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For the Separation of Stadium and State – Article by David R. Henderson

For the Separation of Stadium and State – Article by David R. Henderson

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The New Renaissance HatDavid R. Henderson
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The title of this post is the same as the title of an article by Jonah Goldberg about the Colin Kaepernick incident. (If you haven’t been paying attention to the NFL lately, here’s the summary: Kaepernick is a San Francisco 49er who refused, and still refuses, to stand for the U.S. national anthem.)

I had been pondering writing a similar piece myself. And then I saw his title. Darn, I thought, Goldberg has beat me to it.

Except that he didn’t.

Goldberg’s article is all about his narrow way of keeping politics out of sports: players should stand for the national anthem. Some people would see this as a way of inserting politics into sports.

That means that people who don’t like what Kaepernick did are being forced to pay for the very property on which he did it.

But how would you keep politics out of sports in a fundamental way? It would be by not forcing people to pay for sports.

You don’t have to know a lot about the 49ers or the NFL to know that local governments tax their residents and others heavily to pay for luxurious stadiums.

That means that people who don’t like what Kaepernick did are being forced to pay for the very property on which he did it. On the other hand, it also means that people who don’t like the flag-waving that goes on at NFL games are also forced to pay for the property on which that occurs.

There’s a simple solution here: actually separate sports and state. That is, quit forcing taxpayers to pay for sports.

Now that’s a solution that I will salute.

 

david-r-henderson
David R. Henderson

David Henderson is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California. He is editor of The Concise Encyclopedia of Economics (Liberty Fund) and blogs at econlib.org.

This article was originally published on FEE.org. Read the original article.

Oil Prices Too Low? – Article by Randal O’Toole

Oil Prices Too Low? – Article by Randal O’Toole

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The New Renaissance HatRandal O’Toole
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Remember peak oil? Remember when oil prices were $140 a barrel and Goldman Sachs predicted they would soon reach $200? Now, the latest news is that oil prices have gone up all the way to $34 a barrel. Last fall, Goldman Sachs predicted prices would fall to $20 a barrel, which other analysts argued was “no better than its prior predictions,” but in fact they came a lot closer to that than to $200.

Low oil prices generate huge economic benefits. Low prices mean increased mobility, which means increased economic productivity. The end result, says Bank of America analyst Francisco Blanch, is “one of the largest transfers of wealth in human history” as $3 trillion remain in consumers’ pockets rather than going to the oil companies. I wouldn’t call this a “wealth transfer” so much as a reduction in income inequality, but either way, it is a good thing.

Naturally, some people hate the idea of increased mobility from lower fuel prices. “Cheap gas raises fears of urban sprawl,” warns NPR. Since “urban sprawl” is a made-up problem, I’d have to rewrite this as, “Cheap gas raises hopes of urban sprawl.” The only real “fear” is on the part of city officials who want everyone to pay taxes to them so they can build stadiums, light-rail lines, and other useless urban monuments.

A more cogent argument is made by UC Berkeley sustainability professor Maximilian Auffhammer, who argues that “gas is too cheap” because current prices fail to cover all of the external costs of driving. He cites what he calls a “classic paper” that calculates the external costs of driving to be $2.28 per gallon. If that were true, then one approach would be to tax gasoline $2.28 a gallon and use the revenues to pay those external costs.

The only problem is that most of the so-called external costs aren’t external at all but are paid by highway users. The largest share of calculated costs, estimated at $1.05 a gallon, is the cost of congestion. This is really a cost of bad planning, not gasoline. Either way, the cost is almost entirely paid by people in traffic consuming that gasoline.

The next largest cost, at 63 cents a gallon, is the cost of accidents. Again, this is partly a cost of bad planning: remember how fatality rates dropped nearly 20 percent between 2007 and 2009, largely due to the reduction in congestion caused by the recession? This decline could have taken place years before if cities had been serious about relieving congestion rather than ignoring it. In any case, most of the cost of accidents, like the other costs of congestion, are largely internalized by the auto drivers through insurance.

