May 19, 2024

Promises That Cannot Be Kept

Did Bernard Madoff run the biggest Ponzi scheme of all time, or does this honor actually belong to the US Government?

Is Social Security A Ponzi Scheme?

In the aftermath of the Madoff implosion, quite a few people have pointed out the parallels between a Ponzi scheme and Social Security. Arnold Kling, whom I respect, has written:

I’ve been thinking that Madoff is a perfect analogy for the public sector. The government gives people money, which it expects to obtain by taking the money from people in the future. Even the Center on Budget Policy and Priorities, not known as a right-wing organization, sees the U.S. fiscal stance as unsustainable (pointer from Ezra Klein via Tyler Cowen)—in other words, a Ponzi scheme.

Other people have gone farther. Paul Mulshine of the New Jersey Star Ledger wrote a column entitled “The Ponzi scheme that Baby Boomers are waiting to cash in on.” And Jim Cramer has called Social Security the biggest Ponzi scheme in history.

The article above discussed only social security and not the other two financial time bombs – medicare and medicaid.  The net present value future cost of these three programs is estimated at $52 trillion, a burden that we have thrown on future generations who may be unwilling or unable to pay.

Wages have been stagnant for a decade.  Politicians are afraid to raise taxes and voters don’t want to pay so the easy solution is to borrow the money and add more debt, a self defeating cycle.   Promises and free lunches are great ways to get elected but governments only redistribute wealth.   Without the ability to tax the productive capacity of its country’s labor force, a government would have no fiscal capacity.

Debts do matter, of course, it’s just common sense.  Merely because a governmental entity has taken on the debt in the name of the taxpayer does not mean we can get a free lunch.  Ultimately we fool ourselves to believe that debt obligations are not a problem –  the world learned this in 2008.   The government can promise all of us everything and we can keep electing the fools who say what we want to hear, but ultimately someone has to pay for the promises or they will not be kept.