Most Americans say the most important problem facing the country is inflation — and President Joe Biden just made it worse. His administration announced last week it would extend yet again the emergency suspension of student loan repayments, even as his frenemies on the left are urging a program of complete forgiveness of all student debt.
Granted, the macroeconomic impact of last week’s move is not huge. But it’s not nothing, either. And it’s an example of a larger phenomenon: Many progressive advocacy groups developed their policy ideas during a prolonged stretch of deficient demand, and they have failed to adapt them for a new set of economic circumstances.
Back in November 2020, after Biden’s victory was clear, a fairly ambitious student loan forgiveness program seemed like a good idea. The economy was still uncertain, and Biden was likely facing a Republican-controlled Senate that would probably oppose additional stimulus measures or support them only if regressive tax cuts were attached. Under the circumstances, student loan forgiveness seemed like an appealing way to use the president’s executive power to get cash into people’s pockets.
Then a series of unlikely events happened. First, Senate Majority Leader Mitch McConnell agreed to pass a $900 billion stimulus bill during the lame-duck session, out of an apparent belief that this would help Republican Senate candidates in runoff elections in Georgia. Then both Republicans lost anyway. Then the newly installed Biden administration came to Congress with an audacious $1.8 trillion package called the American Rescue Plan. And then a 50-50 Senate, with the pivot point controlled by the relatively moderate Joe Manchin of West Virginia, agreed to appropriate more or less exactly what Biden asked for.
That gigantic fiscal infusion supercharged demand in 2021, fully closing the output gap and putting inflationary pressure on the economy. Pressure then got superdupercharged by Russia’s invasion of Ukraine and the ensuing sanctions.
In the fall of 2020, I supported a broad-based student-loan-forgiveness program. As the facts changed through 2021, I changed my mind.
The economy no longer needs stimulus — in fact, it needs to restrain demand. The Federal Reserve is therefore engaged in an ongoing series of interest rate hikes. Unfortunately, restraining demand by increasing interest rates also slows investment, which perversely hits the supply side of the economy.
To use an example: Rental inflation is in part a function of the supply of houses. But interest-rate increases raise the cost of building more homes. So to the extent that it’s possible to reduce inflation by directly curtailing consumption, that can be helpful. And the most progressive approach is to curtail the consumption of the affluent. (Taxing the rich to reduce the deficit is one great way to accomplish that, and the White House seems to be warming to this approach.)
Non-collection of student loans, meanwhile, has the opposite effect. Between canceled interest and the erosion of principal due to inflation, the prolonged pause has already saved student debtors a bunch of money.
But the benefits are awfully lopsided. As Marc Goldwein of the Committee for a Responsible Federal Budget shows, medical doctors have received $48,500 in relief versus $29,500 for people with law degrees, $4,500 for people with bachelor’s degrees, and a measly $2,000 for those who didn’t finish their degree and are objectively most in need of help.
Restarting loan payments would drain some demand out of the economy, and would do so by disproportionately targeting those most able to pay.
Much of the left wants Biden to go in the opposite direction. Wisdom Cole, the national director of the NAACP’s youth and college division, urged him to “just cancel it” because “student loan debt is a racial and economic justice issue that stains the Soul of America.”
Given current economic conditions in the U.S., this is an irresponsible approach. College graduates have seen their overall wealth soar during the pandemic, and the Federal Reserve’s survey of consumer finances shows that households with higher levels of student debt also have higher incomes.
A majority of the public, meanwhile, has $0 in student debt. If you limit your analysis to people under 30, the median student loan balance is still $0. For African-Americans, it’s $0. Most people do not go to college and do not incur student loan debt, and those non-debtors have lower incomes on average than the people who do go to college and do have debt.
Restarting student debt collections would restrain inflation at the expense of a disproportionately high-income minority of the population. Broad debt cancellation, by contrast, would boost inflation.
Debt relief advocates used to recognize this logic. In June 2019, Representative Ilhan Omar called student debt relief “stimulus for working people across our country.” In April of that year, Senator Elizabeth Warren said it would “give our economy a boost.” The director of education, jobs and power at the Roosevelt Institute, a left-leaning economic policy think tank, said in December 2020 that debt relief “can help stimulate the economy at a moment when we need economic stimulus.”
All this analysis was correct when they said it. But the same reasoning now applies in the other direction. The U.S. has since enacted trillions of dollars in stimulus and seen a dramatic improvement in the labor market — and the real value of student debt has been eroded by inflation. The country now needs to reduce the volume of consumer demand in the economy rather than increase it.
Of course, progressive interest in the student debt issue is part of a broader critique of how higher education financing works in the U.S. And that argument does not depend on the ups and downs of macroeconomic circumstances. But if the left wants fundamental reform of higher education finance, it should build a legislative coalition for that.
Temporary student-loan forgiveness is an idea that was cooked up under different economic and political circumstances, and the case for it has been superseded by events. Some limited forgiveness for low-income borrowers who are genuinely in dire straits may be appropriate — but it should be paired with a return to debt collection from the affluent majority. It’s one of the best and fairest tools available to reduce inflation.
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