The next-largest cost, pegged at 42 cents per gallon, is “local pollution.” While that is truly an external cost, it is also rapidly declining as shown in figure 1 of the paper. According to EPA data, total vehicle emissions of most pollutants have declined by more than 50 percent since the numbers used in this 2006 report. Thus, the 42 cents per gallon is more like 20 cents per gallon and falling fast.

At 12 cents a gallon, the next-largest cost is “oil dependency,” which the paper defines as exposing “the economy to energy price volatility and price manipulation” that “may compromise national security and foreign policy interests.” That problem, which was questionable in the first place, seems to have gone away thanks to the resurgence of oil production within the United States, which has made other oil producers, such as Saudi Arabia, more dependent on us than we are on them.

Finally, at a mere 6 cents per gallon, is the cost of greenhouse gas emissions. If you believe this is a cost, it will decline when measured as a cost per mile as cars get more fuel efficient under the current CAFE standards. But it should remain fixed as a cost per gallon as burning a gallon of gasoline will always produce a fixed amount of greenhouse gases.

In short, rather than $2.38 per gallon, the external cost of driving is closer to around 26 cents per gallon. Twenty cents of this cost is steadily declining as cars get cleaner and all of it is declining when measured per mile as cars get more fuel-efficient.

It’s worth noting that, though we are seeing an increase in driving due to low fuel prices, the amount of driving we do isn’t all that sensitive to fuel prices. Real gasoline prices doubled between 2000 and 2009, yet per capita driving continued to grow until the recession began. Prices have fallen by 50 percent in the last six months or so, yet the 3 or 4 percent increase in driving may be as much due to increased employment as to more affordable fuel.

This means that, though there may be some externalities from driving, raising gas taxes and creating government slush funds with the revenues is not the best way of dealing with those externalities. I’d feel differently if I felt any assurance that government would use those revenues to actually fix the externalities, but that seems unlikely. I actually like the idea of tradable permits best, but short of that the current system of ever-tightening pollution controls seems to be working well at little cost to consumers and without threatening the economic benefits of increased mobility.

Randal O’Toole is a Cato Institute Senior Fellow working on urban growth, public land, and transportation issues. O’Toole’s research on national forest management, culminating in his 1988 book, Reforming the Forest Service, has had a major influence on Forest Service policy and on-the-ground management. His analysis of urban land-use and transportation issues, brought together in his 2001 book, The Vanishing Automobile and Other Urban Myths, has influenced decisions in cities across the country. In his book The Best-Laid Plans, O’Toole calls for repealing federal, state, and local planning laws and proposes reforms that can help solve social and environmental problems without heavy-handed government regulation. O’Toole’s latest book is American Nightmare: How Government Undermines The Dream of Homeownership. O’Toole is the author of numerous Cato papers. He has also written for Regulation magazine as well as op-eds and articles for numerous other national journals and newspapers. O’Toole travels extensively and has spoken about free-market environmental issues in dozens of cities. An Oregon native, O’Toole was educated in forestry at Oregon State University and in economics at the University of Oregon.  

This work by Cato Institute is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

Ex-Im Bank is Welfare for the One Percent – Article by Ron Paul

Ex-Im Bank is Welfare for the One Percent – Article by Ron Paul

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The New Renaissance Hat
Ron Paul
June 1, 2015
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This month Congress will consider whether to renew the charter of the Export-Import Bank (Ex-Im Bank). Ex-Im Bank is a New Deal-era federal program that uses taxpayer funds to subsidize the exports of American businesses. Foreign businesses, including state-owned corporations, also benefit from Ex-Im Bank. One country that has benefited from $1.5 billion of Ex-Im Bank loans is Russia. Venezuela, Pakistan, and China have also benefited from Ex-Im Bank loans.With Ex-Im Bank’s track record of supporting countries that supposedly represent a threat to the US, one might expect neoconservatives, hawkish liberals, and other supporters of foreign intervention to be leading the effort to kill Ex-Im Bank. Yet, in an act of hypocrisy remarkable even by DC standards, many hawkish politicians, journalists, and foreign policy experts oppose ending Ex-Im Bank.

This seeming contradiction may be explained by the fact that Ex-Im Bank’s primary beneficiaries include some of America’s biggest and most politically powerful corporations. Many of Ex-Im Bank’s beneficiaries are also part of the industrial half of the military-industrial complex. These corporations are also major funders of think tanks and publications promoting an interventionist foreign policy.

