Pie Plate Economics And The Campaign For A More Intrusive Administrative State

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Includes: AMZN, KRE, PBW, TAN, TLT, XLE, XLF, XLK, XLU, XLV
by: Kevin Wilson
Summary

The Green New Deal Resolution is breathtaking in its scope and lays out a Utopian plan to take over or greatly increase the regulation of about 36% of the economy.

Many Progressives and “socialists” subscribe to the notion that the economy is a “fixed pie,” meaning they believe that if one group gains an advantage, another group must lose something.

If voters also accept the "fixed pie" fallacy, we'll turn towards some brand of "socialism" in 2020, perhaps market-based, perhaps not; this would be a fundamental transformation of the economy.

"Crony capitalism" would quietly thrive as we transition to the new brand of "market" or "non-market" socialism, as it generally does under "socialist" governments.

Investors should be wary as the debate continues; any sign of a Democratic victory in 2020 will likely cause XLK, PBW, TAN, and TLT to soar; but XLE, XLU, XLV, IYT, XLF, and KRE would plummet.

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Introduction

The recent proposal of a "Green New Deal" ("GND") by a brand-new (millennial) member of Congress has been endorsed as a concept by many Progressives, including a number of presidential hopefuls (cf. National Public Radio, 2019; Zack Colman, 2019; Ari Natter & Billy House, 2019). It is being presented to Congress as a non-binding resolution (House Resolution 109; Government Printing Office, 2019), and it will probably pass in the House (perhaps by voice vote?), since it carries no weight as a resolution, beyond allowing some political positioning. However, Senate Majority Leader Mitch McConnell will require an on-the-record vote for the version being presented to the Senate. The resolution is breathtaking in its scope and lays out a Utopian plan to take over or increase the regulation of much of the economy (specifically, all of the healthcare, energy, and utility sectors; part of the real estate sector; part of the manufacturing industry (industrial sector); all of the transportation industry (industrial sector); part of the agriculture industry; and part of the forestry industry. This is all in the service of "clean and renewable energy;" "millions of high-wage jobs;" something vague called "justice;" another vague concept called "equity;" and the "prevention of unfair competition;" etc. This would imply direct government intervention and/or new regulation of at least 36% of the economy.

Some have argued that this is merely a Progressive wish list for the 2020 election, and not really a serious proposal. Some conservatives, however, think it may be a Trojan Horse for the eventual adoption of "full-on socialism," whatever that means (e.g., Jarrett Stepman, 2019). We will return to the definition of "socialism" shortly. The "GND" has already been criticized as lacking scientific support for its approach to the energy sector (e.g., James Temple, 2019; Jesse Jenkins & Samuel Thernstrom, 2019). The transportation part of the "GND" resolution also took a hit within days after its announcement when California's Democratic Governor Gavin Newsom cut the state's commitment to its high-speed rail project from 520 miles to just 150 miles. This comes amidst huge cost overruns ($77-98 billion projected cost vs. an original estimate of $40 billion) and substantial time delays on the dream project of former Governor Jerry Brown, which has been a rolling administrative disaster for a decade (Chuck DeVore, 2019).

Prominent business magnate, long-time Democratic donor, and potential Independent candidate for President Howard Schultz, has roundly criticized the "GND" as completely "unrealistic." He has also pointed out that the funding of this grandiose plan would be based on "punitive" taxes and impossibly large federal deficits of as much as $40-50 trillion (Naomi Lim, 2019). A few economists like Glenn Hubbard of Columbia University think the plan is so impractical that it will be "dead on arrival" (Bill McColl, 2019). Many people from all across the political spectrum (including House Speaker Nancy Pelosi [D-CA], quoted by Adam Shaw, 2019) think it is either a pie-in-the-sky dream or an outright farce put together by a starry-eyed band of incompetents (e.g., Timothy P. Carney, 2019). Labor unions have even expressed reservations about the potential impact of the plan on jobs (Valerie Volcovici, 2019).

