The Rise and Fall of Socialism

The Rise and Fall of Socialism


By Lucie Alden

Syncretism has existed since the rise of civilization. The evolution of human society has been a constant rise and fall of competing political systems and socioeconomic structures. Individual societies have not advanced in isolation, they have adopted each other’s successes and attempted to avoid each other’s failures. So why do countries view political and economic syncretism so negatively today, avoiding the foreign influences of socialism or capitalism like the plague? Instead of jumping at the chance to profit from each other’s expertise, the US and Europe seem to be running in opposite directions, each fearing they will lose their identity and morph into hippie, tie-dye-wearing socialists or a blood-sucking capitalists. It’s time to stop running. In the wake of the Great Recession, America has become increasingly socialist out of necessity. The time has come for the Europeans to follow suit and borrow policies from their capitalist comrades in order to bail out their sinking, or at least partially submerged, socialist economies.

In 2008, the US faced a teetering economy. As the housing bubble burst and banks that had made risky decisions were left in debt, the US Government faced an ultimatum: let the banks declare bankruptcy or bail them out. Instead of letting the nation’s leading financial players fail, the US government, under President Bush, made the decision to bail out the banks, buying up to $700 billion in “mortgages and other assets” to increase liquidity and stabilize the economy. Under this decision, banks that had relied too heavily on subprime mortgages, or mortgages granted to individuals with poor credit, were rewarded for their overly risky decisions and saved from failure, which would have been their fate under pure capitalism. This led to the coining of the implicitly judgmental phrase “too big to fail,” as the banks were literally too big and too important for the government to allow them to fail. By intervening and protecting the banks, the US government acted against the laws of capitalism, which rewards efficiency and punishes inefficiency and poor decisions. Instead of letting America’s beloved capitalism strengthen the financial system by rooting out inefficiency and punishing bad banking, the government supported the “losers” and bred inefficiency.

This is a common problem in socialist economies, where state-owned or state-supported enterprises have a disincentive to be efficient, as it is not their own money at stake, but the government’s. This leads to what Janos Kornai labelled the soft budget constraint, where firms expect to be bailed out and, therefore, don’t make decisions based on the competitive notion that revenue must at least cover costs. Firms know that if they fall, the government’s safety net will catch them. In a competitive, capitalist economy, the inefficient firms would be unable to compete with the efficient firms, forcing them out of the market and fostering heightened efficiency and a stronger market sector. This kind of tough love, however, is easier said than done. When the US was presented with this problem in 2008, the government ignored capitalist efficiency theory and turned to socialism, choosing to protect the banks in an effort to quickly stabilize the economy.

Less than a year later, the Obama administration intervened in March 2009 to save General Motors from bankruptcy via the Warranty Commitment Plan, which promised to make good on customers’ warranties in the event that a bankrupt GM could not. Clearly, as Texas Republican Jeb Hensarling noted, the US was on a “slippery slope to socialism.” Quite slippery, in fact: the very same year, the senate passed the Affordable Care Act, making health care more accessible to a greater number of Americans. Take out your tie-dye shirts and practice your tree-hugging, folks: the big bad Socialism just came to town.

The government’s interventionist actions were critical to helping the US economy recover from its crisis relatively quickly, compared to Europe’s still hemorrhaging economies (with the exception of Germany). In a 2014 report, Obama’s economic team noted that “The fact that the United States has been one of the best performing economies in the wake of the crisis supports the view that the full set of policy interventions in the United States made a major difference in averting a substantially worse outcome.” As of February, 2016, the unemployment rate was down to 4.9% from its painful high of 10% in October of 2009.

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Europe’s unemployment rates tell a different story. Eurostat, the European Union’s official statistical office, reported that the “euro area seasonally-adjusted unemployment rate was 10.3 % in January 2016, down from 10.4 % in December 2015, and from 11.3 % in January 2015.” The ever fiscally responsible Germany recovered quickly from the Eurozone crisis, reporting an unemployment rate of 4.3% in January 2016, the lowest in the euro area. Greece and Spain, on the other hand, experienced the highest unemployment observed in November 2015, with staggering rates of 24.6% and 20.5% respectively. Unemployment is even higher among European youth, reaching 51.1% in Greece, 51.7% in Spain, and 42% in Italy in the last quarter of 2014.