Ex-Im Bank apologists claim that the bank primarily benefits small business. A look at the facts tells a different story. For example, in fiscal year 2014, 70 percent of the loans guaranteed by Ex-Im Bank’s largest program went to Caterpillar, which is hardly a small business.

Boeing, which is also no one’s idea of a small business, is the leading recipient of Ex-Im Bank aid. In fiscal year 2014 alone, Ex-Im Bank devoted 40 percent of its budget — $8.1 billion — to projects aiding Boeing. No wonder Ex-Im Bank is often called “Boeing’s bank.”

Taking money from working Americans, small businesses, and entrepreneurs to subsidize the exports of large corporations is the most indefensible form of redistribution. Yet many who criticize welfare for the poor on moral and constitutional grounds do not raise any objections to welfare for the rich.

Ex-Im Bank’s supporters claim that ending Ex-Im Bank would deprive Americans of all the jobs and economic growth created by the recipients of Ex-Im Bank aid. This claim is a version of the economic fallacy of that which is not seen. The products exported and the people employed by businesses benefiting from Ex-Im Bank are visible to all. But what is not seen are the products that would have been manufactured, the businesses that would have been started, and the jobs that would have been created had the funds given to Ex-Im Bank been left in the hands of consumers.

Another flawed justification for Ex-Im Bank is that it funds projects that could not attract private sector funding. This is true, but it is actually an argument for shutting down Ex-Im Bank. By funding projects that cannot obtain funding from private investors, Ex-Im Bank causes an inefficient allocation of scarce resources. These inefficiencies distort the market and reduce the average American’s standard of living.

Some Ex-Im Bank supporters claim that Ex-Im Bank promotes free trade. Like all other defenses of Ex-Im Bank, this claim is rooted in economic fallacy. True free trade involves the peaceful, voluntary exchange of goods across borders — not forcing taxpayers to subsidize the exports of politically powerful companies.

Ex-Im Bank distorts the market and reduces the average American’s standard of living in order to increase the power of the federal government and enrich politically powerful corporations. Congress should resist pressure from the crony capitalist lobby and allow Ex-Im Bank’s charter to expire at the end of the month. Shutting down Ex-Im Bank would improve our economy and benefit most Americans. It is time to kick Boeing and all other corporate welfare queens off the dole.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Transhuman Libertarianism – Article by Kyrel Zantonavitch

Transhuman Libertarianism – Article by Kyrel Zantonavitch

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Editor’s Note and Announcement: The Rational Argumentator is hosting a series of articles on the relationship between libertarianism and transhumanism and the question of whether, and – if so – in what manner and to what extent, advocates of indefinite life extension should ever pursue government funding or programs with the aim of lengthening human lifespans.

This article below presents a perspective from Kyrel Zantonavitch, who strongly argues against government support for life-extension research and instead sees solely private research as being the most capable of achieving indefinite lifespans in our lifetimes.

Mr. Stolyarov’s own views are detailed in his articles “Six Libertarian Reforms to Accelerate Life Extension” and “Liberty Through Long Life” and “Liberty or Death: Why Libertarians Should Proclaim That Death is Wrong“.

The Rational Argumentator invites all advocates of indefinite life extension to share their views regarding these questions, and many perspectives will be considered and published – so long as the authors genuinely support the goal of lengthening human lifespans through science and technology. All articles submitted in response to this request will be linked alongside one another once a critical mass has accumulated, so that readers would be able to analyze the viewpoints presented and formulate their own conclusions.

~ G. Stolyarov II, Editor-in-Chief, The Rational Argumentator, December 4, 2014

The New Renaissance Hat
Kyrel Zantonavitch
December 4, 2014
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All transhumanists are libertarians. They are all believers in, and future practitioners of, laissez-faire capitalism. They’re advocates of 100% liberty in politics, economics, and sociology. Transhumanists never initiate force against their fellow man; they never aggress upon or attack them. Transhumanists think people and property are sacred and untouchable. All transhumanists are political and socio-economic freedom-fighters and libertarians to the point of infinity.

