Russell Roberts's Blog, page 1415

Frank talk with Frank

This week's EconTalk is a little more combative than usual. Robert Frank talks about his new book, The Darwin Economy, and I push back. Lively and civil.

Is Social Security a Ponzi Scheme?

Here's a letter to USA Today:

Arguing that Social Security isn't a Ponzi scheme, you write: "Ponzi schemes have two salient features.  First, they are criminal enterprises, which Social Security is not.  Second, they work only until people get wind of what is going on, at which point they inevitably collapse.  Social Security's finances are plainly visible for all to see. ("Social Security far from a 'Ponzi scheme'," Sept. 12).

Your first point fails: a government declaration of legality no more renders a Ponzi scheme a legitimate mode of investment than it renders slavery a legitimate mode of employment.

As for Social Security's finances being "plainly visible," the Social Security trust fund – for which Uncle Sam writes IOUs to himself and then assures the public that Social Security's liabilities are fully backed by marketable assets – comes awfully close to being a fraud meant to hide the true state of Social Security's fiscal woes.

And as for people catching on to Social Security's unsustainability, consider the following 1996 analysis by a Nobel-laureate economist who, after noting that Social Security is designed to look like an ordinary pension plan, observes that "In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in.  Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in."  That is, as with all Ponzi schemes, reality is obliging people to catch on.

Oh, the Nobel economist quoted above is Paul Krugman.

Sincerely,
Donald J. Boudreaux

And as my friend Dimitri Vassilaros points out to me by e-mail, "Social Security is worse than a Ponzi scheme, because it is not voluntary, and everyone suffers, not just Ponzi's greedy participants."

(HT to Alex Tabarrok for alerting the world to the above-linked Krugman essay.  Alex points out that other Nobel economists who've described Social Security as a Ponzi scheme include Milton Friedman and Paul Samuelson.)

UPDATE: This cartoon, posted over at Division of Labour by Frank Stephenson captures a genuine difference between a run-of-the-mill Ponzi scheme and Social Security.

Quotation of the Day…

… is from page 678 of Will & Ariel Durant's 1963 book The Age of Louis XIV:

It is easier to be original and foolish than to be original and wise; there are a thousand possible errors for every truth, and mankind, with all its efforts, has not yet exhausted the possibilities.

Questions About Imports

This graph from Mr. Graph himself – the indispensable Mark Perry – captures very concisely much of what Russ and I (and Mark, and Doug Irwin, and many other economists) have said in one venue or another over the years.  Proponents of imposing heavier tax burdens on Americans who purchase goods and services from abroad should look at this graph and ponder the following questions:

1. Do you not worry about the possibility that fewer American imports will reduce American economic activity – and, hence, reduce American employment – even in the short-run?  Because nearly six in every ten dollars that Americans spend on imports are spent buying inputs to production, why do you overlook the possibility that, with fewer or more costly inputs for use in production, some U.S.-based producers will either shut down completely or produce less?

2. Because so many American protectionists are (rather inconsistently) also champions of increasing American exports, do you not worry that, by employing protectionist policies that raise the cost to U.S.-based producers of producing, that higher tariffs will actually and directly reduce exports?

3. Do the data in Mark's graph cause you to question the oft-heard argument that America's trade deficit is a symptom of Americans "eating their seed corn" – that is, of Americans borrowing from foreigners simply to finance consumption today?

….

Here's Mark's take – relying heavily on Dan Ikenson's recent superb WSJ essay – on the data.

Who's Benighted?

Here's a letter to the Washington Post:

Steven Pearlstein alleges that a laughable mysticism drives those of us who "reject as thoroughly discredited all of Keynesian economics, including the efficacy of fiscal stimulus, preferring the budget-balancing economic policies that turned the 1929 stock market crash into the Great Depression" ("The magical world of voodoo 'economists'," Sept. 11).

Before guffawing at us oafs, Mr. Pearlstein should check his facts.

