The current credit crisis and ensuing economic contraction has had the distinction of swinging the world’s most unabashedly capitalist nation into a moment of introspection and self-doubt. As a result, new age Robin Hoods have sprung all over America. Admittedly, unbridled capitalism has its pitfalls but socialist programmes, while garnering political mileage, are seldom as effective as advertised.

You don’t have to be a rocket scientist to figure out that there is something fundamentally flawed with the healthcare system in the US. The looming deficit of the Medicare programme is not as much a case of misallocation of funds, as a case of funds mismanagement, among other issues.

To add some meat to the thought, the funds for the Medicare programme are obtained through payroll taxes and these funds are placed in trusts to fund future obligations. But these funds have already been drawn upon by other government departments to fund everything from war efforts to highway construction. The result is that these funds now end up holding IOUs from government entities, instead of real, liquid assets to fund future obligations.

To mitigate this deficit, the current administration has devised a plan which, among other things, recommends a tax surcharge on the rich—an idea that according to a recent NBC-Wall Street Journal poll is the only one that finds mass appeal. The unanimous endorsement, while understandable, given the smaller number of people who will be impacted by the surcharge, flies in the face of capitalism.

This arguably has grave economic impact as the ones getting taxed are the very people capable of creating jobs and investing capital towards economic activity.

Increased taxation undermines the competitive edge of a country.

Social causes with an eye on the ballot should be restrained. In a banal example of political irresponsibility, the US transportation secretary was quoted as saying on the Cash for Clunkers programme (which provides a $4,500 (Rs216,630) cash subsidy to anyone willing to trade in their old, gas-guzzling car for a new one): “People in America love to buy cars, and we’ve given them the incentive to do that. I think the last thing that any politician wants to do is cut off the opportunity for somebody who’s going to be able to get a rebate from the government to buy a new vehicle."

This is a classic example of the inane policies and the thought process that underlines some of the widespread populist social programmes that have sprung all over the world.

Surely the US, with 20% more vehicles than licensed drivers, can do without a rebate. If such handouts were in the education, rehabilitation or healthcare segments, at least they are defensible from a social standpoint but not because Joe six-pack wants a lifestyle upgrade.

The socialist roots of India’s current administration are well known. We have in prior articles disputed the efficacy of oil subsidies, funds mismanagement for which is hardly a whodunit but more of a howdunit, but other feel-good social programmes such as farmer subsidies are also fundamentally flawed. Public sector banks providing subsidized loans to farmers, and then at the behest of the government, writing these off is hardly justifiable.

The Indian farmer is a prime example of what ails socialist policies. Over the years, while vast sums of money have been dedicated to the uplift of the farmer, the farmer’s plight hasn’t changed. Instead of a handout, if there were a focus to remedy the inefficiencies of the supply chain, which is infested with middlemen, the farmer would be better off. These half-baked social initiatives just make for great headlines and voter turnout, at the same time saddling the country with ever-increasing deficits.

Examples of populist socialism are all over the world and not all of them are utter failures. For instance, in Brazil and Mexico, from time immemorial, there have been initiatives in some shape and form towards providing housing for the low-income segments. The current initiative is directed by government agencies which are funded through employer contributions, much like the public provident fund in India.

The housing account, as it is referred to, is mandatory for any formally employed person, and serves as collateral against the mortgage. Monthly payments are deducted through payroll and indexed to inflation, as is the wage. This system has actually seen tremendous success with surprisingly low non-performing loans.

The programme, at least in Mexico, seems flawless with the right balance between capitalism and socialism. It has led to the development of a profitable homebuilding industry, which also has an economic multiplier effect with the sector creating jobs and economic activity throughout the supply chain.

Having extolled these programmes, both the countries have in the past seen housing entities fail rather spectacularly, albeit in conjunction with broader economic turmoil, saddling their governments with looming deficits.

The tug of war between capitalists and socialists is only just about intensifying. The merits and demerits of both philosophies are up to debate. We remain free-market loyalists with little faith in the ability of democratic regimes that acquire a taste for populist, social causes.

Rajeshree Varangaonkar and Bharat Indurkar have day jobs with US-based hedge funds. They write every other Thursday. Send your comments to