Of Ponzi Schemes And Social Security

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According to Politifact, the candidates’ statements at yesterday’s Tea Party/CNN sponsored Republican Presidential debate contained a surprising number of inaccuracies (even given the low expectations most people have of such events). But perhaps the most egregious, in my view, is Rick Perry’s claim that Social Security is a “Ponzi scheme”. Politifact rates this claim as simply false. Here’s why-

So how valid is the comparison?

Mitchell Zuckoff, a Boston University journalism professor who has written a book on Ponzi, noted three critical dissimilarities between Social Security and a Ponzi scheme, which by definition is both fraudulent and unsustainable.

“First, in the case of Social Security, no one is being misled,” Zuckoff wrote in a January 2009 article in Fortune. “…Social Security is exactly what it claims to be: A mandatory transfer payment system under which current workers are taxed on their incomes to pay benefits, with no promises of huge returns.”

Second, he wrote, “A Ponzi scheme is unsustainable because the number of potential investors is eventually exhausted. That’s when the last people to participate are out of luck; the music stops and there’s nowhere to sit. It’s true that Social Security faces a huge burden — and a significant, long-term financing problem — in light of retiring Baby Boomers. … But Social Security can be, and has been, tweaked and modified to reflect changes in the size of the taxpaying workforce and the number of beneficiaries. It would take great political will, but the government could change benefit formulas or take other steps, like increasing taxes, to keep the system from failing.”

Third, Zuckoff wrote, “Social Security is morally the polar opposite of a Ponzi scheme… At the height of the Great Depression, our society (see “Social”) resolved to create a safety net (see “Security”) in the form of a social insurance policy that would pay modest benefits to retirees, the disabled and the survivors of deceased workers. By design, that means a certain amount of wealth transfer, with richer workers subsidizing poorer ones. That might rankle, but it’s not fraud… None of this is to suggest that Social Security is a perfect system or that there aren’t sizeable problems facing the incoming administration and Congress. But it’s not a Ponzi scheme. And Ponzi himself, who died in a hospital charity ward with only enough money for his burial, would never have recognized it as his own.”

We agree with Zuckoff’s interpretation. We rated Perry’s November 2010 comparison of Social Security and Ponzi schemes False, and we stand by that ruling. The comparison still deserves a rating of False.

Putting aside the Ponzi scheme charge, the fact that Social Security could be saved in perpetuity simply by raising the cap on the amount of wages subject to the payroll tax (currently set at $106,800), along with a modest, phased in increase of a year or two in the age at which one can receive full benefits, puts the lie to the often-heard claim that young people should not believe that benefits will be available to them. The simple truth is that such an outcome is likely to occur only if young people come to believe the claim and act to end the program, making it a self-fulfilling prophecy.

There may be principled grounds on which to be against Social Security, but basing opposition to the program on the fantasy that it cannot be saved is not one of them.

The Funny Side of Class Warfare

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Thanks to Warren Buffett’s editorial in the New York Times last Sunday, entitled “Stop Coddling the Super-Rich”, there has been more publicity this week on the growing wealth inequality in the USA than I can remember in ages. Of course, Fox News regards any discussion of the issue as class warfare. And who better to bring out the funny side of class warfare than Jon Stewart-

And here is part II-

Paul Solmon: Land Of The Free, Home Of The Poor

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This week Paul Solmon has had an interesting series of reports on the ever-growing inequality of wealth in our country. Here’s the first of them; I highly recommend the whole series-

Watch the full episode. See more PBS NewsHour.

In case you might want to meditate on those pie charts, here they are-

Equal Wealth Distribution (Exists Nowhere)

Sweden's Wealth Distribution

USA's Wealth Distribution

No, you don’t need glasses. That last pie chart really does illustrate data showing that the bottom 40% of the USA’s population controls just .3% of the wealth. Keep that in mind as you evaluate the positions of the political candidates running in 2012.

