Under the heading: Figures don’t lie, but debt-nut liars figure about student debt

Liberals wish to protect the poor from the rich. Conservatives wish to protect the rich from the poor.

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If you don’t know what you’re talking about, or if you’re outright lying, be sure to quote fake numbers or no numbers at all, as does this article from the notorious Committee for a Responsible Federal Budget (CRFB).

Partial Student Debt Cancellation is Poor Economic Stimulus, June 3, 2021 Last year, we estimated that fully canceling student debt would produce eight to 23 cents of economic activity for every dollar of cost and speculated that partial student debt cancellation might have a higher multiplier. 

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In light of the current economic recovery, and employing new techniques made available by working papers from the Congressional Budget Office (CBO), we find that partial cancellation of federal student loans would also be extremely poor stimulus, producing only 2 to 27 cents of economic activity for every dollar of cost.

Immediately, the acrid odor of bull excrement wafts over the land.

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There is a difference between debt “cancellation” and debt “payment.” The federal government can do both, and both of which cancel the debt.

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But federal debt “cancellation” can take dollars from the economy (depending on who the lender is and how the cancellation is handled), while federal debt payment adds dollars to the economy.

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Let’s look at four scenarios:

I. The government is the lender and the debt is canceled. 

This would add stimulus dollars to the economy, because every dollar that would have been paid to the government, now would stay in the private sector, i.e. the economy. (Federal dollars are not part of the economy until they are owned by the private sector.)

II. Government is the lender and the government pays off the debt (pays itself).

Same as I.

III. Private sector is the lender and the debt is canceled.

This neither would add nor subtract money from the economy, but it would cheat lenders while enriching borrowers.

IV. Private sector is the lender and the government pays off the debt.

This immediately adds short-term stimulus dollars to the economy, but cancels long-term dollars. There would be immediate financial benefits, while long-term interest is transformed into long-term earnings on the payment/

All four scenarios either add dollars to the economy or do not add dollars, but none subtracts dollars.

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These scenarios can be boiled down to one simple financial question: Would you prefer that the federal government adds growth dollars to the economy, or merely circulates existing dollars within the economy?

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In short, would you prefer that the economy grow or remain level? As we shall see, the immediate money supply is not the entire issue.

Specifically, we find: Canceling $10,000 of debt results in an economic multiplier of 0.13x in our central estimate, with a range of 0.03x to 0.27x depending on the parameters.

Before we shovel too much of the bull excrement, we call your attention to the little word “an” that we bolded in their article (above).

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They used the word “an” rather than “the,” because there are infinitely many economic multipliers.

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According to Investopedia: “In economics, a multiplier broadly refers to an economic factor that, when increased or changed, causes increases or changes in many other related economic variables.” And bless their little hearts, the CRFB flips back, forth, and around and around about exactly which multiplier they are talking about. For example, consider the multiplier: GDP/Federal Deficit Spending. The formula for GDP is;

GDP = Federal Spending + Non-federal Spending + Net Exports.

Any of the three terms on the right side of the equation can be considered an economic multiplier with respect to GDP. Increase any of the last three terms in the equation, and GDP must rise.

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In straight algebra, you would say that GDP must rise by the same amount as each one of the terms rises. In the above four scenarios, none indicate an increase in federal spending would cause a reduction in GDP.

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But economics contains multipliers, that if the CRFB were honest (!), are impossible to measure. For instance, consider these questions.

How many additional dollars would be created by federal investments in Research and Development? How many additional dollars would be created by private investments in R&D?

These two simple questions are massively complex and are impossible to answer. They involve factors such as:

1. Which R&D specifically
2. The likely success rates of the R&D
3. How much success
4. The timing of successes
5. The collateral results
6. The effect on the other factors

Or, take just one tiny segment of R&D. What if the federal government and the private sector invested $1 billion in battery research. What will be the effects on GDP? That’s just one minuscule slice of the problem.

