Student debt, inflation and excessive emphasis on going to college

On Wednesday, Biden announced that he will be forgiving student loans for some borrowers. Those who stand to benefit can be forgiven up to $10,000 as long as their income is $125,000 or less. There are more features to it, but that is the biggest part and the part that has received the most attention.

The decision to forgive some student debt has started a big debate over whether it is good or bad. Most of the arguments for or against it have talked about it from a purely moral standpoint centered around fairness. Intuitively, I get the argument that it is unfair to those who paid their debts to see others have their debts cancelled. At the same time, I try to avoid getting caught up in purely moral arguments because they can be argued any which way and there is no right answer. I have my own moral intuitions and sense of fairness, but so do all eight billion of us. Arguing over those things can be fun, but there is never an end to it.

For example, is it wrong for there to be a national public pension system for retirees? Prior to Social Security being created, retirees were on their own if they were able to retire at all. Roughly half struggled and died poor, but others were thrifty, lucky or wealthy enough that they were able to enjoy retirement without any taxpayer support. Is it unfair to those who suffered and died poor that every retiree is now guaranteed a minimum income? I highly doubt many people would argue that it is. That is not to say student debt and Social Security are the same things, they most certainly are not. The point is that the logic of fairness can be used for opposing or supporting most anything and so I do not find it useful to dwell on.

I cannot help but note that the student debt debate has once again shown that activists do not speak for those they claim to represent. It has been a sight to behold watching advocates of “working people” push to cancel student debt when virtually all those who are considered “working people,” i.e., blue collar workers, did not go to college. One of the biggest advocates for cancelling student debt has been the AFL-CIO, which is supposed to represent workers, a vast majority of whom likely did not go to college and so by definition do not have any student debt. Virtually everyone on the left, claiming to be fighting for workers, has advocated for cancelling student debt by much more than Biden did.

That Democrats are more inclined towards reducing student debt than Republicans are is not a surprise. Democrats are increasingly the party of college educated voters and so student debt is a more salient issue for them. I would not be surprised if college graduates with heavy debt loads are very overrepresented among those who staff Democratic Party organizations, left-wing advocacy groups and Democratic members of Congress. There is certainly nothing wrong with trying to appeal to an important voting constituency. That is just politics 101. That said, whatever its merits, dealing with student debt should not be sold as something for “working people.”

While much of the debate over student debt forgiveness has focused on the moral aspect of it, there has been a smaller and less visible debate among economists and other economic writers about its impact on inflation. I am much more interested in that than in any moral arguments. The economists and economic writers who I follow online are almost entirely against Biden’s decision, arguing that it is going to contribute to already high inflation and make it more difficult for the Fed to bring it down and risking a recession in doing so.

How cancelling student debt would contribute to inflation, on the surface, makes sense. Those who benefit from it no longer have to pay off loans and so they can spend money on other things, which drives up demand. Higher demand tends to mean higher prices until supply is able to catch up. One counter to that argument is that although student debt will be cancelled for some, for others they will have to resume payments on their loans beginning in January next year. The net effect may be for both to cancel each other out. Beginning in March 2020, in response to the pandemic, a moratorium was imposed on student loan interest and principal payments. The moratorium has been extended multiple times and remains in effect today.

In defense of those pushing to cancel student debt, it can have merit as a stimulus measure when circumstances call for it. Last decade, when unemployment was high for years and more stimulus was needed, cancelling student debt could have been a way to go about doing it. It would hardly have been the most optimal route, but in the absence of Congress passing more legislation it may have been the only way to go. Today, a lack of stimulus is not the problem and so the stimulus justification for cancelling student debt does not apply.

I have no idea how much of an impact Biden’s actions will wind up having on inflation. All else being equal, I would think it would increase it, but all else is never equal. I would guess it does raise inflation, but its impact is very limited. But since inflation is already high it is not a good idea to do things that will make it worse. That is not just bad policy, but bad politics, too. The biggest problem Biden and Democrats have is inflation. It is in their interest to reduce it any way they can and to not leave that job entirely up to the Fed. Biden and other Democrats have insisted that they are trying to reduce inflation, hence the name of their signature legislative achievement.

There is a limited amount of things they can do to reduce inflation, but those things should be done. Now that Democrats have gotten what they wanted on climate change, they should be focused on making energy prices lower, especially at the pump. Gas prices have gone down significantly since June and it is in Biden and Democrats’ interest to make sure that they keep going down. The permitting reforms that Nancy Pelosi and Chuck Schumer agreed to pursue in return for Joe Manchin supporting climate change legislation should be the top priority when Congress is back in session next month. Making it easier to produce more energy of all sorts is the best way to reduce its price.

