Thursday, February 27, 2020

Week 35: Debt Forgiveness

In Act I of Hamlet, Polonius offers the following advice to his son, Laertes, “Neither a borrower nor lender be.” If college students of the present and of the not too distant past, myself included, had minded their Shakespeare, we would not be in the student loan crisis we are today. Because Polonius’ advice was not taken, and because the federal government promoted the issuance of loans to college students, without regard to factors like the employability certain degrees would procure or the number of years students would take to complete a degree, approximately 45 million borrowers (graduates and those who never graduated) owe more than $1.5 trillion.

In this campaign season, both Bernie Sanders and Elizabeth Warren are proposing to cancel this debt. With Sanders in the lead and talk of Warren as a possible running mate, this is a proposal that may get some traction. While it may sound great to some, it’s yet one more bumper-sticker policy that would fade away quickly and cause long-term damage to the economy and to our society.

First, what does such a proposal teach people, particularly young Americans, about responsibility? When I took out student loans for some of my college, and the terms of my loans were clear. Clearer still was the fact that I would have to repay them. I am still repaying them. Would it be nice to have that debt canceled? Sure! But what happens when I tire of paying my credit card debts (although I fortunately have no such debt anymore) or my mortgage? If I cried loudly and persistently to the Sanders and Warrens of the political world, might they cancel those debts, too? If so, where does it stop? What’s the incentive for me to handle my life and my resources responsibly? There is none. Furthermore, cancelation does not magically happen, the $1.5 trillion debt does not simply disappear. The cost is born by the few lenders of the world or is spread across society, whether directly or indirectly. It is a shift from individual responsibility to societal responsibility. Once that happens, the impetus for personal accountability is removed, and life becomes a free-for-all. Consequences be damned. And what do we expect of a society in which the youth are taught to believe that their choices have no consequences? I, for one, expect the ruination of such a society.

Second, such a proposal turns a blind eye to the lessons of history, and as we know, those who ignore history are doomed to repeat it. Around 325 B.C., Aristotle prepared the Athenian Constitution, which referenced the constitution of the lawgiver Solon from approximately 250 years before. Solon’s constitution included a provision called the Seisachtheia, which means the “shaking off of burdens.” It was Solon’s term for cancelling all debts. This was great for the debtors, but it wasn’t so great for those to whom the debts were owed. One Athenian may have produced some good or performed some service for another Athenian, and with this “shaking off of burdens,” the money owed by the latter to the former was never, nor ever would be, repaid.

Think of it. You perform some service for me, contingent on my promise to pay you for that service. Along comes Sanders and/or Warren, and their government says that, not only do I not have to repay you, but I get to keep the good or service.

It is not dissimilar with education loan forgiveness. The lender gave me money, contingent on my obtaining an education and, because of that education, being able to secure a job that would produce the financial resources necessary for me to repay the lender. If the government, with the stroke of a pen, says I am no longer required to pay back my loan, I keep the education, and the lender gets nothing. The lender promised me money. I promised to repay it. The government, under Sanders and/or Warren would come in and say those promises don’t matter. Where in this situation is the longed-for justice they constantly decry? This is not justice, it is a pack of broken promises.

Back to Athens. The Seisachtheia worked well in the near term, at least for some. The wealthy and well-connected were informed ahead of time that the forgiveness of debts was imminent. Consequently, they racked up huge amounts of debt, knowing it would be wiped out. Many became fabulously rich under this scheme. Make no mistake, if Sanders and/or Warren are successful, there would be a payoff for powerful people. Someway, somehow, someone will become rich.

After the “shaking off” was enacted, people found that no one was interested in loaning money, so it was impossible to get credit. People were stuck. They became frustrated. After Solon’s Seisachtheia, revolt and revolution reigned. Again, make no mistake, if student loan debts are wiped out, who will lend money going forward? One would have to be an idiot to do so.

Sanders and Warren answer this question with “free” higher education for all. They ignore the moral hazard this presents. If “free” to the consumer (i.e., the student), there will be no restraint on people entering university, whether or not they have the ability to succeed or the true desire to be there. Heck, I’d sign up for four years of government-sponsored socializing in ivy-covered halls and pre-game keggers in the fall. There is a but…

As the great economist Milton Freidman reminded people, “there is no free lunch.” Nor is there such a thing as a “free” education. Professors won’t teach for free. Lecture halls won’t be powered for free. There is a price tag, and in the plans of Sanders and Warren, the receipt is picked up by the taxpayers of the nation, whether or not they go to college or have kids who do. Both claim that a wealth tax on billionaires will cover the trillions and trillions of dollars their plans, including debt cancellation and “free” college education, will cost.

What do they take us for…fools…fools who cannot do math or understand a balance sheet? They view us as ignorant fools. We are not!

The bill will come, and eventually it will land in your hands and in mine. As a responsible person, I prefer to enter into financial arrangements, such as taking out a student loan, and to abide by the promises I make, such as repaying them in full and on time. Bringing another party, namely the government, into the mix will do nothing but increase the cost of education. They believe that if the costs are hidden among the various and sundry taxes we pay, we won’t notice and won’t care. Let us not let that be the case.

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