Socialism: The Resilient Delusion

One of the perennial, unanswered questions in this world is: when is government big enough for a leftist? All we hear from people of left-leaning political convictions is that government must grow bigger. American liberals continuously call for new entitlements – the latest being the ridiculous universal child care program funded by money borrowed from China – but even in notoriously welfare-statist Scandinavia the left continues to demand more government. In Sweden, e.g., the incumbent prime minister and his cabinet (nominally “center-right”) are forcing local governments to raise taxes to record levels. The social democrats, in turn, want to significantly expand government spending and raise payroll taxes. And this in the country that has been notorious for world-record high taxes for almost half a century now.

Add to this the trend of higher taxes sweeping across the EU, and there should be no doubt that the left harbors a totally insatiable desire for more government, regardless of how big government already is.

You would think that the debacle of socialism toward the end of the 20th century had left big enough footprints in the history books for anyone to see and be deterred. Not so. Socialism is still alive and kicking and has even seen a resurrection over the past decade. The international socialist movement, which fell into disarray and a deep identity crisis after the fall of the Berlin Wall, got its act together again in 2001 when muslim terrorists committed the atrocities of 9/11 here in America. Suddenly, the old, deeply rooted anti-Americanism that had driven the global left during the Cold War was jolted back to life.

The resurrection of the global left accelerated in 2003 when they aligned themselves with Saddam Hussein to defend his tyranny against a multinational coalition. From there, the global left reignited its hatred for economic freedom and capitalism, a hatred that was partly inspired by the seemingly successful implementation of socialism in Venezuela. Socialists all over the world merrily turned a blind eye to facts such as out-of-control inflation at 30-35 percent per year, the virtual destruction  of property rights when the military seized everything from farms to oil production facilities, the complete pull-out of foreign investors, food shortage, power shortage (in a country that exports oil) and rampant crime.

To the global left, the very existence of Venezuela gave them hope – hope that their warped view of the world was still somehow valid.

Sadly, the political virus of socialism is not contained to Venezuela. In Ecuador, president Correa has been copying “bolivarian” socialism since he took office in 2009. Reinvigorated by another election victory, Correa now sets out to make his destruction of the country “irreversible”. From the Buenos Aires Herald:

Ecuadorean President Rafael Correa said his party likely won three-quarters of the seats in Congress in last weekend’s election and vowed today to “steamroll” through reforms that will make his socialist model irreversible. The 49-year-old economist was re-elected on Sunday with 57 percent of votes, some 34 percentage points more than the runner-up. During his six years in office he has won broad support with high spending on infrastructure and social welfare.

There is another side to his “success” story. We will get to it in a moment. For now, let’s listen to what the Buenos Aires Herald has to say:

“This is going to be a legislative steamroller to serve the interests of the Ecuadorean people. … In democracy, the winners rule, but the losers have to be respected,” he told foreign reporters at the presidential palace.

The left always reduces democracy to a matter of election results. Or, as it has more aptly been called: the tyranny of the majority. In the socialist paradigm, majority votes are unabridged mandates, which explains why the left so adamantly uses its election victories to “transform” the countries they rule. Look at what Franklin D Roosevelt and his Democrat cohort in Congress did to America during the 1930s; go back and see what happened to France after Francois Mitterand was elected president in 1981 – or just glance at the arrogance of the current French president and his socialist majority in the National Assembly.

And these are mild examples by historic comparison.

The Herald again, where the Ecuadorean president takes his hubris to the next level:

“We’re overwhelmed with the amount of support from people. … We’re going to deepen the citizen’s revolution, build a new homeland and make it irreversible.” … [Correa] also promised to press ahead with socialist reforms to empower the low-income majority and dismantle what he called an elitist system that controlled the state and neglected the poor.

Alright, let’s stop there for a second and take a look at the other side of the story. Here is what the Heritage Foundation has to say about Ecuador in its annual report Index of Economic Freedom:

Ecuador’s economic freedom score is 46.9, making its economy the 159th freest in the 2013 Index. Its overall score is 1.4 points lower than last year, with substantial declines in the control of government spending and investment freedom offsetting improvements in labor freedom and freedom from corruption. Ecuador is ranked 26th out of 29 countries in the South and Central America/Caribbean region, and its overall score is far below world and regional averages. Once considered moderately free, Ecuador has slid significantly in the rankings and continues for a fourth year as a “repressed” economy. The reach of government continues to expand to economic sectors beyond the petroleum industry, and pervasive corruption continues to weaken property rights. The private sector has been marginalized by a restrictive entrepreneurial environment. Ecuador’s underdeveloped financial sector, often subjected to state-directed allocation of credit, limits access to financing and adds costs for entrepreneurs. The overall investment climate has become increasingly risky because of the repressive political environment. The restrictive trade regime is reducing competition and eroding productivity. By controlling flows of trade and investment, the government has been forcing closer economic and commercial ties with Venezuela and China.

