This Week in the Mayonnaise Clinic: Student Loan Forgiveness Is Inflationary
Democrats will pay a price for inflation, not for outrage over the forgiveness itself. Plus: How Josh cooks.
President Biden has announced an approach to student loan forgiveness that is somewhat more generous than had been expected. Borrowers will generally have $10,000 of debt forgiven; if they received Pell Grants, up to $20,000 of undergraduate debt will be forgiven. There are income cutoffs, but they’re pretty high: You have to make less than $125,000 (or $250,000 for a married couple) to qualify for relief. And income-based repayment terms will become more generous in the future — Biden proposed a new cap on repayments that’s 5% of a borrower’s discretionary income, down from 10%.
All that said, the Biden administration also promises that the recent extension of the moratorium on student loan interest and principal payments through December will be the last one, really for real for real, this time. Payments will resume at the start of 2023.
I’ve laid out before why I think loan forgiveness is substantively a bad idea. It’s just an arbitrary way to hand out money, and one that doesn’t cause people to get more education because it does not reduce the future price of education. (The changes to income-based repayment are a better policy because they do, at least, improve the incentive to go to college in the future.) And the policy is expensive: Forgiving all this debt will cost the government hundreds of billions of dollars, approximately offsetting all the deficit reduction from the Inflation Reduction Act.
I find most of the arguments about inflation from proponents of forgiveness to be completely disingenuous. Two years ago, one of the leading arguments for student loan forgiveness was that it was supposed to cause people to get out and spend. “Canceling student debt is the single most effective executive action available to provide massive consumer-driven stimulus,” Elizabeth Warren's office said at the time. But if forgiveness was a stimulative policy that would tend to produce real economic growth when the economy was depressed, then it’s a stimulus policy that will tend to produce inflation when the economy is close to full employment. The notion that deficit spending is currently inflationary is at the core of the argument for the major fiscal law Democrats passed earlier this very month, which, again, they named the Inflation Reduction Act on account of its deficit reduction.
Paul Krugman says it’s wrong to call loan forgiveness inflationary because the Federal Reserve can be expected to offset the inflationary impact of forgiveness by raising interest rates more than it otherwise would. And sure: in the face of any inflationary policy, the Fed can choose whether to let the inflation happen, or offset the inflationary effect by raising interest rates more than it otherwise would. But that’s just a matter of choosing how the costs will be borne. Either way, there is a real cost imposed on people who do not enjoy debt forgiveness: Their purchasing power is diminished, or their borrowing costs go up more than they otherwise would.1
I feel like I’ve been hearing progressives talk for months (and not without some merit!) about the fact that interest rates are more than just numbers on the page — when the Fed hikes rates, it discourages business investment, makes consumption more expensive, and causes workers to lose out on jobs and raises. Rate hikes risk pushing the economy into a recession. Often, progressives have used that observation to argue for a lighter touch from the Fed, and for non-monetary policies that they argue (sometimes accurately, sometimes wishfully) would ease inflationary pressure without rate hikes. But now we’re supposed to shrug at the fact that the president is taking an executive action that is likely to require the Fed to top out its rate hikes at a level 50 or 75 basis points higher than would otherwise have been necessary to tame inflation? It’s all just upside down.
All that said, I am actually not that concerned that Democrats are going to face a lot of direct political costs from the choice to extend forgiveness. I’ve seen the same polling everyone else has, showing that this policy actually polls decently well with the limitations the Biden administration has set — capping the amount of forgiveness and the income of people receiving forgiveness. But more importantly, I just doubt that this issue is going to be terribly salient in the election. And my reason for doubt is that we have already had a tremendous amount of student debt relief: the interest and principal payment pause has been ongoing for more than 2 years, costing taxpayers about $60 billion annually, and this does not seem to have been very politically salient, except to the extent that student loan borrowers have appreciated it.
People get outraged about things they see and things they pay for directly, like high gas prices. But the fact that someone else is getting some sort of debt relief — especially pursuant to a somewhat complicated formula — I just don’t think registers that much. I don’t think voters generally make the connection between the loan pause and inflation, and I don’t think they’ll tend to do that with the forgiveness program either, even if they should.
The main political costs to the White House are likely to come from indirect effects: every fraction of a point of higher inflation and higher interest rates — and the drag on economic growth that comes from those higher interest rates — will worsen public satisfaction with the economy. They shouldn’t have done this relief for the same reason that they should have lifted a lot more of the Trump-era tariffs: a better policy would have produced better macroeconomic conditions and stronger approval. For similar reasons, I think Janet Yellen’s diplomatic initiative to reduce the impact of the Ukraine war on domestic gas prices has been one of the most unsung policy efforts that has improved Biden’s political standing this year. Policies that push inflation down make people happier in real time. And the student debt relief plan does the opposite.
A note on the courts.
For the reasons I lay out above, the best outcome for Biden politically would be to issue a student debt relief order and have the courts throw it out. He would get credit for trying, the progressive outrage over the courts produced by Dobbs would further intensify, and the inflationary effects of the forgiveness wouldn’t materialize. The debt cancellation plan is based on an aggressive interpretation of the HEROES Act of 2003, and makes obviously pretextual use of the COVID pandemic emergency to pursue the unrelated policy goal of student debt relief, at a time when the Supreme Court has been looking skeptically at executive assertions of emergency powers.
The Biden administration has already run this play once with another dubious application of emergency powers: Last year, they told Democrats in Congress they lacked the executive authority to order a further extension of the CDC’s eviction moratorium, but when Congress wouldn’t pass one, the White House bent to progressive pressure and issued a doomed order anyway, which the conservative majority on the Supreme Court threw out, adding new case law restricting the use of emergency powers. Unlike with the eviction moratorium, this time, maybe no party will be able to establish standing to challenge the debt forgiveness. Or maybe not. But I’ve been seeing a weird degree of confidence from progressives that the Roberts Court is going to be their ally in protecting a sweeping and counterintuitive application of executive power that the Biden administration itself was saying, just months ago, it lacked the authority to use.
Now, onto the Mayonnaise Clinic. Several of you have questions about cooking. Jason asks:
What resources do you find most helpful for finding recipes? And do you have any particular method for deciding which recipe to try?