Don’t stop at forgiving student debt – forgive everyone’s debt
A jubilee for student debt is an attractive idea but not a fair one, says Merryn Somerset Webb. Better to give everyone a hefty lump sum – whether they have debts or not.
Getting elected as the youngest congresswoman in US history was tough, says Alexandria Ocasio-Cortez. But she shays she has a tougher task ahead: paying off her student loans. So she'd like someone else to do it for her and the other 45 million Americans who owe a total of $1.6trn in student debt.
That debt prevents them from buying houses, starting families and taking risks; it may help explain the dramatic fall in the number of start-up companies after the 2008 crisis. Ocasio-Cortez argues that it poses "a systemic, economy-wide threat", and that's why she is supporting Bernie Sanders' plan to cancel student debt in its entirety.
This may sound nuts: our financial system rests on the idea that debt must be repaid. But debt forgiveness is hardly a new idea. The Bible provides for a debt jubilee every 49 years, wiping all slates clean to maintain social stability and prevent long-term debt slavery. Evidence of debt cancellation can be found in 2400BC in a Sumerian city state.
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Now lots of people are making promises. UK prime ministerial candidate Jeremy Hunt this week promised to slash rates on all student debt and to wipe it out for moderately successful entrepreneurs. Elizabeth Warren, Sanders' rival for the Democratic Party's nomination for the US presidential elections in 2020, wants to forgive some student debt for anyone earning less than $250,000. UK opposition leader Jeremy Corbyn said he would "deal with" student debt during the 2017 campaign.
The conversation isn't just about student debt, either. Back in 2011, Morgan Stanley's Stephen Roach called for a "great haircut" an agreement among bond investors, banks and consumer groups to write down mortgage debt and jump-start the economy. The UK has a Jubilee Debt Campaign. And South Korea launched a National Happiness Fund in 2013 designed to wipe out the debts of the low paid and struggling.
Given all that, it seems but a small gesture of generosity to free 45 million Americans from student debt. There are obvious problems: jubilees could be seen as an attack on property rights; they could be inflationary if newly debt free graduates scurry off to borrow money for something else; they also aren't particularly fair.
If debt jubilees target specific groups such as students, why should anyone who has worked to pay off their debt or has specifically chosen not take out debt have to subsidise those who did? And if we are going to help those who bought overpriced intellectual capital, what about everyone else who failed to get a return from other forms of capital? If a financially struggling degree recipient can be made debt free, why not a failing factory?
Sanders calls his plan to raise the cash for debt forgiveness via a new financial transactions tax the "Inclusive Prosperity Act." But it is only inclusive if you have a degree and debt.
You could also ask, why now? The US economy is doing fine and the gap between the earnings of those with and without college degrees has widened. In 2016, nearly 80% of those in the top income quintile had four-year degrees, up from less than half in 1979. How can it be right to subsidise those earning most to invest in the very source of their advantage?
There are better ways to deal with the student debt problem
All these objections aside, change is clearly coming. There are less drastic ways to try and sort out this problem. We could forgive the debt of the needy or make it easier to get rid of student debt during a bankruptcy. State-supported student loans could be made interest free: that would allow inflation to chip away at the burden while maintaining the principle that debt must be repaid.
We might also all benefit from a proper conversation about degree quality. An estimated 80% of UK students will not pay back their loans. If that many people invested in a financial product only to find it did not cover its base cost it would be a scandal. Why are degrees different?
If politicians insist on full-fledged debt forgiveness they must make it fair if it is social stability they are after. The best way to do that is with an extreme version of "people's quantitative easing" as recommended by Steve Keen of Kingston University.
US students have an average of $30,000 in debt when they leave college. So give every adult $30,000 via government spending. If you had debt of $50,000, that would fall to $20,000. If you had debt of $20,000, you would now be $10,000 in credit. If you had $30,000 savings, you would have $60,000.
That stops anyone feeling hard done by but takes away the relentless burden of interest and worry that debt brings for millions of people. It is inflationary, of course. But that could be controlled if policymakers made it clear that forgiveness was not going to be used too regularly and they had a plan to reform the financial system. Get the optics right and we could even do it every 49 years.
This article was first published in the Financial Times
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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