Report Finds Significant Benefits to Canceling All Student Loan Debt

Canceling student debt is a proposal worth supporting, and it isn’t even radical when it’s considered that the student debt shouldn’t have been allowed to accrue anywhere near the depraved level of $1.4 trillion. It’s also not radical when it’s considered that there is enormous U.S. welfare granted to the rich and to major corporations, much more welfare than the amount that goes to poor and middle-income people.

report from a group of economists at the Levy Economics Institute of Bard College finds that there would be huge benefits if the federal government were to forgive all existing student debt. This would ripple out from young people struggling to pay off massive college loans to the economy as a whole, according to the report.

“The idea of canceling student debt is not just some crazy idea out of left field, but is actually something that could be done, and done in a way that has a moderately positive economic impact,” Marshall Steinbaum, a fellow and research director at the Roosevelt Institute and a coauthor of the report said in an interview.

“The way this and similar polices are often discussed is in a mode of ‘well can we really afford this?’ and the answer is definitely yes,” he added.

The report finds that canceling all student debt would likely lead to an increase in U.S. GDP between $861 billion and $1,083 billion over the course of 10 years. It would also lead to an increase of 1.18 to 1.55 million additional new jobs over the same period — that’s about 50% to 70% more jobs per year compared to an average of recent years.

This new analysis comes at a time when more than 44 million American have a collective $1.3 trillion in student debt — higher than both auto U.S. debt and credit card debt.

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The report also finds that total loan forgiveness would cost the U.S. government approximately $1.4 trillion over the course of 10 years — a number that is almost exactly the same as what the CBO recently projected the Republican’s new tax bill would cost.

But researchers said that the positive impacts of canceling student debt would likely be more broadly felt than those of the tax bill.

“[The GOP tax bill] is going to add 1.5 trillion to deficits over the next 10 years,” Stephanie Kelton, Stony Brook University professor of public policy and economics, said in an interview. Kelton is one of the authors of the report, and recently worked as the chief economists for the Democratic minority on the Senate budget committee.

“What else could we do? Canceling student loan debt was just about perfect because it comes in at about 1.4 trillion and it’s almost six of one, half a dozen of the other in terms of the price tag,” she said.

Kelton emphasized that U.S. government shouldn’t be thinking of how it can spend money to help Americans as a zero sum game. But at the same time, if lawmakers can spend money to provide massive tax cuts for the wealthy and corporations, it can also afford to spend nearly the same amount to cancel student debt and grow the economy simultaneously.

Further Examination of Federal Reserve Reform Proposals

On MLK day, reform of the Federal Reserve should be noted as important to advancing the policy of what’s referred to as full employment, which MLK was very plausibly a strong advocate for. The link contains proposals for that objective, with particular attention being directed towards the malign effects banking interests currently mechanistically have on the Federal Reserve.

The Federal Reserve System has an unusual status as being a mix of public and private entities. The governors are of course explicitly part of the public sector, as presidential appointees subject to congressional approval. However, the 12 regional banks are private, being owned by the member banks in the district, which have substantial control over the district bank’s conduct.

This structure was put in place more than a century ago to fit the politics and the economy of the time. It is inconceivable that anyone constructing a central bank today would use the same framework. The archaic nature of the Fed’s design is perhaps best demonstrated by the distribution of the regional banks. Two are located in the state of Missouri. Meanwhile, the San Francisco region not only includes the whole state of California, but the rest of the west coast, and the states of Alaska, Hawaii, Nevada, Utah, Arizona, and Idaho, in all accounting for more than 20 percent of the nation’s economy.

While there were reasons that a mixed public–private central bank and regulatory system may have made sense at the start of the last century, this is no longer the case today. The United States is the only major economy with this sort of mixed approach. The Bank of England, the Bank of Canada, the Bank of Japan, and the European Central Bank are all purely public entities. It is recognized that the conduct of monetary policy, along with the lender of last resort and regulatory functions of the central bank, are necessarily responsibilities of the government.

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While there does not seem to be much basis for concerns that the Fed will act to support the political party in power, there is a real concern about a structure that gives the financial industry a direct voice in the conduct of monetary and regulatory policy through their control of the regional banks. This is really an extraordinary structure without any obvious parallels in our governmental system.

