TCS Daily

The US Housing Bust is a Big Deal

By Desmond Lachman - August 10, 2007 12:00 AM

As US home prices at the national level begin to decline for the first time since the Great Depression, most Wall Street analysts maintain their rosy outlook for the US economy by allowing hope to triumph over experience. For while they concede that any bottom to the housing market bust is slipping ever further into the distant future, they hew to the view that the US housing sector is far too small to derail the overall US economy.

They arrive at this happy conclusion by blithely closing their eyes to the almost certain negative impact of falling home values on overall consumer spending. More importantly yet, they also choose to ignore the probable negative economic fallout from the seizing up of US financial markets that is presently fully in train as a direct consequence of the acute problems now plaguing the sub-prime mortgage market.

Wall Street optimists minimize the bursting of the housing market bubble by emphasizing that residential construction accounts for a mere 6 percent of the overall US economy. This observation leads them to contend that even were home construction to decline by 20 percent over the next year, it would not shave much more than 1 percentage point off overall US economic growth. And with the rest of the US economy still in fine shape, they happily conclude that there is every reason to expect that the US economy will still continue to expand at a perfectly respectable 2.5 percent rate over the next twelve months.

In maintaining their rosy economic outlook, most Wall Street analysts choose to ignore Fed Chairman Ben Bernanke's recent reminder that a protracted decline in home prices could have a material impact on consumer spending. According to Mr. Bernanke's congressional testimony last week, the Federal Reserve estimates that household consumption could be negatively impacted by as much as 9 cents for every dollar that home prices decline on a sustained basis. And considering that housing wealth, which is the main source of household wealth, presently amounts to 150 percent of GDP, and that household consumption still accounts for around 70 percent of GDP, the prospect of a protracted period of declining home prices is not something one wants to cavalierly brush aside.

Contrary to what many on Wall Street would have us believe, the prospect of a protracted period of declining home prices now seems to be anything but a remote possibility. Indeed, with home prices already falling and with increased inventories of unsold homes rapidly mounting, it is difficult to see how home prices do not start falling at an accelerating rate over the next few months in order to clear a saturated market. This would seem to be all the more so the case as a tightening in mortgage lending standards and as the resetting of adjustable rate mortgages further crimp housing demand at the very same time that a marked increase in home foreclosures leads to more houses returning to an already glutted market.

Perhaps an even greater overlooked risk to the US economy than slowing consumer expenditure is the prospect of a full blown "credit crunch" in the financial sector that would seriously curtail bank lending to the economy as a whole. Sadly, this prospect too now seems to becoming an ever increasing likelihood. In his congressional testimony last week, Chairman Ben Bernanke owned up to the very real possibility that the financial sector's losses from sub-prime mortgage lending could very well reach as much as US$100 billion. Judging by the roughly US$2.3 trillion presently outstanding in sub-prime and Alt-A mortgage lending, Mr. Benrnake's present mortgage loss estimate is all too likely to turn out to be on the low side.

Heightening the risk of a real credit crunch is the fact that mortgage lending was not the only form of reckless lending in which the US financial system has been engaged over the past several years. Rather, financial institutions increasingly made risky loans to the US corporate sector at ever tighter interest rate spread, while they dispensed with the usual covenants on these loans with which banks in the past had protected themselves. Now that the music has stopped, all too many financial institutions will find themselves nursing large losses that will temper their willingness to lend.

In the end, the Federal Reserve must be expected to ride to the rescue of the financial sector by substantially cutting interest rates. However, at present, the Federal Reserve sees the risk that cutting interest rates too soon might simply prolong a credit market bubble that needs to be deflated. The Federal Reserve also appears to be mindful that an unduly quick reduction in US interest rates might cut the ground from under the US dollar, which is already trading at a 16 year low on a trade weighted basis.

If the economy indeed slows abruptly over the next few quarters under the weight of its housing market woes, it will not be the first time that Wall Street analysts as a group missed a major turning point in the economic cycle. Rather, it will only confirm that those analysts seem to have learnt little from the bursting of the earlier bubble in 2001.



What goes up must come down
Lachman is quite correct that housing market declines are a very big deal, and not at all "far too small to derail the overall US economy.".

Housing is the biggest purchase most of us ordinary mortals ever make. So while it may not form a great part of "the" economy (which, after all, includes more than a few equity fund trillions), it certainly forms the major part of OUR economy.

