Arnold Kling David Henderson revisits his claim that Social Security and Medicare are Ponzi schemes based on a comment by John Seater. John’s point was that Ponzi schemes are necessarily insolvent while Social Security would be solvent if the population was growing fast enough.
Arnold David replies:
It’s not necessarily the case that Ponzi schemes must circle around to the original people who invested in them. If the scheme offered modest enough returns and spread slowly, it could last forever in a country with a growing population. Therefore, Ponzi schemes, contra Seater, could remain solvent.
This actually brings to mind a point much deeper than the Social Security debate; a point that may be fundamental to intellectual disagreement in policy circles.
Arnold is using the term Ponzi scheme and I am certain that he feels its appropriate and meaningful. Yet, as best as I can tell he is stripping of its primary connotation: necessary insolvency and bankruptcy for the participants.
It is tempting at this point to say that Arnold is being “dishonest” about Ponzi schemes and Social Security. This is where lots of intellectual discussion go off the rails/
However, I don’t think “dishonesty” is accurate in the traditional sense. I think Arnold means what he says and is communicating in good faith. Leverage the negative affect of the term Ponzi scheme seems appropriate to him because Social Security and Medicare likewise leave him with negative affect. I am assuming because no investment is induced by the system even though its made to look like a savings system.
Yet the term Ponzi scheme leaves most people with negative affect for entirely different reasons. For most people, the negativity comes from the fact that you cannot win and sooner or later the entire thing must come crashing down.
My points in all of this are several
- This type of cross-talk happens all of the time in intellectual disputes and is responsible for a good portion of the disagreement that we think we are having.
- Though it can easily escalate to attacks on intellectual honesty there is no bad faith on anyone’s part
- It can be cut through with careful and calm reasoning. This is hard to achieve but we should strive for it.
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Wednesday ~ June 29th, 2011 at 1:56 pm
Sister Y
Isn’t it relevant that infinite growth is empirically impossible?
Wednesday ~ June 29th, 2011 at 1:59 pm
Gepap
Social Security is an old age pension, not an investment scheme. It can remain solvent as long as we want it to remain solvent, period, unless someone out there envisions the United States seeing its productive capabilities collapse.
Which goes to the second point – the worker to retiree ratio is nonsense. What matters is the production to retiree ratio. how much is being created/produced physically vs. how many people need to live off this physical production. The farmer-nonfarmer ratio today is worse than ever, but because farm production has gone through the roof, we have enough food to feed everyone in the country. If each worker’s production triples, the fact that the number of workers was cut in half does not threaten the viability of an old age pension scheme.
As for the intellectual point, the way to break through this is to set up a group of agreed upon concrete definitions prior to debate. The agreement on definitions need only be for any one argument at a time.
Wednesday ~ June 29th, 2011 at 2:02 pm
Paul
I agree with you on everything except one thing. David Henderson is not Arnold Kling.
Wednesday ~ June 29th, 2011 at 2:06 pm
Gepap
good catch.
Wednesday ~ June 29th, 2011 at 2:51 pm
BSE
I agree with everything that you’re saying except one thing. To “leverage the negative affect of the term” is a form of dishonesty. Especially from someone who really ought to know better. By Kling’s “definition” all forms of saving with compounding interest will also be ponzi schemes, relying as they do on the continuous accumulation of capital and growth in productivity.
Wednesday ~ June 29th, 2011 at 3:33 pm
Alex Godofsky
It’s worthwhile to point out that Bryan Caplan had a similar post a while ago on EconLog where he tried to claim that the draft was slavery. Anecdotally, ideological libertarians seem to get hung up on the definitions game more than most.
Wednesday ~ June 29th, 2011 at 5:10 pm
rhmurphy
SS is Ponzi in the sense EVERYONE uses the term. People are just getting supertechnical because they don’t like the idea of calling something as sacred as SS a Ponzi scheme.
Look at Minsky’s three types of finance- hedge, speculative, and Ponzi. What makes Ponzi different is that it requires new loans to pay off current interest, not that it must circle back around to the same people. The way the system is currently set up, it needs a growing population. For any meaningful sense of the term, that’s Ponzi.
This only “strips the primary connotation” if Minsky didn’t understand the primary connotation of Ponzi finance. Did he?
Wednesday ~ June 29th, 2011 at 8:28 pm
MGJ
Nicely done.
Thursday ~ June 30th, 2011 at 10:35 am
Freddie DeBoer
This is one of the few rules in the blogosphere– never allege bad faith. The problem is that human beings argue in bad faith all the time, and making it illegitimate to accuse people of it when there is evidence is the best way possible to empower the dishonest.
Thursday ~ June 30th, 2011 at 10:53 am
Adam Ozimek
I think that rule is as commonly abided by, probably moreso, in real life, and especially in academia, than in the blogosphere.
Thursday ~ June 30th, 2011 at 11:29 am
Justin84
Social Security isn’t a ponzi scheme.
It’s a government program which provides a basic amount of purchasing power to the elderly, disabled and survivors of deceased workers.
The program can continue forever, regardless of population growth, provided the economy is producing a sufficient amount of real resources which can be purchased with the dollars the government is providing to beneficiaries.
Friday ~ July 1st, 2011 at 12:42 am
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Friday ~ July 1st, 2011 at 6:23 pm
DrJim
“This type of cross-talk happens all of the time in intellectual disputes and is responsible for a good portion of the disagreement that we think we are having.”
As Wittgenstein said “If philosophers could understand each other they would never disagree.” On the other hand, he showed how hard that is with “If a lion could talk we could not understand him.”
@Sister Y – I assume you mean unbounded, not infinite (of course growth can’t = infinity). But there is no reason growth must be bounded; all that is required is that there always be new ways to add value. Without resorting to end-of-the-universe type arguments, there’s no reason technology can’t continue to add value essentially forever.
Saturday ~ September 10th, 2011 at 11:47 am
In a meaningful sense, Social Security is a Ponzi Scheme. « Increasing Marginal Utility
[...] (and some moderates who should know better) have been lately ridiculing the description of Social Security as one big Ponzi scheme. Mankiw [...]