Both aspects of this relationship make little obvious sense. The financial industry certainly has useful insights on the conduct of monetary policy, but it makes no more sense to give them seats at the table than the manufacturing or tech industry. Monetary policy has an enormous impact on the national economy and affects every sector in it; there is no reason to believe that the perspectives gained from working in the financial industry are uniquely valuable.

Similarly, the idea that an industry would be able to pick its own regulator is truly extraordinary. It is understandable that industry groups will try to lobby and in other ways influence the decisions of regulatory bodies. The pharmaceutical industry places pressure on the Food and Drug Administration (FDA) to approve drugs more quickly, the telecommunications industry lobbies the Federal Communications Commission (FCC) for looser standards on universal service, but in neither case are they given a direct role in appointing their regulators. No one would suggest that Pfizer or Merck should be able to appoint a commissioner on the FDA or that Verizon and Comcast should select one of the members of the FCC. The Federal Reserve Board is unique in this way, as the member banks within a district largely have the ability to control the selection of the bank president who plays a direct role in both determining monetary policy and regulation of the banks within the region.[1]

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Inflation has been at relatively steady and low levels for most of the last three decades. In fact, since the Fed officially adopted the 2.0 percent average inflation target in 2012, the core inflation rate has consistently been below this pace. In other words, if we view the 2.0 percent inflation target as a proper goal of monetary policy, the Fed has failed by having too little inflation, not too much.

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This subcommittee is considering a wide range of proposals that would alter the structure of the Fed. Several are quite useful in increasing openness and accountability. However, the ones which aim to give more control of the Fed in the hands of the banking industry, rather than officials appointed through the democratic process seem at odds with recent trends both in the United States and the rest of the world. It is difficult to understand the effort to privatize the conduct of monetary policy and to turn over control of financial regulation to the industry that is being regulated.

 

Government Budget Deficits as Overblown Concerns

Government budget deficits can actually be beneficial if the spending that results in them is in the public interest. This is contrasted with large trade deficits, however, which in wealthy countries have a negative impact on demand in the economy. Both of these truths are important to know for public policy debates.

There are three ways in which deficits or debt can be seen as a problem. First, large deficits can overheat the economy leading to high interest rates or high inflation. Second, a large debt can impose a significant interest burden on the government and implicitly on future taxpayers. The third way is that excessive indebtedness can cause a country to become uncreditworthy, making it difficult or impossible to finance the government. None of these issues plausibly apply to the United States at present.

The first point is the classic story in which large amounts of government borrowing pulls capital away from the private sector. This would be bad news because businesses and state and local governments would have to pay higher interest rates, which would reduce their investment. With less investment, we would see less productivity growth, which would mean that we would be poorer in the future.

There are times when excessive deficits may crowd out investment, but this is clearly not one of them. Interest rates are extraordinarily low. In fact, they are far lower than in the years at the end 1990s when we were running surpluses.

There also is no evidence that excessive spending has led to inflation. The Federal Reserve Board has been struggling for most of the last decade to raise an inflation rate it views as too low.

The second issue is that the debt service — the amount of interest that we pay on the debt each year — will impose a large burden requiring either higher taxes or cuts in other spending or some combination. There also is no basis for this concern at present.

The interest that the government pays on its debt each year comes to around 1.0 percent of GDP, after we subtract the amount that was paid to the Federal Reserve Board and then refunded back to the Treasury. By comparison, the interest burden was more than 3.0 percent of GDP at the start of the 1990s.

It is also worth noting that the much larger interest burden of the 1990s did not prevent us from having a very prosperous decade. In other words, there is a long way to go before we face any serious problem by this measure.

Finally, there is the argument that we could end up in the same situation as Greece was in a few years back, where no one wants to lend money to the U.S. government. There are two major reasons the United States will not end up like Greece.

First, we borrow in our own currency. The U.S. prints dollars; we don’t have to worry about being able to borrow them. By contrast, Greece borrowed in euros, which it did not print.

This brings up the second point; we could print so much money that we face hyperinflation, like Zimbabwe did in the last decade. In principle, that could happen, but the problem in that case would be having a weak economy, not having a large debt. As long as the U.S. economy remains strong and grows at a respectable pace, we will never end up like Zimbabwe.

If we need proof of this fact, we need only look at Japan. The country has a debt that is two-and-a-half times as large as the U.S. debt relative to the size of its economy. Nonetheless, it can borrow long-term at a near zero interest rate. Its inflation rate has also been near zero as the government has been desperately trying to increase inflation for the last two decades.