All The Way From China

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A few days ago, I bought a cute little recharging dock for my iPhone. It cost $29.00; the shipping came to $4.00. Here’s an image of it-

A few hours after completing the transaction, I received an email from Apple telling me that my dock was on its way, along with a tracking number. Out of curiosity, I clicked on the number and discovered that the unit had been placed on a flight out of a little town near Hong Kong, and that I would have it in a few days.

This got me thinking about the global economy. You’d think that it would be worthwhile for Apple to locate a factory in, say, Tennessee, and make such relatively low-tech doodads there. After all, they clearly don’t require a lot of labor to produce. At the very least, you’d think it would be worthwhile to stockpile a few thousand of these things in a warehouse at some central location – maybe Topeka, KS – and ship them to U.S. customers out of there. But no, it turns out that it’s cheaper to make these things in China and ship them to lone customers such as myself literally halfway around the world.

Wasn’t it Groucho who said that “If capital is international, so must be labor”? Or was it that other Marx brother?

The High Cost Of Drugs

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No reasonable person would begrudge pharmaceutical companies a fair return on their investment in research, development, and distribution of life-prolonging drugs. But when these companies jointly start raising prices on competing drugs just because they can, serious ethical and political issues are raised. The New York Times reports

A group of new drugs is promising to prolong the lives and relieve the symptoms of men with advanced prostate cancer, but could also add billions of dollars to the nation’s medical bills.

“What a great time it is in prostate cancer,” Dr. Daniel J. George of the Duke Cancer Institute proclaimed earlier this month at the annual meeting of the American Society of Clinical Oncology.

And it’s a great time for the drug makers, with several drugs competing to fill a niche for longer-term survival. Analysts estimate that some of the new drugs, particularly Dendreon’s Provenge and Johnson & Johnson’s Zytiga, could reach annual sales of $1 billion or even much more.

The recently approved drugs and most of those in development are for cases in which the disease has spread beyond the prostate gland and is no longer held in check by hormone therapy.

Men with that late-stage cancer had a median survival of about a year and a half using docetaxel. The new drugs each added two to five months to median survival when tested in clinical trials. Doctors say that men taking more than one of the drugs in succession would be expected to live more than two years.

But the price of these drugs has already stirred concerns about the costs of care among patients, providers and insurers. For example, Provenge costs $93,000 for a course of treatment, while Zytiga costs about $5,000 a month. Another of the new drugs, Sanofi’s Jevtana, costs about $8,000 every three weeks.

With other pricey drugs on the way, said Joel Sendek, an analyst at Lazard, “We could be talking easily $500,000 per patient or more over the course of therapy, which I don’t think the system can afford, especially since 80 percent of the patients are on Medicare.”

Still, for now, one company’s price is prompting the next one to follow suit.

“The pricing environment is encouraging and getting better for us,” Andrew Kay, the chief executive of Algeta, told securities analysts earlier this month, after announcing that his company’s experimental drug had extended median survival nearly three months in a clinical trial.

Mr. Kay said he had initially thought that his company, which is based in Norway, would charge about $25,000 for a typical course of treatment with the drug, Alpharadin. But with the rival drug Jevtana costing about $50,000, Algeta and its partner, Bayer, are considering a higher price

Who’s Got How Much?

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I’ve been calculating just how big a hit my paycheck is about to take thanks to Governor Walker’s decision to balance the Wisconsin State budget largely on the backs of public workers (including teachers and university professors), the poor (via medicaid and “badgercare” cuts), and school children (who will undoubtedly see the quality of their educations diminish). As it turns out, I’m going to be taking home significantly less, especially for the next couple of months when the cuts are combined with so-called “furlough days” (days off without pay, but not days off from teaching; a sort of catch-22 that renders them simple pay cuts for educators). The bottom line is that I think I’ll be netting around 10% less. I’ll update that figure once I see the actual damages.

