At the seminar I mentioned in my previous post, one of the things I noticed about Burke and Tocqueville was their approach was completely political. The economic side of life and the laws that govern it were never on their radar. This isn’t a defect, it’s simply a result of the fact that one person cannot be an expert in everything.
I try to avoid commenting too precisely on ephemeral political issues, but something’s been stuck in my head for a few days and it ties in with timeless issues. There was some Bernie Sanders bit floating around the internet recently about how absurd it was that you could get an auto loan with a 2.5% interest rate but 7.5%, triple the rate, for a student loan. To a person with his background and training, sure, it probably seems absurd. But even the most cursory familiarity with economics makes it completely intelligible. A man aspiring to the most powerful position in history has a duty to familiarize himself with the ideas that he will confront (largely unsuccessfully) if he attains it. It’s possible he really does know and is simply pandering, as I suspect many of them do much of the time, but my subjective impression of him is that he is overwhelmingly sincere even in his completely uninformed opinions. Perhaps especially in his completely uninformed opinions. Those are the kind you don’t get feedback on by definition.
Consider the different consumers of auto loans and student loans. On one hand, auto loan borrowers are much older (read: more mature) than student loan borrowers. They are already in a stable pattern of employment. If they aren’t, they don’t successfully get loans. Lenders have a decent idea of what to expect from them. Additionally, if a borrower defaults on an auto loan the lender can take the car. This isn’t ideal but it makes the loan substantially less risky. Last, the loans are a percentage of the price of a car, not chump change but not massive.
On the other hand, students are young (read: less reliable). The financial future is still wide open for them. In other situations, isn’t this one of their big complaints? They don’t know, and lenders don’t know, if they will be making big bucks when they finish college or if they will be working part time at a coffee shop trying to figure things out. To top it off, education lenders can’t take back a graduate’s learning if the graduate defaults. The lender is stuck holding the bag. Last, the amounts sought after are usually much greater than the price of a car.
Now, if you’re a loan officer at an institution with money to lend, how will you be induced to lend to this second category of borrowers? How will the people with whose money you are entrusted be induced to let you hold it in the first place instead of putting it elsewhere? The lower recovery rate over a longer time must be balanced with a higher payoff in the event of recovery, i.e. a higher interest rate. Interest rates should be thought of as prices: the prices of giving up current money for repayment in future money in all the situations this occurs. Mandating that education loans and auto loans have the same range of interest rates is equivalent to mandating that it shouldn’t be worth any lender’s time to lend to college students unless they are already well off and worth the risk but least in need of the loan. That’s not exactly what Sanders wants, but it’s what he’ll get.
To a politically-minded person this level of detail is invisible. My guess is that Sanders simply doesn’t see it, the way a color blind person walks in the same world as everybody else but doesn’t see things that are obvious to other people. It’s fine if he doesn’t—most people don’t—but it’s a problem if he aspires to order people around based on his blindness. What I think is his preferred solution, having payment for college education be a public financial responsibility, is a natural outgrowth of this blindness. There would be a possible economic debate as a result, the relative pros and cons of private financing (really quasi-private here) vs. financing out of tax money, but where I’ve seen this comparison made by people on his side it’s been mostly a lackluster token effort.
None of this is a slam-dunk argument against Bernie Sanders and in favor of another candidate. That’s not what I do. I think most other candidates, not just now but in general, either don’t know what they’re talking about or don’t care. But he’s the flavor of the week representing this kind of thought, and it’s a common and important mistake that needs addressing.