Despite her best intentions and her description of the plan as progressive, a quick analysis finds the [Senator Elizabeth] Warren proposal to be regressive, expensive, and full of uncertainties. As I show below, the top 20 percent of households receive about 27 percent of all annual savings, and the top 40 percent about 66 percent. The bottom 20 percent of borrowers by income get only 4 percent of the savings. Borrowers with advanced degrees represent 27 percent of borrowers, but would claim 37 percent of the annual benefit.
This is from Adam Looney, “How progressive is Senator Elizabeth Warren’s loan forgiveness proposal?“, Brookings Institution, April 24.
Looney, an economist at Brookings, lays out why the above pretty much has to be the case.
He writes:
The simple fact is that it’s hard to design a progressive and coherent loan relief policy. In one way, it’s like the subprime crisis: too many borrowers were fooled (or fooled themselves) into taking out speculative loans that were impossible to repay. But the vast majority of prime borrowers were responsible, made conservative choices, and continued to pay their loan obligations. We struggled then to differentiate the deserving from undeserving, responsible from irresponsible, and with the potential costs of widespread write-downs.
Debt relief for student loan borrowers, of course, only benefits those who have gone to college, and those who have gone to college generally fare much better in our economy than those who don’t. So any student-loan debt relief proposal needs first to confront a simple question: Why are those who went to college more deserving of aid than those who didn’t? More than 90 percent of children from the highest-income families have attended college by age 22 versus 35 percent from the lowest-income families.[2]Workers with bachelor’s degrees earn about $500,000 more over the course of their careers than individuals with high school diplomas.[3] That’s why about 50 percent of all student debt is owed by borrowers in the top quartile of the income distribution and only 10 percent owed by the bottom 25 percent. Indeed, the majority of all student debt is owed by borrowers with graduate degrees.[4]
There’s much more there.
This analysis leads to a further question, one that Armen Alchian addressed in 1968 in his classic “The Economic and Social Impact of Free Tuition,” New Individualist Review, Winter 1968. That is: Is subsidized tuition, even aside from loan forgiveness, a transfer from the relatively poor to the relatively rich? Alchian answers yes, using the same kind of analysis: looking at the lifetime income of those who complete college relative to those who don’t.
READER COMMENTS
Henry
Apr 27 2019 at 3:06pm
To me the Warren proposal misses the point. I don’t have a problem with the idea, but of course the specifics are important. Various forms of restructuring of debt is common in business, and the government has an important role in refereeing and even underwriting bankruptcy in all its chapters. However, the big problem is the existence of the debt in the first place. Cost of a diploma has grown much faster than most other things. This huge cost is fueled by student loans in part, and Sen. Warren’s plan does not address this. We need some more reasonable prices. Tuition at a private college not an extremely elite school is $50,000; that’s crazy.
Jackson Mejia
Apr 27 2019 at 6:31pm
Depends on the relative weights placed on signaling and human capital in the contribution to education. If you take the Bryan Caplan story at least half-seriously, then a conclusion is that school should be more expensive, not less. One way to address that is to end subsidized student loans, thereby making college more expensive.
Likewise, you may want to reconsider the idea that “the existence of debt” is a bad thing. An entrepreneur going into debt to fund a start-up plays a major role in innovation and economic dynamism. If you see education as an investment in human capital, then debt is not necessarily a bad thing unless the expected return is poor. Moreover, the fact that college prices are rising faster than others is not in itself a bad thing or indicative of a crisis. Prices of heterogeneous goods and services do not move together and there is little reason to expect that all prices will change at the same rate. Actually that would be bizarre. And what is so special about education? That consumers are facing higher prices? So what? Flip the coin and wonder why televisions get cheaper and cheaper at a faster rate than the rest of the economy and perhaps get upset about producers facing difficult conditions. Yes, as you say, student loans from the government and the perverse incentives associated with them play a role in distorting prices, but we cannot totally write off changes in demand.
There is no “correct” price of school in an objective sense as you seem to think.
John Hare
Apr 28 2019 at 8:01am
I think the total cost of a degree would drop as students became more price aware and colleges had to compete compete is the government quit subsidizing loans. The apparent cost to students would likely rise a lot. I think this could have several gains to the individuals and the nation. Institutions would be far more careful about student loans, denying them to academically poor students, poor ROI or saturated fields, and those with obvious default risk.
Students would pay a lot more attention to the job market. Perhaps as important, many would find jobs instead of wasting several years on a degree in beer pong.
David Henderson
Apr 28 2019 at 9:54am
Actually, ending subsidized loans would make college less expensive. Economist Richard Vedder has shown that after President Carter started subsidizing college substantially and subsequent presidents continued it, tuitions rose almost pari passu with subsidies.
