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  • Economist: Elizabeth Warren’s Plan to Eliminate Student Debt Is Worse Than You Think


    “There ain’t no such thing as [a] free lunch” –from the El Paso Herald-Post, June 27, 1938

    Presidential candidates and campaigns have been offering “a chicken in every pot” for at least 90 years now, but this election cycle seems to be all about offering more “free” stuff than the other candidates. Some have even gone so far as to claim it’s not a problem that the government prints money to cover such things, as if the concept of Modern Monetary Theory (MMT, or, more accurately, Mindless Magical Thinking) makes it okay. This is beyond the scope of this discussion but is more than adequately covered here, here, here, here, here, and here.

    One point relevant to this discussion is that MMT is based on the premise that government can allocate resources more efficiently than the alternative had their exercise of monopoly power over the currency not taken place—a premise without a single example in all of human history.

    The latest salvo in the Free Stuff Wars comes from Elizabeth Warren and her plan to cancel (most) student loans and offer free college to everyone. Some have even suggested, most notably the Levy Institute at Bard College (affiliated with self-described socialist Joseph Stiglitz), that such a plan would “super-charge the economy.” The premise, as we shall see, is absurd on its face. Surely, this is an effective way to woo millennials with college debt. As George Bernard Shaw noted, “A government which robs Peter to pay Paul can always count on the support of Paul,” but that hardly makes it a sound idea economically.

    There are a number of reasons college debt has ballooned, and understanding them is key to determining how best to address the “problem.” The realities haven’t changed since Thomas Sowell wrote on these topics more than a decade ago.

    First, there’s simply supply and demand. According to the National Center for Education Statistics, enrollment in all Title IV institutions, while down somewhat in the post-recession period (attributed to lower birth rates), is still up 36.3 percent from 1995 levels. Over the same period, the percentage of the population with a college degree has risen from 20.2 percent for women and 26 percent for men to 35.3 percent for women and 34.6 percent for men.

    Today, nearly 70 percent of recent high school graduates are enrolled in college. Unsurprisingly, tuition and fees have skyrocketed. The powers that be have responded by throwing ever more money at the problem.

    Unfortunately, that has only made the problem worse. As economists David Lucca, Taylor Nadauld, and Karen Shen found, roughly 60 cents of every dollar in federal credit expansion for tuition goes only to increasing tuition. No wonder spending on higher education in the US already exceeds that of many countries with supposedly “free” college. An earlier study found that

    changes to the Federal Student Loan Program (FSLP) … alone generate[d] a 102% tuition increase” between 1987 and 2010, “which more than accounts for the 78% increase seen in the data.

    In addition, there are already no less than 13 student loan forgiveness programs already in effect, most of which require nominal payments for 10 to 20 years before any balance is forgiven (a major disincentive to balance reduction). The New York Times recently provided a perfect example, citing the case of Samantha and Justin Morgan, who are on an “income-based” repayment plan and will see their loan balance continually rise until the balance is ultimately forgiven. You can’t significantly increase loan outlays, implement policies that hinder repayment, and then honestly act surprised that balances soar.

    Elizabeth Warren’s plan has been fairly described as a “bailout for the elite,” as the top 25 percent of households by income hold almost half of all student debt and as the cost would fall on all taxpayers when about two-thirds of American adults have no college degree, not to mention the 3-in-10 students who leave college debt-free (if you planned ahead or stepped up and paid your debt off, this scheme is a slap in the face).

    But, as the Lucca-Nadlaud-Shen study makes clear, the real beneficiaries are the educational institutions that enjoy the benefit of more money being added to the system without a change in supply.

    Cost: As with health care, and as we’ve already seen with tuition, you never really see just how expensive something can be until it’s “free.” The initial cost of debt cancellation, as Warren herself points out, is $640 billion. Then, of course, she suggests that the tab to taxpayers for “free” college will be $1.25 trillion over the next 10 years. Even that staggering figure, however, does not take into account what we already know happens when federal money is funneled toward tuition.

    If the 60 cents on the dollar figure holds—and there’s no reason to suspect otherwise—it would take $2.08 trillion just to meet the students Warren has taken into account. And then there’s the demand side of the equation. Of the 30 percent of high school graduates not enrolling in college under current conditions, how many does one suppose would enroll when college is “free”?

