Here’s why you should default on your student loans. And here’s why you shouldn’t.

This article popped up on my newsfeed the other day and I (as always) read the headline (“Why I defaulted on my student loans”), looked to see if it was posted by one of my sane or insane Facebook friends (no idea…), then promptly forgot about. Then I saw this response: “The New York Times Should Apologize for the Awful Op-Ed It Just Ran on Student Loans” (posted by a sane friend). Okay, let’s give this some thought.

Lee Siegel (of the first article) writes that he made some bad decisions and faced the prospect of either living a life he didn’t want, or defaulting on his obligation. The question then is “should more people follow his example?”

Choosing a major is essentially an entrepreneurial decision. You are investing in a set of human capital goods that you hope will provide a return in the future sufficient to justify the cost of the investment. One thing we know about entrepreneurship is that it usually fails. We also know that this failure is often not socially wasteful but simply a cost of experimentation. America was lucky to end up with a system of bankruptcy that is uniquely easy on defaulters… why lucky? Because it turns out that this system meant to merely shift resources towards farmers also allows entrepreneurs to quickly dust themselves off and get back to work on their next experiment. Some turn out to be brilliant and ultimately outweigh the costs of past failures.

But this wasn’t what Siegel was advocating. His decision was to not pay his debt but to stay in the line of work he trained for. His thinking was “sunk cost, and now it’s someone else’s problem.” Yes, the higher-ed industry is screwy on all sorts of margins, and yes, he probably didn’t have great information beforehand. But rather than learn from his mistake, he simply ignored it.

Using bankruptcy to subsidize risky experimentation turns out to make sense in some cases (it’s hard to believe, but there it is). And this might be justified in some cases in schooling… it might be worth it to subsidize 100 post-secondary schools that try all sorts of crazy methods on the chance that we learn something useful from the experience. And I think we can justify defaulting on student loans that were made in fraudulent circumstances (“Hey Buddy, wanna get a degree?”). It might be sensible to allow loan forgiveness for students who get a degree in a field that turns out to be obsolete by the time they graduate… as long as it’s paired with a policy requiring student loan applicants to watch a 12 hour long video course on employment projections and labor economics.

We might even justify subsidies by partial loan forgiveness for students studying art or some other field that might generate positive spill overs–but if we do, the decision shouldn’t be left to those who already owe a lot of money for attending an expensive school. It’s not up to Siegel to determine that he should get a subsidy. He wasn’t suggesting walking away from his mistake and starting fresh, he was suggesting letting someone else pay for the cost of his mistake while he reaped the rewards.

If there’s anything to learn from Siegel’s decision, it’s that understanding costs isn’t a requirement for writing in high profile news papers and so we should be leery of policy advice given by journalists. I think the second article I linked to makes a compelling case that Siegel is a bum.

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From the Comments: Populism, Big Banks and the Tyranny of Ambiguity

Andrew takes time to elaborate upon his support for Senator Elizabeth Warren, a Native American law professor from Harvard who often pines for the “little guy” in public forums. I loathe populism/fascism precisely because it is short on specifics and very, very long on generalities and emotional appeal. This ambiguity is precisely why fascist/populist movements lead societies down the road to cultural, economic and political stagnation. Andrew begins his defense of populism/fascism with this:

For example, I still have more trust in Warren than in almost anyone else in Congress to hold banks accountable to the rule of law.

Banks have been following the rule of law. This is the problem libertarians have been trying to point out for hundreds of years. See Dr Gibson on bank regulations and Dr Gibson again, along with Dr Foldvaryon alternatives. This is why you see so few bankers in jail. Libertarians point to institutional barriers that are put in place by legislators at the behest of a myriad of lobbying groups. Populists/fascists decry the results of the legislation and seek a faction to blame.

If you wanted to be thought of as an open-minded, fairly intelligent individual, which framework would you present to those who you wished to impress: the institutional one that libertarians identify as the culprit for the 2008 financial crisis or the ambiguous one that the populists wield?

And populism=fascism=nationalism is a daft oversimplification. I’ll grant that there’s often overlap between the three, but it’s far from total or inevitable overlap. Populists target their own countries’ elites all the time.

