Press Call on the CEA Report: The Opportunity Costs of Socialism
THE
PRESS CALL
BY CHAIRMAN OF THE COUNCIL OF ECONOMIC ADVISERS KEVIN HASSETT ON CEA REPORT: THE OPPORTUNITY COSTS OF SOCIALISM
Via Telephone
A question and answer portion will follow the opening remarks. Please keep your questions related to the topic. And with that, I'll turn it over to Chairman Hassett.
CHAIRMAN HASSETT: Thanks a lot, Ninio. And I guess we should qualify what the operator said: All the lines are muted except mine. I don't think I should be muted.
Hello. Thank you for joining us today to discuss the newest CEA report, "The Opportunity Costs of Socialism." I'm going to make a few remarks about the report, and then we'll open up for Q&A. And should anybody want to follow up even after that, then, you know, you can reach out through Ninio and arrange a discussion with me.
I'm here with several other CEA economists who contributed to the report, and they may chime in on background as we take questions. If someone other than me says something you'd like to quote, then I'd appreciate it if you could check it with us.
First a little history. The CEA was established over 70 years ago by the Employment Act of 1946. Two of the charges laid out in this legislation -- charges that I take very seriously -- are the following:
First, we're to develop and recommend to the President national economic policies to foster and promote a free, competitive enterprise.
Second, we're to gather timely and authoritative information concerning economic developments and economic trends, both current and prospective, to compile and submit to the President studies relating to such developments and trends.
As many of you know, socialism is making a comeback in American political discourse. The goal of this new CEA research is to evaluate the impact of several socialist policies that have recently become popular, and that is: What would be the effect of abandoning America's longstanding commitment to principled, free-market activity commonly cited as crucial factor in national prosperity, ingenuity, and innovation and opportunity.
Let me start with our topline findings based on large empirical literature. How would
Note that living standards in Nordic countries, despite all of that (inaudible) activity, are already at least 15 percent lower than in
Replacing
We find that if "Medicare for All," which is socialized medicine, were financed out of current federal spending without borrowing or tax increases, then more than half of the entire existing federal budget would need to be eliminated through cuts. Alternatively, if "Medicare for All" were financed through higher taxes, GDP would fall by 9 percent for about
So those are the highlights. Now, to go through the research in more detail. A great deal of evidence shows that socialism robs workers and businesses of incentives to work, earn, and innovate by outlawing private business and important sectors, levying high tax rates, and centrally controlling economic activity.
The negative output effect of socialism is observed in cross-country studies of the effect on economic growth, of greater economic freedom. Economic growth is important because it fosters prosperity for all. Academic research in this area finds that greater economic freedom is associated with better economic performance. To expand upon one example cited earlier,
Research suggests that a reduction in
Now, here's a snapshot of
But nonetheless, the average real GDP per capita in the
People of Nordic descent currently living in the
American socialists may be envisioning moving our policies to those of the Nordic countries of the '70s, when their policies were more in line with economists' traditional definition of socialism. We estimate that if
And as we discussed in the paper, their past experience with socialism is one reason why the Nordic countries have moved so many of their policies away from socialism and away from the socialist ideal that many people have mind when they think of
As the final example of the stark differences between centrally planned economies and the free market,
Historical examples of socialism failing to work as intended can be illustrated by these points: Socialist takeovers of agriculture, one of the largest sectors of the economy in many places where socialism has been tried, tended to deliver the opposite of what was promised. Government takeovers were advertised as the path to abundant food, helping the downtrodden, and punishing the rich. Food production plummeted and tens of millions of people died from starvation in the USSR,
Ironically, while socialism was supposed to make people more equal and allow the poor to escape oppression, it was the end of socialism that brought more than a billion people out of poverty and made world incomes more equal.
Let's look at the parallels between classical and modern socialists. Both maintain that workers are exploited by business owners, profits are economically wasteful and should be prohibited. They both promise that a government takeover of agriculture, healthcare, and other sectors now lowers cost, increases productivity, and prevents worker exploitation.
However, while the classical socialists were willing to use state brutality to advance their agenda, today's Democratic socialists, of course, are not.
Another area that would be affected by recent enthusiasm for socialist policy is healthcare. It's currently one of the largest sectors of the
"Medicare for All" legislation nationalizes the payments for 18 percent of the
As I said earlier, "Medicare for All" is costly. If financed out of current federal spending, without borrowing or tax increases, then more than half of the entire existing federal budget would need to be cut. This would imply cuts to
If financed through higher taxes, household incomes after taxes and health expenditures would fall by about 19 percent. Evidence on the productivity and effectiveness of single-payer systems suggest that "Medicare for All" would reduce short- and long-run longevity, as well as overall health and healthcare delivery. And we go into this in detail in the paper.