Or at least they should be.

Because nothing advances human biological/physical development, and intellectual/spiritual ascent, faster than political and socio-economic freedom. Nothing improves quality and quantity of life more deftly or more powerfully. For immortality to have even a remote chance of being achievable within the next generation or two, government-protected justice and liberty must be pure and limitless.

Nothing generates more opportunity for general and particular success and triumph than freedom. Nothing germinates more innovation and genius — more radical and revolutionary brilliance. And make no mistake: immortality within the next 20-40 years will require a lot of innovation and genius.

For this and reasons of fundamental morality, massive government subsidies of science and medicine, via the evil and tyrannical welfare state, are emphatically not the way to go. It would be like suddenly, militarily seizing the powers of world government, and then trying to physically coerce almost everyone on Earth into studying technology and healthcare. Whips and guns (and chains and cattle-prods) are not the path to longevity. As the philosopher Ayn Rand noted: “You cannot force a mind.”

Firstly, such government funding is a type of slavery. Coercive taxation, especially for non-freedom purposes, is evil at its foundation. And no good thing can ever flower from such bad roots. The ends never justify the means. Tyranny and depravity are never practical or workable.

Those who are talented and slick at obtaining government grants, and those who willingly, passively submit to government edicts, are virtually never good scientists or doctors. Meanwhile, the good and great scientists and doctors — mankind’s innovators, creators, geniuses, saints, and heroes — will be hugely misled. With minimalist political knowledge, they’ll massively tend to follow the money and prestige trail; these brainiacs will massively tend to go work for the Big Brother bozos and frauds. At the least, the Good Guys will solidly incline toward reading the Dumb Guys’ (mountains of worthless) papers, and following them and their organizations intellectually. Thus the only real hopes of mankind will overwhelmingly tend to be side-tracked down a dead end.

The purpose of government is to protect individual rights — not expand the human life span. The state has no ability whatsoever to accomplish the later. It can only get in the way. It can only hurt the cause. Anyone who hijacks the government for longevity purposes is sure to massively damage both liberty and transhumanism.

However ironic, the more state funds are spent on transhumanism, and the more people are forced by government to engage in transhumanist research, the slower progress will be. It’ll be a repeat of the U.S. government’s buffoonish 1970s’ “war on cancer.” We’ll go backward. The effort will be counter-productive. It’ll be like throwing money down a bottomless rat hole — only worse.

The reality of today’s welfare state world is that if we finally get around to terminating all government funding of education, science, and technology, then these three fields will have to turn to private industry and free enterprise. This, in turn, will cause human knowledge in general, and transhumanism in particular, to rise like a rocket.

If, say, a very plausible 10% of the world’s G.D.P. is voluntarily dedicated to transhumanist education, investigation, and experimentation via capitalism, this will generate far more progress than if a wildly unlikely 75% of the world’s G.D.P. is coercively dedicated to transhumanist research via welfare statism.

The paramount and stunning reality is one social system will create new versions of Leonardo da Vinci, Thomas Edison, and Steve Jobs. The other will create new, mindless bureaucrats and lifeless, soulless, hack, quack, bozo drones.

And pray note that the above discussion isn’t trivial or merely theoretical; nor is it some ideologue’s and freak’s dubious mere political opinion. It’s the way reality is. It’s the way government and science really interact and work. Misunderstand this, transhumanists, and we’re all gonna die.

Kyrel Zantonavitch is the founder of The Liberal Institute  (http://www.liberalinstitute.com/) and a writer for Rebirth of Reason (http://www.rebirthofreason.com). He can be contacted at zantonavitch@gmail.com.
David Brooks, The Whigs, and Corporate Welfare – Article by Thomas J. DiLorenzo

David Brooks, The Whigs, and Corporate Welfare – Article by Thomas J. DiLorenzo

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The New Renaissance Hat
Thomas J. DiLorenzo
February 8, 2014

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In a January 30 column David Brooks, the house neoconservative of the New York Times, urged Obama to ignore both his socialist/egalitarian base and the “conservative tradition that believes in limiting government to enhance freedom.” Obama already has nothing but hateful contempt for the latter tradition and needs no convincing by a right-wing statist like David Brooks.

