Saturday, September 10, 2011

Brad DeLong Gives a Lesson in Logic, Language, History, and Economics in one Short Dialog

Here's the post from Brad DeLong's Grasping Reality with Both Hands blog:
Ponzi scheme: 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 system is destined to collapse because the earnings, if any, are less than the payments to investors…
Matthew Yglesias adds:
Social Security Is No More A Ponzi Scheme Than Is Anything Else That Relies On Future Economic Growth: A certain class of “smart set” conservative and centrist types persist on believing that analogies between Social Security and a Ponzi scheme are, though perhaps politically unwise, fundamentally sound. This is nuts…. A Ponzi scheme is a fraud where in the end the whole pyramid goes bust a bunch of people wind up with no money at all…
Alex Tabarrok:
Marginal Revolution: Matt Yglesias says anyone who thinks social security is a Ponzi scheme is nuts. So let’s take a look at some of these nuts…. Paul Samuelson… Milton Friedman… Paul Krugman…
And Greg Mankiw:
Greg Mankiw's Blog: A friend calls to my attention this quotation from Paul Samuelson…. "Social Security is squarely based on what has been called the eighth wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived…"
Adeimantos: I have been off in Europe for a while. Why are Alex Tabarrok and Greg Mankiw so eager this week to call Social Security a "Ponzi Scheme"?

Glaukon: Perhaps it is because they think Social Security is going to go spectacularly bankrupt?

Adeimantos: I hardly think that the Commissioner of Social Security will be hauled off to jail like Charles Ponzi was on August 12, 1920, with a general announcement that nobody is going to get any Social Security benefits.

Glaukon: But perhaps they believe it will?

Thrasymakhos: No. Neither Greg nor Alex believes that someday Social Security will have the sudden catastrophic collapse that ends a Ponzi Scheme.

Adeimantos: So they call it is a Ponzi Scheme. But Ponzi Schemes end in a sudden catastrophic collapse, and Social Security will not--that it is a different kind of Ponzi Scheme?

Thrasymakhos: Yes.

Glaukon: Are there any other aspects in which Cowen Tabarrok and Mankiw think that Social Security is different from your usual Ponzi Scheme?

Thrasymakhos: Yes. Because a Ponzi scheme is destined to end in a sudden catastrophic collapse it is fundamentally fraudulent. Since Alex Tabarrok and Greg Mankiw don't see it ending in a sudden catastrophic collapse thy don't see it as fundamentally fraudulent.

Kephalos: So they think that Social Security is a Ponzi Scheme--but that, unlike other Ponzi Schemes, it is not fundamentally fraudulent and, unlike other Ponzi Schemes, it is not destined to end in a sudden catastrophic collapse?

Thrasymakhos: Exactly.

Kephalos: So it's like saying that something is salt--although without the sodium and the chlorine.

Adeimantos: Wait a minute. They also claim that Paul Samuelson and Paul Krugman call Social Security a Ponzi Scheme…

Thrasymakhos: Look at the first sentence Alex Tabarrok quotes from Samuelson: "Social Security is a Ponzi Scheme that Works". Samuelson is trying to grab his readers' attention with the arresting claim that there is a key difference between Social Security and a Ponzi Scheme: Ponzi Schemes don't work, while Social Security does.

Glaukon: Oh.

Thrasymakhos: And go look at the actual article from Paul Krugman that Alex Tabarrok quotes. Paul doesn't say that Social Security is a Ponzi Scheme. He said that over its first seventy-five years it:

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…

Thus, Paul says, Social Security had a "Ponzi game aspect"--a non-fraudulent, sustainable one--as America's population aged, but that it no longer has a Ponzi game aspect. To claim that this article shows Paul Krugman "recognizes the Ponzi-like nature of Social Security" would seem to me to be a no-no.

Adeimantos: And Milton Friedman?

Glaukon: You will note that Milton Friedman says that it is a pay-as-you-go system, which "supporters call 'a compact between the generations' and opponents call a Ponzi scheme". If I had to characterize Friedman, I would say that Friedman thinks Social Security is a pay-as-you-go system, and that the Social Security Trust Fund is a "confidence game to convince the public that what the Social Security Administration calls a social insurance program is equivalent to private insurance". He doesn't want to be out there calling it a Ponzi Scheme: that's something that "opponents say".

Kephalos: So the impression I get is that Alex Tabarrok and Greg Mankiw--and Milton Friedman, Paul Krugman, and Paul Samuelson for that matter--think that Social Security is a pay-as-you-go social insurance system, which is not a Ponzi Scheme.

Thrasymakhos: Or, rather, a Ponzi Scheme that is neither fraudulent nor unsustainable.

Glaukon: So then why do they call it a Ponzi Scheme?

Thrasymakhos: Because Texas Governor Rick Perry calls it a Ponzi Scheme.

Glaukon: Why does Rick Perry call it a Ponzi Scheme?

Thrasymakhos: Because he thinks hat it is fundamentally fraudulent and catastrophically unsustainable.

Glaukon: So when Rick Perry says "Social Security is a Ponzi Scheme" he means the normal old-fashioned fraudulent kind destined to collapse. And when Cohen and Mankiw say "Social Security is a Ponzi Scheme" they mean that it is some new kind of Ponzi Scheme that is not fraudulent and not destined to collapse?

Thrasymakhos: Exactly.

Adeimantos: But they convey the impression that they agree with Perry. Why?

Thrasymakhos: That's because they want to back Rick Perry up.

Glaukon: Why? Is it just because they are playing for Team Republican?
Funny how people who are ideologically motivated can play Three-card Monty with ideas in service of their ideological aims. Honesty out the window, cynical abuse of people's gullibility, ignorance, or credulity are used to hammer home the desired "lesson".

The only lesson I "learned" is that if you want pathological liars and cheats for politicians, vote Republican. If you want cynical manipulators and nihilists to control your future, vote Republican. If you want markets in everything, including selling your mother of into slavery, then vote Republican. The Republicans have a vision for America where governments go away and the "honest" market reigns supreme, the same one that Andrew Carnegie, John D. Rockefeller, and Bernie Madoff used to make off with scads of other people's money.

Go read the original to get the embedded links.

And you can get the official US government's affirmation that Social Security is not a Ponzi scheme. Learn some history and read the official statement:
The first modern social insurance program began in Germany in 1889 and has been in continuous operation for more than 100 years. The American Social Security system has been in continuous successful operation since 1935. Charles Ponzi's scheme lasted barely 200 days.
Oh... and sneak a peek at the arch villian Charles Ponzi eyeballing you from his mug shot.

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