Sometimes oversimplification is a good thing, especially if it helps to clarify something (see, for example, Dr Delacroix’s work on free trade and the Law of Comparative Advantage). One of the hallmarks of fascism is its anti-elitism. Fascists tend to target elites in their own countries because they are a) easy and highly visible targets, b) usually employed in professions that require a great amount of technical know-how or traditional education and c) very open to foreign cultures and as such are often perceived as being connected to elites of foreign societies.

The anti-elitism of fascists/populists is something that libertarians don’t think about enough. Anti-elitism is by its very nature anti-individualistic, anti-education and anti-cooperative. You can tell it is all of these “antis” not because of the historical results that populism/fascism has bred, but because of its ambiguous arguments. Ambiguity, of course, is a populist’s greatest weapon. There is never any substance to be found in the arguments of the populist. No details. No clarity. Only easily identifiable problems (at best) or ad hominem attacks (at worst). Senator Warren is telling in this regard. She is known for her very public attacks on banks and the rich, but when pressed for details she never elaborates. And why should she? To do so would expose her public attacks to argument. It would create a spectacle out of the sacred. For example, Andrew writes:

Still, I’d rather have people like Warren establish a fuzzy and imperfect starting point for reform than let courtiers to the wealthy and affluent dictate policy because there’s no remotely viable counterpoint to their stances […] These doctrinaire free-market orthodoxies are where the libertarian movement loses me. There are just too many untrustworthy characters attached to that ship for me to jump on board.

Ambiguity is a better alternative than plainly stated and publicly published goals simply because there are “untrustworthy characters” associated with the latter? Why not seek plainly stated and publicly published alternatives rather than “fuzzy and imperfect starting points for reform”?

Andrew quotes a man in the street that happens to be made entirely of straw:

“Social Security has gone into the red, but instead of increasing the contribution ceiling and thoughtfully trimming benefits, let’s privatize the whole thing and encourage people to invest in my company’s private retirement accounts.”

Does the libertarian really argue that phasing out a government program implemented in the 1930s is good because it would force people to invest in his company’s private retirement accounts? I’ve never heard of such an example, but I may just be reading all the wrong stuff. Andrew could prove me wrong with a lead or two. There is more:

This ilk of concern trolls (think Megan McArdle: somewhat different emphasis, same general worldview) is one that I find thoroughly disgusting and untrustworthy and that I want absolutely no part in engaging in civil debate. Their positions are just too corrupt and outlandish to dignify with direct responses; I consider it better to marginalize them and instead engage adversaries who aren’t pushing the Overton Window to extremes that I consider bizarre and self-serving. They’re often operating from premises that a supermajority of Americans would find absurd or unconscionable, so I see no point to inviting shills and nutters into a debate […].

Megan McArdle is so “disgusting and untrustworthy” that her arguments are not even worth discussing? Her name is worth bringing up, of course, but her arguments are not? Ambiguity is the weapon of the majority’s tyranny, and our readers deserve better. They are not idiots (our readership is still too small!), and I think they deserve an explanation for why McArdle is not worthy of their time (aside from being a shill for the rich, of course).

I think populism/fascism is often attractive to dissatisfied and otherwise intelligent individuals largely because its ambiguous nature seems to provide people with answers to tough questions that they cannot (or will not) answer themselves. Elizabeth Warren’s own tough questions, on the Senate Banking Committee, revolve around pestering banks for supposedly (supposedly) laundering money to drug lords and terrorists:

“What does it take, how many billions of dollars do you have to launder from drug lords and how many economic sanctions do you have to violate before someone will consider shutting down a financial institution?” Warren asked at a Banking Committee hearing on money laundering.

Notice how the populist/fascist simply takes the laws in place for granted (so long as they serve her desires)? The libertarian would ask not if the banks were doing something illegally, but why there are laws in place that prohibit individuals and organizations from making monetary transactions in the first place.

Senator Warren’s assumptions highlight well the difference between the ideologies of populism/fascism and libertarianism: One ideology thinks bludgeoning unpopular factions is perfectly acceptable. The other would defend an unpopular faction as if it were its own; indeed, as if its own freedom were tied up to the freedom of the faction under attack.