Fact and fiction about student loans

By Felix Salmon
October 19, 2011
Dennis Cauchon has a very odd story today, headlined "Student loans outstanding will exceed $1 trillion this year":

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Post updated, see below

USA Today’s Dennis Cauchon has a very odd story today, headlined “Student loans outstanding will exceed $1 trillion this year”:

The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York.

Note Cauchon’s link, there — it’s meant to take you to the USA Today page for the New York Fed, although for me I just get a 404. What it doesn’t do is take you to the NY Fed’s own website, or give any indication of what data Cauchon thinks he’s using. Because, not to put too fine a point on it, Cauchon’s facts — including the headline on the piece — are simply not true. Here’s the NY Fed’s data, in Excel form, and here’s a chart I just put together, from the NY Fed data:


This chart shows the total stock of credit-card and student-loan debt, up to the second quarter of 2011. The most recent figures show total credit-card debt at $690 billion, and total student-loan debt at $550 billion. It is not true that Americans now owe more on student loans than on credit cards, and total student-loan debt isn’t even close to $1 trillion.

Unfortunately, Cauchon’s article is seeping into the blogosphere: Suzy Khimm picked up on it today, and Kevin Drum and Eyder Peralta followed her lead, asking for “more analysis, please”. Which is always a good thing to ask for, when USA Today can’t get its facts straight.

As for what the real facts show, I think it’s pretty clear: the stock of student loans outstanding continues to increase at a pretty much the same pace it’s been rising at for the past six or seven years. It doesn’t seem to have accelerated with the rise of private-sector online universities, but at the same time it also shows few signs of declining along with credit-card and mortgage debt. And of course it’s also much harder to discharge than mortgage or credit-card debt. It’s a problem, I think. But it’s not a trillion-dollar problem, and it shows no sign of becoming a trillion-dollar problem any time soon.

Update: It turns out that the NY Fed data, which Cauchon cited, is wrong, and is about to be revised; when that happens the total amount of student loans will rise to more than the level of credit-card debt, but still less than $1 trillion. Details here.


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Good catch. (Note that CC debt has been declining–written off?–since Q4 of 2008.)

What’s also happening–and this may well be due to the for-profits “churn and burn students” practices–is that Student Loan delinquency rates have been going up rather steadily (one anomalous quarter, Q1 2011) since a big jump in Q3 2008.

The combination is daunting, but the total remains smaller. For now.

Posted by klhoughton | Report as abusive

The problem is that their is a ridiculous increases in tuition and how much federal aid will lend to cover tuition. Both have been increasing at an incredibly high pace allowing students to “afford school”. With that said you have more recent grads that can’t find jobs and forced to go to grad school, accumulating more debt. But one real killer is that kids don’t know the earning potential from day 1, and compare that with the cost of their educatation.

Posted by davidjcu | Report as abusive

So that article says “Full-time undergraduate students borrowed an average $4,963 in 2010″. The BLS http://www.bls.gov/news.release/hsgec.nr 0.htm) says that there were 12.4 million people between the ages 16-24 enrolled in college in October 2010. It doesn’t say how many of them were full-time, or how many of them were attending a 2-year college (which are much less expensive than 4-year colleges), but since it only covers people aged 16-24, let’s assume those 12.4M people are all full-time students attending 4-yr schools (that should more than make up for the people over 24 who are borrowing money to attend school). That’s $61.5 billion.

Somebody, please tell me where my math is wrong.

Posted by KenG_CA | Report as abusive

KenG_CA, unless I’m mistaken, it doesn’t seem like the $100 billion number makes the distinction between undergrad and postgrad lending.

Posted by spectre855 | Report as abusive

@KenG_CA – this is total debt outstanding I believe, not debt for current students. There’s probably plenty of student loans in the pot of money on the chart from people that graduated already.

Also, I wonder if the BLS statistics include grad school. Not sure how many people are in med school, but I would guess the average loan there is something in the 100k range. Same with MBAs.

Posted by djiddish98 | Report as abusive

thats par for the course for USA Today…they make it up as they go along

Posted by rjs0 | Report as abusive

I think that this sloppiness just detracts from the point. And the point is that banks are writing student loans to anyone with a pulse, and for any total amount. That’s a huge time bomb just waiting to go off.

You know when I went to undergrad, there were many consultations about cost and what my parents and I could reasonably afford. If a top-tier school was out of reach financially, we looked for the best we could go to to meet our circumstances.

