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Wednesday, February 20, 2019

Ponzi Schemes and Socialism Rely on the Same Economic Snake Oil

The “democratic socialists” of today, like Bernie Sanders, Elizabeth Warren, and AOC, are trying to sell you “the economic snake oil of socialism.”

Photo by Vidar Nordli-Mathisen on Unsplash

Below is an excerpt from George Will’s op-ed in Friday’s Washington Post, “It’s common to praise socialism. It’s rarer to define it,” (bold added) that starts with this summary of Marxist/socialist philosophy from Karl Marx: “From each according to his ability, to each according to his needs!”

After many subsequent dilutions, today’s watery conceptions of socialism amount to this: Almost everyone will be nice to almost everyone, using money taken from a few. This means having government distribute, according to its conception of equity, the wealth produced by capitalism. This conception is shaped by muscular factions: the elderly, government employees unions, the steel industry, the sugar growers, and so on and on and on. Some wealth is distributed to the poor; most goes to the “neglected” middle class. Some neglect: The political class talks of little else.

Two-thirds of the federal budget (and 14% of gross domestic product) goes to transfer payments, mostly to the non-poor. The U.S. economy’s health-care sector (about 18% of the economy) is larger than the economies of all but three nations and is permeated by government money and mandates. Before the Affordable Care Act was enacted, 40 cents of every health-care dollar was the government’s 40 cents. The sturdy yeomanry who till America’s soil? Last year’s 529-page Agriculture Improvement Act will be administered by the Agriculture Department, which has about one employee for every 20 American farms.

Today’s angrier socialists rail, with specificity and some justification, against today’s “rigged” system of government in the service of the strong. But as the Hoover Institution’s John H. Cochrane (a.k.a. the Grumpy Economist) says, “If the central problem is rent-seeking, abuse of the power of the state, to deliver economic goods to the wealthy and politically powerful, how in the world is more government the answer?”

The “boldness” of today’s explicit and implicit socialists — taxing the “rich” — is a perennial temptation of democracy: inciting the majority to attack an unpopular minority. This is socialism now: From each faction according to its vulnerability, to each faction according to its ability to confiscate.

What a TV Show Can Teach Us About Socialism

I’ve lately been recording and watching episodes of the fascinating CNBC series American Greed. I’ve noticed a common theme in these episodes, and perhaps that theme is one explanation for the eternal fascination with, and perpetual attraction to, the fantasies of “getting something for nothing” and “prosperity for everybody without sacrifice” known as “democratic socialism.” As I wrote in my 1995 article “Why Socialism Failed“:

Socialism is the Big Lie of the twentieth century. While it promised prosperity, equality, and security, it delivered poverty, misery, and tyranny. Equality was achieved only in the sense that everyone was equal in his or her misery.

In the same way that a Ponzi scheme or chain letter initially succeeds but eventually collapses, socialism may show early signs of success. But any accomplishments quickly fade as the fundamental deficiencies of central planning emerge. It is the initial illusion of success that gives government intervention its pernicious, seductive appeal. In the long run, socialism has always proven to be a formula for tyranny and misery.

The fascinating common theme I’ve observed in episodes of American Greed is the ubiquitous fallibility of even well-educated and financially-successful people for the financial Ponzi schemes of serial con artists. In episode after episode of American Greed, there are countless examples of Americans with life savings of $1 million or more who have fallen prey to the seductive, financial Ponzi schemes promoted by skilled investment con artists and who then lose their entire life savings. As I wrote in 1995:

The temptress of socialism is constantly luring us with the offer: “give up a little of your freedom and I will give you a little more security.” As the experience of this century has demonstrated, the bargain is tempting but never pays off. We end up losing both our freedom and our security.

Likewise, the seductive temptress of “financial get rich quick schemes” is constantly luring gullible Americans, even those with substantial life savings in the millions of dollars that characterize somebody who has worked hard and been financially successful, with the offer from the financial con artists profiled on American Greed: “Give me your millions of dollars in life savings, and I will generate higher-than-market returns for you and make your rich.” As the experiences of thousands of victims of Ponzi schemes so clearly demonstrate, the bargain of abnormally high returns and guaranteed easy riches is tempting, but it never pays off in the long run. Investors eventually lose all of their money, and their financial security evaporates.

Socialism Is a Scam

Like the con artists profiled on American Greed (now mostly incarcerated) the “democratic socialists” of today, like Bernie Sanders, Elizabeth Warren, and AOC, are trying to sell you “the economic snake oil of socialism” that is as worthless and bankrupt in the long run as the numerous Ponzi schemes being profiled regularly on American Greed that leave investors penniless.

The greedy attraction to “get rich quick schemes” featured regularly on American Greed helps explain the eternal temptation of socialism.

The greedy attraction to “get rich quick schemes” featured regularly on American Greed helps explain the eternal temptation of socialism that is gaining popularity today despite the mountain of evidence that Ponzi schemes always fail in the long run, which equals the mountain of evidence that socialism fails in the long run. The temptation of both Ponzi schemes and socialism are based on two seductive factors common to both fantasies: a) the initial success of both Ponzi schemes (early investors temporarily get high returns in the beginning of the financial con job/flim-flam) and socialism (Venezuela seemed economically successful in the beginning of its socialist con job), and b) the attraction of both myths of getting something for nothing, i.e., they are both “get rich quick schemes,” or “get rich at the expense of somebody else schemes.”

So if thousands of financially successful Americans with lifetimes of work experience and millions of dollars in savings fall for financial Ponzi schemes so regularly on the American Greed TV series, is it any wonder that millions of millennials with limited life experience and limited financial savings are now falling for the economic snake oil and economic Ponzi scheme known as “democratic socialism” being peddled today by AOC, Warren, and Sanders?

This article was reprinted with permission from the American Enterprise Institute.

  • Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.