Understanding the phenomenon of the Socialist Death Spiral is critical to evaluating politicians' claims about how their policies will affect the economy. For example, there is Hillary Clinton's oft-repeated claim that economic growth is stronger under Democratic presidents than under Republican presidents. As one example among many, here was Hillary at one of the Democratic debates on October 13:
I have a five-point economic plan, because this inequality challenge we face, we have faced it at other points. It’s absolutely right. It hasn’t been this bad since the 1920s. But if you look at the Republicans versus the Democrats when it comes to economic policy, there is no comparison. The economy does better when you have a Democrat in the White House and that’s why we need to have a Democrat in the White House in January 2017.
Should anyone give the claim any credit?
About a year ago in this post, I started writing about the phenomenon of the Socialist Death Spiral. The concept is that increased government spending and tightening government control of an economy in the "socialist" model reverses the positive incentives of the private ownership/free exchange model (aka "capitalism"), undermines the dynamic of economic growth, and causes a gradual but then accelerating decline of the real economy. Yet somehow as gradual economic decline sets in, official government economic statistics at first do not reflect that reality. Instead, in the early phases of increased government economic control, official statistics appear to reflect continued, sometimes even increased, economic growth. What is occurring is obvious to anyone who looks at how economic growth is measured: government counts its own spending as a one-hundred-cents-on-the-dollar addition to GDP. Even completely non-productive and wasteful spending can thereby be made to appear, for a time, to be "growing" the economy. That is, until (in Margaret Thatcher's words) the government runs out of other people's money. Then everything falls apart at once.
The single most notable example of this phenomenon was the former Soviet Union and its satellites, who continued to proclaim rapid growth and economic triumph into the 1980s, even though it was obvious that the communist economies were in stasis and decline. It all fell apart within a period of a couple of years from about 1989 to 1991. Today, we have Venezuela. Official government statistics there reflected rapid economic growth from about 2003 to 2013, driven by blowout government spending and fortuitously strong oil prices. As recently as 2013 David Sirota in Salon called Hugo Chavez's record in Venezuela an "economic miracle." (Really??? Really!!!) In 2014 the air started to leak out of the balloon; and in 2015 it burst. Today the people of Venezuela are starving and rioting. In retrospect, it is obvious that the government was able to use increasing spending, increasing control of the economy and control of the economic statistics to maintain an illusion of strong economic growth for about ten years. Then it ran out of other people's money.
And then there's Brazil. Former President "Lula" da Silva came into office in 2003 with an explicit left-wing agenda of higher government spending and much redistribution of wealth. I do not claim to be an expert on Brazil's economic policies over the past 13 years. Certainly Lula turned out to be more moderate in governing than many had feared, and did not try to nationalize the whole economy (although Brazil's economy was already dominated by state-owned enterprises before he came to power). Here is an assessment (from approximately 2010, near the end of Lula's term) by a guy named Mark Langevin listing many of Lula's enacted policies: the family cash stipend (bolsa familia) going to about 25% of the population; increased social pensions; in-kind benefits including dental care and rural electricity; repeatedly increasing the minimum wage; etc. Anyway, when Lula left office at the end of 2010 the general feeling about his term of office can best be characterized as euphoria. Literally dozens of articles talked about his economic "miracle" or his "alchemy." He proved that you can engage in massive redistribution of wealth while still preserving economic growth! Example (from CBS News, December 27, 2010, "Lula's Legacy: A Transformed Brazil"):
Early fears that the leftist union leader who battled Brazil's dictatorship would turn the nation socialist proved unfounded. . . . Under Silva, the economy expanded twice as fast per year as it did in the previous two decades, growing an average of 4 percent yearly.
But Silva's legacy goes beyond figures. It's caught in the glint of an eye of a slum dweller such as Lima, who sees herself in Silva's impoverished roots, and feels pride that it was a man from the poor masses who finally delivered on the promise of Brazil.
Unfortunately, it didn't last; and much of the "growth" was likely illusory. According to The Economist here, economic growth (by the official numbers) stopped in 2014 and has turned sharply negative in 2015 and 2016. The government's budget deficit is up to around 10% of GDP, and projections for the future (given massive social spending commitments) are even worse. They have run out of other people's money. The current President is undergoing impeachment proceedings in a corruption scandal.
Walter Russell Mead has a post at the American Interest on May 23, "Brazil's Economic Nightmare." Excerpt:
[T]he country faces a genuinely wrenching adjustment in the immediate term. The experiment with leftwing rule began reasonably well under Lula and had some genuine social accomplishments to show for itself. But Brazil has missed another historic opportunity, squandering the income from the China-driven commodity boom instead of taking advantage of the good years to build a more solid foundation for the future.
Mead is generally an insightful guy, but I'm sorry, this is ridiculously naive. The "experiment with leftwing rule . . . began reasonably well" but they "squandered the income" from the commodity boom? No. The whole idea behind the leftwing rule was the blowout government spending. That's the model: you spend as much money as you can as fast as you can and you pretend that it is all a 100% addition to economic growth. That's how you claim a booming economy and a decrease in income inequality (assuming you count handouts as income), all at the same time. It all seems to work (if you believe the official numbers), until the day that you run out of other people's money and the bottom falls out. If you want to find out how much of the economic "growth" in the "growth" period was real versus illusory, I'm sorry, but no official statistics exist for that.
So we return to Hillary Clinton's claim that "the economy does better when you have a Democrat in the White House." Robert Farley checks that claim here at factcheck.org. He uses a 2015 academic paper by Blinder and Watson. (Yes, it's the same Alan Blinder who served on the Council of Economic Advisors under President Clinton. Somehow Farley forgets to mention that.) The B&W analysis measures the success of each President's economic policies by using the official government GDP numbers and the performance of the economy during exactly the period of that President's term -- in other words, assuming that each President gets his economic agenda enacted on day 1 and that that agenda produces its economic effects with no lags and is perfectly measured by government statistics that count increased spending as a 100% increase to GDP. It's not hard to see how that methodology would favor presidents who increase government spending, and disfavor those who cut or stabilize government spending, even if the latter policy is far better for real growth. John Gaski here at the City Journal on May 30 points out that if you merely introduce a two-year lag into the calculations, the apparent advantage to the Democratic presidents disappears. The experience of Venezuela and Brazil suggests that the real lag before the harm of increased government spending becomes too obvious to ignore may well be more like ten years.