Hello faithful FR readers! Sorry about last week, but we are back on track with a Monday post from Stephen. Thank you Stephen!
Today, I’d like to discuss one of the myriad of problems connected to Sen. Warren’s, and many other leftists’, idea of simply forgiving debt on a massive scale across the nation. In particular, Sen. Warren proposed eliminating up to $50,000 in debt for people who earn less than $100,000. https://www.marketwatch.com/story/elizabeth-warren-its-time-to-end-the-failed-experiment-that-caused-the-student-debt-crisis-and-cancel-borrowers-debt-2019-04-22
Of course, in this highly contested run-up to the next presidential election, she is not the only one pandering free stuff to college voters, Sen. Bernie Sanders will not be outdone on the giveaway front proposing free four year college for anyone whose family makes less than $125,000 and free community college for everyone. https://www.thenation.com/article/bernie-sanders-just-introduced-his-free-college-tuition-plan/
Oh, wait, it was Warren out-pandering Sanders. https://twitter.com/ewarren/status/1120321864604237824
And of course, many on the <ctrl> left never think that government giveaways can ever be quite enough or include enough potential voters. https://twitter.com/mattyglesias/status/1120308414360498177
Oh, don’t worry your pretty little head about how to pay for it, Sen. Warren is only going to tax the super-rich, not merely the moderately rich like her friends Sen. Sanders & Sen. Pelosi, after all, it will only cost a meager $1.25 trillion, mere pocket change.
In a biting, albeit misguided display of sarcasm, Ben Shapiro takes a quick swipe at Sen. Warren’s tweeted proposition. https://twitter.com/benshapiro/status/1120327975973425152
Naturally, many of the leftist respondents to Ben ignored the sarcasm and either applauded the idea of extending the debt relief or chastised him for defending the big banks. Some even wanted a policy of simply eliminating all debt.
I did see one response which correctly pointed out that Ben’s analogy was faulty in that the student loan debt is owed to the government and not to private entities after the government took over the student loan industry as part of Obamacare, which distinction between a debt to the public and a private debt will be addressed later.
It is not merely a leftist idea to simply eliminate student loan debt, or even eliminate debt altogether. https://twitter.com/politicalmath/status/1120332686084542464 Which really tells you that “debt forgiveness” is all about nothing more than cynically buying votes using public funds.
So, let’s examine the economics of the concept of such a massive debt write-off and the effects we could expect to see should such a policy be implemented.
This it the first time in history that anyone has ever thought about just writing off debts! It has never been tried before! Oh, wait, it’s actually fairly common in history and been effected any many different fashions.
A man borrows some money from a usurer creating a debt. In the simplest scenario, the man simply claims he never borrowed that money and doesn’t owe the usurer anything or leaves town with the money. Such a practice, absent government, runs the risk of physical attack and reprisal, but is otherwise simply debt relief by fraud or deceit. (It is not technically larceny because the usurer gave the money to the man.)
The problem becomes how to prove that such a debt was actually incurred, thus the introduction of witnesses and writings. After all, a witness could be simply bribed with a portion of the money, but a writing, that’s proof. Well, provided he does not claim the writing itself to be fraudulent.
To prove such a debt requires government, in particular some form of court even if merely the court of public opinion, rules of evidence, and a measure of the sufficiency of proof.
How does a man seek debt relief in such a situation? One method would be to murder the creditor, provided that there is no writing. Another is to steal and destroy the marker, the writing proving the debt. Such solutions are not mutually exclusive.
Surely such primitive debt relief is not a viable option when it comes to a state. Philip the Fair of France, owing a great deal of money to the Knights Templar, and having exerted certain influence in getting a Frenchman elected Pope, Pope Clement V, in 1305, had the Knights Templar disbanded and arrested throughout the kingdom of France on October 13th, 1307.
Two of the reasons suspected for this action was for the French king to seize the vast gold treasure of the knights rumored to be housed in their temples, and to thus eliminate the rather large debt owed by the king to the knights. No treasure was found, however, there was no longer an order to collect upon the debts owed and the order was in possession of some prime and lucrative real estate holdings.
