The Next Bubble

You remember the housing bubble, yes? One version of that narrative goes like so: homeowners are better off financially than renters; therefore we decided it would benefit the economy to subsidize housing through cheap loans, mandates, low interest rates, etc. — the “ownership society”; this mainly served to inflate housing prices and saddle millions of Americans with unaffordable debts; in 2008, it blew up in our faces to the tune of trillions of dollars.

I said a while ago that I thought the next asset bubble would be green energy. I still think it will be a bubble, but I’m now convinced that higher education is the more imminent problem:

More than half of America’s recent college graduates are either unemployed or working in a job that doesn’t require a bachelor’s degree, the Associated Press reported this weekend.

By comparison, in December 2011, only a fifth of 16 to 19-year-old Americans couldn’t get work. Meanwhile, according to the OECD, just 18.4 percent of all Americans under the age of 25 were unemployed in 2010. By those measures, college grads are actually faring worse in the job market than the overall youth population. They’re also suffering terribly compared to the older college-educated populace, which has an unemployment rate of 4.2 percent.

So is a college education simply less valuable than in the past? In some respects, yes. According to the Census, the number of Americans under the age of 25 with at least a bachelor’s degree has grown 38 percent since 2000. Not nearly enough jobs have been created to accommodate them, which has resulted in falling wages for young college graduates in the past decade, as well as the employment problems we’re now seeing.

Here’s what’s left out of the analysis. The explosion in college degrees — an explosion which has made each college degree less valuable — has been heavily fueled by massive federal investment. The last three Presidents have made it a mission to make college more “affordable” through an ocean of subsidized loans and grants. The result has been a huge surge of new college students and, since loans have only driven tuition prices higher, a five-fold swelling of student debt to about a trillion dollars.

The analogy isn’t quite perfect. There’s no derivative industry in higher education creating a multi-trillion dollar market for bogus education (yet). But the government is making the same mistakes it made in the housing bubble, assuming that subsidized loans can drive prosperity. And just as subsidized cheap loans drove housing prices higher and put people into mortgages they couldn’t afford, the student debt push is driving college prices higher and putting people into educations they can’t afford. Only this time, we can’t blame Bank of America.

The reasoning behind the heavy push for higher education is just as sloppy as the push for home ownership. College graduates earn more than non-college graduates. Therefore, all we have to do is send everyone to college and everyone will have a good paying job, right?

Wrong. College graduates are paid more because some of the highest-paying professions — medicine, law, banking, engineering — require a college education. And, as the article notes, people who get degrees in those fields are doing fine. But most of the influx of students are not getting these kind of degrees. They are getting degrees in liberal arts and other professions which are not as in demand. You can imagine how the job interviews are going:

Employer: So it says here you have a Bachelor’s from Ohio State. What did you major in?

Unemployed: Women’s studies.

Employer: Uh, so do you have any marketable skills?

Unemployed: I can get angry really well.

Employer: We’ll let you know.

A real educational loan industry would not let this shit go on. They would not loan $35,000 to some dude getting a degree in puppetry. They would happily finance degrees in medicine or science, where the likelihood of future prosperity is good. But puppetry? Most of the liberal arts? I don’t think so.

And, yes, I’m seeing education in purely practical terms. I’m not saying that there isn’t value to someone getting a college degree and broadening their mind just for the sake of it. I am saying that I see little reason for the taxpayers to support it for everyone.

Just as our political class ignored the housing bubble until it was too late, we can expect our politicians not to do anything until the roof caves in and we’re facing tens or even hundreds of billions in loan defaults. Right now, both our Presidential candidates are trying to keep student loans cheap and subsidized, keeping the interest rates in the mid 3’s or so. Ironically, as Daniel de Vise points out, these two Nanny Staters are suddenly unwilling to act like parents and say, “No!” to young people. And that’s just for interest rates. It takes a lot more courage than either Barack Obama or Mitt Romney can muster to say, “Not everyone should go to college.”

