Right, Bernie! We Are All (Ersatz) Socialists Now

In 1971 Nixon famously said “we are all Keynesians now” as he ash-canned the Bretton Woods gold exchange standard, thereby unleashing fiat central banking on the world economy.

At the time, the Keynesian part wasn’t viewed as such a big deal by enlightened opinion. It was supposedly just the Republican Right catching-up with the Great Depression and shedding its vestigial Hooverite regard for balanced budgets. Henceforth the GOP, too, would advocate pump-priming when the bathtub of GDP fell too far below the rim.

Fifty years of subsequent history, however, proves the opposite. Nixon’s one-two combo of fiscal activism and unshackled central banking exposed American capitalism to powerful and unrelenting forces of statist assault.

At length, the implicit (but erroneous) assumption that capitalism inherently veers toward sub-optimum performance and recessionary swoons became enshrined in a bipartisan policy consensus. The only room for debate was about the timing and magnitude of intervention and the form of the stimulus as between fiscal spending, tax cuts and easy money.

Indeed, in the 33 years since Greenspan’s ascension to the Fed chair, you can count on one hand the number of years in which there was no monetary or fiscal stimulus directed at goosing economic growth, jobs and spending.

So when you combine quasi-permanent macroeconomic stimulus with the modern Welfare State’s projects of safety nets, health care provision, publicly-supported education and budgetary pork for purportedly disadvantaged groups, regions and industries, you end up with what we have today: Namely, Ersatz Socialism—a form of statism that walks the socialist walk but dares not speak its name.

Well, until good old Bernie Sanders came along. While the MSM claims the danger he supposedly poses to all that is sacred—capitalism, freedom, constitutional government, motherhood and apple pie—got a comeuppance from Uncle Joe Biden this week, we think otherwise.

When push-comes-to-shove, in fact, there isn’t really a dimes worth of difference between Biden and Sanders—and for that matter between the Dems and the Trumpite GOP, either. At least, not when it comes to the foundation of Ersatz Socialism on which the American economy and governance now rest.

Of course, we insert the term “ersatz”, which means an artificial substitute or imitation, to distinguish today’s ad hoc agglomeration of statist policies from classic (and largely academic) socialism, where the state and economy/society were literally coterminous.

But ask a bankrupting Kentucky coal mine owner. The state doesn’t need to own the mine to control it or essentially appropriate most of its value.

And the same goes for a Medicare doctor. Reimbursement rates, permitted procedures and other terms of patient care all come down from Federal bureaucrats and their contractors, as do the payments.

And dare we mention the flag-waving, free market-spouting Iowa soybean farmer. First the Donald expropriates his export sales; then Uncle Sugar sends him a great big subsidy check to compensate for the inconvenience.

Likewise, Boeing sells upwards of $35 billion to foreign air carriers each year, but the financing is spiked with billions of Export-Import Bank loan guarantees.

So, too, with respect to the lifeblood of the US banking system dominated by the Wall Street based behemoths like JPMorgan, Citigroup, Wells Fargo and Bank of America. The latter along with about 4000 lesser fry collected $550 billion in net interest margin (NIM) last year, from whence most of their profits sprung. And thank you, Federal Reserve, for making the deposit side of the NIM dirt cheap.

So in present day America, the dividing line is not between ideological capitalism versus classic socialism, as both the Donald and the Clintonista Dem establishment want us to believe via their heated attacks on Bernie. Instead, it’s between state control and genuine free market decision-making—the latter being a rapidly shrinking corner of the economy.

A big part of the confusion lies in the GDP accounting rules. For example, the total US health care sector in 2019 amounted to about $3.9 trillion or nearly 18% of GDP, with 45% of the total running through government accounts (Medicare, Medicaid, public health services etc) and 55% through the private sector.

In aggregate terms, these private dollars totaled $2.145 trillion, of which $1.1 trillion was attributable to household spending for insurance, copays, cash pays etc and the balance ran through business accounts, mostly for the employer share of company health plans.

Needless to say, that $2.1 trillion of “private” health care expenditure had the government’s fingerprints all over it via the regulatory dragnet imposed on private plans by the ObamaCare rules and a vast expanse of other federal mandates. And on top of that, of course, there was a heavy-duty financing infusion owing to the $300 billion of health care tax expenditures (tax exclusion of employer health plans, medical deductions etc.).

