Musings Report #42 10-19-13 The Incentives of Socialism
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The Incentives of Socialism
I am currently in France visiting my brother and his family. Given that France has a Socialist government and a culture with strong socialist values, it seems timely to discuss the incentives built into socialism.
A discussion of incentives is not a critique of socialism or capitalism, or of political economies (such as those of most developed nations) that combine features of both ideologies. It is more an inquiry into the "lived experience" of how typical humans respond to the incentives and disincentives presented to them by a socialist-flavored political-economic system.
Since we're discussing experience rather than theory, we should start by stipulating that incentives are experienced quite differently by those benefiting directly from socialist programs (for example, drawing a payment from a social program) and those who are paying a significant percentage of their earned income in taxes to support the social program spending.
This tends to divide people into three basic groups: people who are not employed who draw benefits, people who are employees of corporations and the self-employed.
One feature of our experience of social programs is that the the source of the money--the state--is abstract and impersonal. To those collecting benefits, the money is not coming from individuals who made sacrifices to pay the taxes that are then funneled to the individual beneficiaries, but from a State that "owes" its citizens the social benefits regardless of any other conditions.
This perspective distances the individuals from the State's social programs; the money, in effect, comes from some mysterious, distant source.
The experience of the self-employed paying the taxes is intensely personal: paying over 60% in social charges right off the top (the basic social-tax rate in France) or 40% in the U.S. (15.6% Social Security/Medicare and 25% Federal income tax) requires a continual sacrifice of labor and productive work.
The beneficiary does not see that the State is not an abstraction so much as a collective of taxpaying individuals, while the self-employed/small business person experientially understands that the State's programs collect money from taxpaying individuals and transfers the money to other individuals, many of whom do not work or pay taxes.
Humans quickly habituate to windfalls--the classic something for nothing. If I can draw $1,000 a month in cash for doing nothing, what is my incentive for devoting myself to earning $1,600, of which $600 is siphoned off in taxes to pay others $1,000 per month without obligations to the State or other individuals?
Once again, this discussion is not aimed at theory, or the relative necessity of social spending to feed orphans and widows (or suppress political rebellion); it simply asks what incentives are present for the three basic groups: those not working drawing cash social benefits, employees covered by social programs and employers' benefits, and the self-employed who experience the unbuffered tax rates of the State.
The generic answer is that individuals will prefer to earn $3,000 per month rather than collect $1,000 per month for doing no paid work, but this calculus of incentives and choices is contingent on the benefits and the relative difficulty of earning substantially more money by working in a high-tax system.
If a family can collect $50,000 a year in benefits, then what incentives remain to devote effort to productive work? Those with few skills have to devote even more effort than the highly skilled to earn more than they can collect for exerting no effort.
Demographically, systems with rapidly rising populations of beneficiaries and shrinking populations of workers paying substantial taxes are financially at risk of insolvency, by one means or another.
The incentives presented to beneficiaries and the self-employed in States with generous, universal social programs are equally at risk of collapse, as the productive flee, opt out or move to the cash economy to survive rising taxes that increase for purely demographic reasons.
There are two self-reinforcing dynamics in play in socialist programs: as paid work pays less (in terms of purchasing power) and taxes rise, the incentives to work in the formal economy decline. As benefits increase, the incentives to exploit the windfall of "free money" (i.e. money paid without obligations to the State or fellow citizens) increase.
In my analysis, a community economy of mutual obligations and benefits is the only viable alternative system.
Best Thing That Happened to Me This Week
Home-cooked meals with my family in France.
Market Musings
Unsurprisingly, global markets responded to the end of the faux theatrics of the U.S. government shutdown with a paroxym of bullish momentum. The way is open for higher highs, and there are few reasons to doubt that this momentum can continue for some time. Gamed statistics out of China are supportive of a global rebound, and we can only stand uneasily on the sidelines, either playing the rebound with an eye on the exit, or awaiting a blow-off top that can be shorted with some confidence.
From Left Field
Meet The Monster Of The Housing Market: Presenting "Vampire REOs" Where Half Of Americans Live Mortgage-Free -- a lucky few million are living free of rent or mortgage as banks hold defaulted homes off the market.....
Dead Reckoning for American Narcissism: "Yet how strangely this generation seems to embody everything both seductive and disturbing about the American identity—a technical genius, a misplaced sense of exceptionalism, an artless optimism, and a corresponding incapacity to see harsh realities staring it in the face."
Philadelphia Raises Stakes With Plan to Reverse Blight (via Joel M.) "With an estimated 40,000 abandoned houses, lots and commercial buildings, Philadelphia wants to consolidate its inventory of distressed real estate by creating a “land bank” to make purchase more attractive to potential buyers."
Thanks for reading--
charles