And in terms of the butcher, the baker, the candle stick maker it makes a big difference when housing starts are down-- for the simple reason that construction forms such a large role in our employment pattern. A lot of people are buying stuff for their families because of construction jobs, and those workers are not all readily absorbed into other sectors when no one is putting up roofs.

In fact the housing boom is the magnet attracting people to our area, like carpenters who look for work, find it and become the customers the home builder sells his finished houses to. Prosperity becomes self fulfilling.

That causes a cascading effect when housing expands, and more money is being made and spent in the area. And it also cascades on the way down, as housing starts subside and their missing paychecks translate into slow consumer demand.

This causes slowdowns throughout the retail sector. The last time this happened, for instance, they all had to put their RVs, ski-doos and SUVs in the front yard with for sale signs on them. This depressed new auto sales in Detroit to the point where the zero cash option was born.

To me, not a trained economist, the country would be better served by a levelling off of housing values, not this roller coaster ride of absurd increases in supposed value, followed by the gut-rearranging plunge to the bottom. The Boom and Bust cycle is rough on us. Next time around, let's opt for less instant riches from anticipated appreciation, and just use our houses for living in, and keeping the value they had when we signed for the mortgage.

In 1946, home prices did not exceed our ability to pay, and prosperity proceeded. Today a typical home in my area goes in the $200-350K range, and two incomes are required to even think about one. Plus, these house-poor masses can't put aside much in the way of discretionary spending. It all goes toward the mortgage. How does this allow circulating money to reach the rest of our economy? To me, it's lopsided.

2 Questions
1) Do you have SPECIFIC policy recommendations for improving the residential housing market?

2) Any thoughts on how to start a similar downward pricing trend in the healthcare and educations sectors?

"In fact the housing boom is the magnet attracting people to our area, like carpenters who look for work, find it and become the customers the home builder sells his finished houses to. Prosperity becomes self fulfilling." -Some Guy Logged into Roy's Computer

'Prosperity is self-fulfilling?!'
What have you done with Roy?

Not really
Mr B-- These are two really good questions. Good answers to them would be very helpful for keeping our economy healthy-- in fact crucially so.

As to the first, housing, I don't have any good suggestions. From my own experience in real estate I would first allow the current price deflation to stay on its present course, and finish collapsing. These market corrections are necessary, whether they occur in the stock market or anywhere else. And if you interrupt them with artificial fixes they just need to finish playing themselves out naturally at a later time.

It'll hurt.

As to the second, education and health, I still don't have any bright ideas. Education costs are inflating rapidly because of the value of the diploma. We're moving toward an age of increasing wage stratification. And the cost of a bachelors degree will reflect its value in future income. More so with an advanced degree.

Medicine, I'm afraid, only has a socialized answer. As long as the free market dictates the cost of preserving your life, you'll pay anything. ANYTHING. Right?

To me, this is one instance where a government concerned for the public welfare would step in and become a single payer, creating a strict scale of fees for services. I don't see any way the operations of a free market could get this done. And the way costs are escalating, we won't be able to afford health care at all in another dozen years-- there won't be enough money in the economy.

Do you agree? Do you have a better way of looking at it?

Indeed, Quick Jason,
tis a veddy stvange case.

It IS a big deal…
..if you have been living beyond your means. Falling interest rates and real estate prices sound like an opportunity to me.

I've actually always been a big believer in the proper uses of capitalism. It's been good to me over a long career spent in various areas of real estate.

What I disapprove of, in my highly judgmental way, is the improper use of capitalism-- as a tool by which the crafty can enslave their work force and skim off the value added that their labors contribute to, so in the end the only people getting rich are the con men at the top. I prefer a world where labors get rewarded proportionate to the efforts people put in.

In the past couple of decades, phenomenal increases in productivity have been realized-- while at the same time the rewards enjoyed by the workers who made those increases a reality have remained stagnant. Meanwhile the net worth of the mythical average American has leapt forward-- only because ten percent of us-- the successful few-- have made out like bandits, while the remainder have either stayed in place treading water or have fallen behind. Look at median incomes and the story appears a lot different.

Yet we all enjoy the opportunity of possibly getting ahead. And the illusion of thinking at times that we actually are. So we like the idea that our main store of equity is appreciating in value. And we pump up the prices of our homes until the pressure becomes unsustainable-- and the baloon pops.

