The Economic Realities of Democratic Socialism

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

On Jan. 27, 1996, President 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, last Tuesday, 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 Pres. Clinton’s message with that of today’s Democratic Socialist darlings, Bernie Sanders and Alexandra Ocasio-Cortez. Sanders’ 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 healthcare program.”

True to form, Osario-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 which say they prefer socialism to capitalism. The Democratic party of the 90s is so different from the one that 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 Bernie/Osario-Cortez ones are merely aspirational. Clinton ran on a big-government takeover of healthcare, 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 from 20.3 percent in fiscal year 1994 to 17.6 percent of GDP in fiscal year 2001. Inflation adjusted spending grew by 12.7 percent over 8 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’ Medicare for all proposal. While granting Sanders every single 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 gross domestic product 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 that 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 healthcare and the rest. He finds that, the Bernie/Osario-Cortez dream agenda would increase 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 spend already 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 CBO 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 Osario make Clinton look like Murray Rothbard.  

They also make president Obama look like 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.

To pay for all that additional spending would requires jacking 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.

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.

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 show, the effect is even stronger as government benefits grow.

And then there’s the long run. Economic research produced as a response to president Obama’s aspiration to jack up the top marginal tax rate dramatically during his presidency shows that higher taxes might not dissuade today’s rich people from working, but these higher rates will dampen 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 work under such plan. It’s amazing what twenty five years can do to a political party’s ideology.