article in The Washington Post explains why hyperinflations like those in Venezuela occur:

The government wants to spend much more money than it is collecting in taxes — so much more that no one is willing to lend it the money to cover the deficit. Instead, the government uses the central bank to finance the deficit. That puts more money in the economy, but since it’s chasing the same number of goods and services, prices rise to soak up all the extra cash. Unless the government manages to close its budget deficit, it must print even more money to buy the same amount of stuff.

The article goes on to say that Venezuelan president Nicolás Maduro stays on this destructive path while the country’s citizens starve because of socialism.

This is not an issue of left vs. right or of Democrat vs. Republican. This is an American issue. The rise in popularity of socialism in the United States should be a concern to all of us. Just how far have Americans leaned toward socialism? A 2017 survey of adults by The American Culture and Faith Institute (ACFI), 40 percent of adults said they preferred socialism to capitalism. That is alarming! I believe the people in this camp need to review what history has told us about socialism’s repeated failure and to understand what socialism really is.

Why Socialism Doesn’t Work

So why does socialism fail again and again? Mark J. Perry, Ph.D., a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus, gives this reason:

Socialism does not work because it is not consistent with fundamental principles of human behavior. The failure of socialism in countries around the world can be traced to one critical defect: it is a system that ignores incentives. In a capitalist economy, incentives are of the utmost importance. Market prices, the profit-and-loss system of accounting and private property rights provide an efficient, interrelated system of incentives to guide and direct economic behavior. A centrally planned economy without market prices or profits, where property is owned by the state, is a system without an effective incentive mechanism to direct economic activity. By failing to emphasize incentives, socialism is a theory inconsistent with human nature and is therefore doomed to fail.

In August 2018, we are seeing one of the strongest economies in history for the United States, with record employment, rising wages, strong corporate profits and rising markets. This is the result of less tax, less government regulation and more free markets. This benefits everyone, especially lower- and middle-income Americans. This economic prosperity is good news, especially for today’s younger generations to succeed.

We have an amazing opportunity to benefit all Americans with good jobs and a strong economy. Some of the people who are in favor of socialist policies have the best intentions. But it simply doesn’t matter if those espousing free wage and free college are doing so for their own political gains or because they believe it will benefit someone. What matters is that these policies can cripple our economy and country. This is not a political opinion but an economic fact. As we approach the midterm elections, it is important to consider and support candidates whose economic and social policies will benefit the country — regardless of party affiliation.

“Free” Higher Education Isn’t Free

In the 2016 election, Bernie Sanders made free higher education a cornerstone of his presidential campaign, helping him get to a 54 percent favorability rating among 18- to 29-year-olds, according to a Harvard poll. Introducing the bill in a press conference, Sanders said the United States is falling behind as a world leader in educating young people. He might not be wrong about that. Moreover, the sentiment that “Our job — if we are smart — is to make it easier for people to get the education they need, not harder,” is a good one, in our opinion.

How we accomplish this, however, is a matter for discussion. Creating incentives for people to develop a skill and for private business to support this goal makes a lot of sense. Sanders admitted that the plan is costly — and he wants Wall Street to pay for it. In July 2017, he introduced a bill that would abolish tuition and fees at public four-year colleges and universities for students from households making $125,000 or less per year and would make community college tuition-free for students from all income levels.

“Now, some people say that this legislation is expensive, and they’re right. It is,” he said. “Well, I’ll tell you how we’re going to pay for it. We are going to ask Wall Street to end their speculation. We’re going to put a speculation tax on Wall Street.”

This so called “speculation tax” or “speculation fee” will impact every working person who has a 401(k), IRA or any other type of investment. According to USA Today, the estimated cost of the program is $47 billion per year. That would cover, Sanders estimates, 67 percent of the $70 billion it costs for tuition at public colleges and universities. States, he proposes, would cover the remaining 33 percent. This could lead to additional state income tax that would impact everyone.

“Free” Health Care Isn’t Free, Either

The single-payer health-care system that Bernie Sanders and others advocate would shift payment for all health care services to the federal government, eliminate private health insurance plans and dump all Americans onto public health care coverage. One estimate predicts that the scheme will most certainly include a massive payroll tax hike, an additional 4 percent personal income tax on all Americans and at least an 8 percent tax hike on businesses (even the small ones). The plan would cost, by a conservative estimate, at minimum, $16 trillion to sustain, just for the next decade. This could mean giving everyone Medicare or a new health-care system.

And Neither is “Free” Income

Universal basic income (UBI) is a policy that guarantees a fixed, unconditional income to all members of a designated group or entire country. For centuries, thinkers from Thomas Paine to Milton Friedman have kicked this concept around. Proponents claim UBI would be an efficient replacement for the United States expensive entitlement programs and, as a result, would actually reduce overall costs.

The reality is that UBI would just replace one pricey system for another. And unlike the current entitlement/welfare program, which has standards for determining who qualifies for certain aid, UBI would be given to everyone. This would dramatically increase the pool of citizens receiving benefits from the state and inflict massive expenses across the board. This would also create a disincentive for working, as we have seen in places like Greece, as mentioned. There are always claims that UBI could decrease, reform or even abolish our welfare system. But no one seems to have any idea about how this transition would actually look.”

The likely scenario is that UBI would be in addition to, not instead of, the current welfare program. The idea of changing Social Security is known as the third rail of politics” because the mere mention of it can mean political death. Anyone in the policy realm knows that there is no better way to alienate older constituents than by threatening to take away their Social Security benefits. In fact, the mere mention of decreases usually causes rooms full of senior citizens to fear for their well-being. Even if an alternative plan is presented to them, it does not calm their fears of what might happen during the transitionary period. It is for this reason that Social Security is often called the “third rail” of politics.

Also, trying to get individuals transitioned off of one welfare plan and into the next requires, at least temporarily, the funding of both programs. A decision to enact UBI would not magically abolish the American welfare system. America’s welfare program has been around for so long, it would take time to unroot it. Too many people have become reliant on our welfare state to have it simply wiped out overnight.

And who is going to pay for the process in the meantime? Well, the American taxpayer, of course.

If anything, incorporating UBI in America would most likely result in an additional layer of welfare being added on top of our existing programs. This would, in effect, increase the state’s power rather than decrease it. Governments are rarely keen on relinquishing their power, and there is great power in controlling the welfare of the citizenry. It is therefore highly unlikely that the welfare state as we know it today would simply cease to exist.

UBI creates the illusion of decreasing the welfare state, when the facts of the matter all point to the contrary. Everyone would like to live in a society where no one wants for anything and everyone is provided for. But we live in a society of individuals with individual aspirations and goals. Pretending that we can centrally plan a welfare system with so many distinct wants and needs is unrealistic and unobtainable.

Our current system cannot be maintained because it’s too expensive. Period. Already, programs like Social Security are projected to run out of money within the next decade, and there is no plan for how to approach this coming storm. Why would anyone think a broader welfare state situation would be any different?

We Are Here For You!

Nobody knows what the future holds. Regardless of the new political and economic policy, world events or changes that come, we are here for you. Rather than plan based on speculation, we believe in planning based on your needs and current facts. Our customized and proactive approach allows you to adapt to any changes in our tax laws, social net, markets or economy.

We look forward to being your partner. Please contact us whenever we may be of service to you, your family and friends. Right now, we are taking clients only by referral. We are happy to meet, without cost or obligation, with anyone you feel would benefit from our personal Vision Planning™ process. randy.carver@raymondjames.com or (440) 974-0808.