20 September 2011

Jubilee?

Freakonomics asked if forgiving student loans en masse was a good idea.  Here was their conclusion:
1. Distribution: If we are going to give money away, why on earth would we give it to college grads? This is the one group who we know typically have high incomes, and who have enjoyed income growth over the past four decades.  The group who has been hurt over the past few decades is high school dropouts.
I guess it would help to define “high income.”  Everything I’ve seen suggests that college grads generally start with relatively income when joining the workforce and that it eventually increases over time.  And, once you adjust for inflation, grads today are earning less than grads of, say, thirty years ago, on the average.  The only way the above claim is true is if one compares the college grads to those with less education.  Also note that income growth, though a trend, is not promised to continue indefinitely.  Also note that going to college is the recommended course of action, while dropping out of high school is not.  In essence, those who have played by the rules, so to speak, are in a tough bind because they have played by the rules.  It is cruel to argue that they don’t deserve consideration because they are still better off than those who didn’t follow the rules.
2. Macroeconomics: This is the worst macro policy I’ve ever heard of. If you want stimulus, you get more bang-for-your-buck if you give extra dollars to folks who are most likely to spend each dollar. Imagine what would happen if you forgave $50,000 in debt. How much of that would get spent in the next month or year? Probably just a couple of grand (if that). Much of it would go into the bank. But give $1,000 to each of 50 poor people, and nearly all of it will get spent, yielding a larger stimulus. Moreover, it’s not likely that college grads are the ones who are liquidity-constrained. Most of ‘em could spend more if they wanted to; after all, they are the folks who could get a credit card or a car loan fairly easily. It’s the hand-to-mouth consumers—those who can’t get easy access to credit—who are most likely to raise their spending if they get the extra dollars.
Can we get rid of this whole nonsensical stimulus thinking?  All money circulates.  Ceteris parabis, the money will be spent at some point.  The only concern is over timing, not necessarily net effect.  And there is no objective reason to prefer immediate results to delayed results.  This point, though technically true, is irrelevant.
3. Education Policy: Perhaps folks think that forgiving educational loans will lead more people to get an education. No, it won’t. This is a proposal to forgive the debt of folks who already have an education. Want to increase access to education? Make loans more widely available, or subsidize those who are yet to choose whether to go to school. But this proposal is just a lump-sum transfer that won’t increase education attainment. So why transfer to these folks?
This is simply asinine.  No one thinks that forgiving loans makes education more desirable.  People think that the student loan system is fraudulent (i.e. people were talked into loans under false pretenses).  The reason most people support loan forgiveness is because they see it as a reasonable redress to the outrages of the system.  Also, note that the current system does a remarkable job of subsidizing marginal students, which is the problem in the first place.
4. Political Economy: This is a bunch of kids who don’t want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive.  Moreover, if these guys succeed, others will try, too. And we’ll just get more spending in the least socially productive part of our economy—the lobbying industry.
Don’t or can’t?  How many grads have to take on subpar jobs because they can’t afford to wait for better jobs or undertake risky ventures?  These kids have been sold a lie, and many they have no recourse (and I mean this literally as they can’t even default out of their loans).  The government guaranteed repayment of student loans, and, in order to prevent getting hit in the shorts, has made it impossible to discharge this debt through bankruptcy.  As such, banks have little incentive to ensure the loan’s recipient’s ability to repay.  In short, the government has created the mess, under the guise of helping the underprivileged.  They have turned the underprivileged into slaves.  Shouldn’t the slaves be able to lobby their master?  Or is that too much to ask?
5. Politics: Notice the political rhetoric?  Give free money to us, rather than “corporations, millionaires and billionaires.”  Opportunity cost is one of the key principles of economics. And that principle says to compare your choice with the next best alternative.  Instead, they’re comparing it with the worst alternative.  So my question for the proponents: Why give money to college grads rather than the 15% of the population in poverty?
This is simply stupid.  The 15% of the population in poverty already receives money.  To the tune of billions of dollars per year.  How much more do they need?  You’d think hundreds of billions of dollars would be enough to cure poverty, but apparently the federal government sucks worse at charity than it does at disaster relief in a chocolate city after a hurricane.

This is nothing more than a grossly ignorant appeal to emotion.  The poor already get money from the federal government.  And why are corporations more deserving of billions of dollars?  The government has already lined the pockets of their Wall Street cronies through student loans.  Shouldn’t this be redressed?
Conclusion: Worst. Idea. Ever.
More like: Worst. Rebuttal. Ever.
However, I don’t find the idea of student loan forgiveness all that appealing, in part because students still deserve to face the consequences of their (admittedly stupid) decision to go to college instead of getting a real job.  In order for a lie to work, one party must tell it and another party must believe it.  If you believe a lie, you need to live with the consequences.  But if you take advantage of those who have believed a lie, then you deserve the consequences thereof as well.

My proposal, then, is very simple:  allow grads to default on their student loans.  Grads’ credit scores will take a hit, which is a reasonable consequence to their decision to essentially waste four years of their life.  And banks would be forced to write off a bunch of bad loans, killing their profits, which is a reasonable consequence to their decision to loan money to people that didn’t deserve it.

The current system is broken and remarkably unfair to those it purports to help.  Correcting this problem doesn’t require forgiving all students of their loans.  Allowing grads who find that a college degree is worthless to default on their loans should be sufficient to clear the market.

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