The Breakdown - Student Debt Relief Shows Why All Politics Is Now an Inflation Debate

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and ftX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, August 24th, and today we are talking about student debt and the politics of inflation. A quick note before we dive in, however, there are two ways to listen to the breakdown podcast. You can listen each and every afternoon on the Coin Desk podcast network, which features not only the breakdown but other great Coin Desk shows, or if you want the breakdown-only feed, that show comes out a few hours later in the evening. Wherever you listen, I would so appreciate if you took the time to leave a rating or a review. It makes a huge difference in terms of new people finding the show, and I appreciate each and every one of you who takes the time to do that.

Starting point is 00:00:57 Also, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. And finally, I want to tell you about CoinDesk's new event, the investing in digital enterprises and asset summits or ideas, which is designed to facilitate capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience, where you can source, invest, and secure the next big deal in digital assets. Use code breakdown 20 for 20% off a general pass and register today at coindesk.com slash ID. All right, today we're talking about the debate around student debt forgiveness in the United States. And if you're wondering why we're talking about this one seemingly specific political issue, maybe it feels disconnected from our normal fodder, it is for one very specific reason. The student loan debate shows that in times of high inflation, everything becomes about inflation.

Starting point is 00:01:55 So what I hope to do today is not to list my personal positions on student debt, but instead, I want this to effectively be a case study of the impact of inflation on American politics. I think this is worth doing for a couple reasons. First of all, inflation is the driving macro force that is shaping or warping everything around it. It is warping people's actual lived lives around itself. It is warping monetary policy decisions around itself. It is warping politics around itself. And because of all this, crypto markets are being, if not warped, then certainly shaped by it. One need look no farther than the inflation hedge narrative that initiated the last bull run to know this is true. So let's start with what's happening. Right now, more than 40 million

Starting point is 00:02:37 people owe around $1.6 trillion in student debt. Almost a third owe less than $10,000 and more than half owe less than $20,000. The $1.6 million in student loans are more than credit card debt or auto loan debt. Federal loans make up more than 90% of that outstanding debt. At the time of recording, Journal is reporting that later today, President Biden will finally announce executive action on federal student loan debt. Keep in mind, this is from sources, not official, but it's pretty likely close to the final outcome. It appears that the president is set to announce that he will cancel $10,000 in federal student loan debt for borrowers making under $125,000 a year, or couples making less than $250,000 a year. Additionally, those who have received federal

Starting point is 00:03:21 Pell grants and make less than $125,000 a year would be eligible for total forgiveness up to 20,000 instead of 10,000. This applies to loans for both graduate and undergraduate programs. On top of this, President Biden will reportedly extend the pandemic pause on student loan payments through the end of this year. As of now, loans are set to resume after August 31st. According to the Wall Street Journal, these actions could render up to 15 million borrowers whose balances are under $10,000 totally debt-free. The Pell Grant provision would push that number up. Seven and ten borrowers with any federal loans also receive a Pell Grant. So that's what's actually happening, but let's talk about the politics around it, starting with the pre-inflationary politics.

Starting point is 00:04:05 Student debt forgiveness was a key platform of the Democrats who ran in 2020. Bernie Sanders and Elizabeth Warren both ran presidential campaigns with a policy of over $50,000 in student debt cancellation. When Biden got the nomination, he adopted the position as well, although never as vociferously as Sanders and Warren. This year, he's been a bit dithering about it. In May, he said action was coming in the next couple weeks, but that never happened. Now, for Democrats, there are multiple reasons for their position on student debt cancellation. One side is the equitability or fairness side. The argument here is that education is meant as a way for people to break out of the economic circumstances of their birth, but that gets a lot harder if you're burdened for years after by loans.

