Friday, 7 January 2011

The Student Debt Crisis

Anyone who wants to understand the problems that are likely to arise in the UK, should watch this video by CNBC, investigating the Student Debt Crisis in the US.

In the US, student debt now stands at more than $1 trillion, and is more than the total amount of credit card debt in the US. In fact, the situation is now so serious that it is being compared to the Sub-Prime crisis, and has many of the same features. In the video various people come forward to admit that, in reality, they were acting as nothing more than salesemen for the Universities, and for the Student Loan companies. According to the programme, students were given, at the very least, misleading information about their future job prospects. Certainly misleading given the high level of unemployment amongst graduates in the US at the moment.

Mirroring the sub-prime crisis a number of contributors set out why it was that students from low-income families were targeted as loan recipients, just as low-income families were targeted for sub-prime mortgages. The reason was simple.
Poorer students would need bigger loans, which meant bigger commissions for those selling them, and much higher interest payments for the companies lending the money. Two graduates who had married, and had several kids, now found themselves both unemployed, and a combined student loan debt of half a million dollars, on which they would also have to repay another quarter of a million dollars in interest.

What is worse. In the US, this student loan debt is not even written off if you become bankrupt. Once you have the debt, you have it for life. And, even worse than that, one family found that they were liable for repaying the debt of their son, who had died in a car accident, because the parents were required to co-sign the loan application. Other students set out how, even where they had specified that they did not require a loan, they had been signed up for one, and were faced with trying to prove they had not requested it.

Graduates who are unemployed can get repayment of their debt suspended, but the interest continues to accrue during that period. Default on a payment, however, and the loan companies swoop to repossess all of your assets. Yet, in reality the average debts of students in the US, of around $80,000 are no more than those envisioned for students in the UK, whilst for those students in the US who do get a job, US wages are significantly higher than in the UK.

Of course, this average level of debt is only to cover the fees for students at the ordinary US Colleges.
As I pointed out in my blog, US Students And Workers Fight Back, students at some US Colleges and Universities are already facing massive increases in their Tuition Fees, and are following the lead of students in the UK and Europe, in opposing them. But, even those fees are low compared to the costs of going to the prestige US Universities such as Harvard and Yale. In part, this is due to the fact that Higher Education in the US, as much as in the UK, operates on a semi-monopoly basis. Degrees from Harvard and Yale, like degrees from Oxford and Cambridge are considered virtually in a league of their own. In the UK, it is still the case that the higher echelons of the State are drawn from Oxbridge, just as those Oxbridge graduates remain heavily drawn from the Public Schools such as Eton and Harrow and Westminster.
A look at the backgrounds of Government Ministers shows a similar profile. The same is true in the US in respect of Harvard and Yale. The fees charged are almost certainly an example of monopoly pricing, and without a massive injection of competition from new Universities, capable of attracting the best teaching staff, and facilities – which would mean a massive injection of Capital either by the State or by large Capitalist enterprises – it is difficult to see how that Monopoly would be broken down in either the UK or US.

But, herein lies a contradiction for Western Capital. It can no longer compete with low wage, low cost areas of the global economy in high volume production. It is even beginning to lose out in areas such as basic administrative and IT work, as this can be undertaken by well-educated workers in India and other parts of Asia. Western Capital, will only be able to pay its way from two sources. Firstly, it will be able to earn money from its vast built up overseas investments accrued during the last two centuries. In other words, it will reduce these countries to the kind of “coupon clipping”, rentier Capitalists described by Engels in his description of State Capitalism.
Yet, the speed by which these economies most notably the US, have become large debtor nations themselves, shows how little room for manoeuvre such an approach provides. The second option is for these economies to restructure, and to invest heavily in lower volume, but higher value production of manufactures and services. Only on that basis, could these economies have any chance of maintaining current living standards in the medium to longer term, while they wait for living standards in the developing economies to catch up, and for their competitive advantage to disappear. But, a crucial aspect of such a restructuring is the creation of suitably trained and educated labour-power. That means that new workers have to be educated to a high level, which implies a massive extension of Higher Education. Incidentally, it also means a big investment in healthcare, because there is no point investing large amounts in such education and training, if the workers die early, or are regularly absent from work due to ill-health.

