2012 Iowa Caucus Prediction

My prediction for the rankings of the 2012 Iowa Caucus:

1 Ron Paul

2 Mitt Romney

3 Michele Bachmann

4 Rick Perry

5 Newt Gingrich

6 Rick Santorum

7 Jon Huntsman

Debate 9: Winner: Romney Losers: Cain, Perry

CNN and the Western Republican Leadership Conference hosted the ninth in a busy schedule of Republican debates for the 2012 Presidential Election. 

Absent was Jon Huntsman, perhaps indicating that he has gained a willingness to face the reality that he will not win the nomination. Back in August, after she won the Ames Straw Poll, I heard some people say that Michelle Bachmann is locked into the nomination. John McCain got the nomination after receiving .7% in the Ames Straw Poll in 2007, so I concluded that you need to get at least .7% in Ames to win it. This means that even Newt Gingrich is still solidly in it with 2.3% in Ames. Huntsman, on the other hand, got .4%

The debate opened with a round of attacks on Herman Cain's 9-9-9 tax plan. I refer to it as his 9-9-9-0-0 plan to emphasize the fact that it proposes an elimination of both capital gains and estate taxes. The attacks were predictable considering that Rick Perry and Mitt Romney have been the focus of attacks whenever they were leading the polls. The most recent polls show Romney back in the lead, and continuing to make gains. Most of the criticism of the 9-9-9 plan (9% flat income tax, 9% flat business income tax, and 9% sales tax on new products) focused on claims that it would open up the possibility of higher sales taxes in the future. It was also criticized for being too regressive. It was pointed out that the Tax Policy Center estimates it would increase taxes for most people earning less than $100,000.

I've begun to notice a habit Bachmann has of trying to play teacher. "And the American people think that it’s the — the — it is the vendor that creates the tax, but it’s the government that creates the tax." Thank you Michelle Bachmann for explaining to us how taxes work.

Romney had trouble getting a word in edgewise more than once during the debate. After interrupting him four times, Rick Santorum tried to usurp the moderator saying, "You’re out of time. You’re out of time." The most intense part of the debate was the back-and-forth between Perry and Romney over whether Romney had employed illegal immigrants. "This has been a tough couple of debates for Rick, and I understand that, and so you’re going to get — you’re going to get testy. But let’s let — I’ll tell you what: Let me take my time, and then you can take your time," Romney said with a positive audience reaction. The audience was noticeably more pro Romney than the audiences at previous debates. Perhaps the debate sponsors screened for a more moderate audience after some embarrassing audience reactions at previous debates (audience members shouting that an injured person without health insurance should be allowed to die, applause at the number of people executed in Texas, and booing of a gay soldier in Iraq who asked a question about don't ask don't tell).

Finally, I must mention the Herman Cain electrified fence controversy. Cain is beginning to make this election seem surreal. If you're not familiar the Cobert Report summarized it pretty well. Is Cain really worried that he'll lose votes if he doesn't support building a fence that will kill people? Either way, it is worth pondering how someone making such inflammatory comments could get to the level he is at. 

For the record, Romney, Perry, and Gingrich are the only candidates with a realistic chance of getting the nomination.

"Don't blame Wall Street, don't blame the big banks, if you don't have a job and you're not rich, blame yourself!"

These were the words of Republican Presidential candidate Herman Cain in reference to people participating in the Occupy Wall Street movement. Normally such a remark could be dismissed as an outburst from a candidate whose probability of being nominated is approaching zero, but according to a Public Policy poll conducted shortly after the remark, Cain is now in the lead. 30% of respondents said they would vote for Cain, while only 22% said they would vote for Mitt Romney (who came in second place). I don't think that Cain's exceptional performance in this one poll means that he has any chance of being nominated. In some respects Cain reminds us of Steve Forbes. Forbes was noted for making his 1996 and 2000 campaigns into essentially single issue campaigns around his proposed 17% flat tax. Cain now talks about his 9-9-9 tax plan so much that I think his goal is to mention it at least nine times at every debate. Both Forbes and Cain have also promoted themselves as someone coming from outside of politics. This concept may have some populist appeal, but ultimately it probably won't help Cain get the nomination anymore than it did Forbes. The last person to be elected president without previously serving as a governor, US senator, or vice president was Dwight D. Eisenhower. Moreover, since Eisenhower, neither of the two major parties have nominated a candidate who hadn't previously served in one of these three roles. Eisenhower was one of only four such presidential candidates withing the past 100 years.

