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Thursday, April 2, 2015

Robert Reich: The rich don’t work anymore — working is for poor people


Robert Reich: The rich don’t work anymore — working is for poor people

Robert Reich, AlterNet

01 Apr 2015 at 02:59 ET 

Robert Reich speaks to Conan O'Brien (Screencap)
Many believe that poor people deserve to be poor because they’re lazy. As Speaker John Boehner has said, the poor have a notion that “I really don’t have to work. I don’t really want to do this. I think I’d rather just sit around.”
In reality, a large and growing share of the nation’s poor work full time — sometimes sixty or more hours a week – yet still don’t earn enough to lift themselves and their families out of poverty.
It’s also commonly believed, especially among Republicans, that the rich deserve their wealth because they work harder than others.
In reality, a large and growing portion of the super-rich have never broken a sweat. Their wealth has been handed to them.
The rise of these two groups — the working poor and non-working rich – is relatively new. Both are challenging the core American assumptions that people are paid what they’re worth, and work is justly rewarded.
Why are these two groups growing?
The ranks of the working poor are growing because wages at the bottom have  dropped, adjusted for inflation. With increasing numbers of Americans taking low-paying jobs in retail sales, restaurants, hotels, hospitals, childcare, elder care, and other personal services, the pay of the bottom fifth is falling closer to the minimum wage.
At the same time, the real value of the federal minimum wage is lower today than it was a quarter century ago.
In addition, most recipients of public assistance must now work in order to qualify.
Bill Clinton’s welfare reform of 1996 pushed the poor off welfare and into work. Meanwhile, the Earned Income Tax Credit, a wage subsidy, has emerged as the nation’s largest anti-poverty program. Here, too, having a job is a prerequisite.
The new work requirements haven’t reduced the number or percentage of Americans in poverty. They’ve just moved poor people from being unemployed and impoverished to being employed and impoverished.
While poverty declined in the early years of welfare reform when the economy boomed and jobs were plentiful, it began growing in 2000. By 2012 it exceeded its level in 1996, when welfare ended.
At the same time, the ranks of the non-working rich have been swelling. America’s legendary “self-made” men and women are fast being replaced by wealthy heirs.
Six of today’s ten wealthiest Americans are heirs to prominent fortunes. The Walmart heirs alone have more wealth than the bottom 40 percent of Americans combined.
Americans who became enormously wealthy over the last three decades are now busily transferring that wealth to their children and grand children.
The nation is on the cusp of the largest inter-generational transfer of wealth in history. A study from the Boston College Center on Wealth and Philanthropy projects a total of $59 trillion passed down to heirs between 2007 and 2061.
As the French economist Thomas Piketty reminds us, this is the kind of dynastic wealth that’s kept Europe’s aristocracy going for centuries. It’s about to become the major source of income for a new American aristocracy.
The tax code encourages all this by favoring unearned income over earned income.
The top tax rate paid by America’s wealthy on their capital gains — the major source of income for the non-working rich – has dropped from 33 percent in the late 1980s to 20 percent today, putting it substantially below the top tax rate on ordinary income (36.9 percent).
If the owners of capital assets whose worth increases over their lifetime hold them until death, their heirs pay zero capital gainstaxes on them. Such “unrealized” gains now account for more than half the value of assets held by estates worth more than $100 million.
At the same time, the estate tax has been slashed. Before George W. Bush was president, it applied to assets in excess of $2 million per couple at a rate of 55 percent. Now it kicks in at $10,680,000 per couple, at a 40 percent rate.
Last year only 1.4 out of every 1,000 estates owed any estate tax, and the effective rate they paid was only 17 percent.
Republicans now in control of Congress want to go even further. Last Friday the Senate voted 54-46 in favor of a non-binding resolution to repeal the estate tax altogether. Earlier in the week, the House Ways and Means Committee also voted for a repeal. The House is expected to vote in coming weeks.
Yet the specter of an entire generation doing nothing for their money other than speed-dialing their wealth management advisers is not particularly attractive.
It puts more and more responsibility for investing a substantial portion of the nation’s assets into the hands of people who have never worked.
It also endangers our democracy, as dynastic wealth inevitably and invariably accumulates political influence and power.
Consider the rise of both the working poor and the non-working rich, and the meritocratic ideal on which America’s growing inequality is often justified doesn’t hold up.
That widening inequality — combined with the increasing numbers of people who work full time but are still impoverished and of others who have never worked and are fabulously wealthy — is undermining the moral foundations of American capitalism.

