WASHINGTON, March 30, 2016 — During a recent speech in Argentina, President Obama described how he thought each country should choose the economic system that works best for it. “You don’t have to worry about whether it neatly fits into socialist theory or capitalist theory. You should decide what works,” he said. Even though there are huge differences between the two, the president claimed the sharp division between these political and governing philosophies is beginning to blur. But does this president really understand capitalism?
Although public discussion of this issue has resulted in a number of complex definitions regarding the differences between the economic systems, those differences are very clear. In communism there is government ownership of all property and government control in all markets. In socialism there is primarily private ownership of property but government control of markets. In capitalism there is primarily private ownership of property and no government control of markets.
Obama is right that there is some small degree of “blur.” The blur in capitalism is that some goods and services are deemed to be public goods and should be provided by the government on property likely owned by the government and offered in markets controlled by the government. These include services like national defense, a fair and functioning legal system and the provision of goods like military equipment and highways.
With capitalism, in theory, a minimum of public goods and services are provided.
History clearly indicates that countries that follow economic policies that are as close to pure capitalism as possible tend to have the fastest economic growth and the highest standard of living. The problem for Obama and politicians like Hillary Clinton and Bernie Sanders is that capitalism produces some perceived social injustices that they believe simply must be corrected by government influence or even complete government control of markets.
Communism and socialism both operate on the principle that people are paid according to their need. It follows, then that, since the needs of people are similar, income should be divided equally among the population. While this system may have some success when the population is concerned with satisfying the lowest level needs of food, shelter and clothing, the system fails once those basic needs are satisfied.
Since there is no extra reward for producing more, communist and socialist economies tend to have slower growth, which leads to a lower standard of living, as can be readily seen today in countries like North Korea and Cuba.
With capitalism, people are paid according to the value of their individual contributions, so that the more a person contributes, the more he or she is paid. This provides an incentive for workers to increase their contribution, which in turn leads to more economic growth. The perceived problem is that this system results in an unequal distribution of income since there are vast differences in individual contributions.
President Obama, Hillary Clinton and Bernie Sanders think that the unequal distribution of income is not fair. They also believe that lower income earners should be paid more since they “need” more. That’s why they push for raising the minimum wage, raising taxes on the greatest economic contributors and giving free goods and services to people who can’t afford to pay for them.
The problem with the Obama/Clinton/Sanders view is that they simply do not understand how our system works. Obama has said that if a person is successful, “you didn’t get there on your own.” Clinton says, “Don’t let anybody tell you that, ah, you know, it’s corporations and businesses that create jobs.” She’s implying that if business doesn’t create jobs, it is government that creates jobs, and Obama believes it is actually the government that gave you any success you may have achieved.
Sanders claims the system is rigged to favor those who contribute the most and earn the most. He says our economy is “designed by the wealthiest people in this country to benefit the wealthiest people in this country at the expense of everybody else.” Sanders doesn’t understand our system either.
Over the last seven years, our economy has performed very poorly. The recovery from the recession that ended, by economic consensus, in the summer of 2009 has been weaker than any recovery since the Great Depression of the 1930s. The primary reason for this prolonged period of historic economic underperformance is that Obama simply does not understand our system. After previous recessions, the government’s actions in the 1980s and again in the 1990s focused on cutting taxes for all Americans, including the wealthiest who provide investment capital while eliminating regulations that were stifling growth and reducing incentives for individuals to collect public assistance.
Since 2009, Obama has done exactly the opposite, which clearly explains why the current recovery continues to be so tepid. Obama raised taxes on the middle class, significantly increased taxes on the greatest economic contributors, raised the capital gain tax rate, vastly increased the number and complexity of growth-stifling regulations and imposed liberal welfare policies that discouraged people from contributing to the economy.
If only Obama understood our system, the American economy would be much stronger than it is today.
*Cartoon by Branco. Reprinted by permission and arrangement with LegalInsurrection.