Plants and Fungi

I thought weeding my yard was hard enough. Now it looks like I have weeds making their way indoors. I found this in my basement window.

All of the heavy rain has resulted in some interesting mushrooms growing in Minneapolis yards. These three seemed to pop up in just a few days, and they seem to be getting bigger by the hour.

I'm guessing it is an example of Macrolepiota procera, or parasol mushrooms. If this identification is accurate then they are edible. If, on the other hand, it is Chlorophyllum molybdites, then it is a toxic mushroom often confused with the edible version.

The subject of plants and fungi gets me thinking about how much biology has changed in my lifetime. It was just 1969 when plants and fungi were grouped together in the same kingdom. For many years fungi had their own kingdom, but now there is an effort to group them together with animals in a kingdom called Opisthokonta. In terms of biology, these mushrooms actually have a lot more in common with you and me than they do with the grass surrounding them.

State Taxes and Billionaires

In past posts I have analyzed the general effect of state tax rates on state economies. A more focused objection to high taxes by the right concerns the tendency for wealthy people to choose to reside in low tax states. Minnesota Governor Mark Dayton recently dropped his demand for an income tax increase on the top 2%. Disagreement over this proposed tax has led to one of the longest state government shutdowns ever. The Star Tribune quoted Scott Wine, CEO of Minnesota based Polaris Industries, saying "I want to be in as low a tax state as possible." Wine said that he might move when he retires. 

Forbes conveniently publishes a list of billionaires each year. This year it lists 412 of them residing in the United States (including three in the District of Columbia), but only categorizes 400 of them by state residence (presumably information on residence of the other nine wasn't available). I charted the number of billionaires per one million residents in each state as a function of the 2010 state tax to gross state product ratio. The results show a slight preference for billionaires to live in low tax states. The national ratio for these 400 billionaires in all 50 states is approximately 1.298 billionaires per one million residents. The chart is skewed by the fact that there are 11 states with no billionaires (for example, both Iowa and Vermont have no billionaires and are therefore ranked equally, even though Iowa's population is about five times that of Vermont's- presumably indicating that billionaires find life in Iowa much less appealing). It should also be noted that the Forbes list is not an exact one person per entry list. The fourth richest U.S. resident, for example, is identified as 'Christy Walton & Family.' The three highest tax states (Vermont, Alaska, and North Dakota) all have no billionaires. Wyoming, a state with an above average tax rate, has by far the greatest ratio of billionaires. 

In case you were wondering, Scott Wine is not a billionaire. 

Voodoo Economics

“After embarking on a record spending binge that left us deeper in debt, where are the jobs?” John Bohner Tweeted during Obama's Twitter Town Hall. Obama responded by talking about tax cuts and the need for infrastructure improvement. What he should have said was “Don't you remember?, we agreed to layoff thousands of workers.” Many were shocked at the June employment report- only 18,000 jobs added. What got less attention was that 39,000 government jobs were lost. This adds to 72,000 government jobs lost during April and May. The writings of Paul Krugman are becoming increasingly relevant. “If all you did was listen to his speeches, you might conclude that he basically shares the G.O.P.'s diagnosis of what ails our economy and what should be done to fix it,” Krugman wrote in “What Obama Wants”.

A simple overview of the situation should come to this conclusion: Obama is trying to give in to as many Republican demands as possible in order to secure his reelection as the moderate candidate who is willing to compromise. The problem is that this is hurting the economy so much that by November 2012 the objective conditions of the American people might trump the traditional political wisdom for being moderate. By election time people might be ready to vote for anybody but Obama.

Krugman notes that “Almost all the high-profile economists who joined the Obama administration early on have either left or are leaving. Nor have they been replaced.” Obama is not an economist, and one must wonder whether he is trusting the Republicans to develop a coherent economic policy for him. Is it possible that the Republicans realize how much influence they have over him, and are guiding his hand toward deliberate economic sabotage for their own political gain?

I don't think that Obama can just be given a pass as a progressive who doesn't understand economics very well. The more shocking remarks in his Twitter Town Hall were in response to a person concerned about the recent loss of collective bargaining rights for public sector workers in some states. At a time that unions are under the most vicious attacks they've seen in decades, their supposed ally in the White House said, “In the public sector, what is true is that some of the pension plans that have been in place and the health benefits that are in place are so out of proportion with what's happening in the private sector that a lot of taxpayers start feeling resentful.” He further endorsed the thrust of the anti worker attacks saying, “all of us are going to have to make some adjustments.” He concluded his response by bragging about his two year pay freeze for federal workers. (Apparently not all of us will have to make adjustments; the president, vice president, and members of Congress are exempt from the pay freeze.)