I think what you mean is that some students would bear more of the cost and I think you’re right. And the emphasis should be on “some” in the above sentence. Students who never took out subsidized loans (and there are over a million such students currently attending college), would see a drop in their costs.
BC
Apr 27 2019 at 4:54pm
“Why are those who went to college more deserving of aid than those who didn’t?”
I don’t know about more deserving, but recent college grads at least seem to be an important Democratic constituency, especially in the Elizabeth Warren wing. Graduate students even more so, and they apparently owe the majority of college debt. Higher ed workers are perhaps even a bigger constituency, even more so faculty and teaching assistants in non-STEM departments, which otherwise might have the most difficulty attracting non-subsidized students/customers. Of course, subsidies to students are economically indistinguishable from subsidies to the universities (and workers) selling education to the students. Maybe, we should start viewing college education subsidies in the same way that we view subsidies to other industries. Concentrated benefits would seem to be important here.
Mark Z
Apr 27 2019 at 6:18pm
Director’s law in action?
David Henderson
Apr 28 2019 at 9:27am
Maybe. Director’s Law, for those who don’t know, is named after legal scholar Aaron Director, who started the Journal of Law and Economics. (He, incidentally, was the older brother of Rose Director Friedman, the wife of Milton Friedman.)
Director’s Law is that the majority of government expenditures benefits the middle classes but is financed by taxes paid primarily by the upper and lower classes. He had some basis for it. I think George Stigler wrote about it and gave it some empirical support. (George and Aaron were very close friends, by the way.)
Mark Z
Apr 28 2019 at 11:52am
Thanks, I actually didn’t know about Aaron Director’s connection to the Friedmans.
I thought of Director because, though really wealthy people probably do go to college at higher rates than middle class people, I expect they’re more likely to pay for it upfront rather than with loans. I’m also not as cynical about Warren’s motives as she is of her opponents: I don’t think she’s trying to appeal to ‘the super rich.’ This seems more like a middle class entitlement (middle class of course including, many – perhaps most – of the relatively well off, depending on how broadly one defines middle class).
Thaomas
Apr 28 2019 at 9:56am
A much higher percentage than 27% of the “relief” of the “Tax Cuts for the Rich and Deficits Act of 2017” went the the highers 20% of households, but Professor Henderson did not seem too concerned about that. Debt relief (which may or may not be a good idea) would just turn debt financing of college into equity financing, ass assuming that we can restore more progressivity to taxation. Perhaps that’s the way contracts should be written from the start, with the educational institution having some stake in the student’s outcome.
David Henderson
Apr 28 2019 at 5:18pm
You wrote:
The difference is that those were tax cuts, not spending increases. The tax cuts were actually too biased toward lower-income people: they cut their taxes percentage-wise more than they cut the higher-income people’s taxes percentage-wise.
Mark Z
Apr 28 2019 at 6:50pm
I can’t speak for David, but I don’t have any issue with any policy of Warren’s merely because it disproportionately (directly, at least) benefits wealthy people. A policy that makes people in general better off, but rich people more better off, is still a good policy, imo. But Warren’s debt forgiveness policy effectively subsidizes a luxury good, one which is already oversubsidized. The 2017 tax cuts, on the other hand, were focused on reducing taxation on investment.
For the 2017 tax cut, there are, as I see it, two conflicting issues: 1) investment is overtaxed, and 2) the fiscal state of the federal government isn’t so good. The tax cuts did some to remedy 1 but at the expense of worsening 2. Which effect outweighs the other, I can’t say I’m sure.
With Warren’s proposal, the factors are : 1) education is oversubsidized, and 2) the fiscal state of the federal government isn’t so good. The proposal worsens both 1 and 2. It’s not an issue of whether the good effect outweighs the bad. It’s borrowing more than we should to subsidize something on which we already spend too much. One policy may make Americans in general better off, at the expense increasing inequality (not an expense in my opinion, but that’s how most people see it) and skewing the distribution upward. The other policy almost certainly makes Americans in general worse off, at the expense of skewing the distribution upward. That’s how it seems to me at least.
Fred_in_PA
Apr 28 2019 at 9:49pm
Other considerations:
(1) Those who’ve responsibly paid off their debt get no benefit. Those who’ve irresponsibly let it linger get rewarded. A somewhat inverted incentive structure.
(2a) Those who invested in high ROI fields of study are more likely to have-been-able-to pay off their debts. Those who invested in low ROI majors are more likely to still have those debts for Sen. Warren to excuse.
(2b) High ROI fields tend to be what marketers refer to as industrial goods — that is, items purchased not for immediate consumption but rather for use in the conduct of a business, perhaps for resale. Low ROI fields are likely to be so called consumer goods — items purchased for the immediate consumption & pleasure of the buyer. Among college degrees, for example, consider the literature or poetry or theatre majors: all pleasurable enough at the time and likely to make you a better person, but not much resell-able to some corporate buyer who needs someone with those skills. A degree in cost accounting or chemical engineering, on the other hand, probably yields little in the way of enjoyment while learning that material but will be highly resell-able. Going to college to learn a salable skill is pretty much financially mandatory for the more middle class student. Only the sons & daughters of the wealthy can afford to go to college for pleasure.
