Is Capitalism the Real Problem?

I think it is a given that our country is clearly split almost exactly in two over how we want to move forward.  But, forward from what?  That is a question that we seem to have skipped examining.

Many argue that we must give up on capitalism because it is a total failure.  But is it? 

While I think most would agree that the mobility both up and down the economic scale that is the promise of capitalism for all has become far less a reality in this country than it once was, I think that we ignore asking and answering why that is or whether it can be corrected.  Instead about half the country would just dump our capitalist system completely and “move forward.”

Let’s just briefly remind ourselves what capitalism is. Capitalism is an economic system where individuals and firms have considerable freedom to decide what to produce and how to produce. It is an economy dominated by free markets, private property and limited government regulation.

In our capitalist democratic republic, which does not have official caste or class systems that prevent upward mobility, true capitalism allows individuals, based on their talents, individual motivations, and a bit of luck to move both up and down.  That mobility includes an amount of risk and uncertainty, but it also includes the hope and promise of a better life for all.

Critics of capitalism will assert that capitalism ignores peoples' needs, results in wealth inequality, and does not promote equal opportunity. They argue that capitalism also encourages mass consumption, is unsustainable, and provides an incentive for business owners to harm the environment or cause other external harm for monetary gain.

These are to some extent legitimate criticisms.  Capitalism will never result in everyone being in the same position – the equity that is all the rage on the Left these days.  Let’s remind ourselves, however, that equity is not equality; to achieve equity requires taking away equality from those individuals who are in a position that is considered superior.  Equity, along with its colleague “fairness,” actually requires a lack of fairness – a lack of equal treatment – to achieve certain state mandated results.  Demanding equity belies one of our core values that all people are created equal and deserve equal treatment. 

Instead of equity, ideally capitalism provides everyone with the opportunity to use their own skills and desires to get to where they want to be.  That is the ideal and, like any ideal, it will never be achieved.  And, at times, even when the opportunities are entirely equal,  the outcomes may appear or actually be unfair. 

But capitalism creates possibilities, the taking of which vary in risk-factor as well as perhaps the need for luck.  It does not guarantee that any particular actions or inactions will or will not result in a particular end.  And, when results are not guaranteed, there is uncertainty.  Uncertainty is often uncomfortable.

Today it does seem that too many individuals are not finding the desired and sometimes even necessary results.  One cannot ignore that we have far too many people with food or home insecurity despite working two and three jobs.  But the reaction to this seems to be the singular:  Capitalism doesn’t work, dump it and move to a different system with socialism being that system of choice.

I ask that we step back.  Let us ask why is it that capitalism is not working.  Is it truly a failed system, or is it just flawed in its current practice?  What does capitalism need to succeed and is that the environment of our capitalism today?  Is it the fault of capitalism or is it the fact that we actually now have a significant number of socialistic regulations and programs interwoven with our capitalism?  I suggest these are things worth examining before simply perhaps throwing out the baby with the bathwater.

Let’s look at our first major socialist program – social security.  We have all become dependent on it, we expect to receive it when we retire.  It is a clear piece of certainty (security) in our otherwise uncertain lives.  And it is a socialistic government (social) program that is paid for by the taxes of others.  Overall, it is probably a decent program successfully providing everyone who worked at least a minimal income upon retirement. 

But imagine if instead of government collecting the social security tax from your paycheck each month you had that money to yourself determine how to spend.  You could develop your own retirement plan that might net you far better retirement income.   But that does not have the certainty that social security does.  You might just as easily spend that money on frivolities and have nothing for retirement.  You might make a risky investment and end up with far less.  So, to make sure that everyone has something, we give up our personal freedom and decision-making and allow the government to provide us the secure and certain amount that it determines is appropriate for us.

Government regulations which become more and more inclusive have a huge effect on the free market and hence on the capitalist system.  Remember, capitalism needs limited government intervention to thrive.  When the government, its taxes and regulations, encourages businesses and their jobs to go overseas, when excessively high minimum wages force small businesses to collapse, when government programs deflate individual initiative and encourage a hopelessness of existence dependent upon government help, then it becomes very difficult for capitalism to survive. 

When, due to big government, individuals relinquish their belief in the mobility of capitalism and trade it for the certainty of position, no matter how less than or hopeless that certainty may be, then we really do not have a true capitalist system to evaluate or to throw out.

The more the government provides certainty, the more that we become less willing to take the risks of innovation and self-determination that capitalism requires.  We become accustomed to certainty – to security, to social security not just for retirement, but for life itself.  And when the government does not provide enough, we ask for (demand) more.  That is not really the way capitalism works and so perhaps we should not be blaming capitalism for the inequity that we see around us today.

So, rather than jump ahead to the solution of throwing out capitalism, I suggest that we pause and really examine why capitalism is not working particularly well currently.  Is it the fault of capitalism itself, or is it that it has been infused with too many socialist elements that are the direct antithesis of capitalism and which work to prevent the effectiveness of the capitalist system?  Is there something we can do to put capitalism back on track, or is the only possible solution to completely give it up? These are serious and crucial questions that need to be answered before deciding on the best path forward.

I think that many of the problems with our society are concerns to both sides of our warring populace.  The catch is that half of that populace has already made the decision to move forward with socialism without a full examination and understanding of what is actually causing the problems.