If deliberate economic sabotage seems like a conspiracy theory, my other hypothesis is that Obama has secretly been a Republican all along. Perhaps the past 15 years of his political career were all mapped out in a smoke filled meeting with Newt Gingrich and Haley Barbour before he ran for the Illinois Senate. This, I admit is unlikely.

Governor of Strikes and Shutdowns

It seems that Barack Obama is already putting his campaign into full gear by putting out an attack ad highlighting the past troubles of Republican candidate Tim Pawlenty. The commercial features Metro Transit workers picketing during a 2004 strike, and protestors in front of the Minnesota Capital during a 2005 government shutdown- both of which occurred while Pawlenty was governor of Minnesota. 

Oh, wait no, Pawlenty put this ad out himself! Apparently angry people out of work is the best
image of his accomplishments that Pawlenty could find. 

It should be noted that the Metro Transit strike was a result of the Metropolitan Council's refusal to offer decent compensation to bus drivers and mechanics. Pawlenty was only indirectly a part of that dispute, but I guess he wants to take credit for it anyway. 

Minnesota is now in its sixth day of another government shutdown, but this time neither the Democratic governor nor the Republican legislature are willing to take credit for it.

Debt Ceiling and the Tea Party

The debt ceiling debate has continued, and the Tea Party Patriots (TPP) are demanding no debt ceiling increase under any circumstances. Their website has a list of “Four Big Lies” that members of congress are telling people about the debt ceiling. I thought I'd check the accuracy of some of what they state.

The TPP claims that “Obama increased spending and the size of government more than all previous presidents (from George Washington through George Bush) COBMINED.” I'm not sure how they define size of government (they seem to imply that they define it differently from spending), but it seems that they are basically saying that federal spending has more than doubled since the time Obama took office. My assumptions here are that each budget can generally be assumed to be progressively larger than the last, and that George Washington started at essentially zero. According to the Department of the Treasury, 2010 federal outlays were $3.456 trillion. We don't know exactly how much outlays for 2011 will be, but Obama's budget request was for $3.819 trillion. Obama's presidency began in 2009, but the 2009 budget was based on the final request submitted by George Bush, moreover, the fiscal year ends on September 30. Despite this, we'll be conservative and concede that 2009 was the year that Obama's influence began. Outlays for 2008 were $2.978 trillion. So even by these conservative numbers, Obama only increased spending by 28%, and the TPP claim appears to be utterly false. I thought that the TPP claim might be based on projections of outlays for future years listed in Obama's budget proposal, but even for 2021, the latest year projected (and a year long after Obama will have left the White House), the figure is only $5.697 trillion- still less than twice 2008 spending.

“Don't let socialism win,” the Tea Party Patriots urge in a piece criticizing attempts to get spending cuts or other conservative demands in exchange for raising the debt ceiling. Ironically, some socialists have been demanding that the debt ceiling not be raised for years. Socialist Alternative formerly stated in it's program, “Cancel the national debt with no payment to the big investors. Use the money to rebuild the inner cities and the infrastructure under union conditions and wages.” Also see The Need for Socialist Policies. Of course, the more consistent Republicans have qualified their debt ceiling threats by saying that debt service should be prioritized, and the difference should be made up through other obligations (like social security and unemployment benefits).For now it seems that the Tea Party is living by the principle that you don't have to be responsible as long as you're not in power.

State Taxes and Change in Debt

In my last post, I showed that high tax rates at the state level, if anything, tend to improve growth as measured by gross state product (GSP). I wondered how debt might intercede in this phenomenon, so I charted change in debt to GSP ratio over a four year period as a function of the 2005 tax to GSP ratio. The result is the opposite of what is expected, and what has generally been observed at the federal level. The results imply that high tax rates correlate with more rapidly increasing debt to GSP ratios (despite the high tax rate states having GSPs that increase more rapidly). However, if the two outlier states, Mississippi and Arkansas (which both had debt/GSP increases more than twice that of any other state), are ignored, then the correlation is reversed. Moreover, the highest tax state (Vermont) experienced less than one third the debt increase than that of the lowest tax state (Texas).

