FRA: Hi Welcome to FRA’s Roundtable Insight .. Today we have Charles Hugh Smith, author, leading global finance blogger, and philosopher, America’s philosopher we call him. He’s the author of nine books on our economy and society, including A Radically Beneficial World: Automation, Technology, and Creating Jobs for All, Resistance Revolution Liberation A Model for Positive Change, and The Nearly Free University & The Emerging Economy. His blog oftwominds.com has logged over 55 million page views and is number 7 on CNBC’s top alternative finance sites. Welcome Charles!
Charles: Thank you Richard. It’s always a pleasure!
FRA: Great and today’s topic is socialism. What is driving the majority of millennial’s to that? So we want to explore, you know, what’s behind that trend (Especially in the US and in Canada)? You know what is socialism? Misconceptions on socialism? We’ll get different models like the Nordic model and how does that look, positives and negatives. And just in general also how this could lead to increasing levels of political instability and even political violence in the coming months.
Charles: Right and it’s a great topic Richard because we all know that the younger generation, the millennials in particular, are publicly attracted to socialism as a more just system than what they see is unbridled capitalism, which in its current iteration has created extremes of inequality and opportunity.
So I thought we’d just start out by laying 3 different flavours of socialism or what’s commonly called socialism. In classical socialism, that means that the state or the government, owns the means of production and in other words, factories and the resources are owned by the democratically-controlled or structure government so that the benefits from the means of production are then distributed relatively equally amongst the population. In today’s world, most young people according to polls understand socialism not by the classical ownership of the means of production but by social welfare. In other words, the government collects taxes and it distributes it in some sort of fair fashion to the entire populous and so I call that the social welfare version of socialism. And the Nordic model, the Scandinavian countries which are often called socialist but as you’ll explain in a moment, is not technically not really true. But what they do have is a model of deep cooperation between unions, you know labour, big corporations and the government and so there’s a there’s sort of a cultural social contract there that creates a more equal society because the wealthy pay very high taxes and there’s a lot of social welfare programs and also programs to create jobs.
FRA: And I think the millennials are coming to this from the social justice perspective so they sort of focus on that first and then they branch out into economics areas in terms of like socialism. Would you agree?
Charles: Right! Exactly! How do you achieve economic justice and they’re looking to socialism as the answer. But you know that start with the Nordic model because it’s widely understood to be successful in these is relatively small countries. I think Denmark has less than 6 million people which makes it smaller than the inter counties of the San Francisco Bay Area and considerably less than the county of LA and I think Sweden is around 13 million people something like that which puts it on par with the County of Los Angeles. So these are really small nations in terms of their population and so it’s a lot easier to have a unifying culture than it is to have a very large multicultural nation like Brazil or the United States but having said that, you mentioned a quote from the prime minister of Denmark which I thought was really insightful about the Nordic model of socialism.
FRA: Yes, exactly! The Prime Minister of Denmark recently said, “Denmark is far from a socialist planned economy. Denmark is a market economy”. And yeah just to further elaborate on that, the Nordic countries do not generally interfere with free markets so they are promoting free markets, they are promoting free trade, global trade, globalization, and generally do not nationalize industries, and do not subsidize favourite Industries which is a common misconception.
Charles: Right and I think the another common misconception is that they just give away a lot of free money to everybody but in actual fact, they have very strong work ethic. In other words, a lot of their social welfare programs are aimed at retraining people and helping small businesses emerge and hire people. So they’re really focused more on creating jobs than giving free money away and so that’s why universal basic income, which a lot of people feel is the source socialist solution. In the Nordic countries, they’re not really big fans of just giving away free money with no strings attached. They want to help people gain livelihoods. That’s really their culture focus. We were having a conversation about the culture aspects of the Nordic modelling and before we started recording, it’d be great if you could elaborate on that that topic.