But that’s what they should be saying. A lot of people getting college degrees would be better off getting more practical and technical education or job training than reading Das Kapital. A lot would be better off going to community or junior colleges, at least for the first couple of years.

The only alternative view that has gotten any attention is that of the Occupy crowd who want student loan forgiveness. If anything, this is more asinine. While student loan in aggregate is a concern, the typical student has $25,000 in debt when they graduate. While I think some have incurred that expense needlessly, that’s hardly crippling. It’s less than a loan for a nice car, and typically given on better terms. There are millions with bigger medical bills who muddle through. Spare me your sobs.

What we should be doing is making interest rates realistic, moving the loan industry back to the private sector and allowing student loans to be discharged in bankruptcy (the exemption of student loans from bankruptcy is a huge back-door subsidy). We should be capping loans or linking them, in some way, to potential earnings. But neither side wants to risk the wrath of young voters (or academia).

The final act in this drama, of course, will be finding someone — anyone — to blame other than the people who caused the problem. Thankfully, the Left is hard at work on that. For a while, for-profit colleges were the target, but they aren’t really fitting the bill. The recent meme has pointed to a slight decline in state contributions to higher ed as the reason for such high tuition and so much student debt. But the figure they use in their analysis is dollar per student. The absolute dollar amounts poured by states into higher education has fallen in recent years — Pennsylvania just cut higher ed funding by 25% and want to cut it by a similar amount this year. But overall, the last decade has seen these contributions remain steady or rise. The real factor is the explosion in the number of students (hence the drop in dollar per student) and an explosion in tuition, both driven by cheap subsidized loans.

Never forget that when people use the wrong number in an analysis, it’s because they don’t want to use the right one. The problem is not cheap GOP-controlled state governments, no matter how much Daily Kos wants it to be. The problem is a splurging federal government. We’re spending too much on college, we’re sending too many people to college and we’re building a bigger and bigger bubble. And the real victims, in the end, are the students, who are in debt and unable to find good jobs. And it will probably end the same way the housing bubble did — with huge bailouts for the politically powerful and ruinous debt for the masses.

How can this be seen as a good thing? And how can we keep listening to the people who are causing the problem?

Post Scriptum: I am informed by British friends that the UK is experiencing this problem too. The Labour government massively increased the number of students going to college. As a result, the degrees have become less valuable and there are a lot of unemployed college-educated Brits. The Cameron government tried to reign this in and provoked riots, which just demonstrates that the British haven’t learned anything about economics since Adam Smith died. I’d appreciate some confirmation of this.

Update: Please don’t tell me that the government is profiting student loans. It is … now. And mainly based on accounting gimmicks. Again, the analogy to the housing bubble is unavoidable.

Comments are closed.

  1. Seattle Outcast

    “Green Energy” will never be a bubble because, outside of a few idiots like CM that don’t know physics, nobody has any faith in it and won’t invest their own money. Governments will invest in it, because governments tend to stupid.

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  2. Seattle Outcast

    While student loan in aggregate is a concern, the typical student has $25,000 in debt when they graduate. While I think some have incurred that expense needlessly, that’s hardly crippling. It’s less than a loan for a nice car, and typically given on better terms. There are millions with bigger medical bills who muddle through. Spare me your sobs.

    I’ve been making this argument for over a decade – how is it that the equivalent, or less, or a car payment for a few years is “crippling” to people that should have a good paying job. The answer, of course, is that these people can’t get a better job than Starbucks and can’t even afford a car.

    Fuck ‘em. Stupidity should be painful.

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  3. FPrefect89

    One thing Hal, student loans can be defaulted on, but they can never been taken off the “books” through bankruptcy. It basically hangs over their heads the rest of their life until it is paid.

    I remember a post Lee did about a man who just retired and was expecting to get his social security checks, but because he had defaulted on student loans, all the SS money went to pay off his loans. I tried to find it in the archives, but I need to poke around a bit more.

    The reason they are being given out so freely is the fact that the government will get its money one way or the other.

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  4. Hal_10000 *

    The reason they are being given out so freely is the fact that the government will get its money one way or the other.