Flash forward 10 years to Business School. Almost 100k in loans no questions asked. No one ever did an analysis or even asked me “how to you expect to pay off loans that will total over 1000 a month for 15 years? Let that sink in for a second…just out of Grad School and facing over 1k a month in JUST my GRADUATE student loans. Even getting a job for, say 120k a year (which is a lot out of school), that would equal 16% of my take home pay. If I were to get a job for 85k it would equal a whopping 22% of my take home pay.

Is this a problem? It’s not unusual now for someone to have racked up 150k in UNDERGRADUATE loans. How much is that per month when you graduate? This is the next huge thing to blow up.

Posted by skyman123 | Report as abusive

I think a large part of the problem is that most students (and their parents) are financially illiterate at the time they have to make decisions about whether or not to take out student loans and for how much. Therefore they have no idea how to analyze the costs and benefits of doing so, or to value potential loans.

There are a lot of 18-year olds taking on huge amounts of debt to go to college who would arguably be a lot better off financially in the long run if they started working full-time at 18 instead of waiting until they were 22 or older.

But since everyone is now expected to go to college if they can, that’s a conversation that most families never have.

Posted by mfw13 | Report as abusive

While appreciating the commentary of all, especially concerning is mfw13. Increased borrowing is directly related to the spiraling double-digit increase annually of a college education. At the same time, correctly in many cases, government direct subsidies have fallen as one of the few government constraints in place. Without the benefit of a college education, the chances for a job are minimal at best. Given today’s environment, next to impossible. What analysis is going to improve that?
It would be great to see the overlay of reduction in education grants to individuals. In addition, let’s look at the overlay with direct grants to universities from research or earmarks (yes – they still exist).

Posted by Libertarian1976 | Report as abusive

@spectre855, according to a NYT article http://www.nytimes.com/2011/09/22/educat ion/22grad.html), there were 1.75M grad student in the US last year. Let’s say they borrowed twice the average of undergraduates (although it’s likely they borrowed less, as many employers pay for it, many are employed, and many have savings from having worked), so that’s another $17.5B for grad student loans. Let’s assume that of the 12.4M students aged 16-24 attending college, only 8 million were full-time students attending 4 year schools, at $4,963 each, that’s another $40M. let’s say the remaining part-time and 2-yr college students borrowed an average of $2,000 each (probably less than that, but let’s err on the high side), that’s another $9B. So we have $66.5B for college student loans in 2010, not more than $100 billion that the article quoted for last year (@djiddish).

I know people like round numbers, but that seems a little high, and further reduces the credibility of the outstanding student debt #. But it’s great for making headline stories.

Posted by KenG_CA | Report as abusive

Um, Mr. Salmon…..in the midst of your ‘gotcha’ (student loans are only $600M, not $1 trillion), you missed the forest for the trees. Your own chart shows that student loan debt outstanding appears to have increased 5-fold in roughly 12 years. Our job and average wage growth, in that same time period, has remained stagnant, and we’re coming up on Year 5 of a really crappy job market. Kids are leaving school with $100-150k in debt, student aid is declining, and jobs are scarce. Doesn’t the difference between $600M and $1 trillion spell the difference in just how fast we’re driving the labor force’s car off the cliff?

Posted by DCAnalyst | Report as abusive

It looks like the rate of change is $200B every 4 years. It makes sense that this rate has not changed, while credit card debt has gone down (when you don’t have a job, you can ratchet credit card debt down, but going back to school makes sense?) You might also have people who are in school looking to maximize student loans to replace credit card lines. In 8 years it could be a trillion dollar problem – that wouldn’t be described as soon.

Posted by winstongator | Report as abusive

“Your own chart shows that student loan debt outstanding appears to have increased 5-fold in roughly 12 years.”

This is equivalent to saying that student loans, at least in their current form/prominence, are a relatively new phenomenon. The graph would look very similar if no student loans had ever been written before 2001. Don’t assume that past experience with student loans applies!

Not all debt is equivalent. Mortgage debt involves massive amounts of money, HOWEVER its assumption corresponds to a reduction in rent. The total living costs may increase, but not dramatically (unless you buy a much more expensive property than you were renting). In contrast, student loan payments come wholly out of discretionary income, on top of the basic costs for housing, food, medical, and transportation. They also begin at a time in life when household finances are typically most vulnerable — single-earner households with entry-level salaries.

The “Arab Spring” had as much to do with the lack of opportunity for the young as it did with any outrage about political repression. Most people are resigned to the fact that their rulers are corrupt. Yet it is hard to resign yourself to 20%+ unemployment for the young. We are heading towards a similar future, potentially a similar revolution. Meanwhile our power elite worry about protecting the banks, protecting the property values for those in their 40s and 50s, and subsidizing the upper middle class by borrowing heavily to support tax cuts.