FRA: Yeah the first question I usually ask when people make reference to that is have they been there before and then I mention I’ve been to Sweden, I’ve been to Norway, and what I have observed in the nature of the people generally, that in the culture, is a very strong sense of fiscal responsibility and a high level of education. Making very efficient use of government resources and even in the buildings they stay generally not looking to build brand new government offices but working in very frugally, meager type of facilities, government offices or old buildings perhaps and making the funds of the government go much farther in terms of very efficiently. That I think would be very difficult in North America given a lot of politicians are more concerned on getting themselves more lavish pensions.
Charles: Right. I think you are absolutely right and I had a chart that flabbergasted me actually that in the state of California, where I live part-time, that the taxpayers contribution to the public union pension plans there was less than a billion dollars in the early 2000’s and now it’s something like 45 billion.
So the people kind of promoting social welfare versions of socialism, they’re not a tuned to the fact that socialism limbs itself, if you have the wrong cultural traits, to cronyism and exploitation of the state rather than as you say of a fiscally prudent use of state funds to help everyone. So that leads us to, I think, Venezuela which pursued as policy both a classical form of socialism meaning that they nationalized a lot of the industries in that country, the oil industry, and so on. And they also instituted a very broad social welfare programs. And so, as we all know, the Venezuelan policies of the government have led to a complete collapse of their currency, trading at something like 300,000 or to $1. Might even be 3 million to one now. I’m not sure but they’ve impoverished of literally everyone in the country except those high officials and cronies who escaped and then it took their money to Miami before the currency collapsed. So that socialism is one version of it and we really have to ask, what did Venezuela do wrong because they pursued socialism as most people understand it
FRA: Exactly and that contrasts between them and the Nordic countries, in terms of their approach, what has resulted?
Charles: Right and the government ownership of means of production doesn’t guarantee you any efficiency and if the enterprise, where its owned by the government or owned by private parties, it’s still has to create a profit, it still has to use the efficient otherwise it just becomes a source of losses and it’ll take or who ever owns it. So Venezuela, I’ve never been there but I have sources there, I have contacts there, and it seems pretty apparent that the government owned infrastructure and resources are very poorly managed. They were undercapitalized, under investment, and cronyism has run wild there. So that raises the question for millennials, how do you make sure the socialist model that you find attractive is more like the Nordic model and less like the Venezuelan model because socialism as an ideology or as a way of organizing the resources and the means of production of society. It’s not one-size-fits-all and you have catastrophic failure right beside so called success. So socialism as a system is not the answer if it goes the path of Venezuela.
FRA: Just to point out a few more facts on the Nordic countries, their countries economic successive before they built their welfare states. A lot of people don’t realize that it was the actual wealth that allowed the luxury of the generous programs that followed so that’s one fact. Another one is a lot of people don’t realize is they don’t have minimum wage laws in the Nordic countries. None of the Nordic countries have a minimum wage law. Another fact is in Sweden, they have complete school choice so whereas your property taxes may go towards government schools only in North America, there’s a choice in Sweden. You could actually apply those funds instead to even go to a private school to attend private run school if you think that’s better for your children so a lot of people don’t realize that but yeah the result though, I mean is it all bliss, not necessarily. If you look at what’s happening now in the Nordic countries, there are problems, maybe not as bad as Venezuela but in terms of the increasing racial tension, ethnic tension, especially from a lot of new recent migrants that are looking to capitalize on that welfare system that they have in place. They’ve also suffered recently from the oil revenues that go in mainly to Norway and Denmark so that hasn’t been as good. A lot of people don’t realize that in many of those areas, there’s actually the highest consumption of antidepressants in the world. So that’s a fact. That is quite amazing as well. And then even recently what they’ve done is moved to a to do a certain activities which a lot of people are not aware of in terms of strong movements now to cut taxes, limit public benefits, reduce welfare spending, pension savings have been partially privatized, for-profit forces have been allowed in the welfare sector, state monopolies have been opened up, so that there’s a lot of change happening even in the Nordic countries.