    Exactly. However, you know if there is a wave of defaults and hundreds of billions in loans are not being paid, there will be a huge pressure to write them down.

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  5. Seattle Outcast

    But will they bow to the pressure? I’d really like to see them say “pay your fucking bill, asshole” and just fucking ream them. We don’t need another round of sticking it to the taxpayers for other peoples’ stupid decisions in life.

    Also, these morons that decided to blow a shitload of cash on a worthless degree need to be fucking punished in a way that makes them realize just how much of a pain they’ve been to everyone else. If nothing else they need to serve as an example to the next generation on how fucking stupid it is to waste four years and thousands of dollars on something that hasn’t been of any practical benefit to the average person in 50 years.

    It will also serve to deflate the egotistical balloon of liberal arts colleges that continue to tell lies about how a degree in literature or anthropology prepares them for their future careers in whatever they hell they decide to do later on. Sure, this sort of crap was sorta true up until the end of WWII, even when the hippies began graduating college a generation later many people knew it wasn’t true any longer. But rather than adjust to the new reality, the hippies that stayed in academia doubled down on the bullshit in a bid to convince themselves and the world that such crap as “creative writing” taught people “how to think”….

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  6. CM

    Hidden due to low comment rating. Click here to see.

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  7. Mississippi Yankee

    Google alone invested $880 million just in 2011.

    C’mon CM that’s not even couch cushion change to these people.

    “How about a little fire strawman” – paraphrased from Edith Hamilton of course.

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  8. salinger

    But will they bow to the pressure? I’d really like to see them say “pay your fucking bill, asshole” and just fucking ream them. We don’t need another round of sticking it to the taxpayers for other peoples’ stupid decisions in life.

    By ream do you mean imprison (at the taxpayers expense) or are we taking them out back and shooting them?

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  9. Seattle Outcast

    By ream do you mean imprison (at the taxpayers expense) or are we taking them out back and shooting them?

    Garnish their wages until it is paid off. They do this shit for child support all the time, so adding student loan defaulters to the list won’t be a problem, and will actually provide jobs for all those fucking lawyers out there that are chasing ambulances.

    And CM, you’re obviously too stupid to even bother with. Your links are, at best, a joke, and you show zero capability for analyzing and processing information in context. Your only function at this website is to troll, or, as I’m sure you perceive it, to “educate” us. You’re a pathetic failure at both.

    Generally speaking, this will be the last time I acknowledge your existence, except as a point of ridicule.

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  10. salinger

    Garnish their wages until it is paid off.

    Seeing as one of the the points of the post was that these folks cannot find jobs I think this solution is a bit lacking.

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  11. Miguelito

    One version of that narrative goes like so: homeowners are better off financially than renters; therefore we decided it would benefit the economy to subsidize housing through cheap loans, mandates, low interest rates, etc.

    You know, I think the same thinking that those who own houses tend to be more stable and take better care of the home then a renter would, is just as flawed. Previously, it took a lot of hard work, planning, saving, etc to buy a house, and then you have a big stake in the equity and wanted to take care of it. With the cheap mortgages, tons of people doing nothing down, interest only loans, resulted in people “owning” a home that they didn’t really have a stake in.

    While student loan in aggregate is a concern, the typical student has $25,000 in debt when they graduate. While I think some have incurred that expense needlessly, that’s hardly crippling. It’s less than a loan for a nice car, and typically given on better terms. There are millions with bigger medical bills who muddle through. Spare me your sobs.

    You know what would be an interesting political move that would really fuck with a lot of people? Forgive that average amount off all the student loans. You’d essentially free a bunch of those from all said debt, tons more would have a pretty sizable drop of their loan percentage-wise, but the idiots that all got huge student loans without getting a degree that actually is marketable, will still be screwed. Those with the huge loans that got decent degrees are already really ok, and this would be a bit of a gift to them. You’d score huge points with a lot of people, but not bail out the most irresponsible. Those people would still pitch a fit too… but you’d likely come out ahead vote-buying wise.

