Kindergarten debts

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FRONT RUNNING: Student Debt, March 2, 2020

Topic: Student Debt || Guests: Steve Keen, Michael Hudson, Randy Voller

MAX KEISER: Welcome to Front Running 2020 with Max Keiser and Stacy Herbert and a bevy of special guests right here in fabulous, hipster Brooklyn. I’m feeling it. So Stacy, this episode is all about student debt.

STACY HERBERT: And the students, of course, are the Millennials and Generation Z. They like the candidates promising to get rid of all the student debts. There’s $1.6 trillion in outstanding debt today in America. That is up from $363 billion in just 2005. Joining us to discuss this, Dr. Michael Hudson, Professor Steve Keen and Randy Voller. Professor Steve Keen, of course, you talk a lot about debt and in fact the rate of increase of debt. What do you think of that number, $363 billion in outstanding student loans in 2005 and $1.6 trillion today?

STEVE KEEN: Well, it’s doubling every two years, which is a huge rate of growth that simply can’t be sustained indefinitely. And that’s whether by the students themselves coming on board or by the lenders. It’s a huge increase in the private debt load on the economy and it’s falling on the people who earn the least money. And it’s setting them up for being unable to participate in the rest of the economy later, which is also driven by debt. So I think that’s one form of debt that is going to basically eat the other form. Student debt is going to make it impossible to keep boosting household debt. So the financial sector is eating itself.

MAX KEISER: I’m so old, I remember the 2008 financial crisis and if you recall, the subprime debt bubble blew up and we had this global meltdown. The student debt is already bigger than the subprime debt bubble.

STEVE KEEN: No, it’s not the same scale. Subprime debt was about $9 trillion . . . it went from $6 trillion to $9 trillion between about 2000 and 2005. So we’re not talking the same scale of increase in debt. We’re talking about the debt being taken by people who aren’t earning an income. And then when they graduate, they’re graduating . . . often with what about $100,000 US dollars is the level of debt?

STACY HERBERT: The average is $30,000 and, in fact, it’s non-dischargeable. Part of what happened with the subprime crisis was people could do the jingle mail and walk away. Students can never walk away from this. Almost all of it is essentially owed to the government. So the government owns you anyway and you can’t escape it. You can’t just jingle mail away from the US government.

STEVE KEEN: The $30,000 is their starting level and they go ahead and get graduate jobs where they might be earning something of that scale per year. So they’re starting with the debt to income ratio of 100% before they even pay the rent, let alone consider paying a mortgage.

STACY HERBERT: Max and I graduated before 1991, you all graduated before that sort of time. The rate of increase since the 1980s … and a lot happened in the 1980s we could talk about … the rate of tuition increase has gone up eight times faster than income. When I went to UCLA, I was able to afford the tuition and my own apartment by working part time in a stationery shop. You can’t do that today. Dr. Michael Hudson, what do you have to say?

MICHAEL HUDSON: Well, just like a house is worth whatever a bank is going to lend against it, as banks lend more and more for housing, causing real estate prices to rise, education is worth whatever a bank is going to lend against it. The government had banks draw up student loans. You made a key point: subprime debt was owed to banks, but student debt is now owed to the government. That means that the government could wipe out all the student debt and it wouldn’t hurt any private creditor at all. It could be wiped out without any disruption of the economy. In fact, unless it’s wiped out, the economy will be distorted, because as Steve Keen just said, if you have to pay a lot of money in student debt, you can’t afford to get a bank mortgage to buy a house of your own, and you’re going to end up living with your parents.

MAX KEISER: Whoa. Dr. Michael Hudson here, according to Moody’s, erasing student debt would be a small stimulus, but would it create moral hazard. Moral hazard!

STEVE KEEN: They would, wouldn’t they?

MICHAEL HUDSON: What is the moral here anyway? The moral hazard is if the rich families that can afford to send their kids to school without an education would no longer be able to lord it over the families that are driven into poverty by student debt. The moral hazard is that there wouldn’t be a polarizing economy between an oligarchy at the top and a democracy at the bottom. That’s the moral hazard according to the oligarchy and neoliberals.

