Press Call on the CEA Report: The Opportunity Costs of Socialism

THE WHITE HOUSE

Office of the Press Secretary

October 23, 2018

PRESS CALL

BY CHAIRMAN OF THE COUNCIL OF ECONOMIC ADVISERS KEVIN HASSETT ON CEA REPORT: THE OPPORTUNITY COSTS OF SOCIALISM

Via Telephone

10:01 A.M. EDT

MR. FETALVO: Hi, everyone. Thank you for joining today's call. Today we are joined by Kevin Hassett, Chairman of the Council of Economic Advisers. The entire call will be on the record, embargoed until the conclusion of the call.

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 the United States change if we implemented socialism in varying degrees" Well, larger governments tend to be financed by the middle class. Nordic countries today are commonly cited as an example of successful modern socialism. If the United States implemented policies similar to those currently in place in Nordic countries, American families earning the average wage would be taxed $2,000 to $5,000 more per year net of transfers.

Note that living standards in Nordic countries, despite all of that (inaudible) activity, are already at least 15 percent lower than in the United States. If the United States implemented policies similar to those in Nordic countries at the height of their experiment with socialism, which was in the 1970s, the U.S. real GDP would decline by at least 19 percent in the long run, or about $11,000 per year for the average person.

Replacing U.S. policies with highly socialist policies, such as Venezuela's, would reduce its real GDP even more: at least 40 percent in the long run, or about $24,000 per year for the average person.

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 $7,000 per person in the year 2022 due to the high tax rates.

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, Venezuela is a nation that carries a value of only 2.9 on the Economic Freedom of the World index, compared to the United States' 8.

Research suggests that a reduction in the United States EFW value to the level of Venezuela's would reduce U.S. GDP by about 40 percent in the long run.

Now, here's a snapshot of Venezuela's economic policies and their results. Over the past 20 years, Venezuela nationalized most oil assets and many other businesses, implemented effectively high marginal tax rates, and centrally controlled prices of consumer and other goods. Oil production dropped as state-owned operations proved less adept than private ownership. Oil revenues were spent on generous social programs rather than investing in the country's oil production capacity, or cutting taxes.

Venezuela's oil production has been declining, while production in Canada, where the petroleum resources are about the same as Venezuela's, has been increasing. Looking at the Nordic countries -- which proponents of socialist policies in the contemporary U.S. often cite as ideal examples of socialism at work -- it's worth noting that the Nordic countries today are not particularly socialist. They did not give healthcare away for free. That is, when Nordic people go to the doctor or hospital, or obtain prescription drugs, they have to pay something out of pocket. They tax profits and inheritances less than the U.S. does. Norway and Sweden do not have these taxes at all. They do not heavily regulate business. They have a much less progressive tax system than the United States. And we find that, today, Nordic marginal tax rates on labor income are not, in fact, far above those in the United States once employment and income taxes are considered.

But nonetheless, the average real GDP per capita in the U.S. is about 15 percent above the average in Denmark, Finland, Iceland, and Sweden. And that's probably because of the legacy of the highly socialist policies of the 1970s.

People of Nordic descent currently living in the U.S. -- it's another way to think about it -- have incomes about 30 percent above the average American, and therefore have incomes about 50 percent above the average of the people who are residents in their home country. And so if you leave Scandinavia and move to the U.S., then you can expect your income to be about 50 percent higher.

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 the United States were to adopt policies similar to those of the Nordic countries in the '70s, then real GDP -- and this, again, it's based on those cross-country regressions -- would decline by 19 percent in the long run.

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 Norway.

As the final example of the stark differences between centrally planned economies and the free market, Cuba had similar gross national income to Puerto Rico prior to the Cuban Revolution of the 1950s. But by the 21st century, Cuban gross national income had fallen by almost two-thirds relative to Puerto Rico, after decades of socialist policy implementation.

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, China, North Korea, and other state-run economies.

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 U.S. economy, similar in magnitude to agriculture at the time of socialism -- many other countries that experimented with it, and thus would be disruptive.

