Eat the Young: Student Loan Version

So, does this look predation to you?

It looks like predation to me.

Here’s the thing, in the bankruptcy bill, Joe Biden, among others, made it impossible to default on student loans.

This is bad. It is bad capitalism. In capitalism, people who lend money are supposed to bear the risk of lending money. If someone can’t pay them back, they should lose the money they loaned. The function of lenders, in capitalism, is to allocate money to those who will make enough to pay it back. That is the justification for letting people have lots of money–that they are good at allocating it.

When you remove the risk, by having the government both back the loans AND make it so they can’t be discharged in bankruptcy, you make it so the virtues of capitalism (such as they are) don’t work.

In truth, education should be mostly free and paid for by the government. There’s an ethical argument for that, but it’s not the one I’m making.

If education actually increases earnings or welfare (someone who is healthier will cost the government less, someone who is happier is better for other people), then that’s good. The problem with it is that it’s hard to capture. Not everyone gets a lot of benefit from education, but some people do.

Government, if it has high enough progressive taxation, doesn’t need quantify who will win from educating their citizens. They only need to know that enough people will and that whoever wins, they’ll get their share of it. This isn’t just about income or happiness or health: A lot of the greatest inventors, for example, didn’t make much money. Someone else did.

No problem. Government still taxes whoever that is.

This is government’s great advantage, and why there are a lot of things government should do.

But because the recapture rate is basically the progressive taxation rate + the rate of taxation of corporate profits, if you have low taxation it doesn’t work.

Note, also, that what private investors have done, by making default impossible, and having the government guarantee loans, is to make the government give them something close to government returns. “Now we don’t need to know who wins, because we always win.”

But since they bear only the upside and not the downside, unlike a good government, they don’t have an incentive to actually make education good.

Education costs are out of control. So are education loans. This is the rich and, generally speaking, the older, taking returns from the young and poor.

It’s evil. It’s economically stupid. It’s not capitalism.

Let’s hope it ends soon, and for a bonus, let’s hope that government makes default possible again and refuses to make “investors” whole.

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