Change in debt is important to consider when comparing the economic policies of the states. Sharp increases in debt may fund short term economic expansion but with negative long term consequences.

The second chart has the two outliers (Mississippi and Arkansas) excluded.

State Taxes and Economic Growth

The chart below shows the economic growth of states between 2005 and 2010 (as measured by gross state product (GSP)) as a function of the state's total tax to GSP ratio for the year 2005. Advocates of tax cuts often argue that tax cuts will result in more growth. The governments impact on the economy can generally be divided into five categories: regulation, taxation, spending, monetary policy, and debt. Analysis at the state level might somewhat isolate the impact of taxation, since all states use the same currency and are therefore subject to the same monetary policy of the federal government. Most empirical analysis of tax policy compares national growth rates over different periods in history during which different tax policy was in effect. Advocates of supply-side economics frequently point to the Reagan tax cuts and the growth that followed them as evidence in support of their theory. However, Reagan's policies also resulted in vastly increased national debt, thus the long term impact of Reagan's policies may have been much worse than supply-siders claim. The data in the chart indicates very little correlation between taxation and economic growth. To the extent that there is a correlation, it suggests that higher taxes yield more growth. This contradicts mainstream economic thinking. It should be noted that the the chart includes all types of taxes, not just income tax which supply-siders usually focus on.

On Placebos (and a tangential note about childbirth)

A day before my wife went into labor with our first baby, we found ourselves strolling through the Midtown Global Market (MGM) with our friend Manda. MGM serves somewhat like a mall but with all local as opposed to chain stores and restaurants. After eating some hamburgers from Andy's Garage, and perusing some merchandise, we were on our way out when we stopped to look at a bulletin board. Among the various advertisements and announcements was a poster pedaling Herbalife. Herbalife describes itself as a seller of nutrition, weight-management, and personal care products; but with a market capitalization of $6.6 billion, many might consider it the world's largest snake oil company. 

Upon investigation, I've learned that Herbalife is actually more controversial for its marketing techniques than the questionable efficacy of its products. It uses multi-level marketing, similar to Amway and Avon.

To be fair, Herbalife is far from a product line of sugar pills. Although in some cases, a sugar pill might be preferable. Until 2002, some of its supplements contained ephedrine alkaloids (supplements containing ephedra are now illegal). Its most popular product is the Formula 1 protein shake. I don't doubt that meal replacement shakes can be a part of an effective weight loss program, but I'm a little more skeptical of Formula 2, a multivitamin that contains 500% DV of vitamin B6 in addition to an herbal blend. I'm very skeptical of Formula 3 which claims to be a 'cell activator', whatever that means. Maybe we're too hard on placebos though. The Economist published an article about the research of Edzard Ernst into the efficacy of alternative medicine. Ernst studied “everything from acupuncture and crystal healing to Reiki channelling and herbal remedies,” and found that 95% of it was no more effective than placebos. Placebos, however, can be very effective. Some doctors are coming around to the idea that they should not be hesitant to prescribe placebos. Surprisingly, one study showed that placebo treatment for irritable-bowel syndrome was effective even when the patients were told that they were taking placebos. Sometimes the practitioner's job is just to do something, and then let the patient's body take care of the rest.

The amount of intervention involved in childbirth seems to be coming under more and more scrutiny over the years. Fortunately, the hospital we went to was a little less interventionist than most. My wife was never given an IV, an intervention that is routine at some hospitals. Artificial breaking of the water is still a common practice even though there is strong scientific evidence that, under most circumstances, it has no benefit. Is it done because the practitioners don't read research papers, or just because they want to do something, to feel like they are doing their job, even if (scientifically speaking) it is pointless.

My wife made it through labor without IVs or drugs or induction, but that doesn't mean that it was easy. It was long and painful and exhausting. Just when she finally considered opting for drugs, we found out that she was 9 cm dilated. Not long after that she began pushing. As she moved from one pushing position to another, a nurse came in with two small plastic tubs filled with liquid. She said that this was a special pushing juice, and that as soon as my wife drank it she would be able to push much stronger. I hadn't slept for 27 hours. Standing in the dimly lit room, the experience became surreal for me.

The day after the birth, I was carrying two cups of coffee from the hospital coffee shop back to our room when I ran into a former coworker. We talked briefly about what's changed at the company since he left. He told me that his wife was also in the birth center, but she got an operation, not a baby. “It's okay though, we have a lot of kids already,” he said. Naturally, this caused me to reflect on how lucky I was.