Many Progressives and "socialists" subscribe to the notion that the economy is a "fixed pie," meaning they believe that if one group (e.g., the 1%, or mega-wealthy) gains an advantage or makes a disproportionate amount of money, their gains have come directly at the expense of others (cf. Mark J. Perry, 2006). This zero-sum approach may be a natural way to think, but it is not accurate. As Nobel Laureate economist Milton Friedman opined, "Most economic fallacies derive from the tendency to assume that there is a fixed pie; that one party can gain only at the expense of another." Economists proved long ago that this is absolutely not the case (cf. Robert J. Barro, 2000; Chelsea Follett, 2015; Matt Palumbo, 2015). Indeed, the world's level of extreme poverty has declined since 1970 simultaneously with a global increase in wealth inequality, because the pie itself got bigger (Charts 1 & 2).

Chart 1: People Living in Extreme Poverty Now the Lowest Ever

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Chart 2: Global Wealth Inequality Has Grown Since 1980

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Under the "fixed pie" fallacy, President Trump has claimed that a negative trade balance means that China is stealing the negative balance from us (they are stealing from us, but not in that way). Also, under this fallacy, Democrats of a certain stripe believe that when Jeff Bezos and Amazon (AMZN) make big money and pay no income taxes due to their deductions for huge capital investments, the money was directly taken out of the hands of government and taxpayers. Likewise, when Amazon recently negotiated a $3 billion tax incentive deal in New York, a bevy of New York Democrats opposed the deal because that (theoretical, or contingent tax accounting incentive) money should have been given to someone else (cf. Becket Adams, 2019). The influence of the "fixed pie" fallacy is rampant as well in the wording of House Resolution 109 proposing the "GND."

Investors need to pay close attention to this issue in the coming years. Just as the election of Donald Trump to the presidency caught almost everyone by surprise, the next election could swing back the other way quite violently. This would probably only occur under certain conditions: 1) an ongoing and deep recession; 2) a return to substantially higher unemployment; 3) a Fed response to the recession that would include a return to "QE" and "ZIRP;" and 4) the continued growth of the already huge wealth inequality in the US. But all of these things are not only possible, they are likely, in my opinion (Kevin Wilson, 2018a; Kevin Wilson, 2019a; Kevin Wilson, 2019b). If the political pendulum swings left in 2020, investors will be treated to a great deal of uncertainty and a major market drawdown. Because of the crony capitalism that would be built into the "GND" (more on this below), there would be a surge in most technology and many green energy stocks over time. However, the conventional energy, utility, healthcare, and transportation sectors would likely be absolutely pummeled. The banking industry would also likely suffer from greatly increased regulation.

What Might Happen on the Way to Utopia?

With respect to the specific goals of the "GND," there are two likely political outcomes in the near term, according to Timothy P. Carney (2019; Op. cit.): 1) the thing fails to achieve lift-off in practical political terms because of its combination of fantasy federal budgets, a breathtaking grab for power over the economy, unscientific energy supply goals, and extremely expensive and impractical environmental goals; or 2) the deal will pass in some watered-down form because of its oft-repeated goal of having government "invest in industry," which is a common Democratic euphemism for "crony capitalism." Don't get me wrong, the Republicans love "crony capitalism" just as much as Democrats do, and they have long practiced it (Michael D. Tanner, 2015), but they call it a different thing than "government investing in industry."

Indeed, the list of corporate welfare and "crony capitalist" laws from both parties in recent years is impressive: Obamacare's annual support of health insurance companies to cover their losses in 2014-2016; the "TARP" bailout of supposedly regulated and/or insured banks in 2008 (almost all paid back however); the auto industry bailout in 2009 (not all paid back); huge energy sector subsidies (e.g., Chart 3); the Fed's annual payments to banks for their reserves (Chart 4) and huge annual agricultural subsidies (e.g., the ethanol requirement for motor fuels, and subsidies for growing corn; Chart 5). The "crony capitalist" abuse by both parties has historically been so large it is measured cumulatively in trillions of dollars (cf. Rand Paul, 2017; Cato Institute, 2017; Andrew Wilford, 2019). And, this doesn't count the administrative state's (read: Federal Reserve's) suppression of market prices over the last ten years, which is a de facto rejection of "capitalism" in favor of something else (Kevin Wilson, 2019a; Op. cit.).

