theREALnews.com, March 12, 2018
Student Debt Cancellation a Viable Option, Economists Say. A new in-depth study on the consequences of cancelling all student debt in the US shows that it would help the economy far more than it would cost. We talk to Stephanie Kelton, one of the study’s co-authors.
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore. Student debt is currently the fastest growing form of debt in the United States. More than 44 million Americans owe a total of $1.4 trillion. This is more than is owed on all credit cards or on all other loans. It’s the second highest form of household debt after mortgage debt. Last month, Trump’s Department of Education, under the leadership of Betsy DeVos, said that they will issue a rule to the states prohibiting them from regulating student debt collection agencies. In other words, the idea is to make it easier for debt collectors to go after students.
In contrast, the Levy Economics Institute of Bard College released a new study examining the economic consequences of canceling all student debt. According to the study, such cancellation would have a tremendous economic benefit that would far outweigh its costs. Joining me now is one of the authors of the study, Stephanie Kelton. Stephanie is a professor of public policy and economics at Stony Brook University. She’s also the former chief economist on the US Senate Budget Committee and economic advisor to the Bernie Sanders 2016 presidential campaign. She joins us today in our Baltimore studios. Stephanie, great pleasure to have you here.
S. KELTON: Very nice to be here.
SHARMINI PERIES: Stephanie, the fact that 44 million Americans owe a total of $1.4 trillion in debt, is that a crisis for the United States? Is it an economic problem?
S. KELTON: Well, it is for many of the people who are struggling to repay student loan debt. It’s a kind of a mixed bag because there are people who didn’t borrow a lot and they ended up getting good jobs when they graduated college, and they’re paying back their student loans and it’s not really creating a lot of dislocations for them. On the other hand, there are people who borrowed a lot of money, didn’t do well in the job market, didn’t have that kind of success, are having difficulties repaying. Maybe they’re in some form of workout to try to repay the loans. Maybe they’re delinquent, they’re past due, maybe they’re already in default. Maybe they’ve moved back in with their parents in order to try to make payments on their student loans. So it’s a mixed bag but for the economy as a whole, there are a whole lot of people out there, including a number of economists, who believe that student debt poses a real kind of financial crisis for the economy as a whole.
SHARMINI PERIES: But it is also an opportunity, the cancellation of the debt. The study you were doing at the Levy Institute is something that is unheard of here in the United States in terms of debt cancellation. Tell us a little bit about the findings of the study and what it recommends.
S. KELTON: What we did was just ask a hypothetical. We didn’t start off…and the paper itself isn’t really a policy recommendation. We just sort of asked the question: I wonder what would happen? We said, look, there are 44 million Americans who are trapped with student loan debt today. What if they didn’t have that student loan debt? What if they didn’t have to repay it? What if it could somehow just be eliminated, canceled, wiped away, and they had a clean slate? What do you think would happen to the economy? What would be the economic impact of that?
What we did was work with some macroeconomic models, and we ran some simulations and the models answer the question, what would happen? You know, the findings, I don’t think are all that surprising. If you talked to someone who had student loan debt and you said, “How much do you pay every month, take out your checkbook and you write that check and you’re paying back your student loans, how much do you write that check for?” The average for students today who are paying back student loans, that are between the ages of 30 and 40, they’re writing a check for $351 a month.
If you told them “Suppose you didn’t have to do that, you could keep that $351 a month. What would you do with it instead?” I think that most people would understand that the answer would be something like “Well, I’d buy something else. I would spend a little bit more going out to eat. I might replace that with a car payment. I might move out of the basement and get an apartment. I might upgrade my wardrobe, which…I haven’t had a pair of new shoes or new clothes in a long time.” I mean, you would get answers like that, right? People would tell you that, overwhelmingly, with that freed-up disposable income, they would find other ways to spend it.
What happens is if you’re servicing student loan debt, the money is just going essentially to paying down your debt, that doesn’t do any good for the economy. It’s not creating any new jobs. It’s not stimulating demand by getting new consumption spending. But if those people instead had that money available to turn around and spend it into the economy, then you would see new demand. Businesses would see new customers. They would say, “There’s more demand for the stuff that I produce, maybe I should hire some more workers. Maybe I should expand my capacity.” So what we find in the paper is that that’s exactly what happens. By eliminating or canceling the $1.4 trillion in student loan debt, you free up enough disposable income to generate a significant boost to consumption spending that then bleeds over into other forms of spending. Businesses respond by hiring and investing more, and so the acroeconomic effects are pretty substantial.
