2009 May 03 Sunday
Socialism Grows Due To Fewer Taxes On Lower Incomes?

Arthur C. Brooks, president of the American Enterprise Institute, argues that the declining percentage of people paying income tax in America increases support for socialism.

The government has been abetting this trend for years by exempting an increasing number of Americans from federal taxation. My colleague Adam Lerrick showed in these pages last year that the percentage of American adults who have no federal income-tax liability will rise to 49% from 40% under Mr. Obama's tax plan. Another 11% will pay less than 5% of their income in federal income taxes and less than $1,000 in total.

To put a modern twist on the old axiom, a man who is not a socialist at 20 has no heart; a man who is still a socialist at 40 either has no head, or pays no taxes. Social Democrats are working to create a society where the majority are net recipients of the "sharing economy." They are fighting a culture war of attrition with economic tools. Defenders of capitalism risk getting caught flat-footed with increasingly antiquated arguments that free enterprise is a Main Street pocketbook issue. Progressives are working relentlessly to see that it is not.

Well, I guess I have no heart then. But I think that axiom is wrong. A man who is not a socialist at 20 is an empiricist.

Socialism is more popular with adults under 30. They have accumulated less and so have less to lose. But I'd like to see the numbers broken out by race to see if the most rapidly growing ethnic groups are more socialist.

Only 53% of American adults believe capitalism is better than socialism.

The latest Rasmussen Reports national telephone survey found that 20% disagree and say socialism is better. Twenty-seven percent (27%) are not sure which is better.

Adults under 30 are essentially evenly divided: 37% prefer capitalism, 33% socialism, and 30% are undecided. Thirty-somethings are a bit more supportive of the free-enterprise approach with 49% for capitalism and 26% for socialism. Adults over 40 strongly favor capitalism, and just 13% of those older Americans believe socialism is better.

We really need a longitudinal track on where this is going.

Governments serve both serve useful functions and also function as parasites. That parasitism can get out of control and ruin things. Getting involved in politics to protect yourself from government is widely seen as necessary.

Forty-five percent (45%) of Americans adults say most people get involved in politics to protect themselves from what the government might do, according to a new Rasmussen Reports national telephone survey.

Update: We are entering an era characterized by a growing need for political involvement in order to protect oneself. Analysts at Clarium Capital refer to periods such as this one as bull markets in politics.

After a placid quarter-century, many cannot bring themselves to believe that the future holds anything more than a continuation of the recent bear market in US politics. But tremendous structural changes to the world’s economy render impossible any such continuation: for the US, global integration and competition have reached a point where a signifcant political response is inevitable. The bear market is giving way to a powerful new bull market and for the frst time in many years, US domestic politics will become a central concern for investors around the world. The background assumptions of the past three decades — that there will be no major changes in trade, immigration, and tax policy — have become unreliable. Portfolios that underweight the possibility of major policy shifts therefore risk signifcant underperformance as the US moves into an increasingly politicized future.

I disagree with them about immigration. We've had amnesties during Reagan's and Clinton's presidencies. We might have another (disastrous) amnesty under Obama even though unemployment is very high and rising rapidly. But the general gist of their argument, that government intervention will increase, sounds right. Obama is using the financial crisis as an opportunity to grow the size of the state. We should expect a lower rate of economic growth due to the expansion of the state, the aging of the population, and the dumbing of the population.

Share |      By Randall Parker at 2009 May 03 01:29 AM  Cultural Wars Western

Aki_Izayoi said at May 3, 2009 10:44 AM:

Isn't socialism (let's define it as large welfare state with high taxes for the purposes of this post) a rational economic option for most people now? Why would you say that the preference for socialism isn't based on empiricism? Empiricially could socialism offer a nice risk/reward proposition for many people? Also doesn't socialism make people happy since it lowers people's expectations and they are not concerned with status anymore?

Why did you say that 20 year olds who prefer socialism are not empiricists? Does being an empiricist require one to share your economic interests too? What does it have do with epistemology anyway when their preference for socialism is motivated by self-interest in the same way that wealth people's preferences are motivated by self-interest too?

Denmark's large welfare state and high taxes offers bond-like returns with bond-like risk, right? Let's assume this description of Denmark is correct:

Danish politicians proudly proclaims that Denmark is the most egalitarian country in the world. They may be right. The obsession with equality delivers a crushing, daily blow to anyone with a new idea or the inkling to cultivate an ability that surpasses the norm. Young people have virtually no chance to improve their lot in life, to take risks, to make it big through innovation and entrepreneurship.

