- The Centenary of Ludwig von Mises’s Critique of Socialism - June 9, 2022
- In the Beginning: The Mont Pelerin Society, 1947 - May 19, 2022
- Political Paternalism, Not Free Markets, Cause Economic Shocks - May 9, 2022
Imagine that you are standing at a crossroads with a gate sign in front of each road telling the cost of the respective routes. But one says that if you choose to go this particular way, the expense is 50 percent less than the other, or, maybe, is even free; that is, no toll will be charged. Welcome to the world of government subsidies, tax breaks and other such incentives, for politicians to “nudge” you in the directions they want you to go.
The Biden Administration is pressuring nursing home staffs around the entire country to get fully vaccinated or have the facilities at which they work lose their federal Medicare and Medicaid funding. Under Joe Biden’s instructions, the Centers for Medicare and Medicaid Services is issuing a regulation to this effect.
Notice, no one is being directly commanded by the federal government to get vaccinated if they work in such nursing homes. Any of the currently thousands of unvaccinated employees at these nursing facilities can continue to not “take the shot.” But . . . the nursing facility, as a whole, at which they are employed will forfeit the sizable sums of federal taxpayer monies that come its way if any of its staff members fail to comply with what Joe Biden and those administering this rule within the government insist to be done.
The Government Manipulates Costs Rather than Force
The government will not have “forced” anything on anyone. Everyone remains free to make their own decision – no matter how misguided and socially undesirable from the White House’s point of view. However, the indirect incentive is placed on the managers of the nursing home to pressure any unvaccinated staff members to get vaccinated, or to fire them or place them on a possibly indefinite leave until the Biden White House decides that it was safe for such people to return to work.
In this case, following a version of my example in the opening paragraph, the government informs travelers that if they take road “A” (which imposes some extra driving rules on them) they can be assured that a good part of their journey’s expenses will continue to be covered through a deep discount on the road toll; but anyone who chooses to take road “B” (on which some serious road hazards make the success of the journey now uncertain) will no longer receive that discount and will have pay the full value of all their travel expenses out of pocket, with the added doubt that they may not get to where they wish to go. Of course, the choice is still up to each driver, with the road owner not in any way telling them where to go or how to get there. He is not dictating or commanding anything; travelers are still “free to choose.”
Planning for Electric Cars with Commands and Candy
President Biden has also signed an executive order instructing the appropriate federal regulatory agencies that they are to impose revised and new rules and restrictions on the U.S. auto industry so that by 2030, less than a decade from now, at least 50 percent of all new cars and trucks sold in America must be electric powered vehicles.
When announcing this before the press corps at the White House, The New York Times (August 5, 2021) reported that,
“The president was joined on the South Lawn by the chief executives of the nation’s three largest automakers, as well as the head of the United Auto Workers. The automakers pledged that 40 to 50 percent of their new car sales would be electric vehicles by 2030, up from 2 percent this year, on the condition that Congress passes a spending bill that includes billions of dollars for a national network of electric vehicle charging stations, as well as tax credits to make it cheaper for companies to build the cars and consumers to buy them . . . Mr. Biden laid out the stakes in stark terms, calling the transition an act ‘to save the planet’.”
Again, using a version of my opening example, the road owner tells prospective travelers that starting at some point in the new future, people will still be free to drive any car they want on his roads. But . . . older model cars will be diverted to taking only road “A,” with no toll or travel discounts along that route. On the other hand, any drivers in a certain new model with a particular feature will be able to take road “B” that will offer not only a significantly discounted toll, but will offer a variety of reduced expenses along that route that will practically make it a bargain to purchase that new and different model car.
Thus, everyone is still free to choose the vehicle they decide to purchase and drive. But the government uses its regulatory authority to pressure auto manufacturers to produce more of one type of vehicle over another (under threat of financial and related penalties), and entices auto owners to buy the government preferred one by manipulating the terms of trade through tax incentives.