SHARMINI PERIES: So then what do you say to the companies, the banks and the credit companies? Taylor Hebden, who is behind the scenes here right now, she was saying she pays that $320 a month on her student loan but they’re charging her 13% interest. Now, they would be against your plan, or the findings of your study about student cancellation.
S. KELTON: Well, I’m not so sure they would and here’s why. Most of that outstanding $1.4 trillion is owed not to private loan servicers but to the federal government, okay? But a non-trivial amount is money that students borrowed from private lenders. Some of that is government-backed, government-guaranteed, and some of it is not. What we did in the paper is say, “We’re going to eliminate all of it but the government takes the loss on the portion that it holds.” So a little over a trillion, the government just basically says “Don’t pay it back,” and for the rest of it, the privately held debt, the government takes over the payments on behalf of the borrowers. So she’s going to have her loan payment picked up by the federal government. They’re going to take over the interest payments and the principal payments for the lifetime of the loan.
So when you say, “I don’t think the private lenders would be too excited about this,” I’m not so sure, because many of these loans are in default. They’re scrambling and spending money to try to track down borrowers and harass them and get paid back right over time. Now, some of them like that because they can assess penalties and extra fees and layer on additional costs just by having access to people who can’t afford to pay back their loans. But they’re also going to get paid back on a lot of loans that would otherwise default and they may never get paid back. So I don’t know, I think they might actually like the idea of having 100% of the people who they lend money to eventually pay it all back.
SHARMINI PERIES: So then why is the Trump administration issuing this rule to states asking them not to pass any restrictive legislation on debt collectors?
S. KELTON: Well, for the reasons that I alluded to, that they make a tremendous amount of money off of people who have difficulty repaying their student loan debt. You start off owing $30,000, let’s say. But by the time you have a few missed payments, you’re late, the fees they start assessing and then penalties and next thing you know, I’m not kidding, some number of years down the road, you owe 80, $100,000. You started off with $30,000 in student loan borrowing and now it’s tripled in size because of the additional money that they’re able to extract from people who have trouble.
SHARMINI PERIES: Now, in terms of politics, this would be a very favorable position to adopt. The Democratic Party and even if you’re running as a candidate…I’m sure you’re the most famous professor on campus [inaudible 00:09:07]. I mean, this could be a very popular position for candidates and politicians to take up. Why the resistance?
S. KELTON: Well, I don’t know that there is resistance. I just don’t know how many people have considered anything this ambitious. Lots of politicians, frankly on both sides of the aisle, recognize that student loan debt is a problem and it’s something that politicians are looking to address in some way. I haven’t seen anybody do anything this ambitious. You hear all the time, people will introduce legislation to say there’s no reason that students should be paying back loans at higher interest rates than what the Fed lends to the banks or something, so we should lower the rates that we charge students. We should make it easier for them to get out of these loans.
Income-based repayment programs are kind of a popular thing, where you say we’re going to collect back money for a period of time but it’s going to be based on how much you earn and then after a certain number of years of paying it back, we forgive the rest of it. So there are programs…. Public service, if you go into public service employment, you work for the federal government, you can get into one of these loan forgiveness programs of this kind. So it’s not that loan forgiveness is completely anathema and nobody will touch it, there are various schemes. I don’t know anyone who yet has looked at just canceling all outstanding student loan debt, wiping the slate clean.
It does seem like it would be the kind of thing that could be popular because you’ve got a demographic of 44 million people who are touched by this, and that’s directly touched. That is, they have student loan debt themselves. But then figure the loved ones, the parents, the grandparents, aunts and uncles, who have co-signed who are watching their loved ones struggle to pay back debt and you’ve expanded the population of people who are impacted by student loan debt probably up to around 100 million Americans. So as an issue that a politician could take and say “I’m going to address this,” you’re going to hit a lot of people’s lives directly or indirectly with this. So I can imagine it having broad appeal. Our report came out, it’s gotten a lot of attention, I think, on the Hill including. I think we just have to wait and see whether anyone in the House or Senate has ambitions to think that boldly about how to address the student loan problem.
SHARMINI PERIES: If this is implemented, what prevents students from taking out as much loans as they can, knowing that it’s going to be forgiven?
