Category Archives: Current events

Social Security = Ponzi Scheme

Social Security is an inter-generational Ponzi scheme predicated on the assumption that population demographics would remain in a pyramid shape; a large base of workers supporting a tiny apex of retirees (diffuse costs and concentrated benefits). The “baby-boom” generation changed all that: the pyramid now looks like the Washington Monument. In 1950 sixteen workers supported one retiree, today that ratio is a mere 3 to 1. By 2030 it will only be 2 to 1.*

The argument that Social Security is a Ponzi scheme is so common that the Social Security Administration actually has a webpage devoted to debunking this question. Let’s analyze their arguments and see where they get it wrong.

1) A Ponzi scheme must offer extravagant returns. WRONG: Although extravagant returns are typical (otherwise why invest!) they are not necessary for it to be fraudulent. The fraud is that funds are stolen. It is a form of theft by deception, with the underlying deceit (hook) being that reported returns are entirely fictitious because no investment has occurred. The returns aren’t real so their magnitude is irrelevant. The “return” could be 5% and it would still be a Ponzi scheme.

2) A geometric increase of new investors is needed to sustain a Ponzi scheme. WRONG: Or rather only correct if ALL the “returns” are paid in cash. But not all returns are paid in cash. If statements show satisfactory returns then a majority of investors leave their money alone. To cover withdrawal requests it is necessary to procure new investors at a rate proportionate to the ratio of investors withdrawing funds to investors leaving funds alone. That rate is not geometric if the ratio is < 1.

3) Social Security is described as a “pay-as-you-go” program wherein “money from later participants goes to pay the benefits of earlier participants” and that such programs have an inherent vulnerability to “demographic ups and down.” RIGHT: These statements describe attributes that are true for both systems, so I’m not sure how this is supposed to support their argument. Mathematically there is no difference between the two systems: to be sustainable money going out must equal money coming in. It would be more accurate to say the cash flow of a Ponzi scheme functions by employing a pay-as-you-go system. So, if both systems’ sustainability depends on an identical cash flow model then the two systems are functionally equivalent. In other words, a distinction without a difference is no difference.

These are the common characteristics of both systems:

1) Funds are not invested, merely collected by the perpetrator (government)

2) Excess deposited funds (trust fund) are stolen (“borrowed” by government)

3) Required new funds = (excess funds) – (stolen funds) – (funds paid out)

New funds must equal the funds paid out because any excess is pilfered. As long as those values are equivalent both systems are “sustainable.” The problem arises when one of those values changes and equilibrium cannot be restored. A Ponzi scheme could last for forever if the perpetrator had the ability to compel new investors to join. Social Security has endured for so long only because of the government’s ability to legally force more people to participate and extract ever-increasing sums from the participants. At least in a Ponzi scheme the “investors” are not coerced with violence. With Social Security we have no choice. This is very odd indeed. If Social Security is such a wonderful, successful and loved program why is it not optional? Why is participation forced on us at gunpoint?

Privatize Regulation and Relief

The mainstream media misunderstands the role of the federal government as outlined in the US Constitution. They routinely ask questions to the libertarian leaning Republican candidates (Ron Paul, Gary Johnson) that betray this ignorance. For example, of the seven questions MSNBC asked Ron Paul at the last debate (Sept 7, 2011) four of them focused on this.

The questions presuppose that we need the federal government to provide a cornucopia of services that (mistakenly believed) the private sector could not provide. The underlying accusation in these questions is that if you don’t think the government should do these things then you must think no one should do these things and you are clearly a heartless SOB. To highlight the lack of imagination the questioner (Brian Williams) actually suggested that if the government did not run air traffic control then the only alternative would be that pilots would be doing it themselves in their planes! If he had employed a little investigative journalism he would have easily discovered that Canada actually privatized their air traffic control system in 1996 and has consistently received higher marks than the antiquated government run US system.

