Critics of debt relief inflate its dangers

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On Wednesday, President Joe Biden announced a plan to reduce most students' debt by $10,000, with lower-income students eligible for twice that amount. The debt forgiveness was much less generous than many progressives wanted but more generous than many expected. Assuming it survives legal challenges, it will be a big deal for millions of Americans, although the overall economic impact will, as I'll explain, be limited.

There are two big questions about this plan. First, will it, as critics claim, significantly increase inflation? The answer, if you do the math, is a clear no. Second, is it a good policy? The answer should be: Compared with what?

About the math: What you need to have is a sense of scale. If you're worried about inflation, the relevant number here isn't the eventual cost to taxpayers, which might be several hundred billion dollars. It is, rather, the effect on private spending. And I just don't see any way to claim that this effect will be large.

Consider the fact that before the COVID-19 pandemic — that is, before the government paused required payments on federally held student-debt payments — total receipts from the federal loan program were about $70 billion a year. Since most student debt is in the form of large loans, much more than $10,000, these payments will be reduced by much less than that total. At most, then, we're talking about tens of billions a year in a $25 trillion economy. That's basically a rounding error.

Or if you prefer, compare this plan with 2021's American Rescue Plan, which arguably did feed inflation. That plan, however, spent $1.9 trillion in a single year; the new Biden plan is unlikely to boost annual spending by even one-fortieth that amount.

Wait, there's more. The Biden plan also calls for an end to the pandemic pause in payments, which will suck considerably more cash out of the economy than debt relief will put back in.

So, even the pessimists are talking about adding, at most, a small fraction of a percentage point to inflation — which seems high to me.

Add in the fact that the Federal Reserve, which (like me) was excessively complacent about inflation in 2021, is now hyperalert to inflation risks, and you realize that warnings that debt relief will be dangerously inflationary are bizarre — so bizarre that I can't help suspecting that in many cases they're coming from people who would rather take a cheap shot than lay out their real reasons for opposing this program.

But is it a good program?

The right is inveighing against debt relief on moral grounds. "If you take out a loan, you pay it back. Period," tweeted the House Judiciary GOP. On which planet? America has had regularized bankruptcy procedures, which take debt off the books, since the 19th century; the idea has been to give individuals and businesses with crippling debts a second chance.

But, you may argue, student borrowers weren't struggling to cope with a pandemic. True. But many student borrowers were suckered in by the misleading marketing of for-profit colleges; millions ran up debts but never received a degree. Millions more went into debt only to graduate into a labor market devastated by the global financial crisis, a market that took many years to recover.

So, don't think of this as a random giveaway. Many, though not all, of those who will benefit from debt forgiveness are, in fact, victims of circumstances beyond their control.

Will this debt relief give many of these victims a second chance? To some extent, at least. There's solid evidence that freeing former students from overhanging debt makes it easier for them to move to better jobs and increases their income. And since higher income will mean more future tax revenue, the true fiscal cost of debt relief will probably be less than the numbers you're hearing.

Still, there will be a fiscal cost. Is this the best way to spend that money?

As I said, the question is: Compared with what? Given the choice, I'd spend money on children rather than adults — and aid to families with children was, in fact, a big part of Biden's original spending plans. But he couldn't get those plans through Congress, while debt relief is something he can probably do through executive action.