Chart 3: Taxpayers Paying $14 B in Subsidies to Electric Utilities in 2019

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Chart 4: Taxpayers Payed Banks $38 B for Their Reserves in 2018

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Chart 5: Taxpayers Have Paid Over $395 B in Farm Subsidies Since 1996

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This second ("crony capitalist") possibility for the "GND" is really not all that much different than what we saw under President Obama's "green stimulus," the $90 billion semi-boondoggle that was rolled into the 2009 emergency stimulus ("ARRA") bill (cf. Michael Grunwald, 2019). On the positive side, it was characterized by many new solar and wind projects and large new energy research efforts, many of which were moderately successful in producing an uptick in renewable energy projects, although at pretty high cost (Luis Mundaca & Jessika Luth Richter, 2015). However, on the negative side, the "green stimulus" was also characterized by the government actively choosing corporate "winners" and "losers," and it famously helped facilitate minor disasters like the bankruptcy of solar firm Solyndra for a loss of $528 million to the government (Wikipedia, 2019a), and the bankruptcy of vehicle battery firm A123 Systems after an "investment" by the US of $249 million (Wikipedia, 2019b). The explosion of "green-collar" jobs that the Obama Administration touted as part of its "green stimulus" didn't really happen either, although a gross increase in "green" jobs did occur (Luis Mundaca & Jessika Luth Richter, 2015; Op. cit.; Michelle Chen, 2014). It is unknown whether there was any net increase in jobs. The cost of creating the new jobs was something like $479,000 per job, using the above-cited analysis by Mundaca & Richter and the $92 billion cost for the program. So, to the extent that the new "GND" resembles the old Obama "green stimulus," there are reasons for some skepticism about its ultimate effectiveness.

"Socialism" Means Different Things to Different People

Now, it makes a certain amount of sense to me that some people describe "crony capitalism" as merely "socialism lite," based on the actual practices of "socialist" countries (e.g., Byron Schlomach, 2018). In other words, there is commonly a government-business nexus in "socialist" countries like China or Venezuela that results in the crushing of competition and the rewarding of corporations that are friendly to the regime (Wikipedia, 2019c). Still, I would argue that "crony capitalism" as practiced by Republicans could also be termed "diminished capitalism," because it doesn't operate competitively enough, and prices are not set by the markets alone (John Stossel, 2012).

The administrative state's support (from both parties) for private firms is nothing new, however, as tax preference items for small businesses and large corporations built into the Internal Revenue Code will likely amount to $6.121 trillion (Chart 6) over the ten-year period from 2017 to 2026 (Veronique de Rugy, 2017). The ever-expanding size of "transfer payments to individuals" in the federal budget, which have now risen to $2.189 trillion per year (Chart 7), is also a sign that there are strong "socialist" (or at least expansive welfare state) tendencies already built into the system. The question is whether this really constitutes a drift towards full-strength "socialism," or something else. As I listen to the renewed debate over the merits of "socialism," I find it a bit distracting that many people have quite different definitions of what "socialism" is, especially compared to the people they are talking to or trying to influence (Chart 8). At this point then, it behooves us to define what is really meant by the term "socialism" (cf. George Peterson, 2016).

Chart 6: Projected Huge Costs of Federal Tax Preference Items For Corporations and Individuals (2017-2026)

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Chart 7: Exponential Growth of Federal Transfer Payments To Individuals

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Chart 8: What's in a Name?

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According to Wikipedia, "socialism" can be defined as: "a range of economic and social systems characterized by social ownership and workers' self-management of the means of production as well as the political theories and movements associated with them" (Wikipedia, 2019d). Because "socialism" is really a broad spectrum of systems, determining whether a country or party is "socialist" depends on the degree to which the means of production and distribution are owned or regulated by the state, and the degree to which the state indulges in giving resources away "for free" (Council of Economic Advisors, 2018). Thus, there are many varieties of "socialism," but they fall mainly into: 1) market forms; and 2) non-market forms.

