Both top Democrat economist Larry Summers and top Republican economist Arthur Laffer agree that President Biden’s expected decision to forgive a massive portion of student loan debt will worsen inflation.
“The White House is expected to announce a plan to cancel a chunk of student loan debt on Wednesday, in addition to an extension of the existing payment pause,” The Hill reported. “Sources said President Biden’s intended measure will include at least $10,000 in loan forgiveness for borrowers who make less than $125,000 annually, as well as another payment freeze for roughly four months.”
According to economist Arthur Laffer, who served on the Economic Policy Advisory Board under the Reagan administration, the decision will worsen inflation in multiple ways.
“Of course, it will clearly worsen [inflation],” Laffer told Newsweek. “Inflation is really too much money chasing too few goods. There’s more to it, but that’s a good first step. [Forgiving student loans] will reduce the number of goods, which is inflationary. It will increase the size of the monetary base, which is also inflationary. The two together, I don’t know how much it will contribute [to inflation], but it’s not a trivial amount.”
According to Newsweek, Laffer estimated that “if everyone who qualified received the $10,000, it would cost $440 billion in a $22 trillion economy, or roughly 2 percent.” He said that 2 percent constitutes a “big number” in government spending. Laffer also explained that forgiving student loan debt could lead to less people working in an “already-scarce labor market.”
“What you’re doing is getting people out of the labor force not producing goods which will push prices up by itself…and expanding the quantity of money resources available will push prices up,” Laffer said. “More money and less goods—both of those combine to give higher inflation.”
Top Democrat economist Larry Summers, who served in the Clinton and Obama administrations, similarly warned that student loan forgiveness will make inflation worse.
“I hope the Administration does not contribute to inflation macro economically by offering unreasonably generous student loan relief or micro economically by encouraging college tuition increases,” Summers wrote in a Twitter thread on Monday. “Every dollar spent on student loan relief is a dollar that could have gone to support those who don’t get the opportunity to go to college.”
“Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions,” he continued. “The worst idea would be a continuation of the current moratorium that benefits among others highly paid surgeons, lawyers and investment bankers.”
“If relief is to be given it should not set any precedent, it should only be given for the first few thousand dollars of debt, and for those with genuinely middle class incomes,” Summers added.
