U.S. Economic Policy

Communism

The logical next step in our discussion of economic theory and its pertinence to American policy and society has fostered a bit of controversy in the past century, and while many nations hesitate to use the word directly, the world still sees quite a bit of this concept today. Despite its (debatably) negative history, we must regard this harshly connotated idea with ambivalence and respect to fully consider its implications on and applicability to American culture.

With that said, lets dive right into the far-left economic theory and the brainchild of Karl Marx and Vladimir Lenin: Communism. Unlike the free-market theory discussed in the last post, true communism has, in fact, existed in the world’s history, most notably in the Soviet Union during the better part of the twentieth century. Under Lenin’s successors, Joseph Stalin and Nikita Khrushchev, among others, the USSR functioned under complete government economic rule and provided the first detailed case study into the effects of communism on an economy and a society. Communist nations still exist today, and some argue that they have become even more communist than their predecessors who created the idea. Politically, socially, and economically, North Korea in the mid-to-late twentieth century may have surpassed its liberator in communism through the notion of distributed goods, the complete lack of property rights (both physical and intellectual), and the stature determining songbun-kyechung labeling system. North Korea has maintained its position as the least free nation (despite improving in recent years) with a 5.9/100 economic freedom ranking; for comparison, it attained nearly the lowest possible value of 1.0/100 throughout three consecutive years from 2010-2012.

The components pushing Communism so far to the left of the politico-economic spectrum define its structure and implementation. Typically, communism comes alongside tyrannical regimes, whose comprehensive power allows for governmental control of resource production and distribution. This economic structure has also been called a “command economy,” a title whose appropriateness stems from the lack of individual rights and ownership regarding consumption and property due to the overarching governmental intervention. While its originators intended for the system to benefit the lower-class and reduce the gap between the top and the bottom, most countries failed to achieve success under communism because of a lack of desire to partake in international trade.

Despite its failures, communism does have some positive attributes integral to understanding its place in history. Besides the idea’s theoretical end goal of complete equality, a successful communist regime will also have a well-educated and well-employed public. A communist regime needs people to work every job in every sector, and theoretically, each profession will return equal reward. Since every positions needs filling in order for society to function, the supply of labor rarely exceeds the demand, which yields a low overall unemployment rate. Accordingly, communism demands a highly skilled labor force since these positions need filling as well. The lasting presence of demand for skilled labor encourages competent people to pursue higher education at little-to-no cost, ideally resulting in a large percentage of the population attaining above a high school degree.

While communism theoretically has the best interest of the working-class in mind, the system has not fared well in the past, and it also has several fundamental issues that makes the theory itself somewhat flawed. In the twentieth century, communism contended with a poor, ignorant public and strictly violent revolts. In a command economy, everyone likely has a job, but the quality and purposes of these many jobs suffered; the lack of earning and inability to save money led to a significantly expanded lower class. As a nation, communist Russia had less than half the GDP per capita of America (at the same time), and it had a predicted Gini Index of 0.229 (very little data has come out of the Soviet Union, so economists estimate many of these numbers). The Gini Index measures wealth dispersion and the USSR achieved a score lower than any other nation in history with Slovenia coming the closest at 0.24 (theoretically, a successful communist society would have a Gini index of 1.0 since no dispersion in income would exist). Furthermore, due to the tyrannical nature of communist regimes, citizens could rarely protest or assemble legally, which led to violent revolt as the only form of rebellion. Adam Smith expresses the primary theoretical objection to communism by saying, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from regard to their own self-interest.” When no incentives exist for someone to work hard, few people will do so making productivity and consequently a nation’s overall economy suffer.

America has never really even approached a communist structure, the closest being a very small push in the 1930s by the communist party of America, gaining over 100000 presidential votes (still well under 1% of the population). Unless some drastic alteration in the American belief system occurs, it seems likely that communism will not influence American society for a long while, if ever at all. While some believe that the “American dream” is dead, the majority of people still have faith in the founding ideals and economic potential of America, making a communist uprising doubtful (at least in the near future).

