Liberty + Leadership Podcast Episode 42 - Jason Clemens and Ted Tucker on the Realities of Socialism

My pleasure. My pleasure, too, Roger. Thank you.

Sure. We're a public policy think tank, started in 1974 in Vancouver. We now have offices across the country and we really have two main active divisions. One is Public Policy Research with a focus on empirical measurement, and the second is Active Education. So, like FTE, we do teacher workshops, we do outreach to high school and university students. We even have an economics program for journalists, all aimed at trying to better educate average citizens so that they themselves demand better policies. About 90% of our work is Canadian, but as you mentioned, we do have an international division which focuses on our economic freedom of the world and our economic freedom of North America projects, as well as our new work on gender equality and how it relates to economic freedom.

Well, I started there in 1996 as an intern with a full set of hair and less wrinkles.

Thank you.

So, the genesis for the project was basically what you just alluded to, which is we're seeing a larger and larger, now a substantial share of young people who are not only open to the idea of socialism, but actively saying it's a better system than capitalism. And so for those of us old enough to remember when socialism was a real alternative to capitalism on a global scale, it was puzzling about how on earth could we 30 years later be having the same argument? And so we talked about a project to look at a couple of countries that made a real transition from totalitarian socialism to market democracies so that we can understand what the before look like and what the after look like. We haven't released those studies yet, but I can tell you it's pretty stark in terms of the dismal, grinding life that these people lived under socialism and now the kind of prosperity that they're enjoying. We then expanded the project because what we realized pretty quickly is, and we'll certainly talk about the polling data, a lot of young people and a lot of elected leaders when they say socialism don't mean socialism. What they think they mean is Scandinavian democratic, quote unquote, socialism. So we're profiling two countries in Scandinavia to try to better explain that what a lot of political leaders are trying to sell is not the Scandinavian model. It's something else. And then finally, we want to look at a country that actually has a lot of economic freedom but delivers social programs in a very different way than most Western countries, namely Singapore. And so it was a five country project. What we learned really quickly is we needed something to be a foundation for the entire discussion. And that's what led us to the survey project or the polling project that we're going to talk about today, which is really an update to many other studies and polling that's been done over the last decade or so. That again, consistently shows that young people who I think it's important to recognize never lived through socialism, but a lot of young people are not only open to socialism, but are picking it as the ideal economic system.

Yeah, I think it's a great insight. I think there's a couple explanations. One is clearly age. Basically 18 to 34 year olds are markedly more predisposed to socialism and supportive of socialism than older cohorts, which lived in a world that had the Berlin Wall, had the Soviet bloc countries. So part of it is just the real world experience of having lived through that alternative. I think the second part of the conversation, which is a really important one, is: what do we mean by capitalism when we're talking about an alternative? Professor Steven Globerman and I are quite confident that young people are confusing the status quo today with capitalism, as if having 45% of GDP spent by government, probably another 10% to 15% regulated by government, as if that is a capitalist system as opposed to a mixed system. So I think part of the explanation is a dissatisfaction with the status quo. I think particularly in countries like Canada, the United States, when we have continued corporate bailouts, and really I think in many ways we're living in a corporate world, so I think we want to be careful about status quo versus capitalism. And I think the third thing, which is much more pertinent in the United States, is you've got a lot of prominent leaders who are selling young people a vision that is not workable, and they're selling them on something called socialism that not only has never existed, but cannot mathematically exist because the data is pretty clear, no one wants to pay for it. So I'd say it's a combination, depending on the country we're talking about, of really those three factors.

Yeah, one of the important parts of our poll, unlike most of the other polls we've seen over the last decade, is we actually asked three different definitions of socialism. So one is the traditional one: the government owns the means of production, they own companies and industries. The second is: the government delivers much more services and programs. And the third is: the government provides a guaranteed annual income. What is clear, regardless of the age group, is that when people say socialism, they mean the last two. They mean socialism as a much more expansive government sector, providing more programs and services and or guaranteeing an annual income to their citizens. Even for those young people who are supportive of socialism, it's still a minority who define socialism in its historic or traditional context, which that in and of itself I think is a problem. When you've got 40% of people 18 to 24 saying: 'yes, the government should own companies and own industries so that they direct them.' But again, the dominant definition is the alternative, which is government providing more services and or a guaranteed annual income.

