Sunday, June 2, 2013

Giddy over a permanent majority


Sometime Friday afternoon (5/31/13) CNBC's Eamon Javers was asked how Congress was reacting to the President's proposal to cap interest rates on the $1 trillion in outstanding student loans. Javers responded that the Democrats, viewing the Republican plan as more expensive, were "giddy" over the potential of establishing a "permanent Democratic majority."

If the proposal fails, interest charged will go from 3.4% to 6.8%. The GOP proposal would tie the rate to that of 10 year treasury plus 2.5%, which figures out to 4.66% at the timed of this writing. Under the President's proposal, the 10 year Treasury rate would also be used but the initial rate would last for the life of the loan - no annual reset…under the Senate plan the initial rate rate would be locked in for the life of the loan - regardless of how high interest rates might go.

Should the GOP stymie the plan or should the Democrats prevail, the belief is that these student debtors will become a permanent constituency of the Democrats. An important piece of political theatre took place in the recent Presidential election. It was the taping and replaying of Romney's "47% speech." Romney characterized the 47% as individuals who "…are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it…" 

There is a contention, to which I lend a limited amount of credence, that among this 47% there are those who are legitimately needy. Subtract those and there is still a very large voting percentage receiving monthly assistance. Add to this remainder millions of 20 and 30-something non-graduates (and graduates) who feel freshly rebuffed, and the new, "permanent majority" exists.

What's really interesting is that the original program, the Higher Education Act of 1965, was another ornament on LBJ's Great Society Christmas tree. Pushed through by huge Democrat pluralities in both houses, it is one of a number of still existent "social programs" that never stop growing. However, the legislative excesses of LBJ's term were not unlike those from FDR's New Deal days when he, too, had huge Democrat pluralities in Congress. Obama's "new" New Deal also had a filibuster-proof edge in the Senate and a majority in the House, and Obamacare, the costs of which continue to grow even while the regulations are still being written, is set for a New Year's delivery.

During those first two years he could have legislatively accomplished almost anything. Instead, he frittered it away attempting to overhaul (hijack?) the health industry. Those things he whines about currently, could have been obtained easily then. Now he faces a limited amount of opposition from a party which, fortunately for him, has of yet to determine an agenda, a direction, or a leadership. So he satisfies his base by carping about "obstructionism."

And this, in turn has created the unceasing "why can't they get along?" argument. One is left with the impression that good fellowship across the aisle has been the hallmark of our legislative history. It has not. In fact, the existence of "factions" was one of Madison's key arguments why the government he proposed would never devolve into a democracy - a tyranny of the majority.

Unfortunately, we no longer expose our students to the Federalist or Anti-Federalist papers - nor Madison's notes on the Convention. I will confess they are not an easy read. Men of that time spoke in compound-complex sentences with allusions to ancient philosophers, the occasional use of a Latin or Greek phrase, and carefully selected references to Scripture. 

At any rate, it's questionable whether our current crop of secondary school scholars is up to the challenge. Further, the current "debates" that take place in Congress consist of brief "speeches" that are little more than scripted slogans, market-tested for their likelihood to be picked up on the evening news or You Tube. All they lack is substance.

Speaking of substance, over the initial forty years (1965-2005) of the federal student loan program, college enrollment increased by almost 300% - the number of 18-24 year-olds who we expect to be eligible for college increased by only 44%. The early years of easier/cheaper admission witnessed a huge explosion in student enrollment, student demonstrations, and student demands. In 1970 the City University of New York decided to allow ALL high school graduates (regardless of ability) to enroll. This "open admission" policy was picked up by many junior colleges.

Despite an obvious influx of ill-prepared, ill-equipped, and unqualified applicants, the Act was reauthorized in 1968, 1971, 1972, 1976, 1980, 1986, 1992, 1998, and 2008. It is currently due for another reauthorization by the end of this year. The amount students (past and present) owe exceeds the nation's credit card debt. Unlike credit card debt, it cannot be discharged through bankruptcy. Many who carry it will never be able to pay it off - they will spend their lives making interest payments. Which might be one of the more ingenious aspects of the situation.

Many of these same individuals (those fortunate enough to get jobs) will spend their lives making too little to require paying income taxes. However, the beast that is the federal government must be continually fed. And if the average student debt is $25,000, millions of marginally employed persons will pay $850 to $1700 a year (3.4% to 6.8% APR) to Uncle Sam. Any way you cut it, that adds up to a substantial revenue stream for forty or fifty years. Dickens at this worst couldn't fashion a grimmer scenario.

Don't expect a "forgiveness" of these loans - the feds are on the hook to pay them off and big financial institutions, knowing a good thing when they see it, hold the paper. Ironically, an act that was supposed to be such a boon to the poor will have succeeded in creating several generations of debt slaves.

Such apparently beneficent, but unsound, proposals can only come into existence through a "tyranny of the majority" - the one terrible thing the Founders wanted to avoid - and why they rejected a democratic form of government…that we have evolved into one isn't a cause for celebration.