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Archive for July 2014

Voting Ourselves Rich

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A former co-worker sent me a link to a polemic on Social Security by Michael Goodwin, the author of Economix. Since the material is presented as a series of drawings, I have to include the drawings in order to quote them. All the drawings on this page are the work of the author, Michael Goodwin, and the illustrator, Dan Burr.

There is a lot of misinformation on this site, so let’s dig in.

The Pay-As-You-Go System?

"pay-as-you-go" system, from Economix
They way Social Security was advertised to the GI generation was as a pay-as-you-go system: your Federal Old Age Benefit payments (some pay stubs used to have a column F.O.A.B.) went into a fund to pay for your retirement. The first year anyone actually received Social Security benefits was 1940.

In fact, such a system would be unimplementable. What would the government do with such an enormous pile of money, anyway? Stick it in a vault? It would never keep up with normal economic growth. Invest it? The position would be impossible to manage and would swamp competing private investments.

Meanwhile, there would be this enormous pile of money in the Treasury, and somehow politicians were going to be able to keep their hands off it?

So what Mr. Goodwin describes, a pay-as-he-goes system, is actually closer to how the system worked than was the story that was sold to people who were voting adults back in the day. However, there is a fundamental problem with this. If you were to set up a private investment fund along this model, paying earlier participants out of the proceeds from later entrants, it would be called a Ponzi scheme and you would be slung in jail.

And Reagan Screwed Us All, Right?

Reagan borrowing, from Economix

Actually, no. This was getting out of control before Ronald Reagan ever came to town. Howard Ruff was calling Social Security a Ponzi scheme back when Jimmy Carter was still president.

Any fund that a government sets up to collect taxes now and pay benefits in the future is going to have a hard time keeping up with normal economic growth. Government is not a wealth-producing entity. You can’t “invest” in government, because there is no wealth production from which to obtain returns. It is just one big cost center.

Some of those costs are unavoidable and necessary, such as law enforcement, road repair, diplomats, soldiers and food inspectors. You may not agree with the levels at which they are funded, but they are necessary. However, their necessity doesn’t change the fact that none of them are producing wealth, and therefore none of them can contribute returns to an investment designed to provide for citizens in their old age.

But the event that really put Social Security underwater was the inflation of the seventies. Given that there was nothing in which the government could invest a fund of that size and keep up with normal economic activity, there was absolutely no chance of the government being able to keep up with the currency inflation it was driving back then.

By 1980, mortgage rates were pushing 13% and the prime rate for commercial borrowing was near 15% (See this New York Times article). This was completely unsustainable and a threat to the proper function of the economy. Business managers were beginning to question their ability to extend 30-day payment terms. Banks were starting to get interested in workarounds to avoid state usury laws, which would change the credit card business forever.

There are only 3 ways to finance government operations:

  • Levy taxes;
  • Borrow;
  • Print the money.

Taxes were off the table, because they would have pitted some voters against others. Uncle Feelgood didn’t want that. States were already experiencing tax revolts, such as the one led by Howard Jarvis in California that passed Proposition 13 in 1978. Having pushed inflation to the apparent limit, borrowing was the only unexplored avenue. Well, other than not spending — what do you think of that, Mr. Goodwin?

I’m Entitled

Social security entitlement, from Economix

Apparently not much.

Hey, wait — previously, you said that our social security payments were paying for current retirees’ benefits. So how, exactly, does this entitlement thing work?

This touches on another idea that periodically lumbers out of the woods to be beaten to a bloody pulp: means-testing Social Security. Every so many years, somebody floats it, and you will hear it trotted out again before long. But it never goes anywhere, because politicians know that means-testing Social Security will be the death of large-scale political support for the program. If a significant number of voters never expected to receive Social Security benefits, it wouldn’t be long before a revolt against Social Security started. However, with all of us in the system, expecting to receive benefits if we live long enough, there are payoffs for everyone. We can vote ourselves rich!

Only one problem: what happens when we go to collect our entitlement and the cupboard is bare?

The New Dealers never believed that there was enough wealth to make everyone above average. That is why they allowed unfavored groups, such as blacks and Asians, to be shoved to the back of the line. That mentality did not survive the sixties, and I can’t say I’m sorry about that. Nevertheless, the mentality that replaced it was that we were so rich, cool and smart that we really could vote ourselves rich. All of us.

And, yes, you’ll get your entitlement — sort of.