In short, the country has many real problems. Tens of millions of young people struggle to pay for college. Young parents struggle to pay for quality child care and tens of millions of people have inadequate health care insurance.

These are all issues that deserve our attention. The federal debt is just a huge distraction.

Economic Policy Institute Head Steps Down

Working with Jared Bernstein, Larry Mishel is the originator of the famous graph that shows the split between productivity and wages. Mishel is also notable for helping some important and good economists early in their careers. He’s therefore one of the people I am willing to give a tribute to on this site.

WHEN LAWRENCE MISHEL came to Washington during the height of the Reagan revolution, the options for a young leftist economist looking to make a difference were nearly non-existent.

“The liberal position was represented by the Brookings Institution,” Mishel told The Intercept, “which at the time was very free trade uber alles, hostile to industrial policy, not interested in workers and unions. The debate was between Brookings on the left, and [the American Enterprise Institute] and the Heritage Foundation on the right.”

And then there was the Economic Policy Institute, a new think tank designed to fill the ideological gap and shift America’s economic debate to the left. In 1987, Mishel joined EPI as a research director, later becoming vice president and eventually president in 2002. As his thirtieth year at EPI winds down, Mishel gets to see the Democratic Party finally move closer to the positions the think tank has always had. Now, he is stepping aside.

“The hallmark has been to center that an economy is only working if it’s working for the benefit of the vast majority,” Mishel said. “We hammered that every day.”

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From the beginning, EPI elevated the daily struggle of those on the economy’s margins. Starting in 1988, Mishel and colleagues produced a biennial report, The State of Working America, with comprehensive data on wages, incomes, jobs, and wealth. The reports found a discordant trend in the economy: wage stagnation amid increasing productivity. Prior to the late 1970s, these two measures followed one another: as workers produced more goods, they made more money. When that changed, others made excuses for this bifurcation while EPI insisted that conscious policy choices shortchanged workers and funneled the gains to the very top, as evidenced by rising CEO compensation and the erosion of living wages. In other words, EPI argued, natural forces didn’t lead workers to their plight — those in power pushed them there.

If these themes of rising income inequality sound familiar today, they were practically a foreign concept at the outset. In 1994, Mishel and Jared Bernstein created a now-famous chart showing the split between productivity and the median hourly wage.

productivity

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Much of EPI’s work under Mishel served to reject pernicious myths about the economy, hardened into perceived wisdom by self-interested forces. EPI’s research found that social and economic disadvantage, not failing teachers or schools, depressed student achievement. It refuted that high school graduation rates were collapsing, an alternative fact used to push vouchers or charter schools. It proved that automation played little role in inequality. It laughed off the idea that CEOs were paid nearly 300 times more than the average worker based on a competitive race for talent.

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As Mishel steps aside, he believes America needs a broad set of policies to rebuild worker power, things like raising the minimum wage to $15 an hour, empowering union organizing, ending worker misclassification in the “gig economy” to deny benefits and overtime pay, preventing arbitration agreements that limit worker options in a dispute, and banning non-compete clauses that stop workers from moving to similarly situated employers. These moves to strengthen worker bargaining power, collectively and individually, cut a path to robust wage growth for the 99 percent. “It will take bold proposals,” Mishel said. “If not, we won’t have a vibrant middle class, or a democracy.”

Mishel’s mission in 30 years at EPI was not only to identify the economy’s problems, but to demonstrate how to fix it. And he consistently brought complex insights down to a level of popular understanding, striving to reach the ordinary worker rather than the academy. The way he talked about the economy mirrored who he fought for. A garrulous man with a shock of white hair, Mishel cherishes that EPI has become a fixture in Washington, and that the poles of the economic debate have finally trended in his direction.

The Pay of Doctors in America

The article by the economist Dean Baker illustrates why doctors in the U.S. have such high incomes. Directly, it’s basically because limits are imposed on foreign and domestic competition by restricting professional medical practice to those who have completed U.S. residency programs that are too limited in providing opportunities.

It’s $100 billion ($700 per U.S. family) a year in added costs to pay doctors as much as the U.S. does, but in a more ideal world, in world history’s richest country, good doctors could be permitted to make that much money. If the U.S. cut costs in substantial ways — such as switching to single-payer, saving $500 billion from only that annually — I wouldn’t have an issue with doctors making over 200k annually. I’d want a subsidy that allows doctors to earn that much income, however, rather than them earning it through a rigged market structure. That’s my view of the article and possibly the only major point expressed in it that I seem to disagree with the economist on.