Monday, March 23, 2015

GOP’s “screw the poor” budget: Republicans plan some serious pain for low-income Americans


GOP’s “screw the poor” budget: Republicans plan some serious pain for low-income Americans

The new GOP budget seeks to slash Medicaid spending and coverage, and in return will provide nothing

GOP's "screw the poor" budget: Republicans plan some serious pain for low-income AmericansPaul Ryan, John Boehner (Credit: Reuters/Kevin Lamarque/Joshua Roberts)
The House Republicans came out with their big FY2016 budget proposal yesterday, and, as my colleague Jim Newell points out, while Paul Ryan is no longer the official numbers wonk for House Republicans, his influence is readily apparent in their new budget plan. The Republican proposal privatizes everything it can privatize, cuts every non-defense program it gets its grubby mitts on, nukes Obamacare from orbit, and dynamically scores itself into something resembling balance.
It really can’t be overstated just how terrible this budget proposal is for America’s poor. There’s a lot to pick over, but I want to focus specifically on Medicaid. The program would be in for some especially deep cuts under the Republicans’ vision, and the inevitable impact of those cuts would be millions of low-income Americans losing access to health coverage.
The GOP plan envisions two big changes to the existing Medicaid system: it would do away with the Medicaid expansion made possible by the Affordable Care Act, and it would transform Medicaid into a block-granted program, wherein states would receive a chunk of money and be left to their own devices when deciding how to spend it.
Let’s start with the Medicaid expansion. The GOP proposal arrived the day after the White House released data showing that the uninsured rate nationwide had plummeted 35 percent since the Affordable Care Act was implemented. A huge chunk of this reduction is due to expanded Medicaid, which, as of this writing, 29 states have signed on to. The expansion is a great deal for the states – the federal government picks up full cost of the expansion initially, and 90 percent of the cost going forward – and data show that states that expanded Medicaid saw much sharper reductions in their uninsurance rates compared to non-expansion states. Obamacare works largely because of the Medicaid expansion. The Republicans in the House want to eliminate this and replace it with nothing.
The counterargument to this is that expanding coverage through Medicaid doesn’t necessarily mean access to healthcare, and the Republican budget document makes that case in proposing their changes to the Medicaid program:
For many, though, Medicaid’s promises are empty, its goals are unmet, and its dollars are wasted. Sick individuals cannot get appointments, new beneficiaries cannot find doctors, and Medicaid cards are little more than pieces of plastic.
This is undoubtedly true for a number of people. But it’s also true for people on private insurance. In fact, recent studies have found that “Medicaid provides access to health care services comparable to that of ESI but at significantly lower costs. Specifically, if adult Medicaid beneficiaries were instead covered by [employer-sponsored insurance], their access to care would not be significantly different.” Where Medicaid makes a real difference is in shielding low-income people from out-of-pocket medical costs.
But the GOP is determined to “fix” this problem, and that’s where the block grants come in. The party is clearly on a mission to distance itself from the term “block grant” – Paul Ryan’s recent poverty proposal rebranded block grants as “Opportunity Grants,” and the new Republican budget plan rechristens them “State Flexibility Funds.” I mean, who doesn’t like opportunity and flexibility, right? Anyway, the “State Flexibility Funds,” according to the GOP budget, will “give states greater freedom to build the most effective programs for their communities. We empower state policymakers to tailor their Medicaid programs based on the unique challenges they face because governors and state legislatures know their populations better than Washington.”
The reality of the block grant is very different. As the Center for Budget and Policy Priorities points out, block-granting Medicaid is tantamount to slashing its budget by 35 percent over the next ten years as funding increases lag well behind Medicaid’s projected growth rate. And while “flexibility” sounds nice, states may use that flexibility to erect new eligibility barriers to enrollment, or slash benefits, or both.
Also, there’s no guarantee that state “flexibility” will produce better outcomes. Bloomberg’s Christopher Flavelle recently picked over the Medicaid “reform” program that Jeb Bush implemented in Florida, which was supposed to provide flexibility and “let consumers shape and improve the market, rather than have the government tell those plans what to offer.” How’d it work out?
In 2013, the latest year for which numbers are available, the plans taking part in Bush’s reform program ranked below the national Medicaid average on 21 of the 32 quality indicators reported by the state. In some cases, those results were dramatically worse than in other states.
The overall message put forth by the Republicans in the budget document when it comes to Medicaid is that they want to take what works and get rid of it. If you’re a poor person who depends on the federal program for access to healthcare, then you’re in for a world of hurt.
Simon Maloy
Simon Maloy is Salon's political writer. Email him at smaloy@salon.com. Follow him on Twitter at @SimonMaloy.