Excellent and hard work are not rewarded by a system that systematically levels the population into a huge homogenous middle class, whose standard of living advances only incrementally and in ways that flout economic priorities. A total tax level that approaches 70 percent is a relentless and debilitating reminder that this country desires no personal economic achievement and no accumulation of wealth.

And yet many people seem to be happy with this system, somewhat like the masses of Huxley's Brave New World. Of course it sets up a dynamic that harms everyone in the long run, but people don't seem to understand or care about this. Equality and stability are regarded as more important than progress and freedom.


So what is the risk/reward proposition for American capitalism? What is the vega? What is the Sortino ratio?

I would say that American capitalism offers bond-like returns with equity-like risk. Regarding the vega, I suggest you look at the charts present here for income volatility data.

Regarding the Sortino ratio (upside potential for returns above the risk free rate [let's use the CPI as a proxy]):

"And as for fairness, Real Weekly Earnings peaked over 35 years ago in September 1972! Using the CPI to adjust wages to today’s dollars, the average worker made $738.48 per week in September 1972. In January 2008, that figure was $598.18.

(Note: these figures are expressed in Jan 2008 dollars. I use the CPI Index to calculate real dollars, which is based on 1982-1984 dollars. But, I then multiply this figure by 2.1108, which represents the BLS’s index factor for Jan 2008).

So, we are getting poorer. And we have been for over 35 years. Only during the end of the Clinton Administration was there an appreciable upswing in real weekly wages over this time period. Don’t believe me? See the raw data yourself, here and run the numbers.



And of course, bonds do outperform equities for long periods (so a long time horizon might not suffice, but maybe really long time horizon would, but on a long enough timeline, the survival rate for everyone drops to zero) too. See historical data:


Randall, you know as well as I do people really do not care about the moral arguments; they care about their perception of risk/reward.

Now another reason (I would also include equity ownership in addition to paying taxes) why capitalism would not be popular that I have articulated:

On Politics and Equity Ownership:

Despite my political views, I do not have much optimism in Obama I do expect the markets to go down further and the Bernanke/Obama "reflation" agenda to "fail" (as in not spark new consumer lending or cause stagflation.) I still believe in deflation though, and as the discount rate for long term illiquid assets (stocks are relatively illiquid) rises resulting in investors asking for an increased risk premium for holding onto equities and not pricing in economic growth which would drive down the price of equities, people will liquidate and switch to more liquid assets. They will give up on trying timing the market and profit on a recovery (it probably would not happen anyway) because their discount rates have gone up so they want to protect themselves from nominal short-term losses in assets such as equities. The result is that most people who do not have a long time horizon would not hold on to equities.

So what does this mean? Generally people who hold stocks have more conservative political views and tend to vote Republican. If one lets the process go on untouched, it would result in a shift in a preference for more left-wing policies and a preference for labor over capital since less voting people own stock. But if the government tries to intervene in this natural process (a reference to the proposal of confiscating IRAs and 401(k)s), they would loss some potential supporters as these people would feel that the government harmed them by confiscating their assets. Thus, it is simply better for the government (if it seeks to generate people with more left-wing views) to let the Darwinian flush in the equity markets to go on unabated and let them relinquish their equities naturally although that would be a painful process for many.

Most people are incompetent at managing their own money and they do realize that now. This incompetence can be explained by the information asymmetries that professional traders have over retail investors, and as explained above, they have higher discount rates during times of crisis which leads them to make bad long-term decisions. I think there will be little resistance to more government involvement in a democratic population now. The people voted for Bush in the last election because the asset bubble in housing and stocks made plenty of people happy despite the economic fundamentals which also explain the tolerance for policies that favor capital over labor.

On Discount Rates and Equities:
For more see: http://www.theoildrum.com/node/2592

But the best answer for when the bottom would occur would be in the form of a rhetorical question without an immediately quantifiable answer, and one has to consider game theory considerations such as looking at VIX and the put/call ratio which provide information about market participant’s sentiment. The biggest question one has to answer is when the Darwinian flush of the equity markets would finish. This is not a question of valuation (as stocks are not solely valued on valuation, but on discounted cash flow according to the standard Gordon model), but again a large part is based on people's time preferences. Since people do not save as much in the US, the discounting rates would be higher than in the Japanese deflation which would have a stronger short term effect on stock prices causing the decline to be quicker. Also, in Japan, these was less labor competition and securer jobs after the asset bubble burst which is another reason for increased discounting.