"Non-market socialism" has the goal of avoiding the presumed inefficiencies and periodic crises associated with capital accumulation and the profit system of "capitalism." It tries to achieve this by eliminating private property, markets, and other aspects of "capitalism" in favor of state-determined allocations and distributions. Experiments with this form of "socialism" have generally met with outright disaster (e.g., China before 1980; Russia before 1998; North Korea since 1950; Cuba since 1962; and Venezuela since 1999; cf. Council of Economic Advisors, 2018; Op. cit.). So-called "market socialism" retains the use of at least some market prices and even, sometimes, the operation of a profit motive, but with more worker and/or government control on the distribution of those profits than is seen in "free-market capitalism." The countries of Eastern Europe that have been transitioning away from "communism" since 1989 might be examples of "market socialism" (Andrei Shleifer & Daniel Treisman, 2014; Lili Bayer, 2018). Failures here (cf. Chart 9) are a bit harder to spot; for example, Slovenia, Estonia, and Poland have nearly matched Spain's success, and all three have matched or outperformed Portugal and Greece. Not stellar, but much better than relatively unreformed economies like those of Serbia, Ukraine, and Moldova.

Chart 9: Eastern European GDP Per Capita Vs. Nordic Countries, Iberia, and Germany

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There is an argument (i.e., the "socialist calculation" debate) within "socialism" about how to allocate resources in the absence or partial absence of market prices and private ownership of the means of production and its distribution (cf. David Miller, 1991; David Gordon, 1996). This argument is difficult to settle because economic models and historical analyses have been built generally on assumptions about the behavior of the end-members in the political spectrum, i.e., "pure" versions of "free-market capitalism" and "socialism" (e.g., Patrick Tyrell, 2018), although some attempts have been made to take theories and models up the middle of the road via "market socialism" (e.g., Pranab Bardhan & John E. Roemer, 1992). One aspect of the "socialist calculation" is the problem that arises when there is uncertainty about policy in an economy that is centrally controlled, without the known planning advantages that derive from information provided by "free" market prices and private ownership decisions.

For example, how should the administrative state in China make economic decisions now, given the currently great policy uncertainty (Chart 10) that has arisen due to a rapidly changing political and economic environment? By supposedly abandoning unproductive government stimulus spending, but nevertheless refusing to go "full capitalist" either, will the Chinese leadership skip along the edge of the economic abyss created by their massive credit bubble, but somehow never fall? I would guess that there will be a serious problem, and that China will actually fall into the abyss (Kevin Wilson, 2018b). Indeed, is the Chinese government's goal of combining major economic reforms with the retention of absolute centralized control over the economy even remotely realistic? Turning to the US under "crony capitalism," and based on the massive interference of the Federal Reserve in the US markets and economy over the last decade, there is huge uncertainty now associated with trying to return to "normal" (Chart 11). Is it realistic for us to think we will reach our goal of exiting our regime of low rates and huge Fed balance sheets without any major consequences? I am afraid that the impending global recession will catch us unprepared, and we will return to extreme monetary policies very shortly (Kevin Wilson, 2018c).

Chart 10: Chinese vs. Global Policy Uncertainty Indexes

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Chart 11: US Policy Uncertainty Index

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If Not "Pure Socialism," Then What?