"Medicare for All" legislation nationalizes the payments for 18 percent of the U.S. economy, and makes it unlawful for a private business to sell health insurance or for a private employer to offer health insurance to its employees.

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 Social Security of about $0.7 trillion, Medicare by about $0.4 trillion, and defense by about $4.4 trillion.

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 the United States compared to other countries, especially those with single-payer. According to a survey conducted by the Canadian Institute for Health Information in 2017, 59 percent of seniors in Canada waited at least four weeks to see a specialist during the past two years. Sweden and Norway had rates of 45 and 54 percent, respectively, for that same measure.

Among the 11 countries analyzed by the survey, the U.S. had by far the lowest share, at only 21 percent. The U.S. also outperforms many European countries in the longevity of individuals 75 years or older. It's a nice measure of the effectiveness of healthcare. And U.S. cancer patients live longer than cancer patients (inaudible) new countries after the same diagnosis.

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 Denmark, Finland, and Norway. And however, we found that ultimately somewhat fewer of the young adults graduate from college despite the free tuition. And while many American students pay tuition, on average, American college graduates get their tuition back with interest and then some.

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 UK, Margaret Thatcher, once argued, the way to prosperity is for the state to give "the people more choice to spend their own money in their own way."

I'll close by sharing this anecdote with you: Prior to the first five-year plan, economists in the Soviet Union had observed the productivity losses that came with attempts to collectivize farming. The leadership then prohibited the types of economic analysis that might show the opportunity costs of state farms. Out of fear, economists in the USSR ceased writing about their findings.

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 Democrats, should they gain control of power, would turn this country into Venezuela. However, when you look at the last couple Democrats who have been President -- Bill Clinton had a budget surplus; Barack Obama inherited an economy and turned it around. So there's no real evidence of the last couple Democratic Presidents turning this country into Venezuela.

I'm wondering how the President makes the argument that the next Democrats who get in control will turn this country into Venezuela. Thank you.

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 Casey Mulligan from the University of Chicago, who had been teaching undergraduates this topic.

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 Venezuela using that as an example" Because what is troubling Venezuela is not just economic policy but the political instability and breakdown in dictatorial government.

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, Alan Auerbach and I were brought to Sweden to help them redesign their tax code, as they were sort of looking at the economic consequences of socialism and trying to get ahead of the curve on that.

You know, I think that in Venezuela there definitely is a breakdown in the rule of law. But, you know, that kind of thing, if you take away property rights, is something that's not an uncommon pattern. And so I myself have been convinced by the work of Hernando de Soto that a key element of a stable society is that individual citizens feel like they have property that they can trust is going to be theirs, and at that point they start to defend it, to work it, to improve it. And that's kind of where successful economies come from.

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 China moved away from socialism, and modernized parts of their economy, well, that's when the Chinese economic miracle began to happen. And China started to grow, in sectors of their economy, at rates that were sort of consistent with what economic growth theory would predict they should do given how much catching up that they've had to do.

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 China have really come from the sort of non-socialist part of that society.

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 U.S. suggest. But on the other hand, you're saying that their outcomes are not as good. So could you just sort of unravel that a little bit?

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 Fraser Institute is the one that I think has been most useful to scholars.

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 $75,000, you got about a $2,000 tax hike, and you're going to get a wage increase that we've written a lot about here at CEA over the next few years. And he's saying (inaudible) now, that after the election he's going to pursue giving people an additional 10-percent tax cut. That's outside of the purview of this call, so I'll push the answer to that.

So, right now, the person who's discussing the 10-percent tax cut for the White House is the President, and so you should go to the press office and to the President if you want more information on that.

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 U.S., I guess using per capita GDP. But on a number of other measures, several Nordic countries actually have better outcomes than the U.S., if you're looking at life expectancy, healthcare outcomes, less inequality, which I think you mentioned. So why is it important to look only at the per capita GDP when it seems like living longer might be more valuable to someone versus having per capita GDP?

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 U.S., and what the dangers are of are trending in that direction.

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 10:29 A.M. EDT

The White House * 1600 Pennsylvania Avenue, NW * Washington DC 20500 * 202-456-1111