If our society and system are to survive, we need to acknowledge the needs of the younger generation.

The rate of student loan increase will taper off soon — as repayments on past loans begin to balance the origination of new loans — but it will likely reach the trillion-dollar level if nothing changes. Just read that gross wages come to $6T for *EVERYBODY*. If we assume that is distributed evenly from age 25-65 (that isn’t quite true, but it is close enough), then we are asking the young, age 25-35, to carry $1T of student-loan debt on $1.5T of income. A back-of-the-envelope calculation has this segment of the population spending roughly 10% of their gross income on student loan payments (a higher percentage if you limit it to those who actually have loans).

Of course that assumes that they can find jobs. If you don’t have a job, that ratio is infinite.

Posted by TFF | Report as abusive

Before assuming fiction, it looks like the Fed’s household debt calculation only takes into account Federal student loans outstanding. This matches with the amount of Federal loans outstanding cited by the deficit supercommittee of $550 billion.

(http://higheredwatch.newamerica.net/blo gposts/2011/wall_streets_pitch_to_profit _on_federal_student_loans-58962).

FinAid.org also has a clearer explanation: “Based on an analysis of the Presidents FY2011 budget, in FY2009 there were a total of $605.6 billion in federal education loans outstanding, comprised of $149.4 billion in the Direct Loan program and $456.2 billion in the FFEL program. The projected totals for FY2010 are $672.0 billion and for FY2011 are $745.5 billion.

A total of more than $1.17 trillion in federal education loans (including consolidation loans) have been made since the beginning of the loan programs. This includes more than $878 billion in FFEL program loans from 1965 to 2009 and more than $292 billion in Direct Loan program loans from 1994 to 2009. Thus more than half of all federal education loans ever made in the FFEL and Direct Loan programs are still outstanding.”


Posted by anastasw | Report as abusive

The $555 billion is only the Federal Direct Loan debt. I believe there is other outstanding student loan debt not encompassed on that program and then of course there is private student loan debt. That, I believe, comprises the $1 trillion!

Posted by Topazmoon11 | Report as abusive

OK, so we know there’s a lot of student loan debt out there, and whether the numbers reported in these stories are accurate or not, they are still big numbers. And there’s a lot of mortgage debt, and personal consumer debt. The main reason for all this debt is that people don’t have enough money to buy things without borrowing, and those people with money would rather lend it out than invest in something (they haven’t realized that lending is often as risky as investing, or they believe they will ultimately be bailed out if their borrowers default). People want to go to school, people want to live indoors and have heating and cooling, people want to be able to get around, especially if they have a job, or attend school. So they have to finance their spending. What they don’t earn they make up by borrowing.

The distribution of wealth is so narrowly concentrated in a small percentage of the population that in order for the wheels of the economy to continue to spin, people and governments need to borrow. If those who are hoarding cash refuse to invest it, people and governments will continue to borrow, until lenders stop lending. When that happens, the value of the assets of the hoarders will decline, probably steeply, as overall economic activity (i.e, trade, consumption, investment) enters into a downward spiral.

If the economy can only be sustained by debt financing, it will eventually grind to a halt. The problem isn’t the borrowing, it’s the lack of investment. Heeding the calls to reduce deficit spending will not restore economic growth, but rather lead to the opposite, unless it is combined with an increase in private investment. Tax cuts will not lead to increased investment, either, only more hoarding.

The decision to invest is a voluntary one. However, when enough people choose not to invest, the reason for not investing becomes a self-fulfilling prophecy, as the economy declines due to hoarding. People look at debt as the cause of a problem, when it is a symptom of insufficient investment (hoarding). So enough of the chatter about this kind of debt or that kind of debt, and let’s talk about how to convince those with the resources (i.e, cash lying around earning nothing) to put them to work.

Posted by KenG_CA | Report as abusive

Here is the richmond fed link. It’s dated 2010 but shows 850 billion defaults.

http://www.richmondfed.org/publications/ research/region_focus/2010/q4/pdf/featur e1.pdf

Posted by Giggles555 | Report as abusive

“So enough of the chatter about this kind of debt or that kind of debt, and let’s talk about how to convince those with the resources (i.e, cash lying around earning nothing) to put them to work.”

Inflation tends to discourage hoarding.

Or asset-based taxes?