The Several Faces of Socialism and Planning
What we have here are instances of fiscal and regulatory socialism. Socialism is an economic system under which the government plans the direction of resource use, production, and the outputs forthcoming in terms of types and quantities. However, institutionally and historically, socialism has come in both comprehensive and partial forms.
In the former Soviet Union, all economic activity was planned and commanded by a central agency in Moscow known as GOSPLAN. The central planners, based on directives issued by the leadership of the ruling Communist Party, determined and dictated the allocation of resources and labor to state-owned enterprises, with instructions to the government appointed managers of each of these state enterprises concerning the types and amounts of the component parts or finished goods their facility was to produce, and to what other state enterprises they were to deliver assigned quotas of their output.
Socialism can also be partial, in the sense that the government does not directly own and plan all industry and manufacturing, but may only directly own and control selected industries or companies. For instance, in the years following the Second World War, the Labor Party government in the United Kingdom nationalized, planned and directed what it considered various crucial and essential parts of the British economy. For example, among them were the national railway system, the coal industry, steel manufacturing, and with probably the highest profile, of course, the National Health Service (NHS), the latter representing the relatively full implementation of “socialized medicine.”
French Indicative Planning as “Soft” Socialism
Another pattern of government planning in the post-World War II period was introduced in France. It was often referred to as a system of “indicative planning,” in that most of the French economy remained in the hands of and was operated by private enterprises, with many of the government planning goals and targets not directly commanded by the authorities in Paris. Instead, the French government used an intricate web of direct commands, regulatory requirements, and fiscal penalties and incentives in an attempt to fulfill the central plan.
There was little consistency or harmony during the 1950s and 1960s when French indicative planning was at its most popular with many of the country’s political and social engineering elite. And there were wide differences of opinion in those circles concerning the best policy tools and for what purposes indicative planning was to be used.
One of the better guides for understanding this French variation on the planning theme is Vera Lutz (1912-1976) in her fairly detailed studies, French Planning (1965) and Central Planning for the Market Economy: An Analysis of French Theory and Experience (1969). Dr. Lutz explained that:
“The name given to this type of planning in France is . . . ‘soft’ planning . . . It is also called ‘indicative’ as opposed to ‘imperative’ [or direct command] planning . . . by which is meant that French planning does not merely set out to forecast and describe the spontaneous development of the French economy – as the word ‘indicative’ alone might lead us to suppose – but seeks to guide it towards the attainment of chosen objectives, and utilizes ‘instruments of execution’ for so doing, instruments which consist, however, less in administrative orders and prohibitions than in the offering of incentives.” (French Planning, p. 10).
There were a series of implemented “plans” of this type in France during the 1950s and 1960s, with changing goals and policy tool emphases. But what they all shared in common was the idea that the market economy was not to be left to its own “spontaneous” consumer-driven and entrepreneurial-guiding directions and outcomes. The French indicative planners believed that it was the government’s duty and responsibility to direct the rate and the types of economic growth experienced in the country, along with what industries and employments were to be fostered or dissuaded.
Taxes and Subsidies to Shape Private Sector Decision-Making
Tax breaks and credits would be used to “persuade” the private sector to invest and produce in some directions rather than others. Subsidies, government contracts, price and wage manipulations would lower or raise the costs of decision-makers in the private sectors to follow the “suggestions” of the French political paternalists designing the central plan. Dr. Lutz described that it was argued “that the tax system might ‘go beyond neutrality’ and ‘play a selective role favoring certain operations . . . judged by the Plan to be particularly interesting,’ and that within the existing juridical and administrative set up in France ‘the fiscal lever figure(d) among the most important means of inducement at the disposal of the public authorities’.” (Central Planning for the Market Economy, p. 42)
The central bank and other lending institutions in the French financial market were directed by the government planners to offer low interest loans for a variety of specific investments considered essential for the future shape of the French economy. Regulatory ease or difficulties would “influence” mergers and acquisitions or disinvestments, to increase industrial concentration in some parts of the French economy and introduce decentralization in other areas.
