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!

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I discovered this door on a tree at Powderhorn Park.

It states, "Here is the Secret"

"we're born in our dreams."