Starting point is 00:04:47 Another element of fairness and equitability is the sense that even if students can get into the same schools as their wealthier peers, which is difficult already for a variety of reasons. They're simply not coming out on the other side on the same footing if they have all those student loans as burdens. The U.S. Progressive Caucus tweets, let's be clear about who is affected by the student debt crisis. Ninety-nine percent of people with federal student loans didn't go to an Ivy League. 97 percent are lower middle income. 40 percent didn't finish their degree. Nearly nine million people aged 50 plus are still carrying student loans. Now, of course, in addition to all those sort of justice arguments there is a political element as well. Democrats, of course, see this as

Starting point is 00:05:25 an issue popular with younger voters. The Harvard Institute of Politics found in a survey conducted in March that 59% of voters aged 18 to 29 favored debt cancellation of some kind. Bulley Esquire of former Dem has a more cynical take that will certainly resonate with many. Quote, Biden announcing that the government will, quote, forgive millions of borrowers student loans a few months before the midterm election is a transparent effort to literally buy votes. Reminds of when Trump made sure his name was on stimmy checks before the elections. Now, for Republicans, there is also a question of equitability and fairness, but from a different angle. One of the arguments they have against student debt forgiveness is that it is unfair to those who worked hard to pay

Starting point is 00:06:04 down their student loans already, or who designed their careers and lives in such a ways to not have to take on those burdensome loans. Complicating this all further, though, is that this isn't strictly partisan. Some progressive groups are against debt forgiveness for the reason that it doesn't actually get at the groups that need the help most. Jason Furman, who served as chairman of the Council of Economic Advisors for the Obama administration, and who is currently a Harvard professor, said, quote, this is redistribution, and there's nothing wrong with redistribution if it was from the middle to the bottom. Much of this is redistribution from the middle to the upper middle.

Starting point is 00:06:37 Another progressive argument when it comes to partial debt cancellation instead of complete or larger debt cancellation, is that, again, it disproportionately benefits the upper middle rather than the bottom economic rungs. The NAACP has pointed out that black students carry a disproportionately higher loan. burden on average, so a lower amount of debt forgiveness will have racial equity ramifications. The GOP has now seized on this as a talking point as well. This week, the Republican National Committee published a research piece titled Biden's Handout to the Rich, bailing out their student debt. In it, they write, Biden's plan to cancel student loans would bail out the wealthy, worse in inflation, and line the pockets of Democrats and their staffs, all at the expense of the

Starting point is 00:07:14 working class. In the piece, they explicitly quote Jason Furman when he said, the perpetual deferral of interest on student loans is just about the worst policy. It is costly unjustified and is added to inflation. By the way, even now, you can see, as I'm trying to give you the pre-inflationary politics, you can see how much inflation is creeping in. There is another anti-student debt cancellation argument that comes from both Democrats and Republicans, which is about the efficacy of these programs over the long term and the structural issues underpinning them. The cost of attending universities has skyrocketed, while the ROI in terms of relevance

Starting point is 00:07:49 of degrees to jobs hasn't necessarily kept pace. To put some numbers around that, over the last 20 years, between 2002 and this year, 2022, the average tuition and fees for private national universities is up 144%. Out-of-state tuition and fees at public national universities is up 171%. And in-state tuition and fees at public national universities is up 211%. If that sort of price inflation for the cost of university remains, many ask, How would we not just again be in this situation in a few years? A lot of the sentiment, again, regardless of political perspective, reflects this tweet from Wayne Vaughn when he wrote,

Starting point is 00:08:29 Student debt forgiveness is bad policy. It's essentially a bailout for schools that continue to offer overpriced education programs that don't give students the skills necessary for a productive career. So, when we look at the base-level politics of this issue, you've got a sort of classically politically opposed view of fairness, plus party-bending critiques of who benefits on the one hand and long-term structural efficacy on the other. And into that situation walks inflation. In times like these, security of your assets should be your number one priority. If you want to

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Starting point is 00:10:27 When you trade NFTs on FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. Easily, the loudest talking points against student loan forgiveness now have to do with inflation. Lawrence Summers, who is the Treasury Secretary under Clinton, tweeted earlier this week, I hope the administration does not contribute to inflation macroeconomically by offering unreasonable. reasonably generous student loan relief or microeconomically by encouraging college tuition increases. Every dollar spent on student loan relief is a dollar that could have gone to support those who don't get the opportunity to go to college. Student loan debt relief is spending that raises

