Opinion: Crony capitalism responsible for socialism's new popularity

Matthew D. Mitchell

Last week Reps. Alexandria Ocasio-Cortez, D-New York, and Rashida Tlaib, D-Michigan, took their seats in the U.S. Congress. Both are members of the Democratic Socialists of America (DSA). They are not the first members of the DSA to hold elective office in the United States. Nor should they be confused with the-state-should-own-the-means-of-production-type of socialist that occasionally holds office in other countries. These are Democrats whose positions put them on the left wing of the left party. They want more government spending, higher taxes, and more regulations, but they don’t want to abolish private property.

Alexandria Ocasio-Cortez, a winner of a Democratic Congressional primary in New York, acknowledges her supporters as she is introduced at a fundraiser Thursday, Aug. 2, 2018, in Los Angeles.

Still, it is remarkable that “socialism” continues to have cachet some 27 years after Berliners—presumably well acquainted with its miserable results — danced atop a crumbling wall. Indeed, last summer Gallup found that for the first time in its measurement, more Democrats have a positive view of socialism than of capitalism. Meanwhile, President Donald Trump has earned plaudits among some Republicans for his use of state power — taxpayer-funded subsidies and threats to impose selective taxation — to pressure private companies like General Motors, Carrier, and Harley Davidson to do his bidding.

Rep.-elect Rashida Tlaib (D-Detroit) votes for Speaker-designate Rep. Nancy Pelosi (D-CA) while her son does a dance move  during the first session of the 116th Congress, Thursday at the U.S. Capitol.

Even as the left flirts with socialism and the right dallies with state-directed industrial policy, the empirical case for free and open markets has never been stronger. For more than two decades, economists have been measuring economic freedom around the world.

The Fraser Institute’s annual Economic Freedom of the World index, for example, employs publicly available data to assign economic freedom scores to 144 countries. Countries with lower taxes and modest public spending, fewer regulations, open trade, sound money, and greater protection of persons and property are scored as being more economically free.

The index has now been used in about 200 peer-reviewed academic studies, and the overwhelming majority find that countries with greater levels of economic freedom enjoy better outcomes: higher incomes, faster growth, longer life expectancies, greater gender equality, and even higher levels of happiness. It turns out that the poor are especially likely to benefit from economic freedom: the poorest 10 percent of earners in the most-free quartile of countries earn nearly eight times as much as the poorest 10 percent of earners in the least-free quartile.

Worldwide, economic freedom is on the rise — especially in former communist and developing countries. And as more people have enjoyed greater levels of economic freedom, more have been lifted out of poverty. The World Bank estimates that in 1990, the year before the Berlin Wall fell, 36 percent of the world population lived in extreme poverty, defined as consuming less than $1.90 a day (adjusting for inflation and local prices).

In 2015, the last year for which data were available, just 10 percent of the world’s population lived in extreme poverty. To put this another way, as economic freedom has expanded worldwide, 130,000 people have been lifted out of poverty every day.

So why the continued skepticism about free markets? What explains the enduring appeal, at least in some quarters, of socialism? One possibility is that people too often mistake our economy for a genuinely free market. While measured economic freedom has been on the rise worldwide, it precipitously fell in the United States under presidents G.W. Bush and Barack Obama (the nation fell from 4th place in 2000 to 13th by 2014). Whole sectors of the American economy (think: health care and finance) are subject to extraordinary levels of intervention. Regulations, subsidies, and selective taxation reach into every corner of our economic lives.

As Brink Lindsey (on the right) and Steven Teles (on the left) document in their new book, “The Captured Economy,” much of this intervention is designed for the benefit of business. Regulations like occupational licensing restrict competition and protect incumbent firms. This protection comes at the expense of higher consumer prices and fewer opportunities for marginalized populations such as immigrants or those with criminal backgrounds.

Subsidies in the recently passed farm bill prop up a handful of large agribusinesses at the expense of hundreds of millions of taxpayers. Agencies such as the Export-Import Bank are designed for the sole purpose of dispensing privileges to large, multinational corporations like Boeing. Relocating or expanding firms such as Amazon increasingly expect local governments to shower them with corporate welfare. And big banks grow bigger based on the expectation—established over three decades—that policy makers will not let them fail.

This is not free market capitalism.

It is, as economist Randall Holcombe puts it in his book on “Political Capitalism,” a “system in which the economic and political elite cooperate for their mutual benefit.” The political elite tilt the economic playing field in favor of the economic elite, privileging them through subsidies, regulatory protections, and targeted tax breaks. In exchange, the economic elite then help to ensure that the political elite remain in power. The rest of us pay the bill for this quid pro quo through higher taxes, higher prices, and a less efficient, less dynamic economy.

Unfortunately, many observe this tilted economy and mistake it for free market capitalism. If this is capitalism, they reason, socialism must be better.

It is not.

But that doesn’t mean that we need to be content with the status quo. Genuine free-market capitalism requires a free, and level, economic playing field. No special privileges for politically connected or politically correct firms. There is much to do to make ours an open and level economic playing field.

Could Representatives Ocasio-Cortez and Tlaib help achieve this goal? Lately, they have taken a lot of heat for staking out radical positions on taxes and spending. But their conservative and libertarian critics should also take note of some points of agreement. Both have denounced corporate welfare and Rep. Ocasio-Cortez has been vocal in her opposition to the Amazon HQ2 deal in New York. In this, they have been joined by a chorus of free-market thinkers who are appalled at the government’s selective favoritism. Perhaps these socialists have more in common with free-market advocates than they or their critics realize.

Matthew Mitchell is a senior research fellow and the director of the Mercatus Center at George Mason University’s Equity Initiative.