Thursday, February 26, 2015

Why Social “Producer” Models Lose

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Why Social “Producer” Models Lose

Continuing on with highlighting the difference between a social producer vs. conductor it is important to understand why social producers will lose.
People simply do not like to be considered as an asset used to produce results. Yet many corporations think, act and threat people as an asset for production of results. The attitude of using people as production assets came out of the industrial era and remnants of those attitudes linger even in today’s modern society. The use of monthly, quarterly goals and bonus plans are old school methods used primarily to get people to produce more for the organization. Measurement of individual production is yet another lingering method that most people consider sophomoric, foolish and demotivating. Yet we still see these methods being used throughout corporations everywhere.
The Intrinsic Value Factor
People gain intrinsic value from being proud of their work and the company they work for. Intrinsic value is also gained from the people they work with and the relationships they form as a result of their work. Intrinsic value reflects whether something is good or bad but also  how good or bad it is. Working for a company that you don’t trust, whose methods you question and whose management actions  are archaic doesn’t instill much intrinsic value with people.
The same is true of customer experiences with your organization. The experience a customer has with your business, your processes, products, services and people either creates or destroys intrinsic value. If customers do not sense that you really care about them then there is no intrinsic value instilled. If customers feel that all you want from them is a sale then there is no relational intrinsic value created. Using marketing tricks to pull people to a web site that wants to trap them creates no intrinsic value.
The list of value offenses created by organizations  goes on and on.  Consumed with achieving short term results organizations get obsessed with “production” without even considering how to improve the relational values it has with the marketplace of buyers, employees and suppliers.
The “producer” business model will fail in a world connected, relational and transparent. Why? Because people achieve more, share more and give more when they can sense, see and accentuate intrinsic values that allows them to be part of something or a group that is good, rewarding and social.
Social technology will accelerate the differences between organizations who are producers vs conductors because people have been enabled to express, experience and share the intrinsic values created by conductors. At the same time  people have been enabled to express, experience and share the lack of  intrinsic values created by producers. Get it?
If you are an advertiser you ought to get it quick and stop wasting your money.

Tuesday, February 17, 2015

The Christian Right Is Quite Scary, But the GOP's Economic Agenda Is America's Big Nightmare


The Republican corporate agenda is a serious threat to society. 


Woe to the American president who says anything sensible on the subject of religion. President Obama forgot that unwritten rule recently at the National Prayer Breakfast when he pointed out what an eighth-grader could tell you: that acts of violence have been committed in the name of many faiths, not just Islam:
“Lest we get on our high horse and think this is unique to some other place, remember that during the Crusades and the Inquisition, people committed terrible deeds in the name of Christ. In our home country, slavery and Jim Crow all too often was justified in the name of Christ. … So this is not unique to one group or one religion. There is a tendency in us, a sinful tendency that can pervert and distort our faith.”
Cue Christian right fake freakout. The holy rollers, naturally, seized the opportunity to present themselves as persecuted patriots defending America’s regular folk against godless liberal elites. They came charging out of the gate, sending blast after blast of ridiculousness across the media. Catholic League president Bill Donohue retorted that the Inquisition “only” piled up 1,394 bodies, while Rush Limbaugh professed Jim Crow to be something that is “not around today … a thousand years ago, yeah. But not today.” On Fox & Friends, Catholic priest Jonathan Morris warned viewers of a rising “Christianphobia,” a pernicious “hatred of Christians is on the rise in America.” Past and current Republican presidential candidates including Rick Santorum, Rudy Giuliani, Bobby Jindal, and Mike Huckabee hustled to outdo each other in their faux outrage, accusing the president of supporting only Muslims and setting himself against everything Christians stand for.

The paroxysm of pandering culminated with a guest appearance on Fox News’ “Hannity” by Christian conservative Star Parker, who declared herself so violated by the President’s reference to the obvious she pronounced his remarks “verbal rape.” Star commented: “We were not expecting it, nobody wanted it, it was horrible to sit through, and after it was over we all felt like crap.” She went on to claim that Obama was sending a message to Muslim terrorists to “keep doing what you’re doing over there in the Middle East.”

America’s Christian right has a long history of demonstrating its devotion to fanaticism, extravagance and folly, but since the Reagan era, these tendencies have been deployed very effectively by politicians who want to appeal to the sensibilities and loyalties of ordinary Americans while picking their pockets. That’s what this latest round of rabble-rousing is really all about.

From talk radio and cable news pundits to reactionary evangelical pastors, the holy rollers form strategic alliances with politicians who back corporate power and wealthy individuals, working overtime to whip their followers into a religious frenzy sufficient to make them forget that their wages are falling and they will not be able to afford to send their kids to college or to go to the doctor. As Sophia Rosenfeld once put it in the Washington Post, you've got to beware of Republicans bearing the common touch because before you can bat an eye, they have stolen your retirement money and shoveled more money toward the rich. Masking the elitism of their economic policies and politics with fundamentalism in religion has been a tried-and-true formula for the 1 percent to expand their power.