Furthermore, we have the capacity under the Constitution, the Congress does, to coin money, as well as to regulate the value thereof. And therefore, we have the power to provide that money. And we are going to do it. It may not be worth anything when the recipient gets it, but he is going to get his benefits paid.
— Senator William Proxmire, Senate hearings, 1976

Sure, you can have your $2,000/month Social Security benefit. Of course, a gallon of gas might be $1,000 and a gallon of milk $500. Remember that the Core Consumer Price Index does not include food or energy. The feds are never going to overtly default on federal obligations. They are going to constructively default by inflating the currency to the vanishing point.  The process is already under way:


Monetary Base 1979-2014. Federal Reserve Bank of St. Louis.

Monetary Base 1979-2014. Federal Reserve Bank of St. Louis.

The right side of that graph shows a 5x increase in the monetary base since 2008. Ultimately, that means more dollars chasing the same amount of wealth. Why do you think there are all these people advertising to buy your gold?

You can be entitled to something, but you still can’t get blood out of a stone. Imagine how much fun it is going to be when five people with competing claims to a dollar meet in the public square to fight over 35 cents. What do you think all that rioting in the Club Med countries was about? People there had made life decisions in the expectations of receiving benefits, and suddenly the government pulls out its pocket linings. Coming soon to a nation uncomfortably near you.

So Can’t We Default on Someone Else?

So here is Mr. Goodwin’s solution:

Components of debt, from Economix

OK, let’s think about this practically and realistically. Our plan is to flip off the people who are lending us the money to live beyond our means. That won’t cause a problem, will it?

The politicians are hooked on vote buying. Wall Street is their connection that makes it possible. Both Wall Street and Washington believe that Wall Street has the federal government by the short hairs.

As of 2012, $5 trillion in federal debt was to mature within 36 months (see this Wall Street Journal article). It’s not like the feds have the means to pay it off; they have to roll it over. And over. And whose co-operation do they need to do that?

Without the active assistance of Wall Street, elected officials have no chance of buying the votes they need to stay in office. In 2008, we had an election that sent the Senator with the most progressive voting record to the White House. And what changed in the financial sector? The heavens opened up — and a feather fell to earth. Yes, we can … keep on going just the way we have been.

You’ve heard it on the radio all your life:

Meet the new boss
Same as the old boss
— Pete Townshend

By the way, the foreigners are all too familiar with the concepts on these panels. When the wheels really start to come off, you will see foreigners dumping both government debt and dollars.

But Everything’s Cool

Social Security trust fund, from Economix

Try this simple experiment: Apply for a home mortgage. Write yourself an IOU for $1 million and list it as an asset on your mortgage application. Note the reactions of the mortgage originators. Do they laugh? Make rude gestures? Call the men with nets?

Remember the plan to stiff the rich people who lend the money? The intended suckers are the holders of government bonds. The Social Security trust fund is a very large rich person, weighing in at about $2.6 trillion as of mid-2012. When — not if — the government can’t keep with the vote-buying treadmill, the value of those bonds will be significantly impaired. As in a 99% haircut. The kind of haircut that leaves you with a razor through your throat.


Mind Control

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It’s news, but it is not exactly surprising: according to a study reported in The Atlantic, most people would rather receive electric shocks than to be left alone with their mind for company.

In the most, ahem, shocking study, subjects were wired up and given the chance to shock themselves during the thinking period if they desired. They’d all had a chance to try out the device to see how painful it was. And yet, even among those who said they would pay money not to feel the shock again, a quarter of the women and two thirds of the men gave themselves a zap when left with their own thoughts.
— “People Prefer Electric Shocks to Being Alone With Their Thoughts”, The Atlantic, 3 Jul 2014,

The ability to reflect — to be alone with your thoughts and get some positive benefit — is not something that just happens.

It’s Just the Normal Noises in Here

Based on the conversations I have had with other people over the course of my life, I am convinced that most people’s heads are very noisy places, from which they seek to escape. Nathaniel Branden wrote a poem about them decades ago:

These are the persons
who cannot bear to be alone;
who cannot live without sleeping pills;
who drink too much to calm a nervousness that comes too often;
who jump at every unexpected sound;
who feel a constant pressing need to be amusing and to entertain;
who go to too many movies they have no desire to see and too many gatherings they have no desire to attend;
who sacrifice any vestige of independent self-confidence for an obsessive concern with what others think of them;
who long to be emotionally dependent or to be depended upon;
who succumb to periodic spells of unaccountable depression;
who submerge their existence in the passivity of unchosen routines and unchallenged duties, and, as they watch their years slip by, wonder, in occasional spurts of frustrated anguish, what has robbed them of their chance to live;
who run from one meaningless sexual affair to another;
who seek membership in the kind of collective movements that dissolve personal responsibility.
A vast, anonymous assemblage of men and women who have accepted fear as a built-in-not-to-be-wondered-about fixture of their soul, dreading even to identify that which they feel is fear or to inquire into the nature of that which they seek to escape.

