If You're Going To Do Gimmicky Handouts, Why Student Debt Relief Over A Gas Tax Holiday?
Democrats are captured by a narrow, highly educated demographic, and it's costing them.
It looks like we may be about to get some amount of student debt relief from the Biden Administration via executive action. Of course, we’ve already had a lot of student debt relief — repayments and interest accruals have already been paused for more than two years, and foregone interest constitutes substantial relief itself, about $60 billion a year.
Debt cancellation is a bad idea, but it might also be a good idea. Here’s what I mean by that:
As a general matter, student debt relief is bad because it’s distributionally unfair and, in the current economic context, it’s inflationary. (It’s inflationary for the same reason any fiscal stimulus is: It gives people more money to spend, which they go out and use to chase a quantity of goods and services that can’t rise in line with the increase in money.) Debt relief is especially bad if the amount of debt relieved is large and untargeted — such a program would give outsize benefits to high-income professionals like doctors.
The specific debt relief plan that comes out of the White House may nonetheless be good, because the Biden administration is politically constrained in its options on the issue. Targeted debt relief could make it politically possible to end the interest and repayment pause, and it would be much more distributionally palatable than the more expansive cancellation proposals.
As I wrote a few weeks ago, Biden has good reason to fear the consequences if the pause is terminated shortly before the midterm elections. This would alienate tens of millions of borrowers, but a targeted debt relief program — say, relief of $10,000 of debt for borrowers up to a moderately high income level — would greatly soften the blow politically. And it would greatly change the inflation calculus: While debt relief is inflationary, ending the interest and repayment pause is disinflationary, because it will cause a lot of households to start devoting more cash to loan payments and less to trying to buy goods and services (or homes).
Limited and targeted debt cancellation also looks a lot better from a distributional perspective — or an “equity” perspective, as the Warren voters would call it — since the benefits would be relatively larger for the debtors with lower balances, who tend to have lower incomes. The current pause on interest accrual, much like the pie-in-the-sky proposals for total cancellation, applies to a person’s entire government loan balance, which means it overwhelmingly provides benefits to the most indebted borrowers, who tend to be professionals (especially medical doctors) with extremely high earning potential.
All that said, I’m pretty annoyed that student debt relief has gained so much more momentum than a gas tax holiday, as far as gimmicky and awkwardly expansionary economic policies go.
The political impulse behind debt relief and a gas tax holiday is similar: People feel pressed by a financial burden, whether that’s servicing a student loan or filling a gas tank after Russia invaded Ukraine. The government can relieve either burden by giving people money — which is effectively what happens when you relieve a debt or suspend a tax.
Unfortunately, both of these policies would be inflationary. They put more money in people’s pockets at a time when it’s hard to expand the supply of goods and services. But there are some key differences that make a gas tax holiday a better choice:
We’d export some of the inflation a gas tax holiday creates. By raising demand for gasoline, a US gas tax holiday would (modestly) push up the global price of oil, but a lot of that price increase would be paid by consumers in other countries. Relieving the tax would make it relatively attractive to sell gasoline in the US rather than abroad, so to the extent infrastructure allows petroleum products to be redirected, we’d capture a larger fraction of the world’s gasoline supply, making a real increase in domestic consumption possible.
Almost everybody uses gasoline. The vast majority of American adults use cars, and the vast majority of those cars run on petroleum products. So, a gasoline tax cut would mean higher real income for most Americans.
On the other hand, the vast majority of Americans have no student loan debt — only about 15% of adults do — and would draw no personal benefit from debt cancellation. But they would incur a cost: People receiving debt relief would try to spend more money, for example on housing — remember, one of the explicit arguments for student debt relief is it would help people buy houses — and because most goods and services have relatively inelastic supply right now, that higher demand would just lead to higher prices. As such, by fueling inflation, student debt relief would cause most people’s real incomes to fall. Bad!
So, why the ongoing clamor for debt cancellation, and why does it get so much deference and attention from Democratic leaders, such as Chuck Schumer, who wants $50,000 of debt cancellation per person — even when there is no apparent momentum for a much more politically sensible gasoline tax holiday? It’s because the Democratic Party has been captured by the interests of highly educated people generally and the young, highly educated people who staff relevant government, media, and activism institutions specifically. Once again, they are making choices about priorities that ignore the fact that a large majority of Democratic voters do not hold a bachelors degree.
And that’s very annoying, even though the Biden administration may be about to make the best of a bad situation on the issue. Of course, if he goes ahead with this plan, we’ll see whether the courts even think debt cancellation by executive fiat is legal…
I have a brief addendum to my post last week about Elon Musk and Twitter. One of my key takeaways was that Musk would probably change Twitter’s moderation rules less than his fans hope and his detractors fear, because Musk will lose money if he alienates the site’s user base, which leans left, or its advertiser base, which is responsive to those liberal users. Musk claims he doesn’t care about the economics of the Twitter purchase, but he’s taking on a lot of debt to make what is a very pricey acquisition even for him, and so he’s going to need to care about the economics.
I should have noted that there is another area where Musk can address the economics of the purchase: on the expense side of Twitter’s income statement. There’s been a rise lately in Silicon Valley VCs grousing that the big tech companies are all way overstaffed. If they’re right, maybe Musk’s Twitter turnaround can be less about grand visions and more about boring take-private stuff like reducing headcount and saving on labor cost. If he can materially reduce Twitter’s expenses, then he’ll be better able to withstand the departure (or drifting away) of some users and advertisers. We’ll see.
On another Twitter related note, Bloomberg’s Matt Levine is indispensable on this topic as always, and yesterday’s issue of his newsletter has a great discussion of how Twitter’s mediocre management is what got us here in the first place — if there had been a plan to adapt the platform, keep up with competitors, and grow revenue, then Twitter would have been trading way above its IPO price instead of around it, and Musk would not have even bid for the company as it would have been too expensive.
Musk’s vision for the company might be wrong — from an investment perspective, a societal one, or both — but at least he seems to have one.
That’s all for today! I’ll be back tomorrow with the Mayonnaise Clinic. Keep sending in your questions: email@example.com or leave them in the comments.
Later this week, I’ll have a new episode of the Very Serious podcast for you. It’s a return visit with Jason Furman, who has thoughts about this student loan issue and about how certain economic indicators have gotten worse since I last spoke with him in February.
And finally, I want to note that I guest-hosted Mona Charen’s Beg to Differ podcast for the Bulwark last Friday. I had an interesting conversation with Linda Chavez, Damon Linker and Bill Galston about the French elections, Elon Musk, and Twitter. You can listen to that here.
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Here's another reason wiping out student debt is a bad idea: it does nothing to address the core problem (or at least what many people argue is the core problem): the rapidly increasing cost of college. Further subsidizing something does not seem like a good way to bring down its cost.
I am posting about this issue tomorrow in my Happy Wanderer Substack. I am on the left, but I oppose canceling student debt and think it should instead be treated like all other forms of debt: borrowers should be allowed to discharge student debt in bankruptcy. This simple change would remove the perverse incentives on banks and universities. Currently, banks face no risk of default, so they’re incentivized to hand out loans without doing due diligence. Similarly, universities get all the tuition money up front, so they are incentivized to keep raising tuition rather than finding sensible ways to economize.
Giving student borrowers access to bankruptcy would put some of the risk of student debt where it belongs--on the banks and the universities--and help to end rising tuition and credential inflation.