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Now multiply that by the hundreds of thousands of different investments the private sector could possibly make, with the extra dollars received via loan payoff or loan cancellation. Then compute the multiplier. Can you do that? Can anyone do it? The CRFB can, or rather, pretends it can:

Partial cancellation of student debt would increase economic output in the coming years, but only by a small fraction of the overall cost. Canceling $10,000 of student debt per borrower would completely eliminate student debt for 15 million borrowers and partially reduce debt for 28 million more at a cost of between $210 billion and $280 billion.

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We estimate this would reduce annual loan payments by around $18 billion per year (once current automatic forbearance ends), or roughly $54 billion over three years. This means that even over a three-year period, less than a fifth of the total amount forgiven would translate into cash savings.

First, remember that every dollar the Monetarily Sovereign federal government invests is free. No tax dollars are used.  The private sector pays nothing for federal spending. So even if the government found a way to spend a trillion dollars that, by some magical mathematics, translated into only an extra $1 for the private sector, the economy would be ahead of the game.

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And then, why the three-year comparison? What about over a ten-year period. A twenty-year period? The CRFB “cooks the books” by comparing a long-term liability to a short-term return. Given the CRFB’s dumb business logic, no one ever would invest in R&D, because almost none of it pays off in three years. And now the CRFB’s diarrhetic bull really unloads:

Based on existing literature, we estimate these cash savings plus the added wealth from student debt cancellation would lead to $36 billion in increased consumption, resulting in roughly $31 billion in higher output over three years. The net fiscal multiplier in this case would be roughly 0.13x. Employing a broader range of assumptions, this multiplier could be as low as 0.03x and as high as 0.27x.

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Canceling $50,000 would wipe out all student debt for around 36 million borrowers and reduce debt for 7 million more at a cost of $950 billion based on our estimates. This would reduce annual payments by $55 billion per year and $165 billion over three years.

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In our central estimate, we find the resulting increased cash flow and wealth would increase consumption by roughly $104 billion, resulting in roughly $91 billion in added output over three years. The net fiscal multiplier would total 0.10x.

“Based on existing literature”? Make that “based on cherry-picking something someone wrote, that supports our case.” The CRFB has no clue about how much previously indebted students will spend, and how they will spend it, when partly or fully relieved of their debt.

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Consider the student who can’t afford to start a business because of his debt, but now relieved of that debt he is able to start the next Costco or McDonalds. How does that figure into CRFB’s phony math?

Employing a broader range of assumptions, this multiplier could be as low as 0.02x and as high as 0.25x. These multipliers are extremely low. Even during periods of extreme social distancing, CBO estimated most COVID relief measures had a multiplier of between 0.4x and 0.9x.

Wait! What? Now you use “a broader range of multipliers”? What does that say about your “narrower” range of multipliers? How did you pick those multipliers?

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The CRFB arbitrarily picks multipliers from the infinite number available, and then estimates from those multipliers, just to get the answer it wants. Is the CRFB now “proving” that getting us out of the COVID recession was not worth the federal investment? And now we move from bull-scat to a herd of bull’s-scat.

Historically, multipliers on most stimulus policies have ranged from 0.5x to 2.0x.

Which multipliers? The narrow ones or the wide ones? Over what period of time? It’s all vague — intentionally vague.

The multipliers for partial student debt cancellation are low for three main reasons. First, partial cancellation boosts household cash flow very modestly relative to the cost.

Yes, if you pay off a 20-year loan, and then measure the 3-year savings, that is exactly the way it turns out. By that phony criterion, no long-term loan ever should be paid off.

Second, the benefits are poorly targeted to those who are less likely to spend any additional cash they receive.

All that says is, they’ll save it for future investment in the economy, which apparently the CRFB considers worthless.

And third, the combination of a strong economic recovery, excessive cash, and supply constraints in the current economy suggests limited room to further boost demand.

This has been the CRFB mantra for ages: “There is no more room for GDP growth.” A truly pitiful conclusion designed to keep the lower income group from asking for government benefits.

As we highlighted in last year’s analysis on full student debt cancellation, forgiving large amounts of this type of debt results in only modest reductions to annual repayment costs and thus frees up only a small amount of additional funds to be used for consumption in the short run.

