Tag: ponzi scheme

‘The Problem with CLASS Is That It’s Voluntary.’

As I write, the House is debating a bill that would repeal the CLASS Act, one of two new entitlements created under ObamaCare. It’s hard express just how awful this program is. Here’s my attempt from back in October, when the Obama administration admitted CLASS is a bust:

The idea behind CLASS was that the government would run a voluntary and self-sustaining insurance plan to help the disabled pay for long-term care, including nursing home care…

Congress required CLASS to set each applicant’s premiums according to the average applicant’s risk of needing such long-term care, rather than her individual risk. But averaged premiums are only attractive to people with above-average risks. Since few people with below-average risks would enroll, the average premium would rise. That would encourage more people with below-average risks not to enroll, and the vicious cycle would continue until the program collapsed.

As it turns out, CLASS collapsed even before its 2012 start date. The same thing happened when Obamacare imposed the same sort of price controls on health insurance for children in September 2010: the markets for child-only coverage collapsed in a total of 17 states, and are slowly collapsing in even more.

Everyone with a rudimentary understanding of insurance saw this coming. The government’s non-partisan actuaries warned of “a very serious risk” that CLASS would be “unsustainable.” One wrote, “Thirty-six years of actuarial experience lead me to believe that this program would collapse in short order and require significant federal subsidies to continue.”

The Democratic chairman of the Senate Budget Committee called CLASS “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.” An Obama administration official wrote, “Seems like a disaster to me.” One of President Obama’s own cabinet secretaries called the program “totally unsustainable” and echoed a presidential commission on fiscal responsibility by recommending it be “reformed or repealed.”

Sen. Tom Harkin (D-IA) has diagnosed the fatal flaw in this most ill-conceived government program. I swear, I am not making this up:

The problem with CLASS is that it’s voluntary.

Harkin isn’t the first person to wistfully lament that CLASS would be such a great program if only we could put non-participants in jail. He’s just the first person I know of who has said so explicitly. Others have said that the collapse of the CLASS Act should inspire confidence in the rest of ObamaCare, which imposes the same type of price controls on health insurance, and then threatens to put people in jail if they don’t buy it. Here’s how I described that strategy back in October:

Obamacare inspires confidence in its supporters, then, because one part of the law throws a Hail Mary pass to prevent another part of the law from stripping Americans of the insurance that currently protects them from illness and impoverishment. Feel safer?

Rather than make the CLASS Act compulsory, Congress should make the rest of ObamaCare voluntary:

[Ezra] Klein writes, “One way of looking at the administration’s [CLASS] decision is that it shows a commitment to fiscal responsibility.” If so, then let’s handle the rest of Obamacare exactly the same way. Congress should require Obamacare’s health insurance provisions to be voluntary and self-sustaining, just like CLASS: no individual mandate, no taxpayer subsidies. Or is fiscal irresponsibility part of the plan?

Harkin and other ObamaCare defenders have a profound lack of respect for other people’s freedom and dignity. The problem with that is that it’s voluntary. If it were a medical condition, it might be excusable.

Cooling out the Marks in Uncle Sam’s Ponzi Schemes

The flap over whether Social Security is a Ponzi scheme reminds me of two passages about Social Security’s sister program, Medicare, from Cato adjunct scholar David Hyman.

The first is from his book Medicare Meets Mephistopheles, which remains the best (and only) satire ever written about Medicare:

Consider what happened when I presented some considerably less pointed remarks at the conference at Washington and Lee University School of Law. One of Medicare’s most enthusiastic supporters responded by making an impassioned speech that it was improper to describe Medicare as a “Ponzi scheme,” and the program should not be judged by the standards that would apply to a private pension because it was actually a “sacred bond” between the generations. (Leave aside the fact that I never used the word “Ponzi” in my remarks. I did note that the Medicare program bore certain similarities to an inter-generational pyramid scheme, which is something quite different. Of course, it is possible that the use of this term by the commentator was a Freudian slip.) His words brought enthusiastic applause from those members of the audience who had heard enough bad news of the sort found in this book and were more than ready to ignore Medicare’s problems on the basis of empty political sloganeering.