Or an appeal to their humanity? (Buffett is making an effort in that direction, though with limited success.)

Other ideas?

Posted by TFF | Report as abusive

Do your homework… According to the 2010 Census, some 95 million adults have SOME college or a degree. Of that, according to FinAid, 66% have borrowed – or some 60 million. According to Moody’s Analytics a couple of months ago, only 40% of all student loans are in ACTIVE repayment, which means 60%, or some 40 million, are NOT. Since all statutes of limitations were removed in 2005, and BK is NOT an option (death is about the only ‘good excuse’), these loans are BALLOONING out of control.

But HEY! SLABS are “safe” and ALWAYS increase – because they cannot be discharged…

It doesn’t matter how you cut it, the problem isn’t JUST “illiterate” borrowers, it’s predatory lending. Debt and wage slavery are SOP in investment circles – goog for the balance sheets…

Posted by Dorothy95 | Report as abusive

TFF, so far we haven’t seen the inflation we should, mainly because people are borrowing less to consume, so demand isn’t outstripping supply.

Asset-based taxes are impossible to efficiently and effectively implement, as people would just move their liquid, easily priced assets into illiquid, who-knows-what-they’re worth assets (what’s my home worth? Great question, I won’t know until I actually sell it).

Appeal to humanity? For some reason, a lot of people with hoarded cash that they can easily risk believe it is their responsibility to keep hoarding.

Are you trying to get me to repeat previous comments I have made about this? Because I will, ya know. We need a use it or lose it tax system. Invest your profits or pay higher taxes.

Posted by KenG_CA | Report as abusive

“We need a use it or lose it tax system.”

Would you mind elaborating on that part in detail, KenG? What would your “use it or lose it” tax system look like?

Posted by TFF | Report as abusive

Use it or lose it means that either you invest or distribute profits, or face a higher tax bill. The carrot would be very generous tax credits for capital expenditures – new equipment, new construction (not buying an existing building); R&D; new software; tax credits for energy conservation, training, increased health coverage – all kinds of things that are new investments. This would be combined with a higher tax rate (say 50%). For companies that already re-invest much of their profits, this would be a huge tax break, for those who hoard their profits, a big tax increase.

We should also let companies deduct the amount of dividends paid from their income; these should be taxed at the rate paid by the shareholder (retirees on small fixed incomes pay lower tax rates than corporations that own stock in other companies, or just plain rich people who live off dividends and interest. This would also provide incentive for companies to stop hoarding profits; management would no longer be able to use the “profits are being double taxed” excuse to hang on to cash for no good reason other than make themselves look good. If companies paid out most of their profits in dividends and did little re-investing, that’s ok, for those dividends will either get re-used by shareholders or taxed, but won’t just sit in some bank account where the bank is incapable of determining who they can safely lend it to.

Using tax credits and high tax rates is a more efficient and faster way to inject capital into the economy than government spending. Businesses will more likely move quicker than the government can to deploy their capital, because lets’ face it, they want those immediate tax benefits, and they do not need congressional approval (and there is virtually no shareholder and little board oversight over how companies invest their profits). R&D spending and capital expenditures will mean almost immediate jobs (as long as there are qualified employees), and will yield increased tax revenues from the personal income they generate.

Individuals would be given the same carrot and stick; they would be allowed to defer taxes on dividends (and income) that they re-invest in new ventures. As I have suggested in previous comments, I would also have a sliding tax on capital gains, inversely proportional to the length of time the asset was held. This would reward long term investments, and direct more capital to them, while dampening the positive feedback loop that inflates bubbles.

All assets need to be maintained, or they lose their value. If you build a new hotel, you often get to charge more because it’s got the latest features and is in the best condition. If you don’t invest in maintaining the features and condition, after 10 years or so, it’s dated and you can’t charge a premium, and may have to offer a discount. If you’re a farmer, when you grow crops, you are extracting nutrients from the ground; after the harvest, those nutrients have to be replaced, either with fertilizer or some other organic material added back to the soil If you don’t, the soil becomes useless. If you sell technology products, you have to develop new ones every year, or else your product line becomes obsolete (that is now happening faster than once a year in some markets). This is true for everything; an asset must be maintained or it loses value, and maintenance requires re-investment of profits.

The economy is a national asset. It consists of several different infrastructures – transportation, education, communications, shipping, finance, medical care, energy, and like it or not, government services. If any of those subsystems deteriorate, the value of the asset (the economy) declines, and with that, so does the ability to generate income. That has been happening for some time now, as we invest less in the U.S. economy. Our trade deficit is a measure of how much more we consume than we produce, and we finance this imbalance by selling assets (very bad) and borrowing (at least those loans get to be paid back in diluted currency, but still not good).

