Bucket, Meet Drop, or Why We Shouldn’t Tolerate Electoral Sunk Costs

I won’t say people had high hopes for President Obama’s student loan proposal, but its underwhelm does impress. By my understanding it does the two things:

(1)  Accelerates the IBR reforms to allow 2012 university grads to use the repayment plan. This means their interest rates will be 10 percent of their discretionary incomes instead of 15 percent, and their loans will be canceled after 20 years and not 25.

(2)  Allows consolidation of loans for hybrid borrowers (sounds sci-fi) who hold both guaranteed loans (FFELP) and Direct Loans into one massive Direct Loan with a 0.5 percent interest rate reduction. This well benefit up to 5.8 million borrowers.

Point one is good for two years’ worth of grads going forward, and point two helps prevent defaults and bail out FFELP lenders. Intuition tells me that the Democrats’ solution to the near-trillion dollars of student loan debt and the next trillion by 2020 is to put everyone on IBR and walk away. It’s not the worst outcome for student debtors, but for those already in default, those with private loans, or those not in school right now (Hint: December grads, you might want to stay in school for another semester), nothing’s changed.

Coincidentally, the White House responded to the “Forgive Student Loan Debt to Stimulate the Economy and Usher in a New Era of Innovation, Entrepreneurship and Prosperity” petition, which while noble, overreaches in its title. The response merely touts the President’s plan, and a quick read-through solidifies my opinion that the White House thinks IBR will save the day no matter how much universities overcharge or raise tuition. Why does it not see the gravity of the problem?

Not just sunk costs but electoral sunk costs. Allow me to illustrate.

Our Administration recognizes that higher education is a needed investment to compete for the jobs of the twenty-first century, but acknowledges the great financial burden that it places on many American students and families. As an Administration, we are committed to making college more affordable so that all Americans can gain access to an education that will enable them to succeed in a global economy increasingly based on knowledge and innovation.

As President Obama has explained, American students face a paradox: “at the very moment it’s never been more important to have a quality higher education, the cost of that kind of that kind of education has never been higher.” Over the past three decades college tuition has grown 10 times faster than a typical family’s income, making higher education unattainable for many; however, more than 60% of jobs in the next decade will require more than a high school diploma. It is more important than ever for Americans to get a good education to stay ahead in an increasingly global economy.

That’s not a paradox at all: the more everyone needs something, the more it costs. I’m told this is called supply and demand, but I’m just being a jerk.

From these block-quotes, we can infer a few things:

(1)  If the Republican Party wants to appear the party of small business entrepreneurs, the Democratic Party wants to be the party of Google. The working class just doesn’t exist here.

(2)  Democrats still believe “Globalization” means “college-educated people working flex time in Starbucks pushing digital paper,” and not, “massive trade deficits to developing countries due to an overvalued currency.”

Now, I believe the White House is right about the 60 percent higher ed figure, but here’s what the BLS says about job growth this decade. Of the 7,325,000 jobs created that’re listed, 4,878,000 (66.6 percent) do not require a college degree. 431,600 (5.9 percent) require only a post-secondary vocational award, 581,500 (7.9 percent) require an associate’s degree. The remaining 1,433,800 (19.6 percent) require a bachelor’s degree or more. Alternatively, the BLS’s Occupational Outlook Handbook also projects a lot numeric job growth (Table 2) in what I can best describe as jobs for “gammas” and “deltas” in Aldous Huxley’s Brave New World. 394,300 food service jobs? 374,700 retail salespeople? It’s as though the BLS would recommend the following for high school grads (if that): do menial work in the service sector, become a nurse, or get a B.S. in accounting. Smart folk will stay out of college and get an office job. Given the high cost of higher education, setting one’s sights low seems the most prosperous path. Notice, however, that none of these jobs have anything to do with “Globalization.”

Instead, here’s how far behind the curve the White House is:

Real GDP vs. Potential GDP:

The current account deficit as a percentage of GDP:

Private sector debt and net public debt as a percentage of GDP:

Home mortgage debt as a percentage of GDP:

Government holdings of nonrevolving debt (mostly Direct Loans), all other nonrevolving debt, and the total:

The civilian employment-population ratio:

Oh, and we’re short 12 million nonfarm payroll jobs.

If anything, this chart bomb indulgence should help sink in the notion that Bush years were an epic disaster of macroeconomic mismanagement. Few great countries have ever run themselves into the ground the way the U.S. has this century, though don’t ignore how the Rubin-era Clinton Administration set things up. Equally important, it instructs us that the White House lacks the political will to admit how bad the situation is. The paltry incrementalism of the “We Can’t Wait on Congress” plans makes the White House look naïve to anyone who’s informed.

This is what I mean by “electoral sunk costs”: it’s one thing to wake up one morning and realize you’re wedded to policies that sell jet-setting globalization but in reality force people to reduce their life expectations to McJobs. It’s another thing to go out and campaign on, “This country has been wrecked by kleptocrats. Time for the rich to ‘suffer’ painful reforms, and pay no attention to the fact that we just spent four years on hope and change and delivered neither.”


  1. “Smart folk will stay out of college and get an office job.”

    This is basically impossible.

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