The god of the Christian right and the god of unregulated capitalism show themselves to be on intimate terms in the philosophy of evangelicals, like discredited pastor Ted Haggard, who was the leader of the National Association of Evangelicals before he was forced to resign amid a male prostitution/crystal meth scandal. For him, free-market capitalism is “truth” and “globalization is merely a vehicle for the spread of Christianity.” Getting Christianity and elite economics together on the same page is useful in signaling that policies that serve the rich are simply articles of faith, the dispute of which is akin to arguing with a literal interpretation of the Bible.

But there’s a little fly in this ointment that just won’t go away. Good old-fashioned American common sense, as normally understood, has something to do with fairness, and since the financial crisis, plenty of people have woken up to the idea that something very unfair has been happening under their noses, and a so-called recovery that’s basically been a party for the rich but a bust for everybody else has not done much to convince them otherwise.

Do financiers deserve to pay a lower rate in taxes for their unearned income than hard-working Americans who toil on the job all day? No, they don’t. That's just old-fashioned folk wisdom. Does a person who has worked and contributed to the community all her life deserve to live on peanuts in her golden years? No, she doesn't. Common sense.

That’s why a few Republican presidential hopefuls have started tentatively trying out messages that sound like they care about economic fairness as they parade their godly credentials. Recently in Iowa, Chris Christie lamented the plight of the working class and Rick Santorum declared that the Republican party should be the party of the worker. Jeb Bush has been lately heard testing out messages about helping a bereft middle class. Of course, they tend to talk about inequality or “unfairness” as something the evil government has created, a position the demonization of Obama only bolsters. But will it work? After all, the hatred of redistribution is a core tenet of the GOP, as is opposition to unions and taxing the rich more. Even raising the minimum wage a few nickels is still anathema to the GOP: senators Rand Paul, Ted Cruz and Marco Rubio have all opposed the President's plan to raise the minimum wage to $10.10 from the current $7.25, warning that young people will lose jobs if employers are made to pay them enough to purchase food and shelter.

The pivot to populism ought to be a hard sell, but unfortunately, many liberals spend too much time trying to deliver Republican-lite policies instead of tapping into real economic common sense and advancing ideas that would restore some actual fairness to life in America. As long as they are praying to the god Mammon and seeking to do the bidding of their wealthy donors, they are vulnerable to Republican populist appeals, as hollow as they may sound. When Republicans deliver economic nonsense with a megadose of megachurch, plenty of Americans are willing to swallow it.

Lynn Parramore is contributing editor at AlterNet. She is cofounder of Recessionwire, founding editor of New Deal 2.0, and author of "Reading the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture." She received her Ph.D. in English and cultural theory from NYU. Follow her on Twitter @LynnParramore.

Robert Reich: This Very Bad Deal Will Make Wall Street Richer and Bust the Rest of America

The truth about the Trans Pacific Partnership.


Suppose that by enacting a particular law we’d increase the U.S.Gross Domestic Product. But almost all that growth would go to the richest 1percent. 

The rest of us could buy some products cheaper than before. But those gains would be offset by losses of jobs and wages.

This is pretty much what “free trade” has brought us over the last two decades.
I used to believe in trade agreements. That was before the wages of most Americans stagnated and a relative few at the top captured just about all the economic gains.

Recent trade agreements have been wins for big corporations and Wall Street, along with their executives and major shareholders. They get better access to foreign markets and billions of consumers.

They also get better protection for their intellectual property – patents, trademarks, and copyrights. And for their overseas factories, equipment, and financial assets.

But those deals haven’t been wins for most Americans.

The fact is, trade agreements are no longer really about trade. Worldwide tariffs are already low. Big American corporations no longer make many products in the United States for export abroad.

The biggest things big American corporations sell overseas are ideas, designs, franchises, brands, engineering solutions, instructions, and software.
Google, Apple, Uber, Facebook, Walmart, McDonalds, Microsoft, and Pfizer, for example, are making huge profits all over the world.

But those profits don’t depend on American labor — apart from a tiny group of managers, designers, and researchers in the U.S.

To the extent big American-based corporations any longer make stuff for export, they make most of it abroad and then export it from there, for sale all over the world — including for sale back here in the United States.

The Apple iPhone is assembled in China from components made in Japan, Singapore, and a half-dozen other locales. The only things coming from the U.S. are designs and instructions from a handful of engineers and managers in California.

Apple even stows most of its profits outside the U.S. so it doesn’t have to pay American taxes on them.

This is why big American companies are less interested than they once were in opening other countries to goods exported from the United States and made by American workers.

They’re more interested in making sure other countries don’t run off with their patented designs and trademarks. Or restrict where they can put and shift their profits.

