About Those Student Loans…

In the run up to the November midterms, does anybody really believe that the Democratic Party generally and the Biden White House in particular, are making good faith arguments for their policy positions? If so, it may be worth considering the recent Biden decision to unilaterally cancel student loans up to $10,000  and Pell grants up to $20,000. 

For years Democrats argued (correctly, if a bit sanctimoniously) that then President Donald J Trump had no respect for the rule of law, and that he eviscerated norms necessary for the proper functioning of civil society. And what did President Biden and his party do to re-establish the rule of law and democratic norms? They continued in Trumpian fashion, to trash both the rule of law and democratic norms. 

There is for instance, no one this side of sanity who actually believes that Mr. Biden acted lawfully when he announced the cancellation  of student debt in the best tradition of Tammany Hall. It is blindingly obvious that Biden had no legal authority to do what he did. None. Zero. Nada. The hired guns who will be paid paid to argue that he does have that authority will be laughed out of court if the case ever gets there. 

Effectively, Mr. Biden just proceeded to spend about $500 billion without even a hint of Congressional authority, thus doing violence to the separation of powers that is the at the heart of our Constitutional order. In so doing, absent a stinging rebuke from the courts, he has managed to change financial market expectations for  government, for academic institutions and for consumer behavior—and  not in a good way.

What are the likely consequences of the Biden decision? Well, for one, universities will raise their prices to capture the lion’s share of the newly minted $500 billion subsidy. Government will borrow an additional $500 billion to pay for it. And student-consumers will have an incentive to delay paying off their loans on time, betting that another round of loan cancellations will be right around the corner. This will simply encourage the production of more bad behavior, which is to say moral hazard.  

And that’s just the beginning. Why would we stop at college loans? Why not cancel already heavily subsidized home mortgages? Or car loans? Or credit card debt? Or small business loans? What makes college loans so special compared to those other forms of debt? Perhaps it’s because of the urgent need for more gender studies majors. 

All of which brings us back to the question in the first sentence of this essay. Does anybody truly believe that Biden and the Democrats are making their arguments in good faith? When they passed the $1.9 trillion American Rescue Plan, they did so on a Party line vote while dismissing the idea that it would increase inflation. But by March of 2022 the Federal Reserve Bank of San Francisco released a paper that estimated the inflation impact of the American Rescue Plan was about 3 percentage points. 

By that time the Democrats, with some notable exceptions like Larry Summers who was far ahead of the curve, were arguing that inflation was merely transitory. But after having increased spending by $1.9 trillion, they then decided to raise tax rates which they implausibly claimed would raise $300 billion in tax revenue. The effect, they argued, would be to —wait for it—reduce inflation. And a few weeks after that, Biden decided to cancel about $500 billion in student loans on the books, thus increasing aggregate demand which will of course be financed by more borrowing. 

So in sum they argue that (A) $1.9 trillion in spending, financed by borrowing and the Fed’s printing press had no effect on inflation. However, they go on to argue that (B) a tax increase on the order of $100 to $300 billion will lower inflation. But (C) an increase of $500 billion in spending and borrowing to finance the student loan give-away will have no effect on inflation. Got that?

Why would anybody take these people seriously?  More to the point, how can anybody believe that they are making good faith arguments? Clearly they are not, unless the underlying assumption is that they are hopelessly, invincibly ignorant. Unfortunately there is an awful lot of evidence to suggest that there is more than a grain of truth in that proposition. 


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