Charles: Right those are excellent points and it goes to show that what we’re talking about is not a purely economic system that socialism, in whatever flavour we’re speaking of, is a social system and a cultural system. It’s not simply a financial arrangement. So just to kind of speak of change gears a little bit and go through some slides, I have about the social welfare model of a spending on infrastructure and public spending as sort of like a way of distributing the wealth of the nation right (inaudible) and so I have a slide here of infrastructure. Everybody loves infrastructure and it’s a very politically popular way of creating jobs and distributing resources and so we see that globally, China of course has spent huge amount of their capital on infrastructure, you know, and we all know that they have High-Speed Rail and and Subways and they’ve gotten a lot of public benefit as well as jobs from their infrastructure. But at some point, you’ve already built out all the subways you need and all the high-speed rail and then then you wonder what do you spend the money on next if that’s your social welfare program, you know building infrastructure. And here in the US, its well known that in the US infrastructure’s ageing in many ways. The water, electrical systems, roads, and so on all need more investment and that can be seen as a productive useful of public money. In other words, the public is getting some broad based value and jobs are being created as opposed to just giving money away without any strings attached like universal basic income. And then to show another failed way of distributing funds, I have a chart here of higher education student loans in the US and of course, we all know that there were no such things prior to like the 1990’s and now there’s about 1.3 trillion dollars of student loan debt which is guaranteed by the federal government. So it’s a form of socialism that ends up turning students into debts surfs and a lot of people are saying what we need to forgive all that debt. But that debt was issued by for-profit firms and so we have to be really careful when we talk about socialism like who’s skimming profits from these government programs. Then my last slide here is showing the state and local government expenditures, which tend to be the most boots on the ground or the the most visible forms of social welfare spending, tend to be state and local in other words, infrastructure on local roads, local welfare, local school districts, and so on and we can see that all in the US, the state and local government expenditure has soared the rate of expansion far beyond the actual GDP that the domestic economy. And so then we start wondering how are they spending so much money than the economy is creating and then the answer is of course we’re going very deeply into debt. I mean local governments are selling bonds and globally you can see the tremendous expansion of government debt as well as corporate and household debt. So if we’re if we’re funding all of our social welfare and infrastructure with debt, then we’re creating another issue that doesn’t have anything to do with socialism or capitalism. It doesn’t matter! The debt is creating a lot of imbalances and could bring down the entire economy. People always love infrastructure and they love social welfare, they like the government spending more money but where’s the money coming from and what are the consequences of using debt to fund social welfare.
FRA: Yeah essentially putting the burden on future Generations increasingly with the increase in debt as the result. And then some would say maybe we should just say tax income on millionaires but there’s actually a fact that if you even put a 100% tax on income from every millionaire in the US, that would only fund that US government for 4 months. So that’s quite amazing fact. Another one is that even if you confiscated the entire wealth of America’s 537 billionaires, that would not be enough to fund the nation’s budget for even one year. So there’s simply just not enough money out there but there’s a perception that there is.
Charles: Yeah that’s a very good point Richard. I believe the federal budget is pushing for a trillion a year right. I think it was 3.7 trillion and so that’s a big chunk of money and I guess we’re coming back to the question of what’s the downside or the risks of pursuing a socialism and I think if you’re going to follow the classical socialism of the government taking ownership of the means of production, then you risk gross inefficiencies and cronyism, mainly insiders basically pillaging those assets to their own benefit and then impoverishing the nation by under investing or mal investing the state money.
That’s that’s one danger. And in the Nordic model you’ve described it may not be affordable, you know, it as revenues decline even prudent governments end up starting to borrow money and living off of asset bubbles as a way of generating their revenue so that’s the danger. And the US model of just borrowing trillions to pay for infrastructure and social welfare programs. That creates of a really great risk of a currency collapse or a loss of of faith in the entire Financial system.
FRA: And now we go further to that if you look at the history of of socialism and the evolution of it. In particular countries, generally there is a very strong decrease in the standard of living that ultimately results in brain drain and wealth-trained so you get to a point at some point where it nonlinear. A lot of people begin leaving, looking for opportunities elsewhere if they’re educated. Wealthy people don’t sit there as sitting ducks. They’re likely to move at some point together with their wealth somewhere else so that’s also the potential for that to happen, brain drain and wealth drain.
