Column: Would forgiving student debt drive up inflation? Only if you’re using lousy math

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Sens. Bernie Sanders and Elizabeth Warren embrace after Tuesday's debate.

Sens. Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.) ran against each other for the Democratic nomination for president in 2020, but were in agreement on the need to cancel student debt. (Associated Press)

With a deadline looming in less than two weeks for President Biden to decide what to do about student debt, it shouldn’t be surprising that conservatives have been agitating with increasing intensity against relief for the borrowers.

Among their principal arguments recently is that debt relief would be inflationary.

The deficit hawks at the Committee for a Responsible Federal Budget, for example, fretted last week that forgiving even $10,000 in student debt per borrower would be so inflationary that it would destroy a decade’s worth of inflation reduction from Biden’s newly enacted Inflation Reduction Act.

Student debt cancellation will increase the wealth of millions of Americans who need it the most and promote racial equity — all without increasing inflation.

Mike Konczal and Alí Bustamante, Roosevelt Institute

A bill filed by Republican members of Congress Elise Stefanik of New York, Patrick McHenry of North Carolina and Jason Smith of Missouri cites canceling student debt as among “harmful economic policies” by the Biden administration that have “exacerbated inflation and led to skyrocketing prices.”

I’ve written about the fatuous arguments against student debt relief before. The inflation angle is relatively new, however, presumably because inflation is top of mind for voters as we approach the midterm elections. It’s natural, in a way, for opponents of debt relief to bootstrap this kitchen table issue to their long record of opposition.

As it happens, however, they’re wrong. Canceling student debt, even at higher levels, won’t drive inflation. The critics are using faulty math to make their point.

“Student debt cancellation will increase the wealth of millions of Americans who need it the most and promote racial equity — all without increasing inflation,” according to Mike Konczal and Alí Bustamante of the Roosevelt Institute, who expertly refuted the CRFB’s analysis the day after it appeared.

Before getting into the economics of the issue, a few words of context.

Biden’s deadline actually applies to only a portion of student debt policy: the forbearance that has been granted borrowers since March 2020 in recognition of the burdens of the pandemic.

Since then, borrowers with federally backed loans (which is more than 90% of the indebtedness ) haven’t had to make payments, and interest hasn’t accrued on unpaid balances in that time.

Under current policy, the payment freeze will end on Aug. 31. Biden could extend it by executive order; the Washington consensus is that he will do so, perhaps to the end of this year so payments won’t have to resume prior to the elections.

The other aspect concerns cancelling student loans. For many of the 45 million borrowers currently owing a total of about $1.8 trillion today, this issue is far more consequential.

Biden pledged during his presidential campaign to forgive $10,000 per borrower. Progressives such as Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have advocated cancelling $50,000. Others support cancelling full balances for some middle- and low-income borrowers. That decision doesn’t have to be made immediately, though some Democratic advocates think the policy would be favored by Democratic voters in November.

Some traditional arguments against student debt relief can be easily dismissed. One is that forgiving debt today would be unfair to borrowers who shouldered the sacrifice of paying off their loans. As I wrote in the past, this is the argument from pure selfishness and a formula for permanent governmental paralysis.

It’s a favorite among conservatives and those whose comfortable affluence makes them insensitive to the burdens of others. In 2020, responding to a survey of economists conducted that year by the University of Chicago, David Autor of MIT commented, “Alongside my kids’ student loans, I’d like the government to pay off my mortgage. If the latter idea shocks you, the first one should too.”

The truth, of course, is that in a healthy society government policy moves ahead by taking note of existing inequities and striving to address them. Following the implications of the “I paid, why shouldn’t you” camp to their natural conclusion means that we wouldn’t have Social Security, Medicare or the Affordable Care Act today.

The unfairness argument also overlooks the generations of college students whose education was financed by taxpayers to a far greater extent than today. Tuition at the University of California, for example, was free to state residents from its founding in the 1860s until 1970.

UC tuition today is $13,104 per year for residents and $44,130 for nonresidents, and constitutes what the UC says is its “largest single source of core operating funds.” Should today’s tuition-burdened students demand back pay from those pre-1970 enrollees?

Another common argument is that debt cancellation would be regressive — that is, it would disproportionately benefit the rich. The heart of this argument is that wealthier households carry more debt than low-income households, so they would gain more from reducing their balances.

But that’s math-driven misconception. The truth is that the student debt burden falls much heavier on lower-income borrowers than the affluent.