STACY HERBERT: But bringing it back to the subprime crisis, Moody’s was very much responsible for that. Now, Randy, you, of course, have been involved with … you were a Bernie delegate back in 2016. Tell us what Bernie thinks of student debt, what his plan is and how that relates to . . . he’s very popular with Generation Z and the Millennials . . .

RANDY VOLLER: Well, obviously, he’s very popular because this is one of the single biggest issues holding that generation down. His plan is simply to wipe out all the student debt and then come back later and lower the interest rate to below 2% … I think 1.88%. Right now the rates are between 4% and 7% and . . . I didn’t have student debt either, Stacy, I don’t really know what happens when you default, but I do know anecdotally that when you’re paying your taxes and you think you’re going to get your stimulus as a refund, the IRS collects for your student debt. So I know that his plan, and these are policies, Stacy . . . When my parents met at UC Berkeley in 1960, it was free to go to Berkeley and you paid for incidentals. Now it’s $13,000 if you’re in state and $40,000 out of state. These are actual policies made by people in government that decide who’s going to owe what.

STEVE KEEN: And when I went through university, as well, there were fees just before I started, but they were trivial relative to the costs today because the bureaucracy in universities was trivial. The head of department by my predecessor effectively would have a meeting with the vice chancellor, talk about the budget that was needed and it’d be discussed over lunch and that was the end of the discussion. Now there’s an entire bureaucracy involved in doing that. So a huge part of the increase in cost of universities has not been money going to the academics or to the facilities for students, it’s this enormous bureaucracy, which is part of this whole student debt, the whole overload.

STACY HERBERT: And what is that? That’s neo-liberalism, right?

STEVE KEEN: Yeah . . . believing managers make things work better, you need managers to tell academics what to do.

MAX KEISER: But also these universities are acting like gatekeepers. So there are a small number of jobs where you can make the elite type of mega millions and folks are willing to pay. I went to NYU back in the 70s and 80s and I was shocked to find out that tuition is now over $50,000 a year. So you really can’t afford that much. And even you’ve got celebrities and Hollywood folks adding another $200,000 or $300,000 in bribes to get into a university that’s going to cost $200,000 or $300,000 to begin with. Because they want to get the job at the top of the banking system. The bank of the Ponzi scheme . . . financialization has created an enormous Ponzi scheme, if you want access to be at the top of the Ponzi scheme, you’ve got to go through the Ivy League. You’ve got to go deep into debt, you’ve got to pay another huge bribe. And that just disenfranchises so many millions of people that won’t have any access at all. So the whole point of university is not education anymore. They’re acting as gatekeepers to the elite oligarchy.

STEVE KEEN: It’s credentialism. I mean, I have had students telling me they’re only at university in order to get a job and I’m telling my father I was at university to get an education. And if you make it all about credentialism, you end up devaluing the quality of the education itself. So we end up with a less genuinely educated workforce. And the caliber of the teaching that . . . during this whole period of increasing costs, the student to staff ratio has been falling. There’s less staff teaching, there’s more marking load, everything has been more mechanized. The personal contact is declined. So rather than this increase in cost reflecting an increase in input and quality, it’s actually a degradation of that and just this huge bureaucratic layer over the top.

MICHAEL HUDSON: Well, the result of what Steve’s talking about is there’s been a whole change in the shape of the how much education adds to your earning power. It used to be the more education you got to the PhD, the more you earn. But now, that’s been reversed. Certainly in my field of economics. Once you have a PhD in economics, you’re so brainwashed with tunnel vision that the only thing you can do is teach. But the universities, in order to pay all this money to the administration overhead that Steve pointed to, they only hire part-timers to teach. You can only get an adjunct professorship for maybe $3,000 a course. So the higher your education, the less qualified you are to actually work in the real world. Especially in economics.

RANDY VOLLER: One anecdotal point is I have some close friends that were really happy that their daughter got into a very prestigious school in Boston and I asked how they’re going to pay for it and it was $70,000. And they had saved and they had money and she was going to get loans. And I asked them point blank based on what she wanted to study. I said, “Why don’t you just buy her a house in Las Vegas where you live for $280,000 and give her the house and send her to community college.” She’ll have an asset with no debt. She can live there and get a skill. It’s a good question, man. When you’re spending $70,000 a year and she would emerge . . . I mean, she may not have debt, but others could come out of there with $100,000 to $150,000 of debt.