For example, wait times to visit healthcare specialists are low in
Among the 11 countries analyzed by the survey, the
In addition, "Medicare for All" would reduce medical innovation, depriving Americans and the rest of the world of new treatments and cures.
You know, higher education is another realm where socialist ideas, while well intended, have had limited success. And in the paper, frankly, I found this to be about the most surprising part of the paper. We've looked at the effect of zero tuition -- zero college tuition in
And to put it another way, the rates of return to a college education in Nordic countries are low, and propensities to invest not high, despite the fact that such an investment requires no tuition payment out of pocket. I think the title of that section of the paper is "Higher Education is Free in Nordic Countries, But Is It Worth It?" And it looks like American education outperforms, even though it's not free.
From an economic perspective, it's not difficult to see why socialism has not been optimal. It provides little material incentive for production and innovation -- that is, for people in businesses to do what they can do to enlarge the economic pie. By distributing goods and services for free, socialism provides little incentive to reduce waste, and robs the market of important signals as to what people want, when they want it, and where they want it.
Time and again, we see socialism result in less output and lower-quality output. To this end, as then-Prime Minister of the
I'll close by sharing this anecdote with you: Prior to the first five-year plan, economists in the
I hope this has been informative, and I'm happy now to pause and take your questions.
Q Hi, Kevin. Good morning. Thank you for doing this. Appreciate it. As you're holding this call on socialism, the President has been saying over the last few weeks that the
I'm wondering how the President makes the argument that the next
CHAIRMAN HASSETT: Hey, thanks a lot for the question, Blake. And, you know, I think that certainly there are proposals on the table, like the "Medicare for All" proposal that are very consistent with the design of socialism.
And I think that my role at CEA is not to be a politician but to be an analyst. And if our study convinced people of all parties that, if they rely on central planning and try to reduce the influence of private property by either specifically nationalizing things or regulating and taxing things just about into oblivion, that that would be bad for the overall economy, then I would feel like the paper had accomplished its objective.
Q Hi. Chairman Hassett, thank you so much for doing this. Two questions. How much time and money did it cost to put together this report" And then, secondly, a lot of this report gets at issues that are exposed to Baumol's cost disease. And how much do you think the trend towards socialism reflects the fact that maybe the market system right now, its mechanisms are not dealing with the wealth gap or containing healthcare costs for everyday Americans?
CHAIRMAN HASSETT: On the first thing that -- so the CEA is a staff of a few dozen people. And we began this report -- basically, there was sort of a changing of the staff, a turnover of the staff in the middle of the summer, and a bunch of new staffers arrived here, including
And when we had a sort of staff meeting to discuss what we're going to pursue next, then this was a topic that everybody agreed would be a worthy one, given how socialism is something we've been reading about in the news. It's our job to go through academic literatures and help inform a public debate.
Now, it is true that innovation is lower in socialist economies, and I haven't really seen much of a solution to that. But I don't really have in mind like where you're going with the Baumol part of your question, if you'd like to try to rephrase it.
Q Sure. I guess, you know, there's one theory that, basically, low-productivity industries like healthcare or education naturally have costs that increase, and ultimately the government bears some burden of that. Do you think that that's not a factor to be considered" Or -- I mean, how do you view that, given kind of what you're laying out, saying that socialism will literally deteriorate growth?
CHAIRMAN HASSETT: That's why I related it to -- or, even, I could go outside of your question a little bit, that one of the things that you see in the long-run growth literature is that countries that have really large government share of GDP tend, in the long run, to have lower growth and really long-run growth equations.
And my intuition for that always is that total factor productivity, which is the thing that comes from inventiveness and innovation, isn't something that you get a lot of when government eats up a bunch of GDP. That tends to be the private sector that delivers that.
There's a heck of a lot of innovation in the private sector right now, in places like healthcare. In fact, you know, you might even argue that it's about the most innovative sector. So I think that innovation can help you with the cost problem over time. But if the government takes over in an area of the economy, then there's likely to be innovation in that space.
Q Hi, Kevin. Thanks so much for taking the time to do this call. Two things. One -- you alluded to this in your opening remarks -- but is it (inaudible) that, particularly the Swedish example, the period of what you consider "pure socialism" was only a very brief one in the 1970s, and then they quickly reformed away from that" One.
And two, what would you make of the pushback on
CHAIRMAN HASSETT: So, on the Swedish example, you know, it's just something that grew over time. And, in fact, it was like sort of in the early '90s where things really started to turn. I can remember, even at the time,
You know, I think that in
And so I think that, inherently, when you undermine property rights, you also undermine the safety and stability of a country.