In short, the answer to this question is that just because one doesn’t believe the government should be providing a particular service doesn’t mean it should not be done. There is NOTHING that the government does that the private sector can’t do better. Not because somehow the individuals in the private sector are somehow magically smarter and better people. Rather because the private sector is constantly receiving feedback through the profit/loss system. Companies that provide things their customers want receive money and stay in business, companies that don’t lose money and go out of business. What remains are those companies best suited to provide the service. Government has no such feedback; failure is simply an excuse to ask for more money since obviously the failure was entirely due to a lack of money.

For those that believe “some things are just too important to let the private sector run them” and that therefore government must run them, then ask yourselves this: Why doesn’t the government nationalize our food industry? Why aren’t all farms and food processing and distribution government run? Why isn’t food allocated “equally” to local government grocery stores with “fair” prices? Surely food, that product without which we would all die, is important enough that we couldn’t possibly trust the market to handle it? Yes, government does stick its nose into agriculture quite a bit but certainly nothing on the scale of a nationalized government run monopoly of food distribution. Yet somehow the market, with no central planner, is able to magically make food available to everyone in this country. So if we allow the market to handle food (the most important of all goods), why then are we not willing to allow the market to handle other goods, such as education? Retirement? Air traffic control? Health insurance? Product regulations?

But what about drug safety, surely we need the government to handle this? No, we don’t need a monopoly on drug safety. We need several “FDAs” competing with each other. Those that do a good job evaluating drug safety and efficacy will stay in business, and the ones that do a poor job (like the FDA that approved drugs that killed people, but for which they have no accountability) would go out of business. How would this work? We already have an existing model: Underwriters Laboratory. UL is a private organization that is not affiliated with any government. The UL inspired private regulation model is simple and works with any product or service. Here’s how:

Companies sell products. The products might cause harm so companies buy insurance. Insurance companies want to ensure against losses so they require companies be certified by a private certifying agency. If the certifying agency does a good job (preventing damaging products) they make money. The insurer is happy because they aren’t paying out claims. The company is happy because they aren’t getting sued. If the certifying agency does a poor job (allowing damaging products to be sold) then the insurer has to pay claims and the company is sued. That agency goes out of business because no one wants to use them anymore. The good agencies remain, the bad ones go away. It is a positive feedback loop of ever improving self-imposed regulations.

What about national disaster relief? Even easier – ever hear of the Red Cross? I think Ron Paul said it best – “What happened before 1979? We didn’t have FEMA.” Before 1979 did people just lay down and die because there was no federal aid? No, organizations like the Red Cross provided assistance as well as local groups that know their areas much better than the feds. FEMA has created a moral hazard that provides an incentive for people to not take responsibility for themselves (i.e. not buying flood insurance, building fancy homes on hurricane prone beaches, etc.). Private organizations like the Red Cross have a vested interest in seeing their efforts only go toward those that truly need help as they must answer to their donators. Donators don’t want to see their money wasted or swindled away as has happened with FEMA. Unhappy donators = no donations. FEMA answers to no one (or rather it answers only to a bloated government bureaucracy that can’t keep track of the waste, fraud and abuse).

We who believe in liberty of the individual are sympathetic towards our fellow man. We recognize the need for oversight of goods and services. We simply do not accept the proposition that government is the only way to provide such relief or oversight. We think it is the least efficient way to do so. The private market is more efficient due to inherent incentives that provide continuous positive feedback.

Math 101

Let’s do some simple math.

2011 Federal Budget: $3.8 Trillion

2011 Federal Revenue (est): $2.6 Trillion

so

$3.8 – $2.6 = $1.2 Trillion Deficit

100% of all personal income above $200,000 per year = $1.2 Trillion.

So there you go, I guess the President is right after all. The solution to our deficit problem is so simple: take ALL of the income of the “wealthy” above $200,000 per year (in addition to the taxes they already pay on the amount below $200,000 which would effectively be an 83% total (not marginal) tax rate).  I guess “fair share” or “shared burden” is code for “no one should make more than $200,000 per year”.