The last time I saw this sad event occur was in the early eighties... and I made quite a good living at tending the aftermath for the next fifteen years.

So I've always been a capitalist, yes. But a capitalist pig? Never.

Right now I see opportunities out there for a good liquidator. I'd buy cheap, and put the same people back in as renters that got moved out at foreclosure.

Very glad to see that you managed to escape, Roy. I assume that your abductor(s) bound, but --foolishly-- did not gag you.

Within an hour, they were forced to flee, and you heroically logged into your account to assure us that you we alright. It's good to have you back! (Unharmed. Unchanged.)


Improving Market Performance
"Do you agree?"
Roy...not so much!

1) In general...government policies should primarily support the interests of US Citizens...i.e…US CONSUMERS. The agendas of Business, Labor and Special Interests are secondary. These entities are not Citizens, do not have a status in the Constitution and do not even physically exist! The government was created by consumers for consumers...and the interests of consumers are best met when CHOICE is optimized. Federal and Local government can best service the consumer by, among other things, repealing legislation that supports (semi)-monopoly control, repealing tariffs and quota's, establishing Right to Work, and rewriting the FED/FDA charters.

2) Housing...according to my insurance agent, my house costs more to replace than it is worth on the market, despite more than doubling in market value since its purchase in 1989. This is due to inflationary conditions in the housing industries...caused by tariffs, zoning/rental/labor statutes and the interest rate cartel run by the FED. The FED has no option but to dampen economic activity in order to control inflation. Their actions work, but are temporary and inefficient, in that they fail to address the distorted market conditions (mostly caused by government) that fuel inflation.

3) Education...the "value" of the diploma should be replaced by proof of learning. Instead of being issued diplomas for attendance, candidates should earn their Credentials by passing an appropriate testing regimen. Whether an individual is self schooled, tutored or attends MIT...whether they are 15, 22 or 50 years old...if they pass the Materials-Engineering testing, they all are equally certified. Educational businesses should earn their tuition by adding value, not by printing diplomas.
Expanded consumer choice will optimize education value.

4) HealthCare...socialistic medicine APPEARS to work elsewhere on the planet ONLY because the US taxpayer subsidizes prescription (and other healthcare) costs worldwide. The drag of our Institutional Philanthropy is in addition exacerbated by excessive healthcare regulation. This regulation originates in the misconception that healthcare is an insurance product. Most healthcare is a consumer an oil change or tree trim. If health care related legislation (including the FDA charter) is rewritten to support consumer choice, both prices and quality will optimize.

Home prices too high
Am I one of the minority who thinks $400K or more is a ridiculously high price for a normal house in the 'burbs? I'm not talking about California or NYC suburbs either, but areas such as those around Chicago or DC. These areas were higher priced than the national average, but were still within reach of the average wage earner. I never thought I would say this, but I miss the days when one could buy a house in the 200s or (gasp!) under 200K.

Health Care in the US is NOT a free market
The market for health care in the United States is far from being a free market. It is heavily government controlled and government regulated. Here is how the government has destroyed the market for health care in the United States:

- In 1965, that passage of the legislation creating Medicare and Medicaid meant that overnight millions of Americans lost all financial responsibility for their own health care. As a result, Medicare and Medicaid artificially stimulate demand for health care. Any way you cut it, when something is made free, people will attempt to use more of it -- and whether they need it or not will be much less of a consideration when someone else is footing the bill.

- Medicare and Medicaid destroy any incentive on the part of millions of consumers to shop for the best health-care values. After all, it is not THEIR dollars that are being spent -- so it benefits them not at all to shop around for the best prices and greatest values.

Instead, the incentive to shop for best value shifts to government bureaucrats and insurance companies, who then try to manipulate, restrict or otherwise limit the demand according to THEIR needs, not the consumer’s. It was Congress who created the much-hated HMOs and forced businesses to offer them to employees.

- Medicare and Medicaid also largely destroy any need for doctors and hospitals to compete for health care customers. The vast increase in demand caused by the two programs mean that most doctors and hospitals have all the customers they can handle, so why competer for more? The result is that the programs greatly reduce any incentive to improve service, to lower costs or to improve the quality of the goods and services being delivered.