I believe that the current debate over the "GND" is not really about a shift towards "pure socialism" but is rather about a kind of creeping drift towards either: 1) a version of "market socialism;" or 2) something called "democratic socialism." These labels seem a little vague, but if I understand them correctly, the former term refers to the retention of some market pricing and privately-held means of production in an otherwise moderately "socialist" system (as already discussed), whereas the latter term refers to a democratically controlled (non-Stalinist) move to a moderately or perhaps even strongly "socialist" system (Wikipedia, 2019e). It would appear that these two forms of "socialism" are not mutually exclusive then, at least in the near term. In any case, the stated goal of American Democratic Socialists like Alexandria Ocasio-Cortez (aka "AOC") is to promulgate punitive taxes on the rich ("from each according to his ability"), and give away a lot of "free" stuff like college education, healthcare, or even perhaps "UBI" ("to each according to his needs"), just as Karl Marx suggested long ago (Karl Marx, 1875).

I have already mentioned the extreme impact on the federal budget such a move to "democratic socialism" would have. It would also likely cause great economic harm, both because of the massive increase in total debt (cf. Kevin Wilson, 2018d), and because of huge disincentives to work or succeed (cf. Bob Funk, 2014). There would also likely be serious economic inefficiencies in such a system (cf. David Miller, 1991; Op. cit.; Council of Economic Advisors, 2018; Op. cit.). Plus, there appear to be certain "authoritarian" aspects to the "GND" and similar ideas, at least as it is defined by scholars like Juan Linz (cf. Wikipedia, 2019f). Thus, the Democratic Socialists, through the means of a "GND," appear to be: 1) seeking a basis for legitimacy in emotional appeals to fight easily recognized societal problems such as "climate change" (despite the relatively good record of the US in controlling emissions; cf. Chart 12) using the expanded power of the state; and 2) seeking to place constraints on corporate special interest groups but not on union or Progressive lobbyists (Tim Wyatt, 2019). By my calculation, the move towards a "GND" and "democratic socialism" would easily satisfy two of the four criteria used by academic scholars to define "authoritarianism." If the Bush, Obama and Trump presidencies are any examples, a third criterion may also already have been met: that of informally defined executive authority with vaguely delineated specific executive powers (cf. Erin Hawley, 2016; Elizabeth Goitein, 2017; Jonathan Turley, 2019).

Chart 12: The Big Increases in Global CO2 Emissions Since 2005 Did Not Come From the US or Europe

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One real concern I have on this file is about the openly expressed goal of Democratic Socialists and Progressives to take over and/or heavily regulate major parts of the US economy. We have only to remember those fine, high performance (I'm being sarcastic) government programs and bureaucracies like: 1) the "VA" (wildly dysfunctional); 2) Obamacare, aka the "ACA" (greatly increased healthcare costs and loss of choice; cf. Chart 13); 3) the "EPA" (decline in enforcement actions [Chart 14] and a huge backlog of Superfund sites; cf. Jessica Morrison, 2017); and 4) the Dept. of Education (huge cost increases for little benefit; cf. Chart 15) to gain a sense of perspective on the merits of more government control of the economy. We can also recall those truly spectacular episodic government failures, like the 9/11 attacks or the Great Financial Crisis, to feel a profound sense of foreboding about where this trend towards more intrusive (and ever incompetent) government could take us (cf. Meghan Foley, 2018). It doesn't matter much at all which party is proposing this "GND" idea, because both believe in big government and an expansive administrative state, and both have fumbled the ball many times. Not only that, this move towards a polity best termed a "market socialist state" has already been in motion for many years anyway.

Chart 13: Big Increases in Healthcare Premiums under the "ACA" (2010-2018)

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Chart 14: Steep Decline in "EPA" Enforcement Actions Since 2009

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Chart 15: Steep Increase in Spending on Education, to Little Effect

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The Road to Hell Is Paved With Good Intentions

The biggest economic problem in America in recent decades has arguably been the decline of the Middle Class as the returns to capital have soared, while the returns to labor (Chart 16) have stagnated (Kevin Wilson, 2017a). This has been a natural outcome of globalization, as a result of which over a billion new workers entered the global work force in the last three decades or so. Because of the increased labor supply (and favorable tax treatment), US companies had strong incentives to move operations overseas to obtain the cheap labor. However, due to inadequate support for globalization's losers (i.e., workers in certain US industries), there is a great deal of understandable resentment amongst these people regarding the way the "capitalist" (really, "crony capitalist") system works (Amina Dunn, 2018). This has not been improved by the massive financial bailouts and permanent job losses associated with the Great Financial Crisis, nor by the widespread perception that Congress is so corrupt that it is completely dysfunctional and will not do anything whatsoever about growing wealth inequality (Kevin Wilson, 2016; Kevin Wilson, 2017b). President Trump's election partially resulted from all of this frustration with the status quo ante, but there is little sign today that our troubles with wealth inequality (Chart 17) are over.

