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Is This the Turn? Society and State

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Fannie/Freddie and the Stealth Welfare State

by Christopher Chantrill
September 30, 2008 at 11:16 am


BACK IN the good old days the US used to spend big money on secret defense projects. And no wonder, for in 1960 defense and the military industrial complex ate up 10 percent of GDP. It was easy to find money for the odd U-2 spy plane or the granddaddy of all “black” projects, the Mach 3 spy plane variously known as the A-12, YF-12, and SR-71 Blackbird.

The trouble with secret programs is that there is no public accountability. You can spend billions of dollars on some brilliant idea and have nothing to show for it. The Mach 3 spy plane worked, probably thanks to the brilliance of Kelly Johnson, head of the Lockheed “skunk works.” But it cost a fortune to develop and a fortune to operate.

Secret defense programs have their place, but surely it is wrong to create secret social programs. The meltdown of Fannie Mae and Freddie Mac demonstrates why. Everybody thought Fannie and Freddie were boring old government-sponsored enterprises dealing in nice safe mortgages for middle-class Americans. Only they weren’t.

You can understand why President Clinton decided to crank up Fannie and Freddie to deliver sub-prime mortgages in the 1990s. It seemed like a great idea to amend the Community Reinvestment Act to bully the banks into lending more money into inner-city areas. And it was certainly a success in political terms. By the end of his administration, Bill Clinton was wildly popular in the African American community. Of course he would be, after sluicing billions of dollars in mortgage money to the house-hungry women of America’s red-lined neighborhoods.

But who really understood what was going on before the whole thing blew up and tossed the nation into a global credit crisis? A few people did, and a few people tried to warn us. A few politicians tried to reform Fannie and Freddie, but they were no match for the lobbyists and the Friends of Angelo.

It is hard enough trying to reform headline programs like public education or Social Security. At least everything is out in the open.

But with stealth programs burrowed into the Community Reinvestment Act our liberal friends are learning to emulate the methods of the cold war Pentagon. They have learned how to keep controversial programs under the radar, and they usually succeed. It’s only when a program blows up that people realize what is going on.

We are going to see more of these meltdowns in the future. Fannie/Freddie isn’t the only government program adapted to serve a hidden agenda.

But how did we get from open and accountable government to the new era of stealth social programs operating under the radar?

Back in the 1930s with the New Deal and in the 1960s with the Great Society liberals were proud to point to all the wonderful programs they were offering to the American people. They even set up programs to measure the inevitable success of their programs, as Charles Murray noted in Losing Ground. Everyone knew that with a few more billions we could end poverty forever.

Then things started to go wrong. Liberals knew by the early 1970s that their job-training programs weren’t working. The work-force participation of minority youths was going down, not up. What should they do? They could manfully own up to their failures or they could disguise them and keep them going under the radar.

When the much-vaunted public-housing projects cratered liberals replaced their public housing projects with less visible Section 8 rent subsidies. When Hillary Clinton’s universal health-care system went down to defeat Democrats expanded smaller-scale projects like S-CHIP. When the American people rejected the idea of a negative income tax in the 1970s liberals responded in the 1990s with the innocuously named Earned Income Tax Credit.

Then there’s the federal disability program. According to the National Bureau of Economic Research Social Security Disability Insurance (DI) has gone from “2.2 percent of adults age 25 to 64 in 1985 to 4.1 percent in 2005.” Study authors David Autor and Mark Duggan expect disability rolls to increase eventually to “almost 7 percent of the non-elderly adult population.”

Conservatives need to develop a political strategy to de-legitimize these stealth programs. Let’s leave aside the argument from compassion that excessive income support programs rip the social fabric asunder and create a non-working underclass. Let’s be practical.

Somehow, these meltdowns always seem to happen on the Republicans’ watch. Then the American people, egged on by the helpful mainstream media, blame the Republicans for the mess. And that ain’t fair.

Christopher Chantrill blogs at www.roadtothemiddleclass.com.

Buy his Road to the Middle Class.

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presented by Christopher Chantrill

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