- Medicare and Medicaid, with their fixed payment schedules for each type of medical procedure, reduce any incentive for doctors to excel at what they do. The brilliant, dedicated and conscientious doctor receives the same payment for a given procedure as the average, less dedicated and less conscientious doctor.

- At the same time these programs have artificially stimulated demand and reduced the incentive to compete or to improve, Medicare and Medicaid are making it increasingly difficult to increase the supply of health care and are destroying the incentives to get into medicine. There are now over 110,000 pages of Medicare rules and regulations that a physician must comply with or risk going to jail. Doctors that accept Medicare patients now spend OVER ONE FULL DAY PER WEEK doing nothing but paperwork to comply with Medicare regulations.

In summary, the programs have increased demand, effectively destroyed much incentive to compete or improve and have made it much more difficult to increase the supply of health care goods and services. What happens when you stimulate demand for certain goods and services while simultaneously destroying the competition between the suppliers of those goods and services and reduce the ability of those suppliers to provide the goods and services? Prices skyrocket!!! Supply and demand rules!!

These government plans are destroying the health care market in America. And every new increase in prices caused by these programs becomes an excuse to broaden the programs to include more people, thereby insuring another increase in demand and further upward pressure on prices.

And faced with a bonfire, politicians propose to put it out with gasoline. That's what the "universal health care" proposal amounts to.

A 2003 survey by the American Association of Surgeons and Physicians revealed the following about doctors who accept Medicare patients.

1) 33% do not accept new Medicare patients; they simply aren’t worth the hassle and the risks.

2) 40% restrict services to all Medicare patients; (Reasons: “billing and regulatory requirements” ranked first, followed by “hassles and/or threats from Medicare carriers/government, “fees too low” & “fear of prosecution or civil actions”)

3) 41% have had difficulty finding a referral physician; a large percentage of doctors don’t want to deal with Medicare patients.

4) 32% say level of service is less than 5 years ago;

5) 22% is the amount of total staff & physician time spent on compliance with Medicare regulations. Over one full day per week is spent on complying with Medicare paperwork rules.

6) 65% would not take part in Medicare again; 2 out of every 3 doctors currently seeing Medicare patients wish they had never seen them in the first place.

7) Medicare claims cost offices 50% more to process than do private insurance claims. Such is the comparison between the efficiency of the private sector versus the government.

8) 67% predict more doctors opting out of Medicare;

9) 58% predict severely rationed care;

10) 36% predict a complete collapse;

11) 62% plan to retire at an earlier age than expected 5 years ago; (Reasons: “Increased government interference,” followed by “increased regulatory burden.” Money ranked number six.)

Here are some more facts about what socialized medicine has achieved in other nations.

The Health Minister in Britain recently admitted that more than one in eight British patients wait more than a year for treatment under the National Health System (NHS).

More than one in three doctors that work under the NHS buy private health insurance precisely so they will not have to rely on the “free” system.

More than 6 million British citizens buy private health insurance for the same reason.

So few of the British, after 60 years experience with the NHS, want to enter or stay in the profession of medicine, that Britain has had to import more than 20,000 physicians in the last three years alone.

Canadians spend more than $1 billion in America’s health care system every year rather than use their “free” health care system.

We need a free market in health care, not more government spending and controls. Medicaid and Medicare should be repealed.

One final fact: When Johnson sold the nation on the Medicaid and Medicare programs in 1965, he did not make the claim that these programs were necessary because the poor and the elderly did not have access to health care; he didn't make that argument because it was false. Instead, he argued that these programs were necessary because a percentage of the poor and elderly had to rely on private charity, and THAT, he claimed, was "beneath their dignity". Well, they are still being supported by charity, it's just forced charity at the point of an IRS-gun.

I never understood that argument
That private charity was beneath the dignity of the poor.
But having the govt steal the money and give it to you, wasn't.

A close call
It was a close one. But I did get the name of the gang that abducted me. It was the Council of Economic Advisers.

They were wearing red bandanas. And looked mean. Fortunately I managed to tap that message out with my elbows.

The left has brainwashed millions into believing they've a right to other people's money
Millions now believe that they have a right to food, a right to shelter, a right to health care, etc, to be provided "by the government". And since they've been taught not to think, but merely to memorize and regurgitate leftist talking points, it never occurs to them that government produces nothing and can only take money from those who've earned it to give to those who have not.

