Why Subsidize Student Loans?
---
Call me a hyper-anarcho-libertarian, but I don't think the government has any business whatsoever getting involved in the student loan market.
So this is a welcome minor victory:
If you pressed me to name a good that is a far away from a public good as possible, my first answer would be a Snickers bar. My second answer would be a student loan.
Private citizen wants X, private citizen can't afford X, private citizen finances X with a lending institution. What exactly is the logic in the government getting involved in that calculus? Whether "X" a house, a car, a share of stock, a Snickers bar or a college education, the consumption is by a private person and should be privately financed. If the consumer wants it, then let the consumer pay for it.
Of course, the rationale for student loans usually involves either some notion of "fairness" or, worse, some vague promises of "future returns" (i.e., that a government student loan subsidy somehow "pays for itself").
The former justification (i.e., the naked brazen socialist perspective) I can imagine someone advocating. I would never agree with it, but I can see the argument being made. You want to try to invent some silly "right to a college education," go ahead, as long as you fully understand what you're advocating (and if you're not sure whether you fully undertand what you're advocating, then read this and check back later).
But please don't waste my time with any "positive externality" nonsense along the lines of "by subsidizing higher education today, we will have a more productive workforce tomorrow that will have higher paying jobs, which will in turn mean greater tax revenue." Such reasoning has some serious flaws:
1. It's unprovable. You can't run a controlled experiment to show how things would have played out without the subsidy.
2. Even if true, greater tax revenue is only an excuse to raise government spending, wiping out any potential fiscal benefit.
3. The Law of Unintended Consequences: How less reluctant will college trustees be to raise tuition when they know it's being subsidized anyway?
4. Even if there were positive externalities to higher education, then why not subsidize the producer (i.e., the college) rather than the consumer (i.e., the student). Oh wait, we already do that too, quite extensively in fact. Go figure.
The whole subsidized student loan con game is nothing more than the broken window fallacy turned on its head. The government subsidy that sends the (supposed) college-education tax engine into overdrive will have at least as great a negative effect somewhere else in the economy -- you just never see it. Perhaps it will take the form of higher taxes that disrupted someone else's productive engine, or maybe it will manifest as higher interest rates resulting from a higher budget deficit than would otherwise have occurred, with a corresponding decrease in investment and, therefore, in tax revenue.
There is absolutely no reason to suspect that the market for higher education cannot reach equilibrium without a subsidy. And all subsidies cause market disequilibrium (i.e., if you cause a good to be cheaper than it would otherwise be you will get too much of it supplied, to the detriment of other goods and the economy overall). It's true for Snickers bars, and it's true for college education.
Flagship Economic Policy Posts:
Flu versus Bad Vaccine: Let the Public Decide
E.U. to Force Microsoft to Sell a Product It Doesn't Make?
Maybe We'll Be Really Fortunate and Mount St. Helens Will Erupt
Philadelphia Persists in Wi-Fi Nonsense
WhatChannel Country? What Station Price?
Price Gouging: Touch the Toaster
How Evolution is Like Economics
An Econ 101 Moment
(Cross-linked at Outside the Beltway.)
So this is a welcome minor victory:
Congress is ending a promise to banks that has allowed them to reap billions of dollars in profits from a federal college aid program.
Legislation halting the federal guarantee of a 9.5 percent rate of return to lenders of certain student loans was passed Saturday by the Senate and sent to President Bush. The bill, endorsed by the White House, won approval Thursday in the House.
The 9.5 percent interest rate on many loans will be replaced with an adjustable rate reflecting the market. The guarantee to banks has long been a profit-maker because the government has had to pay them whatever amount of interest students do not, and students now pay under 3.4 percent.
...
The bank subsidy cost taxpayers $556 million in 2003 and $634 million through June 2004. Without government action, the cost would quickly escalate into billions of dollars, the Government Accountability Office found.
If you pressed me to name a good that is a far away from a public good as possible, my first answer would be a Snickers bar. My second answer would be a student loan.
Private citizen wants X, private citizen can't afford X, private citizen finances X with a lending institution. What exactly is the logic in the government getting involved in that calculus? Whether "X" a house, a car, a share of stock, a Snickers bar or a college education, the consumption is by a private person and should be privately financed. If the consumer wants it, then let the consumer pay for it.
Of course, the rationale for student loans usually involves either some notion of "fairness" or, worse, some vague promises of "future returns" (i.e., that a government student loan subsidy somehow "pays for itself").
The former justification (i.e., the naked brazen socialist perspective) I can imagine someone advocating. I would never agree with it, but I can see the argument being made. You want to try to invent some silly "right to a college education," go ahead, as long as you fully understand what you're advocating (and if you're not sure whether you fully undertand what you're advocating, then read this and check back later).
But please don't waste my time with any "positive externality" nonsense along the lines of "by subsidizing higher education today, we will have a more productive workforce tomorrow that will have higher paying jobs, which will in turn mean greater tax revenue." Such reasoning has some serious flaws:
1. It's unprovable. You can't run a controlled experiment to show how things would have played out without the subsidy.
2. Even if true, greater tax revenue is only an excuse to raise government spending, wiping out any potential fiscal benefit.
3. The Law of Unintended Consequences: How less reluctant will college trustees be to raise tuition when they know it's being subsidized anyway?
4. Even if there were positive externalities to higher education, then why not subsidize the producer (i.e., the college) rather than the consumer (i.e., the student). Oh wait, we already do that too, quite extensively in fact. Go figure.
The whole subsidized student loan con game is nothing more than the broken window fallacy turned on its head. The government subsidy that sends the (supposed) college-education tax engine into overdrive will have at least as great a negative effect somewhere else in the economy -- you just never see it. Perhaps it will take the form of higher taxes that disrupted someone else's productive engine, or maybe it will manifest as higher interest rates resulting from a higher budget deficit than would otherwise have occurred, with a corresponding decrease in investment and, therefore, in tax revenue.
There is absolutely no reason to suspect that the market for higher education cannot reach equilibrium without a subsidy. And all subsidies cause market disequilibrium (i.e., if you cause a good to be cheaper than it would otherwise be you will get too much of it supplied, to the detriment of other goods and the economy overall). It's true for Snickers bars, and it's true for college education.
Flagship Economic Policy Posts:
Flu versus Bad Vaccine: Let the Public Decide
E.U. to Force Microsoft to Sell a Product It Doesn't Make?
Maybe We'll Be Really Fortunate and Mount St. Helens Will Erupt
Philadelphia Persists in Wi-Fi Nonsense
What
Price Gouging: Touch the Toaster
How Evolution is Like Economics
An Econ 101 Moment
(Cross-linked at Outside the Beltway.)
Posted by KipEsquire on
12 October 2004
To comment on this post, please visit the new blogsite.