About two weeks ago progressive Senator Elizabeth Warren had a press conference (video here) where she promoted three bills which she claims will make a “immediate difference” for the middle class. I will show that here policy prescriptions are not just wrong so is her premise.
Before we even get into what her three bills are Warren makes the, overused, claim that the middle class is crumbling. It is slightly shrinking but that is because Americans are getting richer. According to Mark Perry “The share of “middle-income” US households annually earning between $50,000 and $100,000 in constant dollars (adjusted for inflation) has remained relatively stable over the last 40 years at about 30%.”
-“At the same time, the share of low-income households earning less than $50,000 has decreased by 13.50 percentage points from 63.6% to 50.1% from 1969 to 2009, while the share of high-income households earning more than $100,000 has increased by 14 percentage points from 6.1% to 20.1% over that period.” To see more about how Americans are getting richer check out this Learn Liberty video by Anthony Davies or this video by Steven Horwitz.
Student Loan Debt
Warren claims the government should not make a profit but as Matt Palumbo noted ” The Congressional Budget Office projects a total of $184 billion in profits from student loans from 2013-2023, averaging $18.4 billion a year. But whether or not the government turns a profit from student loans boils down to accounting tricks. Under fair value accounting, the government will project a loss of $95 billion during the same time period.
The odds of the government turning a profit from loans is low considering that federal lenders charge below the market rate for interest for their loans. Private banks take the credit score of the borrower into account to determine the risk of default and adjust the interest rate accordingly. The government does no such thing. What fair value accounting adjusts for the inherent risks of loans, such as a borrower dying or defaulting. Fail to use fair value accounting and you are counting your chickens before they have hatched. ”
The irony in her complaint is that government is the reason that college costs so much! Government is artificially raising demand for college and basic economics tells us that will cause higher prices.
Lastly she wants to lower the interest rate to make college cheaper. Of course this will only make college more expensive and give loans to those who do not deserve to have one.
Raise the Minimum Wage
Of course one of the three bills was raising the minimum wage and of course the line that no one working full time should live in poverty accompanied this claim. While we all can agree we don’t want anyone living in poverty raising the minimum wage is not going to help. In fact according to the Census Bureau only 2.7% of Americans who work full-time live in poverty. Of course I have to remind everyone that according to the law of demand, “all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.”
Fairness in Scheduling
While I view this as by far the most reasonable and least harmful of her three proposals government has no role is deciding the terms of a agreement in which two parties voluntarily entered.
Warren prescribes three policy solutions which she believes will make a “immediate difference” but instead one will make college more expensive, the other will increase unemployment and the last is government overreach.