The latest clamoring, of course, is for "universal health care" and all the Democratic presidential candidates are promising to deliver it.

But the fact is, nothing whatsoever justifies the notion that some individuals should be given free (or reduced cost) goods and services at other individual's expense.

Health care, like all goods and services, is produced by human labor. It does not grow on trees or fall from the sky. To claim that some individuals have a right to such goods and services, at no (or reduced) cost to themselves, is thus a claim that they have a right to someone else's unpaid, involuntary labor -- it is a claim to have a right to either the labor of those who directly produce the health care (doctors, nurses, anesthetists, etc.) or a right to the labor of those who must work to earn enough money to pay the taxes that will pay those who produce the health care.

A claim to the right to unpaid, involuntary labor on the part of others is a claim to the right of involuntary servitude on their part. It is a claim to the right to have others work as your slave.

Granted, it may be part-time slavery, since those whose labor you are claiming a right to will only have to work part of their time to provide these goods and services -- but claiming a right to part-time slavery is hardly less despicable than demanding full-time slavery.

The purpose of calling it "universal health care" is to help evade and disguise the fact that at root, this scheme, like all welfare schemes, is the enslavement of the few to provide benefits to the many. It is a scheme to further loot the upper-income tax payers -- to steal more of their money, which means to steal more of their labor -- for purposes of providing benefits to others.

The scheme is based on the belief that it is proper to punish the most rational, most ambitious, most energetic, and most productive members of society by forcing them to work for the benefit of the most irrational, laziest, the most incompetent and most unproductive members.

Mankind made a great leap forward when it recognized slavery as an evil. But the slavery we eliminated in America in the 19th century was the enslavement of the many by the few. Liberals are determined to complete the implementation of a new slavery: the enslavement of the few by the many.

Both are thoroughly rotten and evil notions. Nothing on earth justifies the claim that some people have the right to exist at the expense of others, that some are entitled to receive benefits while others are sentenced to eternal labor to provide those benefits. It’s evil no matter how many people are in each group.

There's a snag with that approach
You say "The FED has no option but to dampen economic activity in order to control inflation."

Well, the only tool they have in their tool belt to do that is to raise interest rates. And that's how the crisis got started in the first place. Variable rate mortgages got triggered by higher rates, and people who could afford their homes one month couldn't the next. So raising the rates higher would just cause a fresh round of foreclosures.

If anything, the Fed will be lowering rates and increasing liquidity to stave off calamity in the hedge funds-- which are heavily invested in subprime mortgages and which are now nearing the point where they're causing banks to topple.

My approach would be even more libertarian than yours-- do nothing.

Don't even lift a finger to bail anyone out. Let everyone involved in this mess suffer the full effects of the fall. The pain will cause the lending industry to voluntarily adopt more conservative guidelines in the future. And to tolerate less in the way of runaway home appreciation.

2. I'm surprised to find your replacement cost is now higher than your market value. I know materials costs have gone up. But labor costs couldn't account for much of an increase, and construction loans should be cheap in this era of comparatively low interest rates. So I can't explain that.

I've saved your best comment until now. "In general...government policies should primarily support the interests of US Citizens...i.e…US CONSUMERS. The agendas of Business, Labor and Special Interests are secondary. These entities are not Citizens, do not have a status in the Constitution and do not even physically exist!"

Would that that were the case! I'd love to live in that world. Unfortunately in this world, banks and corporations run the show. They are more powerful than mere mortals. When it comes to exercising your rights of free speech, for example, you can get on a soap box and yell at the top of your lungs, reaching dozens of ears. Whereas a corporation can put out a $50 million ad campaign on television. Sadly. you can't top the power of money.

3. "Education...the "value" of the diploma should be replaced by proof of learning. Instead of being issued diplomas for attendance, candidates should earn their Credentials by passing an appropriate testing regimen."

I think that's the way it is now. My understanding is that college degrees are not awarded for mere attendance. It's much like when I was in school-- you need to pass some sort of exam before they give you the paper. Same with high school-- they call them EOGs, or end-of-grade exams. And masters and doctors have to write some sort of thesis, showing that they can both think and write at the same time.

But all that is in fact a little beside the point. The real worth of a diploma now is that it means you made the first cut. There are only so many good jobs out there, and there are a lot of bad ones. And only 27% of the public possesses a bachelors degree or higher (I know, isn't that amazing?). So having one of these priceless bits of paper just gets you in the door to getting a life.

