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Economic Report of the President March 2019

“Socialism” in the Economic Report of the President

Something unusual has just happened. The current Economic Report of the President (March 2019; henceforth Economic Report) has devoted one full chapter to attacking socialism, under the title “Markets versus Socialism.”[1] The only intellectually honest part of the Economic Report is the reason given for allocating no less than 45 pages to socialism:

[T]here was a time in American history when grand debates over the merits of competing economic systems were front and center, and the terms of the debates and characteristics of the competing views were widely known. It is clear that such a time may be returning. Detailed policy proposals from self-declared “socialists” are gaining support in Congress and are receiving significant public attention.

The bourgeoisie in the United States is getting nervous and technocrats in the capitalist state have responded to the growing threat by going out of their way to discredit the increasingly popular alternative of socialism.

Unfortunately for the ruling class of the United States, the authors of the Economic Report did a rather lousy job in their attempt to discredit socialism. The chapter starts with definitions of socialism and presents its criticism essentially in four parts:

  1. The Economics of Socialism
  2. Socialism’s Track Record
  3. Economic Freedom and Living Standards in a Broad Cross Section of Countries
  4. Socialized Medicine: The Case of “Medicare for All.”

Each section contains specific cases, country references, and plenty of repeated flawed arguments. In the following article, we will only focus on the two most significant criticisms: the “unintended consequences” of the collectivization of agriculture in the USSR and the performance of central planning.

The “Unintended Consequences” of the Collectivization of Agriculture

The Economic Report states that a “famine ensued” in 1932-33, claiming that “about 6 million people died from starvation.” To illustrate that this human loss is a concrete example of the failure of socialist economic policy, the Economic Report includes the following graph, which shows the annual trend of births and deaths in Ukraine between 1924 and 1939.

Figure 1: Mortality for Ukraine given in the Economic Report

Figure 1. Mortality for Ukraine

Mortality for Ukraine. Source: Economic Report of the President.

The authors claim not only that millions died as a result of famine, but furthermore that “millions of people more were not born.” The famine is then blamed on flawed socialist economic policies. The extent to which it was due to policy decisions is disputed by historians,[2] but even were we to accept that it was a matter of policy rather than a bad harvest, that would not put the matter to rest.

To have a broader and comparative view, one should look at the period of capitalist restoration after 1990. For example, in the case of Ukraine, population trends present a rather dramatic picture. As can be seen in the following chart, the transition from socialism to capitalism led to a dramatic population decline in Ukraine. Indeed, the restoration of capitalism killed between two and three times as many people in an already developed Ukraine as the famine of the 1930s that occurred in a poor and backward setting.

Table 1: Elevated mortality in Ukraine subsequent to the restoration of capitalism

  1980 1985 1990 1995 2000 2005 2010 2015
Population 49,969 50,921 51,464 50,906 48,840 46,892 45,793 44,658
Deaths 3,021 2,984 3,491 3,788 3,795 3,771 3,379  
Deaths per year 604 597 698 758 759 754 676  
Rate per 5 year 6.0% 5.9% 6.8% 7.4% 7.8% 8.0% 7.4% 0.0%
Rate elevation   -0.2% 0.7% 1.4% 1.7% 2.0% 1.3%  
Excess deaths   -95 380 710 842 936 610  
Excess per year   -19 76 142 168 187 122  
Cumulative excess   380 1,090 1,932 2,868 3,479  

Notes: Total population in thousands.

Source: Data from United Nations (UN) demography database.

Figure 2: Mortality and excess deaths in Ukraine following the restoration of capitalism

Figure 2. Mortality and excess deaths in Ukraine following the restoration of capitalism

Source: UN Demographic Yearbook, various years.

A similar trend is also true of Russia. The overall excess deaths consequent the introduction of capitalism in Russia amount to some 12 million over the period of 1986 to 2009.