Chart 16: The Returns to Labor Have Stagnated

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Chart 17: Wealth Inequality Back to Where It Was In the 1920s

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The danger (in my opinion) is that when the next recession arrives, and especially if it turns out to be a severe one (cf. Kevin Wilson, 2019c), a new wave of anger and frustration will likely drive a renewed surge in Middle Class populism. This drift towards a more motivated brand of populism could theoretically lead to the landslide re-election of President Trump (in one possible but fairly unlikely scenario). But, alternatively, if the promise of a better life under Trump is perceived to have been unfulfilled, it could lead instead to the rejection of Trump and the Republicans, and the election (as yet another act of desperation by the electorate) of a Democrat who got their party's nomination by making big promises to the Progressives (e.g., Elizabeth Warren's backers), the Socialist Democrats (e.g. Bernie Sanders' backers, or "market socialists") and the Democratic Socialists (e.g., Alexandria Ocasio-Cortez's backers, or just plain "socialists"). If we assume for the purposes of argument that the Democrats carry the day in 2020, we can expect a big push for at least some of the major tenets of "market socialism," "democratic socialism," or "socialist democracy" discussed above.

So, the problems from such a big swing of the political pendulum are not just the short-term practical ones that will afflict Republicans and Conservatives because they will lose power and today's Progressives and "socialists" will gain control of the political agenda. I think the economic and political theories that may be put to a test by the Left have the potential to profoundly change our theory of government for decades to come. Since Democrats have not settled which kind of "socialism" they want, we may get a hybrid monster of unknown utility and highly questionable efficacy. That change could thus be far more problematic for the entire country than a single presidential election victory by one side or the other might normally imply. In other words, I think the "socialist" Left has good intentions and the will to succeed, but they lack any real understanding of what's wrong or how to fix it. I'm not suggesting that the Republicans have the answers either, but I think they are less inclined to throw out the baby with the bath water. Indeed, our partisan politics right now are in my view just a symptom of the American political disease. That disease (the one that most needs to be treated right now) is actually the failure of government to solve most of the major problems affecting the Middle Class for over three decades.

Thus, if the Republicans don't offer voters some means of escape from the stagnation afflicting the Middle Class, they will very likely lose power; that is, unless voters simply can't stomach the form of "socialism" being presented to them, and decide begrudgingly to stay with Trump and his party, much as they did when they re-elected Nixon (with McGovern as the only real alternative). If the Democrats make pie-in-the-sky promises built on their faith in some form of "market socialism," and they offer lots of "free" stuff, and they even come up with enough economic mumbo jumbo (e.g., "Modern Monetary Theory," or "MMT;" cf. John Mauldin, 2019) to convince the masses that it can all be paid for (through the magic of the federal printing press), they will win an historic victory. If this improbable-sounding outcome (but not much more improbable than Donald Trump's victory) actually happens, it will usher in a new era of political and economic transformation focused on some new, hybrid form of "market socialism."

The hard left's intentions will be to make a better society through the exercise of government power, and to improve our experience of vague, feel-good emotional things like "justice" and "equity" (as defined by them). I don't know about "justice" and "equity," but I'm quite certain they will use government power to get what they want (just as "FDR" did), and that is exactly the mistake that the Founders were trying to prevent (Roger Pilon, 1995; Robert G. Natelson, 2018). Some people will dismiss the Founders' concerns as out of date, but I don't agree. This not only has political implications, it has profound economic implications.