THAT is why they're worth so much money. It's a hell of a world, isn't it?

Talk about being brainwashed...
This entire post is nothing but a series of libertarian market-will-handle anything hate-the-poor slogans. If you think the country would be better off with even larger differences between the rich and the poor, let me forward some email I received from Africa: it will make a skeptical, free-thinking free market guy like yourself rich.

Health care
The idea that a person will pay anything to preserve his life is untrue. If it were true, there would be no such thing as suicide. Old, decrepit people and people in severe, longlasting pain frequently do not want to put a lot of effort into staying alive. People with advanced Parkinsons or some other forms of severe brain damage have nothing left with which to form an opinion. Many people, if forced into such a choice, will sacrifice for their children.
The free market leaves open a large variety of options for the type and quality of health care available; these options disappear under socialized medicine. For instance, I spend about $1300 a year on supplements and nothing on insurance. My reasoning is that I am using my resources to be healthy now and for as long as I can; rather than squandering my health and hoping some doctor will be able to fix me when something goes wrong. Many of the supplements I buy are not available without a prescription in Europe, because the socialized answer requires top-down control.
The health care system the U.S. has now is damaged because the consumer's costs are largely disconnected from his benefits. There is little reason for him to not demand as much health care as he care get, he's not spending more than a small co-pay. Socialized medicine breaks the connection between costs and benefits completely, so that rationing by waiting time and bureaucratic fiat replaces rationing by cost. Furthermore, "creating a strict scale of fees for services" means that people who provide superior services (and there is a huge range of competence among doctors) won't be able to price their services accordingly. The best will flee to a free country, where their value will be appreciated. Or they will quit. Either way, the best disappear under socialized health care.

Value and price do not mean the same thing. Please do not conflate them.

The housing prices that were high until recently were caused in part by government manipulation of the currency. Manipulation is now causing prices to return to a more reasonable level. Naturally, this causes problems, and the best that can be done at this point is try not to do still more damage. Incidentally, if the current efforts to reduce (illegal) immigration succeed, housing demand will fall even more.

It's called socialism.
Liberals don't like that term. They prefer 'progressive'.

Too bad about those illegal immigrants.
What price do you put on the law?

That could be fixed very quickly if the borders would be opened to ALL with valid passports, who were healthy and not criminals or terrorists.

They could enter the USA, buy property, work for whomever would hire them.

After 5 years they must become a citizen or go home.

That should prop up the housing market.

The hallmark of the brainwashed is the failure to provide arguments, evidence or data
Instead, you attempt to dismiss the other person's position by smearing it as "hate-the-poor" and by invoking the leftist talking point that the gap between rich and poor is evil and automatically damns capitalism.

But the fact is that anyone actually interested in "helping the poor" would begin by observing some basic facts about those living below the official poverty line in America. Here is data on those people taken from the last Census:

76% percent of poor households have air conditioning. By contrast, 30 years ago, only 36 percent of the entire U.S. population enjoyed air conditioning.

46% of all poor households actually own their own homes. The average home owned by persons classified as poor by the Census Bureau is a three-bedroom house with one-and-a-half baths, a garage, and a porch or patio.

Only 6 percent of poor households are overcrowded. More than 66% have more than two rooms per person. The average poor American has more living space than the average individual living in Paris, London, Vienna, Athens, and other cities throughout Europe. (These comparisons are to the average citizens in foreign countries, not to those classified as poor.)

Nearly 75% of poor households own a car; 30% own two or more cars.

97% of poor households have a color television; over half own two or more color televisions.

78% percent have a VCR or DVD player;

62 % have cable or satellite TV reception.

73% percent own microwave ovens, more than half have a stereo, and a third have an automatic dishwasher.

Virtually everyone has a telephone.

Virtually all of the poor have plenty of clothing; very few people freeze in the winter.

They all have access to free public education.

They all have access to free medical care at emergency rooms.

They all have access to free food through the food stamp program. In fact, the single biggest health problem among the poor is obesity.

On the average, they work less than 1000 hours a year, which is about 20 hours per week.

