Categories
Accountability folly general freedom moral hazard national politics & policies responsibility too much government

Giving Up on the Future?

Both Germany and Japan now transfer money, on net, from the young to the old. Austria, Slovenia, and Hungary, The Economist reports, do the same.

The instrument of this transfer? Well, the elephant in the room: those nation’s entitlement programs — their versions of our “Social Security.”

John O. McGinnis, George C. Dix Professor in Constitutional Law at Northwestern University, explains how unnatural the direction of the transfer is. Normally, societies “give more to the young than the young can ever repay.” Remember the truism, “the children are our future”? Families, McGinnis explains, “exemplify this principle. Socially too, the intergenerational flow of resources is what creates civilization as each generation receives benefits from the previous one.”

Taking from the young to give to the old, on the other hand, is not just counter-​intuitive. It stifles innovation, entrepreneurship, progress itself.

What drives the trend? It is complicated. But the politics behind redistributionist programs is the main culprit:

The elderly vote more than the young, who have more distractions, and politicians are thus all too eager to give them goodies. And while individually the elderly would like to direct more resources to their young relatives, when they act in politics they face a kind of tragedy of the commons. They cannot prevent others from living off the state, so they might as well do themselves.

As my generation, the infamous Baby Boom, retires, the demographics turn Social Security against society’s main purpose: building a future. The culture refocuses on retirement … preparing for death.

Another way — on top of growing debt and increasing regulatory burden — we’re leaving our kids with less than we had.

This is Common Sense. I’m Paul Jacob.


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Social Security, wealth transfer, young, old, elderly, Germany, Japan, baby boom

 

Categories
crime and punishment national politics & policies

Ponzi in California

Keeping loans and investments distinct is important not merely for business people, but for governments.

Case in point? Mahmoud “Mike” Karkehabadi’s 89 felony counts of securities fraud and grand theft. The Laguna Niguel, California, movie maker is accused of turning his business into a Ponzi scheme.

When his film Hotel California flopped, bringing in just over half a million dollars, Mr. Karkehabadi convinced his investors to roll over their loans to him into future movie projects. When he did this, it is alleged, he fuzzed up the distinctions between different deals, and entered dark territory. Fraud.

According to California Attorney General Jerry Brown, Karkehabadi “ran a cold and calculated scam, making promises he never intended to keep and using the funds of new victims to pay off the earlier ones.”

I don’t know which this sounds like more, something out of Get Shorty or the Social Security Act of 1935.

It’s interesting that, at the same time it prosecutes Karkehabadi, the state of California is hastily and drastically re-​arranging its finances. Politicians are forced to do so because they have promised the state’s retiring employees returns on investments never made in amounts state government could never, realistically, afford to come through on.

The whole story of the accused Mr. Karkehabadi looks bad. Criminal. But then, so does the whole story of how politicians in California (and elsewhere) behave. 

Fraud isn’t as uncommon as it should be.

This is Common Sense. I’m Paul Jacob.

Categories
too much government

The Moral of the Madoff Story

Detecting fraud is one of the most important roles for government. But our friends in power tend to be incompetent at it.

This becomes clear in light of that most costly Ponzi scheme, Bernie Madoff’s.

Before he was caught, Madoff — who now paints signs in prison — perpetrated one of the longest-​running scams in investment history. It wasn’t an investment scheme that lost its way. No, it was a fraud through and through. It cost his marks billions.

Joseph Cotchett, a lawyer for some of Madoff’s victims, interviewed the fraudster at length. Cotchett calls Madoff “charming” and “no dummy.” But he noted that his fraud was not a great work of sophistication: “It is amazing how simple it was.” 

Still, the regulators responsible for finding this kind of fraud didn’t see it. Early in the millennium, Madoff thought he might get caught. In 2005, the SEC sat down with him, and he thought the gig was up. Regulators, insists Cotchett, did not dig “to the next level, and the next level was not deep by his own admission.” 

Lots of folks clamor, these days, for more regulation. Here’s my advice: Improve the most basic form of regulation — protection against fraud — and build on success. Leave complicated micromanagement stuff alone until governments get competent at the very basics.

If you cannot detect an unsophisticated fraud, how can you run a very sophisticated economy?

This is Common Sense. I’m Paul Jacob.