But, under current conditions the likelihood is that the very opposite will happen. The video above suggests that the actual figures for student defaults on their loans is being deliberately understated, just as for a long time the problems around sub-prime were kept hidden. In the UK, we see the same thing with Government Ministers insisting that the debt that students will rack up will not be a problem for them, given the higher wages they will earn over their lifetime.
They fail to point out the high level of graduate unemployment, they fail to point out the problems that graduates are likely to face obtaining a mortgage when they are already loaded up with tens of thousands of pounds of student debt, and they fail to point out that even on their own figures it just doesn't stack up, as I demonstrated in my blog Paying Off Student debt.

Western Capital needs the development of this highly educated workforce, but as with many more things it is trying to achieve it on the cheap, and in the face of a series of contradictions. One of those contradictions is the simple fact, that Western Capital faces a different situation to Capital in say China or India. In those economies, living standards are already low. These economies are competitive and dynamic. Employment is growing strongly. Saying to new workers, spend money to obtain a good education, in order to get a better paid job, is a realistic option. In developed western economies it no longer is. The reality here is, get an education in order to get a job in one of the dynamic new sectors, and you might be able to sustain a reasonable standard of living, or else face lower wages, and unemployment. In the end, the latter is not an option that western economies can adopt, because it would mean an increasing welfare burden being imposed upon the dynamic sectors of the economy, or widespread social unrest and Capital flight.

But, saying to workers, rack up huge student debts just to be able to get a job, is not a very tempting offer. Capital has to find a way of significantly reducing the cost of Education in western economies, whilst at the same time significantly raising its quality, and output, so that the price students face in obtaining that education, or else that the State has to lay out in order to educate its new generation of workers, is low enough to enable it to generate Surplus Value, whilst guaranteeing workers an acceptable standard of living. In the end, the Value of workers output is now determined by the world market, by the amount of socially necessary labour required for that production on a global scale. The reality is that in India, China, Vietnam, Korea, and many other growing economies, for many many products and services, that amount of socially necessary labour is much lower than it is for the same products in the UK, US and other developed economies. It is the former who determine the market prices, not the latter.
Consequently, that sets the limits which Capital in the West have to work within. If the Value of labour power is high, because the cost of education, healthcare and other components of the reproduction of labour power is high, then the scope for Capital to extract a Surplus Value from that Labour will be small or non-existent, and capital only employs Labour-power if it can make Surplus Value.

But, Marxists have to be clear about that reality too, so as not to mislead or provide workers in the West with a false prospectus, or to ask them to back demands that have no prospect of being adopted by Capital or its State. Apart from the air we breathe, there are no “free” goods. Even “clean” air has a price. The “Free” Education or Healthcare we receive is not free at all. As workers we pay for that Healthcare and Education collectively in the huge amounts of Tax – approximately 40% of the wages of workers goes in taxes of one form or another – confiscated by the Capitalist State.
Capital in western developed economies needs to restructure along the lines outlined above, or else, its only other option, is to reduce workers living standards down to those of workers in China, India and elsewhere, which is probably unachievable, and would in any case also devastate large swathes of Capital in those economies which produces goods and services to meet the existing living standards requirements of those workers. It needs to invest heavily in Education, in particular, but probably also in Health, and that costs money. Either the State lays out that money, recovering its payment by yet higher taxes on workers, or else workers themselves pay for that Education directly themselves.

And, we should not try to avoid this reality by facile suggestions that the Capitalist State could raise this money by taxing the rich. The reason for that should be fairly obvious. It is a CAPITALIST State. Its function is to act as the Executive Committee of the Capitalist Class. Capital might itself voluntarily raise these necessary funds out of its own Surplus Value, just as it would invest a large sum of money in some large Capital project such as a major new road system, from which each individual Capitalist might not make a directly related profit, but from which all, or the majority, of Capitalists would ultimately profit as a result of reduced costs, and faster turnover. But, the condition of that is that Capital actually believes that these future profits will flow from that investment. Short of that situation, and short of Capitalism being overthrown, then there is no way that the Capitalist State can extract such tribute from Capital. If it tries, then Capital will respond with a Capital strike, reduced investment, and in a highly mobile global economy, Capital flight to areas where it can make higher rates of profit. In other words under those conditions, workers would be faced with paying for the supply of that higher level of education either directly in fees out of their wages, or else indirectly via taxes confiscated from them by the Capitalist State. As with any other consumption choice, workers would be faced with the choice of either buying this higher education, and reducing their consumption of some other goods, working longer, or else not buying the higher education – a choice that they would not have if its cost was paid for by a collective payment taken out of workers wages in tax.