The problem is not that people are incapable of mental activity; it is that they are not taught that they even have a responsibility to control it, let alone how. They are not stupid — they just don’t understand that intelligence is like driving: you are responsible for where the car goes and what you run over, and you don’t just put someone behind the wheel and wait for wonderful things to happen.

Just because a thought or feeling walks up to your mind and knocks on the door, that doesn’t mean you have to let it in. I believe that most people do not understand this. Your mind is not a nature preserve that plants and animals occupy of their own accord; it is a set of rooms that you furnish, either by design or by default. Some thoughts and feelings just don’t deserve house room. And the more intelligent you are, the more capacity you have in there, the harder you have to work to furnish it, to keep it clean and orderly and to prevent unhealthy junk from accumulating.

When I was growing up, I heard all about bad attitudes (for example, the assertion that I had one). However, I never heard explained that I had a responsibility to maintain positive control of what I thought about. I believed that the thoughts that came into my mind were facts of life, and it was foolish to deny them. Actually, the thoughts are meanings. Facts by themselves are very boring, like reading an almanac. It is the meanings that make the facts matter, and we control the meanings.

Without controlling the meanings that you are willing to admit, your mind becomes a very noisy place. A sort of Gresham’s Law asserts itself, where bad thoughts and feelings drive out good thoughts and feelings. Most of the people who talk about having a bad attitude are basically saying, “Whatever nastiness you want to admit into your own mind, don’t share it with the rest of us.” In fact, this is the necessary fallback position the rest of us have to take with an adult who won’t control what goes on in his head, but teenagers need more than that. They need grownups to set the expectation that you should expect to have to control what goes on in your head.

It’s so easy to slip
It’s so easy to fall
And let your memory drift
And do nothin’ at all
All the love that you missed
All the people that you can’t recall
Do they really exist at all?
— Lowell George/Martin Kibbee

If a person is going to admit any thought that shows up into her consciousness, it is going to get very noisy in there. Without any positive control, she will find the thoughts meeting up with all the worst things her parents ever said, every negative experience she has ever had and everything she has ever worried about. Yes, I can understand why being activity busy, having people around that she doesn’t really like or even receiving an electric shock would be preferable to her over the screeching racket of these out of control thoughts in her head.


Why is entertaining ourselves so hard? Maybe subjects just couldn’t decide where to steer their thoughts? Nope. In several studies, some were offered topics to fantasize about (going on a beautiful hike, etc.), but that tweak had no effect on difficulty or enjoyment.
— “People Prefer Electric Shocks to Being Alone With Their Thoughts”

The positive value of being alone with one’s thoughts is not to entertain oneself, but to reflect. Only by reflection can a person think about how his life is going, what could have gone better with that last interaction, what do to better next time. Being self-monitoring, which is what grownups have to do, requires reflection.

Man, being reasonable, must get drunk; the best of life is but intoxication.
— Lord Byron

Drugs are the answer, after all, if the question is, “How can I get high as a kite?” or, “How can I make money without working?”
— P. J. O’Rourke, Parliament of Whores, p. 118.

A populace that is seeking bread and circuses each in their own heads is only going to lead to failure. The question is not, “How can we stay entertained and feel better about ourselves?” Rather, it is, “How can I control what goes on in my head so I can become a better person and live a better life?” The way of Byron does not lead to this latter question, because he takes no responsibility for the thoughts he grants admission to his mind.

A man may safely go into himself if what he finds there is not, like Rousseau, his own emotions, but like Buddha, the law of righteousness.
— Irving Babbitt, Rousseau and Romanticism, p. 370.

The person who is seeking only entertainment when alone with her thoughts will be frustrated, because many thoughts are not by nature entertaining. The value in being alone with her thoughts is, as Babbitt elaborated, that she might develop a moral imagination that transcends her experience and allows her to improve her life, instead of sinking to the least common denominator. This is the program that we need if we are to become effective citizens and assert our responsibility as the consenting governed for the destiny of the country.

Written by srojak

July 14, 2014 at 12:37 pm

Posted in Economics, Ethics

Tagged with ,