MAX KEISER: That’s how the Five Guys Burger chain got started. The dad said, I can send you to college or we can start some business together. They started Five Guys Burgers. Now they all can afford to buy a university.

MICHAEL HUDSON: Getting back to what Max was saying about the gatekeepers, the problem doesn’t just begin with college, it begins in kindergarten. Here in New York City, it costs more to go to kindergarten and grade school than it does to go to college. And in fact, you remember in the stock market crisis when Citibank was having the fraudulent stock broker, the deal with the stockbroker is, we will get your daughter into kindergarten if you give a good stock market report here. So the weeding out process begins already in grade school to go to a school that can get you into the prestige college. So it really is a hereditary aristocracy that’s emerging.

STACY HERBERT: I knew you were going to say this because that’s why I wore my kindergarten outfit because I thought this was going to come up. In fact, we’ve had this scandal as well. Not only did we have the celebrities and the powerful people apparently paying bribes to get their children into these schools, which shows you that even though they have this huge wealth, that the importance of getting that degree from a particular university, regardless of what you actually learn at university is so important now in our economy. And we have the hereditary issue is something like 40% – a huge percentage, especially white Americans at Harvard or you know, certain select universities are actually children of families that are powerful or went there. This is the definition of a like an aristocracy or oligarchy that is being entrenched in this economy.

MAX KEISER: Right, the universities and libraries used to be built by the rich to give back. Now the pendulum has swung the other way. They’re using them to ossify and calcify their place as the elites by grading these drawbridges that once you get over the bridge they pull it up and everyone else is left adrift, right? So if there are no public institutions, then there is no public domain and there is no common good and we have not escaped the monarchies of Europe. And we brought back a central bank. What’s the difference now between where we work 200 years ago before we even bothered with the Declaration of Independence and the Constitution?

STEVE KEEN: It’ a compelling question. The point is should we actually be charging for education? Because when we charge for something, it’s because it’s a benefit to the person who’s buying it. And that’s the ideology that took over education about 30 or 40 years ago. But the perspective of education was originally that education is a benefit for society in general. I wouldn’t want to live in a society without doctors or engineers or scientists. I’d happily live in one without economists. Okay. But seeing it as being a private benefit and ignoring the public means that we’re ignoring that the skill basis we need for a sophisticated society and putting the burden of that skill basis on the individuals. And what we’ve turned it into is just another churn institution. Higher education has become a version of a real estate scam that is not the basis for a functional society.

MAX KEISER: Alrighty. We’re going to be back after the break so you can go to school on us right after this. Don’t go away.

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MAX KEISER: Welcome back to Front Running 2020 with Max Keiser and Stacy Herbert. Before the break we were talking about $1.6 trillion in student debt and we left it off on this idea of competitiveness, Stacy.

STACY HERBERT: Yes, Germany has free education. America has expensive education and yet it seems that Germany is out competing us. Steve Keen.

STEVE KEEN: The basic reason is because you’re not relying upon the students for fees. So to get into university, you’ve got to get a good mark. You’ve got to be an intelligent person to get in, not a wealthy one or somebody who’s borrowed money. Consequently you can afford as an academic to fail the students if they don’t do a decent job. Whereas if you try to fail students where they’ve paid, they think they’ve bought it and they deserve to get what they’ve paid for, which is a degree. And that subverts the whole purpose of education. I’ve experienced this over a 30 or 40 year period in academia and I’ve seen the quality, the capacity to fail bad students simply collapse. So what is happening is universities are graduating people with credentials but not an education.

STACY HERBERT: But the fact is we do have a problem with household formation. It is at a record low and a lot of this, many economists say, is because of this student debt. So when people argue against forgiving this debt, and remember Elizabeth Warren and Bernie Sanders definitely want to forgive this debt . . . the argument against it is like, “it’ll create the moral hazard and all these other people paid and they worked hard to pay and why should we forgive these debts?” Which is better for the economy, however, that those debts get made whole and that they’re paid off or household formation. How important is household formation to an economy?

