Paul Krugman is right about one thing in his column today: “What we are experiencing right now is a top-down disaster.” Unfortunately, Krugman does intend this sentence to mean that our economy is suffering from too much top-down central planning in Washington.
No, Krugman just wishes that he was the central planner. If he had been, Krugman claims, we wouldn’t have the deficits we have today. Here is how Krugman assigns blame for our current deficits:
First, there were the Bush tax cuts, which added roughly $2 trillion to the national debt over the last decade. Second, there were the wars in Iraq and Afghanistan, which added an additional $1.1 trillion or so. And third was the Great Recession, which led both to a collapse in revenue and to a sharp rise in spending on unemployment insurance and other safety-net programs.
The Bush tax cuts and Iraq are popular leftist-deficit boogeymen, but as a new study from Pew detailed last week, they are not the top two causes of shift from surplus to deficits. Analyzing all CBO reports from January 2001 to today, Pew found that the Bush tax cuts are only to blame for 13% of the shift from surplus to debt. Afghanistan and Iraq combined totaled only 10%. To put that in perspective, Obama’s stimulus alone is responsible for 6% of that shift.
The biggest driver of today’s deficits? Technical and Economic revisions … which is CBO’s way of saying the tech and housing bubbles burst.
Krugman wants to blame all our economic problems on deregulation. He doesn’t even try to explain how deregulation caused the tech bubble, but he has blamed Ronald Reagan’s deregulation for the entirety of the housing bubble.
Left unexplained by Krugman is how deregulation allowed Countrywide to become the nation’s largest mortgage orginator by 2006, 45% of those mortgages being subprime. The answer is federal government intervention in the housing market. Fannie Mae was Countrywide’s biggest customer. A 2000, Fannie report found:
Countrywide tends to follow the most flexible underwriting criteria permitted under GSE and FHA guidelines. Because Fannie Mae and Freddie Mac tend to give their best lenders access to the most flexible underwriting criteria, Countrywide benefits from its status as one of the largest originators of mortgage loans and one of the largest participants in the GSE programs. …
When necessary—in cases where applicants have no established credit history, for example—Countrywide uses nontraditional credit, a practice now accepted by the GSEs.
Countrywide never could have become an industry giant without preferential treatment from Fannie Mae and Freddie Mac.