Standing at my wife's side during the final pushes, it was as though all of my life's failures were now insignificant. In a few moments, I would become a father, and my life would be redefined. Moments before my healthy son, Cedric, was born, I glanced at the label on the foil wrapper covering the special pushing juice: '100% Pure Apple Juice'.

In Defense of Debt

Comparing government debt to personal debt is comparing apples to oranges, a fact that many fail to understand. I often hear comments like “I pay my bills, the government should pay theirs.” I actually find it almost heartbreaking that last year people donated $2.8 million dollars to the Department of the Treasury for the purpose of reducing the public debt. I fear that these people are under the impression that the debt will eventually be paid off. Interest expenses on public debt in 2010 totaled about $414 billion dollars, and the debt increased by about $1.7 trillion that year. Let us assume that the government both stops all new borrowing and manages to pay all of the interest itself. The $2.8 million per year provided by the generous benefactors would then reduce the debt to zero by year 5125417. That's right, we are just over five million years away from being debt free by donation.

The debt is a problem. United States debt to GDP ratio is 92.7% according to the IMF. That is high, but Japan's is 225.8%, and that country has yet to enter an economic crisis. Still, too much money is wasted on interest, but unlike personal debt, increasing public debt often improves the overall health of the economy. Granted, personal debt can be used to pay for education and some other things that improve an individual's financial health, but all of the credit card debt accumulated in exchange for clothes, liquor, and BBQ Branding Irons has little long term economic benefits. The government, on the other hand, often spends money on infrastructure like roads. This type of spending can generate economic returns that outweigh the cost of interest. It should also be noted that the government pays a much lower interest rate than individuals.

Before we go any further I should make the disclosure that I am not a Keynesian, I'm a socialist. I believe that all forms of capitalism will eventually fail. I also believe that the working class should advance policies that are in its own interest, regardless of those policies' effect on the economy in general. Having said that, I believe that government intervention in the economy can alleviate some of the problems that capitalism creates. Thus the Keynesians do have a point. Increasing government spending can create jobs, and build capital that the private sector is failing to build itself (such as infrastructure and education). Part of the reason that past attempts at Keynesian policy have been ineffective is that they are always implemented halfheartedly. Politicians always like to compromise. The other problem is that, simply put, the government is spending on the wrong things.

The next time a Republican lectures you on the need to cut the bloated government budget, ask him/her this question: What is the federal government's largest expenditure. I would guess that most wouldn't have an answer for you, but some might suggest that Social Security or the Department of Health and Human Services (HHS) is the largest federal expenditure. It is true that, at $854.06 billion for the year 2010, HHS is the single greatest outlay listed in the Department of the Treasury's reports. However, 93% of that money goes to Medicare and Medicaid (usually considered 'mandatory' items). Social Security is listed as $754.179 billion, while the Department of Defense is listed as $666.717 billion. However, it is generally accepted that this is not the true cost of the U.S. Military. Nuclear weapons, environmental cleanup related to nuclear weapons, and naval nuclear reactors are handled by the Department of Energy at a cost of $17.88 billion. $9.942 billion goes to the Coast Guard through the Department of Homeland Security. International Security Assistance is listed as $11.373 billion. The largest expense of U.S. militirism that often gets ignored is the Department of Veterans Affairs at $108.275 billion. The total for all of these is $814.187 billion.

To the extent that the United States is practicing Keynesianism, it is practicing military Keynesianism. As the debate continues about the raising the debt ceiling, I urge people to keep two things in mind: the level of debt is a problem, but not a crisis; and to the extent that there is a spending problem, it is one of poor priorities.