Free Market Economies

“The American free market system is the greatest engine for prosperity and opportunity that the world has ever seen. Freedom works.” ~Ted Cruz, Hillsdale College commencement 2013

Well not exactly since America does not have a true free market (more on that later), but Cruz’s commentary on one of the best known economic structures emphasizes what makes the system so appealing. A free market economy has several key characteristics, the most notable of which describes an environment in which the government has no influence on trade or business. Realistically, the modern world has never seen a completely free-market economy; Hong Kong comes the closest in 2018 and America has seen spurts of seemingly boundless economic freedom in periods like the Gilded Age, but never has a nation achieved complete laissez-faire capitalism. People ultimately use the terms “true free-market” and “laissez-faire capitalism” interchangeably since a government without influence on the economy effectively equals the hands-off government and demand driven prices described by laissez-faire. Expanding on this a bit, laissez-faire directly translates to “let it go,” or more loosely to “let it be”; when considered economically, this approach allows prices to fluctuate naturally and settle at the true equilibrium point, as opposed to having government dictated floors and ceilings that restrict prices from reaching the optimal point for both consumers and suppliers.

The primary benefits of a hands-off system lie in the market’s ability to accurately and, idealistically, instantaneously reflect both the supply and demand for a good in its price. Letting a good’s price settle at the equilibrium point ensures that suppliers produce no more of the good than consumers demand. This eliminates shortages and surpluses, as well as the economic inefficiency that comes alongside these inorganic developments of external intervention. In addition to basic firm-by-firm and consumer-by-consumer optimization through price accuracy, a free-market economy also limits entry barriers into all industries thereby allowing for greater competition and innovation. New firms in an industry necessarily increases supply which not only decreases prices for consumers, but also fosters market competition. Competition increases lead to more productive firms and technological innovation (to a point) as those companies that fail to innovate and work efficiently fall behind and fail.

 

While helping boost individual firms to prosperity, technological innovations also uniformly improve economic conditions because they increase productivity by allowing a firm to spend resources on new problems that could not have been pursued otherwise. Less noticeably, economic deregulation also allows an industry to flatten out, meaning lots of small firms control it, or to spike, meaning a few small firms control it. While consumers typically find oligopolistic and monopolistic tendencies undesirable, certain industries benefit from companies being able to take advantage of their large size to offer lower prices or higher quality items. For example, a smaller airplane producing company could most likely not produce planes at the same price and quality as Boeing and Airbus simply because this small company would lack the human capital base and advanced supply chain necessary to produce planes efficiently.

Opponents of free-market capitalism typically argue that the system gives too much freedom to big businesses which will lead to higher cost of living, decreased lower- and middle-class pay (and therefore a larger wage gap), and questionable ethical decisions. The primary concern of uniformly increased prices alongside decreased pay arises from the notion that without government regulation, monopolies will arise in every industry and they will have so much power that they can charge whatever they choose for their products which inflates prices while also paying their workers next to nothing for their labor, because no better alternative exists. People effectively fear a reversion to early 1900s working and living conditions, where over half of America’s wealth belonged to the top 1% and only a tenth went to the bottom 50%, industrialists stayed at the top through unjust (but smart) tactics that ultimately hurt consumers, and only the popularization of books like How the Other Half Lives and The Jungle could induce the government to do anything. People also fear that businesses will choose to overlook other ethical decisions, such as amount of pollution released during manufacturing or general employee safety, when the government does not regulate their behavior.

As previously mentioned, a complete free-market economy does not exist, and it never has. It simply exists as a piece of economic theory for researchers and politicians to consider when advocating for changes to policy or administration. Despite Senator Cruz’s statement on the topic, America’s “prosperity and opportunity” has been generated by the relative freeness of our market structure, not by the “free-market system.” Laissez-faire capitalism represents the theoretical extreme in the direction of complete deregulation and governmental passivity regarding economic affairs; next week we will consider the antithesis of the free-market and delve into economies under complete governmental control.

