What if?

U.S. House Budget Committee Chair Paul Ryan asks a good question:

Let me ask you a question: what if your President, your Senator and your Congressman knew it was coming? What if they knew when it was going to happen, why it was going to happen and more importantly, what if they knew what they needed to do to stop it from happening and they had the time to stop it? But they chose to do nothing about it, because it wasn't good politics?


What would you think of that person? It would be immoral.

This coming debt crisis is the most predictable crisis we've ever had in this country. And look what's happening. [emphasis added]

Now, I've not been following American budget politics and am consequently agnostic about whatever budget plan he might be proposing; I'd be surprised if it made more sense to cut Medicaid, which helps poor people, than to cut cut Medicare, which helps old people many of whom are wealthy. There's more informed analysis of American budget politics elsewhere.

But I really liked the question. Recall New Zealand Prime Minister John Key's position on maintaining former Prime Minister Helen Clark's policy of zero-percent student loans:

Charging interest would bring in considerable extra revenue for the Government, but Key said he would be voted out if National did so.

"Bluntly, if you want me to be really crude about it there are 565,000 student loans out there. If we add interest back on the student loans, it doubles repayment time of the loan.

"If your loan is $50,000, and it's estimated it will take you eight years to pay it off, we effectively turn it into a loan that is about $90,000 with interest that takes you about 15 years to repay," Key said.

"That is about the only thing that will get [young people] out of bed before 7 o'clock at night to vote, but it's not politically sustainable to put interest back on student loans. It may not be great economics, but it's great politics. It is a bit of a tragedy because it sends the wrong message to young people, it tells them to go out and borrow debt." [emphasis added]

What do we think about this person? Here's what Matthew Hooton thought.

At least Key's not pretending it's good economics; politicians more typically convince themselves that whatever's politically popular is also economically sound.

But instead of leading a national conversation about the size of the deficit and ways of addressing the problem, including reintroducing interest on new loans and phasing interest back in on existing loans over time, he shuts the door on sound policy. Recall Justin Wolfers' argument against forgiving student loans; zero percent loans aren't that different - they forgive a good chunk of the proper present value of the debt.

Budget constraints do bind; Key last year suggested limiting access to loans rather than charging market interest rates. The coming budget is likely to have more restrictions on loan access: rationing the zero-interest credit. And such restrictions aren't necessarily bad economics either: if government-backed loans solve a market failure in credit markets that stems from inability to collateralize human capital, restricting people with other assets that could serve as collateral from accessing zero percent loans reduces costs without any particular policy cost. Or, if some degree programmes or student cohorts are exceedingly unlikely to see sufficiently enhanced earnings for the policy cost to be recouped through the tax system, restricting loan access there also doesn't necessarily do harm relative to a policy of loans issued at market interest rates. But it smacks a bit of government picking winners rather than letting students make their own choices after looking at the expected loan repayment burden at market interest rates.

And, there are other negative consequences for tertiary policy that flow directly from maintaining zero percent loans. The Government caps tuition increases, ostensibly for the students, but really because it can't afford to dish out loans at zero percent were tuition to rise. Similarly, the government has moved to limit domestic tertiary enrolment via capped enrolment at the universities - a policy that would be superfluous if tuition were higher and students charged market interest rates.

I sure hope the budget has something other than "Yeah, the deficit is really big. But everywhere we looked for savings would have somebody complaining, and Labour would then get elected and boy wouldn't that be worse. So we're not really going to do anything - not even commit to raising the age of superannuation eligibility two decades from now. It's horrible economics and boy the Treasury guys will get mad at me. But it's great politics."

iPredict says there's a 43% chance National wins government again in 2014. Pulling out a couple of high variance plays might not be crazy.