Rx-Rolls-Royce

The United States pays more than twice as much per person for health care as other wealthy countries. We tend to blame the high prices on things like drugs and medical equipment, in part because the price tag for many life-saving drugs is less than half the U.S. price in Canada or Europe.

But an unavoidable part of the high cost of U.S. health care is how much we pay doctors — twice as much on average as physicians in other wealthy countries. Because our doctors are paid, on average, more than $250,000 a year (even after malpractice insurance and other expenses), and more than 900,000 doctors in the country, that means we pay an extra $100 billion a year in doctor salaries. That works out to more than $700 per U.S. household per year. We can think of this as a kind of doctors’ tax.

Doctors and other highly paid professionals stand out in this respect. Our autoworkers and retail clerks do not in general earn more than their counterparts in other wealthy countries.

Most Americans are likely to be sympathetic to the idea that doctors should be well paid. After all, it takes many years of education and training, including long hours as an intern and resident, to become a doctor. And people generally respect and trust their doctors. But they likely don’t realize how out of line our doctors’ pay is with doctors in other wealthy countries.

However, as an economist, I look for structural explanations for pay disparities like this. And when economists like me look at medicine in America – whether we lean left or right politically – we see something that looks an awful lot like a cartel.

The word “cartel” has some bad connotations; most people’s thoughts probably jump to OPEC and the 1970s crisis caused by its reduction in the supply of oil. But a cartel is not necessarily completely negative. It means that the suppliers of a good or service have control over the supply. This control can be used to ensure quality, as is the case with many agricultural cartels around the world. However, controlling supply also lets the cartel exert some control over price.

In the United States, the supply of doctors is tightly controlled by the number of medical school slots, and more importantly, the number of medical residencies. Those are both set by the Accreditation Council for Graduate Medical Education, a body dominated by physicians’ organizations. The United States, unlike other countries, requires physicians to complete a U.S. residency program to practice. (Since 2011, graduates of Canadian programs have also been allowed to practice in the U.S., although there are still substantial obstacles.) This means that U.S. doctors get to legally limit their competition. As a result, U.S. doctors receive higher pay, and like anyone in a position to exploit a cartel, they also get patients to buy services (i.e., from specialists) that they don’t really need.

There are two parts to the high pay received by our doctors relative to doctors elsewhere, both connected to the same cause. The first is that our doctors get higher pay in every category of medical practice, including general practitioner. If we compare our cardiologists to cardiologists in Europe or Canada, our heart doctors earn a substantial premium. The same is true of our neurologists, surgeons, and every other category of medical specialization. Even family practitioners clock in as earning more than $200,000 a year, enough to put them at the edge of the top 1 percent of wage earners in the country.

The other reason that our physicians earn so much more is that roughly two-thirds are specialists. This contrasts with the situation in other countries, where roughly two-thirds of doctors are general practitioners. This means we are paying specialists’ wages for many tasks that elsewhere are performed by general practitioners. Since there is little evidence of systematically better outcomes in the United States, the increased use of specialists does not appear to be driven by medical necessity.

In recent years, the number of medical residents has become so restricted that even the American Medical Association is pushing to have the number of slots increased. The major obstacle at this point is funding. It costs a teaching hospital roughly $150,000 a year for a residency slot. Most of the money comes from Medicare, with a lesser amount from Medicaid and other government sources. The number of slots supported by Medicare has been frozen for two decades after Congress lowered it in 1997 at the request of the American Medical Association and other doctors’ organizations.

Furthermore, Medicare exerts little control over the fields of specialization in the residency slots it supports, largely leaving this up to the teaching hospitals, which have an incentive to offer residencies in specialties from which they can get the most revenue per resident. This means they are more likely to train someone in neurology or cardiology than as a family practitioner.

Policymakers have a number of tools to use to introduce more competition, weaken the doctors’ cartel and get their pay more in line with counterparts elsewhere. One would be simply to fund more residency slots. Medicare could also limit the slots for many areas of specialization and instead insist that more of its funding go to train people as family practitioners.