In fact, today’s “trade agreements” should really be called “global corporate agreements” because they’re mostly about protecting the assets and profits of these global corporations rather than increasing American jobs and wages. The deals don’t even guard against currency manipulation by other nations.

According to Economic Policy Institute, the North American Free Trade Act cost U.S. workers almost 700,000 jobs, thereby pushing down American wages.
Since the passage of the Korea–U.S. Free Trade Agreement, America’s trade deficit with Korea has grown more than 80 percent, equivalent to a loss of more than 70,000 additional U.S. jobs.

The U.S. goods trade deficit with China increased $23.9 billion last year, to $342.6 billion. Again, the ultimate result has been to keep U.S. wages down.
The old-style trade agreements of the 1960s and 1970s increased worldwide demand for products made by American workers, and thereby helped push up American wages.

The new-style global corporate agreements mainly enhance corporate and financial profits, and push down wages.

That’s why big corporations and Wall Street are so enthusiastic about the upcoming Trans Pacific Partnership – the giant deal among countries responsible for 40 percent of the global economy.

That deal would give giant corporations even more patent protection overseas. It would also guard their overseas profits.

And it would allow them to challenge any nation’s health, safety, and environmental laws that stand in the way of their profits – including our own.
The Administration calls the Trans Pacific Partnership a key part of its “strategy to make U.S. engagement in the Asia-Pacific region a top priority.

Translated: The White House thinks it will help the U.S. contain China’s power and influence.

But it will make giant U.S. global corporations even more powerful and influential.
White House strategists seem to think such corporations are accountable to the U.S. government. Wrong. At most, they’re answerable to their shareholders, who demand high share prices whatever that requires.

I’ve seen first-hand how effective Wall Street and big corporations are at wielding influence — using lobbyists, campaign donations, and subtle promises of future jobs to get the global deals they want.

Global deals like the Trans Pacific Partnership will boost the profits of Wall Street and big corporations, and make the richest 1 percent even richer.
But they’ll bust the rest of America.

Robert B. Reich has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He also served on President Obama's transition advisory board. His latest book is "Aftershock: The Next Economy and America's Future." His homepage is www.robertreich.org.

Tuesday, February 10, 2015

Robert Reich: The Wealthy Have Pulled America Back to the 19th Century


Wall Street and enormously rich individuals have gained political power to organize the market in ways that leave most Americans behind.

My recent column about the growth of on-demand jobs like Uber making life less predictable and secure for workers unleashed a small barrage of criticism from some who contend that workers get what they’re worth in the market.
A Forbes Magazine contributor, for example, writes that jobs exist only  “when both employer and employee are happy with the deal being made.” So if the new jobs are low-paying and irregular, too bad.
Much the same argument was voiced in the late nineteenth century over alleged “freedom of contract.” Any deal between employees and workers was assumed to be fine if both sides voluntarily agreed to it. 
It was also a time of great wealth for a few and squalor for many. And of corruption, as the lackeys of robber barons deposited sacks of cash on the desks of pliant legislators.It was an era when many workers were “happy” to toil twelve-hour days in sweat shops for lack of any better alternative. 
Finally, after decades of labor strife and political tumult, the twentieth century brought an understanding that capitalism requires minimum standards of decency and fairness – workplace safety, a minimum wage, maximum hours (and time-and-a-half for overtime), and a ban on child labor.
We also learned that capitalism needs a fair balance of power between big corporations and workers. 
We achieved that through antitrust laws that reduced the capacity of giant corporations to impose their will, and labor laws that allowed workers to organize and bargain collectively. 
By the 1950s, when 35 percent of private-sector workers belonged to a labor union, they were able to negotiate higher wages and better working conditions than employers would otherwise have been “happy” to provide.
But now we seem to be heading back to nineteenth century.
Corporations are shifting full-time work onto temps, free-lancers, and contract workers who fall outside the labor protections established decades ago.
The nation’s biggest corporations and Wall Street banks are larger and more potent than ever. 
And labor union membership has shrunk to fewer than 7 percent of private-sector workers.
So it’s not surprising we’re once again hearing that workers are worth no more than what they can get in the market.
But as we should have learned a century ago, markets don’t exist in nature. They’re created by human beings. The real question is how they’re organized and for whose benefit.
In the late nineteenth century they were organized for the benefit of a few at the top. 
But by the middle of the twentieth century they were organized for the vast majority.
During the thirty years after the end of World War II, as the economy doubled in size, so did the wages of most Americans — along with improved hours and working conditions.
Yet since around 1980, even though the economy has doubled once again (the Great Recession notwithstanding), the wages most Americans have stagnated. And their benefits and working conditions have deteriorated. 
This isn’t because most Americans are worth less. In fact, worker productivity is higher than ever. 
It’s because big corporations, Wall Street, and some enormously rich individuals have gained political power to organize the market in ways that have enhanced their wealth while leaving most Americans behind.
That includes trade agreements protecting the intellectual property of large corporations and Wall Street’s financial assets, but not American jobs and wages.
Bailouts of big Wall Street banks and their executives and shareholders when they can’t pay what they owe, but not of homeowners who can’t meet their mortgage payments. 
Bankruptcy protection for big corporations, allowing them  to shed their debts, including labor contracts. But no bankruptcy protection for college graduates over-burdened with student debts.
Antitrust leniency toward a vast swathe of American industry – including Big Cable (Comcast, AT&T, Time-Warner), Big Tech (Amazon, Google), Big Pharma, the largest Wall Street banks, and giant retailers (Walmart).
But less tolerance toward labor unions — as workers trying to form unions are fired with impunity, and more states adopt so-called “right-to-work” laws that undermine unions.  
We seem to be heading full speed back to the late nineteenth century. 
So what will be the galvanizing force for change this time?