Charles: Yeah and my last point Richard would be that you know socialism like capitalism itself, however you want to define it, it tends to work much better when things are decentralized. When powers decentralized, ownership of assets are distributed, and people have a say both as consumers and owners. My example here is water systems. In very localized places like a city or a county, public ownership of water has been very successful because the agency localized their only specific assets in the community and the community is democratically organized so they have a say about how that resource and asset is managed and they can vote out the board if the board is corrupt or incompetent. And so socialism, on a very small decentralized scale, can work very effectively in protecting public assets in the same way that capitalism really only works if competition is allowed to thrive. So we’re talking about when things are in very large scales like centralized power, then you get rid of competition and you usually get rid of the benefits of public ownership of assets.
FRA: And I think overall the majority of millennials have not been able to understand how and why there was a financial crisis back in 2008, 2009 and what the role of the Federal Reserve and Central Banks in general has been in causing that as well as in causing a wealth and income inequality from various Central Bank activities and Central Bank policies, we’ve covered that a lot in prior podcasts how and why that happens. So I think that’s been also a major driver for the millennials to misinterpret/ misunderstand what’s happened and therefore, go to maybe bad conclusions if you will.
Charles: No I think you’re absolutely right Richard. The financial repression of zero interest rates and quantitative easing for the the banks and so on. Yeah that’s what disrupted the opportunities and created the inequality the millennials want to resolve and we understand their desire the justice of resolving those inequalities but it’s how do we do that? And if we’re going to pursue the Nordic model, then what we’re really talking about is, then you need a market economy and a cooperative government and a culture milieu that supports fiscal prudence and wise investment of resources and not just throwing money away and giving it away.
FRA: Yeah exactly. There was also a recent study I saw where it was pointed out that the minority of radical leftist are actually dominating the Democratic party agenda. So this is interesting because between Democratic Socialist Party of America and the traditional democratic party, which is now having their agenda control or dominated by radical leftist, is quite disconcerting you know in terms of what could happen to the potential for extreme socialism in America.
Charles: Right and again what we’re trying to elucidate here is that there are models of like private or public ownership of assets on a small scale like I said that they have a long history of functioning like public ownership of the water works but what’s being proposed is not really classical socialism. It limbs itself to free money for everybody and if we have to borrow the money, then fine. So that’s not really socialism and it’s not on classical socialism nor is it the Nordic model that so many people look too as a successful model.
FRA: Yeah exactly, and we’re essentially in general agreement to conclude as some final words in terms of what could make sense so we don’t take sides on any parties but generally, we see a more limited government approach that is decentralized with minimal special interest group lobbyist, if any at all that lends itself from a centralized form of government that has been optimal. Would you not agree in terms of that approach?
Charles: Yeah absolutely that a planned economy is a failed economy. That’s really what we’re talking about. A planned economy mean insiders benefit and it’s lost all of its adaptability, flexibility, and efficiency.
FRA: Exactly. What do you see as potentially evolving as a final question to consider in a coming years in terms of the evolution of where America’s going?
Charles: Well that’s a big question Richard. I think people are struggling to find some sort of answer to rising inequality and the concentration of wealth and power and they haven’t really come up with anything and so a lot of millennials view socialism as the answer. Other people view like reforming the government so that there’s less cronyism and so on but I don’t think that they’re going to get the results they want from those kinds of policies. I think we need a radical decentralization of power and a radical redistribution of opportunity and that’s going to be breaking up all the cartels that are, you know, basically state managed cartels, which controls most of the US economy, and get rid of the financial repression that we have described. It’s totally centralized and it benefits centralized wealth and power
FRA: Great insight Charles and we’ll end it on those words of wisdom. How can our listeners learn more about your work?
Charles: Please visit me at oftwominds.com and you can read the first couple chapters for free of my new book, “Money and Work Unchained”.
FRA: Excellent, we’ll end it there. Thank you very much Charles!
Charles: Thank You Richard.