Tax Rascal

Is a Post-Madoff Stimulus Really More Madoff?

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Is a Post-Madoff Stimulus Really More Madoff?

When Bernie Madoff made every scammer in history look like an amateur with his $50 billion haul, I’m not sure how many people wondered what positive effects he might have had.

But think about the argument for a stimulus program: let’s say we give Taxpayer A $1,000 right now, and saddle him with another $1,500 in higher taxes down the road. The $1,000 makes him feel richer, so he spends it — the $1,500 is a problem, but not just yet (and it’s a problem for a more robust, post-stimulus economy). The stimulus even works if it’s a different taxpayer: if taxpayer A gets the check and taxpayer B pays the consequences, B doesn’t spend less until the bill comes due, but A can go on a spending spree right away.

Let’s compare that to Madoff’s situation: If you had $1 million with Madoff, you made a fake $120,000 every year. Let’s assume that Madoff did invest the money, but skimmed off the profits for his own purposes (nobody knows just what he did with it, but we do know that he didn’t lose all of it and that he never did anything like what he told investors he did). In this case, the investor spends the money he thinks he’s made, and Madoff can spend the money he knows he’s stolen.

Of course, admitting that Madoff was a thief makes the whole scheme collapse: someone spending all that fake money over the years finds out that he was spending principal, not income — and that years after retirement, he’s broke. Meanwhile, Madoff has to stop spending, too: you can’t visit nice beaches or great restaurants if you’re wearing an ankle bracelet.

And the proposed solution to the Madoff mess? More stimulus-like bailouts! The big difference is the motivation in the meantime: most people honestly think that a little more bailout money (and a little more future tax liability) is a good thing, whereas Madoff knew he was being a crook. While that changes how we should look at someone who advocates more bailouts, it doesn’t change the fact that the net effect is to use an accounting trick to delay and worsen the inevitable: we have to admit that, whether in housing, in deficit spending, and in Bernie Madoff’s investment account, we spent money that we didn’t have, and we borrowed against a mirage.

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