Redistributive policy

Biden’s student loan policy lost track

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President Biden’s student loan policy will cost $400 billion over a decade, according to the Congressional Budget Office.

Stefani Reynolds/AFP/Getty Images

About the Author: Glenn Hubbard is the Russell L. Carson Professor of Economics and Finance at Columbia University and author of The wall and the bridge, published this year by Yale University Press. He served as Chairman of the Council of Economic Advisers under President George W. Bush.

The Biden administration’s decision to cancel substantial amounts of federal student loans has given progressives heartburn as being insufficiently generous. Conservatives, for their part, have denounced both the fiscal cost and the distributive consequences of the action and the ongoing repercussions. Economists have weighed in on concerns about fairness (beneficiaries who have attended college versus many taxpayers who have not), moral hazard (the prospect of a pardon may increase demand for non-economic academic choices) and inflation (additions to aggregate demand in an economy already suffering the inflationary consequences of excess demand). These concerns are valid, but they belie a larger economic and political problem.

The student loan debt relief mistake is not a one-time mistake, but the most recent riff of a policy approach that fails to both articulate an economic narrative and understand how the economy works. . Successful economic policy both comes full circle from telling the story of the problem it is trying to solve and considering the market response. Failure to do so is to lose track and face unforeseen, albeit simple to anticipate, consequences in the market.

The student loan forgiveness action has lost track. The underlying economic narrative is the opportunity value of education in improving the skills of Americans in the contemporary economy. This narrative may well be associated with an expansion on the supply side of this opportunity for more Americans, or new training support. The administrative blunderbuss does neither. Instead, it leads to redistribution for former recipients of educational services and uncertainty about the likelihood of such future redistributions.

On Monday, the Congressional Budget Office estimated that the Biden administration’s plan will cost $400 billion over 10 years. This amount represents about one and a half times the 10-year budgetary cost of a large block federal grant to the states proposed by Amy Ganz, Austan Goolsbee, Melissa Kearney and me. The grant would target community colleges, which are critical institutions for skills development. This would improve community college access and student completion rate once enrolled. We have estimated that such a block grant could close the completion gap between two-year university students aged 18-24 and their peers at four-year institutions by 2030. During this period, it would increase also the share of Americans aged 25 to 64 with a college degree or other high-quality degree at the equivalent level to the share of jobs reflecting advanced skills. Such a supply-side initiative embodies equity, while avoiding bargains based on whether one has saved or borrowed for a college education.

Canceling student loans also ignores the functioning of the underlying higher education markets. Loan forgiveness and the prospect of it in the future increase the demand for a college education, raising the price of a college education, all else equal. (The block-grant approach to community college reform, on the other hand, would not. Neither would grant-funded colleges historically.) Economists have warned for decades that some forms of student financial aid increase fees. tuition, which reduces their effectiveness in increasing the quantity of educational services. Addressing legitimate concerns about the costs of higher education requires a broader approach than simply increasing demand.

The recently enacted Inflation Reduction Act provides another example of economic loss of thread. The new law has little to do with fighting inflation. This narrative is best centered on addressing supply chain dislocations and reducing excess demand due to loose fiscal and monetary policy. Instead, the law focuses on numerous spending initiatives from the previous and failed Build Back Better Act, including various tax subsidies to “green” initiatives for alternative energy and its uses. But a policy discourse on climate change should focus on the underlying externality (an unpriced social cost of carbon) via imposing a price on carbon through a tax or cap system and exchange, as well as support for fundamental research on alternatives to fossil fuels and associated technologies. The Cut Inflation Act’s approach to climate policy is not only indirect, in the form of subsidies, it also raises political concerns about corporate welfare. While the externality and research approach allows markets and innovation to adapt over time, and the focus only on generous subsidies, for example for electric vehicles, could lead to excessive demand for key minerals, with little political – economic or geopolitical – focus on their supply.

The health care provisions of the Reducing Inflation Act provide yet another example. The Inflation Reduction Act and the Affordable Care Act define health policy goals as “access” by expanding health insurance subsidies. In doing so, they also lose track. The narrative of economic policy in health policy is to improve the value and efficiency of health care delivery. This health policy narrative calls for health care and insurance market reforms and reform that goes beyond increased demand-side subsidies. From Massachusetts health care reform to the Affordable Care Act and its extensions, grants drive demand and the well-being of those who access them. But these measures also increase the costs – in the absence of supply-side reforms – of health insurance and health care for many people.

These shortcomings in both current economic policies and their design leave an opportunity for a new framework with a clear narrative and understanding of the markets. Key elements include ways to help more Americas bridge the gap between traditional skills and those needed in the contemporary economy, support for basic and applied research to drive innovation and its diffusion, reform of immigration that balances the need for additional talent with concern for opportunities for low-income people. qualified Americans, health care reform that improves the functioning of care and insurance markets, a review of technology governance to balance privacy concerns and innovation, and a concerted agenda to tackling the rising cost of living not through fiat or price regulation, but by tackling policy-induced inefficiencies in the housing, education and healthcare markets.

Such an approach holds the thread – closing the loop, not leaving a free end to pull.

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