Just the other day, I was asking why there’s little or no discussion of giving out loans rather than subsidies or grants for education, unemployement, welfare, etc. Why subsidize a university education when the problem isn’t that the student has no money; it’s that the student has no money yet? And why give free money to someone who’s fallen on hard times — with the obvious incentive to partake of that free money — when it’s clearly supposed to be a temporary problem?
In An Ownership Society with Opportunity Through Tax Loans, Tom Grey, senior advisor to the F. A. Hayek Foundation in Slovakia, discusses loans enforced via the tax system:
Politicians are drug pushers, voters are drug addicts, and the drug of choice is OPM — Other People’s Money. Free money. Money from the government. Politicians say there’s always more available: more for education, for retirement, for housing, for health care. Political signs say ‘vote for me’ but mean ‘I’ll give you more cash.’ This addictive behavior is explained by the Two Things of Economics:
- There’s no such thing as a free lunch.
- Incentives matter.
Voters know that somebody has to pay — their big incentive is to have the state pay, to use Other People’s Money. Taxpayers know it is urgent to kick this habit, but how? Yes, cutting taxes, cutting the supply of money to the treasury. But while cutting taxes is popular, the more difficult need is to reduce demand. Americans, Slovaks, the entire democratic world, need a policy to reduce the demand for more state cash. What’s needed is a demand reduction program, starting with higher education.
The government should give people loans instead of grants. One’s loans are repaid by one’s own future money. Loan money is your own money, but shifted in time. When a borrower accepts a state loan, taxes paid would be loan repayments — hence Tax Loan — with an extra loan repayment surcharges. The loan provides the opportunity, the taxes plus surcharge repays the loan, and the surcharge provides the demand reduction.
Tax Loans solve the financing problem for poor people, replacing Robin Hood’s gifts to the poor. Paying for higher education is a big expense everywhere. Students often don’t have the money or opportunity to buy the best education. The usual solution has been some state transfers to Universities, allowing admission of students who pay little or no tuition (especially children of the elite). Instead, that same amount of money should be distributed through individual Tax Loans, to the same students. Tax Loans could be much larger than the current Federal Loan programs, while using taxes to repay the loans increases the transparency, and reduces default.
Investing in an education then emulates business investment cycle — borrow money, invest, and repay through that famous return on investment. The contractual agreement would specify how much money is borrowed, and how it is to be repaid. Just like a real loan. Students who take out Tax Loans become investors in their own human capital, owners of their own education.
Are you down with OPM? (Yeah, you know me!)