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Debt Relief Is Bad Means Testing

January 22nd, 2013
giving, money

Forgive student loans! End foreclosures and let people own their homes free and clear! Allow the free coinage of silver! The idea of reducing debt, either outright through forgiveness or indirectly through inflation has a long history. It's easy to see the appeal: forgiveness sounds merciful, people with debt seem particularly deserving, and lenders are unsavory. This comes down to moving money to debtors from lenders, the government [1], or donors.

The "give people money and they will be better off" approach is a good one, but who should get the money? Student loan forgiveness primarily helps people who went to college; what about people who couldn't afford college in the first place, even without loans? People with mortgages to forgive are people with houses, but lots of people are too poor to own. The "has debt" criterion is not a good proxy for "needs our help".

If we're going to give people money, the government would do better to expand the EITC (or institute a negative income tax). Individual donors would do better with unconditional cash transfers with targeting like "people in Kenya with thatch roofs". Targeting based on "do you have debt" is worse than our societal default of "is your income below $X".


[1] A major lender in itself.

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