Relieving debt bondage

Is Brown the Prime Minister reversing the boost to long-run economic growth given by Brown the Chancellor?
Two recent developments make me suspect so: last week's decision to increase support for students, and this week's announcement of a big housebuilding programme.
The effect of these will, eventually, be to reduce the amount of debt young people have: lower student loans, and lower mortgage payments as increased housing supply bids down prices.
But this could reduce long-run labour supply.
Put it this way. My generation (early 40s and older) left college with little debt, and could buy relatively cheap housing. As a result, we could save, build up housing equity, and perhaps pay off our mortgage quickly. This means many of us are in a position to downshift (as I did years ago) or look forward to early retirement.
This means the economy could lose a cohort of highly-skilled workers.
However, more recent graduates are saddled with debt and high mortgages, and so will have to work longer. This improves the long-run supply potential of the economy; in 25 years' time, many of today's 30-year-old graduates might still be working.
I suspect the effect of New Labour's education reform - increasing the number and indebtedness of graduates - was not (just) to improve the quality of the labour force, as to improve its duration. Brown's reforms of the last week threaten to reduce the duration of the graduate labour supply.
The question is - and I'm not sure here - is this effect significant enough to materially affect growth?

Comments

[Alex]

in 25 years' time, many of today's 30-year-old graduates might still be working.

Who but the happy few ever expected otherwise?

[mark Brinkley]

Where is the evidence that a big housebuilding programme will have any effect on house prices? It won't. It will simply encourage more people to move to the UK. Check out what's happened in Ireland in the past ten years. They have been building new homes at an astonishing rate, nearly seven times more per head of population than in the UK. Result? House prices have trebled.

[john b]

I think Mark may be confusing cause and effect...

[dearieme]

If the next election looks as if it's going to be close, suddenly graduates and students will be offered substantial relief from debt bondage if only they vote for Gordy. So don't try to pay down your debt early, kids: just be patient.

[Thomas]

Isn't the argument that higher debt leads to longer working lifetimes and therefore lower growth perilously close to the broken window fallacy? Middle-age/older workers won't be paying down as much debt, which means they will have more disposable income. This too will drive growth, although whether it will offset possible early retirement is unclear.

As they age, workers may retire earlier....or they may just continue working or even do late-life career switches -- "70 is the new 50" as they say.

Also, what really has higher marginal utility to the average worker: Paying down your debt a little faster, or spending on just about anything else? Given the high levels of consumer debt, revealed preferences seem to indicate the latter. If people refinance and take advantage of slower-paydown programs then savings and debt rates may not be affected significantly.

[cityunslicker]

however, on housing they have been threatening to do something for 10 years and have never actually achieved anything. In fact the market has less supply in relative terms.

What Brown says he wants to do and what he actually does are entirely seperate things.

[Kevin Carson]

I don't know if the policies will have the effect you predict, Chris, but your argument about the effect of low mortgage and consumer debt sounds remarkably similar to predictions made by the individualist anarchists a century ago.

They argued that the low interest rates resulting from a free market in banking would enormously increase the bargaining power of labor, not only by reducing personal debt, but by making cheap capital more readily available for worker-owned businesses. If the average person were able to pay off his mortgage ten or fifteen years earlier, and were free from high-interest credit card debt, people would (as you say) downshift by retiring early or cutting back to part-time hours even earlier. A considerable number of others on the margin might cut back hours and supplement their income by part-time self-employment. And for those who remained on the job, the fact that they owned their homes free and clear and were free from monthly credit card payments (and as a result probably had some savings as well), would mean they'd be a hell of a lot less likely to put up with any indignity for the sake of hanging on to their jobs like grim death. In short, labor would become the party with the greater power to walk away from the table, and as a result jobs would start competing for workers instead of the other way around.

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