Place Blame Where It Belongs

I am less sympathetic than most, and less coy as well. I place the blame squarely where it belongs: on Bernie Madoff’s clients, on Tom Petters’s clients, on Allen Stanford’s clients, and on every other dope who was duped into believing he was getting something for nothing.

As for the notorious triumvirate, don’t kid yourself. Its victims were willing participants: Madoff’s clients coveted the illusionary 10% guaranteed annual return, Petters’s clients dreamed of earning impossible double-digit returns funding retail inventory, and Stanford’s clients fawned over 8%-interest-rate, Antigua-insured Certificates of Deposit.

It’s nothing new, really: versions of Charles Ponzi’s eponymous fraud were practiced long before he lived, and they will remain long after Bernie Madoff, Tom Petters, Allen Stanford, and you and I have decomposed into our final reward.

Ponzi schemes always hook a generous share of the public. Getting something for nothing is as primitive an imperative as breathing and eating to the free-lunch-craving majority. The more audacious the scheme, and the more exclusive it appears, the more ravenous the craving, and the more likely the scheme’s success.

For instance, the 1935 Social Security Act was a marvel of Ponzi-scheme legerdemain that surpasses anything Bernie Madoff could conjure. It was pure velvet-rope stuff, excluding a wide swath of America’s hoi polloi (mostly women and minorities) by exempting agricultural laborers, domestic servants, government employees, teachers, nurses, hospital employees, and librarians — in other words, exempting nearly two-thirds of the black and over half the female work force.

Social Security was a sure thing in its infancy. Just think of Ida May Fuller (1874–1975), a nonexempt legal secretary from Ludlow, Vermont. Ms. Fuller exemplifies the advantages of getting in early and getting out early. She paid a whopping $24.75 to participate in Social Security. Her first monthly Social Security check was issued January 31, 1940, for $22.54. Within three months, Ms. Fuller’s investment was in the black. Over the ensuing 35 years, she would collect $22,888.92 in Social Security payments.

Of course, only a small percentage of mankind was lucky enough to have been born in 1874. Everyone reading this polemic resides far down the pyramid — exactly where you don’t want to be in a Ponzi scheme, especially in one where participants keep voting themselves greater remuneration. Social Security benefits totaled $35 million in 1940, soared to $961 million by 1950, rose again to $11.2 billion by 1960, trebled to $31.9 billion by 1970, quadrupled to $120.5 billion by 1980, doubled to $247.8 billion by 1990, and nearly trebled again to $650 billion by 2009.

That’s a lot of cash outflow, requiring a lot of cash inflow. The tax rate in the original 1935 rendition was 2%, half paid by the employee and half paid by the employer on the first $3,000 of earnings. Today, the rate is 12.4% on the first $106,800 of an employee’s taxable earnings. In short, we’ve gone from a maximum dual contribution of $60 a year to maximum dual contribution of $13,243 — a 7.5% average annual increase.

And it still falls far short of funding liabilities. In 2005, the Social Security trustees estimated that the program’s unfunded liabilities were $8.5 trillion.

Today’s Social Security quandary seemed an impossibility in 1965, which is why the progeny of Tom Brokaw’s “greatest generation” had no compunction about starting their own Ponzi scheme by electing a slate of politicians willing to amend the Social Security Act to midwife Medicare and Medicaid.

The 1960s voting generation seems to have learned a thing or two about the fine art of institutionalized Ponzi schemes from their progenitors. Medicare’s costs doubled every four years between 1966 and 1980. Total Medicare spending reached $440 billion for fiscal year 2007, which was 16% of all federal spending. Today, only Social Security and defense consume more taxpayer money.

Given the current pattern of spending growth, the generation of the 1960s will bankrupt their Ponzi scheme twice as fast as its parents did their own. The Medicare hospital-insurance trust fund (a trust fund in name only) will become insolvent by 2019, according to Richard W. Fisher, president of the Federal Reserve Bank of Dallas. He has estimated that in order to “cover the unfunded liability” for the Medicare program today over an infinite time horizon, “you would be stuck with an $85.6 trillion bill.”

It doesn’t matter. If you’re old enough to have voted for Lyndon Johnson and his minions in 1964, you’re probably in an Ida Fuller position anyway, so why should you care? 2019 is still a decade away; unborn generations can carry the freight, or you’ll already be dead. All bases are covered.

Given the Sword of Damocles hanging overhead, the younger generation should have reason to pause. But they don’t pause. In fact, they’ve done past generations one better by voting for supporters of the mother of all Ponzi schemes — a Trojan horse single-payer healthcare system, delivered on the improbable slats of efficient government oversight, onerous penalties for noncompliance, and, as far as I can tell, more taxes on the rich and tanning salons. Thank you, public education.

Poor lads and lasses — the risk is much greater for a more immediate collapse. The economy already groans and creaks under the weight of two massive Ponzi schemes. Sustaining a third is no sure thing. All Ponzi schemes eventually collapse, which is why many of us wish to remain on the sidelines, though we don’t necessarily wish to infringe on the wants of Utopia worshipers.

If a Ponzi scheme is in the offing, I prefer the Charles Ponzi and Bernie Madoff variety. At least their schemes don’t drag unwilling participants into the fray. So I refuse to blame Messrs. Madoff, Petters, and Stanford for duping the dopes; they were simply satisfying market demand.

I also refuse to blame Nancy Pelosi, Harry Reid, or Barack Obama; they are simply satisfying voter demand, just like Franklin Roosevelt and Lyndon Johnson before them.

That leaves the voting majority, whom I do blame. Victims of micro-level Ponzi schemes are only greedy; they don’t infringe upon others’ freedom. The same can’t be said of those who demand that we all participate in these macro-level Ponzi schemes.