Yelling "socialism" won't get the job done
Biden's budget, even if going nowhere, needs a responsible critique and counterpoint.
President Joe Biden's proposed 2024 budget is a serious document deserving serious consideration, even though, with Republicans in charge of the House, it isn’t going anywhere.
Biden has always been a weathervane, pointing in the direction of the prevailing winds in the Democratic Party. His budget represents the party’s commitment to transforming the political economy of the United States into a European-style social democracy. Moreover, since the budget isn’t going anywhere, it is a political statement encompassing the case Democrats intend to make to the electorate. They believe this is a winning argument regarding the future of the country.
And it may end up being so by default. The Republican Party doesn’t seem capable or inclined to mount a responsible critique of where Democrats propose to take the country, or to articulate a comprehensible alternative direction.
A European-style social democracy features an expansive social welfare system extending far beyond providing a safety net for the poor. It includes a market economy, but a highly regulated one, particularly the labor market. And more government control of the direction of the economy, through industrial policy favoring some sectors and a greater reliance on public investment rather than private investment.
A European-style social democracy works, in the sense of providing a decent standard of living. But European political economies, as a general rule, are less dynamic and creative than the U.S. political economy, with its less extensive social welfare system and a freer and more robust private sector economy. European economies create fewer new opportunities, and young adults in particular have difficulty finding a footing.
Biden’s budget, along with previous enactments, clearly move the United States toward becoming a European-style social democracy. Social welfare benefits for the middle class are greatly expanded. Industrial policy has been adopted for the energy sector and computer chips. Price controls for some prescription drugs have been imposed and more are advocated. Public investment is increased while potential private sector investment capital is taxed away.
Biden’s budget, however, also reveals the inherent failure in the Democratic approach to transforming the U.S. political economy into a European-style social democracy. The Democrats propose to have a European-style social democracy without the tax structure the Europeans use to pay for it.
In Europe, a broad-based consumption tax, the value-added tax, is the horse that generates the revenue to pay for the expansive social welfare system. Instead, Biden proposes to pay for it with increased taxes on the rich, which he defines as anyone making more than $400,000 a year.
Biden advocates increasing the top rate on individual income, capital gains, corporate profits, and the Medicare investment income surcharge. He wants to expand income subject to the surcharge. And he wants an annual tax on the unrealized capital gains of the affluent.
The cumulative effect of all these increases would be to create a tax climate for work and private investment in the United States inferior to that which prevails in Europe, a sharp reversal of what has historically been a U.S. advantage. And it still wouldn’t pay for all the government Biden wants.
Historically, federal revenues in the United States have been about 18% of GDP and expenditures around 21%. Under Biden’s proposed budget, revenues would increase to an estimated 20% of GDP, but spending would increase to 25%.
That’s a chronic annual deficit of 5% of GDP, even after soaking the rich in every way Biden can conjure. As a point of reference, European Union rules forbid annual deficits greater than 3% of GDP in normal economic times.
Federal borrowing should be limited to major physical assets, such as fighter jets and buildings, for which borrowing is fiscally responsible. For 2024, Biden’s budget has a deficit of $1.8 trillion. But he only proposes $436 billion in new capital assets. So, around $1.4 trillion in additional borrowing to irresponsibly pay for operating expenses.
The typical response of a Republican politician to all this is to denounce and dismiss it as socialism. That fails to meet the moment and the challenge of the Democratic commitment to transforming our political economy into a European-style social democracy.
In the first place, it isn’t socialism, if that term is to retain any useful meaning. European social democracies include a market economy and not much in the way of government ownership of the means of production.
In the second place, that term no longer packs the political punch it formerly produced. The failure of socialism and the superior performance of democratic capitalism is no longer accepted as a truism, particularly among younger voters.
The Democrat argument is easier to make: these are the additional things we want the government to do for you.
The argument against it is more complicated and less straightforward. It includes the importance of private sector investment capital in expanding opportunity for all, particularly the young. The impossibility of funding a European-style social welfare system strictly by taxing the rich. The potential danger in running chronic large deficits and borrowing to cover operating expenses.
These arguments are being made by think tankers and conservative commentators. But Republican politicians want to make elections about cultural issues. And they shrink from fully engaging the Democrats on what kind of political economy best serves the country’s future. Instead, they mostly seek to avoid stepping into what they perceive as Democratic traps, such as having an adult discussion about what to do regarding Social Security and Medicare in light of the declining ratio of workers to retirees.
Some of the cultural issues are vitally important to the future of the country as well. But, at present, the Republican Party isn’t led by politicians up to the broader challenge presented by what the Biden budget represents.
Reach Robb at firstname.lastname@example.org.