The president should also abandon his life-long infatuation with and devotion to socialism as well, advises David Brooks. In its place he should pursue an agenda of crony capitalism disguised as a “social mobility agenda” with the help of professional propagandists and perverters of American history such as Brooks and his fellow neoconservatives. Of course, Brooks doesn’t use these less-than-flattering words to describe his Machiavellian agenda. He talks of “a third ancient tradition” in American history, namely, “the Whig tradition, which begins with people like Henry Clay, Daniel Webster and Abraham Lincoln.”

Either Brooks knows nothing at all, whatsoever, about the Whig Party tradition in American history, or he is lying through his teeth about it. For he describes it as having been devoted to “using the power of government to give marginalized Americans the tools to compete in a capitalist economy.” The Whigs, says Brooks, “fought against the divisive populist Jacksonians” who supposedly sought to “pit classes against each other.” Every bit of this is exactly the opposite of the truth. The Whigs were the party of crony capitalism, of government of plutocracy, by the plutocracy, for the plutocracy. That is why so many historians have marveled over how a man like Abe Lincoln, who grew up so poor, would become the political water carrier for the Northeastern moneyed elite in American politics.

The most divisive economic issue in American politics during the heyday of the Whig Party (1832–1852) was the battle over free trade versus protectionism. If the Whigs stood for anything, they stood for corporate welfare in the form of high protectionist tariffs that would plunder the masses for the benefit of the few. This meant, for the most part, plundering Southern farmers more than anyone for the benefit of Northern manufacturers who would be protected from international competition by the high tariffs. As John C. Calhoun once said, what “protectionism” protects the public from is low prices. Next to slavery, protectionism was the biggest assault on property rights in America during the first half of the nineteenth century. The Whigs did not believe in “sacred” property rights, as Brooks foolishly writes. Their entire political agenda was based on the government-enforced attenuation of property rights for the benefit of the wealthy and politically-connected.

Next to political plunder through protectionism, the Whigs stood for the worst sort of crony capitalism in the form of needless corporate welfare for road-, canal-, and railroad-building corporations. This was euphemistically called “internal improvement subsidies” at the time. Private capital markets financed thousands of miles of private roads during the first decades of the nineteenth century. As of 1800 there were 69 privately-financed road-building companies in America that would build more than 400 private roads over the next 40 years, as economist Daniel Klein has documented. The great railroad entrepreneur James J. Hill also proved that government subsidies were not needed to build a transcontinental railroad as he and his investors and business partners built and managed the Great Northern Railroad without a dime of government subsidy, not even “land grants.”

When the Whigs did get their way and conned state government into funding “internal improvement subsidies”, it was an unmitigated financial disaster. Very few, if any, projects were ever finished; taxpayers were stuck with enormous government debts to pay off; much of the money was simply stolen; and by 1860 every state except for Massachusetts had amended its constitution to prohibit the use of tax dollars for corporations with which to do anything, according to economic historian Carter Goodrich.

Edgar Lee Masters, the famous 1930s-era poet, playwright (author of The Spoon River Anthology), and law partner of Clarence Darrow, perfectly described the Whig Party on page 27 of his book, Lincoln the Man. Describing the leader of the Whigs, Henry Clay, Masters wrote:

Clay was the champion of that political system which doles favors to the strong in order to win and to keep their adherence to the government. His system offered shelter to devious schemes and corrupt enterprises. … He was the beloved son [figuratively speaking] of Alexander Hamilton with his corrupt funding schemes, his superstitions concerning the advantage of a public debt, and a people taxed to make profits for enterprises that cannot stand alone. His example and doctrines led to the creation of a party that had no platform to announce, because its principles were plunder and nothing else.

This is exactly correct, and exactly the opposite of what David Brooks wants his New York Times audience to believe. Clay’s agenda, which Alexander Hamilton originally labeled “The American System,” was really an Americanized version of the corrupt mercantilist system the American founders had fought a revolution against. The Hamilton/Clay/Lincoln “American System” included protectionism, corporate welfare, and a central bank to dispense even more corporate welfare subsidies to politically-connected businesses. It was a recipe for political power based on using taxpayer dollars to line the pockets of the (mostly Northern state) business plutocracy at the expense of the general public. Some things never change in a democracy.

