When All Social Problems Become Financial Problems

Sarah Quinn –

When it comes to government programs, credit support is often cheaper and less controversial than direct expenditures. Understand this, and you can understand why government officials have an incentive to define all sorts of social problems as financial ones.

Government officials face considerable pressure to promote credit markets. Wall Street firms leverage money, expertise and status to “capture” regulators. It is not only the rich and powerful who make demands on the state for easier access to credit: Farmers in the late 18th century, black activists fighting against redlining in the postwar era, access to credit cards in the 1930s– all have demanded that the governmental help them gain access to credit. When wages are low and welfare state support is stingy, families rely on easy credit to ride out hard times or even meet daily expenses. In the context of neoliberalism, credit access can be a kind of destructive consolation prize for workers with stagnant wages and frayed safety nets, as other scholars have noted.

Demands for easy credit are a crucial part of the story of credit allocation in any political economy, but they do not tell the whole story. That is because lawmakers have their own reasons for turning to credit as tool of statecraft, and those reasons help determine how, when and why government officials move credit and promote financial markets.

I have spent more than a decade researching the role of finance in U.S. political economy, with a special focus on the federal credit programs that buy, sell, guarantee, insure or otherwise incentivize or promote lending. The stated goal of these programs is to promote the flow of credit to desired groups and industries. Most people recognize the biggest and best studied federal credit programs, like FHA mortgage insurance, which is the world’s largest mortgage insurer. Fewer people are aware that the U.S. government entirely overhauled the nation’s system of farm credit with the 1916 Farm Loan Act; or that the Small Business Administration provided credit support for the burgeoning venture capital industry after WWII; or that mortgage insurance is an essential aspect of disaster relief in the United States. Most of all, for decades the bulk of credit support has gone toward propping up home and school loans, two markets at the heart of American family life today.

The U.S. federal government reports that as of 2017 it owned $1.3 trillion in loans and guaranteed another $2.5 trillion through various governmental agencies. The total for federal credit jumps to $8.5 trillion if you include those obligations backed by Fannie Mae and Freddie Mac, and the Federal Reserve’s mortgage- backed securities holdings. According to economists Mariana Mazzucato and Randall Wray, about a third of all private debt in the US is backed in some way by the federal government. Mazzucato and Wray help put the credit programs into the larger story of easy credit in the U.S political economy. The state can also promote credit through low interest rates, lax regulations, and tax expenditures like the mortgage interest rate deduction.

Understanding the Political Lightness of Credit

Credit programs can deliver big results for a low cost. There are a few reasons for this. Guarantees of loans do not require big outlays when issued. They only result in a significant charge (and garner media attention) if a borrower defaults, as in the famous case of Solyndra, the failed manufacturer of solar cells. Loan insurance programs like FHA, if actuarially sound, can cover their own costs. Direct loan programs generate returns over time as loans are repaid. Credit offices may carry low administrative overhead relative to agencies that deliver services directly. And credit programs are easily set up as partnerships, which means that they can share financing costs with private investors.

Entities like Fannie Mae have historically straddled governmental boundaries, remaining just private enough to stay off the federal accounts (since they issue their own debt and so are not funded through the Treasury) but public enough to follow government mandates and receive special support. Especially before 1992, when accounting for these programs was modernized, inconsistent and improper accounting worked to obscure the costs of these federal programs, allowing the government to raise and spend off-budget funds. Subsidies within the programs, like below-market interest rates, cost the government money but in the form of money-not-collected. All of these qualities mean that credit programs can have major policy effects without major associated upfront outlays, and other scholars who analyze the credit programs identify this as part of the key to their popularity.

Credit programs also offer ideological flexibility. Historian David Freund found that designers of the New Deal housing credit programs—including the mortgage lenders who would benefit from and implement the policy—talked about these programs as “essentially non-interventionist” efforts that “unleashed” private capacities. Because they used credit and worked with private industry, the home mortgage programs seemed more like the private market and less like government action.

When I researched how the U.S. government totally redesigned the nation’s system of farm credit in the early 20th century, I found that progressive reformers, businessmen, and lawmakers talked about the overhaul as a way that the government could help people help themselves. It was an ingenious way to reframe massive government involvement. If you are a lawmaker, this ideological flexibility means that government action can be played up to people who want to see the government do more, and downplayed to everyone else. Major political moves can be downplayed as mere market corrections, or a way to encourage self-help, or a means of unleashing the power of the private sector.

Through my research, I have come to think of these fiscal and political qualities as a kind of political lightness. Like tax expenditures and policy nudges, credit programs can be easier to pass, and tend to raise less political blowback, than more direct forms of taxing and spending. The lightness of credit means that policymakers have a great deal to gain if they can redefine social problems as financial problems, such that credit allocation can be used to fix them.

We Need an Honest Conversation About Federal Credit

I am not against all credit programs. Like other markets, credit markets need help from the government, and credit programs have accomplished some amazing things, like the electrification for U.S. homes in the 1930s. I have argued that they are an important part of the woefully underappreciated U.S. developmental state. The answer is not to reject all credit programs, but to have a more sensible public debate about credit allocation as a policy tool.

Not all social problems are best solved through credit. Consider higher education policy.  One path would be to define education as a public good or social need, which might argue for free college tuition or price controls. Or you could conclude that families need more income, and chose to fight for higher minimum wages, more generous cash transfers to needy families, or a universal basic income. Alternatively, you can define the problem of access to higher education in financial terms, and conclude that families need new and better ways to borrow more money to pay for school. This puts the burden of payment directly on families. And, indeed, American families are being crushed under the burden of school loans, as scholars like Tressie McMillan Cottom  and Caitlin Zaloom have shown.

More generally, when governments meter access to social goods through loan support, this produces debt for families and communities, and wealth for the banks and financial firms that collect the interest. Such partnerships and dependencies can erode public control and oversight over shared resources, as Suzanne Mettler and Steven Teles have argued. When government officials grow dependent on financial markets to solve problems, they in turn grow dependent on the particular financial actors they have partnered with, as Benjamin Braun has shown. This can encourage credit expansion to the point of crisis and instability

Another problem with governing through credit is that credit markets are neither neutral nor equitable playing fields. Stratification scholars have long shown that housing credit programs like the FHA and Home Owners’ Loan Corporation relied on redlining maps that excluded families of color, making it harder for them to get affordable mortgages. When families of color were excluded from the largesse of the housing programs, they lost out on multiple fronts: the chance to build what became the main form of wealth for American families; access to the good schools in tax-rich suburban neighborhoods; the chance to build a credit record on forgiving terms; and a chance to get all of this support in a way that came entirely divorced from the stigma of receiving welfare. Credit programs achieve their political lightness in part by disproportionately benefiting white families.

In my recently published book, I argue that government officials have repeatedly turned to credit allocation as a way to solve social problems. Easy credit offers the promise of growth for everyone without the requirement of taxing anyone, a pattern that has roots in the founding period and was well established by the postwar era. This is an incentive to redefine all sorts of problems as a matter of credit allocation. But the result can be high debt levels for families, the concentration of financial power, and even economic instability.

The point here not just that efforts to “unleash” enterprise are sometimes actually strategies to rein in public programsit is that credit allocation has political properties that make it a particularly seductive way of doing so. When new credit programs are proposed, we should always ask what other policies might better serve the public. Above all, it is essential that we cut through the talking points about private initiative, and address the underlying social and institutional forces that make credit seem necessary in the first place.