When President Joe Biden and the fellow Democrats were pushing the passage of a $1.9 trillion stimulus bill at the begining of 2022, economist Larry Summers warned that the American Rescue Plan may likely trigger runaway inflation.
He was ignored, but he was ultimately proven right.
Now, Biden is prepared to announce a broad-based student loan forgiveness plan that will erase between $10,000 and $20,000 in debt for Americans earning around $125,000 this year. The proposal also reportedly extends a continuing payment moratorium through the end of the year. Biden is anticipated to announce the proposal in televised remarks in the White House later this afternoon.
Summers, a veteran of both Clinton and Federal government, is once again warning the policy could worsen already high inflation.
\”Student loan debt settlement is spending that raises demand and increases inflation,\” Summers wrote on Twitter yesterday. \”It consumes resources that may be better used helping those who didn't, for whatever reason, are able to go to college. It will also tend to be inflationary by raising tuitions.\”
There are several good points there worth unpacking.
First, even though student debt settlement may not seem like spending the way we traditionally think of it-the government isn't cutting checks or awarding grants here, the way it did within the American Rescue Plan, for instance-economically, it will function exactly the same way.
Because money is fungible, education loan borrowers will effectively are in possession of extra discretionary income comparable to anything they might have needed to pay towards that $10,000 in loans. That might sound great, but don't forget that the standard definition for inflation is what occurs when a bigger supply of cash is chasing the same quantity of goods and services. Money that will happen to be spent paying back loans will, upon the final outcome of the repayment moratorium, remain circulating in the regular economy. Ending the repayment moratorium without passing forgiveness would've been deflationary by returning U.S. dollars to Treasury.
The last point that Summers makes is another good one. A completely predictable reaction to a $10,000 student loan forgiveness plan would be universites and colleges hiking tuitions-while telling future students never fear about the rising sticker prices because, hey, a portion of the loans will probably get forgiven anyway.
In short, student loan forgiveness will contribute to inflation on both macroeconomic and microeconomic levels, Summers explained. \”Unreasonably generous education loan relief\” would bring about generally higher prices throughout the economy, he tweeted, while simultaneously \”encouraging college tuition increases.\”
Summers is not the only center-left economist to warn about the potential ramifications from the Biden administration's short-sighted student debt relief plan. Jason Furman, a Harvard economist and former head of the White House's Council of Economic Advisors during the Federal government, tweeted on Monday that student debt relief \”benefits recent college grads and hurts most everybody else, both rich and poor.\”
\”Student loan relief is not free,\” Furman wrote. The roughly $300 billion debt forgiveness plan could be paid for, he added, in part through the 87 percent of Americans \”who do not benefit but miss out from inflation.\”
\”Student loan relief would lead many people to invest more,\” Furman continued. \”We can't make much more others would consume less. The way that happens is inflation.\”
But one does not need to be a former Treasury secretary or White House economic advisor to understand your debt forgiveness is inflationary, it appears. A poll conducted earlier this year by CNBC found that 59 percent of Americans worry that forgiving student debt will worsen inflation.
The key distinction between the Biden administration and center-left economists like Summers and Furman would be that the latter group are politically liberal but acknowledge that markets and costs are actually real things.
The White House, meanwhile, is constantly on the pursue economic policies with total disregard for that trade-offs which come from them. It might be nice if you will finish poverty by printing money and dumping it into accounts in the same manner that it could be nice should you could jump from an airplane with no parachute and float gently down. But ignoring reality won't result in productive outcomes in either situation.
Fifteen months ago, Biden ignored economists' warnings and the rest of America got burned. Will it be different now?