Pretty much the same accounting misdirection applies to the education sector, which one way or another is totally dominated by state rules and financing, regardless of the public/private split of dollars expended.

In fact, in 2019 the entire education sector totaled about $1.65 trillion or 7.6% of GDP. About $1.3 trillion of this ran through public sector accounts for elementary and secondary schools and public colleges, but another $350 was toted-up under private sector accounts.

This included about $50 billion for private child care and pre-school, $70 billion for private and parochial elementary and secondary schools and $215 billion for private colleges and universities. But when it comes to Title IX compliance, the disposition of Federally guaranteed student loans, tax deductions for charitable contributions to schools or the myriad other Federal laws and regulations which apply to private education, this accounting divide is essentially a distinction without a difference.

In a word, the giant education and health care sectors represent a combined $5.55 trillion or 25.6% of GDP, but for all practical purposes they are already socialized. Bernie is essentially a day late and not that many dollars long.

Indeed, old Bernie saw it was socialism and said its name—even as his policy proposals amount to little more than bringing currently socialized private activity in health care and education more explicitly under the accounting umbrella of state budgets.

So when it comes to the policy arguments between Bernie, the Clintonistas and the Trumpite/GOP with respect to this nearly 26% quadrant of the GDP (total health and education), the only real issues are about the mechanisms of state control and funding.

For instance, in the health domain, funding and state control is sloganized as Medicare-For-All (Sanders); health mandates for all (Clintonista Dems); and tax credits and pre-existing condition coverage for all (Trumpite/GOP).

Accordingly, the better part of valor with respect to the socialist bogeyman is to adjust the GDP accounting in order to grasp the reality. At the first level of direct spending, therefore, the already existing socialized sector of the American economy totaled $9.92 trillion or 45.7% of GDP in 2019.

That’s right. We already have European style social democracy where the public sector typically approximates 50% of GDP, albeit obfuscated by accounting conventions. The constituent elements include:

  • the Federal government sector at $4.97 trillion or 22.9% of GDP;
  • the state and local sector at $2.45 trillion or 11.3% of GDP;
  • the “private” portion of the  health care sector at $2.145 trillion or 9.9% of GDP; and
  • the “private” portion of education at $350 billion or 1.6% of GDP.

The fact is, when it comes to any issue that could make a measurable difference within this nearly $10 trillion and 46% portion of the US economy which is already socialized, there’s truly not a dime’s worth of difference between Sanders, the Clintonistas and the Big Government besotted Trumpite/GOP.

Take the health care sector, for example. The heart of the matter is that it is none of the state’s business whether citizens choose to buy health care insurance or not; and that’s especially true given the fact that what passes for “health insurance” is no such thing because it is not risk-rated per each insured beneficiary.

What it actually is amounts to a community-rated and pool-averaged pre-paid medical expense payment system that is a creature of tax subsidies and regulatory mandates. It does not remotely resemble any insurance product that would actually be sold on the free market.

To the contrary, on the free market people would shop for health care like everything else; pay for most services with their credit cards or cash; and perhaps purchase individual risk-rated catastrophic coverage for very high dollar, low-frequency medical expenses.

But ever since the US leapt over the statist threshold with LBJ to Medicare and Medicaid in 1965, the system has moved inexorably toward socialized pools of high cost pre-paid medical care. The remaining argument between the above three political contestants is how many of these big pre-paid “insurance” pools will exist and the details of what services they cover and how they are paid for.

Sometimes a chart is worth a thousand words, and this is one of them. Since 1960 the general price level has risen by 7X while nominal health spending per capita has erupted by 82X.

In that stunning leap lies one of Bastiat’s great “not seens” in economic life. That is, American health care essentially went from capitalism to Ersatz Socialism over the intervening 60 year period.

The GOP fellow travelers, the Clintonistas and Obama statists did not say it name. Bernie did.

Image result for Real health care spending per capita since 1960

In any event, it now is what it is. So Simple Bernie wants to clear the rhetorical and accounting decks with one big prepaid pool (Medicare for All). And he would organize it on a one-size fits all basis with respect to coverages (mostly everything), out-of-pockets (mostly none) and payments (payroll taxes).