    This conundrum inevitably leads to rationing. As Ryan McMaken notes, “In the real world, no scarce resource can be both open to all, and also very inexpensive.” This explains why countries with “free tuition” often have a lower—often materially lower—percentage of college graduates.

    Quality: It’s difficult to argue that the highest quality higher education in the world is in the United States due to accident rather than due to the retention of economic incentives. The elimination of those incentives can hardly have anything but a material detrimental effect on the quality of education provided. The experience in England until the late 1990s is particularly relevant.

    Free college caused “quality to decline and socioeconomic inequality to rise.” As noted by Preston Cooper in Forbes,

    England’s experience highlights a fundamental problem with a government role in higher education: If universities rely more on government than students for funding, the level of investment in higher education hinges on the whims of politicians rather than the needs of students.

    All of the claims of economic benefit from both the elimination of student loan debt and the offering of “free” college boil down to the assumption that resources would be better allocated if only students didn’t have this debt to service. They point, for example, to lower rates of home ownership among those under 30 (conveniently glossing over the fact that the same falloff was seen for both those with no college and those graduates with no college debt), but even there, the evidence is mixed.

    While the consensus is that “American youth hav[e] accommodated tuition shocks not by forgoing schooling, but instead by amassing more debt,” perhaps explaining the “decline in homeownership for 28-to-30-year-olds over 2007-15,” the fundamental point missed by those favoring debt forgiveness is simple choice.

    Those incurring student debt did not have it imposed upon them. Rather, debt was incurred because the borrower determined that it was in their interests to incur that debt in order to obtain the benefits of higher education. They did so knowing it would mean that those resources would not be available to spend on other things.

    Certainly, sometimes those decisions were in error, but, particularly for those not majoring in ethnic studies, fine arts, or philosophy, by and large, the benefits of taking on that debt to obtain a higher education still materially outweigh the costs. As one economist noted in 2014,

    The typical student holds debt that is well below the lifetime benefits of a college education. The typical student borrower is not “under water,” as were many homeowners during the mortgage crisis.

    From an economic perspective, there is no reason to second-guess the decision-making process of those who benefit most from the educational services being purchased and, in order for there to be a real economic benefit from expending taxpayer resources to allow those borrowers to expend resources elsewhere, it would have to be demonstrated that those decisions, overall, were wrong in the first place.

    William E. Fleischmann

    William E. Fleischmann is an economist and financial professional with more than thirty years of experience in banking, insurance, and healthcare. Bill has a passion for economic history and, in particular, the extensive harm done by minimum wage laws.

    This article was originally published on FEE.org. Read the original article.


  • Canada’s Universal Child Care Program Suggests Elizabeth Warren’s Plan Would Be Disastrous for Children

    The state does such a stellar job of nurturing and educating children from preschool through high school, we should expand its role from birth onward. That’s the new proposition unveiled this week by US Senator Elizabeth Warren of Massachusetts. On Tuesday, the Democratic presidential candidate outlined a vast federal program of free and subsidized child care for children from birth until school-entry, including creating a network of government child care centers modeled after the federal Head Start early childhood program. Warren states: “Child care is one of those things we’ve got to do for working parents and we’ve got to do for our children.”

    The popular idea that the state should do things for parents, rather than allowing parents to do things for themselves and their own children, illustrates the pervasiveness of the welfare state mentality. What is framed as helping families instead strips them of their individual power and autonomy, making them more reliant on, and influenced by, government programs.

    Warren’s program is to be financed through a “wealth tax” on the most asset-rich American households and reportedly assures that all child care workers will earn wages that are on par with those of local public school teachers. Like other attempts at government price-setting, however, the economic impact of such a program would inevitably be to drive up prices, reduce variety and competition, and lead to more widespread shortages.

    The intentions of universal, government-funded child care may be good. Supporting children and families is a worthy ambition. But as Nobel Prize-winning economist Milton Friedman warned: “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” We should reject Warren’s proposal both on principle and on consequence.