MICHAEL HUDSON: You have to put it in the context of how competitive the economy is in terms of how many jobs it has in the first place. Now, take the case of Germany where Steve mentioned. If you can go to school and don’t have to pay tuition, that means that you can afford, if you’re a doctor to provide medical services or an engineer to provide engineering services, or you can afford to work for an income that does not require you to add on a payment of student debt. In America, if you graduate with … for a dentist it’s $300,000 of student debt from the NYU’s Dental School … you’re not going to be able to afford to take most jobs that don’t pay enough to pay the student debt. And so you’re going to default. So the real question about moral hazard, is it worth polarizing the economy and impoverishing a whole class just for the principle that all debts can be repaid. When, as Steve and I say, we know the debts can’t be paid in the end anyway … to follow this false dream that somehow the economy can afford to pay its debts and somehow the rich people deserve to impoverish the 99% of the economy that’s further and further in debt. The real moral issue is should the 99% be indebted for student debt, mortgage debt, all the other forms of debt to the 1%? That’s the moral issue.

And should America give up its hope for a competitive economy just to make students pay for loans so that you can afford to have the rich families monopolize education and lock out families that cannot afford the $40,000 that it takes to get into kindergarten in America.

STACY HERBERT: But you also have, as we’ve mentioned earlier, the tuitions have gone up. Those are the tuition prices for private university and public university. Public university is up higher … and these are wages. Wages have stayed flat.

MICHAEL HUDSON: But if you take the wages of professors, they’ve gone down and down and down because they can only get part time jobs as professors. So the professors jobs are going down because they’re part-timers while the university costs are going up because of the bureaucracy.

STACY HERBERT: Bureaucracy is what I think of as neoliberalism. And neoliberalism seems to have really come in after we went off the gold standard and you can create all sorts of fiat money, you could create all sorts of debt and credit. And the Boomers were first in. We’re not saying they’re horrible people, they were lucky. They got to be the first one in on this pyramid scheme. And now there is a battle. There is a reconciliation to be made that the Millennials are stuck with these huge debts. And how is this going to resolve itself?

RANDY VOLLER: It’s going to resolve itself through revolution, as Bernie says, “our revolution,” or it’s going to resolve itself at the ballot box. And I think that as more people get fed up and they get interested in casting their ballot on these issues that are basic issues that “I’m indebted to the 1%” and “I’m basically working a dead end job.” I’ve done radio shows where people call in and said, “I did the American Dream. I got two degrees. I went to school and I’m up to my eyeballs in debt and I get paid less than $40,000 a year in Wake County, North Carolina. I’ll never be out of debt.” And yet they did what they were told to do. This will be resolved at the ballot box and it’s exactly why Bernie is incredibly popular with Millennials and Gen Z.

MAX KEISER: To contrast the two approaches here, Sanders wants to make college free. While Elizabeth Warren has proposed a billionaire’s tax that she said would pay to eliminate up to $50,000 in education loans. Are either of those viable? Is there any difference between those two? How would you characterize those?

MICHAEL HUDSON: If you wiped out student debt, as we said before, nobody has to suffer. The government doesn’t need the money. The government either can print the money or it can raise the taxes.

STEVE KEEN: A large part of the problem arose from people saying, we have to pay for things like education using taxes, and that’s a burden on the state. Let’s impose a burden on the individuals that are benefiting from education instead. But the opening thesis is wrong. It argues the government has to tax in order to be able to spend. And part of what is called Modern Monetary Theory, which is a major factor in this election probably for the first time ever . . . The progressive economic theory is part of the political debate, makes the point that governments actually spend before they tax. Governments by spending create part of the money that enables the private sector to function. Now, if the government tries to tax more than it spends, that means it’s actually taking more money out of private bank accounts than it’s putting into them, which means you’re reducing the amount of money that actually makes the economy operate.

In fact, the government is the only institution in society which can manage to spend more than it gets back in income because it owns its own bank. Now that means it should actually be spending more than it gets back. That’s actually a sensible thing, within reason, for it to do. Over history, America’s government has spent 2.4% of GDP more than it has taken in tax every year on average for the last 120 years. I would rather have it do that by funding education than funding bureaucrats in education or funding bombing other countries. So in terms of a way of government actually creating the money, creating it by financing education is a much better way to do it than virtually any other. And that’s why it should be funded by Bernie’s scheme of the government simply paying for education than the taxation scheme.