Like most citizens, I’m willing to make financial sacrifices for the common good. But in the last few days I’ve heard a couple of statements suggesting that balancing the budget entirely on the backs of people like me (and those significantly less well-off) might not be, well, the fairest policy in the world. They are the following:

(1) In 2007, “the top 1 percent of all income earners in the United States made 23.5 percent of all income,” which is “more than the entire bottom 50 percent.” (Vermont Senator Bernie Sanders in a Senate floor speech on Tuesday, November 30th, 2010).

(2) “Just 400 Americans — 400 — have more wealth than half of all Americans combined.” (Michael Moore in a speech to protesters in Madison, Wisconsin, on Saturday, March 5th, 2011)

Being skeptical by nature, and being fully aware that both Sanders and Moore are piñatas for the right wing pundits, I wanted to make sure that these statements were accurate before further publicizing them here. The most reliable site I’ve found on the web for vetting statements like these is Politifact. And, according to Politifact, both (1) and (2) are, indeed, TRUE.

I don’t know how many of those fortunate few live in Wisconsin, although my guess is that at least a few of the 1% of highest income earners do. Maybe… just maybe… they could afford to be taxed at a slightly higher rate than the one they’ve been suffering under while accumulating their huge fortunes, and thereby take some of the pressure off of folks like teachers, garbage collectors and janitors…

Public Employees Already Contribute 100% Of The Money That Goes To Their Benefits

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Nice points made by David Cay Johnston, a Pulitzer Prize winning journalist (who specializes in tax issues) blogging at tax.com-

When it comes to improving public understanding of tax policy, nothing has been more troubling than the deeply flawed coverage of the Wisconsin state employees’ fight over collective bargaining.

Economic nonsense is being reported as fact in most of the news reports on the Wisconsin dispute, the product of a breakdown of skepticism among journalists multiplied by their lack of understanding of basic economic principles.

Gov. Scott Walker says he wants state workers covered by collective bargaining agreements to “contribute more” to their pension and health insurance plans.

Accepting Gov. Walker’s assertions as fact, and failing to check, created the impression that somehow the workers are getting something extra, a gift from taxpayers. They are not.

Out of every dollar that funds Wisconsin’s pension and health insurance plans for state workers, 100 cents comes from the state workers.

How can that be? Because the “contributions” consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services.

Thus, state workers are not being asked to simply “contribute more” to Wisconsin’s retirement system (or as the argument goes, “pay their fair share” of retirement costs as do employees in Wisconsin’s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.

You can read the rest of the post here.

Larry’s World (Part I)

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Two quick ideas for Larry’s World (not a utopia – just a world with fewer problems than this one). The first, I take it, is uncontroversial. I hope those of you who actually know something about economics – as I don’t – will tell me why the second is impossible:

1) In cold climates (like Wisconsin), plexiglass-enclosed bike paths, heated by the sun (mostly passively), with side panels that open in the warmer months.

2) As unemployment becomes structurally permanent (due to productivity gains and automation), simply pay people to consume. It’s nearly a full-time job to shop properly anyway. Citizens could earn bachelor degrees in Optimal Consumption (a new branch of economics). Those who are more productive can still earn more than ordinary consumers, but the structurally unemployed and terminally downsized are actively spending money on producers’ products, instead of fuming with resentment at home. As revenues rise from higher profits, it gets fed back into the system by way of this new class of professional consumers. (Debit cards that draw directly from treasury funds are used instead of cash to prevent professional consumers from saving their salaries; producers, on the other hand, are welcome to save and/or invest their surplus profits. This is still a capitalist society, and the ability of producers to get rich should serve as an adequate incentive to move up to the producer class for those capable of doing so).

Steady State Economics?