The economic boom in the 90s has been attributed to many things; the dotcom bubble, telecom expansion, and Clinton policies, but really, it happened because investment in the U.S. increased. Companies saw that they needed to adapt to the internet and the web, and were investing in communications, computing, training, new businesses, and all the support systems these things required. That it was the dotcom bubble is irrelevant; any sector of the economy that attracts that level of investment would have had the same short term result of increased employment and reduced/eliminated budget deficits. That the internet reduces the cost of doing business has made it, overall, a wise investment for the economy and started to pay dividends after the bubble burst.

So if those earning profits use them by re-investing, or lose them by paying taxes, we’re covered.

Posted by KenG_CA | Report as abusive

I would be very interested in seeing a breakdown of who is holding all this student debt (i.e. banks, government, etc).

Posted by MKCurious | Report as abusive

Interesting ideas, KenG. Would love to see some public discussion along those lines.

Posted by TFF | Report as abusive

TFF, Obama proposed a more radical (although narrower) capital equipment tax credit in 2010 – one that in normal times would have been immediately by passed by a Republican congress, as it would have effectively had the government pay for capital expenditures for any company with enough tax liabilities. I say normally, because it was blocked for purely political purposes. There was very little public discussion then, and I don’t expect it now, so the only public discussion may be between you and me.

Posted by KenG_CA | Report as abusive

“The carrot would be very generous tax credits for capital expenditures”

Sounds noble — but I am concerned that the structure of the incentive might have unintended consequences.

Remember the Hummer credit for doctors and lawyers a few years back? (Might still be on the books?) Trucks exceeding a given weight could be purchased by small businesses with an aggressive depreciation schedule. Some bright tax accountant realized that the massive Hummer SUVs were heavy enough to meet the criteria — and thus could be purchased by any self-employed professional at a steep discount.

Or a renovate/replace decision for a high school in my hometown. Complete top-to-bottom renovations would have cost $20M. Replacing the building cost more than $50M. Yet because of 80% federal/state reimbursement on new construction, the replacement was CHEAPER for the town than the renovation would have been.

Suppose you can purchase a machine tool from Japan for $1.5M that will save you $1M in labor costs. Normally not economic, but if the government steps in with a $1M tax credit then the balance shifts. There is some value in subsidizing investment, even when it would not otherwise be economic, just to get things moving. Yet if you push that too aggressively, you end up paying for the equivalent of digging holes and filling them in. Ripping down perfectly functional old buildings just for the opportunity to exploit a tax credit on the new one.

Furthermore, I fear that much of the cash hoard is being held overseas. Not clear how you might apply a punitive tax rate to foreign income. And if that tax rate keeps it overseas, then it isn’t helping us here.

I would be inclined to rethink the tax system entirely. Herman Cain’s plan would be a conversation-starter, though Kotlikoff’s response is probably more tempting.

http://www.bloomberg.com/news/2011-10-20  /a-fair-accounting-of-cain-s-9-9-9-plan -commentary-by-laurence-kotlikoff.html

One of the keys to crafting a successful tax system is keeping the marginal rates low. A 15% marginal tax rate is not high enough to spur excessive tax-avoidance behaviors. You seem to prefer the alternate approach, suggesting very high tax rates for certain negative behaviors, yet avoiding negative behaviors (typically by tax dodges) isn’t the same as engaging in positive behaviors. I fear the unintended consequences, even when (especially when?) I can’t guess what they might be.

Posted by TFF | Report as abusive

There’s more to the plan that I can cover here, but there would be caveats on business expenses that are used for personal purposes. I realize this would be dependent on enforcement, which is not easy, but that will always be the case. It’s hard to stop lying, but if you make the penalty a big multiple of the crime, that is greater than the percentage of cases being audited, it can work (e.g., if only 2% of returns with business deductions are audited, the penalty for false returns needs to be greater than 50x the cheat. If you evaded $10K worth of taxes, the fine should be at least $500K. Eventually, we’ll get the right amount of tax revenue, and people will decide cheating isn’t worth the risk)

I realize you’re just giving examples of bad ideas, but renovations would be subject to the same credit as new construction, as it is still an investment, so this wouldn’t skew that kind of decision.

Buying a machine tool for $1.5M to save $1M in annual labor cost is already a good idea. This will just make that decision easier to make. I can see that some decisions will result in make work, but most will just make processes more efficient, which will ultimately yield a shorter work week for everyone (ultimately, but not anytime soon).

