Saturday, September 10, 2011

Rick Perry and Ponzi Schemes

Ooops. That was a tactical blunder the other night by Governor Rick Perry to call Social Security a "Ponzi scheme." Even when given the chance in the debate to walk back his mischaracterization, he refused to do it. I was anxious to see him perform for the first time, hoping he would add some firepower to the mix, but I came away disappointed.

Romney clearly outclassed him, when he even defended Perry over his decision to mandate by executive order cervical infection inoculations for young women in Texas instead of going to the state legislature first, he appeared more presidential than ever. "I'm certain we all would do things differently if given a do-over or a mulligan," quipped Romney.

Classy. I wonder how many Americans were having some buyer's remorse the other night, thinking what might have been in 2008, if the country had rejected Obama and chosen Romney instead.

But Perry really stepped into it badly in answer to his comment about the Ponzi scheme being likened to Social Security.

Charles Ponzi
Let's begin with the basics on what a Ponzi scheme really is, because I've been asked this question several times this week. The name of the scheme was first attributed to a man named Charles Ponzi. As defined by Wikipedia, a Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going. Eventually what happens is the house of cards is toppled when more money is being paid out than is coming in. The fraudulent schemes have been perpetuated, and many examples can be cited here in Utah and elsewhere.

The Simpson-Bowles committee tasked with studying America's debt and deficit problem a few years ago coined the phrase that Social Security was a Ponzi scheme and the moniker has stuck. Alan Simpson, customarily verbose and outspoken has referred to what Social Security is currently doing as running a Ponzi scheme, so Governor Perry is merely repeating what he's heard. It's guaranteed to set off a fire storm of denial and attempts to re-explain later, but the cat's out of the bag now that the words have come out of the mouth of a presidential candidate. Here's the way Simpson characterized Social Security in his Congressional testimony:

So is it really a Ponzi scheme? Not really, because there is no fraud involved. You can argue the trust fund has been mismanaged, since the assets were long ago raided to satisfy the general fund of the U.S. Government, but it has always been a system where it has taken in more than enough to handle payouts to subsequent recipients. Cutting spending is a splendid idea, and we must certainly do that, but growing the economy through pro-growth policies will do far more than drastic cuts.

Social Security is comprised of people who funded it and counted on collecting the benefit in their retirement years. I filed for benefits the first day I was eligible on my 62nd birthday, and like clockwork my monthly check shows up in my bank account. That's hardly fraud.

I am not alone, because I know many in my baby boomer category who are receiving exactly what they expected based upon their work history to qualify for the income supplement promised. The promise of future safety is being realized every day. The problem isn't what is happening today, it's what the demographic studies and the projected revenue confirms what will happen in the near future years unless something is done to amend the funding assumptions.

These facts don't rise to the accusations of being a “fraudulent scheme.” It's not even as bad as Professor Harold Hill's scheme to sell band instruments and uniforms in Gary, Indiana and then skip town. That was attempted fraud until a sweet Marian librarian straightened him out, but Social Security is just an entitlement program badly in need of revision. And the revision choices are not that difficult. Governor Perry is right to warn the younger generation that unless it is modified they will not be able to collect. That should be obvious. But the hyperbole has to stop. It might play well in Texas, but it isn't presidential and not worthy of the eventual Republican nominee.

The threat from President Obama to withhold Social Security payments in August unless he got a debt and deficit deal was even less presidential. Leaders must lead or be replaced at the ballot box. Obama is coming under increasing scrutiny after Thursday's jobs speech, many of his base completely disheartened now about his re-election prospects.

The assumptions about demographics, productivity, and economic growth will need to be revisited so they can either be sustained for future benefits to its future recipients, or lacking the political will to amend it just be allowed to expire.

As I've studied it in more depth this last year, I have become convinced it can be repaired rather easily. It will require some combination of benefit cuts and tax rate hikes in order to reduce the spending or to increase the  revenue being paid in; or we will have to witness a growth in the numbers in the workforce and in their individual and collective productivity to dramatically step up the revenue side and avoid increasing tax rates. Thomas Sowell weighed in on the debate too.

Historically, we could almost with certainty predict self-funding because of the predictable growth in productivity, the number of workers and the overall macroeconomic benefit of skilled workers producing more widgets with ever-increasing efficiency. This latest long-lasting recession has blown all those growth assumptions right off their hinges.

I still remain hopeful that if the correct growth policies are still put in place that favor expansion, lower taxes, some certainty about the role of government regulatory practices being put in place in the upcoming election of 2012, these stagnating and stubborn economic problems can be resolved. It will take growth beyond all the proposed cutting to lift us out of this quagmire we are in.

If ever there were a time in human history when false ideas were more prevalent than they are today, I do not know when it might be. The Obama administration's bold Keynesian experiment as painful to watch and feel as it has been, is now on life support and dying quickly. In his attempts to put into practice the bold and false theoretical agenda of Keynes, my hope is that at last reason will prevail and we will re-emerge from this tragic period and forever bury the false ideas of Keynesian philosophy once and for all. I never imagined in my lifetime we would ever seen another attempt to resurrect it the way we have under Obama. November 2012 cannot come soon enough.

