Laurel Amberdine (amberdine) wrote,
Laurel Amberdine

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How We Got Screwed - an Economics Lesson

I've been reading the posts at We are the 99 Percent and watching the Occupy Wall Street protests in fascination. While a lot of this is probably going to sound pretty heartless, I do have sympathy for the protestors. Most of them are in terrible predicaments, which will be very hard if not impossible to get out of. But none of them seem to have any idea how they wound up that way, or whose fault it is.

And that's the thing -- it's not really anyone's fault. Not even the rich people. It's an entirely natural consequence of the kind of economy we have, and a bunch of these weak spots breaking at the same time.

Here's the general principle: any time the cost for a product is dissociated in time or direct payment from the consumer who chooses that product, the price will rise, unchecked by normal market forces.

Currently-relevant examples:

  • Housing, when paid by loans.
  • College education, when paid by loans.
  • Medical expenses, when paid by insurance.

I was working for a real estate attorney in an expensive suburb when the housing boom was going on. Every day we boggled over the loans people were getting. How can buyers believe they can pay this much? How can banks be stupid enough to give out these loans? What is going to happen when this all falls apart?

We all saw: near worldwide financial collapse. And while banks are greedy, heartless bastards as a rule, it wasn't like this was their intent. It was just that people, banks, and builders all found a way to optimize that system to leak the most money. 

The same thing has been happening with college loans. You need a degree to get a good job, right? So it's worth going into debt. And if every student can get a guaranteed loan to pay any sort of tuition… what's to stop those tuition rates from rising forever? Unlimited demand! Unlimited money! Private schools with clever marketing pop up, and state school see an easier way than taxes to make a few dollars. And now it seems like everyone goes to an expensive college, winds up with a ton of debt, and can't get a decent job.

And finally, the big one: medical insurance. This is a double whammy, because you do pay for it before you receive anything, so if anything, people are motivated to get something for their money. Often the more expensive something is, the more desirable it is to the consumer, because the hated insurance company has to pay for it. 

None of these were organized eville big money schemes to shaft the middle class, working class, or poor. They're just natural consequences of things that were a good idea at the time, but under-regulated and taken advantage of for so long, have spiraled out of control. Without financing/insuring big-expense items, only the rich could buy houses or go to college or get serious medical care. No one wants that. 

The problem is simple and unavoidable: people. Given the chance, almost everyone will take advantage of a situation. If they can pay less for something than it's worth, or get paid more for a job than the value they're contributing, or defer payment, or get something for free… well, who passes that up? And when enough people behave that way, the whole system falls apart.

The guys on Wall Street -- the "top 1%" -- had enough luck, starting capital, and savvy to situate themselves on the side of the equation where the money flows, and avoid the building-up-debts side. While increasing taxes on the wealthy is completely reasonable given the amount of government debt, it isn't going to fix the problems of those protesting. 

I don't know a viable governmental solution. I'm afraid life is going to suck for a lot of people for a very long time. 

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