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Two Bad Ideas on Student Loans, Part 1

Summary:
There are various proposals for the federal government to deal with student debt. I’ve seen two main ones. The one I’ll deal with here is the proposal to bail out people who have student loans. I came across this post from Justin Wolfers, written in September 2011. I debated Justin about lockdowns in Apriland We differed on that, but I agree with his bottom line here. I’ll note his thoughts in highlight and then give my comments after each. He wrote that we should look at the issue “through five separate lenses.” 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

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There are various proposals for the federal government to deal with student debt. I’ve seen two main ones. The one I’ll deal with here is the proposal to bail out people who have student loans.

I came across this post from Justin Wolfers, written in September 2011. I debated Justin about lockdowns in Apriland We differed on that, but I agree with his bottom line here. I’ll note his thoughts in highlight and then give my comments after each.

He wrote that we should look at the issue “through five separate lenses.”

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 agree. I would tweak the language a little. “We’re” not giving it; the federal government would be the entity that gave it and it would take from us to do so.

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.

This is Justin’s unreconstructed Keynesian perspective. His view is that one should stimulate the economy by having the government give money to people who will spend it. I think a better way, and a much cheaper way, is with monetary policy. But I agree with him that from either vantage point, this is not good macro policy.

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?

I agree. But I also think it would be a bad idea to have any level of government further subsidize college students. That’s a subsidy from a broad cross section of people to people who will be relatively wealthy. It also distorts incentives. Let people go to college by comparing the costs and benefits, not by subsidizing the costs.

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.

Yes. A bunch of kids and a bunch of non-kids. There are a lot of 30-somethings with substantial student loan debt.

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?

Agreed. I don’t want the government to give it to people in poverty either. I want governments to get rid of the barriers that make it harder for people to get out of poverty. But giving money to poor people would be less bad than bailing out people with student loan debt.

Conclusion: Worst. Idea. Ever.

Well not literally and I’m sure Justin doesn’t mean it literally. But it is a really bad idea.

And I bet that the proponents can’t find a single economist to support this idiotic idea.

I hope he’s right. We’ll see.

He left out one major argument: the injustice of bailing out some while others paid off their student debt or scrimped and saved (or had parents help) so that they didn’t get into debt in the first place.

Next up: Ben Shapiro’s bad idea.

David Henderson
David Henderson is a British economist. He was the Head of the Economics and Statistics Department at the OECD in 1984–1992. Before that he worked as an academic economist in Britain, first at Oxford (Fellow of Lincoln College) and later at University College London (Professor of Economics, 1975–1983); as a British civil servant (first as an Economic Advisor in HM Treasury, and later as Chief Economist in the Ministry of Aviation); and as a staff member of the World Bank (1969–1975). In 1985 he gave the BBC Reith Lectures, which were published in the book Innocence and Design: The Influence of Economic Ideas on Policy (Blackwell, 1986).

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