A second route would be to end the requirement that foreign doctors complete a U.S. residency program in order to practice medicine in the United States. This means setting up arrangements through which qualified foreign doctors could be licensed to practice in the United States after completing an equivalent residency program in another country. The admission of many more doctors would put downward pressure on the pay of doctors in the United States, as insurers would have a new pool of physicians to add to their networks who will accept somewhat lower compensation.

Another approach is to not only change the rules around who can practice, but to change the rules around what doctors do. There are many procedures now performed by doctors that can be performed by nurse practitioners and other lower-paid health professionals. For example, many states now allow nurse practitioners to prescribe medicine without the supervision of a doctor, and there is no evidence that this has resulted in worse outcomes for patients. (It does, however, reduce health care costs.) The scope of practice of nurse practitioners and other health professionals can be extended in this and other areas for which they are fully competent. This would both directly save money and further reduce the demand for doctors, putting more downward pressure on their pay.

Yet one more approach is being tested in Missouri: While a doctor can’t practice independently without completing a U.S. residency program, Missouri will now allow foreign-trained doctors to practice under the supervision of a U.S.-trained doctor. This should also help to increase the supply of doctors.

Drastic Inequality is from Policy, Not Technology Itself

Technology basically has no moral imperative. Policy has been what’s actually created the disastrous inequalities often seen today.

The most popular explanation for the sharp rise in inequality over the last four decades is technology. The story goes that technology has increased the demand for sophisticated skills while undercutting the demand for routine manual labor.

This view has the advantage over competing explanations, like trade policy and labor market policy, that it can be seen as something that happened independent of policy. If trade policy or labor market policy explain the transfer of income from ordinary worker to shareholders and the most highly skilled, then it implies inequality was policy driven, it is the result of conscious decisions by those in power. By contrast, if technology was the culprit, we can still feel bad about inequality, but it was something that happened, not something we did.

That view may be comforting for the beneficiaries of rising inequality, but it doesn’t make much sense. While the development of technology may to some extent have its own logic, the distribution of the benefits from technology is determined by policy. Most importantly, who gets the benefits of technology depends in a very fundamental way on our policy on patents, copyrights, and other forms of intellectual property.

To make this point clear, consider how much money Bill Gates, the world’s richest person, would have if Windows and other Microsoft software didn’t enjoy patent or copyright protection. This would mean that anyone anywhere in the world could install this software on their computer, and make millions of copies, without sending Bill Gates a penny.

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The argument for intellectual property is well-known. The government grants individuals and corporations monopolies for a period of time, which allow them to charge well above the free market price for the items on which they have a patent or copyright. This monopoly gives them an incentive to innovate and do creative work.

Of course this is not the only way to provide this incentive. For example, the government can and does pay for much research directly. We spend over $30 billion a year on bio-medical research through the National Institutes of Health. Various government departments and agencies finance tens of billions of research each year in a wide variety of areas. In fact, it was Defense Department research that developed the Internet and also Unix, the program that was the basis for Dos, Microsoft’s original operating system.

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It is reasonable to argue whether patents and copyrights are the most efficient mechanisms for supporting innovation and creative work. In my book, Rigged: How the Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, I argued that in the 21st century they are in fact very inefficient mechanisms for this purpose. But separate from the question of whether these are the best mechanisms, there is no real dispute that intellectual property redistributes money from the people who don’t own it to the people who do. Not many people with just high school degrees own patents or copyrights; they are part of the story of upward redistribution.

Since intellectual property can be either longer and stronger or shorter and weaker, the decision about how much intellectual property we have is implicitly a decision about a trade-off between growth and inequality. (This assumes that longer and stronger IP rules lead to more growth, which is a debatable point, especially since productivity growth has slowed to a crawl in the last decade.) If we are concerned about the degree of inequality in society, one way to address it would be to shorten the duration of patents and copyrights or lessen their scope so that they are less valuable.

That would mean less money for the pharmaceutical industry, the medical equipment industry, and the software industry, as well as many other sectors that disproportionately benefit from IP. Shareholders in these industries would see a hit to their income, as would the top executives and highly educated workers they employ. The rest of the country would see a rise to their income as the price of a wide range of products would fall sharply.

And, there is a huge amount of money at stake. We are on a path to spend more than $450 billion this year on prescription drugs alone. If these drugs were sold in a free market without patents or other forms of protection we would almost certainly pay less than $80 billion. (Imagine the next great cancer drug selling for a few hundred dollars rather than a few hundred thousand dollars.)