Wednesday, November 7, 2012

Bankster tax? How about a profester tax?

It seems that barely a week goes by without an op-ed by a distinguished professor of social policy, labour, or political science, declaiming income inequality and calling for new taxes on the rich.

Not to tear down straw men, but the argument tends to go that since banks (and their executives and employees (though apparently not pension plan shareholders or bondholders)) have profited so much from being bailed out by taxpayers, their salaries, bonuses, capital gains and lately, wealth, should be clawed back in the form of higher taxes, to "give back" the money they have "taken" from the public.

The arguments include accusations that employees and executives in the financial sector do not provide social utility, nor do they work enough to deserve to be paid in multiples of what low to middle income people earn.  It seems unjust that governments bear such staggering debt and run crushing deficits, and then instead of hiring more nurses, social workers or teachers, they bail out the companies that employ the wealthiest people in the country. The mortgage crisis in the US had something to do with predatory lending by banks and unscrupulous financiers, and the ensuing foreclosure crisis was just the same banks illegally evicting families from their now bank-owned homes.

The compensation packages for some financial sector employees have indeed increased exponentially since the 1970s, as has the portion of western GDP associated with financial services.  It's all very complicated, but what a number of professors seem to know for sure is that governments would be solvent if rich people just paid more in tax.

Yet, when we look at the liabilities on public balance sheets, the big spending areas are health, education, defense, and interest payments on all the debt the state has accrued overspending on said areas over the last few decades.

Where politicians on both the right and left have not been able to hire people directly,  in exchange for votes, they have used 30-years of monetary policy to facilitate easy access to credit for loans to pay for education, mortgages, cars, and health services, while providing consumer price "stability." Notwithstanding the inherent risk of this tactic, these seem like laudable goals.

By guaranteeing loans (or in the case of health care, expanding services) to middle and lower-middle income voters in all of these areas - from vast government backed student loan programs to government mortgage insurers such as Fannie Mae and Freddy Mac, or the Canada Mortgage and Housing Corporation, - successive western governments have opened credit spigots and created massive inflationary bubbles in the price of university education, houses, and health services. 

The money for these things is loaned into existence using a mix of private and national (federal reserve) banks, with the ultimate guarantor (re-insurer) being whoever the government of the day will be when the music stops playing.  Since bankers are so close to the source of these massive new cash flows, they are rewarded based on the volume of business they do. That is, the government borrows from banks, or via banks from public markets by selling bonds, keeps interest rates down, and then uses the borrowed money to spend on public sector jobs and underwritten loans for voters.

In the mean time, those voters in the US have used those loans to ride  up about $450bn in outstanding student debt. Just to put that in perspective, in 2008 the cost of the bank bailout was $475bn, hurricane Sandy is estimated to cost around $60bn.

Some napkin arithmetic shows that if a student graduates into a $30,000/year teaching job with $45,000 in debt, even with raises averaging slightly higher than inflation, it will take a decade or longer of spending $400/mo to pay it off. The student will pay just under $15,000 in interest. Not a bad deal for bank executives and shareholders whose government guarantee on the loan means they have made that $15k in interest effectively "risk free." The sticker price for tuition fees seems almost attractive, but with interest on student loans, the actual tuition costs are about %30 higher.

So where did all the money go? Well, as it turns out, shockingly, that there is a few hundred billion in student loans that went to paying tuition at universities. We all know that universities need climbing walls, ergonomic classrooms, cutting edge architecture, IT, and opaque purchasing and procurement systems based on collegial principles that don't hold any single person accountable. They also need professors, some of whom would qualify as if not %1'ers, at least %2'ers. Anyone with tenure would be at least a %9'er.

Professors have not earned bonuses, outsized or otherwise, and they aren't ostentatious about their relatively meagre wealth. We don't call them profess-sters, and many of them side with the %99. They tend to advocate redistributive policies, support environmental causes, and advocate data and evidence driven government.  They are the foes of ideologues, and the stewards of wisdom. To a point, anyway. 

But if you want to know where the hundreds of billions or so dollars in student debt went, a lot of it is parked in the retirement savings, pension plans, downtown brownstone houses and vacation properties of the Harris tweed and Birkinstock set.  Of course, teaching students has tremendous social utility, and it would seem crass to compare academics to vulgar bankers. But next time you are served by a waiter with an advanced degree or obstructed by clerk with an undergrad, with so much inequality in our society today, it may be worth pausing to wonder just where that half-trillion in student loans went.

Arguably it went the same place all those so-called "liar loans" for mortgages in the US went: to subsidize a new middle class. Surely this money went to sending kids to college, ones who were the first in their families ever to pursue higher education, and it lifted many millions out of poverty based on merit. But the difficult question now is, other than expand the public sector to unsustainable levels, what did they do with it? The tech boom was run by rich, white dropouts and financial services is where people work who already had money. There are numerous exceptions in both, but we just don't hear much about blue-collar financial firms or tech start-ups from critical theorists. Of course university education isn't about training people for jobs, it's for creating well rounded, thoughtful and critical citizens ready to engage and lead. Except it seems someone forgot to mention all that on those student loan applications.

Perhaps professors who write screeds in newspapers about taxing bankers and the rich should think more about what it means to "give back" what has been given to them by society. A profes-ster tax would be unpopular, anti-intellectual, and spiteful philistinism, but if we're going to start talking about fairness and equal treatment for people whose lifestyles are supported by massive government deficits, it is something we should put on the table.

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