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June 17, 2009

The Socialism Death Spiral

How increased government ownership reduces the size of the overall economy

Over the past several months, Americans have been giving the Messiah (Barack Obama) a thumbs up on nearly every socialist plan that is put into place. Yet, if you survey average Americans, they will tell you that they do not believe in socialism. Looks like some people are drinking the Kool Aid!

Socialism is defined by Wikipedia as:

"any one of various economic theories of economic organization advocating state or cooperative ownership (like GM and Chrysler)" (

However, lets put aside the evidence of socialism as seenin our banks, AIG, and the US auto industry. The best indicator of socialism is the percentage of GDP that is comprised of government spending.

GDP= Consumer spending + investment spending + government spending + net exports

The greater the government percentage of GDP the more socialist a country is since a greater percentage of its output is produced from the federal government. Makes sense right?

From 1980 to 2007, the average government percentage of GDP was 20.9% (see chart here). That means that for roughly every $5 produced by the American economy, $1 was sourced from the government.

Now, according to this site, government spending as a percentage of GDP is estimated to be 45% in 2009!! That means for every $5 produced by the American economy, $2.25 will be sourced from the government. Federal government control over the economy has effectively doubled the historical moving average. Estimates are that this number will be around 42% in 2010, but that is only if the economy begins to grow. This is the highest government expenditure as a percent of output since World War II and that was an era of war production, rations, and several other socialist measures.

Now, how does socialism cause a death spiral? Well, socialism requires money, taxpayer money. And when the government cannot get enough taxpayer money, it borrows from private capital. So, instead of private capital going to private companies, it is going to the federal government. This increase in demand for private capital also raises interest rates, making it harder for small and medium businesses to continuing operating. Many of these businesses shut down, raising unemployment, and continuing the decline of economic growth. Socialism plays right into the deflationary death spiral.

So, what happens to the larger businesses in socialism? Well, most survive until they have trouble refinancing their debt due to a lack of private capital. Then, who do they go to for help! Why, the government of course! So, the government's obligations continue to grow and the cycle continues over and over again.

We need a plan in place for the government to divest itself from our economy (an exit strategy of sorts). Without one, we are prone to continued government ownership for years to come and increased ownership in future recessions as more Americans become too weak to take the brunt of an economic contraction.

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