Republicans have been trying to counter the renewed enthusiasm for "market socialism" or "socialist democracy" (cf. Council of Economic Advisors, 2018; Op. cit.) by citing the track record for most historical forms of "full-on socialism," which is of course absolutely terrible (e.g., the USSR, China, Venezuela, etc.). However, no one is currently proposing "full-on socialism," although something like that is the long-term goal (after a transition period) of the Democratic Socialists like Alexandria Ocasio-Cortez (Meagan Day, 2018). Socialist Democrats like Bernie Sanders have attempted to rebut the conservative argument by pointing to the great success achieved by the various Nordic economies in recent decades (cf. Jeffrey Dorfman, 2018), and also by noting that Western European economies have much less wealth inequality than the US (cf. Chart 18).

Chart 18: Comparison of Wealth Inequality in America vs. Western Europe

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The example of the Nordic economies (all of which have been claimed by Democrats to be some version of "socialist" democracies) has been the more politically effective weapon in the political fight over "socialism," at least so far. It's not clear, however, that this example should really be considered pertinent, given the mixed nature of the evidence. A number of conservatives have responded with the counter-claim that these countries are not "socialist" at all, but instead are "capitalist" democracies that simply have high taxes and very large welfare states (Anthony B. Kim & Julia Howe, 2018; Ethan Lamb, 2019). Certainly, it is hard to explain away the fact that the Nordic countries score very well on the Index of Economic Freedom (Chart 19), which would hardly be expected under any brand of "socialism" that would seem worthy of the name (e.g., Venezuela; Julia Howe & Patrick Tyrrell, 2018).

Chart 19: Index of Economic Freedom for Nordic Countries vs. America and the "UK"

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The fact that there are also some interesting counterfactuals to consider just makes it harder to attach any kind of simple label to the Nordic countries. For example, Norway's percentage of government workers in its economy is more than double that of the US (Chart 20). The percentage of union workers in the Nordic countries is 6-8x that in the US (Chart 21). The amount of family benefits (as a percentage of GDP) paid out by Nordic countries is 4-5x the amount paid out in the US (Chart 22). At first glance, the tax system in the Nordic countries doesn't appear to differ much from that of the US (Chart 23), but when one digs a little deeper, significant differences emerge (Chart 24). Furthermore, recent (2014) total tax revenues as a percentage of GDP in Denmark exceeded 50%; those in Finland and Sweden were about 44% and 43%, respectively, compared to only about 26% in the US (Chart 25). On the other hand, in contradiction to the "socialist" label applied to the Nordic countries by Bernie Sanders and others, it is a fact that government debt/GDP ratios in the Nordic countries were considerably lower than that of the US in 2015 (Chart 26). This is likely due to a concerted effort in recent years to turn away from the unbridled spending associated with traditional Nordic government budgets (e.g., Chart 27). Indeed, Danish Prime Minister Lars Lokke Rasmussen recently rebutted Sanders with the statement, "I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy" (Ethan Lamb, 2019; Op. cit.). So, it is not at all clear that the so-called "socialist" paradigm for the Nordic countries is an accurate or fair description of what instead appear to be unique "capitalist" economies with high taxes and very expansive welfare states, as already described.

Chart 20: Government Workers as Percent of Economy For Nordic Countries vs. US

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Chart 21: Workers under Union Contracts in Nordic Countries vs. US

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Chart 22: Family Benefits/GDP for European Countries vs. US

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Chart 23: Top Marginal Tax Rates (Plus Payroll Taxes) in Nordic Countries Not Much Different than in the US

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Chart 24: Top Tax Brackets in Nordic Countries May Be Far More Progressive than They Are in the US

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Chart 25: Nordic Countries Total Tax Revenue/GDP

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Chart 26: Government Debt/GDP Comparison in 2015

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Chart 27: Government Spending Has Fallen Sharply in Sweden