Another way to ask is to question when would everyone realize that buy and hold many work for some people, but not work for everyone? When people start realizing that equities have downward volatility in long run as well as the short-run as evidenced by the Japanese equity market for the last two decades? When do people who are saving for education, housing, and retirement leave the equity market (in a way similar to a Darwinian flush) when they realize that “long beta” is a bad “investment” “strategy” as they start demanding liquidity? Even people who are currently bullish (in the long term, not technical traders who go long in anticipation of a bear market rally) on equities argue that if you need liquidity, then do not put money in the stock market.

See this as an example of this view:

If you need a certain amount of cash within a 3-5 year time period, it cannot be in stocks. The vagaries of stock prices on a five year basis are unknowable, but history tells us that prices usually revert to fair value over five year periods. For example, if you need money for a down payment on a home, tuition payment, or emergency, that money cannot be in stocks. It must be in cash or bonds. If you are in retirement and drawing from your portfolio for living expenses, you must have a certain allocation in bonds or cash to fund current needs
Aki_Izayoi said at May 3, 2009 11:13 AM:

Personal disclosures:

Short US capitalism

I do not know if I could long European socialism or socialism in the US. Increased immigration destroys socialism.

Why do you disagree with them? Robertson Morrow (who wrote the piece in question) donated to NumbersUSA.

The Undiscovered Jew said at May 3, 2009 11:14 AM:

Isn't socialism (let's define it as large welfare state with high taxes for the purposes of this post) a rational economic option for most people now?

The problem is not whether socialism is rational for individuals.

The problem with socialism in America is twofold:

1) Is socialism economically sustainable over the long term with our changing demographics?

2) Is socialism politically sustainable as white taxpayers are forced to support non productive minorities and their spawn.

If you answered "Yes" to either or both of these questions then you have clearly not been paying attention.

I'm personally hoping Obama breaks the economy because the sooner the economy breaks down, the sooner we will stop supporting unsustainable policies such as mass immigration and welfare statism and start implementing rational policies like welfare for sterilization.

Leftist social engineering only looks affordable to the elite when they have lots of money to throw at unrealistic policies.

The sooner we go bankrupt, the sooner the elites run out of money to fund their pet social engineering projects and the better off we are over the longrun.

If there was ever a country that needed an economic crisis it is America in 2009.

Aki_Izayoi said at May 3, 2009 11:58 AM:

Correction: "bonds could outperform equities" and this as happened (not "do outperform")

I didn't say "feasible" did I? I asked whether it could be perceived as a rational risk/reward proposition especially when one compares it to the status quo.

I'll post what I have said about socialism elsewhere:

However, I am going to be realistic now instead of making policy recommendations on the US that are unrealistic. In my mind, a break up of the US is far more likely than social democracy. I do not think it is possible because of ethnic inhomogenity. Read this for more. (Yes, it was a psychology paper written by a liberal if one wants to use ad hominems on the source.) I do believe our morality is derived from our evolutionary heritage (and also market behavior; those who understand it can use it to have an edge in trading securities), and respect for the in-group is one feature of morality. It is hard to justify this using abstract moral principles (because it evolved as a means of passing on our genes to future generations), but it is a salient future in human morality. One reason why this probably evolved is to deal with the free rider problem. In addition, it is also congruent with the “selfish gene” hypothesis and “kin selection” since people who possess similar ethnic heritage have very similar genetic material relative to other groups.

Another implication of this view is that immigration would add to Japan's problems. In addition, there is a large poor working class there and they do not need more competition. Using that argument, the prospect for France isn’t that good either, but this is more long run thinking and I do not think it has much current use in security valuation.

We all know what discounting by time is. By think of it as discounting by “genetic distance.” For example, we are less likely to consider the suffering of a pig in our ethical calculus than a human. Within the human race, this overtly manifests itself as racism, and Peter Singer calls this “speciesism” outside of out the human species.

Regarding that view… it seems to be a force for global protectionism (protects local jobs from foreigners who presumably do not share as much genetic material) although it would be weaker in the US, although there are other forces against it.

I claim credit for being "kynikos" (which translates into "skeptic" or "cynic").

Aki_Izayoi said at May 5, 2009 8:59 AM:

Here is another reason why socialism is attractive:


Mish also suggests that if you eliminate the top 10%, the graph would look worse.

Anonymous said at May 5, 2009 10:38 AM:

In the USA socialism is racial. This could kind of work back in 1965. Back then, the USA was 90% white and 10% black. Maybe 1% other. A little bit could be taken from every white family and handed to blacks to uplift them. The leading edge of the Baby Boom generation was just entering the work force. Millions and millions of young well-educated, high IQ, productive people coming online every year.

That situation no longer exists.

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