Starting point is 00:11:07 demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions. The worst idea would be a continuation of the current moratorium that benefits among others highly paid surgeons, lawyers, and investment bankers. If relief is to be given, it should not set any precedent. It should only be given for the first few thousand dollars of debt, and for those with genuinely middle-class incomes. So here you've got a combination of Democrat and Republican talking points, right? But let's highlight this argument that this would encourage tuition inflation. The argument is effectively that this sort of student debt relief would create conditions

Starting point is 00:11:46 in which universities would be incentivized to increase prices even more, having no scruples about that as they assume the government will bail out lenders again. Jason Furman again continues some of this thinking, talking about who pays the actual price for this sort of program. Student loan relief is not free. It would be paid for. Part of it would be paid for by the 87% of Americans who do not benefit but lose out from inflation. Part of it would be paid for by future spending cuts and tax increases, with uncertainty about who will bear those costs. Two ways to think about it. One, real resources. We're at capacity now. Student loan relief would lead some people to spend more. We can't make more so others would consume less. The way that happens is inflation.

Starting point is 00:12:27 Two, budget constraint. If you add hundreds of billions to the deficit, eventually taxes will rise or spending will be cut, or some tax cut or spending increases that could have happened won't. Either way, a cost. A full evaluation of student loan relief would take this into account. You might still like it. It benefits recent college grads and hurts most everyone else, both rich and poor. But don't assume it is free money. It is not. Think tanks are also getting in on this inflation debate as well. The Committee for a responsible federal budget, a DC-based think tank that opposes loan forgiveness found that wiping away $10,000 of debt per borrower would cost roughly $230 billion. I've seen estimates from other sources that increase would be even higher, something like $300 billion plus.

Starting point is 00:13:07 The CRFB also found that extending the moratorium would increase core inflation by 0.2% and wipe out all of the deficit reduction achieved in the Inflation Reduction Act over the next decade. Their report essentially argues that the Inflation Reduction Act would have negligible short-term disinflationary effects, but that the effects of debt cancellation would be felt immediately due to an increase in available income for affected households. And to be fair, it's not just think tanks and not just one party with these concerns. According to polling conducted by CNBC, 59% of Americans are concerned that student loan forgiveness will make inflation worse. So are there counterpoints that actually address inflation head on? Actually, there are. In that same survey, over half of respondents said that

Starting point is 00:13:49 if they received debt forgiveness, they would use the additional discretionary income towards paying down other loans. Forty-five percent said they would put additional money into retirement savings. These are obviously not inflationary uses of money in that they aren't consumption expenses. And indeed, this is the counterpoint raised by think tanks on the other end of the political spectrum. The Roosevelt Institute, a left-leaning think tank, analyzed the CRFB's claims and argued, quote, their own analysis shows that any inflation from debt cancellation is small and more than offset by payments restarting. Properly measured, people have not been spent. spending out of wealth in this recovery. Both have used this recovery to build up savings,

Starting point is 00:14:23 and student loan cancellation would continue this welcome trend. Essentially, they argue that the short-term inflationary impulse would be negligible, and argue that people who receive forgiveness are likely to disproportionately allocate that additional discretionary income towards savings and investment rather than consumption. Moody's analytics also looked at this and found that partial debt forgiveness, when combined with a plan to restart payments on loans at some point, would be disinflationary on net. It's worth at this point looking at what is actually happened over the last couple years. The influx of fiscal stimulus and delays in debt servicing meant that personal savings in the U.S. rose significantly in 2020 and 2021. By December of 2021,

Starting point is 00:15:02 the personal savings rate stood at 8.7% of total income, or around $1.5 trillion. However, this shifted significantly, both as those COVID-era programs went offline, but also as inflation took hold. In early 2022, the savings rate plummeted from 5.8% in January, to 5.1% in June. The total amount saved by households dropped to $944 billion, which is the lowest level captured since January of 2021. Inflation has also eroded personal savings, bringing the rate to its lowest point since the height of the 2008 financial crisis. So basically, you had a situation where, when people got a little money in their pockets during the pandemic, they did use it to pay down other debt and to increase savings. But they also bought stuff, and what's difficult for economists

Starting point is 00:15:45 right now is that the melange of causes behind this current record inflation is nearly impossible to detangle. How much of the inflation we're experiencing right now is the product of supply chain disruptions, more about fundamental shifts in production based on geopolitics, derived from excess capital from fiscal stimulus, or part and parcel of changes in demand patterns based on new living situations post-pandemic. There are good arguments that all of these things are a part of it, and indeed the debate between these is really one about which is most supreme, as it's fairly hard to deny that any of these aren't contributing. Now, if we zoom out from the inflation side of this argument, there is another whole piece of this, which is just a question of generational productivity.