Q Hi, Kevin, thanks for doing this. I'm curious, nowhere in the report do you talk about industrial policy, and there's very little mention of trade or tariffs. But I'm curious, by the report's metrics, would the Chinese economy today be considered something that would be sort of collapsing under problems and not something to emulate" Or would it be something that a capitalist country would want to take lessons from in its own policies?
CHAIRMAN HASSETT: Thanks for the question. Yeah, this is something that we ourselves, as a large group, study carefully and (inaudible) over. And I think that the first observation is that, as
Of course, they still have large state-run enterprises and so on. And so they're really, at this moment, something of a hybrid; that they've got pockets of the economy that are maybe even less regulated than they are in many developed countries, but other pockets of the country that are not. But the really rapid growth that we've seen in
Q Hey, Kevin, thanks again for doing this call. I just sort of wanted to clarify a little bit your views on the Nordic countries. Because on the one hand, you seem to be saying that they're actually a lot freer and less socialist than socialist advocates in the
And this is sort of a second question: Can you talk about the GDP number" I got 19 percent decline of GDP. Can you talk me through how you get that exactly?
CHAIRMAN HASSETT: Sure. You know, the Nordic -- the affection, or lack thereof, for the Nordic countries, you know, I think if you look at their current policies, then they've certainly done a lot of things that are quite different from the textbook socialist ideal. And as they've done that -- which is a departure from their policies of the early '70s -- then we've seen that their economic status has improved dramatically.
So, in some instance, you can say that Nordic countries are kind of like the proof that when you move away from classical socialism, that it improves the welfare of its citizens, even to the point where you see things like privatizing the post office and so on, which is not something that you expect to see in a purely socialist country.
So I think that the actual -- like what do we think about the Nordic countries -- you know, one of the persons on the team helping to write the paper is himself a dual citizen with Swedish citizenship. And I know he loves both countries. I would say that the path of policy over time is a thing that we try to focus on.
In terms of how the GDP number is calculated, basically what happens is that there are -- there's this literature where they take indices of economic freedom, which you could think of as being a variable that you could sort of spin between zero and one. And if it's one, then you're all socialists, and if it's zero, you're all capitalists. And then they look at how variation in that measure predicts long-run growth.
And from that literature, we took a sort of central tendency estimate to hypothesize what the growth impact would be should our freedom index change in (inaudible).
Q Who came up with the index" You guys came up with that index?
CHAIRMAN HASSETT: No, no, no. There's a big literature on that. And we'd be happy to -- you know, if you follow up with us, we'll send you a link to a bunch of papers on that.
But the index -- I mean, there are a number of different people who have produced indices in this space. But the
But again, I'm happy to follow up and send you some papers to look at. But they're all in the references as well.
Q Thanks for doing this, Kevin. You mentioned that you took this on because socialism was something that was coming up in the news a good bit. Can you talk a little about what sort of analysis the CEA has done on the 10-percent tax cut the President has been talking about in recent days?
CHAIRMAN HASSETT: You know, the President has spoken a lot about how the success of the tax cuts that we've passed -- you know, we've already given the middle class, with an income of
So, right now, the person who's discussing the 10-percent tax cut for the
I think we have time for one more question.
Q Hey, thanks, Kevin. Thanks for doing the call. I have actually two questions, if you don't mind. They're somewhat related. The first one is, you mentioned that living standards in Nordic countries are about 10 to 15 percent lower than in the
And then, secondly, I wanted to ask if you looked -- or if you plan to look at the opportunity cost of inequality" Because in this report you talk about how there are disincentives for higher-income people to continue working if there's higher taxes and more central planning. But since we have such a low labor participation rate, it seems like looking at what is dis-incentivizing lower-income people from working, and potentially inequality being part of that, might be something worth looking at, and maybe studying how other countries that have high inequality measure up against the
CHAIRMAN HASSETT: Oh, yeah, thanks for the question. You know, I think you're right that, in terms of personal wellbeing, that GDP is not the only measure that one could look at. But I think that if we're going to be engaged in big cross-country studies of the impact of economic freedom on wellbeing of citizens, that it's not sort of an odd choice for an economist to make use of the thing that we have the best data on.
I think that if you wanted to write a piece, making the case that changes in life expectancy should qualify the way we think about these things, I look forward to reading it.
Now, we do have a discussion of inequality in the paper, and it is absolutely correct that, in some of European nations, in Nordic nations, that things like the Gini coefficient measures of inequality suggest that they are more equal than us. And I think that, presumably, that equality comes at some costs in terms of per capita GDP and economic growth.
And whether those costs are costs that you would want to accept or not depends on sort of what your own view is of what economists calls what the social welfare function is, like what your inequality (inaudible) looks like. And there's a big literature on that, but I think it's outside of the purview of the call.
And with that, I'd just like to thank everybody for calling in. And please reach out to the press office if you'd like to have a follow-up conversation. And have a good day.
END
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