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Buck McKeon’s Student Loan Crony Capitalism

By Matthew Yglesias on February 27, 2009 at 11:01 am

"Buck McKeon’s Student Loan Crony Capitalism"

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The Obama administration’s budget proposes to have the federal government spend billions of dollars on student loans to help students attend college. Since conservative ideology indicates that money should only be spent on killing people, preparing to kill people, and threatening to kill people it’s not surprising to learn that some members of congress are not enthusiastic about this proposal. But there’s a twist. The government already spends billions of dollars on student loans. And the Obama administration is proposing to reduce expenditures.

How so? Well right now we do student loans through a really pointless mechanism of basically laundering the money through private firms. All of the downside risk is borne by the government in case of default. And the lenders receive federal subsidies for doing the service of undertaking no-risk lending. But of course the companies also take a slice off the top for profits and salaries for executives and so forth. Consequently, this is more expensive than just directly lending the money. And the government is bearing all the risk anyway. So what Obama is proposing to do is to save taxpayers money by simply having the government make the loans. What’s not to like? Well:

But there’s already been pushback from Republicans. Rep. Howard P. “Buck” McKeon (Calif.), ranking Republican on the House Education Committee, lashed out against the proposed shift, calling it a “government takeover of the private-sector-based student loan program, taking away options and benefits from students while adding tens of billions” of dollars to the deficit.

The government is not, however, “taking over” anything. The government already completely controls the industry since it’s existence is predicated on the existence of federal subsidies. Obama is simply proposing to cut out the middle man and save some money. The tens of billions of dollars to the deficit point, meanwhile, is just an accounting gimmick. By having the government guarantee loans that formally “belong” to the private firms, a certain level of implicit liability is kept “off the books.” But the liability is still there. And the actual overall cost to the government is lower lower.

The interesting thing here is not just the particulars of the policy, but the bizarre view of the role of government that Howard is espousing. Rather than a debate between progressives who want the government to provide a public service and conservatives who want the service to exist just insofar as it can be supported by the private market, we have a debate where both sides agree that the service ought to exist but the right thinks it’s important that it be done in a less efficient more costly manner because doing it that way generates profits for people who in turn give them money in some kind of nutty sense is supposed to preserve the integrity of the private sector. And it’s not just on student loans. You have essentially the same debate over Medicare Advantage between Democrats who want the government to provide seniors with costly medical services and Republicans who want Democrats to provide seniors with an even more costly version of those services by bringing private insurance companies in as middlemen. It’s ludicrous. Now elected officials are going to get mixed up in these kind of scams now and again, much as you see some Democrats siding with campaign contributors in the hedge fund industry over the basics of progressive politics. But when Chuck Schumer pulls that kind of stunt he takes crap about it from liberals while conservatives seem too busy whipping themselves into frenzies over fake pork-barrel schemes to send mice on maglevs to Disneyland to notice what’s happening.

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