Discover Politics

Mired in a recession, Americans probably don’t want to hear it, but our personal financial troubles may pale in comparison to our national woes. Our national debt continues to climb, while tax revenues have fallen with the recession, deficit spending has dramatically increased, and baby boomers are beginning to cash in on medicare and social security. Our nation’s checkbook is a mess.

There are several conservative commentators, like Professor Walter E. Williams of George Mason University, who see an interesting parallel between our treasury and the illegal scheme that has famously embroiled Bernard Madoff, and Tom Petters: the Ponzi scheme. Most recently, David Kahane used this comparison in a column for the National Review.

A ponzi scheme is a simple-structured fraud where investors are continually drawn to a fund with promises of a high yield return on their investment. This return is not actually derived from profits earned, but from subsequent investments. The scheme can run smoothly as long as the base of investors continues to grow – and it usually does grow on its reputation as a reliable investment. However, once the flow of cash is stunted, either by economic downturn or lack of adequate investment, the scheme is usually exposed, and the investors realize too late that they have been defrauded. Their investments are squandered through “profits” made by earlier investors, and the fiscal philandering of Mr. Ponzi (or Madoff, Petters, etc.).

While Washington has undoubtedly mismanaged our national portfolio, can we really compare our federal treasury to this heinous scheme?

According to the Congressional Budget Office, the U.S. federal debt will increase by 7.14 trillion dollars in the next ten years, with yearly deficits consistently above $500 billion. During this same period, federal mandatory spending (Medicare, Medicaid and Social Security) will nearly double, and continue to increase until long after current taxpayers have shuffled off this mortal coil.

To predict the long-term effects of these problems would be highly speculative. Perhaps our economy will experience hyper-inflation; our debt devaluing at the expense of our economic might. Perhaps revenues will rise proportionally to our debt. Perhaps our alien overlords will implement some paternalistic caste society and our daily servings of protein mush will be provided free of charge. Regardless, with a decade of deficits, exploding entitlements, and Joe Mauer nearing retirement, 2019 is starting to look like pretty a dark year.

So one must beg the question: how did we ever get into this position? Is it really crazy partisan demagoguery to liken our situation to such a heinous crime? Professor Dan Hofrenning of St. Olaf College can see the link, but he is not sold quite yet. He points out that there are distinct differences between the two situations:

“The counterargument (to the comparison between the government and a Ponzi scheme) is that, unlike the participants in a Ponzi scheme, the citizenry is immortal.  There will always be people to pay the debt.  Of course, the real consequence is increasing debt payments for future generation(s). So the question is: what’s a reasonable amount to carry?   I think our debt as a portion of GNP is still below the post WWII levels.  But it’s going up.”

Professor Hofrenning’s observation begs the question: If this is a Ponzi scheme, then who’s Ponzi? Who is responsible for siphoning off all of our money, and will they ever cut and run? Well the culprit appears to be our nation’s federal discretionary spending, no big surprise there. Whether the money will ever dry up is an entirely different matter. In order to cover budget deficits, Congress has been borrowing from the Social Security trust fund, issuing special issue government securities, (basically really big IOU’s). As these pile up, the likelihood that they may be defaulted on, changed, forgotten, or at least devalued through inflation is increasing with our new debt. Until this happens, America will get by with passing the debt off to the next generation.

So basically, no, the government is not running a Ponzi scheme. Of course, neither was Tom Petters until his empire crumbled.

Is there a solution?
Advocates of fiscal sanity, like Dave Walker of the Peter G. Peterson Foundation preach that the best solution is very simple: run the country’s finances like a responsible family handles its checkbook.

Walker strongly advises Congress to adopt statutory PAYGO, or pay-as-you-go-spending, which means that the government should only spend money that it has. This is far from a partisan charge. Republicans under George W. Bush, and Democrats under President Obama have both been party to massive spending and entitlement increases. But PAYGO can be a hallmark for either side of the aisle. Republicans can utilize it to keep taxes and government spending low; cutting government programs due to the realistic spending guidelines. Democrats, like Bill Clinton, have used it to spend responsibly, justifying tax increases on the wealthy.

Professor Hofrenning, however, is skeptical about the chances for a politically viable solution to our mounting debt. He points out that the last major Presidential candidate to campaign on deficit reduction was Ross Perot, and he failed to garner 20% of the vote. Perhaps it is a hopeless cause. But one warning for those with the forethought to look ahead to 2019: massive debt always comes with a cost, and a catcher’s knees can’t last forever.