It is equally outrageous for Brooks to claim that the Jacksonians were “divisive” and wanted to “pit classes against each other.” This was the function of David Brooks’s beloved Whigs, who were simply an early version of the neoconservatives; it was the libertarian Jacksonians who opposed politicized divisiveness and the pitting of classes against each other. This is exemplified in President Andrew Jackson’s famous veto of the re-chartering of the Second Bank of the United States, a precursor of the Fed.

The Whigs championed a central bank. The Bank of the United States (BUS) even paid both of Brooks’s heroes, Clay and Webster, many thousands of dollars as bribery money to promote the continuation of the bank despite the fact that it was well known that the BUS had corrupted politics and generated boom-and-bust cycles. In vetoing the re-chartering of the BUS (which was not overturned), Jackson wrote:

It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. … In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy and virtue, every man is equally entitled to protection by the law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society — the farmers, mechanics and laborers — who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. … In the act before me [the bill to re-charter the BUS] there seems to be a wide and unnecessary departure from these just principles.

Neither Jackson nor the Jacksonians were “perfect” libertarians, but by their motto of “equal rights” they meant equality under the law and opposition to the use of the state to dispense “exclusive privileges” and special favors to special interests. They stood for exactly the opposite of what David Brooks claims they stood for, in other words.

Brooks’s commentary turns to slapstick humor at one point when he claims that the Whigs, who were, after all, politicians, were somehow “family-oriented in their moral and social attitudes.” (I assume that he threw this into his article to further dupe the “evangelical Christian” base of the Republican Party into accepting his thesis). The leader of the Whigs, the slave-owning Kentucky hemp plantation patriarch Henry Clay, was indeed “family oriented” in that he had 11 children. But he was also a notorious gambler who rang up $40,000 in personal debt in the 1820s and was famous for staying out late carousing and dancing with women other than his wife while he was in Washington and the wife was back home in Kentucky, according to several biographies.

Armed with this absurdly false history of American politics, Brooks argues for an explosion of governmental central planning by Obama during the rest of his term. He wants Obama to employ “social entrepreneurs” to fundamentally transform American society by “improving family patterns,” expanding early childhood education, “structuring neighborhoods,” paying “young men wage subsidies so they are worth marrying,” training “middle-aged workers” for jobs, and generally micromanaging everyone’s life from cradle to grave. In his words, government should promote “[social] mobility issues from the beginning to the end of the lifespan.”

Something very much like this has been tried before. It was called totalitarian socialism, and it failed miserably.

Thomas DiLorenzo is professor of economics at Loyola University Maryland and a member of the senior faculty of the Mises Institute.

He is the author of The Real Lincoln; Lincoln Unmasked; How Capitalism Saved America; and Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution — And What It Means for Americans Today. Send him mail.

This article was published on Mises.org and is reprinted pursuant to a Creative Commons Attribution License.

Anthropogenic Global Warming, Liberty, and Technology – Video by G. Stolyarov II

Anthropogenic Global Warming, Liberty, and Technology – Video by G. Stolyarov II

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Mr. Stolyarov argues that, whether or not anthropogenic global warming is real, political interference is not the proper way to address it. The solution is maximum individual liberty and freedom for entrepreneurs to innovate and develop improved technologies.

Remember to LIKE, FAVORITE, and SHARE this video in order to spread rational discourse on this issue.

Federal Student Aid and the Law of Unintended Consequences – Article by Richard Vedder

Federal Student Aid and the Law of Unintended Consequences – Article by Richard Vedder

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The New Renaissance Hat
Richard Vedder
July 8, 2012
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RICHARD VEDDER is the Edwin and Ruth Kennedy Distinguished Professor of Economics at Ohio University and director of the Center for College Affordability and Productivity. He received his B.A. from Northwestern University and his M.A. and Ph.D. in economics from the University of Illinois. He has written for the Wall Street Journal, National Review, and Investor’s Business Daily, and is the author of several books, including The American Economy in Historical Perspective and Going Broke by Degree: Why College Costs Too Much.