A tax credit on new construction will further accelerate the re-pricing of real estate you are seeking (btw, building a house to sell would not get a capital equipment tax credit, that is manufacturing. Buying the equipment to build the houses would warrant a credit).
Giving a tax credit for building new office buildings for rent effectively just accelerates depreciation, as the tax base cost for the building will be subject to the credit. Building a new factory, though, is a different story. I like accelerated depreciation of factories, for it removes the opportunity to write down an investment from the decision to close a marginally profitable factory.

Yes, a lot of the cash hoard is held overseas, and should be allowed to be repatriated without tax if invested in the same fiscal year. this pains many people because they feel corporations are getting away with not paying taxes, but they made the money outside the US, and they are investing it here, so we should be happy about that. It’s not being distributed as bonuses, it’s being invested in our economy, which we need more than anything else. If it allows domestic profits to be distributed as dividends, those will be taxed at the individual rates.

The nation spends too much money to survive on a 15% marginal rate, and even if it generated enough revenue to cover the bills, there still isn’t incentive to re-invest. There has to be re-investment, otherwise the economy shrinks, and with it, the standard of living. I don’t want to tell people how to invest their money, just that they must invest it – and trading assets is not investing. The only negative behavior I’m taxing is hoarding, because no economy can survive that (ok, i would taxes cigarettes. a lot). If this leads to digging holes just for the sake of digging holes (which I doubt will happen), then at least the income is being distributed enough so that people can consume without borrowing. Which brings us back to the debt issue.

Posted by KenG_CA | Report as abusive

I just got a chance to read your link, and I don’t have a problem with a national sales tax, but I think a VAT is inflationary and punishes US manufacturers who sub-contract out work. I know it’s popular in Europe, but their economy isn’t setting standards these days, either.

The tax rates are also low. Whether 9% or 15%, it’s too low. And I like the idea of a flat tax for individuals, but only on income above say, $25,000 per year. So if you make $25K, you pay no taxes. If you make $50K, you pay taxes on $25K, and if you make $1M, you pay taxes on $975K. There are no penalties for making more money as there would be with brackets, and it approaches the marginal rate on high incomes (but never actually reaches it). If we excluded the first $25K, we could set the rate at 25-30% (assuming social security taxes were rolled into it). I know, good luck with that.

Posted by KenG_CA | Report as abusive

“Buying a machine tool for $1.5M to save $1M in annual labor cost is already a good idea.”

Meant $1M in labor costs over the lifetime of the tool. Apologies for the unclear reading.

“The nation spends too much money to survive on a 15% marginal rate”

Federal revenue is presently 14% of GDP, including all taxes. (Admittedly that is 11% short of federal spending.) If you have a sufficiently broad tax, a 15% rate covers present collections.

Your suggestions seem focused on capital investment. Might we not achieve better effect (especially for employment and the distribution of wealth) if we reduced the barriers to investing in LABOR? Reduced employment taxes, reduced health care expenses? I am unconvinced that a lack of invested capital is what is holding us back.

“punishes US manufacturers who sub-contract out work”

How so? I thought the implementation of a VAT typically allowed credits for goods/services purchased by another US company.

Company A buys $2 of inputs, does all the work internally, and sells for $10: VAT on $8

Company B buys $2 of inputs, does pre-assembly, sells that for $5 to Company A: VAT on $3
Company A buys $5 of inputs (from Company B), sells for $10: VAT on $5.

How is either arrangement put at a disadvantage?

A VAT tax definitely puts exporters at a disadvantage, but so does the present system that raises so much money with employment taxes. If you were really concerned about exports you could give export credits for a portion of the VAT.

And a VAT tax could be phrased to put imports on an equal footing to domestically produced goods, simply by assessing it on the full value of the import. Presently American manufacturers pay far heavier taxes than those importing goods made overseas.

“And I like the idea of a flat tax for individuals, but only on income above say, $25,000 per year.”

Works for me. And if you look at the charts, we aren’t that far from a flat tax anyways (once you add in FICA tax on the first $100k of earned income).

Posted by TFF | Report as abusive

Yes, buying a $1.5M tool to save $1M in labor over the life of the tool would be bad, but I think that kind of tradeoff would be the exception, rather than the rule. In any case, if the tool was built in the U.S., then it might not matter, as some of that cost of the $1.5M tool would be U.S. labor. Also, the net result would be more cash trading hands ($1.5M for the tools vs. $1M for labor), which really is the goal – increased trading.