    It’d still take a shitload of taxpayer money though, so it’s still crappy even this way.

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  12. Seattle Outcast

    Seeing as one of the the points of the post was that these folks cannot find jobs I think this solution is a bit lacking.

    They’ll end up flipping burgers or retail sales, but they’ll eventually find work.

    Of course, you can also deny them food stamps and other aid until their debt is paid.

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  13. Seattle Outcast

    With the cheap mortgages, tons of people doing nothing down, interest only loans, resulted in people “owning” a home that they didn’t really have a stake in.

    I know people that have “owned” their home for nearly a decade and have zero equity. They essentially rent the place from the bank.

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  14. AlexInCT

    By ream do you mean imprison (at the taxpayers expense) or are we taking them out back and shooting them?

    Either works for me. I felt this was a bad idea back when they introduced it. Unlike the GI bill, where at least people were being rewarded for good behavior, this practice of having government guarantee loans has only served to let the lenders off the hook and to let the colleges inflate cost without nary a care for the economic reality of the crap they are peddling. I feel for the idiots that bought into the whole “college grads will on average earn a lot more than non-college grads” nonsense, when it is quite obvious that the average basically lumps people with valuable and high paying degrees with the basket weavers, puppeteers, and gender/wymen studies losers, to name a few.

    I feel even worse for the poor souls that got told to study whatever they wanted, you know, pursue your passions, and then found out that their French Poetry of the 14th Century degrees, to name some of the obscure and ridiculous degrees I know people put themselves in debt to the tune of $80-$200K for, and now find out that their investment was a real bad one because those degrees they were so passionate about are meaningless. But that compassion evaporates quickly when I hear people that have not worked a day in their life complaining about the massive pile of debt they have because they attended expensive, oft Ivy League schools, to study low probability of employment things and now feel jibbed.

    They where had, and it is one particular philosophical outlook, practiced by the people that have made government the disastrous behemoth it is today, that is behind this massive fleecing. I get real angry when the people that fell for the “college is your salvation” silver bullet, then turn to these exact same crooks that rigged the system in a way that shafted them so hard, to pass the buck off to those of us that didn’t fall for this nonsense and knew better. Fuck that.

    Government should have never gotten involved with this stuff. The end result of the changes to the loan system is that college degrees have been horribly devalued, because too many people, far too many of them unqualified and wasting time on degrees that will never return the investment, now hold degrees, and the natural balance between the worth of the degree and its cost have been artificially skewed, and skewed on a logarithmic scale, such that the cost not exceeds the value by orders of magnitude.

    The cure for this problem is to pull government out of student lending completely. Let the risk fall on the esteemed institutions of higher learning and the lenders. I foresee all those schools of humanities, gender or whatnot studies, and other such degrees that never return the investment, quickly drying up, and that’s a boon. Higher learning costs will drop drastically, the value of a degree will go up, and a lot of people will not be racking up the equivalent of a mortgage to end up with just enough qualifications and/or skills to then look down upon burger flippers that they aren’t much more qualified than.

    But this isn’t what government, especially the big nanny state government, wants or would ever do. Higher learning is after all where you brain wash kids into believing the nonsense that passes for enlightened thinking these days. If your cure destroys that lucrative voter churner, you aren’t going to like the cure. And that’s why they will never fix this in any meaningful way. The social engineers are more concerned with keeping that machine going than its viability.

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  15. CM

    Generally speaking, this will be the last time I acknowledge your existence, except as a point of ridicule.

    So no different to normal then.
    Your claim about private investment in sustainable energy is just nonsense. Bitching about links doesn’t change that. But, of course, anything that challenges you is inherently ‘trolling’…….yawn.

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  16. davidst

    Education is already a bubble. Every state with a Republican governor (that is worth a shit) is cutting education left and right. Along with everything else. I’m about to jump ship and find a more stable job.

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  17. Hal_10000 *

    I hear you, David. We’re joking that we’re slowly moving from a state-supported university to a state-located university.

