Bernie’s Freebies
Vote for Bernie. He is going to forgive your student loan. That is a lie! No loan is ever “forgiven”. The liability is, one way or another, transferred.
Let us say you borrow money from a bank and default on the loan. The bank has lent you money that its customers have deposited for safe keeping. The bank’s profit is the spread between the cost of keeping track of its depositors’ money and the interest it charges for loans. In the case of CDs, the bank pays the depositor interest and charges its borrowers a higher rate of interest. In all cases, the bank is obligated to give the depositors’ money back on demand. Your failure to repay your loan does not relieve the bank of its obligation to honor the withdrawal requests of its customers. The principal amount of the bad loan comes out of profits. The loss is borne by the bank’s stockholders. If a bank makes too many bad loans, it goes broke. In that event, the stockholders are wiped out and the bond holders bear the remaining liability.
In the case of student loans, “forgiveness” means that you, the taxpayer, gets stuck with the bill. As a practical matter, the immediate effect would be to increase the national debt by $1.6 trillion. Taxpayers owe that debt to those who bought treasury bills. Bernie’s answer is that we’ll pick a taxpayer to pay the bill that isn’t you.
The first target is billionaires. The defect with that solution is a lack of billionaires. There are probably less than 1,000 people in the country who have assets that could be readily converted into a billion or more dollars that the IRS could seize. They would also have to stand like a bunch of sheep waiting to be sheared if the process is going to work. Taking every dime they have wouldn’t make a dent in the debt, much less the student loan portion thereof.
How about tapping the merely rich? The problem is that the top 10% of earners pay half our current tax bill. In order to move the government take (federal and state combined) from 33% of the economy to European levels (the minimum necessary to begin to pay for Bernie’s agenda), tax rates have to be raised radically. During my early days in business, the top rate was 70%. Those earning over $25,000 per year spent endless hours searching for deductions, loopholes and investments designed to lower their tax bill. In real European life, everybody pays a high tax rate, and spends a lot of time working to evade the bill. Once again, the problem is a lack of rich people.
How about taxing those nasty corporations? There is no such thing as a corporate tax. It’s a fiction. Tax is just another cost of production. Increased tax has to come from some combination of profits, increased prices or lower wages. That means that shareholders, and/or consumers and/or employees pay the bill. If you believe that all the cost should be allocated to shareholders, remember that your pension fund or 401k is a shareholder. In the real world, higher corporate taxes mean higher prices for goods and services. Everybody pays.
The ultimate solution to our debt problem, being pushed by Bernie’s economists, is MMT (Modern Money Theory), which posits that we can just keep running up debt because we print our own currency. If buyers fail to appear at Treasury auctions, the Federal Reserve can buy the debt. That’s printing money in a transparent disguise. The problem is that fiat currency is nothing more than perception and paper. If the sellers of goods and services no longer perceive the value of the currency, which begins to happen as soon as the printing presses start rolling, it becomes worth less than the paper on which it’s printed. Ask the folks in Venezuela or Zimbabwe how that works. When inflation takes over, the entire citizenry pays off the debt by means of a loss of purchasing power. That repayment plan devastates the entire society.
Every debt gets paid by somebody. There is no forgiveness.
