## Social Security as PonziJanuary 2, 2009

Posted by A Texan In Grad School in Economic Theories, Federal Debt.
Tags: , ,

The recent Madoff scandal has brought renewed attention to the Ponzian nature of Social Security.  But, is Socially Security really a Ponzi scheme?  Michael Mandel at Business Week’s Economics Unbound says that because technology advances more than population does, Social Security is not a Ponzi scheme. The key to any debate is to define the terms.  So let’s look at the definition of Ponzi Scheme:

An investment swindle in which high profits are promised from fictitious sources and early investors are paid off with funds raised from later ones.

That’s according to The American Heritage Dictionary.  From this definition, it seems that Social Security is a Ponzi scheme.  Generation A pays in, then Generation B pays in while A receives, so on and so on.  But, interestingly I noticed that some dictionaries have a slightly tweaked definition of a Ponzi Scheme:

an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risk

That’s from Merriam-Webster.  The intriguing part of this definition is the idea that a Ponzi scheme has the goal of encouraging more and bigger risk.  Who is taking these risks and what they are is ambiguous.  Social Security encourages some risks because people don’t feel as much a need to save for their own retirement because Uncle Sam will pay them to be old.  But I don’t think this is the kind of risk Merriam & Webster have in mind.  So, under this (I believe poor) definition, Social Security is not a Ponzi scheme.

But, ultimately what seperates Social Security from a Ponzi scheme is the ability of the government to always make good on its promises.  The government can always raise taxes or print more money.  The government could even stop forcing people to pay in to Social Security while still paying people.  Obviously this would have perverse effects on inflation and debt, but it’s possible.  Social Security does  not require that people pay in, so that it can pay out to others, at least in nominal terms.  Therefore Social Security is not a Ponzi scheme.  But, that isn’t exactly a good thing.

## More on Stimulus and ImportsDecember 7, 2008

Posted by A Texan In Grad School in Economic Theories, Federal Debt.

Apparently BW beat Rodrik et. al. to discussing the difficulties of orchestrating a domestically effective fiscal stimulus.   Business Week claims that,

The financial crisis was caused, in large part, by U.S. consumers borrowing trillions of dollars from the rest of the world to buy imported cars, clothes, and gasoline, even as jobs slipped overseas. As long as the U.S. is running a big trade deficit and borrowing from abroad, a fundamental cause of the crisis remains.

Which is a bit misleading.  While our extremely leveraged consumption played a role in the propagation of the crisis, I personally think that it was not a cause.  Furthermore, our current problem is not so much one of too much existing debt, but the inability to get new debt.

So let’s think about all this.  The problem with a fiscal stimulus is that it sends too much money abroad to other countries that manufacture our goods.  This means fewer jobs created here.  But, one must never forget the relationship between the current account and the capital account.  If our stimulus is spent on goods from abroad, then our current account deficit will increase, but our capital account surplus will also increase.  This is because all the foreigners who have our dollars have to do something with them.  That is, either buy our goods or invest in our economy.  This will increase liquidity.

Now, does this mean that a stimulus is definitely the best policy?  Not necessarily.  Keynesian multipliers and stimulus are not a free lunch.  While foreigners will be investing money in our economy, there will also be an increase in government debt to fund the stimulus.  This will cause crowding-out of private investment.  Also if the government is selling more debt that puts upward pressure on interest rates.  Perhaps what we need is a stimulus funded by federal lands.

## Multiple ProblemsDecember 6, 2008

Posted by A Texan In Grad School in Economic Theories, Federal Debt.

Here’s an interesting question on trade and Keynesian fiscal policy inspired by a post by Dani Rodrik:

The Keynesian multiplier is:

$\frac{1}{1-c(1-t)+m}$

where c is the marginal propesnity to consume, t is the tax rate, and m is the marginal propensity to import.  It is clear from this formula that m is inversely proportional to the multiplier.  So, if we decrease m, we will maximize the multiplier, in terms of m.  Therefore, raising import tariffs such that m=0 will give us high growth and employment for the same amount of government spending.  Also we eliminate our current account deficit.  Seems good all around…

Now, how can this be square with Ricardian theories of comparative advantage?  How can eliminating trade actually increase economic growth?

## Reagan Revolution, RIPNovember 23, 2008

Posted by A Texan In Grad School in Federal Debt.