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  18. Seattle Outcast

    For the record – I don’t really think the government should be involved in funding higher education on any level, so I’m all for the end of state-supported universities and colleges on a general level. Many of these institutions have massive endowments from alumni, to the tune of billions of dollars, that they never touch while still receiving taxpayer funds.

    For profit institutions, which are generally recognized as the better ones anyway, should be the model. I’d support legislation that gradually (ten years, max) cut loose the apron strings of state funding for the vast majority of campuses.

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  19. AlexInCT

    Education is already a bubble. Every state with a Republican governor (that is worth a shit) is cutting education left and right.

    Are they cutting education, or are they cutting bloated budgets, which then results in the administrators, the ones that cause that bloated budgeting in the first place, protecting their own asses and cutting teachers, kind of like we see happen whenever big government entities are told to trim the fat and then immediately resort to cutting the more essential services – prison guards, policemen, firemen, and so forth instead of paper pushers at the bloated government agencies – in order to panic the people into ponying up more money they don’t have anyway?

    There is a distinction there, and there is a problem that is being abused by those that are abusing the system in the first place. If we had more control over who got cut when everyone gets told to tighten their belt, I bet you the system would work better. Useless $125K+ a year administrators that really don’t do much and are over represented could be done away with, and more teachers could be hired. In my small town we have 5 of these Admin types at one school – that’s so 3 of them can always be available since other “obligations” keep one or two of them away during the regular course of the year – and a few more teachers could be hired in addition to saving the town money. This phenomenon seems to recur at every school, and at every level (kindergarten, elementary, middle and high), all across the place, and we tax payers foot the bill. In the mean time we get told we have too few teachers. Go freaking figure.

    Along with everything else.

    Who cares if there isn’t any money to pay for this stuff? It’s essential or a right! So let’s keep pretending we can keep doing it, that is, until everything implodes and we end up with nothing but anarchy, because we didn’t deal with the reality that we can not afford this bloated system. If I can not afford my bills I have to cut back. Government needs to be doing the same: not taking even more of my money so it doesn’t have to do more with less, like I am being forced to do.

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  20. davidst

    I don’t know what they’re doing exactly. From my perspective it looks like plenty of administrative positions are being cut. Plenty of top level administrators leave voluntarily (perhaps for states with more funding) and some positions are being consolidated (I’m pretty sure vice chancellor and provost aren’t always the same position).

    As for what we could afford… we could afford it before. We can’t afford it now. Now is the time for cutting so that’s what we’re doing. State that haven’t gotten the message yet… well they were probably richer states to begin with. Countries that haven’t gotten the message yet… richer countries. The cuts will happen in due course.

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  21. salinger

    Seems to me the crux of the question is whether one believes that education is a benefit to the society at large or to the individual. If one believes it benefits the aggregate then public funding makes sense if on the other hand if one believes it is a personal benefit, then higher education will return to the realms of the well heeled.

    Once this is determined by the majority then curriculum can be tackled.

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  22. AlexInCT

    I don’t know what they’re doing exactly. From my perspective it looks like plenty of administrative positions are being cut.

    Not seeing much of this in my local system or across most of the CT systems I looked at. They are hammering the teachers and programs and the bloat stays on.

    As for what we could afford… we could afford it before.

    Actually we could not afford it then either, but slight of hand made it look like so. Any system predicated on other people’s money that grows out of control like our government has been doing, is doomed. Good times hide that fact.

    State that haven’t gotten the message yet… well they were probably richer states to begin with.

    Actually as we are discovering despite the efforts to conceal these facts, many of those states, which where coincidentally blue states, ended up getting massive chunks of that porkulus wealth transfer package, and they used that “shovel ready project” money to keep the bloated bureaucracies alive this long. Without it the layoffs would have been needed 3 years ago. They tried to do a porkulous part deux to keep that gravy train riding and the votes in the bag, but tax payers seem to have derailed that hit job.

    Countries that haven’t gotten the message yet… richer countries.

