A policy so bad it can't even be defended.

From No Country for Pension Geeks by Allison Schrager.  The subheading is Perhaps expecting meaning from work is a bad idea.  

Student Loans

I’ve written before that student debt forgiveness is bad economic policy. I don’t say that lightly. Usually, there’s some merit to any economic policy. Even if I don’t think it’s the right choice, I can make an argument for it. But this is shockingly bad, even if we knew it was coming. I still didn’t believe it, but it seems like once a bad policy idea gets into the ether, it necessarily comes to be.

There are reasons economists on the left and right (except for the extreme left) are all horrified. I don’t think it’s fair, but fairness is not how I judge an economic policy—because fairness is subjective. I hate it because it is inefficient.

I operate under the assumption that someone has to pay for a $300–$900 billion giveaway. I think many people genuinely believe we don’t have to pay for it, or the only potential cost is inflation (Modern Monetary Theory still lives in the minds of the naïve). I think it will be inflationary—not in a big way, but in a way we don’t need right now. If you thought the IRA reduced inflation by lowering the deficit, then you should think forgiveness is inflationary because any deficit reduction is eliminated—twice over. Inflation will probably decline over the next year for other reasons, but now it will be higher than it otherwise would have been. So, people will probably assume forgiveness was costless.

I judge policies based on their efficiency. By efficient, I mean this thing will cost something, and what are we getting out of it? It will cost something by increasing the national debt, which will mean higher interest rates and/or taxes one day. Generally, for that cost, you want the policy to do one of two things: boost growth or help the needy. This does neither. You can quibble about overall inflation, but it will make education inflation worse and distort incentives, which is bad for growth: so are more debt and higher rates. And there’s an opportunity cost. Think of the better ways we could use that money: climate change, K–12 education, anything. And the benefits go to the well-off. Most graduates earn less than $125,000 right after they graduate, but graduate salaries grow quickly. And so, we’re giving a big, big bailout to the highest earners who don’t need it. It’s the most inefficient policy I can think of, and we’ve had some very inefficient policies.

Economists also take institutions seriously. Good institutions are critical to growth and prosperity. And the fact that the president used the pretext of a “COVID emergency” to hand hundreds of billions of dollars to his favored political constituency and more than double the generosity of an on-going entitlement is really disturbing. I don’t love every economic policy, but when Congress passes a spending bill, I figure, “Well, it’s the will of the voters, and whoever passed it will be held accountable in a local election in a few months.”

Spending bills are supposed to go through Congress for a reason. And the fact that some Democrats, who are facing an election this fall, are critical of forgiveness suggests this would not have passed Congress. The whole thing degrades our institutions and changes how we spend; what’s next when Republicans are in office? This is a banana republic–level policy and economic malpractice.

The fact the White House says they don’t even know what this will cost and then mocked businesses who took PPP grants is shameful. We can quibble about all the COVID-era policies, but we came out of the pandemic with one of the best jobs market in a generation (at the cost of inflation) for new graduates; why do they get a bailout on top of that?

I agree there are problems with student debt, especially for borrowers who did not graduate or went to for-profit schools. But we can deal with that by allowing debt to be discharged into bankruptcy filings and reforming the income-based repayment program to something sane and meaningful (not 5% of income).

Then there are the issues related to agency.  Who is on the hook for what?  Ideally, it is the universities who ought to be guaranteeing the value of their product by underwriting the loans to their students.  If students do not make the good educational choices that allow them to become more productive and effective, then the university takes the hit, not the tax payer.  As it stands right now, there is a reduced positive feedback mechanism to reward good educational decision-making and no negative feedback mechanism for bad educational decision-making.

Student loan forgiveness drawbacks:

Doesn't increase individual or national productivity.

Doesn't help the needy.

Unknown price tag because we don't know how many students would have how much debt forgiven.

Exceedingly regressive, rewarding the privileged and doing nothing for the poor.

Inflationary.

Increases national debt with no compensatory national benefit.

Rewards degrees and education which do not improve individual productivity outcomes.

Almost certainly illegal.

Erodes trust in institutions (educational and governmental).

A blatant bribing of voters.

Bi-partisan opposition. 

Student loan forgiveness policy benefits:

TBD

It is pretty shameful and a black mark on the administration when an immensely expensive policy is proposed under shaky legal cover, with no clear benefits and many negative outcomes.  How did we get to this state of affairs?