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Howard Dean: Going Rouge

Howard Dean, in an address to a small group of sympathetic listeners meeting at “Café Rouge” in Paris, declared that the “sensible debate” of our times is to what extent we would blend together capitalism and socialism. See video. He is quite right to assert that this is the debate of our times (and maybe of our species), but its resolution over the near and immediate future may not be pretty.

His statement, which enrages many on the right, merely tells us what we already know to be the case globally. China and Russia, formerly command economies, have integrated capitalism and prospered. But it does not follow that economic prosperity results from diluting capitalism with socialism. Post World War II Europe became heavily reliant upon entitlements, regulation of business, and high taxation. The result has been anemic growth and chronic underemployment. Prior to that war it had spawned early socialistic rebellions such as the “Springtime of the Peoples” that swept across the continent in 1848, so it was expected to have given birth to the ultimate revolution that would sweep communists into power in Russia instead in 1914. Japan responded to its financial bubble with massive flexing of governmental muscle, resulting in lost decades. The United States has been gradually embracing socialism since the end of World War II also. In my just released book, Endless Money: The Moral Hazards of Socialism (John Wiley & Sons –see, I argue that the supposedly socialist-leaning Franklin Roosevelt levied taxation that was only one-third as punitive as felt today, even after having seen a massive cut implemented by 1988. In 2009, a married household earning approximately $370,000 would be in the top bracket and remit 35%, plus several more percentage points in state income tax, not to mention other taxes. On an inflation adjusted basis, this same couple would only have fallen into the 17% bracket in 1932, far below the top bracket of 60%.

So regardless, the future that Howard Dean envisions already began long ago. Against this more open-eyed backdrop of history, what my book argues is more germane is whether we have reached a tipping point when the majority of the American populace can install permanent control over a productive minority. This is why the public option on health care, the concentration of assets into “too-big-to-fail” institutions that are ham-handedly regulated and left on the Federal Reserve System’s iron lung, and the transfer of ownership of the auto industry to labor interests arouse cries of socialism now. Previously political correctness silenced the use of this highly charged word. Dean tells us it is OK to debate whether we can integrate socialism into capitalism, as if by discussing it we can dilute its shock value and be inured to the “change” that in the name of “hope” 52 percent of the American electorate cast its lot for one year ago.

Special credits and deductions available to the bottom half of U.S. households have been on the rise, such that its share of the income tax burden has fallen from 5.8 percent in 1990 to just 3.5 percent in 2002. And the bottom 40 percent collectively pay nothing at all. It is not far fetched to imagine a complete, permanent symbiotic relationship should the majority strengthen its grip over the minority. Defying those who would analyze only tax rates, the plank of Obama spelled out in the “Blueprint for Change” left brackets largely untouched, but utilized $1 trillion of items to redistribute taxpayer resources such as Cap-and-Trade, Making Work Pay, or changes to the Alternative Minimum Tax.

In Endless Money, I develop the theme that democracy might be the bane of capitalism, unless we as a people can wake up and understand that to let the boat tip in favor of a strong form of socialism would trigger the decline of our republic. Margaret Thatcher quipped “Socialist governments traditionally do make a financial mess. They always run out of other people’s money” (Thames TV This Week, 2-5-76). Ironically, after government mismanagement in the 1840s, the nations of Europe saw riots spread from Italy through France to even the formerly untouched Austria, demanding, as Niall Ferguson details in The House of Rothschild: Money’s Prophets 1798-1848, that, “For the first time, socialist (as well as ultra-conservative) arguments against economic liberalism were voiced alongside- and sometimes in contradiction to- the older arguments for political liberalism and democracy.” (pages 438-439). He continues, “All over Europe, the combination of rising expenditures (first on railways, then on social palliatives, finally on counter revolutionary measures) and falling revenues (as earnings and consumption slumped) led inevitably to government deficits. Between 1842 and 1847, for example, the Austrian budget rose by 30 percent.” (page 448).

The world may be facing a similar dilemma. Governments are increasing spending in the name of Keynesian stimulus, and running large deficits. The U.S. Treasury is accessing the capital markets with shorter and shorter dated borrowings, exponentially compressing refunding into larger and larger floatations. The roughly 6.5 million households which are expected to pay nearly all of America’s taxes, if accordingly burdened with our nation’s entire $12 trillion debt, unknowingly have assumed a mortgage of another $1.5 million or more. This can’t have gone unnoticed by the Chinese or other external creditors. Ironically, that land of the politically red has gone full circle, excoriating us publicly for financial mismanagement, its students laughing in Timothy Geitner’s face when he insists we can repay their national savings. Even so, they have not learned much. Into Howard Dean’s Waring blender they go, whipping together fiat currency money growth that has regularly exceeded 20 percent annually, stoked in the name of the most dramatic dosage of Keynesian stimulus ever seen – one which has perhaps single handedly propped up the global economy after the global meltdown of 2008.

Dean is absolutely right. We are debating to what extent we can combine capitalism and socialism. But as we reach a tipping point, it may prove to be a very explosive mixture. The financial crisis of 1846-1848, which followed that of 1837, saw government bonds collapse in value. Austrian 5 percent metalliques plunged from 112 to 58; French 3 percent rentes slid from 84 to 32 (per Ferguson, page 461). Like a true academic, Dean concludes we will enjoy a “sensible debate” now that we have matured as a people and recognize that there are two opposing sides to human nature. One favors capitalism, where human beings want “to do things themselves,” which is juxtaposed by the desire of all to want to serve their “great responsibility” to the community generally. But history tells us it can end badly, and hardly be sensible or a mere debate, because tyranny or chaos can result.

Disclosure: Positions in gold, various gold equities, and long/short stocks.