In Defense of Social Democracy: Contra Ron Paul & Conservatism

I saw the following post from Ron Paul on Facebook. In the post, he attacks social democracy. I would like to break down his critique and respond to it. This post by Ron Paul is going to serve as a point of departure for a broader critique of right-wing ideology in general.

Firstly, Ron Paul refers to social democracy as "democratic socialism." While social democrats do sometimes refer to themselves as democratic socialists, that is actually somewhat anachronistic and an inaccurate description. Historically, socialism just meant anything other than the status quo. Today, socialism has a more specific meaning, entailing public-ownership of industry, a planned economy, and anti-market ideology. Social democracy is absolutely not socialist in this modern sense, as it actually advocates private-ownership and a market economy (what we call "capitalism" today) with some regulations and protections to ensure the well-being of all citizens. When people like Ron Paul call social democrats "socialists," they are using it as a term of derision. Ron Paul and his followers adhere to the Austrian School of economics, which is known for defeating socialism in the great calculation debates in the early 1900s. When Mises and Hayek refuted "socialism," they were specifically refuting the notion of a centrally-planned economy as opposed to a market system. When Ron Paul refers to social democracy as "socialism," he is implying that it somehow entails central planning and falls under the Austrian critique of socialism, which it does not. For more on this, see my article Social Democracy As An American Ideal.

The next point that needs to be made is that Ron Paul's whole argument rests on the notion that taxation is everywhere and always theft. The fundamental conservative and libertarian critique of social democratic reforms is that they entail theft. Libertarians and conservatives are, at least in rhetoric, anarchists. Or, I should clarify, they would have to be individualist anarchists in order to be consistent. If taxation for funding welfare constitutes theft, then taxation for funding the military and police departments equally constitutes theft. While they deride social democrats for being socialists, it is actually these conservatives that are the most socialist of all. Conservatives and libertarians generally support the military and the police, both of which are government-owned industries (i.e. socialism). The inconsistency of conservatism is that it is simultaneously anarchist and State-socialist! On the one hand, it opposes government doing anything and regards taxation as theft (anarchism); but, on the other, it praises the police and the military, two government-owned industries (socialism) that are entirely funded via taxation (theft, in their estimation). Conservatism and non-anarchist libertarianism are idiotic and self-contradictory positions to hold. The conservative is an irrationalist at heart.

The next question we must ask is: Does taxation constitute theft? I suppose we must ask another question before we can get to the bottom of this: What is money? Money is a government-issued token or IOU, representing a claim upon government services. The use of precious metals as a medium of exchange did not arise from barter or from market exchanges. The use of precious metals as money was entirely the invention of the State. When primitive governments conquered surrounding peoples, they would plunder and confiscate all of their precious metals. The conquering government would then melt down those metals and mint them into coins and use those coins to pay its soldiers. Simultaneously, the government would demand that everyone pay tribute (tax) in those same government-issued coins. By doing this, it made it necessary for everyone to acquire money in order to pay taxes, which created a market in which the soldiers could spend their money. Prior to government-issued money, there were no markets. There were only primitive gift economies. Barter wasn't even common. Theoretically, at least, the tax was a service fee for security. It was the cost of being protected from invading armies. Money has become a store of value and a medium of exchange, but it was first and foremost a claim upon government services. The purpose of money is to pay taxes. Money is only useful within market systems, yet market systems only exist because of taxation, which is, coincidentally, what money was created for. If we were to eliminate taxes, markets would stop existing, meaning that money would become useless. Given the nature of money, if conservatives want to eliminate taxation because it is theft, then they must revert to primitivist communist anarchism.

It is only after you understand the nature of money that you can understand the function of taxation within a monetary system. When the government collects a tax, it takes back its IOUs, removing the money from circulation. Taxation causes the money supply to contract, inducing deflation and increasing the value of money. The function of taxation is not to fund government spending, but to help stabilize the value of money. Taxation can fund certain programs, but that is not its function. Money fluctuates in value due to speculation and international trade. When the value of money drops because foreign investors lose faith in the dollar, the government has to increase taxes in order to counteract the inflation and stabilize the price level. When the value of money increases due to deflationary pressure caused by outsourcing and the use of cheap foreign goods, the government has to print money in order to devalue the currency enough to keep the price level stable. Otherwise the value of money would drastically fluctuate and become useless for exchange. When government creates new money, it is creating new IOUs that basically say "the government is indebted to the holder of this token." When the government collects taxes, it eliminates some of the debt by removing the tokens from circulation. Every dollar in existence is a credit in the hand of the holder but a debit for the government. In other words, every dollar in existence is a debt owed by the U.S. government. This means that the conservative push to balance budgets is fundamentally misguided. It is impossible to balance budgets without collapsing the whole system. You cannot have a market system with a balanced budget. It is mathematically impossible. The only way to pay off the government debt is to tax every single dollar into non-existence and, thereby, abolish the market system. While conservatives claim to be for capitalism and the market, their incoherent ideology unwittingly threatens to ruin the entire capitalist system altogether.

