Thursday, October 29, 2015
Free stuff can turn out to be a bad buy
Free stuff sounds good to many people, and it’s not just Democrats who promise it. Republican candidates have been talking about reducing college costs too, and George W. Bush was as passionate a supporter as Bill Clinton of encouraging home ownership for blacks and Hispanics.
Such policies are not necessarily examples of political demagoguery, though some are. They are based on observations of undisputed facts. College graduates over the years tend to make more money than non-graduates. Homeowners over the years tend to accumulate wealth and to build communities more than renters.
From these observations, policymakers have drawn the following conclusion. If we just get more people — especially minorities — into college, they will make more money. If we just get more people — especially minorities — to become homebuyers, they will accumulate more wealth. And what easier way to do that than to make these things free, or close to that?
This argument has special appeal to those oldsters born in the 1940s — Bernie Sanders, Bill and Hillary Clinton, George W. Bush, Donald Trump. Back then most Americans did not own homes and only a small minority graduated from college.
These politicians saw how public policies like the FHA and VA home loans and the G.I. Bill of Rights, together with unexpected postwar prosperity, changed that. By 1960, more than 60 percent of Americans were homeowners. By the 1970s most high school graduates were going on to some form of higher education. If old public policies could increase college attendance and homeownership, shouldn’t new public policies be able to increase them still more?
Over the last quarter-century we have had such policies, with some unhappy results. By 2007, 69 percent of American adults were homeowners. In 2009, 70 percent of young Americans went on to some form of higher education. But those numbers have slipped down since.
Government grants and subsidized loans have enabled many people to afford higher ed. But they haven’t guaranteed that recipients graduate or that graduates find satisfactorily remunerative work. The availability of government subsidy has prompted colleges and universities to raise tuitions far more rapidly than inflation, with much of the proceeds going into administrative bloat. That has left many borrowers with enormous debts which they cannot shed in bankruptcy.
Government policies, aided and abetted by Fannie Mae and Freddie Mac, promoted low- or no-down-payment mortgages for buyers previously considered uncreditworthy, many of them black or Hispanic. Policymakers, lenders and buyers all assumed that housing prices would always rise so that homeowners could always refinance any money problems away.
Oops. Housing prices fell sharply starting in 2006, and financial firms ended up with mortgage-backed securities which regulators classified as safe but for which they suddenly could find no buyers — and the economy crashed. Mortgage foreclosures soared, and by my estimate about one-third of those foreclosed on were Hispanics in California, Nevada, Arizona and Florida, whose recent low- or no-down-payment mortgages left them deep underwater when prices plummeted.
In response many politicians, mainly Democrats, are calling for iatrogenic policies: more of the medicine that caused the malady. Free college (actually, just free tuition) falls in this category, giving colleges and universities a more direct pipeline to government funds but not guaranteeing better results for students. Junior college is already largely free, but most enrollees don’t graduate.
And the Obama administration is seeking to reinstate Clinton and Bush administration policies providing low- and no-down-payment mortgages to those who do not meet traditional credit standards. What could go wrong?
Recent experience should tell us that college and homeownership are not for everyone. Many people lack the cognitive skills for higher education but have other abilities which can make them productive and successful adults. Many people, like those who move frequently, are better off renting than paying the transaction costs of buying a home.
Maybe policymakers got causation backwards. Increased college and homeownership, they thought, would upgrade people, and for a long while it did. But we seem to have reached the point of diminishing returns, when making things free will hurt the intended beneficiaries more than help.