Monday, May 20, 2024
Business & EconomicsFinanceGovernment

Resuming Student Loan Repayment May Well Break The Economy. The GOP Is Cool With That.

The Supreme Court is set to decide whether the Biden Administration’s efforts to forgive $20,000 per borrower in student loan debt is unconstitutional. Exactly how much money that would take out of consumers pockets is up for some debate, but one firm estimates the amount at about $18 billion per month.  Republicans frame the cost of loan forgiveness as a cost to the economy without recognizing that repayment of student debt doesn’t generate economic product— consumer spending does. This puts into context the Republican assault on the initiative in the form of a couple of lawsuits that have made their way to the highest court– anything to defy Biden a win. Even if it means breaking the economy and throwing the US into a recession.

 

Weren’t We Saving, Like, A Bunch Of Money During COVID?

COVID subsidies– basically a trial run of universal basic income, which we fully support here at Handbuilt Heavy Industries, Inc.- showed huge promise for reducing rates of poverty without the pesky strings attached to most social spending programs. Economists have known that these cash payments– called “cash transfers”- are beneficial to humans as far as poverty reduction for a long time, of course, but the loudest economists end up going to work for think tanks where they’re effectively required to sign a form stating that they hate poor people and will help the neoliberal Washington machine reinforce the hegemony of really rich people, even if it’s theoretically worse for economic growth and demonstrably way worse for human beings at large.

But I digress.

The PUA money in particular was a trainwreck from an administrative standpoint, but it was beneficial for the poor, which, in turn, stimulated more economic growth. But it doesn’t seem that this translated to long-term savings, because Americans don’t save. Of course, until interest rates increased, the money that people saved during COVID (if they did) might well have translated to personal savings if not for the fact that there was little to no financial incentive to save when rates were so low. Combined with the unpredictable stock market, which I’ve been saying is grossly overinflated for years thanks mostly to some pretty wanton federal policy, you can easily see how we have set ourselves up for a minor train wreck.

Economic Math: How Bad Is Bad?

We are going to look at two economic equations to figure out the estimated effect on GDP if the Supreme Court decides that the loan forgiveness program is unconstitutional (and that there is no recourse to fix it– the former seems likely given how the court is now packed with radical conservatives, but the latter is a murky question):

  • Multiplier = 1 / (1 – Marginal Propensity to Consume)
  • Change in GDP = Change in Spending * Multiplier

If the marginal propensity to consume (MPC) is probably about 90%, that means that the average person spends 90 cents for every dollar they receive or earn, and save 10% of the rest. This is an average. That number if higher for poor people than for rich people because there’s only so much a rich person can spend to keep themselves alive, while poor people need to spend basically every dollar they get to survive. (A full two thirds of the country lives paycheck-to-paycheck). The US economy is largely defined by consumer spending (65-70%) because we have a mature economy with very well-developed markets. Did you notice that this is roughly the same as the percentage of Americans living paycheck-to-paycheck? Curious.

Anyway, this gives us a $10 multiplier for every dollar received by consumers. If the $18 billion number is correct, this will work out to a hit to GDP of $2.16 trillion in the twelve months following the decision. That’s almost 10% of US GDP. Of course, this doesn’t mean that the US would immediately lose 10% of GDP overnight. The SCOTUS case is not about the pause on repayment, it’s about the forgiveness of billions in debt. Resuming repayment would have a huge effect on GDP– I’m guessing over a trillion dollars over that time frame- but it’s more of an instigating event that comes as major corporations are already downsizing workforces (shortly after celebrating their best years ever, of course).

Is There Any Silver Lining?

Well, maybe. It’s either going to happen or it’s not. If SCOTUS does rule against the program, it’s likely that there will be any number of other efforts to accomplish the thing through a different channel. This is at least one benefit we have in our legal system– there are many ways to achieve similar results if the law blocks one thing or another. One possibility would be to allow borrowers to refinance their loans at a much lower interest rate, perhaps, or figure out how a program like the embattled-but-actually-rebooted PSLF could be used to facilitate loan forgiveness on a broader scale.

It’d certainly be a recession for me personally, since I simply don’t have the money to pay for the loans. I accrued a ton of debt after I got laid off from the city in 2019 and have been paying it off ever since (the $117 a month that I make from my loyal donors isn’t exactly covering it, much as Iove you all). I’ll be done paying most of it off by next year, but the insertion of an additional $1300 a month would wreck me in the interim.

While more than half of Americans live paycheck-to-paycheck, the loss of repayment deferment means that they will lose that buoyancy and start sinking– sort of like a submersible did a few days ago, for which its owner apparently received $450,000 in PPP loan forgiveness. But I don’t see too many complaints from Republicans about those loans being forgiven. A fascinating comparison, to be sure.

 

Nat M. Zorach

Nat M. Zorach, AICP, MBA, is a city planner and energy professional based in Detroit, where he writes about infrastructure, sustainability, tech, and more. A native of Lancaster, Pennsylvania, he attended Grinnell College in Iowa, the Kogod School of Business at American University, the POCACITO transatlantic program, the SISE program at the University of Illinois Chicago, and he is also a StartingBloc Social Innovation Fellow. He enjoys long walks through historic, disinvested Rust Belt neighborhoods at sunset. (Nat's views and opinions are his own and do not represent those of his employer).

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