In addition, there was a strong sense of integrating government-business partnerships in which the politicians and the planning authorities would “have a kind of central economic planning implemented by persuasion rooted in consultation and discussion that had originated the philosophy, much in vogue in France since the war, of the so-called ‘concerted economy . . . In such an economy the Plan is made effective by virtue of the various decision-making units assuming ‘informal and morally-binding obligations’ to do their part, e.g., to carry out their share of the investment envisaged by the Plan.” (Central Planning for the Market Economy, p. 24)
The Error of Trying to Plan the Complex Market Order
Dr. Lutz was highly critical of the methods and results, in spite of the continued finessing of “the Plan,” with its changing emphasis on what was to be planned for, and with which of the options in the indicative planning toolkit. The knowledge and predictive capabilities of the planners were persistently faulty; the manipulation of prices and fiscal “incentives” generated their own imbalances and distortions, with resulting discoordination within and between sectors of the French economy; and pressure group politics always played its disruptive and corrupting part in the process.
Part of her conclusions rested on Friedrich A. Hayek’s arguments against various forms of central planning. Near the end of Dr. Lutz’s study of Central Planning for the Market Economy, she said:
“It is of the very nature of the genuinely decentralized economic system that it is not, in Hayek’s words, the ‘product of designing reason’ . . . The case for decentralization of economic forecasting and decision-making rests ultimately on the belief that it is not sensible for society to act as though it were a single mind about the future course of economic events, when it is not and cannot be so in fact. This belief is but one expression of the idea, going back to the . . . eighteenth century and recently given new emphasis by Hayek, that, contrary to what followed from the ‘constructive rationalism’ of, Descartes, the ‘undesigned results of human action’ may be not inferior but superior to the ‘product of designing reason’.” (p. 142)
Joe Biden as Indicative Central Planner
Yet, more than half a century after Dr. Lutz’s criticisms of the French experience with fiscal and regulatory socialism, “indicative planning” is alive and well in the United States. It is not something new to America with the coming of the Biden Administration. No, the use of regulations and fiscal manipulations have been standard policy tools for presidential administrations with the assistance of Congress for a very long time, certainly going back to the early decades of the 20th century, but most certainly it has been standard fare since from Franklin Roosevelt’s New Deal days all the way to the present.
But it is a more conscious method of directing economic activities under the cover of a multiple of “crises,” from the Coronavirus to the hysteria about the dangers of global warming. Insisting that the mass unemployment that the government’s own lockdowns and shutdowns had created in the spring of 2020 had to be alleviated through enhanced unemployment payments to assist those thrown out of work, it made remaining on the employment sidelines more attractive to many than immediately going back to work. Amazingly, when various state governments began to opt out of these supplementary federal unemployment payments, a growing number of people found it once more worthwhile to rejoin the active labor force. (See my article, “The Labor Shortage is a Government-Contrived Scarcity”.)
Dictating Electric Cars with Political Carrots and Sticks
Declaring the determination to replace fossil fuels with “renewable” energy sources to deal with global warming, Biden introduced the quantitative planning goal of 50 percent of all new vehicles to be electric powered by 2030. But in true Soviet planning style, no attention is given to the capital outlays, the shifts in labor force uses, the tradeoffs both in dollar and opportunity cost terms, or the economic feasibility of keeping America moving if half of all the new cars to be manufactured in less than a decade must meet upgraded emission standards and safety features. (General Motors announced on August 13, 2021, that it was recalling almost 150,000 of its electric-powered Bolt vehicles due to fire risks connected with the car’s battery system.)
Set a target and quantitative quotas, threaten to impose regulatory penalties if the product is not produced to government standards by a certain date, and pressure and coax the manufacturers to appear with the president of the United States at a photo op by promising that the needed infrastructure and tax breaks and credits will be forthcoming to make what on a free market would be unprofitable into the economically feasible (maybe) by distorting the incentives and pricing system meant to guide production into properly cost-efficient, consumer-oriented directions.
