Thursday, February 2, 2012

Letter to an Expat in Newt Country

A friend writes:

 "Could you please write a blog about how it isn't actually the 'entitlement' programs for the poor that  have gotten us into a recession. I could use some good information to quote down here in conservative FL. "

Wow, where to begin?

1. The Recession

Entitlements had nothing to do with the recession. The recession was caused by a bubble in housing prices (see, for example, Tampa and Miami in the chart), in which banks made loans to people who couldn't afford them on the assumption that housing prices would continue to go up. When prices stopped going up, and then started going down (around 2007), banks were left with a lot of bad loans. To make matters worse, a lot of those loans had been bundled into packages and sold to other banks, so nobody was sure exactly what each bank had. So banks didn't want to lend each other money, for fear that the other bank would go bankrupt. So nobody could get loans, so businesses started having trouble paying employees and ordering new inventory, so people got laid off. Which made everyone cut back on their buying, etc.

Republicans want to believe all this couldn't be the fault of the private sector, so they've got a story involving how Fannie Mae and Freddie Mac, which are "government-sponsored" although privately owned.... oh, forget it. The so-called subprime mortgages, which were mortgage loans to people who couldn't really afford them, were made by the private sector.

2. Entitlements

This is pretty much a scam. Entitlements are basically any program that doesn't require an explicit appropriation by Congress. Everyone says, "We have to do something about entitlements," Mitt Romney runs around  talking about the "entitlement society", and then after the election they say, "You knew we were talking about Social Security and Medicare, right?"

Here are some rough figures:

2010 Federal Spending

Social Security 
$701 billion
  520 billion
 273 billion
"Food Stamps" (SNAP)
   70 billion
"Welfare" (TANF)
   17 billion

Something does have to be done about Medicare and Medicaid, because their costs are going up very fast, but that's because medical costs are going up very fast. The Democratic solution to this is to try to control medical costs. The Republican solution is to accuse Democrats of "raiding Medicare" (because they show smaller cost increases), do nothing about medical costs, and then cap how much Medicare will pay. They thus remove the problem from the Federal budget by shifting it onto recipients. This is known as the "Ryan plan", and its fundamental cynicism is compounded by making it only applicable to people under 55, in the hope that they won't pay attention the way people 55 and over would, and that people 55 and over don't mean it when they talk about their concern about future generations.

3. Other

On the allegedly crushing burden of future debt, don't forget that Ronald Reagan doubled the national debt, and that around 60 percent of the current debt was incurred under the Reagan, Bush I, and Bush II administrations.

If you find yourself getting into arguments with libertarians, try this.


  1. That banks made loans to people who couldn't afford them was a very small part of the problem. The problem is that they made a lot of highly leveraged loans (like 100%) to folks who could walk away from them; most of them did. In recourse states, rather than walk away, folks just stopped paying their mortgages. How do you spell relief? Bankruptcy.

    The evidence is pretty clear that once you adjust for down-payments, the average credit scores of defaulters was higher than non defaulters.

  2. Yes, that is what I have been saying: If you don't put any money down, it is easy to walk away.