Why I am not feeling the Bern

The 2016 presidential campaign has been full of surprises. Among the greatest is the support Democratic Socialist Bernie Sanders has garnered. Senator Sanders believes America must abandon one of its ideological pillars—capitalism—to redress social and economic inequities. His vision has proven compelling for many. It is also dangerous and wrong.

Senator Sanders’ concerns are not without reason. Over the past several decades, the United States’ substantial economic gains have indeed been matched by large increases in income inequality. The main force driving this change has been a consistent increase, since the 1970s, in the skill premium: the difference between the wages of skilled and unskilled workers.

The reason for this development is a simple story of supply and demand. For the past two centuries, America’s rapid economic growth has constantly increased demand for skilled labor. Why? Innovation and the expansion of markets increase the quantity and sophistication of an economy’s technology, thereby requiring increasingly skilled workers. With sufficient investment in human capital—the quality of an economy’s labor force as determined by factors such as IQ, education, creativity—the supply of skilled labor can match the increases in demand and keep skill premiums in check.

Over the past 30 years, however, the supply of skilled labor has failed to keep pace with demand. Therefore, firms compete over a scarce amount of skilled workers offering enormous salaries to attract them and having them work longer hours (just ask your friends in investment banking). On the other hand, many unskilled workers struggle to find jobs in a low-wage environment—further depressed by globalization and automation—and can often only find part-time employment. The solution is clear: by increasing our human capital—thereby increasing the supply of skilled workers and decreasing the supply of unskilled workers—we could decrease the skill premium and address the problem of inequality at its root.

In contrast to this impersonal reality, Bernie Sanders paints a picture that is far more sinister. The wealthy have unscrupulously robbed the middle and lower classes of our country in what he calls the reversed Robin Hood principle. Working within this divisive framework, Sanders has proposed a series of redistributive policies that ultimately treat the symptoms rather than the sources of inequality. Making public universities tuition-free, one of his few policies that "prima-facie" provides a positive shock to human capital, is unlikely to reduce the skill premium. The reason is that today’s lack of skilled workers is not due to an insufficient amount of people attending university. Indeed, the fraction of people attending college has increased in proportion to the wage premium for a college education. Instead, many students simply aren’t getting enough out of their college education. One reason might be that they are underprepared. For example, while a greater percentage of people are attending university, there hasn’t been any significant increase in the amount who complete their education. A better solution, then, would be to spend more on improving the factors that affect the earlier foundations of an individual’s human capital development such as K-12 education. Further, many people simply aren’t meant for the academic path. Rather than attempting to make college more attractive, we should incentivize and develop other programs that help fill specific skill gaps in the labor market.

Bernie Sanders’ policies are not simply ineffective; they are also reckless. He wants to implement protectionist policies that would make Jean-Baptiste Colbert proud. For example, Sanders wants to reverse certain free trade agreements in order to protect American jobs. While this may provide a short-run boost to employment, there is strong consensus in economics—something of a rarity—that openness to trade is highly linked with growth. Sanders ignores many other inconvenient truths, as well. For example, his proposal to tax U.S. corporations and impose restrictions that make them fulfill their “patriotic duty” may sound desirable. Unfortunately, his tax plan would simply make corporations move even more of their operations to more welcoming jurisdictions, like Ireland, taking thousands of U.S. jobs and billions of capital with them.

Sanders’ denunciation of individual and corporate America’s greed does not change the fact that the most successful policies and institutions are those that respond to the reality of human nature, not some idealized conception of it. Free markets and property rights have produced prosperity precisely because they harness, rather than attempt to suppress, basic human impulses, such as the innate desire to improve one’s condition. By linking prestige and material rewards, both of which humans covet by nature, to the importance one plays in the provision of a good or service, markets incentivize individuals to maximize the impact they can have on societal utility. Decreasing these rewards, as Bernie Sanders proposes, reduces the incentive to engage in productive activity or pursue the risky entrepreneurial activities that drive economic growth.

Before attempting to impose Scandinavian solutions on an economy and population that is more than 80 times larger and infinitely more complex, Senator Sanders would also do well to understand the challenges those countries now face. The strength of the Swedish economy today rests primarily on the foundations it developed from the 1860s to the mid 20th century, when a high degree of economic freedom led to the creation of some of its greatest companies such as IKEA and Volvo. Lars Christensen, a Danish economist, today acknowledges the trade-off between growth and equality that exists even in a country of 5.6 million people.