The second is from Hyman’s response to a critic of Medicare Meets Mephistopheles:

Finally, my reply is titled “Cooling Out the Marks, Medicare Style.” This is a reference to a well-known article by a famous sociologist, on con games and the social process of adaptation to failure:

“Sometimes, however, a mark is not quite prepared to accept his loss as a gain in experience and to say and do nothing about his venture. He may feel moved to complain to the police or to chase after the operators. In the terminology of the trade, the mark may squawk, beef, or come through. From the operators’ point of view, this kind of behavior is bad for business. It gives the members of the mob a bad reputation with such police as have not yet been fixed and with marks who have not yet been taken. In order to avoid this adverse publicity, an additional phase is sometimes added at the end of the play. It is called cooling the mark out. After the blowoff has occurred, one of the operators stays with the mark and makes an effort to keep the anger of the mark within manageable and sensible proportions. The operator stays behind his team-mates in the capacity of what might be called a cooler and exercises upon the mark the art of consolation. An attempt is made to define the situation for the mark in a way that makes it easy for him to accept the inevitable and quietly go home. The mark is given instruction in the philosophy of taking a loss.”  Erving Goffman, “On Cooling the Mark Out: Some Aspects of Adaptation to Failure,” 15 Psychiatry 451, 451-52 (1952).

The occupational hazard for Medicare’s defenders is the tendency to become coolers on the program’s behalf. Professor Horwitz largely avoids this temptation, although she is not (yet) willing to concede how hot things actually are in the place in which we find ourselves. The same cannot be said for Medicare’s more ardent defenders, who routinely justify and excuse Medicare’s pathologies on the grounds that it is a “sacred inter-generational trust,” and not just another mediocre government program. Yet, even these ardent defenders may eventually find themselves wondering, in the dark of night, how it came to pass that they became coolers, giving instruction to the poor and working classes on the philosophy of taking a loss at the hands of a program that was supposed to help them, but ended up treating them as marks. With friends like that, who needs enemies?

The Horror of It!

Today Politico Arena asks:

Will Reid be able to portray Angle as an extremist?

With an air of wonder, POLITICO reports this morning that Sharron Angle, facing Senate majority leader Harry Reid in the fall elections, “has previously made eyebrow-raising statements about withdrawing the U.S. from the United Nations, eliminating the departments of Energy and Education, and privatizing Social Security.” Eyebrow-raising? As in “who could stand for such things”?

Beyond the Beltway (and even in pockets within the Beltway), there actually are people who believe that American taxpayers should not be subsidizing the play things of such human-rights-respecting exemplars as Cuba, China, Russia, and their ilk, all of whom sit on the United Nations Human Rights Council. And for some reason, we actually did have both energy and education in this country before the Departments of Energy and Education were created, hard as it may be to believe, just as we had art, philosophy, and radio before the NEA, NEH, and NPR were created. And people retired, on their own savings, before the Social Security system was invented. Speaking of which, it might be useful to note that that Ponzi scheme is now operating in the red, six years earlier than expected. Now there’s a reason to raise one’s eyebrows.

SEC Incompetence

There has been much speculation that the Securities and Exchange Commission (SEC) released its charges against Goldman Sachs on the eve of a Senate vote on new finance regulation in order to help Democrats win that vote.  Perhaps that theory is wrong: It now looks more likely that the SEC timed its Goldman case in order to divert attention away from two SEC inspector general (IG) reports criticizing the commission.

In one of the reports, the SEC IG found that several of the top staffers at the SEC were spending their days surfing the web for porn, rather than looking for securities fraud.  One senior manager spent almost 8 hours a day looking a porn, getting to the point where he even filled up his government issued hard-drive with porn.  His actions were not some isolated incident.  Over 30 employees were found to have regularly used SEC computers to download and view porn.  Some of the senior employees had salaries as high as $222,000 a year.  Sounds like nice work, if you can get it.

But the porn charges are the least of the SEC’s worries.  Also released was the IG’s report on the SEC’s failure to stop the Stanford Ponzi scheme.  The report shows a clear pattern of incompetence at the SEC.  Given the SEC’s failure to act on the Madoff scheme, and the repeated warnings about Stanford, one has to wonder how good SEC investogators are at discovering fraud if they don’t even pursue the clear-cut cases brought to them.

The IG report does help explain the SEC’s poor track record.  The SEC’s head of enforcement made it very clear that the staff was “to bring more Wall Street types of cases.”  Perhaps ones like the recent Goldman case?  The head of enforcement even goes so far as to ask the staff working on the Stanford case, “What are you bringing these cases for?”  Clearly the SEC only seems to care about fraud if its catches a big headline.  Since the SEC was first warned about Stanford, investors placed about $8 billion more into the Ponzi scheme, far more than the damages alleged in the Goldman case.

If anything should expose the current financial regulatory bill being debated in the Senate as a fraud, it should be the fact that it leaves the SEC still standing.  Even worse, it reduces Congressional oversight of the SEC by removing it from the appropriations process.