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Be that as it may, the coming national debate on the merits of "socialism" will hardly be decided on the facts of the matter, nor on subtle nuances visible in complex data sets. No, it is far more likely that the publicly perceived impacts of the coming recession, the degree of wealth inequality, the viability of "socialist" giveaways to voters, and the actions taken by the current administration to ameliorate the problems of the Middle Class, will all be swirled around in the cauldron of public opinion, and the odor and flavor of the stew that is produced will determine the outcome. There is evidence that the public's opinion of "capitalism" (or at least the "crony capitalism" now practiced) is declining for all age groups (Chart 28), but it is held in especially low regard by those under 45 years old. This is hardly shocking, given the impact of the Great Financial Crisis and declining job availability on this group (e.g., at least one-third of people aged 25-29 live with their parents; Dan Kopf, 2018). Job growth in the recovery has mainly gone to low-paying sectors (Chart 29), and the employment/population ratio is still depressed by 4% from its high in the year 2000 (Chart 30).

Chart 28: "Capitalism's" Favorability Is Falling in All Age Groups

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Chart 29: Most US Jobs Added Since 2008 Are in Low-Paying Sectors

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Chart 30: Employment/Population Ratio (1990-2017)

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Conclusion

The Green New Deal ("GND," House Resolution 109) is breathtaking in its scope and lays out a Utopian plan to take over or increase the regulation of much of the economy. The influence of the "fixed pie" fallacy is rampant in the wording of House Resolution 109 and in the thinking of "socialists" of every persuasion, and this portends a massive political and economic transformation if Democrats win in 2020. Whether this would be a good thing or a bad thing depends on one's point of view, of course, but there are economic reasons to fear such an outcome. Investors need to pay close attention to this issue in the coming years. Just as the election of Donald Trump to the presidency caught almost everyone by surprise, the next election could swing back the other way quite violently. This would probably only occur under certain conditions: 1) an ongoing and deep recession; 2) a return to substantially higher unemployment; 3) a Fed response to the recession that would include a return to "QE" and "ZIRP;" and 4) the continued growth of the already huge wealth inequality in the US. But all of these things are not only possible, they are likely, in my opinion.

If the Democrats do win in 2020, the "GND" will pass in some watered-down form because of its oft-repeated goal of having government "invest in industry," which is a common Democratic euphemism for "crony capitalism." This will be good for certain sectors and industries, such as technology (e.g., Technology Select Sector SPDR Fund [XLK]) and green energy (e.g., Invesco WilderHill Clean Energy Fund (NYSEARCA:PBW); Invesco Solar ETF (NYSEARCA:TAN)). However, the conventional energy (e.g., Energy Select Sector SPDR Fund (NYSEARCA:XLE)), utility (e.g., Utilities Select Sector SPDR Fund (NYSEARCA:XLU)), healthcare (e.g., Health Care Select Sector SPDR Fund (NYSEARCA:XLV)), and transportation (e.g., iShares Transportation Average ETF (NYSE:IYT)) sectors would likely be absolutely pummeled. The investment and commercial banking industries (e.g., Financial Select Sector SPDR Fund (NYSEARCA:XLF); SPDR S&P Regional Banking ETF (NYSEARCA:KRE)) would also likely suffer from greatly increased regulation and perhaps even concerns about potential breakup of the biggest banks. The viability of "socialist" giveaways to voters will be tested as well, and that means a huge increase in the deficit (which is already near $1 trillion) and either: 1) an absolute avalanche of newly issued government debt that chokes the market and triggers a sharply dropping dollar and high inflation; or 2) outright debt monetization on the "MMT" or Japanese model, but without Japan's advantages. In the Treasury avalanche case, bonds (e.g., iShares 20+ Year Treasury Bond Fund (NASDAQ:TLT)) would sell off dramatically. In the debt monetization case, the same bonds would decline in yield and deliver significant capital gains, much as they have in Japan for many years (cf. Kevin Wilson, 2018e). I think debt monetization is by far the more likely scenario.

Disclosure: I am/we are long TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks or other securities mentioned or recommended. This post is illustrative and educational and is not a specific recommendation or an offer of products or services. Past performance is not an indicator of future performance.