Economic policy

Reviews | Biden’s student debt relief plan is very good economic policy

In August 24the Biden White House announced his project to relieve Americans in debt. The amount of debt cancellation can reach $20,000 for Pell Grant recipients, and otherwise $ten,000in both cases for people whose annual income is less than $125,000 and married couples earning less than $250,000.

Other elements of the plan will help ease the debt burden, such as a 5 percentage cap on loan repayments to monthly income – but these are the most important numbers.

Let’s review the arguments for and against relief. This is an intra-Democratic debate as much as a partisan one. You can guess where the Republican Party stands – totally opposed to the idea of ​​debt cancellation. No ambiguity there. But in the case of the Democrats, we have serious people on both sides. Critics don’t hold water, and politics should be welcome.

“The impact on inflation of larger amounts of relief is generally overstated. Much more wouldn’t be bad.”

Nothing substantial likely happens in Congress for the rest of this year, which means other major policy changes hinge on action by the White House executive. The legal limits of President Biden’s sphere of action have been disputed, so the new debt relief package could become entangled in legal challenges.

During his election campaign, Biden pledged at least $ten,000 of relief, disappointing those who wanted more. Calls for higher levels are disheartening for an administration spooked by the ongoing inflation spike. The threat of inflation is disputed, but there is no doubt that the price increases of the past year have not yet calmed down. This appears to be the Republicans’ favorite whipping boy, although his power over other voter concerns, such as the potential for an authoritarian turn of the federal government, can be questioned.

The cost of debt relief is easily misunderstood. We get the main numbers for the total cost, maybe $300 billion, but the total amount would have no immediate impact on consumer spending, so no immediate effect on the price level. On the contrary, as every borrower knows, the repayment of his debt is spread over years, even decades. The impact on inflation depends on the extent to which savings on monthly payments are channeled into consumer spending.

The Biden administration has maintained a moratorium on student debt repayment since taking office. His plan is to restart payments in January 2023. Since these payments, even reduced by the new relief, reduce the current purchasing power of debt holders, the impact of the debt cancellation policy is not inflationary, but precisely the opposite, whenever the pandemic-related pause in payments comes to an end, as economists Paul Krugman and Dean Baker have pointed out. In the context of the current economy and current politics (including the pandemic ​pause” in payments), the debt relief policy is deflationary in the longer term. Since the administration is also extending the break until the end of 2022, over the next four months, there may actually be a positive effect on the price level. How many?

Suppose the plan leads to $300 billions in relief, as many outlets predict. If required payments resume next year, the positive impact on inflation is limited to the next four months. What is the inflationary impact of an extra dollarten billions of dollars (300 billion spread over ten years pro-rated over four months) of additional expenditure, compared to total personal consumption expenditure of $4.25 trillion in the second quarter of this year? Not a lot. Here, the fear of inflation belongs in the territory of the laugh test.

Using economic modeling rather than a simple calculator, economists at Bard College’s Levy Economics Institute found evidence for an equally limited impact on inflation if the government were to cancel all student debt (now at $1.6 trillion), and their analysis of 2018 does not include any account of any payment break. In models, debt relief provides a Keynesian boost to employment and includes a variety of additional social benefits, but this study was carried out four years ago. The likelihood of a rise in GDP on the back of spectacular job growth this year is less, compared to 2018.

Envy is perhaps the sentiment that comes up most often in the debt relief debate, with opponents claiming some version of ​I paid my debt, it’s not fair that someone else gets a break. It is very personal for both parties – those who have paid and those who are trying to pay – and is therefore politically significant. But that’s politically stupid. Any reform could help someone while not helping someone else for whom the recourse no longer applies. Is it fair to provide a benefit to someone that someone in the past has not received, because there was no program to provide that benefit? According to this line of thought, no reform would ever be tenable.

Another common complaint is that Joe Sixpack will pay student debt to a reputable Ivy League attorney. It doesn’t work that way. No one is repaying someone else’s loans. Nobody’s taxpayers’ money is earmarked for something mythicalloan repayment account. Next year’s taxes depend on total federal spending, the state of the economy, and more frivolous factors. It is true thatall things being equal,” the cost of the Biden plan is reflected in total spending, paid for by borrowing or taxes. But all things are never equal, so the plan’s impact on your taxes is completely unknowable.

The biggest dilemma, envy aside, is that relief for existing borrowers does nothing to solve the cost problem for future students. Schools might be tempted to increase tuition fees, knowing that the borrowing capacity of some of their current students is increased after the windfall of debt relief.You have $ten,000 embossed, so you can borrow another $ten,000.” A pressure in the other direction is that higher tuition fees discourage new students from entering higher education without any certain prospect of relief in the future.

The politics of envy is somewhat complicated by the confusion over debt relief for the wealthy. The value ofmeans-tested” is supposed to be a budgetary saving, but virtually all analyzes indicate that the budgetary savings resulting from the exclusion of very wealthy families from any benefit are minimal. The big dollar savings are for the large upper middle class.

The upcoming relief will be limited to people whose income does not exceed $125,000and families below $250,000. These amounts are well above median levels, but they still expose many high-income families to ongoing liabilities. Not surprisingly, in dollar terms, most debt is held by those with higher incomes, since the ability to borrow depends primarily on income. These income caps should therefore effectively reduce the cost of the program considerably.

Opposition to means testing is often justified by reference to the administrative costs of distinguishing between eligible and ineligible. The administrative cost, however, is a function of the investment in administration. The increased funding for the Internal Revenue Service passed through the Inflation Reduction Act will help. In general, the long-term shrinking of the federal public service outside of defense and homeland security makes it more difficult to manage all types of programs. This problem is bigger than student debt.

Some, fascinated by modern monetary theory, frequently claim that fiscal costs are meaningless because purchasing power, for all intents and purposes, is capable of assuming very large debt relief. I agree that in economic terms there is room for much greater relief, but the political constraint remains. Unless the general public is converted to MMT’s view, there remains a political limit to the extent of debt relief, albeit disguised as an aversion to providing relief to ​the rich.”

Analysis of the distributive impact of debt relief—the impact on income inequality — is tricky. It depends on what you compare to what. A simple catch is that the $ten,000 the relief cap will still help many middle and working class Americans in percentage terms (the increase in money available relative to their income). For the rich, if they were eligible, it would be a drop in the bucket. There is also an impact on the reduction the racial wealth gap.

We are bound to see criticism of any policy in the form ofThe money we waste on debt relief for the rich could buy millions of hamburgers for the homeless. Of course, those same critical parties would likely oppose the latter option for one reason or another. The truth is that such an alternative is not currently on the table, and debt relief policy, once in the box, will not constrain fiscal policy under the next Congress. The comparison makes no sense.

Even after debt relief, the general appeal of Bernie Sanders’ plan for free college will remain, as long as tuition fees remain exorbitant. The impact on inflation of higher relief is generally exaggerated. A lot more wouldn’t hurt.