The Clintonistas seek a vastly expanded Medicare Light (public option). That is to say, a huge enlargement of the existing Medicare pool by eliminating the age restrictions, plus a moderate number of corporate and union-based pools that would continue to exist only if they approximated Bernie’s Medicare for All standards (i.e. coverage of mostly everything and mostly no out-of-pockets).

Accordingly, the Clintonista pools (i.e. Biden) would on average cost the same of the Bernie pools on a age/health adjusted basis. The only difference would be whether Uncle Sam extracts the funding through payroll taxes (Sanders) or mandates employers to extract like and similar costs from the total envelope of employee wage and benefits compensation.

Of course, the Trumpite/GOP will argue they are manning the barricades against socialized medicine, but that’s mostly stale rhetoric from their grandfathers’ platforms. After losing the ObamaCare fight, the GOP is now four-square for mandates (pre-existing conditions) and tax-credit and employer exclusion induced pre-paid health pools.

The only difference is that the Trumpite/GOP would have a lot of government regulated, fiscally enabled employer plans and private group plans along with the giant Medicare/Medicaid pools. But it amounts to the same thing: To wit, high-cost, prepaid, socialized health care pools where the price mechanism plays no role and personal accountability for health care costs is largely non-existent.

The litmus test would be rather simple. Would any of the three above described approaches materially reduce the massive waste built into today’s 18% of GDP, $3.9 trillion health care system?

Not a chance, and here’s the reason. To wit, the horse of massive health care excess and waste is already out the barn door and that won’t change if a creeping share of the so-called “private” portion of the system is brought under government accounting (as Obamacare did with income based subsidies to private pool purchasers).

The reason the social democracies of Europe only spend 9-12% of GDP on health care is that they have been explicitly socialist since WW II. The apparatchiks who run them simple triage and ration health care owing to the limits of public tolerance for payroll taxes.

By contrast, in the US we have had socialism for the consumer (heavily subsidized pre-paid, average cost based “insurance” pools) and capitalism for the providers and their powerful K-street lobbies. The latter have inflated the combination of public and private insurance pools to 18% of GDP and mean to hang on to what they have extracted from the system over the last 60 years.

Even if Bernie should win, heaven forfend, his health czar would get nowhere shrinking the incumbent 18% of GDP. That’s because any minor amounts they managed to squeeze from the capitalist providers (i.e. drug companies) would likely end up paying for new benefits favored by the Sandernista ground forces that would have elected him.

The same is true of education, and especially higher education where Bernie is blowing the horn loudly about the nation’s insane $1.6 trillion of student debt. The fact is, there shouldn’t be anything that resembles student loans because you can’t underwrite the future earnings prospects of 20-year olds.

So what all of this “loan” funding has done is to drastically inflate the cost of education. The US figure of 7.6% of GDP for all education levels, in fact, is well above the 4-5% level of most other advanced countries, which practice actual education socialism rather than its ersatz cousin.

At the end of the day, the Clintonistas stand for free public education light (i.e. means testing for the very high income), and the Trumpite/GOP proposes to get to the same place with tax credits, public paid school vouchers and various student loan deferment and forgiveness schemes that are only slightly less generous than Bernie’s burn the mortgages plan.

Beyond education and health care, there is literally nothing doing except for the typical GOP symbolic gesture to cut say $15 billon per year from food stamps. That amounts to about 0.008% of Federal social insurance and welfare spending outside of health care, and 0.002% of the total $10 trillion socialized sector of the US economy.

In effect, after the Donald took Social Security off the table and the GOP’s even tepid attempt to supplant ObamaCare failed, it was all over except the shouting.

Not only is the 45.7% of GDP already directly socialized off-the-table in terms of any meaningful 2020 campaign debate, the real socialist elephant in the room has not even gotten an honorable mention—-except for the Donald’s blustering demand for even more socialized money.

We are referring to the Fed, of course, and as long as two of the three contending forces seeking the White House want to beat the tom-toms against socialism, let them ponder the fact that virtually every financial asset price on Wall Street is pegged, rigged and boosted by the Federal Reserve.

That’s just more Ersatz socialism but of the very worst kind: It involves capitalist upside for the gamblers and socialist safety nets when their speculations fail.

So there is a debate in the presidential contest, but it’s not about socialism, which is already here.

Indeed, it’s not about any serious policy differences at all. Apparently, mere political theatre will more than suffice.