MICHAEL HUDSON: This is very important because it clears up a widespread misinterpretation that Vice President Biden contributed more than anyone else to. He said, “Unlike all other forms of debt, student debt cannot be forgiven, cannot be wiped out by bankruptcy because it’s owed to the government. And we don’t want the tax payers to lose a penny.” But Modern Monetary Theory, which Steve and I both believe in, says wait a minute, taxpayers won’t lose a penny if you wipe out all the student debt, because the government will fund it the same way it funded the bailout, the same way it funds the military industrial complex.

It’ll simply print the money. It doesn’t need the money. So all Biden did was put in a very nasty thing. “We’re going to make students that are not born rich really suffer, because when they can’t pay, they cannot use bankruptcy that all the rest of the population can use.” It’s one of the most perverse arguments made in American politics.

STACY HERBERT: Just to clarify, it was Vice President Biden as a Senator who introduced the bankruptcy reform, which made it very difficult to discharge many debts but almost impossible to discharge student debt.

MICHAEL HUDSON: That’s correct. Biden had read 1984 and he knew what doublethink is.

MAX KEISER: So it’s like a financial gerrymandering, right? So you’re politically parsing the society in ways for political gain. You know, and the thing is about this education market, and again referring back to NYU, it’s really a property development firm disguised as a university. The property development is enormously profitable because of the way students are crammed in, professors are underpaid, and the people who run New York University are property developers, like a Trump, who are fabulously wealthy disguised as an institution of education. That’s clearly not what’s going on.

RANDY VOLLER: You’re exactly right, Max. This is what’s going on with charter schools and even in higher education and what they do is they own the real estate and they lease it back. And sometimes it’s two separate organizations, but it’s controlled by the same group. Just how McDonald’s made a lot of money owning the real estate and you’d have a franchisee, they’re doing the same scheme with some of the real estate in higher education or public school education with K through 12. And ultimately what it’s doing is creating more debt. It’s creating a lot of wealth for the 1%, but it’s not producing an educated workforce.

STEVE KEEN: Yeah, it’s devalued education dramatically over my career as a professor. The whole idea that you should be able to buy an education is a fallacy. You should be passing an education. You should achieve a standard, which means you’ve got the skill set, you understand the technology, you understand the philosophy, whatever’s involved in your discipline. That’s what should be the arbiter. And instead that’s completely gone away … with this increase in student debt has gone a degradation of the quality of education and we should get rid of it and go back to the days when was provided by the state. But it was difficult to get in. You needed to get good marks and be intelligent to get into the particular level of education. You needed to study hard.

STACY HERBERT: But bringing it back to Germany, Germany has apprenticeships, they have vocational programs. We don’t have that. Part of it is this neoliberal economy. You’ve got to be like a celebrity kind of vague doing nothing, McKinsey-eque sort of think tanker. How do we even bring back vocational schools though, if we don’t even have an industrial capitalism here anymore? Michael Hudson.

MICHAEL HUDSON: Well, you may have mentioned China also, where you have the Confucian system, where you have to take tests in order to get into the university. And the people who get in are the people who do the best in tests. So again, we’re having a whole international divide. We’re having that part of the world where people get an education on the basis of merit and intelligence, and here where people get education in proportion to how much wealth they’ve inherited from their family and which of their ancestors have gone to the most prestigious schools so that they get a legacy. We’re having a bifurcated economy here that is the exact opposite of what the more successful economies are doing. And these successful economies have much lower costs of education . . . They can afford to compete because they don’t have this overhead of a sort of idle, rentier aristocracy.

MAX KEISER: Right. So the student debt cancellation, is that a winning vote getter? Yes or no? Dr. Hudson?

MICHAEL HUDSON: Absolutely, yes. Because if a student can’t pay the debt, it’s a bad loan.

MAX KEISER: Steve Keen?

STEVE KEEN: Yes, it’s a winning idea and it’ll make the economy and the society better for it.

MAX KEISER: Randy Voller?

RANDY VOLLER: Yes, I agree. It is. And it’s actually going to turn out a huge amount of vote for Bernie Sanders.

MAX KEISER: Well, that’s going to do it for this edition of Front Running 2020 with me, Max Keiser and Stacy Herbert. By the way, I’ve given you all straight A’s.

RANDY VOLLER: All right?

MAX KEISER: Talk about grade inflation. And until next time, bye all.

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