Hence (2c) It is more likely to be the sons & daughters of the wealthy who hold the low ROI / consumer-goods degrees and still have that debt for Warren to forgive.
(3) Warren knows but ignores the present deployment of the wealth she intends to confiscate with her 2% toll: It is invested — in large degree in America’s offices and factories. Take it away and it will be (very roughly, of course) 2% of those offices and factories that will more likely get shuttered.
But Warren knows where those millennial votes are in the early primaries and she thinks she knows how to buy them. Reach your own conclusions about selfishness & cynicism.
wd40
Apr 28 2019 at 10:57pm
Wouldn’t a more sophisticated analysis require some attention toward who pays the taxes. if the middle and upper classes pay most of the taxes and they get most of the benefits, then on those grounds there is not much redistribution. Of course, there may be other redistributive issues such as those who paid back their loans paying taxes for those who did not. Do not interpret my question as supporting Warren’s policy proposals
zeke5123
Apr 28 2019 at 11:02pm
I thought the same thing at first, but I think it is because equivocation. In short, the wealthy (given that Warren plans to fund this via a wealth tax — if not struck down by the Courts) pay off the debts of the high income earners. Perhaps more to the point, the current wealthy and very high earners pay off the debts of the future wealthy and only medium-to-high earners. Thus, still likely “progressive.” Not sure that really matters however. Still seems like a bad policy.
Dave Smith
Apr 29 2019 at 1:11pm
There is still redistribution. That’s the whole point of the policy. But if the taxes paid match with the benefit of the plan it might be much worse. The redistribution would go from the responsible to the irresponsible holding income constant.
David Henderson
Apr 29 2019 at 4:21pm
Good point, wd40. As zeke5123 implicitly points out, it depends on where the incremental tax revenues come from. That’s hard to know.
Chris
May 1 2019 at 6:06pm
I’d like to point out a few points.
several people have discussed responsible versus irresponsible debtors. As someone with a ton of student loan debt I think I can reasonably say that I was, at the time, making a rational choice to take on debt to pay for college. Having gone to college, learned much more about economics and been hit with the reality of what my field pays versus how much debt I have, I can say that I would probably make a different choice now. I do not consider myself at the time irresponsible, but poorly informed and lacking important data and advice as a teenager making a huge life decision. I can’t imagine that I’m in any way alone in that regard. Before you judge debt holders, try to consider who you are judging and what is reasonable to expect of them. Ideally, parents can help to make those decisions, however, not everyone has parents with the financial knowledge to provide that help.
Dividing the free college portion of Warren’s plan from the debt forgiveness, I think is important, as they are two very different issues. The goal of free college is that it levels the field and allows smart people of any wealth bracket to pursue a degree that can help them improve their financial situation and develop their skills in a way they would not have otherwise been able to. I think that’s a good ideal and it’s worth discussing how best to increase this level of equality of education. Debt forgiveness is an attempt to address the huge financial impact student loan debt has on a large population and, in turn, the economy as a whole. Student loan debt has been linked to millennials owning fewer homes, starting families later and saving less money. By reducing or removing this debt burden a bunch of money gets dumped into the economy and a huge number of people become far more financially secure. You can argue about the cost versus benefit, or the utility cost of this portion of the plan, but if you immediately jump to “this isn’t fair” you are missing the point and are not approaching the policy objectively.
Thomas Sewell
May 3 2019 at 12:43am
Where did that money (wealth) come from to get dumped into the economy? Did it not also come from the economy? There’s no net benefit from that aspect.
In similar terms, there isn’t actually a proposal for “free” college out there. That would be a proposal to pay teachers and administrators and groundskeepers and such nothing. No, the proposal is for college to be paid for by collecting wealth from other people rather than for the people who directly make the decision to receive what they perceive as a benefit to pay for it.
As for your “rational” choice, if we set things up so that people can consume them (schooling, in this case) without cost, then that surely distorts the incentives of the decision-making process for them so that people will consume well beyond what would be rational and certainly well beyond what is actually economically efficient.
Without the availability of massively subsidized and guaranteed student loans, I doubt the calculation to take on so much debt would have been the choice you made at the time. You may instead have done something closer to what you’d now encourage your younger self to do… find a way to attend college without taking on that debt. At the same time (as others have referred to in this comments section), schools wouldn’t be nearly as expensive as they currently are with the “If you love your children, we charge whatever you’re able to pay us and then a little bit more” model of college pricing, which has led to an explosion of additional administration staff and campus amenities.
Comments are closed.