Robert B. Reich has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He also served on President Obama's transition advisory board. His latest book is "Aftershock: The Next Economy and America's Future." His homepage is www.robertreich.org.

Tuesday, February 3, 2015

Debunking Libertarian Economic Theory as Total Nonsense



Friedrich Hayek argued that centralized economic planning would lead to totalitarianism, but that's totally wrong.


Since the 2014 midterm elections, Democrats have been trying to figure out what happened. There are probably dozens, if not hundreds, of reasons for the Democratic bloodbath. But one reason, in my opinion, is that Democrats never discuss, much less analyze, the fundamental theories of modern conservatism. As a result, erudite-sounding nonsense is passed off as wisdom, and sways an electorate grasping for answers. Republican calls for limited government find fertile ground with workers whose wages are stagnating.

One of the intellectual foundations of this idea of limiting government comes from an Austrian √©migr√© economist named Friedrich A. Hayek, in his 1944 book The Road to Serfdom. Conservatives use that term as shorthand for the idea is that socialism and centralized economic planning don’t work and ultimately lead to totalitarianism, which ends up enslaving the people and impoverishing a nation. That idea taken alone isn’t necessarily wrong, but the theory actually takes a step back and says that any form of centralized economic planning, including government regulation of business, is the first step on the road to serfdom.

Hayek argued that government intervention almost always creates more problems than it fixes, and many current Republicans believe this as a matter of faith. Rand Paul mentions Hayek as one of the intellectual forefathers of his economic ideas and former vice-presidential candidate Paul Ryan discussed Hayek frequently on the campaign trail. Ryan is also notorious for giving copies of The Road to Serfdom to his staffers.

At the time Hayek wrote the book in the early 1940s, governments around the world were engaged in central economic planning. Russia had been collectivizing and devising “five-year plans,” for nearly two decades, and a number of Eastern European countries were following Russia’s lead. Germany had created a massive war machine through central planning. Beyond that, many Western democracies, including the United States and Britain, had instituted various degrees of centralized economic planning to help deal with the economic collapse of the Great Depression and then with the emergency of the second world war.

Hayek didn’t like what he was seeing in the west because it was too close to what he’d seen firsthand in Eastern Europe. He wrote the book as a warning that even small efforts at government control of the economy could cause changes in society that would eventually lead to collectivism, dictatorship, and ultimately, widespread poverty and suffering.

The book was a hit among conservatives in the United States, more so than in England. It neatly encapsulated their worst fears about government and the behavior of liberals. Hayek noted that starting in the 1930s there was “a complete change in the direction of the evolution of our ideas and social order.…We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past.”
This may have accurately reflected the existing political changes in the 1930s, but Hayek acts as if this was the end product of some nefarious liberal takeover of the economy. He largely ignored the events that caused this change, most notably the Great Depression.

Hayek said that collectivism was replacing individualism, and that was dangerous because the development of individualism “is closely associated with the growth of commerce. From the commercial cities of northern Italy the new view of life spread with commerce” throughout Europe, “taking firm root wherever there was no despotic political powers to stifle it.” But over the years many in society forgot this lesson, and as social problems arose many began to look to collective action. As this happened there was a “decline of the understanding of the way in which the free system worked, [and] our awareness of what depended on its existence also decreased.”

And so, step by step, society changed, resulting in “an entire abandonment of the individualist tradition which has created Western civilization.” Command economies also “replaced the… mechanism of the market by collective and ‘conscious’ direction of all social forces to deliberately chosen goals.”
Hayek then describes some of the problems with collectivism and central planning. “The common features of all collectivist systems may be described, in a phrase ever dear to socialists of all schools, as the deliberate organization of the labors of society for a definite social goal.”