This last fact is the most significant one. These people could improve their lives substantially by simply holding a full-time job. But a substantial percentage don't do so because they are either high-school dropouts that lack any skills, or they are addicted to drugs or alcohol, or they gave birth to a child out of wedlock or they are involved in criminal activities or gangs. Thus, most are poor by choice.

John Edwards is right, there are indeed two Americas: there is one America that is working and paying taxes, and there is another America that is largely sitting on its butt living off the other half. And what John Edwards and all the Democratic politicians want to do is to further punish the working and tax-paying group by taking more of their money to give to the sitting-on-their-butt group.

Next, the person sincerely interested in eliminating poverty would take a global survey of the economies of the world to see what historically works and what doesn’t work in terms of producing the most wealth and minimizing poverty.

Such a survey would reveal an overwhelming correlation: the greater the degree of government interference, regulation and control over the economy, the lower the standard of living and the greater the number of people living in poverty. In the most tightly regulated and controlled economies, such as that of the former Soviet Union, Cuba, North Korea, etc, people actually starved to death by the millions, while the just-slightly-less controlled socialistic economies impoverished still more millions.

The lesson is quite clear: controlled, planned, regulated, highly taxed economies perform poorly and impoverish large percentages of their populations -- while free, less regulated, less controlled, more lightly taxed economies perform much better. If economic progress and a rising standard of living are the objectives, freedom works; statism does not. There has never been such a gap between “rich and poor” as the gap that exists between the party elites under communism and fascism and the millions they starve to death.

Such a survey would also include a review of the “War on Poverty” program in the U.S. In the last four decades, the US Federal Government has spent about 6.6 trillion dollars on various anti-poverty programs. The spending increase began in the late 1960s and has continued at an increasing rate ever since. In the decade prior to the launch of this spending, both the rate of poverty and the number of people living under the official poverty line were decreasing steadily. In the decades since the spending increase began, the poverty rate stopped falling and the number of people living under the poverty line has increased substantially.

Go here to see a graph that illustrates how poverty stopped falling when this massive government spending began:

There is only one rational conclusion.

Having completed this survey, the honest poverty opponent would immediately set about campaigning for the de-control and de-regulation of the American economy and further cuts in taxes of all sorts coupled with reduced government spending on anti-poverty measures.

However, I’ve yet to see any alleged opponent of poverty advocate any such thing. Instead, they agitate for greater and greater government control, more regulation, higher taxes and still more spending on anti-poverty programs.

Obviously, reducing poverty is not their goal.

Useful idiots
There are those who acknowledge all the facts you have presented and intentionally try to deceive in order to accumulate power. Many are running for the democratic nomination for President and are in the majority in Congress.

And then there are the slim majority of useful idiots who believe the propaganda.

Now with the internet, and a belief that the majority of "useful idiots" are not completely irrational, there is hope that rational evidence, as you have just presented, will sway enough to create a slim majority of rational voters who value liberty.

Good idea (no irony intended)
Marjon-- I'm almost with you on this one. The current laws just aren't working. There's no reason why we shouldn't just set a very large quota for legal work permits, open to anyone able bodied on either side of the border. Maybe ten or twelve million. And put them through a background check. That way we would know who they were and could process their tax payments-- through a valid guest workers' tax ID.

They would need to file current residence with the state. This would keep some burdensome paperwork out of federal hands, and we could keep better track of them.

But I don't see the need to give them five years, and then insist they must become citizens or go home. Many are here to become citizens, and that's fine. Many more just want the work. They should be able to renew their work permits indeifnitely, and conveniently go home when the work is slow, or when there are better opportunities in Mexico.

Make them citizens or send them packing.
Saudi Arabia has had guest worker programs for decades and just recently allowed people to buy property and stay after 20 years.

Why should we encourage people to move here to work, and continue to give them the incentive to send most of their money home?

What I would find interesting about my plan is the response of foreign governments. Many require exit visas. I wonder how many countries would try and keep their most talented people from emigrating?

If a significant number of Mexico's professional chose to move to the USA, how would that affect Mexico's economy?

They're already packing
According to this morning's paper far fewer Mexicans are coming across the border now. Too much trouble, with the new enforcement rules.

In Washington state, crops are rotting in the fields. Our own NC Growers' Association calls it a farming crisis. So I guess the nation gets its wish. No more cheap labor.

Another Washington DC lie
"We can't deport millions of illegal aliens."

Enforce the law and they will go home by themselves.