    The results of similar universal, government child care programs are dismal. In 2005, economists with the National Bureau of Economic Research, including Michael Baker of the University of Toronto, Jonathan Gruber of MIT, and Kevin Milligan of the University of British Columbia, analyzed the effects of Canada’s government-subsidized, universal child care program. Similar to Warren’s proposed child care plan, the Canadian program is available to all families—not just those who are disadvantaged. The researchers discovered that demand for child care increased significantly under the government plan, as more parents abandoned informal child care arrangements with family and friends in favor of regulated child care programs.

    While demand increased, the researchers found that children’s emotional and physical health outcomes declined dramatically with the introduction of government-subsidized, universal child care. Children in the Quebec program experienced increased rates of anxiety and decreased social and motor skills compared to children elsewhere in Canada where this program was not offered. The researchers write:

    We uncover striking evidence that children are worse off in a variety of behavioral and health dimensions, ranging from aggression to motor-social skills to illness. Our analysis also suggests that the new childcare program led to more hostile, less consistent parenting, worse parental health, and lower-quality parental relationships.

    Last fall, these economists published updated findings on their analysis of Canada’s universal child care program. Their recent research revealed similarly alarming results of government-funded child care, including a long-term negative impact of the program. They assert: “We find that the negative effects on non cognitive outcomes persisted to school ages, and also that cohorts with increased child care access had worse health, lower life satisfaction, and higher crime rates later in life.” This early institutionalization of children may have enduring, undesirable consequences.

    While it’s not clear exactly what is causing the negative outcomes of Canada’s universal, government child care program, the research hints at some possibilities. A primary explanation is that the program funneled more children into government-regulated, center-based child care facilities and away from more informal child care arrangements. There was also a drop in parental care, as the opportunity cost of stay-at-home parenthood rose.

    Proponents of universal, government child care programs often tout the expansion of allegedly “high-quality” child care options, suggesting that parental care or other unregulated child care arrangements are subpar. But who determines quality? If Canada’s program is any indication, the government’s definition of “high-quality” child care may, in fact, be harming children.

    In his recent article on the economic causes of current child care shortages and correspondingly high prices, Jeffrey Tucker explains that the key to affordable, accessible daycare for all is to reduce government regulation of child care programs and providers and allow parents to choose the child care setting that best suits them and their child. Let parent preferences drive the market for child care options, not government interventions that squeeze supply, devalue informal caretaking arrangements, and unnecessarily raise the cost of stay-at-home parenthood.

    We should all heed Tucker’s conclusion: “Daycare for all is a great idea. A new government program is the worst possible way to get there.”

    Kerry McDonald


    Kerry McDonald

    Kerry McDonald (@kerry_edu) has a B.A. in Economics from Bowdoin and an M.Ed. in education policy from Harvard. She lives in Cambridge, Mass. with her husband and four never-been-schooled children. Kerry is the author of the forthcoming book, Unschooled: Raising Curious, Well-Educated Children Outside the Conventional Classroom (Chicago Review Press). Follow her writing at Whole Family Learning.

    This article was originally published on FEE.org. Read the original article.



  • Elizabeth Warren And Sherrod Brown Fight Fed Audit, Foreclosure Transparency

    Top progressive senators are running away from a bill authored by Sen. Rand Paul (R-Ky.) to audit both the Federal Reserve’s monetary policy operations and millions of foreclosures. Their aversion could doom any chance for public transparency surrounding the widespread abuse that banks deployed against homeowners in the aftermath of the financial crisis.

    Both Sen. Elizabeth Warren (D-Mass.) and her fellow financial reform advocate, Sen. Sherrod Brown of Ohio, the top-ranking Democrat on the Senate Banking Committee, have come out against Paul’s proposal, which would for the first time provide a public accounting of the central bank’s monetary policy maneuvers and its transactions with foreign central banks.

    “Sen. Brown has supported recent actions that have brought historic levels of transparency to the Federal Reserve,” spokeswoman Meghan Dubyak told The Huffington Post. “But he does not see how this legislation will benefit working Americans.”

    Warren and Brown insist they’re on board with more transparency in the Fed’s regulatory operations, but they’re drawing the line at monetary policy.

    “I oppose the current version of this bill because it promotes congressional meddling in the Fed’s monetary policy decisions, which risks politicizing those decisions and may have dangerous implications for financial stability and the health of the global economy,” Wa