The "Socialism" debate

Our government's unprecedented interventions in the economy are evoking charges of "socialism" from people who should be just a little more careful with that word. 

Within a few days, I'll have a lot more to say about the GM bailout now being contemplated by our current and future leaders in Washington DC. For now, I just want to draw a line that apparently isn't clear to at least a few who have been carelessly tossing the word "socialism" around. Specifically, whenever one side of the GM-bailout debate says it would be "socialism" not to let GM fail, the other side says "Well, it was 'socialism' to bail out financial folks, so stop complaining." 

Good point — sort of — but let's not ignore one extremely important difference between keeping a financial firm afloat versus keeping a car company afloat. The ultimate responsibility for the integrity of the money side of our economy rests with the government; but the ultimate responsibility for the real goods-and-services side in a capitalistic free-market system is almost always the market. 

Below is a graphic illustrating the point.

Money is the lube for the real economy, and it moves in the opposite direction. (When we buy laundry detergent, the money and the Tide pass each other as they move in opposite directions.) Money soundness is the (ultimate) responsibility of the sovereign government (...because the sovereign is the only entity with the authority to define what "money" is, control its sources, and define how it's to be used). In our recent crisis, it would have been highly desirable to allow the market to punish the financial idiots and gluttons who failed to do the jobs they were hired to do — if those failures had been compartmentalized sufficiently. But they weren't, and as a result, the entire money side of the economy was threatened with collapse. 

Guess what a collapse of the money side of the economy would have done to the real goods and services side of the economy. (No hints are necessary, I hope.)

So, if "socialism" means government intervention where government really does not belong in a properly-functioning free-market system, the case for using that word is far weaker when the subject is the money side of the economy. That's a fundamental difference that should be getting more attention in the GM-bailout debate.

Comments

[Mike H]

Good point Steve. I knew that the banks were the exception because we need the financial sector for everything else to work, but it didn't occur to me that another reason is that the government is the source of money and therefor ultimately responsible for the stability of money and keeping velocity high and constant. Otherwise, every other sector is moot unless we start trading in pigs and cows again.

Can't wait to hear your take on the proposed automotive bailout.

Oh, what do you think about the shift in the TARP plan to buying stocks instead of assets? Also, are you furious that the regulators refuse to give up their power over mark-to-market accounting? Do they really believe it's good for the economy to continue such strict unnecessary rules?

[Steve C]

Jim Manzi has a good post on this today too:

http://theamericanscene.com/2008/11/13/bankruptcy-for-gm

[Jimmy the Dhimmi]

If the government buys shares in the banks,(As i believe is the plan now) in essence, owning them and setting policy as shareholders do, does it go beyond merely keeping the integrity of the dollar? Aren't bank services like mortgage and lending part of the "real services" economy? Is that what Paulson has proposed doing?

[nick26]

can you tell me what the difference between Tot.debt
and Pub.debt is on your debt clock.
thanks nick

[Optimist123]

Yes, total debt includes intragovernmental debt (what the government owes to itself); publicly-held is what the governmetn owes to you, me, and foreigners. See this article:
http://tinyurl.com/2dljs9

[Gil]

I agree with you S.O. that 'socialism' is like the word 'racist' to Libertarians - they use the word so much now to mean any other than pure free market economics that it has become meaningless. (Heck! A good argument for not using the 'F' word in entertainment is that particular word is rather losing its sting nowadays!)

[Bob]

Maybe you can come up with a plausible argument about letting the automakers fend for themselves. I haven't been able to. Let me state, though, that I believe that GM cannot continue to manage their business the way they have and continue as a going concern - bailout or not.

I suspect that most folks will use AIG in their argument for a GM loan. It's an insurance company, has already used up over $100B, yada, yada. Good point.

If GM is to survive it is going to have to get it's cost structure in line and that means streamline it's own bureaucracy and tell the UAW it can no longer provide cradle to grave benefits nor pay the wages it does nor pay people at 90% (or whatever the obnoxious number ) of wage when they are laid off.

However, if the government makes such stipulations (and it should like any majority investor) it will be seen as too much intervention and union busting.

GM will also claim that the government screwed up the financial system and is therefore
culpable in this so they should make things right.

Those are just a few of the arguments I've been playing around with. Again, I know what I'd like to see and what should happen but it won't.

[Bob S.]

Dear Steve,

I appreciate your efforts. Question: Do you believe that our government has the efficiency to manage what they have created in terms of programs, departments, etc. and how do you view the expected continuing proliferation of our governance? (positive/negative?)

[Optimist123]

Bob S:

That's several questions; I'll take them one at a time.

First, I think the government is, for the most part, inefficient as hell; with a few important exceptions, almost everything I've ever seen government touch starts running as slowly as molasses (at best), burning money at three times the rate the private sector would tolerate, and doing all that with a holier-than-thou arrogance. That's why the things we ask govt to do should be limited to the five things Adam Smith reminded us a govt is supposed to provide its people (i.e., its reason for existence): defense, justice, education, infrastructure, and a stable currency.

Second, preventing the money side of the economy from collapsing is ultimately the government's responsibility, so I support the financial rescue efforts -- as I hold my nose or grind my teeth watching crooks and idiots get off, because letting them fail would have the undesirable side effect of taking the whole economy down.

Third, preventing bankruptcies in the nonfinancial side of the economy is NOT the government's responsibility, and I oppose corporate+union welfare. I obviously won't get my wish about allowing the Detroit Dinosaurs to go extinct, though. So I'd at least like to see some results criteria inserted at various milestones in the UAW/Little-3 bailout plan, to stop the bleeding if it's not working, but I probably won't get that wish, either; our 536 leaders are more concerned about designing which cars Detroit should be building next year than about holding their Little-3/UAW protectorate accountable for profitability in the face of competition from automakers who know how to manage their companies.

I still think we should just be honest about it, and designate the newly-created federal protectorate around Detroit as a new national park.