Too bad about the crops. Maybe they could round up all those on welfare or in prisons to pick the crops.

Or, even better yet, they could offer enough money to encourage some to do the work.

The USA DOES have a guest worker program and there are many who try to use it. But true to government form, it is extremely inefficient and takes about 8 months lead time to arrange for the workers.

In NW WA state, many have switched from strawberries to growing raspberries because they now can use mechanical pickers.

The entire so-called housing debacle is being manufactured by those who packaged the MBS and CDO obligations into derivatives. Now we are in a down real-estate market and the underlying value of those fundamental debt obligations has declined. However, nobody is willing to revalue the underlying obligations because it would reveal the stupidity of institutions for leveraging their MBS and CDO purchases by further borrowing money to increase ROI yields. Now, the financial industry is offering comically low values for these debt instruments so they can capitalize on their intrinsic values and those who will manage to re-fi out of the pool. Those debts that are based on pure fraud will be unrecoverable. Everything else still has value. So the housing bust is no big thing as housing bargains will become more apparent in the short-term future. The problem is that the institutions are afraid to lend -- thus we have a liquidity crisis. The middlemen are hoping that the Fed, Fannie, Freddie and FHA will bail the homeowners out and thus perfect the value of the pool components and allow the recovery of a profit. Already the FED is pumping dollars into the lending market to allow people to purchase the right-priced homes coming onto the market.

The entire story of the subprime-trigger mechanism is described at

Hallmark of a good post
Almost 48 hours since posting and no retort from the lefties.

Guess you guys going have to really think a bout this

Not 'slim'...
And then there are the slim majority of useful idiots who believe the propaganda.
The only exception I take to that statement is the word 'slim'. But I wish it were so.

Why no definitive answer?
Well, the post you refer to is certainly well written and exhaustive in its detail. I'm guessing that no one has taken the time to compose specific responses to every one of the observations being expressed. This would be an hour out of someone's life, to send a message maybe two or three people might ever read.

Me? I didn't happen to come across it, until just now. But it's worth addressing, so I'll do that now.

"The" poor
Your thesis is very well argued, and you have come up with a lot of supporting data, for which some kudos are in order. But I believe your reasoning proceeds from a faulty premise-- one that I've pointed out here before on occasion, in arguments you may not have seen.

There's a temptation for people who've never lived and worked with lower income people to lump them all together in some great, shadowy ur-klasse called "the poor". And it's easy to depict the behavior of these beasts of the imagination if you don't know any of them. But I think it's more useful to distinguish between two distinct groups of people who aren't making it in this country-- both of whom may have cheap color TVs in their living rooms.

The first is the underclass, the dysfunctional class, the criminal class. They have no education as they are put into dysfunctional public schools and drop out early. They grow up, as we say, culturally impoverished because their parents and other peer adults don't have any good lessons to teach them. And they profoundly don't know how the world works-- so they arrive at adulthood being unemployable for a variety of reasons.

Usually, two tracks are open to them. Either they succumb to failure and its adjuncts, alcohol and the crack pipe, or they become criminals. So we deal with them through the courts and the penal system.

Their behavior, while important, is I think beside the point in addressing what liberals mean when they discuss "the poor". Here we have a totally separate group, the working poor. People who are trying to make it but are falling under the wheels.

The plain fact defining them is they're working as many hours as they can get, but are still unable to meet expenses. By the time they've exhausted all available means of credit they're overdrawn, falling behind and being hounded by bill collectors. They try to take out as much time as they can manage to improve their lives, taking night classes, etc. But there's really no time there, and no jobs waiting for them with better pay.

We, meaning members of the progressive community, tend to observe that they're doing the best they can to improve their lot-- but that unaided, they've gone about as far as they can go. And they still have trouble getting to work on time when there's no affordable day care and the old Ford in the driveway can't pass inspection because of $600 worth of needed work.

So instead we say that a society isn't really healthy until it finds a way to open paths for these people to attain at least one goal in life: to be able to actually meet expenses with income.

During this past year for the first time, the average family in America had a net worth of just below zero. That is, the total value of everything they have worked for in their lives was less than the amount of debt they had hanging over them. And I, for one, don't think that's a healthy way for a country to exist.

If you've been unaware of this class of fellow Americans, a good introduction can be found in David Shipler's book, The Working Poor: Invisible in Amewrica.

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