This idea that taxation constitutes theft really misses the mark. It represents a fundamental misunderstanding of the nature of market systems/monetary systems. It's an idea that doesn't make sense once you understand the nature of money and market systems. The idea that the government needs a balanced budget also represents a fundamental misunderstanding of the nature of money and markets. If the government has very little debt, then its people's market must be small. If the people want to participate in global markets, it requires a large debt on the part of the government. Government debt is what creates the money that people spend. You can't have a growing and prosperous economy without a growing government debt.

Let's return to Ron Paul's critique of social democracy. He basically asserts that free college, free healthcare, and universal basic income have to be paid for, then suggest that social democrats wish to fund these things by "coming after your paycheck." This is a misrepresentation of social democracy. Firstly, when social democrats speak of "free" healthcare, etc., we mean free at the point of service. We do recognize that these services have to be paid for. Furthermore, it is dishonest to suggest that social democrats would increase the taxes of the average person in order to fund their programs. For instance, I have advocated universal basic income funded via land value tax. Under this scheme, most people's taxes would actually go down. They would have to pay an additional land value tax, if they owned a house, but would have that tax offset by a basic income. The tax increase would really affect landlords and large corporations that own valuable land. Your taxes would not increase, but the taxes of the Walmarts and Donold Trumps would go up. In general, social democrats advocate progressive taxation, which means that things like universal healthcare would be paid for by millionaires, billionaires, and corporations. Under social democracy, the average person receives more in benefits than they take on in increased tax burden.

I guess at this point I should probably explain why progressive taxation is totally fair and fundamentally just. Most conservatives and right-wing libertarians favor some sort of flat tax. According to progressives and social democrats, a flat tax is unfair and unjust. Allow me to give a few illustrations to explain the virtues of progressive taxation. Please bear in mind that the rates chosen for these examples are chosen for the purpose of making the math easy to follow and are not actual rates that I would recommend. Let's suppose that there is a flat income tax rate of 50%. John Doe has an income of $30,000 per year. After taxes, he is left with only $15,000. His mortgage costs him $4,800 per year and he spends $3,600 on food. The cost of owning and operating his vehicle, including insurance, fuel, and maintenance, comes to $4,800 as well. With a flat tax rate of 50%, John Doe is left with only $150 of spending money each month, after his necessary expenses. However, this money has to be saved for rainy days, since he will need it for an unexpected trip to the dentist or doctor at some point. A 50% tax rate leaves him totally impoverished. Now, compare this to a 50% tax rate on Donald Trump's annual income of $530,000,000 per year. Trump would be left with $265,000,000 per year. With a flat tax rate of 50%, John Doe would be taxed into absolute poverty while Donald Trump would still be allowed to enjoy a standard of living that is more than 17,666 times that of John Doe. While the wealthy individual pays more in taxes under a flat tax rate, the poorer person bears more of the burden of the tax. Alternatively, let's compare Mr. X, who makes $10,000 per year, with Mr. Y, who makes $1,000,000. A 50% flat rate on these individuals leaves X with only $5,000 per year, not enough to live on, while Y keeps $500,000 after taxes. Y can still live in luxury even with a high tax rate, whereas X cannot. Let's shift to a slightly more progressive scheme, where Mr. X pays a 5% rate and Mr. Y pays a 51% rate. Mr. X now pays just $500 in taxes and is left with enough to survive. Mr. Y now pays $510,000 in taxes, and is still left with $490,000 to live on, still a pretty good deal. Well, this progressive rate is fairer, insofar as it doesn't unjustly burden the poor, but also more efficient, insofar as it brings in more revenue. The revenue generated by this tax is $510,500 vs. $505,000 under a flat rate. So, this progressive tax would equalize the burden of taxation, so that neither the rich nor the poor are unfairly punished by taxes, and bring in an additional $5,500. This illustration is just dealing with two individuals. Spread over the entire populace, progressive taxation would bring in far more revenue while lessening the tax burden for most people without substantially increasing the burden on the wealthy.

A society run by conservatives, with a flat income tax rate, would actually make most people in society worse off. It would be harder for working class people to make due. In a society run by progressives, with a progressive tax scheme, the working class is left with more money and is left better off. Furthermore, it should be remembered that the increased revenue from progressive taxation in social democratic countries goes to programs that benefit everyone. Generally speaking, everyone in a social democratic society has free access to healthcare, paid vacation, and a retirement pension. This is why social democratic countries always rank highest in metrics related to human happiness. Social democracies take the top ten slots in the World Happiness Report. Coincidentally, social democracies also occupy the top ten slots on the Democracy Index, indicating that they are the most democratic countries in the world. They also rank highest in well-being, measured in terms of health and reported happiness.

Conservatism is not only the enemy of markets, but the enemy of working class people. Conservative policies wreck the economy and impoverish working class individuals. Social democracy, on the other hand, makes everyone in society better off. And, as I demonstrated in Social Democracy As An American Ideal, social democracy is what the American Founding Fathers envisioned for the United States.