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Agenda of Impoverishment

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Agenda of Impoverishment

Bernie Sanders’s proposals would destroy America’s economic vitality. March 3, 2020
Economy, finance, and budgets
Politics and law

If fully implemented, Senator Bernie Sanders’s agenda for the economy would represent a dramatic break with American precedent and impose major costs on our economic well-being. Working from data provided in the Council of Economic Advisers’s 2018–2020 Economic Reports of the President, I have calculated what the impact of Sanders’s policies could be—within, say, five to ten years of implementation. In my projections, the Sanders agenda would reduce real GDP and consumption by 24 percent, assuming that its taxation was efficient and prudent (focusing on labor and consumption taxes, rather than taxes on wealth, for example). Real wages would fall more than 50 percent after taxes, and employment and hours worked would fall a combined 16 percent. There would be less health care and childcare provided, less energy available to households, and less value added in the university sector. Though harder to forecast, the stock market would likely fall more than 50 percent. (Without any help from Sanders, the market has already dropped more than 10 percent over the past week, due to coronavirus fears.)

Sanders’s top priorities include effectively nationalizing three industries. The federal government would pay for all health care (Medicare for All, or M4A), public-college tuition, and childcare. Everything in these industries would be “free” to the consumer, with all costs shifted to the federal government. Profits and private advertising in health care would be prohibited, as would private health insurance. All health providers—hospitals and clinics—would have their capital investment financed and approved by the federal government, which would control the “means of production” in health care, even if it does not legally own them. Because the M4A principles regarding profits, advertising, and investment apply equally to public college and childcare, these two industries will, under the Sanders agenda, presumably operate like health care in these dimensions.

Sanders also seeks to transform the energy sector. The Green New Deal, which Sanders supports, aims to transition U.S. energy consumption away from fossil and nuclear fuels, probably with a significant federal subsidy to poor and middle-class households. Green energy production is less efficient, requiring more labor, capital, and materials per unit of energy consumed, and its costs of implementation and transmission are higher.

And Sanders wants to restructure America’s industrial economy and labor markets by regulating employment relations. He would introduce new federal rules stipulating how employers and employees can interact—for example, mandating a $15 minimum wage—granting special privileges to labor unions, regulating business-to-business relationships (through net neutrality, among other policies), regulating consumer-to-business relationships, and imposing new rules on the composition of corporate boards. Sanders would also raise taxes on business—for purposes of “fairness,” rather than revenue.

Economic value derives from the amount of labor and capital deployed and from productivity—the efficiency with which labor and capital are used. The taxes needed to finance Sanders’s agenda reduce labor and capital because they reduce private reward. There is less reason to work and save when the government is providing health care and more “for free.”

In assessing the economic impact of Medicare for All, the CEA concluded in its 2019 Economic Report of the President that payroll tax rates would increase 14 percentage points. Labor employed and real capital stock would fall 9 percent. But CEA’s analysis was limited to M4A and did not account for Sanders’s programs for college and daycare.  With public college and child care becoming free, federal spending and taxes will rise accordingly. The federal budget will also increase in order to finance energy assistance to low-income households.

Assuming no productivity loss or increased use of newly free health, education, and childcare, the full Sanders agenda would expand the federal budget by 13.25 percent of baseline consumption. With an estimated 19 percent additional demand for these “free” goods and services, tax rates on labor income will increase by 23.5 percentage points. The employment of labor and capital will fall by 16 percent as a result.

Proponents of Medicare for All frequently assert that while taxes may go up, total costs will go down. But nationalizing an industry’s revenue is not merely a matter of relabeling the dollars that people spend on it. The perennially forgotten fact is that it matters when we shift from spending our own money on ourselves to spending other people’s money on other people. Individual incentives essentially disappear under the “free stuff” approach to organizing an industry, which Sanders proposes and social-democratic countries have already tried.

Government control of industry also reduces productivity. A business cannot maximize value creation when it is also constrained by social-justice agendas, federal-contractor requirements, union rules, and so on. Without the profit motive, little incentive exists to discover and implement productive modes of operation and pare back nonproductive ways of doing things. Industry-specific productivity losses under a Sanders regime would probably amount to 25 percent, though that estimate is optimistic, given the experience of other countries after nationalizing industries.

Fossil and nuclear fuels produce more energy with less labor, capital, and materials, but the Sanders agenda would eliminate them. Productivity loss in energy is estimated at 50 percent, which, again, is optimistic—it’s impossible for renewable-energy sources fully to replace fossil and nuclear fuels in the short term. Reregulation and increasing the corporate income tax would, the CEA finds in its 2018 and 2020 Economic Reports of the President, significantly slash productivity as well.

All told, the scale of the economic contraction that a Sanders agenda would impose resembles the Great Depression of the 1930s. The Depression, though, was eventually followed by a recovery; the Sanders agenda does not envision a return to prior economic policies. Of course, these assumptions are based on taking Sanders literally, which is not a good forecast of what his policies would be: his promises are so extreme that Congress would likely block large portions of his agenda. Indeed, Sanders surrogates such as Alexandria Ocasio-Cortez have been saying as much to assuage nervous voters. But Sanders and his program are nonetheless compelling to many. Marxism itself retains its appeal, surviving over a century in the marketplace of ideas, despite its evident failure. Sanders’s agenda, if realized, would write another chapter in the history of that failure.

Photo by Chip Somodevilla/Getty Images

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