Table 2: Excess deaths after the introduction of capitalism in Russia

  Deaths (thousands) Excess relative to 1986   Deaths (thousands) Excess relative to 1986
1986 1,498 0 1998 1,988 490
1987 1,531 33 1999 2,144 646
1988 1,569 71 2000 2,225 727
1989 1,583 85 2001 2,251 753
1990 1,656 158 2002 2,332 834
1991 1,690 192 2003 2,365 867
1992 1,807 309 2004 2,295 797
1993 2,129 631 2005 2,303 805
1994 2,301 803 2006 2,166 668
1995 2,203 705 2007 2,080 582
1996 2,082 584 2008 2,075 577
1997 2,105 607 2009 2,010 512
      Total 48,388 12,436

Source: UN Demographic Yearbook, various years.

Figure 3: The evolution of Russian birth and death rates in Soviet (non-shaded) and post-Glasnost (shaded)

Figure 3: The evolution of Russian birth and death rates in Soviet (non-shaded) and post-Glasnost (shaded)

Source: Pockney (1991) and UN Demographic Yearbooks.

It should come as no surprise that, having driven half the population to poverty and despair, capitalism in advanced capitalist countries also finds that it is ultimately unable to reproduce the workers on whom it depends.

The US, and now the UK, are already showing declines in life expectancy. Deaths due to poisoning, suicide, liver disease—afflictions of poverty and despair—are taking an increasing toll (Figure 4).

A large part of this toll, illustrated by the “poisonings” curve in the following figure, is caused by the deliberate promotion of opiate addiction. From the East India Company’s pushing of opium to the Chinese in the 1840s, to the Bayer company’s selling over-the-counter heroin as a “cure” for morphine n 1895, to Purdue

Pharmacy’s aggressive marketing of Oxycontin starting in 1995, companies have viewed addicts as a secure source of income. Thus, “legitimate” drug companies have opened the door to addiction, which has then been further exploited by the black capitalism of the illegal drugs rings. Their profits are then laundered via blue chip banks like HSBC, a bank that was founded from the very profits of the opium trade to China.

Figure 4: The rise in mortality due to the diseases of despair, United States

 

Figure 4: The rise in mortality due to the diseases of despair, United StatesNote: “Poisoning” deaths are primarily the result of drug overdoses; and chronic liver disease is largely due to excessive alcohol consumption.

Source: Case and Deaton (2015).

Performance of Central Planning

The basic thesis of the Economic Report is that a centrally planned economy performs worse than a market-based economy. Russian history provides us with a couple of controlled experiments to test this thesis. We had the initial introduction of a socialized planned economy in the late 20s and early 30s, and then the introduction of a liberal market economy from the 1990s.

If it is the case that, allowing for any peculiarities of national character or national culture, socialism is markedly inferior to capitalism, then the transition to socialism should have been associated with a decline in economic growth; and the transition to capitalism to an acceleration. This indeed was the promise held out to the people of Russia around 1990 by U.S. economists with a similar outlook to those who drafted the Economic Report. Liberal theory held that once enterprises were free from the state, the ‘magic of the market’ would ensure that they would interact productively and efficiently for the public good. But this vision of the economy greatly overstated the role of markets. Even in so called market economies, markets of the sort described in economics textbooks are the exception, restricted to specialist areas like the world oil and currency markets. The main industrial structure of an economy depends on a complex interlinked system of regular producer/consumer relationships in which the same suppliers make regular deliveries to the same customers week-in and week-out.

In the USSR this interlinked system stretched across two continents, and drew into its orbit several other economies: Eastern Europe, Cuba, North Vietnam. Enterprises depended on regular state orders, the contents of which might be dispatched to other enterprises thousands of miles away. Whole towns and communities across the wilds of Siberia relied on these regular orders for their economic survival. Once the state was too bankrupt to continue making these orders, once it could no longer afford to pay wages, and once the planning network which had coordinated these orders was removed, what occurred was not the spontaneous self organisation of the economy promised by liberal theory, but a domino process of collapse.