S. KELTON: Yeah, economists call that moral hazard. That’s one of the problems that we talk about in the paper. The only way this would really make sense is if you fold this into a broader approach to college education, to higher education in this country. If you were to cancel all outstanding student loan debt today but do nothing else, then immediately you start running up the clock again tomorrow. Students begin borrowing the finance college expenses again and 10 years down the road, we’re right back where we are today. So that wouldn’t be a very good policy.
What we’re imagining is that this is kind of like a hitting of the reset button, at a time when you’re transitioning to making public colleges and universities tuition-free. If you do both things in tandem, then it makes more sense, right? Because you’re eliminating the tuition payments that students incur when they go to college in the first place and you’re saying, “We’re resetting the debt clock. We’re at zero, and we’re making public colleges and universities tuition-free,” and then you try to make it more manageable for students to attend university.
SHARMINI PERIES: Did you do any comparisons with countries that do have free education, higher education, available and what that would mean in terms of the economy?
S. KELTON: We didn’t in this research paper. I did some of this for the Sanders campaign and some when I was working in the Senate office when we were working on the College for All Act that he introduced. We did look a little bit at that time at what other countries do in terms of how they deal with any student debt problem that they have. In some cases, you had countries where public education was tuition-free, Germany for example, and then they transitioned away from that. They started charging tuition, student debt becomes a problem, there’s a backlash and an outcry, and the decision is made to return to making public colleges and universities tuition-free. We learned some lessons about what the UK, for example, is doing in terms of income-based repayment and that sort of a thing, but not in this paper.
SHARMINI PERIES: Right. I remember in Germany when it was not only did they cover the cost of higher education but they actually paid a stipend for students to go to college.
S. KELTON: See, I don’t remember Germany being among those countries, but Finland, I recall, offering a substantial stipend. So not only can you go to college for free, and that included professional degrees and advanced study, not just the four-year, but they would pay you a stipend that was sufficient to cover your living expenses as well, which is why you don’t have the student debt associated with the entire college experience.
SHARMINI PERIES: Stephanie, let me go back to a point you made earlier, which is that this a bold new idea. Is it in fact the case that in the United States they have not considered debt cancellation for students in the past?
S. KELTON: Well, when you say “they have considered,” who do we mean?
SHARMINI PERIES: The legislators in Washington.
S. KELTON: Do you know something?
I don’t know. The person that I think we all heard talk about this in 2016 was the Green Party candidate, Jill Stein. That’s the closest I’ve heard, I think, to an aspiring politician, let’s say, talking about canceling all outstanding…. At that time, it was $1.3 trillion. It adds up quickly. But I’m not aware of anyone on the Hill, elected official, who’s talked about or introduced legislation to do anything this ambitious.
SHARMINI PERIES: That seems remarkable. Why do you think that is?
S. KELTON: Well, because it’s so audacious. I mean, I don’t know that anybody has thought through…. Certainly Jill Stein had not thought through the mechanics of how to actually do this, and that’s a big part of what we do in this paper. It’s a 75, 80- page paper. It’s got some very wonky bits, lots of balance sheets and description of the mechanics because when she was proposing this, she sat down in some interviews and I remember her being asked “Exactly how do you go about doing this?” She didn’t have the answer to the question.
She said, “Well, it’s like what the Fed did with QE, quantitative easing.” I think at one point she said “It’s sort of magic. You just poof and it disappears,” and that is not actually how you go about it. It’s reallya lot more nuanced than poof and it’s gone. You’ve got to be able to trace through the balance sheets and the mechanics and explain how do you get the student loan debt that currently resides on the balance sheets of 44 million people moved off of their balance sheets, put somewhere else, who absorbs the losses? How does it actually work? That’s what we did in this paper, but I don’t know that anybody currently elected has thought to go that far.
SHARMINI PERIES: You would think this is something that the student movement would take up in a big kind of way, but yet they haven’t. I know that there are people in the movement who are talking about student debt cancellation but it really hasn’t taken root. Why is that?
S. KELTON: Well, I don’t know that they’ve had a partner. I don’t know that they’ve had a blueprint. In a sense, this paper serves as that blueprint. Now, we, again, we didn’t right the paper to promote the policy. We wrote the paper as an intellectual experiment. What would happen? We were curious. But now that we’ve done the work and you’ve got a document in place that traces out not just the economics, not just the cost and the impacts of it, but the mechanics of how to actually go about doing it, I think what we’re seeing is some groups like Strike the Debt and other student groups who are beginning to latch on to this as a document and say, “This is how to do it. This is what we want, and this is how to go about doing it.”
