Wednesday 5 October 2011

Forgive student loans? [updated]

Justin Wolfers lays out the reasons why forgiving student loans is about the stupidest possible stimulus package. My condensed paraphrase:

  • It gives money to relatively rich people or those more likely to become relatively rich
  • You get awful bang-for-the-buck in giving money where it won't generate spending. 
  • It's a lump-sum transfer to those who already have an education so doesn't affect current decisions to invest in human capital except to the extent folks bet on debt forgiveness happening again
  • It induces lobbying for such forgiveness in any downturn
  • The tradeoff isn't giving free money to people who have debt versus "the corporations"; it's against the next best alternative - giving money to poor people.
Wolfers' final line? "Conclusion: Worst. Idea. Ever. And I bet that the proponents can't find a single economist* to support this idiotic idea."

I hope then that Green MP Gareth Hughes' tweets (1, 2) on the policy proposal don't constitute endorsement. Gareth, you're a smart guy, your work on copyright has been top notch, and you're great on civil liberties. Why keep pushing for utterly absurd economic policies? Why does pro-environment and pro-helping poor people have to be bundled with utterly absurd economics?

Justin Wolfers is hardly a raving free market screw the poor kinda guy. His objective function - what he wants to achieve in the world - is probably very very close to yours, Gareth. There are better and worse ways of achieving economic objectives. Why do the Greens keep going for the sillier ones? [I blame David Suzuki]

As for New Zealand, I haven't recent data on loan take-up by household decile. A 2005 report has the following:
Students coming out of the highest decile schools also go on to carry the biggest student loan debt.

The 2010 report [HT: Greg Dwyer for both] shows those achieving a Bachelors have higher than median earnings a year after study (and even higher earnings three years out), with higher median earnings for the higher level degrees that also correlate with higher debt levels. And, debt repayment through the income tax system depends on income - at zero percent interest on those loans, the real present value of loan balances is lower for poorer people! Forgiving the debt of student loan holders disproportionately gives free money to high-income surgeons. Is that really what the Greens stand for?


* It would be awfully fun to have an iPredict market on which of the usual suspect economists in New Zealand would come out endorsing "Worst. Idea. Ever." I know where I'd put my money and at what prices. 

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