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High youth unemployment is worsened by the fact that a large portion of young citizens are obtaining more and more higher education, creating a labor force that is over-qualified for the available jobs. In 2013, “France and Austria were the only Member States where fewer than 50 % of all tertiary students were studying for Bachelor’s degrees,” and in Greece, 89.2% were pursuing a Bachelor’s degree. Part of the reason for an increasingly educated youth population could be the minimal to nonexistent costs of higher education in Europe. In France, for example, the annual public tuition for B.A. is 189.10 € and in Finland, Norway, and Greece, among others, a Bachelor’s degree is completely free. Without the cost constraints that, say, American students have, there is less of an incentive to stop acquiring education at the personally optimal level, or the level that maximizes future earnings with relation to costs. This leads to the over-education of European youth, increasing structural unemployment and decreasing the net benefit of higher education.

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In a similar vein, economists have attributed Europe’s relatively higher rate of unemployment to states’ generous welfare system and high unemployment benefits. Though it may be unpopular with Europe’s citizens, if countries like Greece and Spain, with high unemployment and even higher youth unemployment, wish to dig themselves out of debt, they may need to take a more capitalistic approach. When their country is over €300 billion in debt, as Greece is, citizens cannot expect the same level of social welfare they enjoyed under sunnier economic skies. By cutting their social programming, countries like Greece, Spain, France, and Italy could continue to tackle their economic issues in two dynamic ways. First, decreased social programs would free up government funds which could then be directed toward debt payments. If Greece’s debt is left unpaid, Greece and the EU will continue to be forced to make “policy choices that guarantee recession and high unemployment for years to come.” The faster Greece and other dangerously indebted European countries such as Italy, Portugal, and Ireland, can bail themselves out, the faster the Eurozone’s economy will recover, lowering unemployment and boosting morale across Europe.

Second, a tighter welfare program would teach self-reliance and spread efficiency by forcing individuals to make cost-effective decisions. As we saw with state-owned enterprises, an overly-generous safety net relaxes an individual’s budget constraints and allows them to make inefficient decisions that they would not make if the government weren’t footing the bill. Though citizens may be unhappy in the short run, employing more capitalist policies and decreasing welfare spending will strengthen their economy, making citizens better off in the long-run. It’s time for Europe to rip the Band-Aid off and plan for the future.

Welfare, however, is a particularly volatile subject. People do not like change, especially when money and benefits are being taken away. Disagreements over welfare make it difficult and very unpopular to change the system, as the Obama administration saw, and continues to see, with the Affordable Care Act. In a country that was founded on protestant individualism and the cliché “pull-yourself-up-by-the bootstraps” mentality, asking the rich to help the less fortunate was downright scandalous. Asking to change the economic system in Europe is equally, if not more, unseemly. It all boils down to two things: self-interest and old habits. People don’t want to change, especially when the current system is benefiting them: either they have health care and don’t want to pay for their neighbor’s, in America’s case, or they are unemployed and don’t want to face the harsher reality of decreased benefits, as in Europe. This is where the government comes in.

Whenever there is financial trouble, people point fingers at whoever’s in charge. In 2008, as the US was trying to dig themselves out of the Great Recession, that was Obama, who caught fire from the right for his ‘socialist’ bailouts, and from the left for his ‘corporate protectionist’ bailouts. Kentucky’s Republican Senator Jim Bunning said that when he found out about the bailout “I thought I woke up in France. But no, it turns out socialism is alive and well in America.” And now, Sen. Bunning, so is your economy. At the end of the day, America is not France, nor is it socialist. The US did not turn socialist overnight, they merely used more interventionist policies in a moment of crisis. Now Europe faces the same tough decision: embrace capitalist tactics to save their economies, or refuse and allow their debt and unemployment rates to fester. Although to an outsider cutting spending to pay back debt may seem like an obvious solution, to European countries it is uncharted territory that is “shaking the foundations of the European Union’s shared social vision.” Have no fear, Europe. There is no way you will become the blood-sucking, self-interested capitalists you fear so much. Selectively embracing capitalist policies to end a recession and kick-start a stalling economy is, actually, a very generous thing to do. It is certainly more fiscally responsible than handing out benefits Europe can’t afford to pay for.

It’s time we stopped viewing temporary changes in policy as a dramatic metamorphosis of our ideals. It is merely the ebb and flow of experience that countries have been trading for centuries. It’s merely syncretism. Syncretism is not appropriation or a loss of national identity, it’s free knowledge. As socialism rises in America or falls in Europe, it would behoove citizens to realize that adopting a neighbor’s successful strategy does not constitute the total transmutation of a nation’s political beliefs. You’re not ending your relationship with capitalism or socialism, you’re just ending a recession.