A new study out of Bard will no doubt produce a hissy fit among orthodox economists…assuming they don’t succeed in ignoring it instead
In The Macroeconomic Effects of Student Debt Cancellation, Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum present a detailed examination of the costs of cancelling all student debt, public and private. Their main findings:
A program to cancel student debt executed in 2017 results in an increase in real GDP, a decrease in the average unemployment rate, and little to no inflationary pressure over the 10-year horizon of our simulations, while interest rates increase only modestly. Our results show that the positive feedback effects of student debt cancellation could add on average between $86 billion and $108 billion per year to the economy. Associated with this new economic activity, job creation rises and the unemployment rate declines….
It is important to note that the macroeconomic models used in this report cannot capture all of the positive socioeconomic effects associated with cancelling student loan debt. New research from academics and experts has demonstrated the relationships between student debt and business formation, college completion, household formation, and credit scores. These correlations suggest that student debt cancellation could generate substantial stimulus effects in addition to those that emerge from our simulations, while improving the financial positions of households.
The study examines two possible routes for wiping out student debt, via having either the Administration or the Federal Reserve cancel the debt, and it also considers the operational issues in depth. They also use two different macroeconomic models to estimate the impact.
Because the idea of cancelling debt is such a third-rail issue, it is not hard to imagine that if this study does get the attention it warrants, it will elicit a great deal of pushback. It is going to be interesting to see how much if any is intellectually honest and analytically sound.
Some may point out that while cancelling student debt will free up past borrowers, it leaves unsolved the problem of out of control higher educational cost inflation. That has resulted in large measure from access to borrowing allowing students to mortgage future income, which in fact may fall short of what debt-pushing college administrators cheerily said they ought to be able to earn. Even borrowers who do land good jobs can miss payments as a result of illness, job loss, or reductions in pay that then result in them being hit with penalty interest rates. And that’s before you factor in that some borrowers, particularly borrowers from private lenders, may not finish their course of study and thus are saddled with debt, yet don’t get earnings-enhancing credentials.
The evidence is overwhelming that the rapid rise in higher education costs hasn’t produced better schooling. Even in public university systems, schools have been found to spend as little as 10% on teaching. Higher expenditures have gone substantially into adminisphere bloat (both numbers and pay levels) and building programs.
The Democrats are sure to do everything they can to avoid treating this analysis seriously. If they acknowledge that burgeoning student debt is such a serious problem that radical-sounding solutions are better options than a gangrenous status quo, that then raises the next set of uncomfortable questions: what to do going forward? Someone who just graduated will get a big break, but what about the kids who are in school now and on track to graduate with big debts? Conservatives and neoliberals both are sure to say we can’t have mass debt writeoffs every 15 years, that Something Must Be Done about the underlying problem.
That is a conversation, to employ Dems’ own turn of phrase, that the party will do everything to avoid. The higher educational complex is a Democrat stronghold. Op-eds from academics far more often back pet Democratic party positions than those of Republicans or the bona fide left. Reliable support from scholars serves to augment the efforts of Democratic think tanks. In keeping, we’ve noted that Elizabeth Warren, who was the top bankruptcy law professor in the US, has advocated only rearrange-the-deck-chairs-on-the-Titanic level remedies for the student debt penury, and has never pumped for an obvious solution of having student debt be dischargeable in bankruptcy, as it was before 2005. The only way to explain her silence is that she does not want to cross swords with university officials and call out military-industrial-complex-levels of waste in higher education.
I hope you’ll circulate this report widely. We’ve embedded it at the end of the post. From its executive summary:
• The policy of debt cancellation could boost real GDP by an average of $86 billion to $108 billion per year. Over the 10-year forecast, the policy generates between $861 billion and $1,083 billion in real GDP (2016 dollars).
• Eliminating student debt reduces the average unemployment rate by 0.22 to 0.36 percentage points over the 10-year forecast.
• Peak job creation in the rst few years following the elimina- tion of student loan debt adds roughly 1.2 million to 1.5 million new jobs per year.
• The inflationary effects of cancelling the debt are macro-economically insigni cant. In the Fair model simulations, additional inflation peaks at about 0.3 percentage points and turns negative in later years. In the Moody’s model, the effect is even smaller, with the pickup in inflation peaking at a trivial 0.09 percentage points.
• Nominal interest rates rise modestly. In the early years, the Federal Reserve raises target rates 0.3 to 0.5 percentage points; in later years, the increase falls to just 0.2 percentage points. The effect on nominal longer-term interest rates peaks at 0.25 to 0.5 percentage points and declines thereafter, settling at 0.21 to 0.35 percentage points.
• The net budgetary effect for the federal government is modest, with a likely increase in the deficit-to-GDP ratio of 0.65 to 0.75 percentage points per year. Depending on the federal government’s budget position overall, the deficit ratio could rise more modestly, ranging between 0.59 and 0.61 percentage points. However, given that the costs of funding the Department of Education’s student loans have already been incurred (discussed in detail in Section 2), the more relevant estimates for the impacts on the government’s budget position relative to current levels are an annual increase in the deficit ratio of between 0.29 and 0.37 percentage points. (This is explained in further detail in Appendix B.)
• State budget deficits as a percentage of GDP improve by about 0.11 percentage points during the entire simulation period.
• Research suggests many other positive spillover effects that are not accounted for in these simulations, including increases in small business formation, degree attainment, and household formation, as well as improved access to credit and reduced household vulnerability to business cycle downturns. Thus, our results provide a conservative estimate of the macro effects of student debt liberation.