A lot of well intentioned, thoughtful people seem to be misunderstanding the inflation argument around student loan debt relief and its relevance in assessing the policy. Let me explain in a ๐งต that hopefully will help to clarify the inflation impact and why it matters.
At the outset let me say that relative to current law (i.e., assuming the temporary interest moratorium ends), this will add about 0.2 to 0.3pp to inflation. That's ~$200 for a middle-income household and/or 50-75bp on the FFR.
You can call that "small" or "large" if you want.
You can call that "small" or "large" if you want.
I've seen two types of objections to this:
The first is just talking past each other. One person says "small" or "marginal". I say 0.2-0.3pp. We might actually be agreeing. That's why I like to use numbers not just words.
The first is just talking past each other. One person says "small" or "marginal". I say 0.2-0.3pp. We might actually be agreeing. That's why I like to use numbers not just words.
Many people make points like "principal relief won't get spent right away." I agree & incorporated that into my number, is why the multiplier I'm using is < 0.1. But the evidence is that interest savings do get spent, and there are tens of billions of those in the first year too.
The second, and more common, is arguing that under this plan interest payments will resume & will nullify any effects on inflation.
Short response: Interest payments would have resumed with or without this plan.
Longer response: Assuming otherwise gets you to incoherent places.
Short response: Interest payments would have resumed with or without this plan.
Longer response: Assuming otherwise gets you to incoherent places.
The reason I'm interested in inflation is PART of analyzing the policy. The policy has direct effects on interest and principal payments. It also has indirect effects on inflation, interest rates, future budgets, tuition costs, college attendance, etc. Need to tally all those.
Ideally to evaluate a transfer policy you would produce a distributional table that would show the direct & indirect effects for each income group (measured in terms of income, consumption or welfare). These facts/analysis should be something that we strive to all agree on.
Then people could look at the distribution table and bring their values to bear to decide if they like the policy or don't like the policy. (They could also bring other process values that are not reflected in the distribution table, eg libertarian values.)
To get this right, and to be able to decide if you like the policy or not, it is absolutely critical that both the direct and indirect effects are assessed relative to the same counterfactual or baseline.
In this case I would argue the most logical baseline is CURRENT LAW, which is that interest payments resume. It is the most logical for two reasons: (1) crazy to think zero interest payments ever again & (2) the more natural way everyone talks about and understands the policy.
For example, White House officials have pointed out that income-driven repayment would reduce interest payments. And have shown distributional tables documenting the benefits of the policy. All of these are relative to CURRENT LAW.
There is no one who supports this policy who would show a distributional analysis or examples of how it affects typical people that depict it raising student loan burdens and costs. And I agree--this is providing about $500b of benefits to student loan borrowers.
You then need to assess the inflationary impact & other impacts using the same CURRENT LAW baseline. The reason to do that is because you can't judge a policy just by the visible winners, you have to understand how it will affect others as well.
Another coherent baseline is CURRENT POLICY, which is assuming everything temporary is actually permanent. That can be a useful baseline for some purposes and I've used it before. I don't think it makes sense for emergency programs. But if you disagree have to be consistent.
The CURRENT POLICY baseline does help you answer a question which is how does this policy compare to no one ever paying interest on student loans ever again. FWIW I think this policy is much better than that precisely because it requires people to pay more.
Moreover, proponents are not even applying a current policy baseline correctly. Under that baseline all temporary programs are assumed permanent. That means you should also assume the temporary pause through January becomes permanent. So no interest payments resumptions.
Finally, there is a third type of baseline I've seen which I'll call POLITICALLY REALISTIC. That is someone's judgement about what is politically likely/possible (e.g., the only way interest payments would have been resumed given the political pressure is this plan).
This baseline gets you to some strange places. Would you say the Bush or Trump tax cuts didn't raise the deficit because they were politically foreordained once a Republican won the White House with their base pushing for them? Because they were predictable?
Also once you are in the world of a POLITICALLY REALISTIC baseline you also need to add in the probability that interest payments are delayed further (e.g., because we're in recession) or Biden does another round of debt relief in 2024.
In sum, the commonsense view that the plan provides a direct benefit to borrowers is correct. It is helping many & not hurting any.
But economists & analysts need to use that same perspective to understand what the indirect costs are for others. Inflation is one of them.
But economists & analysts need to use that same perspective to understand what the indirect costs are for others. Inflation is one of them.
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