“Federal revenue is presently 14% of GDP, including all taxes. (Admittedly that is 11% short of federal spending.”

Hey, if we’re going to re-do this, we should do it right and charge enough to pay the bills. Besides, a 15% marginal rate will not raise anywhere near 15% of GDP, as there will be plenty of exclusions for low incomes and tax-free bonds.

“Your suggestions seem focused on capital investment. Might we not achieve better effect (especially for employment and the distribution of wealth) if we reduced the barriers to investing in LABOR? Reduced employment taxes, reduced health care expenses? I am unconvinced that a lack of invested capital is what is holding us back.”

TFF, I see you accept at least some of that supply-side voodoo. Making labor less expensive doesn’t mean more people will buy it, especially businesses. This is along the same misconception that if interest rates are low, and the cost of capital is cheap, businesses will invest. No, businesses will invest only if they think they can make money. Or if they are forced to. which is the goal of this plan.

A VAT taxes every stage of value added. The company that buys sand to make silicon pays a VAT. The company that buys silicon to make wafers pays a VAT; the company that buys wafers to make ICs pays a VAT; the company that buys ICS to make a circuit board pays a VAT; the company that buys a circuit board to sell to retailers pays a VAT; and the retailer who buys the finished product to sell to a customer pays a VAT. If you just mean one VAT at the end of the chain, then i’s just another sales tax (which we should have).

If you impose any kind of a tax on imports to make up for the lack of a VAT, it will reach a political dead end and possibly lead to a war of tariffs. I think a VAT encourages inefficiency, as it gives manufacturers an artificial incentive to vertically integrate, even if they aren’t good at everything.

But at least we have two votes for a flat tax on income above $25,000. That’s a start.

Posted by KenG_CA | Report as abusive

“Besides, a 15% marginal rate will not raise anywhere near 15% of GDP, as there will be plenty of exclusions for low incomes and tax-free bonds.”

One of the best (or most evil?) aspects of a VAT is that it captures *everything*. Since it is assessed on production, there can be no exclusion for low incomes (though you can offer welfare/rebates to the needy). Similarly, there is no way that a bond could possibly be “tax-free”. Rather, *all* investment income is tax-free, or tax-deferred, until it is consumed.

Assess the VAT on imports, credit it for exports, and (I believe?) you perfectly capture gross national consumption. Admittedly that could spark a tariff war.

“A VAT taxes every stage of value added.”

The version I have seen proposed offers VAT credits for supply-chain exchanges such as you describe. Not terribly different from a sales tax, though the VAT is intended to be implemented without the exclusions that creep into a sales tax. (A sales tax is not assessed on the vast majority of our household spending. We probably pay just a few hundred dollars a year in sales tax, while a VAT would run just as high as our income and FICA tax bill.)

“Making labor less expensive doesn’t mean more people will buy it, especially businesses.”

Why should labor be an exception to the law of supply and demand? More activities become profitable when labor costs are lower.

In some sense, it doesn’t matter WHAT you tax. Businesses will pass along any costs to the consumer. But the structure of the economy depends on the structure of the tax. If you tax labor costs without taxing consumption, then you encourage foreign production to meet domestic consumption. If you tax consumption but not labor, then you encourage domestic production.

Kotlikoff takes a different perspective from other economists, but I’ve found his opinions generally well-considered and worth reading. You might read up on the “FairTax” proposal that he supports? His 15-15-15 proposal offers a lower sales tax but makes up the difference through payroll and inheritance taxes.

Don’t know what the “best” solution is, but we definitely need something simpler than the present mess.

Posted by TFF | Report as abusive

“Why should labor be an exception to the law of supply and demand? More activities become profitable when labor costs are lower.”

The economy is driven by demand, not supply. If you priced garbage really cheap (it already is), people still wouldn’t buy it. If household workers were ten cents an hour, there would still be a limit to how many I would want to hire. You can only stimulate demand for products by increasing the supply (lowering the price) if there is enough demand to absorb all that supply.

However, whatever demand you have, people will strive to supply it.

Further, if you drive labor costs low so you can sell things more cheaply, there will be less people able to buy those things. Demand will drop, so it won’t matter how cheap you can make them.

In the big economic black box, demand is the input. Supply is a function of what the box is capable of producing.

Posted by KenG_CA | Report as abusive

“The economy is driven by demand, not supply.”

We’ll have to disagree on that point. The economy is driven by demand AND supply, and either/both can be sensitive to price.

“If household workers were ten cents an hour, there would still be a limit to how many I would want to hire.”