American indicative planning uses the central bank and the financial system, as well, to direct private sector investment, with the Federal Reserve announcing in March 2021 the important – under its general guidance – of the banking community to evaluate its lending practices to assure that the pattern of investment loans foster “green” solutions and methods to facilitate the reduction in global warming. By what benchmarks lending decisions should be made, with more traditional business plans and prospective profitability standards being shunted to the side, was not explained.
And in July 2021, Biden issued an executive order directing a variety of federal regulatory agencies to more actively determine the shape and form of the business and industrial structure of America with renewed antitrust vigilance so the sizes and focus of private enterprise conforms to the indicative planners’ notions of a “competitive” environment moving the economy in the directions the political paternalists consider socially desirable. (See my article, “Under Biden Free Enterprise Means Government Control”.)
Indicative Planning Fosters Political Profit-Seeking
Fiscal and regulatory socialism also sets in motion all the elements of interest group politicking, in the form of “defensive” and “offensive” rent-seeking (or political profit-seeking, as it might be better called). The Washington lobbying expenses and campaign contributions to those running for and holding public office serves either the purpose of preventing government regulations or tax breaks from working against you (defensive rent-seeking) or actively attempting to get the regulations and tax incentives to get your enterprise net gains that otherwise might not have been yours on the competitive, open marketplace (offensive rent-seeking).
Sometimes both of these rent-seeking motives are at work at the same time in a system of indicative planning, and even within the same person or leadership of a private enterprise that is navigating in a political world of ubiquitous benefits and penalties for so many in the society. (See my article, “Gordon Tullock: Economist Who Explained by Government Corruptly Grows”.)
Planning the Economy Through Big Government Spending
Another feature of the French indicative planning system was the ability of the government to induce shifts in what was produced, how it was produced, and for which purposes based on the magnitude of government expenditures in the society. Dr. Lutz pointed out that the “existence of a large public sector means that the public authorities (administrative and industrial) are large buyers from the private sector, and may exert pressure to conform to the Plan on firms from which they purchase supplies and of which they may . . . be the chief customers.” (Central Planning for the Market Economy, p. 26)
When the U.S. government is projected by the Congressional Budget Office (CBO) to spend $5.5 trillion in fiscal year 2022 (which begins on October 1, 2021) out of an anticipated 2022 Gross Domestic Product (GDP) of around $24.3 trillion, millions and even billions of dollars are at stake for industries and sectors of the economy to “follow the money” and to try to influence where and on what those in political power are spending all of that taxed or borrowed money. Government expenditures become a massive steering mechanism of political central planning
The CBO projects that in fiscal year 2022 the federal government will spend over $1.4 trillion on major health care programs ($904 billion on Medicare and $545 billion on Medicaid, alone). These are huge sums not only affecting and influencing the types and degree of services the health care sector offers, but puts almost irresistible pressure on determining people’s actions and behavior in places like nursing homes concerning getting staff, for instance, vaccinated.
With so many federal dollars in play, it is not too surprising that the nonprofit, “Open Secrets,” which tracks lobbying expenditures and campaign contributions in federal elections, reported that in 2020, $623 million was spent in Washington, D.C. lobbying activities by businesses in the healthcare industry to sway those dollars in their general and respective specific directions. And the health care sector donated nearly $459 million is campaign contributions in the election cycle of 2020 (about 62 percent of these contributions went to Democratic Party candidates, with Senate majority leader, Charles Schumer, the biggest individual recipient with donations from the healthcare sector of over $1.1 million).
The defense budget is anticipated to spend over $751 billion in fiscal year 2022. This politically determined spending flow on armaments and related military hardware and support procurements therefore “commands” the direction of a huge amount of resources into avenues that result in fewer consumer-oriented goods and services being supplied than otherwise could have been available if the means of production were not drawn into defense planning uses decided upon by U.S. government.
