On Wednesday, President Biden announced a plan to reduce the debt of most students by $10,000, which gives those with low incomes the possibility of accessing double that figure. Debt relief has been much less generous than a good number of progressives wanted, but more than many expected. Assuming it survives the legal hurdles, it will be good for millions of Americans, though, as I’ll explain below, its impact on the broader economy will be limited.
In relation to this plan, two big questions arise. The first is whether it will increase inflation significantly, as its critics claim. The answer, if you do the math, is clearly no. The second is whether it is a good measure. The answer should be: compared to what?
With regard to the accounts, you have to pay attention to the scale. If one is concerned about inflation, the relevant figure is not the final cost to taxpayers, which can be several hundred billion dollars, but the effect on private spending. And the truth is that I don’t see a way to maintain that it will be important.
Consider the fact that before the Covid pandemic—that is, before the government suspended federal student debt repayment requirements—the total bill for the federal loan program was about $70 billion a year. Since most student debt is in large loans, well over $10,000, the payments will be reduced by much less than that total. So we’re talking at most tens of billions a year in a $25 trillion economy.
Or, if you prefer, compare the proposal to the 2021 US Bailout Plan, which can be said to have fueled inflation. That plan spent $1.9 million in a single year. Biden’s new program is unlikely to increase annual spending by even a fortieth of that figure.
I am not the only one who comes to this conclusion. A preliminary analysis by Goldman Sachs estimates that student loan payments will drop from 0.4% to 0.3% of personal income. Is that supposed to fuel the bonfire of inflation?
Wait a minute, there’s more. Biden’s plan also calls for an end to the pandemic suspension of payments, which will suck much more cash out of the economy than debt relief will return.
So even pessimists are talking about adding, at most, a small fraction of a percentage point to inflation. To me, even that seems like a lot.
Add to this the fact that the Federal Reserve is now more than alert to the risks of rising prices, and we see that the warnings that debt forgiveness will be dangerously inflationary are grotesque, so grotesque that I can’t help but suspect that, in many cases, they come from people who would rather take a cheap shot than expose their true motives for opposing the program.
Now, is the program any good?
The right rejects debt reduction for moral reasons. “If you take out a loan, you pay it back, period,” tweeted Republicans from the House Judiciary Committee. On what planet? In the United States, regularized bankruptcy proceedings have existed since the 19th century. The idea is to give a second chance to people and companies with crippling debts.
And many people have benefited from these processes. For example, companies owned by a certain real estate tycoon named Donald Trump have filed for bankruptcy six times. During the pandemic, many business owners received government loans that were later forgiven.
Now, it could be argued that students who had applied for a loan were not going through the difficulties of facing a pandemic. It’s true. But many had been duped by the fraudulent advertising of for-profit colleges, and millions went into debt but never received a degree. Millions more contracted debts that only served to obtain a certificate that gave them access to a labor market devastated by the global financial crisis that took many years to recover.
So let’s not think that this is a random gift. Although not all, many of those who will benefit from debt forgiveness are, in fact, victims of circumstances beyond their control.
Will this debt relief give those victims a second chance? At least to some extent, yes. There is compelling evidence that freeing ex-students from outstanding debt makes it easier for them to move to better jobs and increase their income. And since higher incomes mean more taxes collected in the future, the true fiscal cost of debt reduction is likely to be lower than the numbers we’re hearing.
Even so, there will be some fiscal cost. Is this the best way to spend that money?
As I have already said, the question is: compared to what? If I had a choice, I would spend the money on children rather than adults. In fact, helping families with children made up a significant part of Biden’s original spending plans. The president was unable to get those plans approved by Congress, but debt forgiveness is something he is likely to accomplish by executive order.
And a question for Republicans who complain that the plan does nothing for America’s blue-collar workers who didn’t go to college: what do you propose to do for those folks, aside from cutting taxes on the rich and claiming profits will trickle down to those below?
So they would do well to ignore the inflation alarmists, whose numbers don’t add up. They would also do well to assess Biden’s plan against political reality, that is, against what the president can actually do. From that perspective, it looks pretty good.
Paul Krugman is a Nobel laureate in economics. © The New York Times, 2022. Translation of News Clips.
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