If decent household help were $10 an hour, no taxes, no paperwork, I would seriously consider hiring some. (Not that I’ve ever asked. Is cleaning help that cheap?)

“Further, if you drive labor costs low so you can sell things more cheaply, there will be less people able to buy those things.”

This doesn’t necessarily apply if the METHOD of driving labor costs lower is to reduce employment taxes and health care overhead, deriving taxes from other segments of the economy.

Posted by TFF | Report as abusive

.Interestingly, I was the original source for the claim that student loan debt had surpassed credit card debt (see the original article in the WSJ article by Mary Pilon).

More interestingly, if you are truly interesting in murky– or not so murky (depending on your take) student loan statistics, see my claim at http://www.studentloanjustice.org (main page), that the government is actually profiting on defaults. This claim has been begging for a (hopefully) disinterested, unbiased analysis, and so forth. Please email me at justice@studentloanjustice.org if you would like to chat about this. Important claim. Important ramifications.

ps. I would probably be inclined to take Kantrowitz’s figures over the NY Feds. Mark is pretty fair most of the time about these things with only one exception that I can think of (interestingly, related to claim referred to in previous paragraph). Nonetheless…

Posted by alan_collinge | Report as abusive

I would bet you could find cleaning help for $10/hr in the northeast (maybe not in the cities), and I’m sure you can not pay taxes and not file any paper work. Someone who is getting paid $10/hr would be happy to not have taxes taken out of their pay cash.

The people who don’t want to pay for health care also don’t want the government to pay for health care – they want people to pay for it out of their $10/hr. And those employment taxes you would like to get rid of are employers’ contributions to the workers social security. To do away with those, you would have to dispel the myth that social security is an annuity that returns more than people put in, like some magic pot that keeps cooking food.

If you have a supply, you will not always have demand. If you have demand, you will always attract a supply.

Posted by KenG_CA | Report as abusive

So proud of myself for holding my own in the riddle of the missing student loan data! I am fuzzy and squeamish about statistics and finance, yet sharp and passionate about student loan reform and the disgusting monetization of education. I read your following blog post and, although I had no idea that there was a miscellaneous, catch all category of loans that were left out, I did have some idea that there were loans other than FDSL loans possibly unaccounted for and that surely private student loans were unaccounted for. Now, I really want to know how many private student loans there are. I want to move over to that post to ask any questions or make further comment about the student loan crisis which I think is imminent, but wanted to just come back here and reread the amazing thread in which a new corporate tax structure is set forth and other world problems are solved. Damn, you have some smart readers! Between looking for primary sources on the outstanding student loan debt yesterday and reading your blog today, I feel like I’m the one back in school; pre-huge debt and bitter taste left in my mouth about studying the social sciences! I will continue to read your blog in the hopes that you will be writing a lot about the cost of higher education and I hope that KenG, TFF et al will be writing too!

Posted by Topazmoon11 | Report as abusive

As Felix Salmon has noted in a follow-up, the student loans outstanding figures in the Q2 household credit report from the Federal Reserve Bank of New York are wrong. That report says that there is a total of $550 billion in federal and private student loans outstanding. According to the US Department of Education, as of September 2011 there was a total of $848 billion in federal education loans outstanding. That federal education debt figure is almost $300 billion higher than the Federal Reserve figures for both federal and private education debt. The US Department of Education figures are actual totals, based on the National Student Loan Data System (NSLDS). With roughly $170 billion in private student loan debt outstanding, the combined total is over $1 trillion. (I believe that the $848 billion figure includes about $50 billion in capitalized interest. The student loan debt clock at http://www.finaid.org/studentdebtclock does not include capitalized interest on federal loans, only private student loans, because the federal education debt figures are based on the federal budget’s reporting of actual figures for the previous fiscal year, and these figures do not include capitalized interest.)

The source of the error in the Federal Reserve figures is unclear. In addition to omitting some types of debt from the student loans category, there may also be an issue with the aging of the consumer panel used to sample credit reporting agency data.

Mark Kantrowitz
Publisher of Fastweb.com and FinAid.org

Posted by mkant | Report as abusive

If half of all the loans are still outstanding, then we made a mistake lending this much! Sorry, we don’t owe you a higher education!

Posted by DrJJJJ | Report as abusive

This chart says the same ting: one generation has passed its debt and the burdens of their extravagance (granted by China) to the next.

Note Felix Salmon’s “update” that student loans have in fact passed credit cards debt.

Posted by Summerland81 | Report as abusive

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