After running a budget surplus in 1930, Uncle Sam ran a budget deficit in 1931 of $462 million and a budget deficit in 1932 of $2.74 billion.  Moreover, 1932′s budget deficit was four percent of GDP – a deficit-to-GDP ratio the size of which was not matched after 1946 until 1976, and which was exceeded by only three of FDR's non-war-year budgets.  For 1930-1932 as a whole, the U.S. government ran a net budget deficit of $2.46 billion.*  Herbert Hoover's deficit spending was so alarming that, during the 1932 presidential campaign, FDR emphasized his own commitment to reverse what then seemed to be unprecedented fiscal recklessness.

Of course, FDR broke that campaign pledge.  He ran a budget deficit during every year of the greatly depressed 1930s – a fact that should cause Mr. Pearlstein to shed some of the arrogance with which he dismisses skeptics of Keynesian economics.

Sincerely,
Donald J. Boudreaux

* See Tables 1.1 and 1.2 here.

Quotation of the Day…

… is from Plutarch, quoted on page 95 of the 1998 Liberty Fund re-issue of Trevor Colbourn's superb 1965 book The Lamp of Experience:

No beast is more savage than man, when possessed of power equal to his passion.

Harry Johnson On Keynes

Keynes was – without any intention of slurring him – an opportunist and an operator…. [I]n 1931 he came out in favor of protection.  These gyrations frequently made him seem inconsistent to his contemporaries; actually, the examples cited can easily be reconciled by reference to the modern theory of second-best, but Keynes never spelled out such a theory.  The General Theory represents the apotheosis of opportunism in this sense, in two ways.  Mass unemployment had lasted so long that it appeared to the average man to be the natural state of affairs, which economics was powerless to explain and political processes  powerless to alter; a new theory of its causes that promised an easy cure was thus virtually certain to sell, provided its author had impeccable professional credentials.  But to be a new theory it had to set up and then knock down an orthodox theory, not merely explain what traditional theory really was and develop its application to the problem at hand – a procedure that Keynes had applied frequently in his younger days…

Earlier in this 1973 essay (entitled "Keynes and British Economics," and reprinted on pages 77-90 of Johnson's 1975 collection On Economics and Society), Johnson quite properly derides Churchill's catastrophic 1925 decision to return Britain to the gold standard at pre-war parity – a policy that even a good freshman economics student would have seen would require a significant reduction in the price level given the inflation that Britian had experienced over the previous ten years.  About this historical calamity, Johnson writes (on page 79):

Had the exchange value of the pound been fixed realistically in the 1920s – a prescription fully in accord with orthodox economic theory – there would have been no need for mass unemployment, hence no need for a revolutionary new theory to explain it, and no triggering force for much subsequent British political and economic history.

Some Links

One of the best books on political theory that I've read in years is Mark Pennington's Robust Political Economy.  I'll be writing more about it in the future.

Compared to many other bloggers, Arnold Kling is more polite – and thinks more much more deeply – about the state of economy (and about proposed 'solutions').

And while we're highlighting Arnold's work, don't miss this gem of a post – in which, by the way, he mentions the important new study by my GMU Econ colleague Garett Jones and AEI's Dan Rothschild.

Bob Higgs here discusses the relevance to economic theory of the recovery of consumer spending.

 In today's Wall Street Journal, the Cato Institute's Dan Ikenson argues that "the president should strongly advocate the elimination of duties on imported manufacturing inputs and other domestic impediments to U.S. competitiveness abroad and at home."  [Dan's correct - although I pick a nit: talk of "U.S. competitiviveness," while it might help to better sell politically the case for freer trade, is wrong and misleading.  As Paul Krugman correctly argued in 1994, "competitiveness is a meaningless word when applied to national economies."]

Quotation of the Day…

… is from page 199 of Karl Popper's The Open Society and Its Enemies; here he's talking about Plato:

He transfigured his hatred of individual initiative, and his wish to arrest all change, into a love of justice and temperance, of a heavenly state in which the crudity of money-grabbing is replaced by laws of generosity and friendship.  This dream of unity and beauty and perfection, this aestheticism and holism and collectivism, is the product as well as the symptom of the lost group spirit of tribalism.  It is the expression of, and an ardent appeal to, the sentiments of those who suffer from the strain of civilization.

Office of the Repealer

Government innovation from Kansas: Office of the Repealer. (HT: Matt Warner)