President Biden still doesn’t get it.
Pandering once again to restive progressives whom he desperately needs to come out and vote in November, Biden has extended the moratorium on student loan repayments through Aug. 31. This is bad policy and will make inflation worse.
Inflation emerged in the U.S. last year because amid a fast-recovering economy, federal spending went through the roof. As JP Morgan CEO Jamie Dimon wrote in his annual shareholder letter recently, “in hindsight, the medicine (fiscal spending and QE) was probably too much and lasted too long.” Amen to that.
This taxpayer-funded generosity caused excess demand, exacerbating supply-chain problems brought on by COVID-19; it also led to a labor shortage. Thanks to Biden’s $1.9 trillion American Rescue Plan, and to earlier stimulus measures, millions of Americans received $1,400 checks, incremental unemployment benefits and were temporarily relieved of paying off their student loans and paying rent.
Thus supported, many stayed home, even as millions of jobs went begging. Wages began to rise.
Today, we are experiencing an accelerating wage-price spiral. Pay is increasing because workers are aware that with inflation of nearly 8 percent, they are falling behind; they are demanding more. Companies, meanwhile, pass through higher wages to customers, and are doing so with abandon.
The most critical issue facing our economy today is that too few people are back at work. As economist Paul Krugman recently pointed out, even as output has recovered, “the number of employees is still about a million and a half below prepandemic levels and even further below the prepandemic trend.”
Every time Biden hands out another benefit, like the just-announced extension of paused student loan payments, it gives a cohort of people one more reason to stay out of the workforce.
In a recent letter sent by 100 Democratic legislators, including Sen. Elizabeth Warren (D-Mass.) and members of the progressive “Squad,” they cite the benefit to borrowers as amounting to $343 per month on average. One less reason to go back to work.
In this case, the moratorium, which was adopted early in the pandemic, applies to some 43 million Americans who owe a total of $1.6 trillion in student debt.
Democrats have been pushing the president to extend the moratorium, or to forgive those loans altogether, citing the economic downturn. But the downturn is over; the economy is growing rapidly. According to Biden himself, the economy is “on the move.” There is no excuse for a further “pause.”
The interest in alleviating the burden of student loan payments may be about economic stress, but it is also about turning out young and minority voters in November.
As reported recently in Politico, “A range of Democrats had urged the Biden administration to extend the pause on payments through at least the end of 2022, which would be long enough to avoid requiring borrowers to make payments just before the midterm elections.”
Like most other building blocks of the Democratic coalition, young people have moved away from Joe Biden en masse. That is a problem for Democrats hoping to maintain their majority in Congress, especially since younger people often fail to turn out in midterm elections.
In a recent Economist/YouGov poll, only 12 percent of voters between the ages of 18 and 29 gave Biden a strongly favorable rating, and only 16 percent in the 30-44 age bracket gave the president a strong endorsement. A year ago, those totals were 21 percent and 29 percent, respectively.
Democrats are also nervous about minority defections. In the letter from legislators, they note that “Black students in particular borrow more to attend college… and have a harder time paying their debt off than their white peers. They are more than three times as likely to go into default within four years on their federal loans as white borrowers…” They also note that “Latino borrowers are more likely to struggle in repaying their loans and have some of the lowest post-education earnings among all racial or ethnic groups.”
Overall, the Democrats conclude, “Canceling student debt is one of the most powerful ways to address racial and economic equity issues.”
Yes, and seeing your polling drop among those groups, as it has, is the most worrisome development of all for Democratic candidates.
As many have noted, cancelling student loans mainly helps those with above-average earnings prospects. A recent study by the Brookings Institution also concluded that, “Measured appropriately, student debt is concentrated among high-wealth households and loan forgiveness is regressive whether measured by income, educational attainment, or wealth.”
Another look at the issue, from researchers at JP Morgan, found, “a disproportionate amount of debt forgiveness goes to middle- or high-income households…because higher-income households tend to hold more student debt.”
Rather than rewarding those who have voluntarily borrowed for school, insulting families who worked hard to pay off their loans, Biden should encourage everyone to get a job. That would be good for inflation, good for the economy and good for him.
Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.