What is a Socialist Economy?

Here is a report I wrote a few months ago about European socialist systems.
It may help understand the slowly unfolding European crisis.

Thursday October 14, 2010

What is a socialist economy?
Ayaan Hirsi Ali, a Somali-born former Dutch MP, gives us a hint in her latest book Nomad.

In Holland, Mrs. Ali’s maverick friend Pim Fortuyn used to refer to the elite class as the “regenten” – the regents.
“The regenten form an elite triangle: the upper class and royalty, leaders of the unions and directors of corporations.
These three groups have divergent interests, but their prominent leaders gather in five-star hotels, elite clubs and government institutions, and once in a while the queen opens her palace to them.”

A socialist economy is one that is managed from the top down.
It is an economy run by a very visible hand.
It has one overriding purpose: keeping social peace.
By doing so, the elite can comfortably continue to enjoy its prestige and many little perks.
Workers get a good deal too.
They form the majority of voters, after all.
Growth and its engine, entrepreneurs, are at the losing end of this social deal.

Of course, social peace comes at a price.
Government expenditures average a whopping 50% of GDP in Euroland, for example.
Now, that is a lot of money that is being transferred from the real economy to the bureaucrats.
Economists do not seem to have paid attention to this when forecasting still quite bullish growth in the near future.
Today’s austerity plans will hurt more than they want to believe.
How can it be otherwise when these plans are directly affecting 50% of GDP?
In the US, by contrast, that number still hovers around 23%.

So, to keep a socialist economy going, entrepreneurs have to be kept alive.
They are being milked, but just enough.
Byzantine regulations and heavy taxes are the norm.
But the elites that live on entrepreneurs’ production know how not to go too far.
The goose that lays the golden eggs needs to be kept alive.
Today, however, austerity in Euroland makes it inevitable for the decision makers to try to squeeze a few more eggs out of the poor goose.

A socialist economy is all about preservation.
During the financial meltdown, preservation of jobs was the focus.
Hence, Europe has weathered the latest crisis pretty well.
At least so far.
Unemployment did not budge.
People went on with their lives.
Investors bought stocks again and the economic cycle resumed.
It was very simple: corporations were told not to lay off workers.
The cost of preserving jobs was to be dealt with at a later stage.

The automobile industry illustrates this very well.
Even with our expensive bailouts here in the US, eighteen factories have been closed since 2008.
None were shut in Europe.
Fiat now operates a plant in Pomigliano that produces a paltry 7 cars per employee per year.

Socialism is all about preservation.
Even unemployment benefits are designed to preserve one’s buying power.
If one loses her job in a socialist economy, that person is entitled to get a – high – percentage of her previous salary.
This is designed so that no one has to suffer a change in status or life style.
No wonder that a majority of Europeans love the system.

After WW II, European socialism blossomed during the reconstruction years.
Times were easy and politicians very generous with other people’s money.
Then, it reached its first major crisis in the 1970s.
Stagflation led to Eurosclerosis which led to the reinvention of socialism.
A new generation, influenced but not impressed by the Reagan revolution, worked hard to refine the system.
The new generation of national elites proved to be on average more competent than their predecessors.
Corporations bounced back, unions became less confrontational and politicians kept budgets under control.

Some have done a better job than others.
The Northern European countries have shown restraint and moderation in the redistribution of the shrinking wealth.
The Club Med countries, on the other hand, are still learning the craft.
And then there is France.

France has elevated the defense of the status quo to a religion.
It was fine while times were good.
With austerity, though, we are now seeing the consequences.
Highschool kids are today in the streets of Paris…to fight for their pensions!
This is just breathtaking.
In most countries, young people want a good job, a career.
French youth is different.
It has a longer horizon.
Kids in France look beyond that transition phase in their lives when they have to be productive.

This is Sarkozy’s Thatcher moment.
But then again, every French president has had his Thatcher moment.
All have walked away.
All have caved in to the pressure of the street.
Is the present man at the Elysee different?
We will see.
I am afraid that, as they say in America, plus ca change, plus c’est la meme chose.

France matters.
The importance of the growing unrest in France should not be overlooked.
France is only at the forefront of the coming confrontational business environment.
The tyrany of the status quo is in full display.

Because, ultimately, a socialist economy is about confrontation.
It is inherent in the idea of sharing a stagnant pie.
When the pie grows, most people can be given enough to not feel left out.
Not so in difficult times.
Every group or individual will now fight harder to get what they think is their deserved share.
Investors are pooh-poohing the growing number of strikes in Europe at their own risk.

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