“Open Secrets,” reports that in 2020, defense-related private enterprises in the United States spent $104 million on influencing legislation in the country’s capital. And in the 2020 political election cycle, the defense industries contributed over $49 million to candidates, parties, or outside groups, such as PACs. Lockheed Martin spent the most, with a bit more than $6 million, followed by Raytheon Technologies and Northrop Grumman, which spent, respectively, $5.8 million and $5.3 million. (Campaign contributions were slightly more for Republican candidates than Democratic ones.)
A Political Planning Environment Cultivates Corruption
Once such fiscal and regulatory socialism becomes endemic within the political and economic system, a symbiotic relationship emerges and takes shape between indicative planners and the indicatively planned. It is a relationship that reinforces the politicization of economic decision-making on both sides of the indicative interconnection. Each side lives off and becomes dependent upon the other, if their relative political and economic positions and status is to be preserved or enhanced.
Many if not most on either side of this relationship have no incentive to believe in or call for the end or significant weakening of this form of “soft” central planning. It operates through political mutual gains from trade at the expense of other sectors of the economy who end up being net taxpayers and/or bearers of the regulatory burdens in their roles as consumers or non-politically influential private enterprises.
But equally if not more damaging than any of the political corruption and financial waste to the society as a whole due to the amount of time and money and scarce resources devoted to influencing political and indicative planning outcomes that might, otherwise, have been used for more fully market-directed investment and production, is the undermining of market-based pricing and profit-oriented production decision-making.
The very perversity of such indicative, or fiscal and regulatory, planning is precisely that it prevents the full emergence and determination of the price system to “tell the truth” as to what consumers actually want to purchase, and for the supply side of the market to fundamentally capture the real value and opportunity costs of capital, labor, resources and raw materials in producing those products and providing those services the buying public would most want and be willing to pay for in a much smaller government setting.
How Different the Economic Direction Without Planning
The reality of this may be expressed in terms of a mental experiment: suppose America’s system of indicative planning – our version of that French fiscal and regulatory socialism – were to be eliminated tomorrow. What would now be seen to be economically wasteful and misallocated once prices and costs were no longer affected by such government policies, and the taxes and borrowings to cover what the government spends in these ways were radically reduced or even ended? And what sectors of the economy would now be seen to be the properly profitable ones, now that prices and costs reflected actual private sector consumer demand and the entrepreneurial decisions as to what, where, and for whom production will be undertaken and guided without the interference of either “hard” or “soft” government planning?
Joe Biden sees the potentials and possibilities for indicative planning everywhere. In rebuilding transportation infrastructure to change how we travel around; in transforming how we heat or cool our homes and provide energy for our industries in the name of “saving the planet;” for redistributing income so to centrally plan people’s relative income shares, regardless of how or when they work or what may be judged to be their productive value in the producing of those things others may be willing and able to buy; and/or in remolding the educational system to reflect how a new generation is to be indoctrinated to think about race and gender meanings and relationships in a new tribal collectivism; just to name a few that especially fills the news headlines. (See my articles, “Infrastructure Bill as Political Plunder and Social Engineering” and “The Paternalist Instincts of a Central Planner” and “Biden’s Agenda of ‘Democratic’ Paternalism and Planning” and “Biden’s Executive Orders vs. American Public Opinion”.)
All forms of government central planning are inconsistent with personal liberty, freedom of association both inside and outside the marketplace, and the necessary institutional order for free and open competition with market-generated and market-guiding prices for the use of resources and capital and labor, to assure the cost-efficient satisfaction of consumer demands not tainted and twisted by the indicative planning of production, employment, and human relationships by those in government.
Instead of cultivating the institutions of a free market society here in America, Joe Biden has chosen to impose an old and expired French ideological import known as indicative planning. We can look forward to even more fiscal and regulatory socialism in the months and years to come.
[First published at the American Institute for Economic Research.]