Remember that recession we’re still recovering from? Poor people didn’t cause it.

Four years after a major recession it seems that we’re still not clear on what lessons we should have learned economically. So, let me say it clearly. The recession was caused by a housing bubble that burst and a financial sector that took too many risks and almost collapsed as a result of the bubble. It was not caused by poor people being lazy. Or people wanting stuff from the declining white establishment (Bill O’Reilly). Or Santa Claus Obama (Rush Limbaugh). Or a sudden increase in welfare recipients using drugs (Texas Gov. Rick Perry). Or food stamps (Newt Gingrich).

In the fourth quarter of 2008, the economy contracted at a 9 percent annual rate and unemployment spiked from just over 5 percent to an eventual high of 10 percent in October of 2009. It should go without saying, but clearly doesn’t, that this did not happen because an additional 5 percent of the population decided they wanted to be dependent upon government.

The basic economic story here is that the economy crashed because a housing bubble burst  and took the financial sector with it.  Wall St. had placed fifty dollars worth of bets for every dollar of mortgage payments and had vastly, vastly underestimated the risk of default. The economy is now going through a painful deleveraging process in which individuals pay down their debt. Financial crisis really do simply take longer to recover from than other recessions. Here are some alternate explanations of the past five years that simply don’t hold up:

Food Stamps: The increase in the number of people on food stamps was a result of the recession, not a cause of it. Over at the University of Chicago Casey Mulligan is trying to make the argument that
if we cut the social safety net  it would reduce unemployment because people would be willing to take low wage jobs. 1) Even on his analysis the impact on unemployment is relatively small. 2) It’s not immediately clear to me that increasing the rate at which people are willing to accept lower wages is a good thing. 3) Minimum wage jobs don’t pay well enough for a person to get off of food stamps, so even if people were to accept low wage jobs they’d either be food insecure or need a government program to make up the difference. Here’s a chart of people receiving food stamps.

The Deficit: The deficit spiked as a result of the recession, it did not cause it. The deficit is a problem going forward, but it did not cause either the housing bubble or the financial crisis.

The 47 percent: The Earned Income Tax Credit is the biggest reason that people don’t have a high enough tax liability to pay federal income taxes. The EITC is also specifically designed to discourage dependency because the benefits of the earned income tax credit only apply to people who are earning income. In real life, people don’t neatly divide into makers and takers. Well over 90 percent of people have received government benefits at some point, and well over 90 percent have paid taxes.

Drugs: Rick Perry wants to drug test welfare recipients in Texas. Rick Scott tried that in Florida and lost money because the number of people kicked out of the program was not enough to cover the cost of the testing.

So, to review:

Things that caused the recession: A gigantic housing bubble burst and took an overleveraged financial sector with it.

Things that did not cause the recession: food stamps, laziness; drugs; 5 percent of the population deciding they were tired of working and wanted to be dependent on government; the deficit.

Note: This blog has a much angrier tone than most of the blogs I post. I did not post it right away, but after taking a few days I decided that it  was and is correct to sound angry about this. People are scapegoating the poor for a recession that was not of their making, and that’s something we really should be angry about.

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