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August 26, 2014

"A Fiscal Reckoning for Oregon's 'Pay It Forward'"

My advice: never ignore "fundamental laws of finance".

Surely, many are wondering: How could Pay It Forward be so expensive if students would be paying for their own educations, perhaps even more than they do now? The answer is that it costs money to move money through time. Pay It Forward enthusiasts often ignored this fundamental law of finance.


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Ted Craig

Apparently, Pay It Forward doesn't work for anything:


Oregon is prone to this foolishness. Portland has long believed Tax Increment Financing is a boon. It is easy to see how people would believe such nonsense would transfer one foolishness to other areas.

The other area where something similar is happening is public pensions and benefits. Portland's transit agency, TriMet, is legendary for deferring maintenance costs, as well as retirement pension and medical costs. The current result is the opposite of the story above with the spending being deferred into the far future. The results are, however, the same - catastrophe.

Both pay it forward or spend it forward seem to be the battle cry at the end of the Progressive era. It is unlikely to end well.

Mark Sherman

Jack PQ

Neglecting the time value of money is indeed a blunder.

But the article does not discuss the other huge problem with such plans: moral hazard and adverse selection (a 'lemons' problem). If students pay back something proportional to their future income, first the plan will attract mainly students with lower future income prospects, and second, students will choose less lucrative careers than they would have otherwise (the second effect may be small, I admit, but it's there).

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