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I know very little about economics, but since the onset of the Great Recession I’m beginning to wonder if economists trained under the standard paradigm(s) know much more about it. In any case, the BP oil spill has – for a few minutes, anyway – spurred me to mull over our conventional economic assumptions about the need for ever more growth (fueled, of course, by ever more oil until a more efficient and/or less dangerous energy source is developed). And I’ve recently discovered that attacking these assumptions is one of the main passions of Herman Daly, author of “Steady State Economics“. Here’s an excerpt from Chapter 5, which I found here

One of the most popular arguments against limiting growth is that we need more growth in order to be rich enough to afford the costs of cleaning up pollution and discovering new resources. Economist Neil Jacoby says, “A rising GNP will enable the nation more easily to bear the costs of eliminating pollution” (1970, p. 42). Yale economist Henry Wallich makes a similar point:

The environment will also be better taken care of if the economy grows. Nothing could cut more dangerously into the resources that must be devoted to the Great Cleanup than an attempt to limit resources available for consumption. By ignoring the prohibitionist impulse and allowing everybody to have more, we shall also have more resources to do the environmental Job [Wallich, 1972 p. 62].

No one can deny that if we had more resources and were truly richer, all our economic problems would be more easily solved. The question is whether further growth in GNP will in fact make us richer. It may well make us poorer. How do we know that it will not, since we do not bother to measure the costs and even count many real costs as benefits? These critics simply assume that a rising per-capita GNP is making us better off, when that is the very question at issue!

If marginal benefits of physical growth decline while marginal costs rise (as elementary economic theory would indicate), there will be an intersection beyond which further growth is uneconomic. The richer the society (the more it has grown in the past), the more likely it is that marginal benefits are below marginal costs and that further growth is uneconomic. That marginal benefits fall follows from the simple fact that sensible people satisfy their most pressing wants first, whether in alternative uses of a single commodity or in alternative uses of income. That marginal costs rise follows from the fact that sensible people first exploit the most accessible land and minerals known to them, and that when sacrifices are imposed by the increase of any one activity, sensible people will sacrifice the least important alternative activities first. Thus marginal benefits of economic activity fall while marginal costs rise. Were this not the case, our previous “economic activity” would not have been economic — less pressing wants would have to have taken priority over more pressing wants, and the level of welfare could have been increased by reallocation with no increase in resources used.

…Once we have gone beyond the optimum, and marginal costs exceed marginal benefits, growth will make us worse off. Will we then cease growing? On the contrary, our experience of diminished well-being will be blamed on the traditional heavy hand of product scarcity, and the only way the orthodox paradigm knows to deal with increased scarcity is to advocate increased growth — this will make us even less well off and will lead to the advocacy of still more growth! Sometimes I suspect that we are already on this “other side of the looking glass,” where images are inverted and the faster we run the “behinder” we get.

Again, I don’t know enough about economics to evaluate Daly’s argument here, and in any case, utopian thinking is always dangerous. The devil (or the angel) is always in the details, and dogmatic presuppositions must always be guarded against. But I do have a sort of intuitive grasp on what a steady-state economy would involve (maybe because I seem to have reached a sort of steady-state of economic well-being myself, though perhaps not an optimal one), and the question is this: would a steady-state economy – one that aims to supply each individual with an optimal level of well-being, however ‘optimal’ is defined – really be any more utopian than an economic system predicated upon the occurrence of never-ending growth (even in the most well-off societies)?

Elizabeth Warren, Consumer Crusader

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Elizabeth Warren, Harvard law professor and Chair of the Congressional Oversight Panel, is probably the most passionate and articulate consumer advocate since the young Ralph Nader. She’s done many interviews, and if you’d like to hear her views on the current wrangling over financial reform in the House-Senate reconciliation committee, I recommend listening to her recent interview on NPR’s “On Point”. But here she is in July 2009, in a self-produced 7.5-minute video, explaining without any interruptions why she favors setting up a strong Consumer Protection Agency-


For more video messages delivered in her official capacity as the Chair of the COP, click here.

