Commentary

Is Capitalism Dead? Yes

Do we still live in a capitalist country?

Is the U.S. drifting toward socialism?

Even using only the narrowest meaning of the word — government ownership of business — the answer is clearly yes.

Last year, the Bush administration trampled private property rights by expropriating 80 percent of AIG, Fannie Mae and Freddie Mac without shareholder approval. As should have been expected, that scared stockholders away from other financial stocks, depleting the banks’ cushion of high-quality capital. “Capital injections” from TARP (thinly disguised debt) greatly aggravated that exodus of private capital. So did Treasury Secretary Timothy Geithner’s frightening “stress test” threats to wipe out shareholders by converting government’s preferred stock to common.

Like other flirtations with socialism, the Troubled Asset Relief Program has been an unmitigated disaster. Public capital simply displaced private capital, leaving taxpayers holding the bag. The expression “socialize the losses and privatize the gains” is only half right; both shareholders and taxpayers were losers.

Politics and economics mix badly, like oil and water.”

Having learned nothing from the bank bailout fiasco, some have actually proposed to turn taxpayers into involuntary shareholders in General Motors and Chrysler. Britain nationalized their legacy auto companies for decades, wasting billions in a futile effort to save brands that ended up being owned by companies in India (Jaguar) and China (Rover).

Politics and economics mix badly, like oil and water. Those with the most political clout get subsidized or bailed out, while taxpayers bear the costs and risks. In less than a year, the government’s contingent debt alone — all those loans, securities and deposits guaranteed by the Federal Reserve, Treasury and FDIC — has increased by more than $3 trillion. If things go awry, guess who pays?

During the presidential campaign, Joe the Plumber became famous for criticizing as “socialist” Mr. Obama’s plan to hand out $400 checks to those earning less than $75,000, while raising tax rates and curbing deductions for those earning more than $250,000. Trying to redistribute income through the tax system is what Karl Marx called “vulgar socialism.” It doesn’t work. When the government takes money from those who earn it and gives it to those who didn’t, that discourages both of them from earning more.

Compulsory health insurance isn’t necessarily socialism either, but it is compulsion — an intrusion into personal freedom and choice. I eschew Medicare in favor of a health savings account, but suspect that Obama’s central planners would rather not leave me that option. Unlike free markets, where the consumer is king, centrally planned economies favor the simplicity of one-size-fits-all uniformity.

An occasional nasty recession is no excuse for runaway federal spending. Even welfare state economies like Sweden have experienced worse recessions than the U.S. Purer socialist economies like Maoist China, or North Korea and Cuba today, avoid booms by keeping the economy in perpetual depression.

The more we drift toward a socialist/fascist state, with the government grabbing a larger share of our dwindling GDP, the more we allow government bureaucrats to decide who shall produce what for whom. Such power is inherently corrupting. The results are always bad.

Alan Reynolds is a senior fellow with the Cato Institute. He has written for numerous publications, including The Wall Street Journal, The New York Times, National Review, The New Republic, Fortune and The Harvard Business Review. His weekly column is now nationally syndicated.