    I just recently read that the Dutch, which had one of the most prosperous economies and touted collectivist systems in Europe, have finally admitted they are in deep doo-doo, and that without serious austerity measures, their system is doomed to collapse. Nobody is rich enough to support a state where the moochers outnumber the producers and the balance keeps shifting in favor of the moochers. But the collectivists and free loaders whose votes they depend on, want to pretend otherwise. Go figure.

    The cuts will happen in due course.

    I pray they happen sooner than too late, which seems to be a manifest of these blue states. Look at CA.

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  23. AlexInCT

    Seems to me the crux of the question is whether one believes that education is a benefit to the society at large or to the individual. If one believes it benefits the aggregate then public funding makes sense if on the other hand if one believes it is a personal benefit, then higher education will return to the realms of the well heeled.

    Seriously? I can come up with a ton of things that are a benefit to society. The problem is that societies have finite resources, and benefit or not, can not afford to pay for it all.

    Nobody is advocating the end of the education system. I am pointing out that in too many cases the cost far exceeds any and all benefits, and that’s a dumb thing to do. Education is of value, yes, but what passes for education these days at the primary level, the hard core leftist indoctrination of kids at all levels starting even in god damned kindergarten, at the expense of learning real and valuable things, makes it all bunk. When you graduate a ton of Gaia worshipping idiots that can’t think their way out of a paper sack and believe fairness and self esteem are the most important concepts to believe in, well, you threw pearls to swine.

    College has also become a joke. Charging people tens of thousands of dollars a year to waste time studying idiotic things that prepare you for no job other than to flip burgers, is a waste of resources. Them is the facts.

    Education IS a valuable thing, but it is valuable it if teaches people the things that prepare them to be contributing members of society, not just leftist drones.

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  24. Miguelito

    To go along with the cutting education budgets, then having administrators keep their fat pay (along with new buildings and all) while killing teachers and stuff to pluck the heart strings…. there was just recently mass wailing and gnashing of teeth over pink slips for people being laid off in the SDUSD… then this bullshit. Note how the article starts out talking about the >75k netbooks before they talk about ipads.

    At least people are waking up. Or some at least if the comments on there are any indication.

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  25. davidst

    We’ll never come close to cutting enough voluntarily. Ron Paul was the only candidate willing to do it and he is marginalized.

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  26. FPrefect89

    Exactly. However, you know if there is a wave of defaults and hundreds of billions in loans are not being paid, there will be a huge pressure to write them down.

    That is one of the problems. Why should they get written down? Just to create another bubble? It is the same problem I had when first Bush Jr. put into the American lexicon, “Too big to fail.” Now what isn’t too big to fail?

    Make them pay off the debt, if they have to do it flipping burgers at McD’s or serving my coffee from the multitude of local Starbucks. Or, if they refuse to pay off, they lose what social security they would have received. I started going back to school a bit more than a year ago, I am using federal student loans, because they are cheap, if they were not available, I’d be using private. I don’t mind doing this because I am not studying underwater basket weaving, but working on a science degree. The reason I am doing loans for school is to pay off higher interest debt, then with that paid for, wipe out the student loans quickly with no other debt to pay for aside from a mortgage.

    Unfortunately, those with the BA degrees do not have that many options in a crappy job environment. That does not mean that bad behavior should be rewarded.

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  27. Mississippi Yankee

    We’ll never come close to cutting enough voluntarily. Ron Paul was the only candidate willing to do it and he is marginalized.

    Ron Paul was the only candidate willing to say he would do it and he is marginalized by his own words and deeds.
    There, fixed it for ya.

    If Ron Paul was really serious about cutting federal spending WHY is he staying in a race he has absolutely no chance of winning? Could it be that matching federal dollars kicked in TODAY?

    We already knew Newt’s reason, he so much as admitted it was to recoup campaign losses. Dr. Paul doesn’t even have that much honesty.

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  28. davidst

    I assume Ron Paul is in it for the ideology. He’s been ideologically consistent enough that that makes sense. He stays in just to continue getting the message out and hopefully next time there is an election there are more libertarians in the country.

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