Wednesday, June 26, 2019

Bernie’s Daft Debt Jubilee


National Review Online
Tuesday, June 25, 2019

Bernie Sanders, the Brooklyn socialist who represents Vermont in the Senate and is seeking the Democratic presidential nomination, is ready to show those Wall Street meanies a thing or two: He’s going to write them a check for something north of $100 billion. That’ll settle their hash.

The Democratic presidential aspirants are having a cash-giveaway arms race, coming up with creative ways to shovel public funds into the pockets of likely primary voters, and Senator Sanders’s plan is to forgive all college debt, some $1.6 trillion of it. This story will be familiar to some of you: It’s like Fight Club for people who went to Sarah Lawrence College. Sanders’s plan would write off all of the student-loan debt on the federal government’s books — because what’s $1.6 trillion these days? — but not all of the student debt is government held. Financial institutions hold more than $100 billion of it, and they’d do well under the Sanders program: early repayment of principal plus accrued interest and any outstanding penalties or fees.

U.S. taxpayers won’t do as well.

Like a similar proposal from Senator Elizabeth Warren (D., Harvard), Sanders’s program is a giveaway for relatively well-off people, i.e., those who went to college, who on average earn tens of thousands of dollars a year more than those who did not attend college. The median amount of student-loan debt is less than $10,000 — about 100 months’ worth of the average cable bill — and most borrowers pay 5 percent or less of their monthly income in loan payments. A third of all student debt is held by those in the highest income quartile, whereas those in the lowest quartile hold only 12 percent.

The majority of all student-loan debt is held by people with graduate degrees. What this means is that relatively low-income people who never went to college are being taxed to subsidize the careers of people who went to law school or who took other advanced degrees. Poor people are not as important to the Democratic coalition as they once were.

Worse, Sanders’s plan creates permanent perverse incentives for young Americans to take on even more debt. For one thing, it may create the expectation that this giveaway will not be a one-time thing. More concretely, it would fix interest rates on student loans at less than 2 percent. With the U.S. inflation rate hovering around 2 percent, it would make more financial sense for students to borrow 100 percent of their education expenses — indeed, to borrow all the money they can — rather than see their families dip into their own pockets. Which means that if the Sanders plan were passed, then the most likely result would be that we would see record student debt just a few years down the road.

America’s colleges are run by reasonably clever people. Put trillions of dollars in free money on the table, and they’ll figure out a way to absorb it. Indeed, subsidized student borrowing is believed by many economists to be an important driver of tuition inflation.

Senator Sanders says he would pay for this bonanza with a tax on “Wall Street speculation,” i.e. a tax on savings. That’s the contemporary Democratic party: taxing savings to subsidize debt for relatively affluent people. The Sanders plan would mean paying $25 to the federal government every time you traded $5,000 worth of stock — or five times what you’d pay the typical online brokerage in fees. Over the long term, that imposes serious costs on actively traded funds such as the ones containing many Americans’ retirement funds. For example, if the fund that manages the retirement money of California’s public-sector employees were to sell off its Microsoft position, those retirees would be obliged to pay $11 million in new taxes — on top of what they already are paying.

This will be a windfall for college administrators, giving them additional headroom to raise tuition. Administrator salaries already are among the fastest-growing areas of college spending: The president of the University of Massachusetts system was compensated to the tune of nearly $800,000 in 2016. Why not give yourself a raise? It isn’t your money.

This is bad fiscal policy, bad education policy, and poisonous politics. If that is a foretaste of 2020, it is going to be an ugly scene.

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