As Bloomberg.com reports, this unrelenting decline in economic freedom is taking its toll:

Ecuador’s economy, South America’s seventh biggest, is growing at its weakest pace since 2010 as lower oil prices and limited financing options after a 2008 default crimped government spending and cooled domestic demand. Gross domestic product expanded 4.7 percent in the third quarter from the previous year and 1.5 percent from the prior quarter, the central bank said today in a report on its website. The bank revised down figures for second-quarter growth to 4.6 percent from a previously reported 5.2 percent, the lowest yearly reading since the third quarter of 2010.

These growth figures may seem strong, but they are driven entirely by a government that is not only growing its spending, but doing it while critically dependent on oil-export revenues:

Ecuador’s government, which depends on oil sales for about 44 percent of its revenue, used public spending to boost growth in 2012, Economic Policy Minister Jeannette Sanchez said yesterday. As oil prices fell last year, revenues declined, which limits the amount the government can spend to stimulate the economy, said Capital Markets economist Michael Henderson. “Under Correa you’ve basically seen government spending driving growth,” Henderson, who forecasts 4 percent annual growth in 2012 and 2.5 percent in 2013, said Jan. 2 in a telephone interview from London. “You’re going to see domestic demand slow further and pretty much we expect that to translate into a halving of growth rates from 2012 to 2013.”

It would be a valid point that this expansion of government spending should pull the economy into a higher growth gear. However, for that to happen, the economy must meet three conditions: it must have a healthy entrepreneurial environment; it must have a well-working credit market and a free banking system; and the spending that government engages in must be of such a kind that it actually generates productive economic activity.

The first condition is essentially the same as rock-solid protection of property rights. If a country’s property rights system is weak, no one will risk his investments even if he sees the potential to make some money. As the Heritage Foundation said, Ecuador has not exactly excelled in its protection of property rights.

The second condition is also not met by the Ecuadorian economy. The Correa government has been very heavy-handed in regulating the banking sector, which has stifled access to credit and made it more difficult to finance expansion of private businesses. As a result, it is difficult if not impossible for the private sector to take advantage of any sign of growing economic activity, including government spending on, e.g., infrastructure.

The third condition is rarely discussed in the literature on the role of government spending. If government pours more money into entitlement programs, then there will be no substantial multiplier effect at all for the private sector to capitalize on. Entitlements, especially in the form of work-free income, discourage productive activity such as participation in the work force. At the same time, there is no discernible increase in consumer spending, as the recipients of those entitlements are at the very bottom of the income scale.

A good part of the Correa government’s spending has been on entitlements – though it is still somewhat difficult to determine the exact figures – which leads to the conclusion that a government-driven expansion of the economy falls flat to the ground beyond the dollars the government spends.

The Bloomberg report also indicates that there is a looming budget deficit crisis in Ecuador, which means that Correa will soon face the same problems that Hugo Chavez had to deal with in Venezuela. Chavez chose to print money (partly through so called sterilization of the exchange rate) which ultimately set off an inflationare bonfire in the Venezuelan economy. Will Correa follow in his footsteps? To do so he would have to introduce a national currency; so far he has conveniently been riding on the coat tails of the U.S. dollar.

Would he be willing to drop the dollar as the nation’s currency? Let’s return to the Buenos Aires Herald to see if they can give us a clue:

Among the bills Correa has pledged to push are a plan to distribute idle land among the poor, and a media law to regulate content in newspapers and TV networks – which could stoke an ongoing confrontation with opposition media. “We’ll ask for the same things that we asked for before this resounding victory: for the media to be decent, ethical, to inform instead of manipulate, to communicate instead of getting involved in politics,” the president said. In the past, Correa has called journalists “dogs” and “hired assassins,” and has filed lawsuits against reporters and media owners who he says are determined to undermine his government. He is also expected to pass a new mining law to ease investment terms that could pave the way for the development of some large and mid-sized projects that would let Ecuador diversify its economy away from a dependence on oil exports.

So the freedom of press is in grave danger, and Correa presses on with more government spending despite a decline in oil revenues. So far the Chinese have been generous with loans to cover his budget deficit, but unless Correa is going to put all his country’s oil reserves in Chinese hands he will sooner or later come to the point where Beijing imposes a credit ceiling on him. At that point, he will either have to abandon his socialist agenda – or introduce a national currency.

Once the national currency is there, he can basically create whatever commando economy he wants. That would only accelerate his nation’s plunge into the despair and deprivation that always follows in the footsteps of arrogant socialist revolutionaries.

If the Ecuadorian people cannot be saved from the inevitable, at least let’s hope that Correa’s failure will stand as a stark reminder to the world – just like Venezuela does today – that socialism is never, ever a free meal.

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