Tuesday, October 18, 2011

Regarding "occupy wall street";

specifically regarding the demand that all student loan debt be forgiven, I have some analysis to offer: A basic economics question: what happens to the price of a good when demand for it is increased and supply stays relatively constant? The price increases, of course. What would happen to demand if some outside party were to give money to potential consumers of a good explicitly to buy that good? Demand would increase, the price would go up, and in the long run supply would also increase.

Thus in education: governments and other entities have long made it a deliberate policy to encourage young people to get higher education; subsidizing loans, providing grants, sponsoring scholarships, and so on. And so: the price of education has risen. I would speculate that the dramatic rise in cost is directly proportional to the amount of subsidy that has been poured into it. Further, the advent of low-quality "for-profit" educational institutions is the long-run response to the increased price.

The increased price is the direct, obvious effect of intervention in the marketplace. What are the "unseen" effects? A lot of people who otherwise wouldn't seek higher education will do so, and will aspire to attend more prestigious (and expensive, incidentally) institutions. That's all good, right? Maybe, but much of that price-increasing subsidy comes in the form of subsidized debt, so these new students bear an increased burden. Further, since new students are (at least temporarily) shielded from the economic consequences of their choices of subject matter, we can expect more people to study subjects that are more fun. More literature, more art, more humanities; more of all the things that are intrinsically satisfying but, alas, less valued societally than more difficult and "practical" subjects like science, engineering, and business. Thus, we have more people with expensive educations and skill sets that produce goods that few people are willing to pay for, at least at the price needed to service the subsidy-inflated debt burden held by the producers of those goods.

Maybe the the unseen effects outweigh the obvious ones, and we should concede that the whole project was poorly motivated and give up on it. But what about all those poor students who were encouraged to borrow money in order to buy an asset that's, ultimately, unproductive? It was a bad loan, so maybe its appropriate to write it off; consider it a dead loss. But again, back to that subsidy point; most of those loans (~70%) are made through Sallie Mae, and thus guaranteed by the federal government. If they default totally (ie; are "forgiven") then the federal government is obligated to pay the difference to the people who lent the money to the students for their unproductive educational investments.

The federal government is broke. It could only make those payments by raising taxes, inflating the currency, or issuing more federal debt. All three have negative implications for those same oppressed students ever being able to find the jobs their educations have prepared them for. And so the students are left barely better off: no debt, but still no income. It does seem as though they've been done wrong by somebody.

But who? Is it the people who lent the students the money? It does seem like they're guilty of naivety-bordering-on-stupidity to lend on the order of a hundred thousand dollars for a degree that leads to a profession that earns around thirty thousand dollars (I'm thinking here of a friend who studied photography at an expensive school, who's case I don't think is unique). But the fact of the matter is that the lenders have not been using the type of degree one is planning on perusing as a decision criteria at all. Imagine walking into a bank, asking for a hundred thousand dollars, and being given it without asking what you're doing with it or how you plan to pay it back. It sounds ridiculous, right? Why would any institution concerned about loosing money lend it out on those terms? Don't they deserve to loose it if they're that stupid?

Yes, they certainly do. But the lenders were willing to take the risk not out of stupidity, but because someone else had already agreed to bear almost all of that risk. Again with that subsidy: by guaranteeing all those loans, the federal government enabled the lenders to have lending standards that would be suicidally lax otherwise, thus achieving the goal of making financing more broadly available to potential students. The lenders didn't care how the borrowers were planning on paying back the loans because the government had already legally promised to pay if the borrowers failed. And the government was unconcerned about the risk because a) it made student loans ineligible for bankruptcy a decade ago, b) education was a political priority, and c) its not very smart about money or risk in general.

In conclusion: you've got the wrong street, occupiers; try "K" instead of "Wall."