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|Socialism in America|
Ushio - October 2008
America, it is often said, is the land of free markets, of unregulated capitalism, of what detractors call “market fundamentalism”. The financial crisis, popularly known as the credit crunch, that emerged from
Yet, even though this impression fits the Wild West image of America found in books and movies, there is something odd about it. That oddity begins with the fact that this financial crisis began in America’s housing market. And that market is in fact more subsidized and socialized than the housing markets in virtually any other developed country. It is certainly much more heavily subsidized than the housing market in Japan.
When I was chief editor of The Economist magazine in London, I noticed one big difference in the way foreign correspondents that we sent to work in America organized their lives compared with what our foreign correspondents did elsewhere in the world. The difference was that most of them bought themselves houses or apartments rather than renting them.
A British foreign correspondent sent to Tokyo for a three or four year posting would not dream of buying an apartment. He or she would certainly rent. But their equivalents sent to Washington soon realized that they were eligible for a large subsidy from the American government if they bought a property, one available to every American resident, namely the full deductibility of the interest they paid on their home mortgage loan from their American income tax.
Then there are the two huge financial institutions, known as Fannie Mae and Freddie Mac, whose job is providing guarantees or funding for more than half the mortgages outstanding in America. Established following the Great Depression of the 1930s, these companies, which benefit from an implicit federal guarantee, own or guarantee mortgages worth more than $5 trillion. This has long represented a huge government subsidy for home-related borrowing, since the aim of the firms is to reduce mortgage-financing costs. On September 6th the implicit federal guarantee became entirely official and explicit as the Bush administration decided to take full control of the two enterprises and to support the whole of their debts.
This is socialism by any other name. The only way in which the American housing market could be more socialist would be if the government were to control directly the prices of properties, whether for purchase or for rent. But exactly that does happen in some American cities, including New York, where the city government has imposed rent controls for many properties.
What does this tale of American socialism tell us? Mainly, it tells us that simple descriptions and slogans about the way economies or societies work are almost always misleading. All our countries are full of contradictions, which are often the legacy of particular historical periods and events.
If Barack Obama is elected president in November, the United States is likely to become more socialist in health too. He has promised to extend mandatory health insurance to every American resident, bringing more than 40 million currently uninsured people into the main health system. This will not be as socialist as Britain’s National Health Service, but it will be a big move in that direction.
After all, like in Japan, complaints about inequality have become a big feature of American political life. The stock- and property-market booms of recent years greatly widened the gap between rich and poor. Globalisation, in the form of trade and foreign investment, is widely blamed for depressing the wages of poorer and less skilled Americans.
There is little that a new president can do to remedy this problem, for direct intervention in wage rates or big increases in welfare subsidies would be highly controversial. Health care, however, offers one chance to make a difference. High costs for health insurance weigh especially heavily on people earning low wages, which is why so many people decide not to pay for insurance or else cannot get themselves into insurance schemes. A universal, low-cost insurance plan from the government would make people feel richer as well as safer all in one go.
The question, of course, is how to pay for it. America’s federal budget deficit is not large, at 2.4% of GDP, but resistance to paying higher taxes is fierce. The new administration will enter office at a time of economic weakness, when tax revenues will be depressed and when workers will be feeling poorer and more insecure about their jobs. That is not exactly an ideal time to be introducing a costly health-care reform which will cost the federal government hundreds of billions of dollars and force it eventually to raise taxes.