The following is adapted from a speech delivered on May 10, 2012, at Hillsdale College’s Allan P. Kirby, Jr. Center for Constitutional Studies and Citizenship in Washington, D.C.

Reprinted by permission from Imprimis, a publication of Hillsdale College.

FEDERAL STUDENT financial assistance programs are costly, inefficient, byzantine, and fail to serve their desired objectives. In a word, they are dysfunctional, among the worst of many bad federal programs.

These programs are commonly rationalized on three grounds: on the grounds that assuring more young people a higher education has positive spillover effects for the country; on the grounds that higher education promotes equal economic opportunity (or, as the politicians say, that it is “a ticket to achieving the American Dream”); or on the grounds that too few students would go to college in the absence of federal loan programs, since private markets for loans to college students are defective.

All three of these arguments are dubious at best. The alleged positive spillover effects of sending more and more Americans to college are very difficult to measure. And as the late Milton Friedman suggested to me shortly before his death, they may be more than offset by negative spillover effects. Consider, for instance, the relationship between spending by state governments on higher education and their rate of economic growth. Controlling for other factors important in growth determination, the relationship between education spending and economic growth is negative or, at best, non-existent.

What about higher education being a vehicle for equal economic opportunity or income equality? Over the last four decades, a period in which the proportion of adults with four-year college degrees tripled, income equality has declined. (As a side note, I do not know the socially optimal level of economic inequality, and the tacit assumption that more such equality is always desirable is suspect; my point here is simply that, in reality, higher education today does not promote income equality.)

Finally, in regards to the argument that capital markets for student loans are defective, if financial institutions can lend to college students on credit cards and make car loans to college students in large numbers—which they do—there is no reason why they can’t also make student educational loans.

Despite the fact that the rationales for federal student financial assistance programs are very weak, these programs are growing rapidly. The Pell Grant program did much more than double in size between 2007 and 2010. Although it was designed to help poor people, it is now becoming a middle class entitlement. Student loans have been growing eight to ten percent a year for at least two decades, and, as is well publicized, now aggregate to one trillion dollars of debt outstanding—roughly $25,000 on average for the 40,000,000 holders of the debt. Astoundingly, student loan debt now exceeds credit card debt.

Nor is it correct to assume that most of this debt is held by young people in their twenties and early thirties. The median age of those with loan obligations today is around 33, and approximately 40 percent of the debt is held by people 40 years of age or older. So when politicians talk about maintaining low interest loans to help kids in college, more often than not the help is going to middle-aged individuals long gone from the halls of academia.

With this as an introduction, let me outline eight problems with federal student grant and loan programs. The list is not exclusive.

(1) Student loan interest rates are not set by the forces of supply and demand, but by the political process. Normally, interest rates are a price used to allocate scarce resources; but when that price is manipulated by politicians, it leads to distortions in the use of resources. Since student loan interest rates are always set at below-market rates, too much money is borrowed for college. Currently those interest rates are extremely low, with a key rate of 3.4 percent—which, after adjusting for inflation, is approximately zero. Moreover, both the president and Governor Romney say they want to continue that low interest rate after July 1, when it is supposed to double. This aggravates an already bad situation, and provides a perfect example of the fundamental problem facing our nation today: politicians pushing programs whose benefits are visible and immediate (even if illusory, as suggested above), while their extraordinarily high costs are less visible and more distant in time.

(2) In the real world, interest rates vary with the prospects that the borrower will repay the loan. In the surreal world of student loans, the brilliant student completing an electrical engineering degree at M.I.T. pays the same interest rate as the student majoring in ethnic studies at a state university who has a GPA below 2.0. The former student will almost certainly graduate and get a job paying $50,000 a year or more, whereas the odds are high the latter student will fail to graduate and will be lucky to make $30,000 a year.

Related to this problem, colleges themselves have no “skin in the game.” They are responsible for allowing loan commitments to occur, but they face no penalties or negative consequences when defaults are extremely high, imposing costs on taxpayers.

