I’ve recently done posts on America’s financial system as well as its health care system.  I view both systems as borderline disasters, and more particularly socialist disasters.  In my previous post, I lamented that the taxpayer now assumed so much risk from bank deposits that banks were encouraged to take excessive risks, leading to occasional financial crises.

In the post on health care, I discussed how the US government spent even more than European governments, but with far less to show for it.  But even the 8% of GDP spent on public health programs greatly understates the US government’s footprint.  The government also provides huge tax breaks for private health insurance, which greatly distorts decision-making (including my own personal decisions.)

Some conservatives don’t view tax breaks as “government spending”, because the money is returned to the public.  But in an economic sense, the following two programs are identical:

1.  A 30% flat rate, with no deductions, and a welfare program giving everyone $5000.

2. A 30% flat rate tax, with a $5000 tax credit for each person.

While those two regimes are essentially identical, there are treated very differently in any statistical rankings of various countries.  In case #1, the $5000 welfare program is treated as government spending.  In that case, both tax revenue and government spending are considerably higher than in case #2.

Our current income tax system with deductions for health insurance (contributions are both payroll and income tax free) is actually equivalent to a system with higher taxes and explicit government subsidies to buy health insurance.  Thus instead of spending 8% of GDP on public health care, we are likely spending more than 10% of GDP, when tax breaks are added in. The way this distorts our behavior is a huge problem.

When I talk to conservatives, I often feel like they are too inclined to defend our financial system and our health care system.  They see the left criticize these two systems, and they rightly recoil from the socialist arguments used by the left.  But just because the left is wrong in their proposed solutions, doesn’t mean that the left has not correctly identified some highly flawed policy regimes.  Both regimes seem indefensible to me, not justifiable on either equity or efficiency grounds.

Conservatives often talk about the problems with regulation, and the need for free choice.  But the massive subsidization of risk in these two systems means there is no free choice to begin with.  Fans of free markets should never be put in the position of defending regimes that are so distorted by subsidy and other regulations.  Our financial system is equivalent to a regime where every bank deposit is first lent to the Treasury, and then re-lent out to a commercial bank.  How is that not socialism?  Conservatives complain about proposals to allow private bank accounts at the Fed, but why isn’t the current system just as bad?

Eventually, the internal inconsistencies of these two systems will become unsustainable.  Who will the public look to for solutions?  Those who defended the regimes, or those who had for decades been pointing to their flaws?

Here’s Robert Kuttner, reviewing a book by Adam Tooze:

The historian G.M. Trevelyan said that the democratic revolutions of 1848, all of which were quickly crushed, represented “a turning point at which modern history failed to turn.” The same can be said of the financial collapse of 2008. The crash demonstrated the emptiness of the claim that markets could regulate themselves. It should have led to the disgrace of neoliberalism—the belief that unregulated markets produce and distribute goods and services more efficiently than regulated ones. Instead, the old order reasserted itself, and with calamitous consequences. Gross economic imbalances of power and wealth persisted. We are still experiencing the reverberations.

I think Kuttner’s wrong; the Great Recession showed that the world needs more neoliberalism.  He (implicitly) focuses on time series evidence, whereas cross sectional evidence is far more meaningful.  The more neoliberal the country, the better it’s done over the past decade.

But Kuttner’s argument has more intuitive appeal to the average voter.  I’m just as surprised as he is that neoliberalism hasn’t suffered an even greater setback as a result of the global financial crisis of 2008.  But suppose it happens again.  Suppose the “deregulation” I discussed in my previous blog post allow reckless mid-sized banks to make extremely risky loans to property developers, and then it all goes bad.  Who will be blamed?  Those who wrote Dodd-Frank?  Or those who weakened the rules so that mid-sized banks could more easily take socially excessive risks?

If the health care system keeps getting more dysfunctional, are voters going to turn to the group that persistently defended the US system as best in the world?  Or those who criticized the system?

Conservatives need to remember that the “liberty” to spend or loan out government subsidized funds is not true liberty.