Warren claims to have no political ambitions, which is understandable given that she is around 60 and has a very good job. But I wouldn’t be surprised to see her on a ticket someday.

Unreal Advertising From Equifax

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I recently received this sales pitch from Equifax-

Here’s the second page-

Notice the warm and fuzzy testimony from folks just like us: an office manager, a high school teacher, a systems analyst, and the all-important small-business owner. No doubt that asterisk next to each comment directs us to a footnote which will inform us that these are real consumer comments, names on file. The footnote, in a font so tiny it’s almost illegible, is at the bottom of page 2. See it down there? I’ve highlighted it in yellow, just like the comments. Here’s what it actually says:

Now, doesn’t that just make you want you to run right out and buy security “from the nation’s oldest and most trusted name in credit”? (I know that this sort of fictionalization is normal in t.v. advertising, but somehow it seems more egregious and deceptive in print…)

After The Signing, The Rising

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Shortly after the House passed the health insurance reform bill that, according to every Republican in Congress, will ruin the private health care sector of the economy, the stock market, recognizing the coming apocalypse… markedly rose? As Business Week reported

Bristol-Myers Squibb Co. and Pfizer Inc. climbed at least 1.4 percent to help lead health-care companies higher after the House approved legislation that will ensure tens of millions of uninsured Americans will get medical coverage. Boeing Co. advanced 1.7 percent to help lead gains in the Dow Jones Industrial Average. Citigroup Inc. jumped 3.6 percent as Richard X. Bove at Rochdale Securities LLC advised buying the shares. “The health-care legislation approval removes the uncertainty,” said Richard Sichel, chief investment officer at the Philadelphia Trust Co., which manages $1.4 billion.

Surely this was just a brief mistake, a mere blip. No doubt the market would recognize the coming disaster to the U.S. economy today, having had another 24 hours to consider the dire consequences of the cursed legislation that that Kenyan Usurper Anti-Christ Commie Muslim Terrorist Obama signed into law today-

Dow rises 100+ points as Obama signs health insurance reform

(By the way, I know you can’t tell much from daily fluctuations of the stock market, but in this case you can at least tell that the market does not think that health insurance reform poses any danger to the private health care system).

Have You Checked Your Cable Bill Lately?

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I recently noticed that my Time Warner cable bill had increased by around 7% or so, so I took the time to actually look at the statement. I know that large corporations bet on their customers not carefully examining their bills over time (particularly in this age of electronic statements and automatic payments), and, let’s face it, it’s usually a very safe bet: generally speaking, it’s not worth the time it takes to study a statement every month. Like frogs in slowly heating water, we generally don’t notice small increases, or we do register them (barely), but they’re not significant enough to motivate action. Multiply this effect by several million customers, and we’re talkin’ some real money here.

Anyway, the relatively large recent increase managed to rouse me from my consumerist stupor, and I finally took a close look at what I was paying for. The company had recently rearranged its channel lineup, making it “theme based” instead of package based, and various promotional offers – which, of course, I had forgotten I’d accepted – had expired. For instance, HBO and Cinemax had been offered bundled together for a promotional price, and now they were separate (and more expensive). Other channels (now bundled together under the headings “Digital Variety” and “Digital Choice”) were mostly in those television wastelands above Channel 99 but below the HD channels we generally watch. There were also four channels bundled together under the “HD Plus Package” that we rarely watch. So, by dropping three optional packages and Cinemax (is there really any need for cable movie channels anymore, given streaming Netflix and the like?), we were able to save about $40 a month. I also decided to take Time Warner up on a digital phone deal that will allow us to drop our present land-line service, and that should result in about a $20 monthly savings, at least for the next year or two. So, by being a little more on top of my consumption, I was able to save over $700 this year (in return for an hour or two of work).

