Capitalism vs. Socialism

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The USA Today continues to show that it has some of the best economic journalists in the business. Yesterday, it was with a story showing that wages coming from the private sector have not kept up with income coming from government. And that this government redistribution has soared to a record. It's a trend that no other newspaper has noticed and it cannot be sustained. Read the story here.

The story got us thinking: How does the income from American capitalism compare to that from American socialism? We crunched the data in the first chart above. It shows that for the first time in history, redistribution from government (welfare, social security, Medicare, food stamps, unemployment benefits, etc.) has climbed above income from assets (rent, interest and dividends).

In the first quarter of 2010, government redistribution to individuals accounted for 17.9% of all personal income. Investment income made up just 17%. In other words, socialism has become a larger source of dollars to Americans than investment earnings from assets, like stocks, bonds, property, and bank deposits.

If we add proprietor's income (income from small businesses, including farms) – to the income from interest, dividends and rent, we get a total income from investment and entrepreneurship of 25.7% of total personal income. This is exactly equal to its average over the past 50 years.

What this means is that as a source of income, government redistribution is now equal to 69.5% of entrepreneurial income, well above the 50-year average of 43% and triple the 23% level of 1960. We understand that the recession boosted the level government spending and with a 9.9% unemployment rate, the demand for government help is off the charts.

However, every dollar the government redistributes through income transfers must come from the private sector. Government tax revenues are generated by private economic activity. The government may think that it generates wealth, but it doesn't. Government roads don't make profits, it's the companies and the people who use them to serve their fellow man that earn profits. And it is those profits that fund the government.

The amazing thing about our current economy is that it is growing despite this unbelievable burden from government. Productivity is soaring, profits are booming and economic growth is rising. In the short-run, this growth will continue, especially with the Fed holding rates at zero. In the longer-term, the economy will pay a price. Redistribution leads to higher inflation, more long-term unemployment and less entrepreneurial zeal. But these are long-term costs. In the short-term the economy still looks strong.

Posted on Wednesday, May 26, 2010 @ 10:47 AM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.