An important thing to remember is that when economists talk about inflation, they are talking about all kinds of things, but when normal people talk about inflation they are talking mostly about energy prices. That is why bringing down energy prices is so important. Even with inflation still remaining high, most of it does not affect everyone. For example, increases in rent do not affect homeowners, which most Americans are. The decrease in gas prices is probably a big part of why Biden has seen his approval rating increase in recent weeks. Even though inflation is still high, gas prices tend to be the most visible part of it and so when they come down or go up it has a disproportionate effect on the public’s mood.

There are many other things Biden and Democrats can act on to try to reduce inflation. Reducing or eliminating tariffs imposed by Trump would be a great place to start. It is something Biden can do on his own. Issuing more visas to help with labor supply issues would be good, too. It would also be good to look at any regulations that are causing delays or making things more expensive, often in the name of job creation. One example of that is a regulation that requires freight trains to have two people operating them instead of one. That could have been justified when jobs were scarce last decade, but today jobs are plentiful and so the priority needs to be efficiency. There are no doubt many other regulations like that which should be suspended if not repealed.

Ultimately, the Fed will have the biggest role in bringing down inflation. That will entail continuing to raise interest rates as well as communicating future intentions about their priorities. At the same time, Biden and Democrats can make that job easier or harder. Anything they do that increases inflation will make it harder, which will likely mean interest rates have to be raised even more. While raising interest rates can be necessary, as it is now, it has serious economic costs.

Although high inflation by itself is a problem, a big danger is that the Fed will wind up causing a recession in their efforts to bring it down. Jay Powell has been communicating that he is willing to cause some economic pain if that is the price to be paid to getting inflation back down again. Whether he really will do that is unknowable now, but that is certainly the message he wants to convey. Ideally, by communicating to everyone that he means business, everyone will act accordingly and reduce spending on their own. That will lead to inflation coming down from market forces and not the Fed raising interest rates to a crushing level. That would be a great outcome, but whether it will happen is unknowable and relying on that alone would be unwise for Biden and Democrats.

What should be done about student debt? Is college all it’s cracked up to be?

Regarding the wisdom of cancelling student debt, my own view is I think it is on the whole a bad idea. Those who incur the most student debt tend to have high incomes, i.e., doctors and lawyers, and they are perfectly capable of paying it off. I am glad that Biden did not listen to the most vocal advocates who wanted him to cancel all student debt with no limits. His imposing of a dollar amount and an income limit makes it much less regressive and much more politically palatable. Had I been in his position, I would have lifted the moratorium of student debt payments a year ago at the latest and would not be cancelling any student debt. Then again, I am just writing from the comfort of my keyboard and do not have to worry about coalition politics so take that with a grain of salt.

The biggest problem I have with cancelling student debt is that it is just a one-time thing. It does nothing to address the cycle of more and more students taking on huge debt loads. Simply cancelling student debt and doing nothing else guarantees that cycle will likely continue and get worse. Right now, student debt, unlike almost all other kinds of debt, is not dischargeable in bankruptcy. That should change.

Going forward, student debt should be dischargeable in bankruptcy. That alone will ensure that lenders are very careful about who they make loans to. Today, lenders are free to make loans to anyone knowing they will be able to recoup it no matter. If that guarantee is taken away, their incentives will change substantially. That will likely mean fewer students will take on large debt burdens and those denied loans will not go to expensive colleges. Some may wind up choosing not to go to college at all.

I do not think fewer people going to college is a bad thing. I think we have overcredentialized way too many jobs and reducing barriers to entry to those career paths would be very good. There are many benefits to having an economy with low unemployment like we have now. One of them is that it increases job opportunities for those who would not have had them if unemployment was higher. That is one of many reasons why I really want to see the current economy survive efforts to bring down inflation. Workers now are enjoying leverage they have not had in a long time and I want to keep it that way. The more things are done to increase inflation, the more likely it becomes that the Fed induces a recession, which is a great way to end the leverage workers now have.

There will always be some jobs that require a college degree or more, but not every job needs to do that. In fact, there are very few jobs that I would say justify that. For the record, that includes lawyers. Having been to law school and taken a bar exam, I can assure you the former has little bearing on the practice of law and the latter has no relevance whatsoever. In general, I think having to get a license to work in a job is almost always a scam to protect incumbents, but that is for another blog post. With lower unemployment, fewer people will choose to go to college and they should be able to have good paying jobs, too. A college degree should not be the only path to success in life.

Some people are inclined towards jobs that require a college degree or more. Whether it is something they are naturally inclined towards or they think it will pay off well in the future, they will navigate towards those lines of work. That is fine and I want them to be able to do it. For others, maybe a large majority of people, they are inclined towards jobs that do not require any college education and that is also fine. I want them to be able to work in the areas they want to work in without having to jump over unnecessary barriers.