Bad Economics May Also Be Bad Politics - August 28, 2022

It’s the critic’s gift that keeps on giving. Today President Biden announced forgiveness of up to $10,000 in current student loan holders who make less than $120,000 per year. Beyond election year pandering to young college educated independents and Democrats who may not bother to vote, and perhaps some Republicans, this decision is economic malpractice. 

The measure is carefully tailored to younger voters. Most mid or end of career college trained professionals will be making more than the threshold, and may even have paid back their loans. The policy is not aimed at young people who are not college-trained as that demographic is either very unlikely to vote or are increasingly voting Republican. The politics of this are obvious, as many have noted. 

The policy is also regressive in that college educated young people from higher income families or who attended private colleges are also more indebted, as counterintuitive as that may seem. 

Such a decision to favor one economic or social class over another, ultimately based on their political dispositions, is what economists call equity decisions. They are policies borne from some policymaker’s sense of what is fair, meaning typically what is advantageous to them or the groups they wish to represent. 

Economists have little to say about equity. In the best of cases, equity decisions just divvy up the pie differently. In the worst of cases, in the process it also makes the pie smaller. So long as the latter doesn’t happen, economists say such antics are perhaps benign overall, and are just one of the games politicians like to play. 

But, there are serious efficiency problems with this and many such gimmicks. And that is what upsets economists. Such efficiency losses incurred to confer equity gains on some just makes the pie smaller as a result. 

I believe that the encouragement of improved education attainment is a good thing for the economy. Our economy needs more doctors and, especially, nurses, more electricians, more scientists, more to care for the elderly, more plumbers, and more tradespeople who can install sustainable energy infrastructure. To the extent that we expand the cadre of people with the skills we need to expand the economy, these make the pie larger. 

Unfortunately, education subsidies rarely work like that. Instead, they are often broad-based, with no specificity regarding the skills the economy needs to recover or grow. 

But, this policy is not even that. The policy President Biden announced does absolutely nothing to expand education. It is merely a regressive reward on those who already made their decisions years ago, with no expectation of loan forgiveness. 

Now, each of these lucky relatively few find themselves $10,000 or so wealthier, by the stroke of a pen using COVID allotments as a justification. Not one penny will end up making college any more affordable for anyone, and hence will do nothing positive at all for our future economic growth. 

In fact, beyond the demoralizing message it sends by bestowing wealth on some, but at the expense of all others, this policy also does economic damage. 

Economists well understand the power of what we call the wealth effect. When people feel more wealthy, especially from a windfall, it temporarily changes their spending patterns. For millions to find themselves $10,000 wealthier at a time when too much demand is already chasing too little supply will only exacerbate the worst inflation in most Americans’ lifetime. Half the population of this country is under 35 years old, and the last stagflation before the current one was more than 40 years ago. This stagflation is for most a once in a lifetime economic shock, made only worse by our chief executives’ penchant for handing out free money. Well, that is free for those who vote today, but at a high cost for those still too young to vote and those yet unborn. 

Today’s graph shows the rapidly escalating levels of student debt. The graph is not rising so dramatically because more students are graduating from college. Instead, it reflects the rapidly increasing cost of college and misguided attempts to send everybody to college, regardless of whether that is the best path for each individual or the economy as a whole. 

Student loan debt liberalization has left students with increasing debt and a plethora of colleges tapping into their capacity to spend more on tuition, It is the education equivalent of President Eisenhower’s concern over the military-industrial complex, expensive and inefficient corporate welfare that imposes great long term costs on society. If we really want to help young people go to college, we should be putting our dollars toward their best value by influencing the decisions of bright and motivated young people who could not otherwise go to college, not by increasing indebtedness, especially for more affluent students, and then once in a while forgiving said indebtedness in a pique of politics. 

At least the additional $10,000 for those who received Pell grants, and hence may have been more economically disadvantaged is one bright spot in the policy, if only it was a provision that could be used going forward, not to simply bestow an award on those in the past.

Let’s see. This political equity game offers absolutely no efficiency gains for society, is demoralizing for many, widens government’s debt, is inflationary, and is highly regressive. What’s there not to love?