Two Kids En Route from Minneapolis to Oklahoma City

Barack Obama Will Win the 2012 Presidential Election

The 2012 Presidential Election will be the first presidential election to use the new electoral apportionment based on the 2010 census. Because states experienced differing levels of population growth between the 2000 and 2010 censuses, eight states will gain electoral votes, while 10 will lose electoral votes in the 2012 election. Texas, for example, experienced the greatest change- gaining four electoral votes. In 2008, Barack Obama was elected with 365 electoral votes versus John McCain's 173. If that election were rerun with the new apportionment, Obama would have been elected with 359 versus 179. To win the 2012 election, Republicans will still need to gain another 91 electoral votes. They could gain 95 by winning the six states that Obama won by the narrowest margin in 2008: North Carolina, Indiana, Florida, Ohio, Virginia, and Colorado (listed in order from narrowest margin to greatest). (Nebraska's Second Congressional District was also among the jurisdictions Obama won by a very small margin, but with only one electoral vote it will probably be inconsequential.) From this purely statistical perspective, the outcome of the 2012 election will be determined by Colorado. Presumably, if the Republicans can retake Colorado (which they previously lost by an 8.95% margin) then they can easily win the other five. An alternative theory might suppose that Obama wouldn't have done nearly as well in Colorado if the Democratic National Convention hadn't been held in Denver in 2008. This might suggest that Virginia will be the most important battleground. The home state of the candidates can also sway election results. (Notably, Walter Mondale's home state of Minnesota was the only state he won in the 1984 presidential election.) If Mitt Romney is nominated, however, he will have little chance of winning his solidly Democratic home state of Massachusetts. The home states of Sarah Palin, Mike Huckabee, and Newt Gingrich (Alaska, Arkansas, and Georgia) were all won by McCain in 2008. Tim Pawlenty may be the only serious contender who could potentially swing his home state of Minnesota to the Republican side. Obama's margin of victory was 10.24% in Minnesota, which has 10 electoral votes. Pawlenty, however, is performing dismally in polls of Republicans. Moreover, McCain may have performed even worse in Minnesota if the 2008 Republican National Convention hadn't been held in St. Paul. The 2012 Democratic and Republican National Conventions will be held in Charlotte, North Carolina, and Tampa, Florida, respectively. Both locations are within the six key swing states listed above.

I predict the Republican nominee will be either Mitt Romney or Newt Gingrich. Romney will be the first choice of the Republican establishment that seeks to nominate whoever they think is most electable. Newt Gingrich would represent a compromise with the Tea Party faction which sees Romney as being too liberal. Both will have difficulty with Christian social conservatives. Romney because he is a Mormon, and Gingrich because of his history of adultery and divorce.

Any votes Obama looses will be from the left. A sober analysis of his policies would conclude that he is the most right wing Democratic president in recent history. The Republican plane of attack will therefore have to rely on vague accusations such as implications that he is 'un-American' (as has been characteristic of the birthers' accusations). The alternatives for left voters will be few. Although Ralph Nader has suggested he might run, he will be 78 years old on election day, and it can be assumed that his campaign would be very limited. Stewart Alexander is seeking both Socialist Party and Green Party endorsement, but he is not well known. Most of the left who are too disillusioned to vote for Obama again simply won't vote.

In all likelihood, Barack Obama will win the 2012 election, probably with an only slightly narrower margin than 2008.

In Defense of Ponzi Schemes

Well, I don't actually mean to defend Ponzi schemes, it's just that I've heard the term used incorrectly one too many times. Bernie Madoff and Tom Petters put a lot of work into concocting their schemes, and I'm sure they don't appreciate it when people casually accuse the Social Security program or the Federal Reserve of being Ponzi Schemes.

Jim Cramer on his Mad Money show said, “We all know the name of the biggest Ponzi scheme in history and it’s not even illegal. In fact, it is run by the U.S. government. And the name of it – well, they call it Social Security.” John McCain similarly said in reference to Social Security, “It’s a Ponzi scheme that Bernie Madoff would be proud of.” Texas Governor Rick Perry (no relation to myself as far as I know) said that counties that opted out of Social Security are “going to take care of their people in the future. You can't say that for Social Security. It is indeed a Ponzi scheme.”

We should start by establishing just what a Ponzi scheme is. I was among the presumably few who were familiar with the term 'Ponzi scheme' before the Bernie Madoff collapse. A few years ago I dabbled briefly in Second Life, an online virtual world. Second Life has its own economy with a virtual currency that can be exchanged for real US dollars. Several virtual banks were launched by Second Life users, but unlike normal banks, these ones offered APYs of around 70%. The most prominent of these was Ginko Financial, which reportedly owed depositors $750,000 at the time it collapsed. Ginko's management never admitted guilt, saying that if a bank run had never occurred, it would have been able to pay all obligations. It's difficult to draw the line for what's too good to be true. SPM Structured Servicing Holdings returned 134.6% in 2009 by investing in mortgage-backed securities. I'm not making a direct comparison here, those returns are unsustainable, and investors were never guaranteed anything (not even that their initial investment would be preserved). In the end, the biggest red flag with Ginko Financial was that its management was never very clear in explaining how it was making so much money.