Now if I only remember to check my bill two years from now, when that promotional phone deal has expired…

Tax Day, Tea Parties, and How To End Poverty

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Today was the dreaded deadline to submit your tax forms or an extension form to the dearly beloved IRS, in case you somehow managed to forget about it. Cheryl and I have managed to ease the pain by intentionally overpaying a bit during the year, so that we can actually look forward to filing our tax returns… because we actually get returns.

Meanwhile Ron Paulians and other disgruntled citizens have been organizing “tea parties” all around the country to protest… I’m not quite sure what. It can’t be about their taxes, since most people in this country will be paying less in taxes this coming year than they did last year. The signs being held at these social events include phrases covering most right-wing complaints, from over-spending to illegal immigration. Some are quite general, including one that seems to be against tax collection per se: “You Are Not Entitled To What I Have Earned”. I imagine a counter-demonstrator holding a sign that says: “Unless You Pay Taxes, You Are Not Entitled To Drive On Our Interstate Freeways, To Visit Our National Parks, To Be Protected From Pirates On The High Seas, To Benefit From FDA Regulation Of Contaminated Food, To Have Your Individual Right To Protest Protected By Our Supreme Court…” and so on.

The over-spending issue is certainly one over which reasonable folks can disagree. Although I thought Ross Perot was a bit of a nut, I appreciated his concern about massive deficits, and as it turned out, he probably deserves credit for having split the opposition in 1992 and electing Clinton, who actually did balance the budget and accumulate a surplus. But while I don’t hold much stock in economists’ opinions these days (pun intended), there seems to be a widespread consensus that some over-spending at present is necessary to keep unemployment at bay. So I’m hoping that Obama and the Dems in Congress can ease the future deficits by dealing with future entitlement costs, particularly those associated with medicare and social security. Yawn.

On a more whimsical note (and more whimsical notes are needed more than ever these days), I think I’ve stumbled upon a cure for world poverty. The idea is very simple… far too simple to be accepted, of course. But it goes like this…

Since governments can obviously create money out of thin air, let’s just forgo the illusion that money represents anything real (including hard work, since those with the most money clearly work less hard than nearly everyone else). Let’s just create several trillion dollars (we can do this and still save the trees, since we can deposit all that money into banks simply by entering a few zeroes into the right databases), and require all of the banks to fairly distribute that money to those with the lowest balances – especially to those with no accounts at all. The idea is to make everyone presently living in poverty millionaires. Sorry, those of you who don’t quite qualify as impoverished: we can’t afford to undermine your motivation to work by sharing the wealth directly with you, because we need you to fulfill the pent up demand of the impoverished. We need you to make millions of (green) cars, build renewable energy plants, pave roads, and then produce the zillions of goods and services the nouveaux riches will be buying with their sudden good fortune. With the tax collections (sorry Ron Paulians), all governments with impoverished populations – including our own – will be able to build schools and hospitals, distribute effective birth control, and create new, self-sustaining industries. I guess we’d better make this a requirement of receiving the money in the first place. Then the next generation, raised in material comfort and with ample opportunities, can begin working productively, without a handout. (Oh, I almost forgot: there has to be a global freeze on prices so inflation is held in check… That should be easy enough to accomplish by printing up an extra billion or two to bribe the lawmakers). By then the multi-trillion dollar infusion will have been distributed throughout the world economy, and everyone will be much, much happier.

A Voice In The Wilderness

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You may have seen this before, but if you haven’t, it’s worth watching, if only to remind yourself of the amazing arrogance of ignorance. While self-styled pundits and stock-market cheerleaders like Arthur Laffer and Ben Stein helped to lead many off an economic cliff, financial advisor Peter Schiff was spot-on in predicting the current recession.

By the way, Ben Stein helps to confirm the theory that stupidity (or at least willful, ideologically-driven ignorance) is not “domain-specific”, unlike some forms of genius: in addition to having ridiculed the truth about the economy long after others had accepted it, he’s a major evolution-denier and “intelligent design” promoter, having been primarily responsible for the incredibly misleading “Expelled: no intelligence allowed“.