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Endless economic growth is its own Ponzi scheme

Posted: September 22, 2011 - 12:08am

It didn’t take long for Texas Gov. Rick Perry to back away from his accusation that Social Security is a Ponzi scheme. It turned out to be a lighting rod that’s too hot to hold. Now he’s merely saying that the nation’s “elected leaders must have the strength to speak frankly about entitlement reform.” And if they find the courage to do that, maybe they’ll also admit that our entire growth based economic system has been an entitlement that’s not sustainable either.

First of all, Social Security doesn’t have the fraudulent characteristics that define a Ponzi scheme. It wasn’t conceived to enrich its creators at the expense of working Americans. However, there are similarities between the two that makes Perry’s analogy worth considering. In 1996 Paul Krugman, a liberal columnist and winner of the Nobel Prize in Economics, wrote that the redistribution of wealth occurs “because of its Ponzi game aspect in which each generation takes more out than it put in.”

For hard line conservatives, wealth redistribution is code for socialist welfare. That’s probably why Perry would like to see Social Security dismantled. But in reality, neither Perry nor Krugman are suggesting that we should abandon the program entirely. To them, it’s a matter of restructuring how revenue is generated and benefits paid out. They probably differ on whether it should be administered by federal or state governments or put completely into the hands of the private sector. Right now, though, it’s a massive federal program. So in any scenario the repair work has to begin in the nation’s capital.

It didn’t have to be this way. At least 30 states recognized the need for an old age pension system before passage of the Social Security Act of 1935. In fact, in 1915 Alaska’s territorial government enacted the first such legislation that wasn’t challenged on the grounds it was unconstitutional.

Despite these efforts, retirement benefits were only being paid to about 3 percent of the senior population. Then the Great Depression took hold of the nation, plunging more than half of them into poverty. So the federal government, led by Franklin D. Roosevelt’s New Deal administration, took the reins.

In 1935 no one anticipated World War II or the baby-boom economy that would follow. So they might be excused for not predicting its long-term impact on the Social Security Trust Fund. But that we’ve been irresponsibly ignoring the baby boomer effect since then isn’t unique to the retirement issue. And if we examine the history of home ownership we’ll find the same Ponzi-like feature that Krugman explained 15 years ago.

This economic story parallels that of Social Security. For the 40 years preceding World War II, only about 40 percent of the American population owned homes. But after the baby boom began, the rate of home ownership steadily increased until it peaked at about 69 percent in 2004.

During the same time period, median home values outpaced inflation by a staggering 325 percent. That means for decades homeowners have been able to bank incredible gains in home equity, much of which was financed by the succeeding generations of first-time home buyers.

Meanwhile, in 60 years, median income has increased a paltry 9 percent in real dollars. This drastic decline in wages relative to property values means fewer and fewer people will be financially capable of purchasing a home. They’ll be living in tenant housing, which will in turn leave a serious shortage of home buyers. So today’s younger generation of homeowners could get saddled with property that’s not worth the value of their mortgages.

Social Security isn’t the only long-term insolvency issue threatening the economic future of today’s working class Americans. The housing sector has serious problems too. And both are examples of a system that depends on the fantasy of limitless growth to finance the present without regard for the future.

We’ve had six decades of believing we’re entitled to live beyond our means. And we’ve done more than borrow money. We’ve used up more than our fair share of vital resources. Paraphrasing Perry, to tell our kids that the economy we’ve built will benefit them in the years ahead is a monstrous lie.

• Moniak is a Juneau resident.

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