The basic principle is actually very simple: Given freedom to buy and sell stuff without government restriction (a situation sometimes referred to as "capitalism"), each year humans figure out small ways to work a little more efficiently or make their product or service a little better in order to improve their own lives. This phenomenon is observed as economic growth. Conversely, under conditions where buying and selling stuff is severely restricted and government controls who gets what, people devote their energies not to working more efficiently or making better products, but rather to getting in on more and more of the government largesse. In the sectors of the economy dominated by government restrictions and handouts, economic production shrinks, first a little, and then faster and faster. I have called this phenomenon the "Socialist Death Spiral."
But it is important to recognize that the Socialist Death Spiral is difficult to spot in its early stages, when all you have to go by are government-produced numbers. All government statistics, in all countries, are designed and engineered to favor government spending in order to make those in power look good and help them grow their spending empires. All government spending on goods and services is counted as a one-hundred-cents-on-the-dollar addition to GDP. So if the government borrows a billion dollars and spends it on a completely wasteful and useless project (solar panels for Buffalo anyone?), the GDP accountants count that as a one billion dollar increase in GDP. This kind of thing can keep GDP apparently growing for a long time, even as it is really shrinking. Then one day the whole house of cards collapses.
In Venezuela strongman Hugo Chavez came to power in 1999. He embarked on a long list of explicitly socialist programs: nationalizing many formerly privately-owned businesses (the remainder of the oil industry, telecoms, utilities, cement, etc., etc.); extensive price controls and subsidies for widely-used consumer products; massive government spending on public housing; currency and exchange controls; hiring lots more government employees; etc., etc. And how did that go? At first it seemed as if all was going well, at least if you believed the government numbers. From an article by Oscar Raul Cardosa in 2006:
Chavez stepped on the gas for his social reforms — education, healthcare, etc – and also in regard to breaking down the country’s excessive concentrations of wealth. ... Chavez presided over economic growth of nine per cent in 2005 and ... the first quarter of 2006. Above all, however, he has achieved a 6.3 per cent effective reduction of poverty, after taking over a country whose vast majority — 80 per cent — was perched between poverty and squalor.
To his credit, Cardosa does recognize that Chavez may have been helped by the good luck of rising oil prices during his early years in power; but Cardosa shows no skepticism at all as to whether the government numbers were accurate or honest. Move a few years later, and Venezuela was still managing to keep up the image of success, even as skeptics were asking whether it could really be possible. Try this article from Salon as late as 2013, titled "Hugo Chavez's Economic Miracle" (you can't make this stuff up):
[A]s shown by some of the most significant indicators, Chavez racked up an economic record that a legacy-obsessed American president could only dream of achieving. For instance, according to data compiled by the UK Guardian, Chavez’s first decade in office saw Venezuelan GDP more than double and both infant mortality and unemployment almost halved. Then there is a remarkable graph from the World Bank that shows that under Chavez’s brand of socialism, poverty in Venezuela plummeted (the Guardian reports that its “extreme poverty” rate fell from 23.4 percent in 1999 to 8.5 percent just a decade later). In all, that left the country with the third lowest poverty rate in Latin America. Additionally, as Weisbrot points out, “college enrollment has more than doubled, millions of people have access to health care for the first time and the number of people eligible for public pensions has quadrupled.”
Of course, that was all right before the bottom fell out. I particularly like the line in the Salon article about "infant mortality" being "halved." The lead front-page story in today's New York Times gives us an update on that. The article is titled, "Dying Infants and No Medicine: Inside Venezuela's Failing Hospitals." Here's how the article starts:
By morning, three newborns were already dead. The day had begun with the usual hazards: chronic shortages of antibiotics, intravenous solutions, even food. Then a blackout swept over the city, shutting down the respirators in the maternity ward. Doctors kept ailing infants alive by pumping air into their lungs by hand for hours. By nightfall, four more newborns had died.
What, are you telling me that socialism can't completely fix infant mortality, let alone make all human existence perfectly just and fair? Read on in the article and you find that the rate of deaths among babies less than a month old has recently multiplied by a factor of one hundred, going from 0.02% to 2% between just 2012 and 2015. And that was before the recent electricity and food crises! And then there's this description of the general economic situation in the country today:
The economic crisis in this country has exploded into a public health emergency, claiming the lives of untold numbers of Venezuelans. It is just part of a larger unraveling here that has become so severe it has prompted President Nicolás Maduro to impose a state of emergency and has raised fears of a government collapse. . . . Lines for food, long a feature of life in Venezuela, now erupt into looting. The bolívar, the country’s currency, is nearly worthless.
And meanwhile, from Europe, comes news that at least a few people over there are beginning to recognize the problem of the Socialist Death Spiral -- although I haven't seen anyone but me use that term yet. In a letter published yesterday in Britain's Telegraph newspaper, some 300 corporate CEO's have decided to buck trendy establishment opinion and advocate for the UK's exit from the EU. The reason: the stagnation brought about by the bureaucratic EU model:
Year-on-year the EU buys less from Britain because its economies are stagnant and millions of people are unemployed. According to Mervyn King, the former governor of the Bank of England, the euro “might explode”. Brussels’ red tape stifles every one of Britain’s 5.4 million businesses, even though only a small minority actually trade with the EU. It is business – not government – which generates wealth for the Treasury and jobs for our communities. Outside the EU, British business will be free to grow faster, expand into new markets and create more jobs. It’s time to vote leave and take back control.
Amen. Are you listening, Bernie Sanders? In Europe, government spending in most countries is around 50% of GDP. In round numbers, that means that only half the economy is growing, and fully half is very likely shrinking (although not reflected in the official government numbers). And then there are the big spenders with government spending in excess of 50% of GDP -- the likes of Greece, Italy, and even France. Their official numbers show stagnation, but the likely reality is that if you could accurately take account of the (larger) shrinking sector of the economy, and net it against the (smaller) growing sector, you would have net shrinkage. If past experience is any guide, when the crisis comes, it will hit all at once.
We have a world sadly lacking in examples of the opposite economic strategy, but one comes today from the Economics21 branch of the Manhattan Institute. It is Latvia. In an article titled "Latvia's Free Market Success Story," Preston Cooper shows that from 1995 to 2015 Latvia's per capita GDP has almost tripled, from about $8000 to almost $23,000. How did they do it?
Latvia followed the exact opposite of the Krugman-Keynesian prescription. The nation maintained its currency peg and cut government spending instead of increasing it. The medicine worked: with broad public support, Latvia abolished half of its government agencies and cut the state workforce by 30 percent, according to Åslund and Dombrovskis. Coupled with regulatory and education reform, this downsizing galvanized the private sector and brought the country roaring back.
I would be as skeptical of Latvia's numbers as anyone else's. But notice that these guys actually cut government spending and the size of government, which eliminates the principal fraud of faking economic growth by counting government spending as a full addition to GDP. There's a very good chance that this one is real.