Student debt is a product of our excess – Twin Cities
Millions of Americans collectively owe hundreds of billions of dollars in student loans. Reimbursement is difficult for many. During his 2020 campaign, President Joe Biden promised to cancel some federal student loans. Halfway through his term, he did not.
The 2022 election is looming, Biden’s popularity in the polls is low, and the cancellation would be wildly popular with his Democratic “base.” More and more people are asking him to act. Should he act and how?
If you poll economists from all political persuasions, most would say no — that fundamentally, canceling student debt is bad economic policy.
Former Fed Chairman Ben Bernanke, a longtime Republican ousted by Donald Trump, briefly commented on this in a recent New York Times interview. He pointed out that many highly indebted borrowers also have high incomes. He also noted that an after-the-fact rule change like this would penalize those who saved and saved to repay their loans.
This is all true, but things are more complicated.
Loan forgiveness advocates point out that blacks, Hispanics and other minorities bear a disproportionate burden. Many were first-generation college students, many socially disadvantaged and ill-prepared. Across all races and social classes, many distressed borrowers are people who, for whatever reason, have not graduated and must pay for higher education without the benefits of a degree. All of this is also true.
I would join most other economists in saying that, taken in isolation, general forgiveness would represent bad economics on the criteria of fairness and economic efficiency.
However, issues like this should never be viewed in total isolation. On the issue of student debt, there are related key questions to think about:
How did we arrive at this unprecedented situation where such a category of debt affects so many people to such a degree?
How have global public policies treated the age cohorts who owe this debt, primarily the children and grandchildren of baby boomers?
How would the debt cancellation “bailout” compare in size, fairness, and economic efficiency to other bailouts in recent history?
The answer to the first question is that over the past half century we have reduced the state and federally subsidized share of the cost of post-secondary education. And at the same time, we implemented policies that inadvertently led to higher costs at colleges and universities.
I have a personal recollection illustrating the first – my 1971 expense statement from the U. Returned from Vietnam in September 1970, I started as a freshman at the University of Minnesota in the winter term of 1971. My fee statement shows a total of $122 that I paid for tuition for 18 course units, plus health care and other services. It was less than a month of my GI Bill benefits or the social security check I received as a single survivor under 22. I paid for the books. The state covered all other costs of undergraduate education in public post-secondary institutions.
At the time, it was still a three-quarters system. Updating my costs with the consumer inflation rate, for a full year I was paying $2,606. At that time, Minnesota’s costs were typical of other states.
For people not eligible for my benefits, there were federal grants and loans. Costs were higher at private colleges, as was aid.
Over the next 20 years, things changed. State governments have taken over smaller and smaller fractions of undergraduate education in their colleges. The overall operating costs of public and private schools began a seemingly inexorable increase, far exceeding increases in the general price level. Federal grant funding has grown more slowly than tuition. Federal aid has shifted primarily to direct or government-guaranteed loans. And the income bonus rewarding four-year degrees first widened, benefiting most baby boomers, but then narrowed in the new millennium, hurting their children and grandchildren.
The result is that baby boomers like me experienced a golden age for attending college, more favorable in terms of access and funding than any cohort before or since, and more favorable earning potential after graduation. graduation. Young people are now right to complain that baby boomers have scrambled the myriad government lifelines extended to them – then pulled the lines after them, leaving the next generation to sink into debt.
Consider next the many cases in which government action transfers large sums from the treasury to a group without regard to equity or economic efficiency. In the 1930s, when one-third of the nation’s households lived on farms, federal farm payments reduced poverty. This had dwindled by the late 1960s, but the programs survived. Farmers are a small minority of the population, and the small number that produce more than 80 percent of total agricultural production is even smaller.
Critics of presidential decree erasing student debt rightly call it an endgame around the constitutional requirement that no Treasury funds be disbursed without authorization and appropriation bills passed by the Congress. But they make this argument selectively.
Consider that Trump was able to shell out some $18 billion to buy farmers off protesting his trade war with China using an obscure USDA slush fund that Congress will always top up later when the spotlight is diverted. somewhere else.
Consider the appalling spectacle of Treasury and Fed contortions to prevent major financial institutions from failing after 2007, while ignoring vulture funds, like that of future Treasury Secretary Steven Mnuchin, encouraging ordinary owners to spend the net worth of their home, then foreclosure.
And consider the intergenerational injustices embodied in the federal government’s borrowing and spending policies since Ronald Reagan’s inauguration in 1981 and accelerated by George W. Bush’s tax cuts of 2001 and 2003.
Medicare is another hallmark of a complex of recklessness and injustice. Spending in 2022 exceeds $800 billion. The actuarial value of what current beneficiaries have contributed is estimated to be less than $300 billion. The rest is paid, now and in the future, by the children, grandchildren, and great-grandchildren of baby boomers who haven’t seen an increase in FICA rates for Medicare since 1987, while the fraction of US output going to medical care more than doubled to almost 20%.
The economic inefficiencies and injustices of budget deficits and current funding for Social Security and Medicare require many columns to explore in depth. Suffice it to say, baby boomers living in glass mansions shouldn’t be throwing stones at their offspring.
St. Paul economist and writer Edward Lotterman can be reached at [email protected]