A “flashy gimmick.”
That’s what the Wall Street Journal‘s editor… oh, wait, it’s the Washington Post!
Joe Biden’s student debt relief plan is a piñata. Anybody and everybody is free to pick up a baseball bat and take a blindfolded swing at it. When it cracks open, some $400 billion in purportedly “free money” will fly out everywhere like candy, which “the upper-middle class and wealthy” will gleefully collect with “American taxpayers footing the bill.”
The passages in quotes are from a scathing WaPo editorial, which, as noted here at the outset, decried Biden’s decision as a “flashy gimmick.”
I feel compelled to update cost estimates on the final plan, although I’m not sure why. The idea that federal spending (any federal spending) in the US is ever “paid for” in the same sense that you and I have to “fund” our daily purchases is among the most ridiculous canards ever foisted on the voting public.
But, because this is topical (to put it mildly) and because I documented the initial estimate from Penn Wharton last week, I’d be remiss not to at least mention the updated forecasts, which were based on Biden’s actual plan.
Penn’s estimates show the debt cancellation cost alone will exceed a half-trillion over a 10-year budget window “depending on whether existing and new students are included” (red in the figure, below).
The year-one cost is $469 billion (orange in the figure, above). All-in (i.e., including loan forbearance and the new income-driven repayment program), the 2022 cost is estimated at $526 billion (rose colored cell).
For what it’s worth, White House press secretary Karine Jean-Pierre told CNN the cost of the plan is likely to be about $24 billion per year. Last week, she was repeatedly pressed to provide specifics, but generally demurred in favor of allusions to Biden’s deficit reduction efforts — it’s “fully paid for because of the work that this President has done with the economy,” as she put it.
Jean-Pierre might’ve simplified things by stating: Dollars are fungible, estimates are subject to uncertainty and budget math is malleable.
Republicans lambasted the plan. And the White House hit back — hard. The tweets (shown below) were apt and trite simultaneously.
Congressman Vern Buchanan had over $2.3 million in PPP loans forgiven.https://t.co/bXpwJlWRm4
— The White House (@WhiteHouse) August 25, 2022
Congressman Kevin Hern had over $1 million in PPP loans forgiven. https://t.co/XsBaqxNZN4
— The White House (@WhiteHouse) August 25, 2022
Congressman Matt Gaetz had $482,321 in PPP loans forgiven.https://t.co/XPgC0pETkp
— The White House (@WhiteHouse) August 25, 2022
So, that’s more than $6 million in forgiven PPP loans across just six people, all of whom took the opportunity last week to swing at the student debt relief piñata, either without realizing they were opening themselves up to charges of blatant hypocrisy or, more likely, assuming nobody would care.
I’m (extremely) reluctant to engage in this sort of counterproductive finger-pointing, but I do think it (inadvertently) underscores an important point.
Something good happening to someone else isn’t the same as something bad happening to you. Someone else’s gain isn’t your loss, unless you can be made to believe you’ve somehow “paid for” that gain. American politicians habitually perpetuate the poisonous (and manifestly false) notion that through tax dollars, other people’s gains are everywhere and always your loss. In addition to being almost criminally injurious to societal cohesion, mischaracterizing federal programs as taxpayer “funded” is a road to nowhere.
It will almost never be the case that any individual taxpayer would answer in the affirmative if the question is “do you want to pay for [XYZ]?”
Do you want to pay for Sally’s liberal arts degree? Of course you don’t. Do you want to pay the wages of Congressman Mullin’s plumbers, especially if, as The Oklahoman suggested, “at least some” of them “would have been shielded” from the state’s pandemic emergency orders “since essential services like plumbing were exempt”? Of course you don’t. Do you want to pay for the CIA to fire a drone missile into the middle of nowhere without assurances it’ll hit its intended target and without ironclad guarantees that the target is in fact a threat in the first place? Probably not. Do you want to pay for every, single thing the National Park Service does? Again: Probably not. Same goes for NASA.
Fortunately, you don’t have to answer those questions because you aren’t “paying” for any of those things. Taxes are better conceptualized as a necessary “evil” that legitimizes the currency in the first instance. Why do you want dollars instead of Ethereum? Well, there may be a lot of reasons, and there may be a lot of reasons you want Ethereum instead of dollars, but come April, the reason you want dollars is because that’s how you stay on the right side of the IRS. As long as taxes can only be paid in dollars, and as long as taxes are mandatory, there will always be domestic demand for dollars.
The idea that those tax dollars “pay for” a stranger’s theater degree, a congressman’s plumbers, drone missiles, trash cleanup at national parks or spaceships, is pure, unadulterated fiction. As is the idea that any of those things are “paid for” with “debt.” US Treasury bonds aren’t “debt.” They’re just dollars that pay interest in more dollars, and because the US is the sole legal issuer of dollars, there’s no amount of “debt” the US can’t service.
The short passage (below) is excerpted from a Goldman note. Do me (and yourself) a favor. Read it once as you’d read anything else. Then, read it again in the context of what I’ve just said about dollars and debt. You’ll come away smarter for it and, I hope, less irritated about the liberal arts degree you absolutely didn’t pay for.
