People are always fascinated by Ponzi schemes, and this has been a week of articles on Ponzi schemes and Ponzi schemers like no other. What are they? Why do they always fail? And if they always fail, why are new Ponzi schemes always hatched? The Times had a long article on that one, the reporter incredulous that smart people start Ponzi schemes, since they must know that what goes up will eventually go down.
The article missed the point. The recent why Bernard Madoff could have run a Ponzi scheme for so long is simple. For forty years he made a ton of money off it, became rich, powerful, and respected, consulted by the SEC on how securities firms should be regulated, able to bestow his largess on properly obsequious beneficiaries. And he also thought that things would never go down, and if they did, he was smart enough to figure a way out of it. Oh, I suppose it is the vulgar Marxist in me, the Bertold Brecht writing the Rise and Fall of the City of Mahogonny, who would reduce all of American capitalism to a con game. No, it is not that simple, if only because most of the players are (were) convinced of their rectitude, and avoided the overt swindling of a Bernie Madoff. Most of our capitalist crooks can go to bed with clean consciousnesses—it’s part of the beauty of the system; our system insists that one of the responsibilities of the filthy rich is to lecture us on the superiority of their morality. And if the financial industry is not simply a big Ponzi scheme, it is close enough. Lots of people thought they could make something out of next to nothing, and were clever enough to live on the peaks and avoid the troughs, and if they were wrong, well, at least they would become rich trying to do. The most interesting article this week, in my opinion, was a little noticed piece that because of the way the TARP money has been distributed—none of it actually used to purchase “toxic assets”—none of the already loose restrictions on executive compensation will be able to be applied. The one thing we know is that those who got filthy rich during the recent asset bubble, except for those, who like Bernie Madoff, were openly involved in swindles, will be able to keep all their money, though the papers are already full of sob stories about multi-billionaries who have been reduced to morosely hanging on to their last billion.
This takes me to the real point of this post; David Paterson’s new budget. Because of a number of factors, of which the most significant is the Wall Street turndown, the New York State budget is seriously in arrears. To address this, and the constitutional requirement that all New York State budgets be balanced budgets, Paterson has proposed a number of service cuts, primarily in education and health care, and a number of revenue enhancers, primarily “levies” of one sort or another, such as a tax on sugary soft drinks, on haircuts, and on cable television. These taxes are almost all regressive, and what is conspicuous in its absence is the lack of a hike in the state income tax. Paterson has rounded up the usual suspects to defend this—an income tax hike will hurt business, people will take their jobs elsewhere, etc. But beyond the question of shared pain, raising income taxes on the wealthy is by far the most efficient way to increase government revenues, and it would also be the most efficient way of ensuring that money, redistributed from the rich to the relatively modest, would be spent and not hoarded. Everyone is expecting Obama to be the second coming of FDR, but the effect of a large stimulus package would be completely undercut if it feeds into fifty state budgets that reincarnate the economics of Herbert Hoover.
Part of the problem is that I think we have remembered only half of the legacy of the New Deal. Part of it was fashioning economic stimuli in various forms. But the other part, was, as it was vulgarly put at the time, was an effort to “soak the rich” by unprecedented increases in income taxes. But the fear of raising taxes is so ingrained in our politicians, that Obama has already moved away from his campaign promise to eliminate Bush’s tax cut on the wealthy. And for all sorts of reasons, it would be easier for Obama to increase taxes than the already strapped state governments. Yes, it is true, imprudent tax increases can further depress a declining economy. But this would only be the case if the government doesn’t spend it. In any event, we can’t be afraid to soak the rich. They are, as Willie Sutton would have said, where is the money is. Any other way to raise revenue, besides questions of fairness, is bound to inefficacious. The rich have utterly failed us, and have come close to ruining the economy, but expect the rest of us top clean up their mess. As always happens in Ponzi schemes, it is we the victims, who have been swindled and been left holding the bag, and we are expected to pay dearly for the misdeeds and miscalculations of others. Suckers of the world unite, we have nothing to lose but other people’s bad debts.