Imagine a new federal investment that would cost $350 billion over the first ten years. How could such funds be invested for the highest social ROI? Lots of candidates: health care, transportation infrastructure, carbon reduction, and the like. In the education arena, Nobel prize winning labor economist James Heckman has argued for significant increases in spending on pre-kindergarten so that all children would start school on a more equal footing.
Former first lady, US Senator, and Secretary of State Hillary Clinton came out last week for spending $350b on debt relief for college students and alums. A political stroke of genius, no doubt. But who wins from this? College graduates tend to come from upper income households and earn, on average, 60 percent or more over their lifetime as high school graduates. Most of the spend would go to those who would have attended college anyway. Why would debt relief for this crowd be such a high priority? Recall the much more serious mortgage debt crisis in 2008 and how few politicians advocated federal intrusion into the mortgage business.
And what would colleges do? To be eligible, they would have to show they are taking steps to control costs and that their students repay their loans. But how many schools would be cut off from participating in the program if they do not make their numbers? The feds have run a very loose ship on this front for decades. In basic microeconomics, subsidies lead to more output and higher costs of operation.
As for Clinton's claim that the plan would be financed through higher taxes on the rich, be wary. Congress is really good at coming up with new entitlements, not so good on coming up with ways to pay for them.
Bottom line: a new entitlement for the upper income brackets at a time when there are many, many higher priorities for public investment (if such investments can be wisely made in light of the other commitments our society already has). The proposal also ignores some of the fundamental problems in the student loan market, especially the universal availability of loans regardless of odds of repayment.
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