Social Security Funding and Pyramid Scheme

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Erica Greider has a variety of gripes with Social Security and Jonathan Bernstein has a variety of gripes with her, including “Note too that Grieder calls Social Security a ‘pyramid scheme,’ which is also common usage and also totally wrong.”
I think perhaps the best way to describe what’s wrong with this is to observe that on an adequate level of generality everything is a pyramid scheme. Imagine a country with no Social Security. People would still presumably want to structure their lives such that for a while they produce more than they consume, and then later in life when they’re old they consume more than they produce. The only way for this to work is for them to save money in vehicles that earn a positive rate of return and the only way for that to happen on average is for the future economy to be larger than the present economy. That, in turn, relies on population growth and productivity growth. If population growth slows, you’re going to have a problem. In a pyramid scheme, everyone makes money until you run out of new people to bring into the scheme. Similarly, if you imagine a country with no children and no immigrants then clearly the economy is going to go bust once it starts running out of new workers. But the fact that it would go bankrupt if the country ran out of people doesn’t make Wal-Mart a “pyramid scheme” and Social Security’s no different from Wal-Mart in its implicit assumption that there will continue to be new people in the future.

The difference between a government program founded on an assumption about future population growth and a private investment founded on an assumption about future population growth is this. If your private investment turns out to be founded on a small but meaningful miscalculation, the adjustment happens automatically. If your government program turns out to be founded on a small but meaningful miscalculation, the adjustment requires an act of congress. But the facts about the quantity of real resources available aren’t affected by the existence or non-existence of a public program.

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Keep Your Government Hands Off My Government Programs! - NYTimes.com

Keep Your Government Hands Off My Government Programs! - NYTimes.com: "n a smart column today, Bruce Bartlett looks at why it will be so hard for politicians to cut government spending: because so many Americans who say they support cutting government programs don’t realize just how much they benefit from them.

Remember, for example, when a town hall attendee famously told his congressman to “keep your government hands off my Medicare”? Apparently that bewilderingly blinkered sentiment is hardly unique.

Mr. Bartlett produces the following chart, from a recent paper by the Cornell political scientist Suzanne Mettler, showing how many recipients of government benefits somehow don’t believe they’ve received any benefits:
Percentage of Program Beneficiaries Who Report They “Have Not Used a Government Social Program”
Program “No, Have Not Used a

Percentage of Program Beneficiaries Who Report They “Have Not Used a Government Social Program”
Program	“No, Have Not Used a Government Social Program”
529 or Coverdell	64.3
Home Mortgage Interest Deduction	60.0
Hope or Lifetime Learning Tax Credit	59.6
Student Loans	53.3
Child and Dependent Care Tax Credit	51.7
Earned Income Tax Credit	47.1
Social Security—Retirement & Survivors	44.1
Pell Grants	43.1
Unemployment Insurance	43.0
Veterans Benefits (other than G.I. Bill)	41.7
G.I. Bill	40.3
Medicare	39.8
Head Start	37.2
Social Security Disability	28.7
Supplemental Security Income	28.2
Medicaid	27.8
Welfare/Public Assistance	27.4
Government Subsidized Housing	27.4
Food Stamps	25.4
Source: Suzanne Mettler, “Reconstituting the Submerged State: The Challenge of Social Policy Reform in the Obama Era,” Perspectives on Politics (September 2010): 809.

Pretty amazing, right?

Voting is NOT irrational

The Monkey Cage: Yes, it can be rational to vote. Yes, your vote could determine the outcome of the election. Maybe if 90% of well-educated, older white people do something, we shouldn't be so quick to dismiss it as "irrational." Etc.:
Levitt, at Freakonomics said:

Nobody in their right mind votes because they think they're going to affect the outcome of an election. If you look over the last hundred years of, say, elections for the U.S. House of Representatives, I think there's been maybe one [very close] election that's been decided by votes. And in the modern era, elections that are close are always decided by the courts. There's always litigation -- look at what happened with Bush against Gore. So in no meaningful way can you say that your vote will ever decide an election. The reasons for voting have to be something very different: it's fun, your wife will love you more if you do it, it makes you feel like a proud American -- but never should anyone delude themselves into thinking that the vote they cast will ever decide an election. ... Just about anything you do with your time would be more productive [than voting].