This demonstrates, yet again the problem of Capitalism as an unplanned, profit driven system, racked with contradictions. Given the history of western Capital of being driven by short term profit concerns, which tends to mark it out from the approach of Capital in Asia, the prospect of that Capital recognising the importance of a large scale investment in higher education is not good. In a Co-operative economy, where the means of production were owned and controlled by workers – even an economy where market relations rather than planning continued to dominate – those workers would not be driven by short term profit concerns.
Other considerations would determine their actions, such as the need to ensure higher living standards over the longer term, the desire to maximise employment over the longer term, and so on. The fourfold increase in employment at the Mondragon Co-ops over the last twenty years is an indication of that. .
As a result, workers in such an economy could see the trends of the global economy, and recognise that those considerations of higher long term, profitability, employment, and living standards could only be achieved by shifting production into those areas in which they could enjoy a comparative advantage, could recognise that a higher proportion of production would need to be allocated to education, and to developing these new industries, allowing a planned reallocation of both Labour and Capital accordingly. By contrast, Capitalism can only achieve such restructuring by repeated wasteful crises. The sooner we begin to build that Co-operative economy the better.


vngelis said...

There is another way round the bankruptcy question. In the US students who couldn't pay back loans debts would go bankrupt in one state and then move to another. In Britain it can be done the other way round. Get a loan to pay of the debt, then go bankrupt to those who gave you a loan. You can come off bankruptcy 18months after declaring it. You just need to look at things differently.

Boffy said...

I'm not sure about the legal position in the US, but I think that as this would be a Civil Law issue, moving state would not stop the Loan Company coming after your assets. Besides, for those who have homes simply moving would not be that easy, and as the video shows, it would not stop the Loan Company coming after parents or other co-signatories.

In the UK, if the law was set up on the same basis, then moving to another County would not change anything. I doubt even moving to another EU country would change it either. However, the main point is what it says about the contradiction Western Capital faces in needing to massively raise education levels, and how to achieve that. It is trying to do it, by persuading workers to finance it directly through Fees. If students begin to recognise that they will not get that back in higher earnings etc. that strategy will fail. The Capitalist State will then have to try to convince Capital that it is in its interests to make the investment out of Surplus Value, but that may not be easy as Capital can easily move elsewhere. So, short of the revolution, worekrs will pick up the bill through higher taxes.

vngelis said...

Another angle on the issue is why the government increased higher education participation from around 10-12% in the mid-1980's to around 45% today, to hide youth unemployment? Coupled with the selling off of places to non-UK and non-EU students places for university have never been so competitive. Fees regulate demand and the higher the better. I am still of the view that when you are saddled with debts of £100 to £200k when you start in life you will then also have 40 year mortgages like they do in Japan then a new serfdom will be upon us...

Boffy said...

I agree. Back in the 1980's, I wrote that one consequence of globalisation, and the shift of manufacturing to the East would be that the developed West would shift more rapidly to concentration on Services. In fact, I didn't think the shift to services such as Finance would be as pronounced as it was, but I did anticipate that services where the West specialises such as healthcare and education would become internationally tarded, and a source of income.

The move to encourage a much higher take up of Higher education is part of the restructuring I have described. Alan Greenspan in repeated testimony to Congress has spooken about the faulire of US education to provide sufficient number of people with higher levels of education, which has meant a shortage of Supply, which has pushed up the wages of the worekrs who do have the necessary skills and qualifications at one end, and has led to a surplus population at the other.

For all the last century Capital has been very good at persuading workers to pay for those elements of teh reproduction of Labour power that modern Capitalism requires. That is why it developed the Welfare State. Even the US State has created the basic elements of that. Europe in particular after WWII had a shortage of labour - it was less a problem for the US. If for example education in Europe had been wholly private with workers choosing how much to buy like any other commodity, they may have chosen not to. The same is true for healthcare. That would have meant that European Capital would have faced a significant problem in reproducing the Labour Power it required. A State Monopoly of Education and healthcare ensures that workers have no choice in how much of these commodities they choose to buy - up to a minimum standard. It is compulsory, and the payment for it out of wages is similarly compulsory.

It is trying to pull off the same tricj with HE. Loading people up with debt to turn them into debt slaves as well as wage slaves is an added bonus, particularly as after WWII, workers were able to amass a certain degree of assets, which gave them a limited amount of independence from Capital.