Charles Ponzi didn't invent the Ponzi scheme, but his operation, which took in millions of dollars in 1920, will remain one of the most legendary. Ponzi didn't plan on setting up an outright fraud starting out. He tried to start a legitimate business selling advertisement in a business listing catalog. This failed, but he received a letter from a Spanish company inquiring about the catalog. The letter contained an international reply coupon (IRC), basically a coupon that can be exchanged for postage in any Universal Postal Union member country. This gave Ponzi the idea for an arbitrage operation in which he would buy IRCs from countries where they are very inexpensive and then redeem them in the United States. He borrowed money and sent it to relatives in Italy who then bought IRCs and sent them back. It turned out that Ponzi had miscalculated the overhead expenses of buying and selling large amounts of IRCs, but peoples willingness to lend him money with the promise of a 50% return in 45 days was apparently enough to convince him to make the leap from the business of arbitrage to that of fraud. While he continued to claim that he was making money hand over fist using IRCs, any and all interest that he actually paid out was from money obtained from new investors. The scheme was ultimately doomed to failure, as the pool of potential investment money was limited. Ponzi, perhaps cognizant of this fact, bought a controlling share of Hanover Trust Bank of Boston and began plans to start a conglomerate involved in banking and import/export operations near the end of his scheme. It seems he thought that he could return to legitimate business if he could just sustain the fraud long enough.

The typically identified similarity between Social Security and Ponzi schemes is that payments to beneficiaries are financed by taxes on current workers, who also will, in theory, expect to get benefits when they retire. Firstly, this isn't exactly true, but more importantly, it wouldn't make it a Ponzi scheme even if it were true. When Michele Bachmann said “Social Security, like I told you, is out of money. This year it is borrowing from the general treasury,” she was just doing what Michele Bachmann does best: making stuff up. The Social Security Administration reported that by the end of 2010 assets in the retirement fund totaled about $2.4 trillion. That is the highest it's ever been. That isn't to say that there are no problems. The fund will eventually start to be depleted, but even without reforms, the fund is not expected to be out of money until sometime between 2037 and 2052.

The most important difference between Social Security and a Ponzi scheme is that Social Security never claimed to be producing fictitious profits. Moreover, too many people seem to think that their Social Security account is equivalent to a 401k or IRA account. Social Security is an insurance program. Although there is a relationship between one's account and the amount they receive in benefits, individuals do not own their Social Security accounts.

The logic of those who claim that Social Security is a Ponzi scheme could be used to claim that any organization with increasing liabilities is a Ponzi scheme. Just to give one of a multitude of examples, AMR Corporation, better known as American Airlines, had an increase in total liabilities of $817 million between 2008 and 2009. During that same period it had an operating loss of $1.004 billion, but American still has yet to default on any of its debt. By the logic of Cramer, McCain, and Rick Perry we should conclude that American is paying coupons on its bonds, not with money it has obtained through operations, but with money it acquired from new debt, and is therefore a Ponzi scheme.

The problems in the Social Security system could easily be fixed by increasing taxes, but at this point it seems there will be more political will in the Capitol to do the inverse: decrease benefits. In 1935, during this country's worst financial crisis, a decision was made to take care of the elderly, the disabled, and the surviving families of deceased workers. How is it possible, that with all the technological advances since then, that we now no longer have the ability to do this.

I don't think Ponzi or Madoff were really driven by greed. Near the end of his life, after being deported from the United States, Charles Ponzi gave a final interview while living in Brazil. "Even if they never got anything for it, it was cheap at that price. Without malice aforethought I had given them the best show that was ever staged in their territory since the landing of the Pilgrims!... It was easily worth fifteen million bucks to watch me put the thing over," he told the reporter. Prestige motivates more than greed. It motivates despots to massacre their opponents rather than retire comfortably. Many volumes could be written about how to achieve it, but under the ethos of capitalism achieving a dollar figure is sufficient. The question of how that figure was achieved is, inevitably, secondary.

Mayday 2011 at Powderhorn Park

Every year In the Heart of the Beast Puppet and Mask Theater organizes the Mayday Parade, Ceremony, and Festival in Minneapolis, Minnesota. This year the theme was Caws to Unite!

d

I discovered this door on a tree at Powderhorn Park.

It states, "Here is the Secret"

"we're born in our dreams."