I've discussed this before (see also the string of entries here), so this time I'll keep it brief. Levitt is making a couple of mistakes:
1. At a purely technical level, it's not true that litigation of elections means that a single vote can't matter. Most elections are not litigated, and your vote can be the one that makes the election close enough to send it to the courts. Under any reasonable model, the probability that your vote determines the election is the same whether or not the courts are involved, and you can show this by adding up the probability of any vote margin being decisive. For a mathematical derivation, see page 674 of our article in the British Journal of Political Science.
2. We estimate the probability of your vote being decisive in the presidential election as about 1 in a million, at best. (See, for example, our paper in Economic Inquiry.) But--and this is a big "but"--if your vote does swing the election, this could be a big deal. From the voter's standpoint, a national election is like a lottery: there is a very very small chance that your vote can matter, but if it does, you can get a big payoff. In this case, it's not a personal payoff; rather, it's the social payoff of making the world a better place (as you see it). We discuss this in our article, "Voting as a rational choice: why and how people vote to improve the well-being of others," in Rationality and Society (see also this shorter version published in the Economist's Voice).
If your vote is decisive, it will make a difference for 300 million people. If you think your preferred candidate could bring the equivalent of a $50 improvement in the quality of life to the average American--not an implausible hope, given the size of the Federal budget and the impact of decisions in foreign policy, health, the courts, and other areas--you're now buying a $1.5 billion lottery ticket. With this payoff, a 1 in 10 million chance of being decisive isn't bad odds.
And many people do see it that way. Surveys show that voters choose based on who they think will do better for the country as a whole, rather than their personal betterment. Indeed, when it comes to voting, it is irrational to be selfish, but if you care how others are affected, it's a smart calculation to cast your ballot, because the returns to voting are so high for everyone if you are decisive. Voting and vote choice (including related actions such as the decision to gather information in order to make an informed vote) are rational in large elections only to the extent that voters are not selfish.
3. Levitt says: "Just about anything you do with your time would be more productive [than voting]": Define "productive." Is playing chess productive? Going to the movies? Sledding? Etc.
That said, I agree with Levitt's point that there are a lot of other reasons for voting besides affecting the election. Levitt, Dubner, and I live in New York and Illinois, where any vote has an extremely low probability of determining the presidential election. (First off, it's highly unlikely that New York or Illinois will be so close that one vote can make a difference; second, if either of those states is tied, we're probably in an electoral landslide, in which case swinging either of these states' vote won't change the Electoral College winner.) I vote anyway. So I'm certainly not claiming that rational decision making is the only reason or even the most important reason to vote. What I'm saying is that it can be rational to vote. "Rationality" does not have to equal "selfishness."
I'd like to add one more thing. You've all heard about low voter turnout in America, but, among well-educated, older white people, turnout is around 90% in presidential elections. Some economists treat this as a source of amusement--and, sure, I'd be the first to admit that well-educated, older white people have done a lot of damage to this country--but it's a funny thing . . . Usually economists tend not to question the actions of this particular demographic. I'm not saying that the high turnout of these people (e.g., me) is evidence that voting is rational. But I would hope that it would cause some economists to think twice before characterizing voting as irrational or laughable.
P.S. I don't mind that Levitt doesn't want to vote, and I'm not saying that it's rational for everyone or even most people to vote, and it's fine for Levitt to present arguments against voting, but I don't think it's so great for them to him to use his wide influence to spread the notion that "voting doesn't make good economic sense" as if this is some sort of absolute truth. I think it is far more consistent with the best principles of Freakonomics to try to understand people's behavior, not to snarkily dismiss it as not making sense.

I would think that economists do not vote much given this type of attitude, but the two polls of economists that I have on my hard drive (Davis et. al, 2011, Klein & Stern, 2006) show that economists overwhelmingly vote.  Only 1% in both polls chose not to vote!

Simple Taxes for Thee, But Not For Me | Mother Jones

Simple Taxes for Thee, But Not For Me | Mother Jones: "a big part of the reason for that complexity is that rich people want it that way. A simple tax code is hard to game, after all.

Yglesias » Film Subsidies

Are film subsidies a good idea? Do they correct a market failure that is big enough to justify the taxes? I also wonder about subsidies to sports teams. 
Yglesias » Film Subsidies:

why would you think a target tax subsidy for the movie industry is a smart economic development strategy. Let’s say you start with a certain quantity of public services and a balanced budget. Your money’s coming in from property tax, sales tax, income tax, and a few licensing fees. Now it’s definitely true that a tax break for folks who film movies in your city might spur some additional business activity in your city. But you’ll have to pay for it with either higher taxes or else fewer services. Won’t the higher tax rates just offset the positive impact of the targeted tax break? And if you’re willing to live with fewer services in exchange for lower taxes, wouldn’t it be more beneficially to cut rates across the board?

Regulating Land Use

There are numerous land use regulations that encourage sprawl.  The reason that new development usually has lower density than older developments is largely government action to encourage sprawl by using regulations and providing millions of dollars worth of roads, sewers, and utility connections.  One common regulation mandates that each house must have a minimum amount of yard.  Yglesias:

As Atrios says, the problem with lot occupancy rules isn’t that there’s something terrible about backyards (or front yards or side yards or rows of bushes in front of buildings or what have you) it’s just that land is a valuable commodity. Think about something else. I like television. And most Americans like television. If we had a rule mandating that every new housing unit include a television, it’s not like people would be sobbing in the streets saying “oh noes, this television is ruining my life.” Most people would just watch TV and some minority of cranks would maybe smash TVs in back alleys or whatever.
But this would still be a stupid policy and inefficient allocation of televisions! In a world where TVs are not mandatory, most people buy TVs. Some buy expensive ones, some buy cheap ones, many households own several, and some households own none. Lawns should be just like that, available to those who want to pay the market price, but not cross-subsidized through arbitrary rules. There’s no collective action problem posed by contemplating a world in which most houses include some green space many do not. There’s no adverse selection issue. There’s nothing.

Notes On Government Employment - NYTimes.com

Notes On Government Employment - NYTimes.com:

...most government workers are at the local level, and most of the rest are state workers; the federal government is a small piece of the total. And if you look at what they do, a lot of them are teachers; many of the rest are firefighters, police, and other occupations we sort of like.

Third, why has government employment grown over time? Because, um, we have a growing population. Here’s government employment as a share of the population:

Yes, government got bigger under those socialists Dwight Eisenhower, LBJ, and Nixon. Since then, however, there has been no trend relative to population.

And bear in mind, again, that the representative government employee isn’t a bureaucrat trampling on your liberty; he or she is a schoolteacher.