Starting point is 00:16:25 Holding aside any discussion of their role in getting themselves into this position, it is an absolute waste for an entire generation to be mired in debt rather than taking risk. When your young is exactly the time that you're supposed to be trying things, pushing the envelope, experimenting. By structurally saddling an entire generation, worth debt, we're undermining a key innovation function of society, and I can't see how that works out for us in the medium to long term. Rana Epting from Move On writes, the economics of forgiving student loans don't exist in a vacuum. Even if nominal inflation does occur, it would be offset, if not reduced, by payments restarting and pales in comparison to the looming economic

Starting point is 00:17:03 calamity of an entire generation impaired by debt. Now, when it comes to the argument, and perhaps you'll allow a little editorializing here, that people should be stuck with the decisions they made because they could have chosen better economical options. Let's not forget that everyone who is 17 and 18 in America is pushed into four-year universities absolutely relentlessly. There is a massive marketing machine that is not limited to anyone's socioeconomic group. What's more, the market is sort of doing its job right now on the front of trying to realign the ROI of degrees. Between 2011 and 2021, there has been a massive shift in what people are getting degrees in. What's down? Religion, down 40 plus percent, humanities down 35%, history down 34%, English degrees down about 32%, law degrees down about 22%,

Starting point is 00:17:49 and while that might seem not so good because at least there's a clear career path with law, it actually is a reaction to the fact that we've been producing too many law students for the available positions. Philosophy degrees are down about 15%, and arts degrees are down about 7%. Meanwhile, what's up? Technician degrees are up 10%, aeronautics degrees up 20%, math and statistics degrees up 55%, engineering degrees up 55%, nursing degrees up 90% plus, and computer science degrees up comfortably over 120%. In other words, the young answer get in the memo, which means that the argument that the problem with college is that it's just a bunch of four-year liberal arts kids who don't

Starting point is 00:18:26 get economics is getting less and less relevant by the year. However, what I do resonate with and what I think is absolutely inescapable, is the question of just what the hell the long-term plan here is? Even with the quote-unquote right degrees getting more popular, the cost-structural of universities remain bloated and getting worse. I think there is a strong argument to be made, in fact, that the last decade of post-GFC easy monetary policy aided and abetted this. In a world where loans were cheap, more lenders got into the game, people took on more debt, and because more debt was available, universities could just keep charging and not see a drop in who can say yes. Except what people were actually saying yes, too, was getting worse and

Starting point is 00:19:04 worse and worse. This is a fairly pernicious cycle, and I think that the concern that the government just clean slating debt every few years will absolutely reinforce this. However, at the end of the day, as the point of the show was, inflation is what's dominating the conversation. Last night, the Wall Street Journal editorial board wrote student loan forgiveness is an inflation expansion act. Unless you think it's just Republicans, liberal Noah Smith, no opinion.

Starting point is 00:19:29 On Twitter, writes, Biden's student cancellation is just about equal to all of the new tax revenue raised by the Inflation Reduction Act over the next decade, but concentrated all in one year. That doesn't seem like a good approach to reducing inflation. Between this and the IRA's increase in Obamacare subsidies, Dems are still doing the throw money at overpriced service industries thing, but at least the Obamacare subsidies went to poor folks. So there we have it. Inflation is the inescapable driver, not just in economic questions, but also in these sort of political questions.

Starting point is 00:19:57 For what it's worth, I don't think this ends at the midterms, even though it's going to get louder because of the midterms. Until inflation comes down significantly, this is just the world we live in. For now, I want to say thanks again to my sponsors, nexo.io, chain aliasis and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Student Debt Relief Shows Why All Politics Is Now an Inflation Debate

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