Without any orders, factories engaged in primary industries closed down. Without deliveries of components and supplies secondary industries could no longer continue production, so they too closed. In a rapid and destructive cascade, industry after industry closed down.

The figures in Table 3 show how far the economy had regressed. These figures show how little recovery there had been, even after 13 years of operation of the free market.

Table 3: Output of Selected Branches of Industry in Russia in 2003 Relative to 1990 (1990=100)

Electric power 77
Gas 97
Oil extraction 94
Oil refining 70
Ferrous metallurgy 79
Non-ferrous metallurgy 80
Chemicals and petrochemicals 67
Machine building 54
Wood and paper 48
Building materials 42
Light industry 15
Food 67
Total Industry 66

Source: Goskomstat (2004. Table 14.3). Note that all sectors of the economy have drastically shrunk over this 13-year period.

If the economy had continued to grow even at the modest rate of the later Brezhnev years (say 2.5%) then industrial production would have stood at 140% of 1990 levels. The net effect of 13 years of capitalism was to leave Russia with half the industrial capacity that could have been expected even from the poorest performing years of the socialist economy.

U.S. economists might argue that this poor performance was merely the result of making such radical changes to the economic system. But 13 years of abysmal economic performance?

Now let us contrast this period of (re)introduction of capitalism with the first years of transition to a socialist economic system. In this case we have the beginnings of a truly revolutionary shift in the mode of production itself—with no prior precedent, an uneducated population, and no economic advice from the outside world. If it is anything like the transition to capitalism, one would expect to find evidence in key economic statistics. But what do we see in Table 4? Rapid growth!

Table 4: GDP growth by sector at the start of the planned economy period (1928–1940) in the USSR

  1940/1928
Factory consumer goods 180%
Machines 826%
Military equipment 7000%
Construction 275%
Transport and communication 275%
Trade and restaurants 169%
Industrial output 353%
Agriculture 110%
GDP Index 178%

Source: Allen (2003), Table 5.4.

Conclusion

Between the 1930s and 1960s the economic superiority of socialism to capitalism was widely recognised and accepted. The Economic Report laments that this was the case and worries that the same situation may be returning. In the aftermath of Reagan and Thatcher, and Western victory in the Cold War, it briefly looked as if the verdict of history had been reversed. In the early 1990s a triumphant Western economics profession declared that socialism had failed, and that the superiority of the market economy had been decisively established. But this is to mistake a political/military victory for an economic one.

If one compares the promises of Western economists to the reality of the Soviet economy, the promises looked great. Faced with the growing popularity of socialist politics in the U.S. the Economic Report authors go on as if the promises of 1990 had been kept. But the gap between promise and the grim reality of capitalism in Russia has became too glaring for them to face: a drastically shrunken economy and millions of deaths. It is no wonder that President Trump’s economists retreat to the fantastic and discredited promises of the Reagan era.

Sources

  • Allen, Robert C. Farm to factory: A reinterpretation of the Soviet industrial revolution. Vol. 11. Princeton University Press, 2003.
  • Case, Anne and Angus Deaton. “Rising Morbidity and Mortality in Midlife among White non-Hispanic Americans in the 21st Century.” Proceedings of the National Academy of Sciences, 112(49):15078–15083, 2015.
  • Pockney Bertram Patrick. Soviet statistics since 1950. Aldershot (UK) Dartmouth, 1991.

[1] Obviously there have been occasional references to socialism, such as in the Economic Reports of 1991 and 1992. However, the term was used only once and twice, respectively, in these reports, without any substantive criticism. Indeed, they both use the same boilerplate sentence: “These worldwide changes promise to settle intellectual debates that have persisted for decades.”

[2] Tauger, Mark B. “The 1932 Harvest and the Famine of 1933.” Slavic Review 50.1 (1991): 70-89.

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