Redistributive policy

The student loan bailout is a terrible policy. The GOP response has been weak.

(Photo by Paul Morigi/Getty Images.)

President Biden’s executive student loan forgiveness action exposed both the crude self-interest of progressive politics and the political recklessness of the Republican Party.

America’s burgeoning progressive movement increasingly defines itself as championing poor families held back by an economic system rigged for inequality. Framing politics as a battle of the “people against the powerful,” progressives demand that the government devote more resources to the working class and poor families. However, as working-class families have drifted to the right and the professional class has shifted to the left, progressive priorities have accordingly shifted to their new coastal and upward-moving electoral base. Much of the Democratic legislative push against the 2017 tax cuts has focused on restoring the full state and local tax deduction (SALT) that massively benefits high-income coastal families. The US bailout spent a lot of money on rebates to upper-middle-class families who had suffered no loss of income due to the pandemic. The recent (and misnamed) Inflation Reduction Act has devoted most of its resources to climate policies that are widely championed by progressive students and professionals.

And now President Biden wants to spend up to $600 billion to bail out student loans of up to $40,000 to families earning up to $250,000 a year. This is pure redistribution from the working class to wealthier university graduates. Two-thirds of millennials do not have student debt because they did not attend university or were able to avoid loans. Of those who borrowed, the typical student got a $30,000 student loan for a bachelor’s degree that will increase average lifetime income anywhere from $1 million at $2.8 million (although these returns vary widely with middle finger). At an interest rate of 4%, these typical loans require monthly payments of $182 for 20 years, or about 4% of typical earnings. Only 6 percent of student borrowers take out more than $100,000 in loans, and they are highly concentrated at the Faculty of Law and the Faculty of Medicine.

If Washington is looking to spend $600 billion to alleviate economic hardship, it’s disconcerting to target upwardly mobile college graduates. Nearly half of all student loan debt is held by people with advanced degrees – including doctors, lawyers and MBA business executives – who borrowed as an investment in high future income that makes debt affordable.

President Biden has defined student loan forgiveness as helping low-income college graduates whose loans prevent them from buying a home or affording child care. If that was really the goal, the White House could have capped eligibility well below $125,000 per person ($250,000 for a couple) — nearly quadruple the median family income and set an income cap that largely excluded doctors, lawyers and business executives. Even the president’s income cap underestimates the policy’s upward tilt, as many lucrative degree holders who currently earn less than $125,000 will earn raises and have substantial lifetime incomes.

Combined with the $300 billion cost of the student loan payment moratorium first put in place by President Trump but repeatedly extended by Biden, the total bailout for college borrowers could reach $900 billion, according to the Committee for a Responsible Federal Budget. This executive action creates more debt than that generated by all but a handful of laws passed by Congress in the past 50 years. And according to the former Obama White House Chief Economist Jason Fourman, the inflationary effects of the additional bailout could cost families up to $200 each in higher prices, in addition to higher government interest payments on that debt, which will eventually result in higher taxes. This additional inflation will likely force the Federal Reserve to raise interest rates higher than otherwise, which will cost jobs and increase the risk of a recession.

This bailout of student loans does nothing to stem the rapid tuition fee hikes that have forced students to borrow more money. In fact, it will further increase tuition fees and student debt. Current and future students will feel freed up to take out even more student loans in the event of future bailouts. Colleges and Universities – which usually raise tuition fees enough to capture 60 percent of all student aid – will likely raise tuition again to capture a large chunk of future borrowing. Therefore, student debt will return to its current level by four years, leading to calls for another round of taxpayer bailouts in an endless cycle.

We cannot overlook the moral case against a student loan bailout. This bailout violates the premise that borrowers have a moral obligation to repay their debts, especially when the borrower will profit generously from this investment. It redistributes money up the income ladder to wealthy professionals. And that makes fools and suckers of Americans who (as Bill Clinton so aptly put it) “played by the rules” and paid off their student loans, or went to college to avoid excessive borrowing. In short, a student loan bailout violates nearly every tenet of progressive rhetoric and simply represents the same raw, transactional redistribution to its (non-needy) voter base that Democrats railed against in the US tax cuts. GOP in 2017.

The bailout is also brazenly illegal, violating the Anti-disability law which requires that all executive branch spending be appropriated by Congress first. The president cannot unilaterally appropriate hundreds of billions of dollars.

Where is the intense and mobilized Republican opposition? As Democrats increasingly prioritize their upwardly mobile professional base, Republicans should have an easier time blasting student loan forgiveness on behalf of their increasingly popular constituents. Instead, most GOP politicians and leaders have been relatively timid in their opposition.

This reflects a broader Republican Party shift away from public policy in favor of cultural grievances. Much of the conservative discussion today is dominated by topics such as Donald Trump, critical race theory, gender issues, and liberal biases in the media, Hollywood, corporations, universities, and public schools. . Many of these topics are important – with progressives often acting as aggressors – but this focus has come at the expense of traditional issues such as taxes, spending, the size of government, strong foreign policy and the rule of law. . Twenty years ago, the conservative media devoted most of its time to debating and analyzing the traditional political issues of the time. Turn on the conservative media in 2022 and you’re more likely to hear about Donald Trump or woke corporations. For better or for worse, that is where the conservative energy lies today.

Republicans also fight less on economic policy because his transition from Paul Ryan-style free markets to Trumpist populism — with his support for big spending, tariffs and regulations — has left Republican lawmakers lopsided and unsure of where Trump stands. their constituents on most economic issues. Strategies. The GOP’s economic energy has traditionally prioritized: 1) pro-growth policies to create jobs and reduce inflation, 2) tax relief, and 3) tackling spending programs that redistribute income. down (social protection programs) or up (bailout of banks). Big Democratic spending bills have traditionally triggered fiscal, inflationary and redistributive fears and thus energized the conservative opposition.

However, as both parties grew more tolerant of budget deficits, Democrats dropped most middle-class tax hike proposals, then focused deficit spending on areas such as the infrastructure, science, veterans, and failed middle class relief checks. arouse conservative opposition. And as conservatives shifted their focus elsewhere, they elected lawmakers more as cultural totems than experts in legislative policy.

This means that while Democrats are forcing through a student loan bailout that is genuinely redistributive, costly, inflationary, and offensive, Republicans seem ill-equipped to elicit significant popular, legislative, or legal opposition. Nor did they lay the legislative groundwork for such opposition by first crafting a political narrative around the drivers of rising student debt (bureaucracy-heavy universities building billion-dollar endowments while taking advantage of federal student aid to dramatically increase tuition levels for students who cover too many unnecessary majors), or rallying behind alternative policies to rein in universities and help the small minority of borrowers truly unable to repay their student loans.

Democratic spendthrifts continue to emerge as genuinely representing upper-middle-class professionals rather than the low-income families they claim to prioritize. And Republicans have apparently become too bored and rudderless over economic policy to mount much opposition to wasteful government handouts. This is how a nation sinks into public debt.

Brian Riedl is a senior researcher at the Manhattan Institute. Follow him on twitter @Brian_Riedl.