Overview of America’s General Economic Policy

The American government and the economy typically get along pretty well. The government is that parent that hangs around a little bit, not too close but close enough to help if anything goes wrong. Every 10 years or so the economy rebels against its ever-present government, but the parent steps in and the relationship eventually goes back to normal and typically strengthens again with time. A lot of people like to yell at this somewhat protective parent, arguing that the child will thrive on its own and the government can only hinder its growth when standing so close. Others scream the opposite and tell the government to assume an even tighter grasp on its child, controlling it so much that it can never do wrong. And some people think the government has reached the pinnacle of parenthood, finding the perfect mix of involved but not overbearing which has let the child grow and prosper with only a few falling outs along the way.

I hope you enjoyed that extended parent-child metaphor for the American economy (if not, it’s over now anyway). Realistically, the somewhat overbearing but typically sidelined parent comparison fits the U.S. government’s role and policy regarding the economy pretty well. For the past hundred years or so, America has mostly fit the mold of a mixed economy. In the next few blogs, we will dive into some other types of economies and their arguments, but for the moment it is enough to understand that a mixed economy has foundations in capitalism yet undergoes governmental adjustment and imposition to promote public benefits.

Regarding the true “freeness” of the American economy, the government keeps its hands off, called laissez faire economics, to a large extent, but it does tax, subsidize, place tariffs, and control certain things, making it an imperfect version of capitalism. Nevertheless, the public can find satisfaction in many of the government’s economic dealings, such as funding road improvement, subsidizing oil (to lower the price), and discouraging the use of cigarettes through heavy taxation. While the government has not resolved to follow the lead of Hong Kong and Singapore, America still falls in the top twenty worldwide in economic “freeness.”

Accordingly, the 2018 Index of Economic Freedom recognizes America’s “mostly free” nature, and this best describes the economic policy. Some of the intricacies that makes America a mixed economy, however, come in the area of the government’s socialistic tendencies. While the government funds “positive” projects like infrastructure improvements and general health concerns like tobacco and other even more harmful drugs, it covers the cost of these programs through often large and potentially burdensome taxes on the public. In fact, America ranks among the bottom quarter of “free” and “mostly free” economies in tax burden, making this a primary debate regarding American economic policy. The government currently argues that people prefer to fund programs that will benefit them in the future, regardless of whether their taxes increase by marginal amounts in the present. We will explore this tax issue more when discussing overall economic “freeness,” as well as the equally pressing of government spending and financial well-being.

While America does fall in the middle third in government spending per GDP among economically “free” and “mostly free” nations, the yearly budget for governmental expenses averages over 3 trillion dollars for the past decade and this continues to rise again under the new administration.

These extravagant spending numbers in combination with national debt’s reaching over 20 trillion dollars puts America in relatively poor fiscal standing, notably in the bottom three among fellow “free” and “mostly free” states. These statistics throw into question the entire foundation of American monetary policy and beg the question “Can we change something to make America fiscally better off?” While we cannot presently do anything about the 7% interest the government has to pay on its astronomical debt, we could take a look at the funding of Social Security, Medicare, and Medicaid, which comprise 75% “mandatory expenses,” or military and “other” expenses, which make-up just under 75% of “discretionary expenses.” Analyzing current government spending and searching for policy changes to reduce the current expenditure figure could help improve America’s financial health.

In the next several posts, we will discuss the three predominant types of economic system and analyze the potential benefits and pitfalls of each for America, both economically and socially. Later on, we will take one post to look at American monetary Policy and some potential ways to handle the issues that come with the production of currency and the management of credit in the country. The final five posts will more specifically discuss the United States fiscal policy, then will dive into each of the potential raise/spend options for America regarding its current financial standing. Including this post, which broadly overviewed the type of American economy and some issue it currently faces, this blog should give a holistic view of American economic policy, the intricacies within it, and some potential methods for handling the problems it need combat.