On the liberal wing of American politics, US Senator Elizabeth Warren’s (D-MA) success in capturing the love of millions is astounding. Her image as savior of indebted workers and unheard voices in America strikes a note with those concerned about reduced class mobility, and rightly so.
Consider Warren’s speech introducing emergency legislation to allow refinancing of student loans. She noted, “Congress set interest rates on student loans at artificially high interest rates that generate extra money for the government. … These young people … deserve a fair shot at an affordable education.” Her indignation at mounting student loan debt is admirable, but her cures may be worse than the disease.
It’s absurd to suggest that the solution to overpriced government student loans is to eliminate profit from the program. Loans are supposed to be the current use of one’s future capital. Interest rates signal how efficient this advance is. Given that government cannot determine the efficiency of investment in education, it has no business setting prices by fiat. Still, Warren’s program is not merely one among a million other arbitrary suggestions for government set prices. In her words, “Our work will not be done until we have eliminated all of the profits from the government-run student loan program.” One wonders if she has any concept of what prices do. Warren doesn’t just want government to continue putting students in massive debt; she wants it to give students even more reason to malinvest their savings and throw themselves at the mercy of the state’s financial caprice.
Government distorts supply by propping up banks whose oligopoly power makes the real cost of lending money obscure from public view and undiscoverable even by the banks themselves. When costs are unknowable, market-clearing prices are unknowable to at least the same degree. Neither government nor banks can set efficient prices. However, even if the government were capable of effectively pricing loans, there’s no good reason to believe it would try to. Politicians, bureaucrats and their lobbyist friends aren’t interested in market efficiency. Politicians like Warren get elected by trumpeting the cause of the debt-drowned graduate while others get campaign support by driving students from expensive government loans into the hands of private banks.
However inscrutable the precise equilibrium price, it’s reasonable to think that, without government, the supply of student loans would skyrocket, making education exceptionally affordable. Without barriers to entry, crowd-funded education loans might allow people to make small investments in many students, spreading risk and decreasing upfront costs to any individual lender. Mutual funds in student loans provided through Indiegogo or Kickstarter analogs would open the floodgates of investment money even from those just barely out of poverty. With the possibilities for new funding mechanisms, interest rates on student loans would fall enormously.
With good reason to expect a market-clearing price of student loans lower than today’s price, it is almost unbelievable that Warren manages to suggest a figure guaranteed to be TOO low. Market competition seeks out prices where resources are most efficiently used to satisfy people’s preferences. If it happens that the efficient price falls below the cost of a good, that good simply won’t be produced. No supplier wants to lose money. If Warren understood this, she would see the absurdity of her anti-profit mandate. She wants to force expenditure of resources in ways that underutilizes them. That money could be used to pay wages to workers not in school, or to fund the education of students who wouldn’t be working. In a classic case of Bastiat’s seen and unseen, Warren improperly redirects financial capital toward education.
New York Federal Reserve data shows an underemployment rate of about 44% for recent US college graduates. Though recent grads are more prone to underemployment than experienced workers, this still reveals a considerable problem with the notion that simply by going to college automatically improves employment opportunities.
Among the alternatives: Praxis is building an education program designed to compete with bachelor’s degrees in the job market on a mere ten month learning period, $12,000 tuition and paid partnership with businesses that pay ten dollars per hour for forty weeks at thirty hours per week, covering that $12,000 tuition. Surely Senator Warren would agree that ten months at no net cost is better than four years at even a low-interest loan if it creates the same job opportunities.
So what does Warren want? A simple supply and demand argument shows that if enacted, her vision would indebt more students by encouraging them to enter an overvalued self-investment plan, misusing what little financial capital is available in the US, stunting job growth for her maleducated aspiring wage slaves and encouraging more dependency on people like Warren. This doesn’t sound like a “fair shot” for “these young people.”