The Socialist Plan for America

Most socialist countries have pursued extreme policies. Most, but not all. The argument made by socialists and dyed-in-the-wool communists, such as Bernie Sanders, is that socialist policy in the United States would involve fewer increases in tax rates, but one notices that Sanders never discusses the likely economic or social consequences of socialism. Why should he? He’s trying to sell socialism to the American people. A full discussion of socialism’s likely ramifications would only defeat his argument.

To begin with, socialist policy produces lower real growth. We know this because we can observe the effects of socialist policy on citizens who live in countries that embrace it. Experts who have not sold their souls to a proven ruinous ideology tell us that in the long run, American socialism would likely reduce real GDP by 40% (See Economic Freedom of the World, 1975-1995, Fraser Institute and Economic Freedom of the World Index). The Fraser Index provides a range between the least-free (1) and the most free (10). These indicators are aggregated to five main categories, which are given equal weight in the overall. The categories are indicators of economic freedom, not political freedom or civil liberties. The categories are:

• Size of government in spending, taxing, and size of government-controlled enterprises
• Legal system and property rights
• Sound money (measuring policies relating to inflation
• Free international trade
• Limited regulation, the freedom to exchange and trade domestically

Currently, the United States is at 8.0 (out of 10). Moderate socialist nations average between 6.0 and 7.5, which is an increase from 5.5 in 1975 when most of these countries aggressively pursued socialism (many no longer do). As a bellwether, Venezuela is rated at 2.9. What this tells us is that increases in socialist policies correlate to increases in public financing, public production, and government restriction through regulation, all of which substantially reduces each citizen’s disposable income. The less disposable income a citizen has, the less economic freedom he or she enjoys. More to the point, the EFW index confirms that increased economic freedom results in improved national economic performance: faster growth, higher living standards, and a happier society. As an example, a one-unit increase in the EFW index from 1980 to 2000 equated to a 2.6-point increase in private investment and a 1.2% increase in economic growth during the same period (See Institutions and the Impact of Investment on Growth, 2006). Other studies found smaller effects, but still economically significant.

Bernie Sanders’ voted against gutting the corporate income tax, which had a statutory rate of about 39% for federal and state taxes combined. This rate is well above where the United States is now. He also proposes a 68% rate on dividends and capital gains, which is more than double, also 39-points above where the US is at present. He also wants to add 24-points to the top estate tax rate. Of course, he has to make these proposals if 4-year universities are “free” and Medicare is granted to all. Interestingly, Sanders never quite gets around to the truth: access to medical services is one thing and obtaining quality (life-saving) medical treatment is quite another.

What is the value of medical care that costs a patient nothing? What is the value of a college degree if everyone gets one for showing up to class and has no stake in the endeavor? Obtaining large amounts of tax revenue (to pay for free stuff) ultimately involves resorting to high tax rates on the poor and middle class because these groups generate much of the nation’s income. Some economists call this “widening the tax base.” One way in which socialist countries do this is by imposing a value added tax (VAT), which is essentially a national sales tax. It applies to everyone, whether rich or poor. VAT may demand an added 24-25% to the cost of consumer purchases (added to all other impositions, such as excise taxes and retail sales taxes). In the US, taxes vary by state, but none are as high as proposed by the Sanders’ economic team.

What most people understand with clarity is how much money they’re making, as compared to how much they are bringing home as disposable income. In the United States today, per capita income is 20% higher than in moderate-level socialist countries. People living in some US states have a higher per capita income than in others, mostly as a result of oil production income. Do Americans really want 20% less income under a Bernie Sanders presidency? Among those who do not understand the implications of the Sanders’ proposal, the answer is yes. The blah blah blah of economics is muted and over-shadowed by the words “free stuff.”

