The debt of many student borrowers will disappear. What happens next?

As President Joe Biden announces his plan to cancel student debt, economists have already begun to wonder whether this action could worsen the inflation spike that continues to plague the US economy.

What to know about student loan debt forgiveness

Among the most prominent voices warning that forgiveness would lead to higher inflation is Larry Summers, former Treasury secretary and president emeritus of Harvard University, who expressed his opinion in a series of tweets on Monday.

“I hope the administration does not contribute to macro inflation by offering unreasonably generous student loan relief,” he wrote. He said debt relief would result in increased spending, which in turn would increase aggregate demand and, therefore, inflation.

The Committee for a Responsible Federal Budget, a nonpartisan, nonprofit organization focused on fiscal policy issues, echoed concerns, written on August 16 that $10,000 of debt cancellation would add 0.15% to a common measure of inflation, personal consumption expenditure, or PCE, price index, with a compounding effect over time.

The PCE price index is a more comprehensive measure of the price of goods and services than the most commonly observed measure of inflation, the consumer price index or CPI. Unlike the CPI, the PCE showed no signs of slowing down.

Moreover, canceling the debt would negate the impact the recently enacted Inflation Reduction Act is expected to have on fighting inflation, the group said.

“Debt cancellation would boost short-term inflation far more than the IRA would reduce it,” he said.

Other economists disagree. In a series of tweets On Wednesday, New York Times columnist and former Princeton University economist Paul Krugman dismissed arguments about inflation, writing that the relative impact of debt cancellation would be small compared to the size of the US economy and that any potential increase in spending would be moderated by the Federal Reserve’s plan to tighten financial conditions.

“The ‘but it will be inflationary’ argument seems so obviously wrong, so inconsistent with the math, that, like I said, it’s baffling,” Krugman said.

That of the White House fact sheet on Biden’s debt cancellation plan does not address the possible inflationary aspect of it. And advocates for student debt relief have said the plan doesn’t go far enough.

Another economist believes that as long as the moratorium on student debt repayment ends, the inflationary impact of debt cancellation will eventually prove to be “largely a washout”.

As people start repaying their loans, they’ll have less money to spend on discretionary items, like clothes and dining out, said Mark Zandi, chief economist at Moody’s Analytics. Less spending may stimulate less demand, which could slow inflation.

Economists will continue to debate the question of the impact of inflation, said Victor Bennett, professor of entrepreneurship and strategy at the University of Utah Eccles School of Business.

He said questions remain about whether the benefits of Biden’s plan will accrue primarily to wealthier people, who tend to spend less of their overall budget, and how long the economy will continue to see higher inflation. provided that.

Higher consumer prices in the near term, along with growing uncertainty about an economic recession, could encourage people to save more.

“[It] depends on whether beneficiaries start spending [more]and that’s an open question,” Bennett said.

Charles Hermann contributed.

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