Well, certainly I think there's some important insights, regardless of which side of the aisle, so to speak, that you're on. I think the first one is there's just clearly an unworkable, unsolvable problem for those advocating socialism, because the data is very clear that people do not want to pay higher taxes, which is the Scandinavian model. Regardless of the country, so all four countries that we surveyed, the data was very clear. They just do not want to pay higher taxes. And so when you do the math, you can take all the income of the top 10% and you just don't have enough. Forget the incentive effects. You just don't have enough income there to finance the kind of expansion of government the socialists are advocating for. And so I think from a policy perspective, that's got to start being part of the discussion about this. As economist Harold Demsetz would have said: 'this is a nirvana fallacy' that we're talking about something that's never existed in reality and mathematically can't. And so what's the practical alternative that someone like Senator Bernie Sanders is really proposing? I also hope that the research that we're doing, clarifying the Scandinavian model in Sweden and Denmark, will really help that conversation in terms of: 'okay, if you as a young American want the Danish or the Swedish system, are you willing to support a 25% national sales tax?' The data is very clear, they don't. They want someone else to pay for it. Now, I think one of the really interesting insights for those on the sort of market side of the debate is the danger, which I think is clearly coming out in most Western countries now. The danger when average citizens bear a very low tax burden relative to the services they consume. And so I think for a long, long time, conservatives or free market advocates have said any tax cut, any time, even if it's heavily concentrated at the low end of the income spectrum. The problem, though, which I think we're in the middle of now, is we've got a substantial amount of people who pay very little tax and get services at very little to no cost. And so you have this dynamic which several economists at George Mason have talked about, where people will demand services if they're free, even if they're crummy, because they're not seeing the price of that through any type of tax. So, I do think that's an important insight about the longer term risks of continuing to concentrate the tax burden on the top 20 or even top 10% of income earners, because I do think it leads to this dynamic where you're getting a larger and larger portion of the population who just has no stake in the game when it comes to the tax burden.

Absolutely. So, in Canada, the top 20% is the only group, and it's the same data in the United States and the U.K. I haven't looked at Australia, but the top 20% is the only group that pays a higher burden in total tax relative to their income. So, in Canada, the top 20% earn about 45% of total income, but they pay about 53% of the total tax burden. And so that means the other 80% are paying less in the tax burden than they're earning in income. And this is the foundation for what I would call: 'let's rob Peter to give to me because I'm not paying the price.' And in Canada, there's an interesting dynamic because our national sales tax is visible. So, whenever you make a purchase, you see that tax. It's the most hated tax in the country and it's only 5%. And so when I say to relatives who say: 'we should have a Swedish or Danish system, look at all the free stuff you get,' I said: 'okay, well, so you want our national sales tax to be 25%?' And there's this look of horror of: 'no, no, no, no.' It's that rich person hiding in the forest who doesn't pay his fair share and the data does not bear that out.

Sure, of course. So, Poland and Estonia are the two countries that we're looking at in terms of countries that were totalitarian, socialist countries that transitioned to market democracies. Poland, that will be released in May. So, it's right around the corner. Estonia will be after that and then the two Scandinavian countries. I am certainly happy to share with you some of the results we've seen or that I've been able to see from the Poland study. You look at the data and then you really have to take a step back. As an example, in the 1980s, Polish people waited 15 to 30 years for housing. To me, that data point should be the end of the discussion. We shouldn't then have to talk about that Polish people for basic goods had to work anywhere between four and 17 hours more than West Germans during the 1980s. Those kinds of data, we hope, really start to explain how grindingly poor the average person was in Poland. But perhaps I think the most powerful insight, it'll be interesting to see once we release it, is that the elites within the Communist Party did not live that kind of life. The idea that socialism in its real world form eliminated inequality is just not true. They didn't pay taxes, they used special grocery stores only for party members, they had access to resorts that were only for party members. So, the reality is they didn't live the same kind of life as the average person. Now, seems to me what's important is that they didn't get that special treatment because they delivered a good or service that average Polish people benefited from. They got that special treatment because they were elites in a corrupt political system. And so, our expectation is that there are some really important and powerful examples of what real socialism actually looked like in those two countries, and then thankfully, as they made the transition to markets and democracy, the life of the average Pole and Estonian increased almost immeasurably. Some of the charts actually look like we made them up because it looks like a hockey stick where it's just grinding poverty or stagnating life expectancy, and then you see them starting to catch up with the other industrialized countries when they make this transition. So, I do think there are some really important insights that are easy for people to understand. Like that stat about waiting 15 years at a minimum for housing, that's not what we enjoy in Australia or Canada, the United States or the UK or most Western countries, because to varying extents we have functioning markets.