And just to disabuse anyone of the notion that corporations are where the real money is: the combined income of everyone making more than $200,000 per year exceeds the combined income of EVERY corporation in the country ($2 Trillion vs $1.2 Trillion – and no I’m not double counting, these are C-Corporations only). Indeed, the combined AGI of every US Citizen is $7.5 Trillion vs only $1.2 Trillion for every corporation. Why is individual income so much more than corporate income? Payroll is the single biggest expense for corporations. Median profit is only 5% of revenue whereas Payroll is 18%. That’s right, companies pay more to their workers in salaries than the company itself retains as profits.

So what is my point? Obviously I’m not actually advocating 83% absolute tax rates on the “wealthy” (hopefully I haven’t given the Democrats any ideas!) My point is that spending is the problem, not revenue. Even returning to the much-touted “Clinton era” tax rates would not even begin to make a dent in the federal deficit. The rate of increase in the federal budget from 1980-2000 was a consistent $60 billion/year, but starting in 2001 the rate of increase jumped to $150 billion/year and in 2009 jumped even further to $240 billion/year. Clearly Bush got us off course spending wise and Obama has made it that much worse.

If we were to return Federal spending to the 20 year trajectory it was on when we got off course in 2001 the Federal Budget for 2011 would be a “mere” $2.4 Trillion. That’s right, we’d actually be in surplus EVEN with the Bush tax cuts. For a detailed outline of how this could be achieved please see this Reason article. The Cliff notes version is this: no sacred cows, EVERYTHING (defense, social security, Medicare, entitlements, etc) must be cut.

All values obtained at: www.irs.gov/taxstats/ and are for the latest years with available data.

Productivity kills Jobs?

Recently Congressman Jesse Jackson Jr. (D-IL) remarked that Apple’s iPad was “probably responsible for eliminating thousands of American jobs.” Further, he tried to link it to the recent bankruptcy of Borders Books as well, quipping that “Why do you need to go to Borders anymore? …just buy an iPad and download your book…”

Wow.

Such an expression of sheer ignorance of basic economics is astounding. And from a sitting U.S. Congressman no less makes it all that much more sad and appalling. But I guess I shouldn’t be too hard on Jesse. This fallacy has been with us for a long time. Every time some new tool that enhances productivity (and thus lowers costs) is introduced it is decried as terrible because it will put so many out of work. The benefits (lower prices) are ignored. But after awhile the controversy dies down and we’re all much happier to be paying less for our robot built cars, our sewing machine made clothes and our machine harvested food.

So why does this myth persist? Well quite simply because it is true – people do of course lose their jobs – in the short term. However it is disingenuous to evaluate productivity gains over a narrow time frame and summarily conclude the outcome as negative because a few will lose jobs.  That’s like planting seeds and a day later noting that nothing has yet sprouted therefore the seeds must be worthless. Productivity gains take time to take root and spread their fruit of lower prices throughout the economy. As people spend less money on the newly cheaper goods they now have more money to spend on other goods. The increase in demand for these “other goods” drives job creation. Of course it does take time for people to retrain or to move to where the new jobs are, it doesn’t happen overnight. That’s why we have Unemployment Insurance. In the “big picture” there are no job losses, in fact there will be net job gains if the productivity enhancements are sufficiently large.

But some inevitably want to prevent the process from ever starting because of short term fears, thus they use the power of government to act as a break to these productivity gains. Government will either subsidize the outmoded industry or attempt to penalize the new entrant through punitive taxes or burdensome regulations. This only happens of course if the “harmed” industry has a sufficiently well funded lobbyist group. This explains why sugar is more than twice as much in the US than in all other countries (due to the trifecta of tariffs, quotas and subsidies) whereas typewriters have practically gone the way of the Dodo. Government meddling in the market simply makes the process take even longer (we’ve been waiting since 1812 in the case of sugar!) by eliminating most if not all of the cost savings achieved and thus the net additional jobs that could have been created.