Education Debt: The Next Bailout?
- Subsidize
- Over-Consume
- Bailout
- Repeat
It’s a continuous cycle that that policymakers would be wise to end.
Whenever the government subsidizes a good or an activity, it causes individuals to consume more it than they would otherwise. This is because the subsidy decreases the price to consumers, many of whom, by the law of demand, consequently consume a higher quantity. This occurs across all industries. In Missouri, for example, it happens in ethanol production, homeownership, historic preservation, health care, film production, etc.
Education is another product that is over-consumed when subsidized. Last Sunday, a New York Times article illustrated how federal subsidy is partly responsible for the over-consumption of law school:
Apparently, there is no shortage of 22-year-olds who think that law school is the perfect place to wait out a lousy economy and the gasoline that fuels this system — federally backed student loans — is still widely available.
A negative consequence of this overconsumption is degree inflation. According to the signalling model, which contributors to Show Me Daily have discussed previously, individuals have an incentive to accumulate degrees to indicate to employers that they are higher-quality than others in the labor supply. Many jobs that may have required only a high school degree in the past now require a college degree. Based on this article, it seems that jobs that may have required a college degree in the past now require a law degree.
Another negative consequence is lower earnings. It’s a catch-22: The prospect of high earnings encourages a higher number of people go to law school, but because there is a high supply of lawyers, there is downward pressure on earnings.
By knocking the price system out of equilibrium, the government causes a misallocation of resources, which produces a market bubble that will burst as soon as the subsidy ends. Is education debt the next bubble to burst? Will there be an education debt bailout? The protagonist in the article — who has a law degree, $250,000 in debt, and a low-wage temp job — doesn’t seem too worried. He says:
“Bank bailouts, company bailouts — I don’t know, we’re the generation of bailouts,” he says in a hallway during a break from his Peak Discovery job. “And like, this debt of mine is just sort of, it’s a little illusory. I feel like at some point, I’ll negotiate it away, or they won’t collect it.”
Bailing out education debts would mean bad news for taxpayers, since the costs would be diffused onto them. The federal government could not afford it — adding the debts of debt-laden law students would certainly exacerbate the federal deficit.