Contrasting borrowers in the poorest 10% of income earners with those in the richest 10%, Laura Beamer and Eduard Nilaj of the Jain Family Institute showed that although “higher-income groups experience higher median debt burdens ($23,160 for the richest decile and $16,094 for the lowest-income decile), this difference is small compared to the difference in median incomes ($60,193 for the richest decile and $16,770 for the lowest-income decile).”

Even cancelling $10,000 in debt would be a greater boon for lower-income borrowers than the rich. Among borrowers with $20,000-$40,000 in income, 234,000 carry balances below $15,000, Beamer and Nilaj calculated. About 57% of borrowers in that income range have balances of less than $20,000, compared to 43% of those with income of $75,000 or more.

Nor is there any doubt that debt cancellation would have a strong impact on racial and ethnic economic inequality. About 75% of Black borrowers have current loan balances greater than the original loans, due mostly to difficulty in making repayments, compared to 50% of white borrowers.

Once repayments resume, the New York Federal Reserve Bank reported in April, “lower-income, less educated, non-white, female and middle-aged borrowers will struggle more in making minimum payments and in remaining current.”

That brings us back to the newest wrinkle in the anti-relief argument: That debt relief will be inflationary and add to the deficit.

The CRFB is perhaps the most ferocious deficit scold among conservative think tanks in Washington. It’s a full-spectrum fiscal critic. To its credit, it was critical of the GOP’s massive tax cut for the rich in 2017, but it has also pursued benefit cuts in Social Security and Medicare, a reflection of the long patronage of the late hedge fund billionaire Pete Peterson, who conducted a long campaign to shrink those programs.

The CRFB analysis of student debt relief asserts, “Simply extending the current repayment pause through the end of the year would cost $20 billion — equivalent to the total deficit reduction from the first six years of the IRA …. Cancelling $10,000 per person of student debt for households making below $300,000 a year would cost roughly $230 billion.”

Put these two options together, the group states, and “these policies would consume nearly 10 years of deficit reduction from the Inflation Reduction Act.” Its analysis further states that “debt cancellation would boost near-term inflation far more than the IRA will lower it. A $10,000 cancellation, according to the CRFB, could add .15 percentage points to the inflation rate “up front and create additional inflationary pressure over time.”

Konczal and Bustamante found some suspect math in this reasoning — specifically the comparison of apples to oranges by applying formal federal budget rules instead of real-world accounting.

Under the formal rules for credit programs, cancellation of debts must be treated as though the foregone interest and principal payments all occur immediately, in year one, when in fact they’re spread over the life of the loan. The Inflation Reduction Act, similarly, is treated as though all its inflation effect occurs in the first 10 years, when it’s also spread over two decades or more.

The CRFB’s analysis therefore overstates the impact of debt cancellation on the IRA’s inflation reduction. This flaw should be obvious. Spread over the decades-long terms of student loans, the foregone debt payments come to about $13 billion a year.

“It’s about allowing borrowers to keep $13 billion a year in income,” Bustamante told me. “That comes to about 0.08% of total personal consumption.” For an economy with about $16.5 trillion in annual personal spending, $13 billion is “insignificant when it comes to inflationary pressure.”

Nor is there any evidence that people would go out and spend that money, creating inflationary demand. The evidence from more than two years of debt forbearance thus far is that borrowers have used it to improve their household balance sheets, paying off high-rate credit card debt and saving the rest.

That’s not even to mention what has been driving inflation over the last year. It’s not demand-side personal consumption, but constraints such as supply-chain disruptions and restricted supplies of oil. Both factors have decreased in recent months, which is why the month-over-month inflation rate in July fell to 0.0%. (The Federal Reserve may be making the same mistake in its inflation-fighting campaign.)

The power of inflation as a scare word just now must explain the rhetoric employed by Stefanik, McHenry and Smith when they introduced their attack on debt relief in July.

Stefanik represents the sixth-poorest congressional district of New York’s 31, with a median income of $57,320. McHenry’s is the fifth-poorest in North Carolina, with a median income of $53,189. Smith’s is the poorest in Missouri and the 22nd-poorest of all the 435 districts represented by fully voting members.

That suggests that their own constituents would be in line for the most help from student loan forbearance and cancellation, including help dealing with prices at the pump and the supermarket. In this case as in many others, we must ask who these politicians are working for — certainly not the people who elected them.

Clearly, student debt relief will be a wealth-producing, economy-growing initiative. It won’t create unfairness, but redress economic injustice that has been building for decades. Biden’s proper course should be obvious.

This story originally appeared in Los Angeles Times.

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