Reconciled

Now that socialism* is no longer a dirty word in American politics, we’re starting to argue about what socialism in the United States would look like. Conservatives and libertarians argue that American socialism will make us more like Venezuela, whereas progressives argue that American socialism will make us more like Sweden. I think both arguments have strengths and weaknesses.

I. Welfare vs Regulation

To see why, let’s distinguish between the welfare state and the regulatory state. The welfare state provides various kinds of transfers, tax-funded social programs that typically take the form of social insurance. The regulatory state intervenes in markets to fix various purported flaws, say through imposing price controls, providing subsidies, restricting the activities of business, creating unstable property rights regimes, and the like.

Substantially expanding the American welfare state is probably not going to lead us to become more like Venezuela.** The freest countries tend to have extensive welfare states. But substantially expanding the regulatory state runs that risk. If we look at the most influential economic freedom index, which is comprised mostly of measures relating to the regulatory state, Venezuela ranks 179th out of 180. Sweden, by contrast, is in the top 20. And if you remove government spending from the economic freedom index, Sweden should climb even higher, and further away from Venezuela. Sweden has one of the freest and most stable market economies in the history of the world, whereas Venezuela is riddled with constant, desperate market manipulation. The Venezuelan nation-state messes with the economy far too much, and that has led to massive dislocations and to tyranny. The Swedish economy, by contrast, redistributes a lot of wealth, but Swedes deliberately moved away from a heavy regulatory state a few decades ago, and it’s done them a world of good.

Here’s how this point can improve our political discourse. Bernie Sanders stands above all the other Democratic presidential contenders in his enthusiasm for the regulatory state, and has proposed dramatic expansions of the welfare state. When Bernie talks about expanding the regulatory state, such as supporting nationwide rent control, pointing to Venezuela is fair game. But when Bernie talks about expanding the welfare state, pointing to Sweden (today) is perhaps more appropriate.

That’s not to say that an extensive welfare state is justified. The point is that expanding the welfare state doesn’t set us on the road to Venezuela, while expanding the regulatory state very well might.

II. Trust Matters Too

Both sides should also bear in mind that social trust plays a huge role in explaining how well a society’s political and economic institutions work. Venezuela is a low trust society, whereas Sweden is a ridiculously high trust society, with the United States in between (trust data).

For instance, in the mid 90s, nearly 60% of Swedes said most people can be trusted, 35% of Americans said most people can be trusted, and 14% of Venezuelans said most people can be trusted. Sweden continues to hover around 60-65%, the US around 35-40%, and Venezuela around 13-15%. If you don’t trust most people, transactions are harder, including transactions with the civil service. The programs that work in Sweden may work worse in the US, and will tend to work worse still in Venezuela. So it’s important to recognize social trust as a variable in policy efficacy.

This limits the claims of both sides. Progressives shouldn’t expect that Swedish policies will work as well in the US, and conservatives and libertarians shouldn’t expect that Venezuelan policies will work as badly in the US.

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* Here “socialism” refers to an extensive social democratic state, not government ownership of the means of production.

** Unless the social programs are funded with unstable resources subject to great government control, like revenue from government-run oil companies, as this mixes the welfare state and the regulatory state.