3 possibilities if transferring $250b to a group:
1. They raise their consumption (now and/or in future). Total output unchanged or rises by less--consumption of others falls.
2. Same but total output rises commensurately--others held harmless.
3. They never raise consumption.
1. They raise their consumption (now and/or in future). Total output unchanged or rises by less--consumption of others falls.
2. Same but total output rises commensurately--others held harmless.
3. They never raise consumption.
3 is extremely unlikely so let's ignore it (and if 3 actually did happen then what was the point of the transfer?)
In the current high inflation circumstances it is also very unlikely that total output will rise by as much as the increase in consumption by the beneficiaries (now and in the future).
So consumption will fall for others.
So consumption will fall for others.
In fact, if I had to use a modeling assumption I would assume that total output would be unchanged so the rise in the consumption for one group would be matched by equal declines in consumption for other groups. That's likely close to correct right now.
What is the mechanism that reduces consumption for other groups? The immediate one is inflation--the transfer recipients purchase more, drives up prices & so others can afford less.
In the case of student loan relief, the inflation impact is likely small--about 0.1 to 0.2pp.
Avg consumer spending by households in the middle quintile is ~$70,000. So this is about $100 per household in reduced consumption due to inflation.
crfb.org
Avg consumer spending by households in the middle quintile is ~$70,000. So this is about $100 per household in reduced consumption due to inflation.
crfb.org
Total Consumption is $17 trillion. So the inflation would offset about $25 billion in immediate spending by people not receiving relief.
That could plausibly be about equal to the immediate increase in spending by people receiving relief (multiplier is a very low 0.1 * $250b).
That could plausibly be about equal to the immediate increase in spending by people receiving relief (multiplier is a very low 0.1 * $250b).
If you don't like these numbers what are your alternatives for what $250 billion of debt relief would do to:
Total immediate consumption by borrowers;
immediate change to output;
reductions in consumption for others;
inflation?
Total immediate consumption by borrowers;
immediate change to output;
reductions in consumption for others;
inflation?
Inflation is only the immediate mechanism and a relatively small one. Present value consumption for group receiving relief probably up by close to the full $250 billion.
Most of that comes from the much larger mechanism: the inter-temporal budget constraint.
Most of that comes from the much larger mechanism: the inter-temporal budget constraint.
Increased deficits today mean higher taxes or lower spending in the future. No matter what you think of our fiscal course this is true--even if you think we have lots of fiscal space it would still mean forgoing spending increases or tax cuts.
Incorporating the impact of deficits into distributional impacts of policies is a long-standing practice. @WilliamGale2 & @porszag have been doing it for decades.
This same mechanism also incorporated in the featured Saez-@gabriel_zucman distributional numbers.
This same mechanism also incorporated in the featured Saez-@gabriel_zucman distributional numbers.
None of the above says whether student loan relief is a good policy or a bad policy.
But it does say that you need to think seriously about macroeconomic effects and intertemporal budget constraints.
This is not free money.
But it does say that you need to think seriously about macroeconomic effects and intertemporal budget constraints.
This is not free money.
Also the word "small" is not particularly useful, much better to use numbers and provide context for them. Even if this only 0.05pp on inflation (i.e., half of a tenth) that would be about $35 for a middle quintile household. Is that worth it? Or not?
P.S. I appreciate many of the people who were enthusiastic about my last thread making these points. I would like to make sure they remember it the next time they're considering unpaid for tax cuts, like in 2001 & 2017. The same points apply there too. vox.com
P.P.S. This is only one of many important issues in thinking about this policy. But it is a reasonably central one. And an issue Iβve focused on in distributional analysis of fiscal policy for some timeβwith a new twist for an economy at capacity with high inflation.
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