SHARMINI PERIES: Right. Stephanie, that’s incredible, what you’ve done here with your colleagues. I congratulate you and thank you so much for coming on The Real News Network and talking about it. I’d like to keep this conversation going and feed the student movement and the people in the movement who want to fight this issue in terms of debt cancellation and to the legislators who are out there and the politicians who can put this on their platforms. I think it could really take off, so hope you’re part of that with us.
S. KELTON: Thank you so much.
SHARMINI PERIES: Thank you.Thank you for doing the paper, and thank you for joining us here on The Real News Network.
Stephanie Kelton is a Professor of Public Policy and Economics at Stony Brook University. She is also the former Chief Economist on the US Senate Budget Committee and Economic Advisor to the Bernie 2016 presidential campaign.
Our Comment
Student debt slavery prompts many a question. For anyone of my vintage, the first has to be, “How has this come to be?” In my student days, even though one might have grown up poor, it was possible to go to university for five years and graduate debt free.
Why, one might wonder, would anyone hesitate to cancel all student debt, given the examples of other countries who have benefited from policies like those of Finland and Germany, and, in the light of new evidence uncovered in the Levy Economics Institute’s in-depth study?
How to account for policies that would burden “44 million young people with the fastest growing form of debt in the United States, and [impact] probably up to around 100 million Americans”?
How justify “[making] it easier for debt collectors to go after students”?
If not “resistance,” what word might best describe the failure of politicians to seriously address what they recognize as a problem? Why would they have to be “ambitious” to suggest anything more than “[making] it easier for [students] to get out of these loans?
Well, what if there were not one, but two economies – two competing economies?
What if one of those economies, designed originally to support the other, were to take on a life of its own – one at cross purposes with the original economy – and develop a dynamics all its own? But, no need to continue hypothetical – we can get real!
In J is For Junk Economics: A Guide to Reality in an Age of Deception, Michael Hudson explains that, “Domestic private sectors are composed of two distinct systems. These are often conflated to mean “The economy,” but their dynamics are quite different.
- The “real” economy of current production and consumption, wages and industrial profits account for only part of the economy.
- The FIRE sector (finance, insurance and real estate) consists of land, monopoly rights and financial claims that yield rentier returns in the form of interest, financial fees, economic rent (unearned income) and monopoly gains, plus asset-price gains (“capital” gains). Within the FIRE sector, the relationship between banks and real estate is dominant.
“Since the 1980s, banks have created credit to lend mainly into the FIRE sector, not to businesses in the ‘real’ economy of tangible investment and employment. This long credit buildup has inflated prices for real estate, stocks and bonds, leading borrowers to anticipate that capital gains will continue indefinitely.”
Most of the FIRE sector’s financialized “wealth” – the asset side of its balance sheet – is held by the rentier class. The magnitude is much larger than the GDP. Its debt counterpart on the liabilities side of the balance sheet consists mainly of mortgage debt, a financial overhead for homeowners and commercial real estate. Since World War II, the “real” economy has spent more and more income on real estate, insurance and payments to banks, pension funds and other financial transactions.
Bubbles are created when speculation on credit enters the phase in which debts rise as rapidly as asset valuations. When these financial bubbles burst, negative equity results as asset prices fall back, plunging below the face value of mortgages, bonds and bank loans attached to real estate and other assets. The post-2008 collapse is the result of the “real” economy having to pay down the debts it had run up, deflating consumer spending along with housing prices” (page 232).
In The Bubble and Beyond, Hudson “traces how industrial capitalism has turned into finance capitalism. The finance, insurance and real estate (FIRE) sector has emerged to create ‘balance sheet wealth’ not by new tangible investment and employment, but financially in the form of debt leveraging and rent-extraction. This rentier overhead is overpowering the economy’s ability to produce a large enough surplus to carry its debts. As in a radioactive decay process, we are passing through a short-lived and unstable phase of ‘casino capitalism,’ which now threatens to settle into leaden austerity and debt deflation” (page 529). He goes on to explain that “today’s post-industrial strategy of ‘wealth creation’ is to use debt leveraging to bid up asset prices. From corporate raiders to arbitrageurs and computerized trading programs, this ‘casino capitalist’ strategy works as long as asset prices rise at a faster rate than the interest that has to be paid. But it contains the seeds of its own destruction, because it builds up financial claims on the assets pledged as collateral – without creating new means of production. Instead of steering credit into tangible capital formation, banks find it easier to make money by lending to real estate and monopolies (and to other financial institutions). Their plan is to capitalize land rent, natural resource rent and monopoly privileges into loans, stocks and bonds” (page 529).