Yeah, I think it's a really interesting point because I think there's two things happening right now in most Western countries. One is average citizens are getting hit in the face pretty hard with the idea that we can just simply print money through the central bank. I mean, the polling data is clear that inflation is the number one issue in most Western countries. So, it's a really interesting time because for 30 years roughly, we've been talking about the central banks need to have an inflation target, and their only job is to look at the money supply and ensure a stable rate of inflation. The experiment with COVID and the monetizing of the borrowing has led us to the position we're in now. So, I think average people are not interested in an answer that says the central bank's going to finance more government spending, as the modern monetary theory advocates would suggest. I think the second issue or the second aspect of the argument is a tougher one. Particularly as we're seeing in most Western countries, a lower and lower share of households have children. Well, I mean, as Milton Friedman explained a long time ago, he was astounded at the degree to which parents went out of their way to make sure their kids had a better life, even though they wouldn't be around for most of their life. My own view is when you have a smaller and smaller share of households with children, to me it does mean you're more and more open to kicking the can down the road for the cost of current spending, which is debt. The other issue which is related to that, and I think countries like Canada are going to pay a higher price than, say, a country like the United States, is our interest costs for government are increasing quite precipitously, which obviously then create a real wedge between what people pay in taxes versus what they get back. And as a small open economy, we're more susceptible to those interest rate movements. And so that wedge where we're spending more and more money just on interest costs for past debt, I think really starts raising questions when it's not six months, but it's a couple of years. And certainly in Canada, we went through a near debt crisis in the mid 1990s that led to incredibly important reforms. So, I think one of the interesting questions for the UK, Australia and Canada is: 'are we now at the front end of that where the discipline of having to pay interest on your debt is going to impose fiscal discipline on those governments?' I think the US is in a slightly different position because whether China likes it or not, the US is still the reserve currency for the world.

Absolutely. I mean, once people kind of wrap their head around what economic freedom means, it's interesting to see some politicians who say they believe in freedom when it's the antithesis of what they're talking about. But once people get an idea of what are we actually talking about, it is an incredibly powerful tool because as you both know, on issue after issue, in some of the innovative work that Professor Rosie Fike is doing on gender norms, on gender equality and rights for women, on issue after issue, it's just clear that as you get more economic freedom, you get more of all these other things that we value. And so the argument for the socialists of: 'we want a much larger government sector,' where by definition it means bureaucrats and politicians control the resources. You're not getting all these other benefits, whether it's life expectancy, openness to different races and different sexual orientations, whether it's women's rights or gender equality. I mean, all of these other things we tend to value come hand-in-hand with greater economic freedom. So, I think it can be an incredibly powerful tool. And thankfully we've partnered with FTE and TFAS on many projects along those lines, and certainly this project, Realities of Socialism, fits right into that.

Who is in the top? I know Hong Kong has been number one. Are they still number one?

There's kind of a running bet in our shop as to when the data is going to show that they're going to fall, and what's interesting for us is that the country that's going to be number one, we assume Singapore is the fifth country in our series on Realities of Socialism. So it'll be a very interesting discussion amongst think tanks about the Singaporean model.

My pleasure. Thank you.