I believe we owe it to ourselves, our country, and our future generations to consider whether we can make corrections to our capitalist system that will address many of the problems with which we are faced.  I think it is at the very least worth a try.

Socialism on the other hand is usually a snake-oil cure.  If we are as a nation to decide to take the path of socialism I would like to see that decision made with a full understanding of what socialism really is and where it leads.  I do not think that many of those leading or following the charge away from capitalism and toward socialism have taken a complete and honest look at either the problems or their proposed solution.

Thinking About Social Security

During the past week I have had conversations with at least 3 people about Social Security.  In a variety of ways it seems to be on the mind and there seems to be a fair amount of confusion out there.  So, let me offer some thoughts.

First, yes, Social Security is an entitlement.  The U.S. Senate glossary of terms defines entitlement as follows:

entitlement - A Federal program or provision of law that requires payments to any person or unit of government that meets the eligibility criteria established by law. Entitlements constitute a binding obligation on the part of the Federal Government, and eligible recipients have legal recourse if the obligation is not fulfilled. Social Security and veterans' compensation and pensions are examples of entitlement programs.

That is, recipients of the Social Security entitlement automatically receive the benefits for which they are eligible based on the eligibility criteria (40 “quarters” of eligible earnings).  No one is dependent on annual Congressional appropriations to receive their Social Security benefits. 

Not all social programs are entitlements.  For example, SNAP (food stamps) is also an entitlement program.  In contrast, the Housing Voucher Program is not an entitlement program because Congress appropriates a certain sum of money for the program which may or may not be enough for all who seek funds from the program.

Entitlement programs require mandatory spending.  Mandatory spending is generally governed by statutory criteria; it is not normally set by annual appropriation acts.  The Congressional Budget Office notes “Social Security and some other mandatory spending programs are in effect indefinitely, but some (for example, some agriculture programs) expire at the end of a given period.”  Essentially what this means is that the Government could (though it is unlikely that it will) alter or end the program.

The money that you receive in your Social Security payment is not the same money that you put into the program.  The Social Security taxes that you paid along with the amount that your employer contributed on your behalf was put into the government’s Social Security coffers and used to pay other individuals who were receiving Social Security benefits while you were working.  Not unlike a ponzi scheme, the money you paid with the promise that it would be returned to you was used to pay off the promise that was made to someone else.

Social Security was created because FDR and others in power at the time (during the Great Depression) believed that workers were not making wise choices for their own retirement and that the government could create a retirement plan for all workers.  This would mean that workers would pay a larger portion of their paycheck to the government in the form of additional taxes specifically designated for Social Security.  Rather than choose their own retirement plan, all workers would participate in the same government run plan.  (The current Payroll Tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.) 

Now, I can’t help but think that if I had been able to keep the money that I paid to Social Security, and had invested it wisely I would have a far better retirement income than I have under Social Security.  But the question is, would I have done that or would I have spent that money on shoes and wine or some other frivolity?  Had I wasted the money away, I might be less well off than I am with Social Security. 

The important thing to note here is that whatever I would have done with that money and however I would have ended up in retirement would have been my choice and not that of the government.  I had the freedom to choose and would have been left with the consequences of my choices.

So, Social Security is an example of turning over one aspect of our freedom to the government – we have ceded to them our freedom to choose how to plan for retirement.  In return they have promised us that we will have the amount that they decide is fair based at least in part upon the amount that we and our employer contributed on our behalf. 

So far, this has worked to ensure that everyone who worked at least 40 quarters will have some sort of income when they retire.  But it has removed the ability of those workers to use that money - the Payroll Taxes – in ways that might be better suited to them.  Private retirement plans allow the individual to determine not only how much money they will invest, but also when they will collect the money they have put in, how much they will collect, etc. 

Social Security is entirely run by the government.  The government is in full control. The Social Security program requires workers and their employers, along with self-employed individuals, to pay into the system throughout their working years. Congress decides how much of your paycheck is taxed in order to contribute to the Social Security fund.  The government decides when you contribute.  The government decides how much to give you, and when you can start collecting those benefits.  There are only a few very narrow exceptions of who can opt out of the program. 

The number of people reaching retirement age and the number of people currently working to pay those people’s benefits will affect the amount you receive in Social Security benefits as will such things as when you retire, how much you earned, and your marital status.   You may see a better or worse return in terms of getting back more or less than you contributed.  And your return may be better or worse than if you had created your own retirement plan.

Because it is owned and controlled by the government, Social Security is a form of socialism.  That does not make it a bad program.  There are many who might not have the income they do if not for social security.  But there are also many who might have done better if they had been left in control of their own retirement taxes, had them to use or invest wisely at the time they earned them rather than paying them to the government, and had the benefits of their own choices when they retired.

As an entitlement, like any other right granted from the government to the people, the government has the ability (if not the likelihood) to terminate that entitlement.  An entitlement is not a right that is owned by the people.  It is “owned” and controlled by the government. 

Like any other entitlement people learn to depend upon it.  They become in that piece of their lives dependent upon those in power rather than themselves.  Few actually think about this as they look forward to the certainty of their monthly payments.  Few think about how they might differently have spent their Social Security taxes had they not been required to give them to the government.  While now expecting the government to take care of them, few even realize that they might have had a choice instead.

The reality is that, much as we accept and perhaps like it, Social Security is a piece of socialism. For better or worse, we have relinquished a part of our freedom to government control.