He asserts that “this is not a natural and even inevitable form of evolution.”
Much has been written about finance capitalism. John McMurtry, for example, has described it as, The Cancer Stage of Capitalism, stressing that his title is not merely allegorical, but that it signifies a real process. Hudson has explored that process in, Killing the Host.
The point, of course, is that the system is unsustainable and bound to self-destruct.
Hudson cites the financialisation of education as a process whose result is that, “instead of being treated as a public utility to prepare the population for gainful work, the educational system has been turned into an opportunity for banks to profiteer from a debt market guaranteed by the government.”
The student debt crisis is an excellent opportunity to face up to the need to deal with the reality that neoliberal economics has sacrificed the real economy to the financial economy.
The 2007-08 financial crisis was an opportunity to deal with financialization that was ignored by those who, instead, “solved” the problem by bailing out those who had created it. The student debt crisis is an opportunity none of us can afford to pass up – a possible spring board to essential monetary and economic reform – that will address a broad spectrum of many other deepening social crises.
The impact of student debt cancelation would differ dramatically from one economy to the other. Whereas it could boost the real economy from income that would be spent into the economy – to the benefit of the society – it would eliminate the “second-greatest, fastest growing” source of household debtbased unearned income (rent), presently driving the financial economy, to the benefit of the rentiers (rentier: a person whose main income comes from interest on assets).
While the rentiers might welcome a one-time cancelation that bails them out, it’s hard to believe they would accept free tuition as an ongoing policy.
Alas, the advantages of exploiting an “appealing cause,” all too seldom outweigh others afforded the ruling power.
The concern about the moral hazard incurred by student debt cancelation is specious – at best – considering the lack of attention paid to the proven moral hazard leading up to the 2007-08 collapse and the subsequent bailout.
In Looting Greece, Jack Rasmus attributes are growing inequality to this shift in “global capitalism” that, since the 1980s, has favoured “financial asset investment and financial securities speculation over ‘real’ investment.” This has “[accelerated] capital incomes from finance,” while “real investment…wage growth and…rates of productivity” have declined. Consequently, he points out, there has been “a drift toward deflation in real goods and services, while inflation and price bubbles in financial assets become more frequent and widespread.”
This development, he explains, has generated “new financial institutions, sometimes called shadow banks”… or “capital markets – along with a spread of highly liquid financial markets globally and an explosion of new forms of credit – creating financial securities traded in those markets by those institutions.”
“A new global finance capitalist elite manage these institutions who sell the new securities created for [the purpose] of generating profits via the expanding financial markets rather than via the real economy.”
He notes that new technology has created “new non-monetary forms of credit that have been exacerbating the liquiditydebt explosion.”
“What is up for grabs,” says Hudson, “is how society will resolve the legacy of debts that can’t be paid. Will it let the financial sector foreclose, and even force government to privatize the public domain under distress condition? Or will debts be written down to what can be paid without polarizing wealth and income, dismantling government, and turning tax policy over to financial lobbyists pretending to be objective trechnocrats” (Michael Hudson, The Bubble and Beyond, page 530)?
Hudson refers to the example of the housing bubble in the early 2000s that drew new buyers to invest in that debt-leveraged “wealth creation.” He points out that after 2008, many were left with property worth less than the mortgage they still owed on it.
“A similar phenomenon, he says, has occurred as education has been financialized. Students must take on decades of studentloan obligations and pay them regardless of whether the education enables them to get jobs in an economy shrinking from debt deflation….
Instead of being treated as a public utility to prepare the population for gainful work, the educational system has been turned into an opportunity for banks to profiteer from a debt market guaranteed by the government (pages 531-2).
At issue, it would seem, is not the merits of student debt cancelation, but its feasibility, given the vested interest of the finance sector in a debt-driven, debt-dependent, schizophrenic economy.
Élan
