By Casey Harper
The middle square
https://www.thecentersquare.com/
President Joe Biden is considering eliminating student loan debt for millions of Americans, a move critics say could increase inflation and further exacerbate the country’s economic woes.
“I’m considering looking into deleveraging,” Biden told reporters this week.
Biden added that he would not forgive up to $50,000 in debt per borrower, a number that had previously been tossed around, but would “examine closely” another plan. He said he will release more details in the coming weeks.
As inflation remains high, bipartisan groups are raising concerns about federal spending and the latest economic reports show the economy has contracted over the last quarter.
Critics say canceling student loan debt would further increase federal debt and inflation, which is at its highest rate in decades.
“Student debt relief may be a highly appealing political topic, but it’s not good politics,” said Maya MacGuineas, president of the bipartisan committee on responsible federal budgeting. “It’s costly, inflationary, poorly targeted, and doesn’t address the fundamental issues in our college funding system.
“Either the President is serious about reducing deficits and controlling inflation, or he isn’t,” she added. “The White House cannot have both. We need to focus on a serious and effective agenda that prioritizes sound policies, not poorly targeted political giveaways.”
Economic inflationary pressures, fueled in part by the rush to take on government debt in recent years, are making Americans feel the crisis. A recent study found that they limit their discretionary spending to focus on what matters most. A newly released Gallup poll reports that Americans view inflation as their top concern.
“American confidence in the economy remains very low, and mention of economic issues as the top concern in the US is at its highest level since 2016,” Gallup said. “Inflation, which was and continues to be the top economic problem last month, was at this level before in 1984.”
A recent survey by NEXT Insurance found that one in three small businesses has considered closing.
“According to a new survey by NEXT Insurance, small business owners in the United States are frustrated and stressed about inflation and the state of the economy,” the group said. “More than a third have considered closing in the last 12 months. As prices continue to rise and supply chains continue to falter, many small business owners have been forced to work longer hours, hike prices and even cut their own salaries just to stay afloat, our survey found. And a majority of small business owners believe the pain is not over yet.”
The Bureau of Economic Analysis reported this week that the economy contracted 1.4%, contradicting forecasts that the economy would grow 1%. The data comes after the economy grew nearly 6% in 2021, a year of recovery from the economic hardships of the COVID-19 shutdown.
The Federal Reserve has announced a series of rate hikes to fight inflation, but some experts doubt whether they will succeed or worsen the economy.
“An overheating US economy will prompt the Fed to act more aggressively on inflation,” said Orphe Divounguy, chief economist at the Illinois Policy Institute. “Faster inflation will weigh on US economic growth. However, more aggressive action by the Fed – to bring inflation down – could also plunge the economy into recession. To curb inflation, either demand must fall or America needs a miraculous increase in productivity. Recent economic data should lead to faster and more aggressive rate hikes.
“Unfortunately, the Fed has rarely been able to bring inflation down without inducing a recession,” he added.
These economic woes have raised the stakes for possible debt relief. However, Biden has already canceled some student debt. The Department of Education recently announced “immediate debt relief” for 40,000 borrowers via public sector loan forgiveness after years of complaints about mismanagement of the program. While the number of borrowers pardoned was comparatively small, it raised more questions about a more significant cancellation.
MacGuineas added that even partial debt relief in the middle ground would be costly.
“Full cancellation of debt would be massive handouts to rich doctors and lawyers, worsen our inflationary crisis, and cost almost as much as the entire 2017 tax cut,” she said. “Even partial debt relief would be costly, regressive and inflationary. $10,000 per person debt relief would cost as much as universal pre-K or a full extension of expanded ACA subsidies.”
Regardless of whether Biden cancels student loan debt, experts say the US could face a bumpy economic ride and even a recession.
“On the one hand, this economic report shows that US demand is resilient despite many headwinds — COVID, supply chain issues, labor shortages, a slowing global economy, a war in Europe and rising commodity prices,” Divounguy said. “That’s because private consumption — about 70% of GDP — and investment have actually increased despite price hikes. On the other hand, higher input costs for producers are hurting the US economic outlook. Higher inflation pulls down US manufacturing and US exports. Uncertainty in Europe and a weaker global economy have also strengthened the US dollar and US imports are surging. For ease of accounting, lower net exports are subtracted from GDP.
“The increase in the trade deficit is also a sign that domestic demand is outstripping the economy’s productive capacity,” he added. “And that means the US economy is overheating.”
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