Our economists estimate this program will discharge about $400 billion in student loan balances with a commensurate increase in the level of federal debt, but note that the only near-term effects on Treasury cash flows will come from the resumption in student loan payments next year (worth ~$35 billion annualized, roughly $20 billion less than the pre-pandemic trend). From an issuance perspective, while federal student loans do not count against the deficit when they are made, they do result in incremental Treasury issuance in order to finance their disbursement. In practice, rather than requiring a one-off increase in issuance to finance the relief, the impact on USTs outstanding will be felt gradually, as transferring the debt from households’ balance sheets to the federal government reduces future repayments to Treasury that would have taken place over many years.
I read the Goldman piece yesterday but the conversation I had last week was amusing. A Carpenter fellow my age was complaining vehemently about this and when push came to shove he had to admit that he really doesn’t pay taxes and he’s worried about how much Social Security he will get.
After reading your comment, I looked it up…..57% of US households paid no Federal income tax in 2021. Pre-pandemic that percentage was 44%.
Biden’s team response was good. PPP loans were ok, but not helping with student loans. The student loan thingy was the Democrats taking care of a constituency. Time honored. That is all there is too it.
Thanks H. Keep hammering it home.
There’s one thing I have yet to see anyone point out: the end of the loan repayment moratorium is dis-inflationary.
Since April 2020, effectively no one has been making payments on their student loans. That all ends January 1st. There’s still close to $1.5T loans outstanding, payments on which will have to be made by those with the highest marginal propensity to consume. That takes a lot of money out of a lot of pockets and will materially impact demand going forward.
This even impacts those professionals–the vaunted doctors and lawyers who don’t “need” it–at the top of the income distribution, as they’re at the point in their lives where they’re buying all the things. Sure, the need to resume payments might change their spending plans none-at-all, but they’ll still have fewer dollars left over at the end of the month. That money would have probably gone into the stock market, so it’s dis-inflationary for financial assets as well.
Thank you for continuing to hammer these points home. I really wish more people understood this and hope that this is a net positive for democrats come November, but I fear that there are far too many people who will believe that they are directly funding a “useless” liberal arts degree. I don’t blame the average person for not understanding how government financing works in the US, but I do blame them for not acknowledging all of the policies that directly benefit them while complaining that someone else is getting “free money.”
Yeah, I mean look, the optics around so-called fiscal “responsibility” are fine and great. And I’m not being sarcastic. I’m not anti-fiscal responsibility. In the case of emerging markets, the optics are obviously very important. If the US can run a balanced budget or a surplus, great. Do it. But if not, not. It doesn’t matter. My point isn’t (and has never been) spend to spend. Obviously you never want to spend to spend, just like you don’t generally want to do anything just to do it. My point is very simple: The US government doesn’t need “your” dollars or “China’s” dollars or “King Salman’s” dollars to forgive $10,000 in student debt, or pay for Mullin’s plumbers or send a rocket into space, just like the Pentagon doesn’t need you to pay your taxes before they can drone somebody. We do “stuff” and then we pretend to pay for it later with taxes and “borrowing.” If we want to cover the difference (i.e., offset the spending with taxes and Treasury issuance) later and pat ourselves on the back for it, and there’s a reasonable path to doing that, then I’m all for it. It looks good. I like things that look good just like anybody else. Also, I’m the first to say that sometimes the “stuff” we choose to do with the money we conjure is dumb. Maybe student debt relief is dumb. Maybe it isn’t. I’m not weighing in on that (or at least not here I’m not). I’m merely pointing out that there will never be a point (ever) when any citizen gets a bill in the mail that says “Due now: Sally’s unpaid tuition,” nor will there ever be a “Sally’s tuition” tax hike.
Agreed, one of the most asinine uses of billboard space in America is displaying everyone’s “share” of the US government’s debt. Does anyone really think Uncle Sam is going to come calling one day to collect those hundreds of thousands of dollars to cover their share?
While I appreciate the discussion of how liars lie, I disagree with the invocation of MMT’s claim that money isn’t money when the government spends it.
True, my tax dollars will never pay for the principle on the debt that this $400B giveaway* will incur, but that doesn’t lead to a reasonable conclusion that this expenditure is harmless. Even if you don’t view this as a direct transfer to Biden’s base (I do) and a form of vote buying, using political capital to spend the money here means the money won’t be spent elsewhere and more productively. Using an antiquated War on Terror law to backdoor the expenditure is an additional cynical cherry on top.
*yes, the Trump tax cuts were the same, as was my reaction
MMT doesn’t “claim” anything. It states facts. I’ve come to believe that MMT “proponents” either don’t understand their own arguments for what they are (i.e., a description of reality) or else do understand it and are using the “Theory” branding in order to present something that isn’t new or novel as a revelation in pursuit of — I don’t know — notoriety? On the other side, Republicans all understand MMT intuitively because, again, it’s just how things work. It’s not a “theory.” Republicans make “unfunded” expenditures all the time, and prior to Trump, most GOPers never saw a drone target or a military adventure they weren’t ready to throw newly-conjured money at.
