Last week we were inundated with end-of-term Supreme Court rulings. The headline cases each seemed to please one plurality of the population while upsetting another. Well, that’s politics. 

There is one ruling that may also have had its political supporters, but it was also bad economics.

Economists do not much delve into the normative decisions of politicians (and, increasingly, Supreme Court justices). The slap-down on President Biden’s plan to wipe out $400 billion in student loan debt may have pleased taxpayers who will ultimately pay that tab - at least the taxpayers who had less debt than the average of about $2,400 each taxpayer will someday pay for those bailed out. 

Your view of Biden’s gesture may depend on whether you have more student debt than that. Those who paid for themselves to go to elite private schools, medical school, or law school most likely benefit most. Nonetheless, the program was immensely popular among those young people that Biden hoped would go to the polls. 

Now that we’ve dispensed with the messy politics of largesse designed to cultivate votes (something most politicians probably do, at least if they are able to), let us instead focus on the economics of the Supreme Court decision to deny Biden that ability to forgive student loans. 

First, there may be instances when we decide to spend $400 billion of taxpayer dollars. If that money could be spent more wisely and generate more economic activity than if left in the pockets of taxpayers, it may be a good investment. Certainly, FDR’s spending in the Great Depression had the goal of ending that prolonged recession. We invest in road building and education because we know that a dollar spent creates more than a dollar of efficiencies in increased human and industrial productivity.

The progressive tax system is designed similarly. It raises tax revenue from those who likely consume a smaller share of their income so it may spare from taxes those who would otherwise be forced to consume less as their wherewithal declines. 

If the principle, then, is to leverage the benefits an economy could accrue by redistributing $400 billion of income from us all to some sector of the economy, it would be most economically productive to increase spending to those who consume the greatest share of their income. Perhaps this sector would be those saddled with college loans. Or, perhaps it would be the poorest and maybe even the least educated members of society.

Income redistribution aside, does that redistribution improve any behavior? Does it induce more people to attend university in the future if the debt of those in the past is forgiven? If we would like to encourage college education, greater subsidization of future loans makes more sense than forgiveness of past loans. 

One troubling aspect, though, is not what was forgiven but what legacy the Supreme Court leaves in its wake. 

A case has two parts. One is whether those offended by an action incurred damages. Another is whether these damages are of a type an efficient society cannot tolerate. 

In the case of Missouri vs. Biden, there were two types of damages. One was the penalty all of us incur when government taxes. Another is a more specific damage the state claimed would be suffered by Mohela, a student loan provider based in Missouri. In Missouri’’s and the Court’s mind, their damages were the lost profits if loans were forgiven and hence loan servicing became unnecessary.

We know the government has the ability to tax and spend, although actual bills defining these actions are the province of Congress, based on the U.S. Constitution. The Supreme Court likely concluded correctly that Biden exceeded his authority to circumvent Congressional prerogative. 

However, the case still has to get that far before the Supreme Court makes their determination. Here’s where it gets interesting, at least to an economist. 

Some entity must incur damages sufficiently immediate and substantial to be harmed by Biden’s policy. We already know the government has the right to make decisions that affect all taxpayers and benefit some sector of taxpayers. Government does not have the right to damage individual taxpayers, though. For instance, the government cannot impose a Musk tax, even though the Supreme Court is likely to soon consider whether the government can tax wealth, of which Musk has a lot. 

In this case, Missouri argued that Mohela’s business model became obsolete because of actions of the federal government. 

Yet, the most successful economies are dynamic. They grow by rediverting our scarce resources from one sector to another. In the early 1900s, government paved roads that enabled automobiles to thrive, but bankrupt the buggy whip industry and publicly-owned streetcars. Should the government have the right to, in essence, pick winners and losers by paving roads?

This is little different from a government innovation that makes obsolete student loan facilitation. Standing requires not only harm but harm that is particularly acute and which violates economic rights. 

We must separate the economic rights of intentional government actions with the secondary economic consequences of government policies. Whether or not one agrees with student loan forgiveness, Biden’s policy was certainly not designed to destroy Mohela. 

We may have opened up a Pandora’s box in this ruling. A state has an interest in coal extraction to earn royalties and power electricity generation. Does it then create standing to claim the EPA has no right to produce policies that reduce greenhouse gas emissions and hence may damage the market for a coal mine in its state? Can the federal government now be prevented from subsidizing or providing public education if a state determines demand is reduced for private schools? Can it be prevented from funding basic research that results in patents which makes obsolete ventures that may have otherwise provided bounty to society and royalties to state coffers of public universities? Does an innovation that improves national efficiency be stymied because it makes obsolete some state initiatives? 

It is the nature of a market economy to innovate in ways that makes some enterprises obsolete. The economist Joseph Schumpeter called this creative destruction. Some entities are harmed on occasion to improve economic efficiency. In doing so, profits of some may become obsolete. That is the price of progress. The resources previously diverted to the obsolete industry are then reemployed elsewhere to create even greater value. That’s economics. 

Like many of the rulings this session, Missouri v. Biden was more than the trumping of state’s rights ideologies over federal actions. These rulings change the balance of the economic playing field. It may well be that Missouri v. Biden is the most profound in distorting the space-time of the marketplace.