If an American purchases a Ford Ranger (small truck), he or she will pay around $24,300.00. In a moderately socialist country, someone buying the same vehicle will pay $40,600.00 (due to VAT). But wait, the actual cost of that truck in a moderately socialist country increases when you add in taxes on fuel. The fact that paying for these additional taxes requires more work (an average of six additional hours per week), workers incur even more taxes. Select any moderately socialist country in the world and then select any worker in any field of endeavor. Compare that person to his or her counterpart living in the United States. Economically, the American worker is 44% better off than his socialist cousin. Why this is true is explained by analyzing consumption. Americans spend their disposable income at higher rates than the socialist cousin. Spending (demand) creates employment. In moderately socialist countries, consumption is 30-35% lower than in the United States.

If we examine “free college” and rely on the Organization for Economic Cooperation and Development (OECD) studies for our numbers, here’s what we’ll find. Despite the fact that most American students pay college tuition, they are more likely to pursue a college education than their socialist cousins. Why? Because Americans realize that they will recoup their tuition through good-paying jobs. Beyond this, from what we know about the quality of “free stuff,” no reasonable person will want to diminish the quality of her or her education.

Sanders, in a recent townhall meeting, assured his constituents that under his plan for free Medicare For All (M4A), consumers can keep their doctor and can choose any hospital they want. As if we haven’t heard this sort of thing before. Bernie Sanders was at least honest and upfront about this: taxpayers will pay more —much more. How much more will depend on their tax bracket, but $20,000.00 more (annually) is not beyond the pale for free education and health care for all.

Economists expect America’s health care sector to grow a fourth of the US economy over the next few decades. “Free” single-payer healthcare continues to be the foundation of socialist policy proposals in the United States. Currently, 141-members of Congress support M4A proposals, which call for a public monopoly to cut costs (See Section 1804, House Resolution 676). Why? Because they are more efficient, or so the argument goes. How is this possible? Because a government monopoly will avoid waste on administrative and advertising costs and will use its bargaining power to obtain better deals from health care providers. If passed into law, the plan would make it unlawful for a private business to sell health insurance, or for a private employer to offer health insurance to its employees. In contrast to Sanders’ scheme, M4A would phase in mandatory enrollment over four years.

M4A is a tax, which the government may legally impose. The issue of quality or productivity of this plan would be determined through centrally planned rules and regulations, but at this point, I wonder if anyone can remember the promises associated with the ACA —literally none of those promises were true or came true for middle-income Americans. Should any American not like the tax charged or the quality of care provided by the government monopoly, there would be nothing they could do about it. Moreover, price competition in healthcare itself would be completely eliminated because all the prices paid to providers would be centrally established by the single-payer. Along with preventing private health plans, preventing private markets from supplementing public programs, and by prohibiting healthcare providers from earning profits, cost-sharing would also be eliminated.

One must wonder, after comparing the United Kingdom’s National Health Service and Canada’s Medicare System (both of these a single-payer system), do Americans really want critical healthcare decisions placed into the hands of median-income health professionals or government bureaucrats? The fact is that in both the UK and Canada, medical professionals receive their paychecks from the government. They are, for the most part, mid-income wage earners who have no incentive to increase their professional knowledge through continuing education because no matter how much they know, it will not improve their income position.

It is not simply a matter of doctors; nursing staffs and lab technicians are also adversely affected by single-payer systems. Waiting lists for critical surgeries in the UK and Canada range from six weeks from the time of diagnosis to six months, but that assumes that patients receive a correct diagnosis (from their barely competent/minimally interested physicians) in the first place. In the UK, the issue is not one involving the availability of hospital beds; it is the availability of doctors and nurses. It is so bad, in fact, that the majority of doctors and nurses in the UK come from other (mostly Middle Eastern) countries—people who are willing to work for less money than their British counterpart.

Even if it were true that UK/Canadian healthcare providers are among the best in the world, high-quality healthcare becomes ineffective when there are delays in diagnosis and/or treatment. Quality degradation takes many forms, from shorter appointment times to longer waiting times for treatment. In European countries with single-payer systems, the average patient spends no more than five minutes with his or her doctor during consultations. In the USA, only 21% of seniors waited more than four weeks to see a specialist; in the UK, this jumped to 51%. This is the Democrat plan for America.