It is not possible, according to Hayek, to simply control the economy. Government will eventually control every aspect of life. That is because ultimately a “conflict arises between individual freedom and collectivism.” Collectivism differs from “liberalism and individualism in wanting to organize the whole of society and all its resources for the unitary end and in refusing to recognize autonomous spheres in which the ends of the individuals are supreme.”

This happens step by step. First economic plans are made, then education has to be controlled to ensure the population learns the necessary information to achieve the economic goal, then government has to engage in propaganda to ensure that the population agrees with the centralized goal, then a strong police state must be instituted to round up and silence the dissenters, then democracy must be abandoned to ensure that those hostile to the plan aren’t elected.
Hayek’s point is that once you start central planning you can’t stop. This is because people get in the way, they don’t cooperate, they object, and so this “people problem” also has to be controlled. Freedoms are slowly stripped away, and then all freedom is lost. The end result is that planning, according to Hayek, inevitably leads to dictatorships.

“Most planners who seriously consider the practical aspects of their task have little doubt that a directed economy must be run on more or less dictatorial lines.” And this slide toward dictatorship is the crux of conservatives’ worst fears:
“The authority directing all economic activity would control not merely the part of our lives which is concerned with inferior things; it would control the allocation of the limited means for all our ends. And whoever controls all economic activity controls the means for all our ends and must therefore decide which are to be satisfied and which are not. This is really the crux of the matter. Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends.”
So, according to Hayek, once you allow a little control, you will always need more to make it work. Small planning inevitably leads to big planning, and protecting people from the vagaries of life eventually leads to people becoming dependent upon government. That is the idea that many of Hayek’s conservative followers fervently believe. And that is why they so fear any government involvement in the economy.

It’s an interesting theory, and given the state of the world in 1940, certainly one worth taking seriously. But how did Hayek do? As he noted at the beginning of the book, “we can in a measure learn from the past to avoid a repetition of the same process.” So what does the past, which was Hayek’s future, teach us about Hayek’s predictions?

The book was published during a worldwide trend toward central economic planning. Some of it was due to the rise of communism, some was the Western response to the Great Depression, and some was the rise of Fascists and their drive to world domination. So the book certainly fit the times. And, in the immediate aftermath of the war, many western European nations embraced cradle-to-grave welfare, nationalized industries, and created employment boards, and government managed industrial cartels. Many others fell behind the Iron Curtain, and had communism and totalitarianism imposed on them. It was a dark time, and Hayek’s ideas seemed prescient.

But by the early 1950s, economic conditions began to improve, particularly in Western Europe, and nations began to weaken government control of their economies. Some nationalized industries were sold off, many countries abandoned employment boards, others removed government control over industrial cartels. The Western world was not following Hayek’s model, and so he had to adapt. In a new introduction to the book in 1956, he admitted that no country had apparently taken his road to serfdom, and suggested that it wasn’t some kind of iron rule (though he’d been pretty adamant that it was).
"It has frequently been alleged that I have contended that any movement in the direction of socialism is bound to lead to totalitarianism. Even though this danger exists, this is not what the book says. What it contains is a warning that unless we mend the principles of our policy, some very unpleasant consequences will follow which most of those who advocate there policies will not want."
He modified his argument to fit the new reality. Now he said that the first step on the road to serfdom was a “soft” socialism, in the form of government regulation of aspects of the economy, wealth-transferring welfare programs and high taxes to pay for it all. Hayek said that these programs would protect people from the consequences of their actions, which would erode individual initiative and make people increasingly dependent on a paternalistic government. (If this sounds familiar it’s because it could have come from the stump speech of virtually any recent or present-day Republican candidate for president.)

So how did this revised theory pan out? Well, again particularly in the West, as economic conditions began to improve in the late 1950s, and increasingly in the 1960s and into the 1970s, governments continued to  scale back on their government control of the economy. The wave of nationalization of industries crested in the late 1960s, labor boards eliminated in the UK, and a wave of deregulation began in the United States. The tide of “centralized planning” receded. A few countries, particularly the Scandinavian countries of Northern Europe, retained exceedingly generous welfare programs, and the necessary high taxes, and retained some aspects of centralized planning, but they never abandoned democracy.

The United States never nationalized industries, but did have the War Production Board during World War II, which helped manage and coordinate industry to supply material for the war effort. It was abandoned in 1945. The United States did have a number of government management boards for various industries, like airlines and trucking, but those were eliminated during a wave of deregulation in the late 1970s. Banking and financial regulations were also scaled back in the 1990s (with a minor effort to re-regulate after the crash of 2008).

