White House Report Says Socialist Policies Could Cut GDP Nearly in Half

CEA releases report on socialism’s potential impact on America

New York congressional candidate and Democratic Socialists of America member Alexandria Ocasio-Cortez / Getty Images
October 23, 2018

A new report from the President's Council of Economic Advisors, released Tuesday, analyzes the economic case for socialism and finds it wanting.

Self-identifying as a socialist is increasingly in vogue on the left wing of the Democratic party. Candidates like Cynthia Nixon and Alexandria Ocasio-Cortez have attracted attention using the label, while the mainstream media has actively discussed the pros and cons of the 200-year-old economic philosophy. Membership in the Democratic Socialists of America, a prominent organization for young left-leaners, has ballooned in the first two years of President Donald Trump's administration.

Trump has taken full advantage of this leftward swing, slamming his opponents across the aisle for wanting to "raid Medicare to pay for socialism" and, in a speech to the United Nations, attacking the socialist regime in Venezuela for the human misery it has caused.

"The problem in Venezuela is not that socialism has been poorly implemented, but that socialism has been faithfully implemented," Trump told the U.N. in September

Of course, what exactly is meant by socialism is up for discussion. Historically, it has been understood as a position on the ownership of the "means of production" (i.e. goods that produce other goods) in a society. Capitalism puts the means of production in the hands of private individuals, while socialism puts them in the hands of the state, ostensibly to socialize the benefits of holding them.

But not all self-identified socialists today necessarily support this arrangement: some identify socialism with high levels of government regulation of the economy, or with a more redistributive welfare system. Ocasio-Cortez, her campaign told the Free Beacon, uses a definition offered on Meet the Press in July.

"The definition of democratic socialism to me," Ocasio-Cortez said, "is the fact that in a modern, moral and wealthy society, no American should be too poor to live."

To capture this variation, the CEA economists looked at how socialist policies from different countries and times would affect America’s productive output. The results were uniformly less than stellar.

"An extensive economic growth literature … documents a relationship between real GDP and the degree of socialism, measured in a large sample of countries as the opposite of economic freedom," the report notes. "The studies suggest that moving U.S. policies to highly socialist policies would reduce real GDP at least 40 percent in the long run."

That highly socialist benchmark is based on analyzing what the United States would look like if it implemented policies similar to Venezuela, a highly industrialized country whose major industries—most notably petroleum production—are state-owned. Such policies have led to food rationing, hyperinflation, and a mass exodus of the population. Similar policies implemented in the United States would cut GDP per capita by some $24,000 per person, the CEA estimated.

Many proponents of socialism look instead to contemporary and historical policies in the Nordic countries—Sweden, Norway, Denmark, and Finland—as a picture of what they would like to see implemented. The CEA notes that in many ways, those countries are less economically restrictive than the United States: they have lower corporate tax rates, less regulation of business, a less progressive income tax regime, and do not offer full welfare benefits to people that do not work or provide totally free healthcare. It is thus not clear to the study's authors that the modern Nordics are meaningfully "socialist."

Socialists may prefer policies from the height of the Nordics' socialist experiment, in the 1970s. The CEA report indicates that if analogous policies were adopted, U.S. real GDP would decline 19 percent, or about $11,000 per person per year.

Lastly, the CEA looked at the impact of one popular proposal among American socialists: socialized healthcare, in the form of Medicare-for-All. Spearheaded by self-identified socialist Sen. Bernie Sanders (I., Vt.), and supported by as many as 70 percent of Americans, the plan would have negative long-run impacts on the economy, the CEA argues. That includes a nine-percent reduction in real GDP and a 19-percent in household incomes after tax and health spending.

Socialist proposals like Medicare-for-All, the CEA argues, are less likely to succeed than their capitalist counterparts for well-established reasons: central planning and government bureaucracy are generally worse at the provision of services than the private sector.

"The historical evidence suggests that the socialist program for the U.S. would make shortages, or otherwise degrade quality, of whatever product or service is put under a public monopoly," the report concludes. "The pace of innovation would slow, and living standards generally would be lower. These are the opportunity costs of socialism from a modern American perspective."

Published under: Government Spending