According to Centers for Medicare and Medicaid Services (CMS) in 2016, about $7,500 was spend per Medicaid beneficiary. Should these beneficiaries had been given the $7,500 to spend as they think best, it is more than likely that none of them would have spent it on health insurance. The problem always comes back to the inefficiencies of spending other people’s money on other people. In this case, CMS is spending tax dollars on beneficiaries. By expanding the size of the eligible population for program benefits, those who are currently eligible are unlikely to benefit. The evidence for a trade-off between universal and senior healthcare is supported by both the European single-payer experience that limits care for the elderly and in the US by ACA reforms that cut Medicare spending by nearly $1 Trillion to help fund expansions for younger age groups.

The existing system has:
• Private insurance as well as insurance for lower-income households
• Essentially zero deductibles
• Medicare for the elderly
• ACA for the non-elderly who are ineligible for Medicaid.
• Uncompensated emergency care/guaranteed hospital admission

Thus, M4A leave little room to improve health care among US citizens —and while it is true that the current system has some non-Medicaid eligible citizens who are uninsured, they are healthy people who have chosen not to purchase an ACA plan. They have exercised their right to choose.

Additional consequences of socialized medicine will be a much smaller economy because single-payer health care provides, as I said, disincentives to work and learn. If financed solely through higher taxes, M4A will reduce long-term GDP by 9%, and household incomes, after taxes and health expenditures by 20%. Worse (for those suffering from chronic or acute medical problems), M4A will reduce longevity while at the same time have a minimal effect on increasing the fraction of population with health insurance.

A thinking American will wonder, given what we know about Medicare now, how government will finance M4A. By 2022, CMS projects that the private sector will spend $1.47 trillion on private health insurance, and $460-billion in out of pocket health expenses in an economy of $24.4 trillion Thus, M4A will increase healthcare utilization at the federal government’s expense … adding $2.37 trillion to government spending. Where will this money come from? Without additional taxes, the federal government would have to cut all other programs in the federal budget by a whopping 53%, which implies significant reductions in Social Security and Medicare benefits, and serious reductions in the Department of Defense. One projection includes a 79% cut to Social Security benefits ($1 trillion annually) and a 74% reduction in Medicare services to those who are currently entitled.

Proponents of M4A argue that the population would be no worse off financing M4A solely with taxes because these taxes would merely replace the cost of premiums paid to private sector insurer. It is an inane argument because it ignores the fact that taxation distorts economic activity, making the cost of tax revenues larger than the revenues themselves. Economists call this the dead-weight loss of taxes in excess or revenues. Here’s an example: if the federal government imposed a $1-million tax on air travel, government would collect no revenues because no one would fly. Moreover, such a tax would impose a more onerous burden on the population by forcing them to replace air travel with some other form of transportation. The cost of collecting taxes to fund M4A (in one year) is 1.5 times the additional revenue needed to fund the program (See Toward Obtaining a Consistent Estimate of the Elasticity of Taxable Income using Difference-in-Differences, Journal of Public Economics 117: 90-103, 2014).

Of course, there would be a middle ground: funding M4A by using spending cuts and tax increases. The Congressional Budget Office estimated that the ACA was evenly funded by both tax increases and cuts to Medicare and Medicaid, but for a program as large as that proposed by Democrats, it is unclear whether it is feasible that sufficient tax revenue can be collected in the presence of tax avoidance behavior, particularly by higher income populations that provide the largest share of total federal tax revenues. If the maximum amount of revenue collected (the height of the Laffer curve) remains below that required in new funding, then spending cuts will be required regardless of lawmaker preferences.

All in all, poor Americans have a higher living standard than their socialist cousins. One has to wonder why Bernie Sanders wants to change this. One wonders how the American people are so easily convinced to embrace such a ruinous system as M4A. One must conclude that the only reason anyone would support single-payer health care is that (a) they do not understand its ramifications, and/or (b) politicians—like Bernie Sanders—intend to deceive them through confusing and often repeated political blather.