A number of countries in South America have lurched from incompetent socialist states to equally incompetent fascist and right-wing police states. And with recent examples of Venezuela and Bolivia, the lurching continues. But none have followed Hayek’s road from soft socialism to hard socialism to totalitarianism. Many Mideast countries have strange hybrid economies, with many large industries, particularly the petroleum industry, controlled by the government. Some provide government support for their citizens based on oil revenue, but they don’t have Western-style welfare systems. And they are largely autocratic, but none have embraced communism or even socialism.
Quite a few countries became communist at the end of the second world war, but that was a product of geography, not political or economic philosophy. Many nations in Eastern Europe fell behind the “Iron Curtain” and had communism and totalitarianism forced upon them. Essentially the same thing happened to North Korea and North Vietnam. And a few countries did become communist, particularly China, Cuba and Vietnam, but this was only after violent upheaval and civil war. So while these countries ended up as communist and totalitarian, they didn’t get there on Hayek’s "road."

How many countries in the last half-century have moved, as Hayek suggested, from soft socialism to totalitarianism? Precisely none.

Another aspect of Hayek’s theory was that once the communists or the collectivists take over, all is lost. They will institute totalitarianism and control the populace with an iron fist. And how has that worked in the intervening 60 years? Well, the vast majority of formerly communist countries have abandoned communism. And far from abandoning it in a bloody fight, with the commissars holding onto power with a bloody grip, as Hayek seems to imply, most of these countries sloughed it off with a shrug.

Russia did so in the late 1980s and early 1990s. The Berlin Wall came down in 1989 and most of the former Soviet Bloc countries behind the Iron Curtain abandoned communism. China allowed private ownership of property and businesses in 1978 in a move at market reform, and now it is one of the largest economies on earth. The government still exerts enormous economic control, and total political control, but it resembles nothing like what Hayek suggested. It is now more of a mercantilist country, like England in the 18th century. And most of the formerly communist countries of Asia, particularly Cambodia and Vietnam, have abandoned most of the economic aspects of communism, though they are far from free market capitalist economies, and certainly not democracies.

The last few remaining communist and totalitarian holdouts are North Korea, Cuba and Burma, though Cuba and Burma are slowly scaling back government control of the economy. Despite these efforts, the economies of both are complete basket cases, which is an insult to baskets. That leaves North Korea as the last communist dictatorship. But it had communism imposed on it at the end of WWII, so even it did not follow Hayek’s road.

In fact, around the world the road ran in the exact opposite direction as Hayek prophesied. Countries certainly did become socialist and communist, but it wasn’t the slow march Hayek predicted. A few countries elected socialist governments, but those never took over in the way Hayek predicted. And most of the countries with various forms of “soft” socialism—much of Europe—scaled many of these programs back. Certainly most European countries still have generous welfare programs and a high degree of government regulation of the economy, and many have government-controlled healthcare, but few still have widespread nationalized industries. And they are among the oldest democracies and the freest nations on earth. 

There is no other way to say this: Hayek was wrong. He swung, and he missed. Nice try, though. Yet despite this, conservatives still bring him to the plate. He’s Paul Ryan’s lead-off hitter. Despite the fact that Hayek was completely wrong, conservatives still claim that liberal economic policy will lead us down the road to serfdom. Republican politicians say it, libertarian activists hold panel discussions about it, and conservative commentators allude to it.

So what does it mean that Hayek was so wrong in his predictions of the future? I know it’s easy for us to look back and criticize those from the past who get their predictions wrong. But let me suggest that the issue isn’t really fairness. The inability to predict the future indicates a flaw in the underlying theory. That’s how it works in science. A scientific theory is only considered valid to the extent that it accurately predicts future behavior. Galileo’s theory of gravity, for example, was that gravity applies equally to all bodies regardless of their weight or density, and that a falling body will speed up over time. Subsequent experiments proved Galileo correct. Newton based his gravitational theories on Galileo’s work, and scientists ever since can reliably predict the effect of gravity. NASA landed men on the moon with little more than calculus, slide rules and Newtonian physics. They were able to do it because Galileo and Newton were right, and the underlying theories were sound.

Shouldn’t political theories be subject to the same criteria? Shouldn’t they be judged based on how well they predict future events? Perhaps the test shouldn’t be as rigorous as in the physical sciences, because we’re dealing with messy and imperfect human affairs, but there should be some correlation between a prediction and actual events.

In The Road to Serfdom Hayek said that embracing socialism—government ownership of the means of production, pervasive social welfare programs—was the first step on the road to serfdom. And what happened? Not a single country has gone that direction. In fact, in the past 50 years almost exactly the opposite has happened. So what does that say about Hayek’s theory? In a word: wrong. But, more importantly, what does that say about modern conservatives who quote a fool and call him a sage? And what does it say about the liberals who let them get away with it?