One of the issues addressed by the Congress of the newly formed United States of America was the issue of debts accumulated during the recent Revolutionary War and those incurred even prior to the war and whether the new nation was to be saddled with debts which were incurred prior to there even existing a nation to be so indebted.
After all, it was argued, those debts being incurred prior to the establishment of the nation itself the nation had no moral duty to recognize those debts, and if the debts were to be honored then perhaps those debts ought to be more properly apportioned among the states, or in a more extreme case, disregarded all together.
Wiser heads prevailed deciding that the reputation of the newly formed nation in the eyes of other nations was more important than the burden of the debt and that the faith and credit of the nation rested not upon their legal obligations but their moral obligations to pay those debts incurred in the creation of the nation itself.
Short of denying one’s debts or eliminating one’s debtors, Adam Smith regales us with tales of disreputable kings who would cut their currency, literally mixing their gold coins with baser metals to create a less valuable alloy. This was done often as a form of general debt relief, not merely for the state but for the poorer citizenry as well, such measures were thus often quite popular among the poor, initially.
How does this work? Well, supposing a man had borrowed 1000 Marks from his usurer with the promise to pay back the 1000 Marks together with 100 Marks in interest a year hence. In the interim, the king remints the coinage, gathering up all of the old coins and issuing brand new coins, also called Marks, but containing but half of the gold as the original. As the agreement is for 1100 Marks, the man dutifully pays his debt, but the creditor who lent 1000 Marks of gold receives back but the equivalent weight of gold of but 550 of the original Marks.
‘Tis but an ancient scurrilous practice you say? Of what modern relevance hast such knavery to our day? It is nothing more and nothing less than those who simply say that the Treasury can simply print sufficient currency to pay off the national debt, as well as to pay for anything else the government wants to purchase.
In modern terms, this is call a devaluation of the currency, which causes a number of economic ills.
One of the most obvious is the hyper inflation which results, which, simply put just ads zeroes to the currency, where one day you have a $1 bill, you trade it in for a $10 bill, but then the price of a dozen eggs goes from $1 to $10. There is no net gain in purchasing power, but at least that $100,000 school loan you had is much easer to pay back.
With such inflation, people become unwilling to hold on to cash, because that $1000 you had in the bank account will become worth only about $100 in no time, so economically it only makes sense to spend all of your money as quickly as you can because every minute you don’t spend it, it loses value.
It has the further effect of drying up the lending of money, for very much the same reasons. Interest rates are not merely based on how fast the money supply is increasing, but how fast the money supply is expected to increase, as that becomes less predictable, banks will stop lending money, because having been cheated before they expect the government to simply cheat them again.
However, I hear all of the leftist supporters crying out that “student loans are different because the debt is owed to the government not to any person or bank”.
Let’s examine that. If you take a mortgage out to buy a house, and you set fire to the house just for fun, you still owe the mortgage. The government, being the creditor to the students, those loans are an asset to the government, just like that house. The money for the student loans was borrowed by the government from the banks. Student loan forgiveness is simply eliminating the asset, it is burning down the house.
Put another way, the government is a bank for student loans, were there no national debt the government gets its money from taxing incomes, the average man’s work. Then decides to simply give that money away for students to buy beer and books . . . lend, I meant lend. Then forgives the debt after the beer is drank and the books are burned, only to tax the working man for some more.
However, lest I be accused of being one sided and partisan, there is a point at which you realize that you have lent money to a bankrupt who will never repay his debts. There is something to be said for not throwing good money after bad and that one may not get blood from a stone. The articulation of forgiving this debt, thus further burdening the taxpayer would be more credible if the advocates were not seeking to throw more money down the rathole with free college. Saying that they want to fix the problem by exacerbating it is not a convincing strategy.
Government mandated debt forgiveness is a fancy way to simply cheat creditors. In the case of student loans, the creditor is the taxpayer. But it’s for education? What lesson does it teach? Really, there is a valuable lesson here of borrowing reasonably, or there is a less that people can cheat creditors if enough people get angry at the people who lent them money so they could play the prodigal. What lesson is worth teaching these young people?