Friedrich Hayek
Here's a favorite quote from Friedrich Hayek, summarizing the false theoretical ideas of Keynesian economics:

"[John Maynard] Keynes' disciples were shocked when, long after his death, it became known that he had, in a private letter, said of my book, The Road To Serfdom, that morally and philosophically he found himself in agreement with virtually the whole of it -- and, not only in agreement, but in deeply moved agreement. . . [However] He qualified his approval by the curious belief that dangerous acts can be done safely in a country that thinks rightly -- which [Hayek asserted] could be the way to hell if they were executed by those who feel wrongly." (Emphasis mine).

All of which is to underscore the point. Cut, Cap and Balance is imperative in some acceptable combination, but all of it is only a good first step. What is needed is sustained and predictable growth like the 59-point proposal Mitt Romney has put forward for review and scrutiny in the buildup to the election. His leadership is welcome, and so is the plan put forward by Jon Huntsman, hailed by The Wall Street Journal as the best they've seen to date. Take your pick -- either one works for me, because both contain the kind of pro economic growth policies sadly lacking in President Obama's Keynesian administration.

John Maynard Keynes
If you pressed Obama to the wall, he would undoubtedly stand by this statement from John Maynard Keynes in 1933: "The decadent international but individualistic capitalism, in the hands of which we found ourselves after the War, is not a success. It is not intelligent; it is not beautiful; it is not just; it is not virtuous - and it does not deliver the goods. In short we dislike it - and are beginning to despise it." So beginning with Social Security in 1937, the course was set toward government being the end-all, be-all for everyone and everything. 

Until 2010, we continued down the path of more and more government intervention into our lives. That's when Americans finally awakened to their terrible plight, and in an historic mid-term election stripped Obama of his majority in the House and sent Nancy Pelosi to the back bench. 

Thanks very much for proving the case, Mr. Obama. America will take Hayek's private enterprise growth engine now that you have almost single-handedly discredited Keynesian philosophy and economic theory. The State must be toppled, and we as Americans will do it at the ballot box in November 2012, without a single shot being fired in the revolution. Individual freedom is on the rise once again.

That way, we'll be able to tamp down the hyperbole about Social Security, Medicare and Medicaid, and get on with the serious business putting America back on the map economically.

We have stared over the edge into the Keynesian abyss, and we didn't like the view.


  1. "As I've studied it in more depth this last year, I have become convinced it can be repaired rather EASILY. It will require some combination of benefit cuts and tax rate hikes ..."

    You've got to be kidding about that. That's the 3rd rail. Obama is proposing just the opposite. Talk benefit cuts and you get seniors scared and the almighty AARP bombarding America and Congress with its spin. Talk tax rate hikes and you might just have a worker's revolt, not to mention the threat of real opposition from business, especially SMB.

    They are definitely going to need to raise the age of eligibility. Or perhaps have benefits graded, i.e. 100% once a certain age is reached, less before that. I was thinking of kicking in an income / ability-to-work test to get full benefits earlier. The problem with that is the added complexity (leading to more bueracracy) and fraud, which would probably be massive as indicated by Medicare / Medicaid. Sigh, its complicated.

    I think it'd be worthwhile to revisit the original intent of SS as Simpson implicitly suggests. The wide-eyed idealsit in me thinks that might help the American people alter their expectations. The realist knows otherwise.

    How does productivity help with SS? If we do more with less, how does that help increase SS revenue or cut its cost?

    We cannot just yank out SS, and it definitely needs rethinking, including the options of (very gradual) phase-out, a replacement system, or some hybrid. But to focus too much on it at this time is a distraction that our country can't afford.

  2. Well, okay, it's complicated, sigh. . . I agree. My thought on productivity affecting the SS solution is more workers in the workforce but that trend is down. China is suffering right now because of their one-child policy coming up with enough workers to do even the most menial tasks in their factories. No doubt about having to raise the eligibility age, and some reduction in benefits for subsequent generations. Nobody's going to take on the seniors already dependent upon SS.

  3. Charles Krauthammer to the rescue (Washington Post yesterday):

    "Three easy steps: Change the cost-of-living measure, means test for richer recipients and, most important, raise the retirement age. The current retirement age is an absurd anachronism. Bismarck arbitrarily chose 70 when he created social insurance in 1889. Clever guy: Life expectancy at the time was under 50.

    "When Franklin Roosevelt created Social Security, choosing 65 as the eligibility age, life expectancy was 62. Today it is almost 80. FDR wanted to prevent the aged few from suffering destitution in their last remaining years. Social Security was not meant to provide two decades of greens fees for baby boomers.

    "Of course it's a Ponzi scheme. So what? It's also the most vital, humane and fixable of all social programs. The question for the candidates is: Forget Ponzi — are you going to fix Social Security?

    and there you have it, simplicity, right?

  4. Yes, that's sounds sensible. I don't know the particulars of the COLA, I'll take his word for it that it needs fixing. Means testing, I wonder what AARP will say to that. What do WE who generally oppose socialism say to that? I suppose if you look at SS as an insurance plan, it takes the redistribution of wealth angle off.

    Another thing to look at is the salary cap, where there's no SS tax on any wages over $107,000 or something like that.

    Obviously, I don't know much about SS, other than we pay a helluva lot into it and wonder if any of it will ever come back to us younguns.