Another great perspective on this situation H!
While I applaud the student loan forgiveness implementation, I feel that it is really only a band aid on the larger problem of the exorbitant cost of secondary education in the United States. This measure will provide temporary relief but the larger problem is sure to come back up again later if we don’t resolve it.
A Slovenian friend once told me”people here are never happy until their neighbor’s house is on fire.”
Whatever the case about monies and college, the less fortunate who happen to be geniuses have made the total cost worth it for the wealth of our nation.
Meritocracy should not be allowed to die off.
I agree, and I strongly agree with your concluding sentence.
There is no “meritocracy.” That’s a myth. Always has been, always will be.
And that myth is what makes it possible for the upper-middle class to suppress the very same “less fortunate” that you mentioned.
The privileged in America lean on the meritocracy myth to pretend they “deserve” what they have, while everyone (or most everyone) who’s poor is described as having “not worked hard enough,” etc.
True meritocracy can only come about when the initial playing field is totally level — when equality of opportunity is real. When inner-city kids and the rural less fortunate have the exact same educational opportunities that suburban upper-middle class kids have, for example.
There’s nothing meritocratic about a scenario where one child has to spend his teens dodging literal bullets in a housing project in Chicago, while another kid his age wakes up in a $750,000 home every morning to a nutritious breakfast and a ride to a top school in a Mercedes SUV. There’s no way (none) to know which of those kids is actually more capable or smarter, because the bullet-dodging kid will be lucky to make it to 18 alive.
Here’s a thought: If our hypothetical kid who grows up dodging bullets manages to become a millionaire by 25 selling drugs, and the suburban rich kid is a millionaire by 30 because he landed a great job thanks mostly to opportunities afforded by privilege and family pedigree, who’s actually more capable and more self-sufficient and thereby more deserving of the “meritocracy” label? Probably the drug dealer. Put him anywhere on Earth and he’ll find a way to make it. Put the suburban kid out on the streets for a week and see how long he lasts.
Doesn’t the US government need our dollars to legitimize the currency? Doesn’t the currency need to be legitimate to forgive $10,000 in student debt, or pay for Mullin’s plumbers, or send a rocket into space?
“Your” / “our” dollars? Where did you / we get them from? Did you / we mine dollars in your / our backyard(s)? Or print them on your / our Inkjet(s)? Or mine them on your / our computer(s), like Bitcoin? You / we only have dollars because the government created them in the first place.
Why do they need them back?
They don’t!
OK…I’d like to see how that works.
You’re conflating two different things. The government doesn’t “need” your dollars. The tax regime serves a variety of purposes (e.g., it can, when leveraged properly, incentivize desirable social outcomes, etc. and it can cool demand — you seem to be alluding to the latter). What folks who make the argument you’re making (tacitly or otherwise) can never (ever, ever) answer is this: If the PLA invaded the UK next week and Xi claimed London as the new offshore capital of China and established a puppet regime at No. 10, why (and how) is it that nobody on Capitol Hill (not a single soul, Republican, Democrat, Progressive, Trump-ist, or otherwise) would spend a single second discussing how to fund “Operation Free London”? Why is that? How is that? If the government “needs” “your” dollars (or “China’s” dollars), then how is it that the US would simply spend a trillion (or a quadrillion or a bazillion or whatever the necessary number of dollars would be, even if that number ended up being more than the total number of current dollars in circulation), to liberate London? Because I can promise you that’s what would happen. There is no ceiling on that number. If London is ever commandeered by a foreign power, there is no limit to the amount the US would spend to go over there and rescue the city and there would be no delay (none) in going either. The ships would be in the water as soon as it was logistically possible, and the entire US military machine would be mobilized overnight and we’d spend, and spend, and spend until there was nothing left of the PLA. Eventually, “your” tax dollars would come into play, and we’d issue some (a bunch) of war bonds. But that’d just be a paper charade. Whether you paid your taxes or whether anyone bought those bonds wouldn’t change anything at all in terms of what we would do.
Great conversation. Interesting. Money is a tool. It can be used to poke or prod. It can be used to incent. Yay, the power of the money press!
These posts remind me of the news back in 2017 when Japan simply cancelled 50% of its national debt. It’s as if they said, “It’s okay. No problem here. We’ve got this.”
I recall remarking, “Huh? How can they do that?” The talking head on the newscast indicated they did not expect the move would create any issues for the economy. And the country and people of Japan did not experience any consequence whatsoever. All was, and is, well in Tokyo.
I was referring to the tax regime in the same way that you had: “Taxes are better conceptualized as a necessary “evil” that legitimizes the currency in the first instance.
If taxpayers legitimize the currency, then it’s still reasonable for taxpayer’s to be upset with how their elected government spends it…if they do disagree with it. Real Consequences are within the realm of possibility for irresponsible stewardship of the world’s reserve currency.