'Til Debt Do You Part - Is Your Future Already Over?

You may be wondering why it's so expensive to receive a college education in countries like Australia and the United States. Or maybe not - a lot of people have accepted that this is just the way things are.

When I was in my early teens, I remember seeing a television commercial where a man in his early twenties walked into a bank and asked for a current account that came with a cheque book. The big shocker was that the bank manager said yes. You see, banks didn't want to do business with young people because they didn't have any money and had little or no track record of earning an income.

Banks didn't give huge home loans back then, either. From memory (and I'm beginning to realise how distant this is as I'm writing), they typically lent out two and a half times a person's annual income and no more.

Then came deregulation and, suddenly, college students were considered credit-worthy. They could borrow now based on the assumption that their education would ensure a high enough income for them to easily repay their loan. And people who wanted to buy a house could borrow many times their salary. Some lucky customers didn't even have to make a downpayment!

The thing is...

It may appear as though this kind of lending may be helping the students and home buyers, but it's actually making things worse for them and benefiting the education providers and home vendors.

You see, if a university knows that students can borrow $50,000, then they'll increase their tuition fees to that amount. If students then become more credit worthy to the tune of $100,000, can you guess what the cost of a college education then becomes?

The same principle applies to buying a house - the more money banks are willing to lend to their customers, the more house prices increase.

Is everything going to be okay?

This wouldn't be too much of a problem if incomes were increasing at the same rate. Incomes are not increasing at the same rate!

There is a special term used for the ever widening gap between incomes and debt levels - a bubble.

I've had debates with economics professors from some of the most prestigious universities in the World and they flat-out refuse to acknowledge this. They firmly believe that it's impossible to know that a bubble exists until after it bursts. If you don't believe me, call the economics department of any major university on the planet.

Tell me the bad news first

The bad news is that more and more people are going to have to take on crippling debts just so they can have normal things like an education and a home of their own. The alternative is to get a lower paying job so that you can work like a slave to pay rent to cover your landlord's mortgage. And once their mortgage has been paid off, you continue to have the privilege of paying rent.

What's the good news?

The good news is that it's a mild day in Sydney. Not too hot, which makes walking to the shops easier.

What? Did you think that there's some good news for you about not being forced to surrender your freedom to rent seekers?

The deregulation that prevented rocketing levels of debt was done in the name of freedom. Not your freedom, of course - you're too poor to matter. It was done to provide rent seekers the freedom to exploit you. That's why they keep repeating the message that deregulation is always good, in every circumstance.

Does debt mean freedom? No. So why should anyone believe that freedom means debt?

Solution

Okay, we could re-introduce regulations, but there may be another option with which libertarians (real libertarians, not the exploiters who just pretend) could agree.

Right now, people get walloped with taxes for doing work. The more productive they are, the more they get hit over the head with taxes. Rent seekers are fine with this because they tend not to work, but just collect money from people who do.

What if, instead of taxing people on the money they've earned, the government were to tax them on the money that they didn't earn?

"But universities are earning their money by providing an education, blah, blah, blah." Yes, but the portion of the money that they take which exceeds the cost of providing that service is an economic rent.

Unearned incomes are a form of privilege. Tax privilege instead of production and you'll give people a fair go at building a decent life for themselves, their families and their communities.