(3) Perhaps most importantly, federal student grant and loan programs have contributed to the tuition price explosion. When third parties pay a large part of the bill, at least temporarily, the customer’s demand for the service rises and he is not as sensitive to price as he would be if he were paying himself. Colleges and universities take advantage of that and raise their prices to capture the funds that ostensibly are designed to help students. This is what happened previously in health care, and is what is currently happening in higher education.

(4) The federal government now has a monopoly in providing student loans. Until recently, at least it farmed out the servicing of loans to a variety of private financial service firms, adding an element of competition in terms of quality of service, if not price. But the Obama administration, with its strong hostility to private enterprise, moved to establish a complete monopoly. One would think the example of the U.S. Postal Service today, losing taxpayer money hand over fist and incapable of making even the most obviously needed reforms, would be enough proof against the prudence of such a move. And remember: because of highly irresponsible fiscal policies, the federal government borrows 30 or 40 percent of the money it currently spends, much of that from overseas. Thus we are incurring long-term obligations to foreigners to finance loans to largely middle class Americans to go to college. This is not an appropriate use of public funds at a time of dangerously high federal budget deficits.

(5) Those applying for student loans or Pell Grants are compelled to complete the FAFSA form, which is extremely complex, involves more than 100 questions, and is used by colleges to administer scholarships (or, more accurately, tuition discounts). Thus colleges are given all sorts of highly personal and private information on incomes, wealth, debts, child support, and so forth. A car dealer who demanded such information so that he could see how badly he could gouge you would either be out of business or in jail within days or weeks. But it is commonplace in higher education because of federal student financial assistance programs.

(6) As federal programs have increased the number of students who enroll in college, the number of new college graduates now far exceeds the number of new managerial, technical and professional jobs—positions that college graduates have traditionally taken. A survey by Northeastern University estimates that 54 percent of recent college graduates are underemployed or unemployed. Thus we currently have 107,000 janitors and 16,000 parking lot attendants with bachelor’s degrees, not to mention bartenders, hair dressers, mail carriers, and so on. And many of those in these limited-income occupations are struggling to pay off student loan obligations.

Connected to this is the fact that more and more kids are going to college who lack the cognitive skills, the discipline, the academic preparation, or the ambition to succeed academically. They simply cannot or do not master well much of the rather complex materials that college students are expected to learn. As a result, many students either do not graduate or fail to graduate on time. I have estimated that only 40 percent or less of Pell Grant recipients get degrees within six years—an extremely high dropout or failure rate. No one has seriously questioned that statistic—a number, by the way, that the federal government does not publish, no doubt because it is embarrassingly low.

Also related is the fact that, in an attempt to minimize this problem, colleges have lowered standards, expecting students to read and write less while giving higher grades for lesser amounts of work. Surveys show that students spend on average less than 30 hours per week on academic work—less than they spend on recreation.  As Richard Arum and Josipa Roksa show in their book Academically Adrift: Limited Learning on College Campuses, critical thinking skills among college seniors on average are little more than among freshmen.

(7) As suggested to me a couple of days ago by a North Carolina judge, based on a case in his courtroom, with so many funds so readily available there is a temptation and opportunity for persons to acquire low interest student loans with the intention of dropping out of school quickly to use the proceeds for other purposes. (In the North Carolina student loan fraud case, it was to start up a t-shirt business.)

(8) Lazy or mediocre students can get greater subsidies than hard-working and industrious ones. Take Pell Grants. A student who works extra hard and graduates with top grades after three years will receive only half as much money as a student who flunks several courses and takes six years to finish or doesn’t obtain a degree at all. In other words, for recipients of federal aid there are disincentives to excel.

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If the Law of Unintended Consequences ever applied, it is in federal student financial assistance. Programs created with the noblest of intentions have failed to serve either their customers or the nation well. In the 1950s and 1960s, before these programs were large, American higher education enjoyed a Golden Age. Enrollments were rising, lower-income student access was growing, and American leadership in higher education was becoming well established. In other words, the system flourished without these programs. Subsequently, massive growth in federal spending and involvement in higher education has proved counterproductive.

With the ratio of debt to GDP rising nationally, and the federal government continuing to spend more and more taxpayer money on higher education at an unsustainable long-term pace, a re-thinking of federal student financial aid policies is a good place to start in meeting America’s economic crisis.