Is the U.S. Economy One Big Ponzi Scheme?

When I was teaching, I used to joke with students that my classes were particularly demanding because I wanted to be sure they would succeed in the real world so that they could pay for my Social Security checks.  Economists are supposed to believe that self interest is the dominant human motivator.

I was only partly facetious.  Social Security is a pay-as-you-go pension program, in the words of The Economist newspaper.  Today’s tax payers are paying for the income checks for today’s recipients.  We maintain the fiction that there is a “Social Security Trust Fund.”  That sounds like a place where your payroll taxes are deposited to be invested so that funds are there to pay your future benefits.  In reality, this is an accounting device for the Federal government to issue IOUs, essentially borrowing from Social Security taxes to pay for the rest of  current government expenses for which we are unwilling to tax ourselves to pay.

The scary reality is that this is just one manifestation of our whole economic system as a Ponzi scheme.  It is predicated on the notion that we can borrow today to fund our wants and needs, with the expectation that the future will pay off those debts.  While this is hard to do in our personal lives (lenders are aware of our individual mortality), it is easy to do for the overall economy.  Like any good Ponzi scheme, we need to borrow from future payers just slowly enough to maintain the fiction of responsibility.

The most obvious place to see this is with the Federal government.  Federal debt now is over $20 trillion, an unfathomable number.  This amount is over 100% of our annual gross domestic product.  In other words, were we to run the economy for a year to only pay off the Federal debt and pay for nothing else, we would not quite get that done in that year.  On top of this Federal debt, households have private debt of nearly $4 trillion.  So it is not just the government living beyond its means.

In the fiscal year that will finish at the end of the month, we will add over $400 billion to the Federal debt.  The last time we ran a budget surplus was 2001, the final budget of the Clinton Administration.  (There is certainly irony that Democrats are the Presidents who oversee fiscal restraint.  The last time the Federal budget was close to balanced before the Clinton administration was in the Carter administration.)

The Clinton-era budget surpluses were ended by three events:  the Bush tax cuts for high income earners, the expansion of Medicare to include a drug benefit (whose largest beneficiary was the pharmaceutical industry), and then the great recession triggered by the 2007 financial crisis.  Deficits in recessions are called for by most economists, who see deficit spending as one tool for fighting down-turns in the business cycle.  In these downturns, investments in public infrastructure stimulate a return to fuller employment.  But where we are today in the business cycle with low unemployment and large, some would say unprecedented corporate profits we should be running budget surpluses and paying down our collective debt.  Yet we just added to the deficit at the rate of $400 billion a year.

Of course, paying our way would require a combination of expenditure reductions and tax increases.  It is so much easier just to borrow.  Let the future pay.

Many economists justify borrowing by assuming that economic growth will mean more people with higher standards of living will populate that future.  The idea is that they will gladly pay our debts because we left them better off than we are.  This is sort of like me expecting my former students to gladly pay my social security income because I helped them develop the tools to be more productive than I was.  And this worked in the seven decades after World War II.  Both the numbers of Americans and the size of our economy grew meaning that a larger and wealthier population was able to imagine paying off the debts of former generations.  Growth masks temporarily the eventual reckoning that will come.

Of course we did not pay those debts, rather we added to them.  That is easier than raising taxes and reducing expenditures.  The result has been that some segments of our society continue to get wealthier, largely on the backs of future Americans.  The issues of income inequality and deficit spending are closely linked.  Like in Ponzi schemes, those who act early and buy into the scheme profit at the expense of those who pay in later.

The so-called First Law of Economics applies here.  There is no such thing as a free lunch.  Like in any good Ponzi scheme payment is deferred to the future.  Those who inherit our debts will regret our collective profligacy.

Mark W. Anderson

About Mark W. Anderson

I am proud to be a Mainer, born in Caribou and schooled at Brewer High School, Bowdoin College, and the University of Maine. I am grateful for a 35 year career at UMaine, the last decade in the School of Economics.