Social Democracy: How Bernie Sanders’ Dream Turns into a Nightmare

By Samuel Gregg Published on May 25, 2016

When some Americans describe themselves as “socialists,” not all of them have in mind the command economies that laid waste to the former USSR and Eastern Europe, or even the disaster presently unfolding in Venezuela. Despite the increasing absence of serious history from the average American classroom, the economic destruction inflicted by these versions of socialism is somewhat well-known — even if many on the political left are disinclined to acknowledge these facts.

Many Americans favorably disposed towards socialism are thinking of some version of social democracy of the type that exists, to varying degrees, in some Western European countries. That seems, for instance, to be Senator Bernie Sanders’ vision. These societies have market economies, but they are highly-regulated, deeply permeated by endless government interventions, and overlain with large welfare states. Unfortunately for American social democrats, the briefest of surveys of European social democracy’s history illustrates how these policies invariably induce the type of slow-motion decline that’s turned much of today’s European Union into the sick man of the global economy.

Once Marxists, Now Establishment

 Though rarely mentioned today, continental European social democracy’s roots primarily lie in Marxism. In 1891, for example, the German Social Democrat Party (Sozialdemokratische Partei Deutschlands, or SPD) embraced what was called the Erfurt Program. Drafted by Marxist theoreticians such as Karl Kautsky, many of Erfurt’s tenets were subsequently adopted by other European socialist parties.

Erfurt’s two most prominent claims were the Marxist assertions that

  1. All societies were characterized by a class-struggle; and
  2. The proletariat’s control of the means of production would eventually come about through an “inevitable” revolution.

Though Erfurt didn’t rule out the party seizing power (as Lenin would in Russia 25 years later), it did commit the SPD to pursuing the betterment of workers’ lives through participation in existing institutions and progressively implementing social legislation and welfare policies.

Over time, more and more Western European socialists opted for this “evolutionary” path. The shift was also precipitated by the fact that some Western European social democratic parties suddenly had to assume political office in very difficult conditions.

The SPD, for instance, was unexpectedly propelled into government following the fall of Germany’s Hohenzollern dynasty in November 1918. Its leaders thus had to negotiate an end to the war and return the economy to a peacetime footing. Almost immediately, SPD government ministers were pressured by middle-class centrists, liberals, Catholics, and national-conservatives to face down their erstwhile comrades on the extreme left who wanted immediate revolutionary transformation. The responsibilities of office consequently meant that SPD leaders backtracked from the implications of their ideological commitments and started behaving more like middle-class politicians inclined towards compromise.

Another element driving the shift towards less-revolutionary positions was some socialist parties’ relative success in establishing a number of welfare state measures. In France, for example, the “Popular Front” (which drew support ranging from the moderate left to the Communists) came to power in 1936 and implemented what was called the Matignon Accords. This resulted in labor laws which established collective bargaining and required businesses to negotiate with trade union officials. It also mandated a 40-hour work week, two weeks of paid leave, and raised wages.

In the decades following World War II, social democratic parties continued cementing themselves and their ideas into the political landscape. In 1945, for example, Austria’s Social Democrats entered a grand coalition with the center-right People’s Party. By the late 1950s, most Western European social democrat parties were engaged in tactical alliances with centrist, moderate center-right, and Christian Democrat parties. Some, such as Sweden’s Social Democrats, even governed in their own right for long periods. The most illustrative symbol of these changes was the West German SPD’s adoption of its 1959 Godesberg Program which formally rejected Marxist theory.

Socialism as a Cocoon

If one was to describe the European social democratic project today, it might be summarized as enveloping citizens from birth to death in a web of protections and benefits that seek to shield people from life’s uncertainties, especially the turmoil often associated with market economies.

This translates into things like government-provided healthcare, state-funded public education, extensive labor market regulation, and generous welfare for the poor, disabled, and elderly. All this is provided and managed by a government and large public sector that also seeks to smooth the economy’s ups-and-downs through tools such as deficit-spending and targeted subsidies. Amidst these arrangements, private property and market-mechanisms such as free exchange are maintained in place, albeit with considerable restrictions.

It’s easy to see why social democratic policies took root in Western Europe. Given the horrors of World War II and the opprobrium attached to “capitalism” (which not just the left but also many on the right and even some Catholic and Protestant conservatives blamed for the continent’s problems), the case for free markets was always going to be a hard sell in postwar Western Europe. Many, including some Christian Democrats, also saw social democratic policies as a means of reducing support for Western European Communist parties — which, we shouldn’t forget, regularly received 25 percent or more of the vote in countries like France and Italy until the late 1980s.

The difficulty, however, with social democrat policies is that they contain several political and economic time-bombs. These become harder and harder to defuse as time passes.

The Socialist Straitjacket Keeps Getting Tighter

The first cost is, ironically enough, a breakdown in solidarity. As observed by the German free market economist and intellectual architect of West Germany’s postwar economic miracle, Wilhelm Röpke, the claim that “the nation pays” disguises the economic reality that when it comes to welfare benefits “we are really asking all our neighbors, and often very rudely, to pay and give us a bit more.” Over time, it becomes harder to tell who’s giving and who’s receiving. In 2009, one German academic described this as having produced a situation which he likened to “fiscal kleptocracy” throughout the EU.

A second cost of social democracy is a steady dulling of productivity and competitiveness. Growth rates in West European economies have been slowing down since the early 1970s. Social democratic policies aren’t the only cause of this, but to the extent they reduce labor force participation, such policies encourage perfectly able and economically productive people to stop working before they need or even want to.

In 2010, for example, French employees worked an average of 620 hours a year, compared to 870 in America. This gave America an edge in globalized competition over France. Productivity and growth-rates are also negatively affected by the higher costs associated with the extensive labor market regulation throughout Western Europe that prioritizes job security. This undermines businesses’ ability to adapt quickly to change.

A third cost of social democratic policies are the obstacles they create to reform. If governments choose to address the problem of rising social security costs and below replacement level population growth by raising taxes, they effectively suck more capital out of the economy’s wealth-producing sectors. This progressively weakens the economy’s ability to sustain high government expenditures. On the other hand, the main alternative to raising taxes — cutting welfare spending — may swing a sufficient number of a reformist government’s supporters to opposition parties who, in order to get elected, will promise to maintain welfare spending at pre-reform levels.

To these three problems, one could add the fact that social democratic policies require high taxes. While economists disagree about when high taxes start undercutting competitiveness and productivity, few deny that, at some point, they will have these effects. That creates a vicious cycle in which governments raise taxes to cover diminishing revenues, which further undermines productivity and competitiveness.

No Way Out

The longer social democratic policies are in place, the greater the number of people who look to the state for their economic well being instead of working in the private sector or starting a business. Here’s where the “democratic” part of social democracy kicks in. Once enough people are reliant in some way on social democratic policies for some or most of their income, they can start outvoting those who rely on the private sector. So while social democratic policies are light-years away from Stalinist command economies, they do induce the type of gradual economic deterioration that’s difficult to detect, save from the standpoint of decades, which isn’t exactly the perspective of your average voter in modern democracies.

In that regard, perhaps the most disturbing thing about many Americans’ embrace of the social democratic variant of socialism today is less that it amounts to a call for radical change but rather that it represents a desire to further what many know to be an unsustainable status quo through democratic means. And that is very bad news for a society like the United States which purports to take liberty and responsibility seriously.

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