Oops. They sneaked in that little phrase, “in the short run.” As in, “Never invest in anything that does not pay you back fully within three years. Never buy a stock. Never buy a bond. Never buy a business.” And the above is what passes for financial sense in the world of the CRFB.

Student debt is generally repaid gradually over a 10-to-30-year period. In fact, the majority of canceled debt would result in no improvement in cash flow this year.

Hmmm . . . Let’s do some CRFB-style calculations:.

Say I buy a house for $1,100,000, put down $100,000, and mortgage $1 million for 30 years at 5%.

Not counting taxes and other costs, that mortgage will cost me $64,418.64 a year — or using the CRFB’s three-year criterion, $193,255.92 for three years.

Over the full 30 years of the mortgage, I will pay $932,559 in interest.

If instead, I decide to pay cash for the house, rather than mortgage, I will pay an extra $1 million, and save “only” $193,255.92 for three years.

According to CRFB math, I will “lose” $806,744 in the first three years.

My cash flow in the first year will be a negative $935,536.

So, the CRFB:

1. Ignores the fact that federal spending costs no one anything
2. Claims one never should pay off any loan unless they net profit in three years, or even in one year.
3. Relies on vague, optional estimates based on vague, optional, and ever-changing “multipliers.”

All of this is to “prove” that it is better for America that college students — especially those who don’t come from wealthy families — be indebted for life, thereby prevented from investing in lucrative careers.

The South kept black slaves from getting an education for the very same reason. 

But it is how liars figure.

Almost 90 percent of IDR borrowers have balances above $10,000 and around 40 percent have balances over $50,000.

Now suddenly, the CRFB seems to be criticizing the small size of the payoff! Hey guys, make up your minds.

According to an analysis by Sylvain Catherine and Constantine Yannelis, which shows that the top income decile receives more benefit than the bottom 30 percent of earners.

Obviously. If you eliminate almost any tax or any cost in America, the high income people will receive more dollar benefit. But that isn’t the point.

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A $10,000 savings means more to a low earner than to a high earner. It will have a greater effect on the low earner’s life, on his ability and willingness to spend, and on the economy. Sadly, there is no noncontroversial way to do this correctly. One might want to give low-income people more of the school loan benefit, or pay off less of high-income people’s loans, but there are many reasons that never has seems to work.

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The U.S. tax code tries but fails.

Given high levels of savings, massive stimulus in the pipeline, pent-up demand, supply constraints, inflation pressures, and expectations of a strong economic recovery, additional cash injected into the economy will have few places to go. To the extent that it leads to new spending – as opposed to saving – it is likely to result in additional inflation pressures (especially in the near term), which risks higher interest rates (especially once the economy has fully recovered) and thus tamped-down growth.

When it suits their purpose, CRFB becomes fixated on the near term.

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We might have inflation for a couple of months, at which point the CRFB will set their hair on fire, and subsequently ignore the welfare of the people. But inflation never is caused by federal deficits. It always is caused by shortages. And the federal government can cure any shortages by additional federal spending to obtain the scarce goods or to reward their creation.

When the economy is well below potential and the Federal Reserve is constrained, CBO estimates each dollar of demand leads to about $1.50 of ultimate output. But when the economy is near potential and the Fed is able to respond, CBO believes $1 of demand will produce only 50 cents of net output.

Not choosing to understand economics, the CBO and the CRFB won’t tell you that even if $1 in demand produced only 2 cents in net output, it still would be worth it, because the $1 in demand cost no one anything. And so far as the economy being “near potential,” that is as bogus a figure as is the “economic multiplier.

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Economic potential the total ability of a nation to produce goods and services. It is a corollary to GDP, which a total spending number. The latter is history. The former is predicted. What is the total capacity of the U.S. to produce goods and services? No one knows because capacity not only includes the availability of production assets but also changes in methodology due to automation and many other factors.

While there is no doubt that student debt cancellation would be a financial and psychological benefit to many borrowers who would receive forgiveness, canceling $10,000 or $50,000 in student debt would not be an effective stimulus.

Huh? Something that not only is a financial benefit, but also a psychological benefit, is not an effective stimulus??? Was that part of the “let the poor suffer,” conservative playbook?

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And now, for the best part, which conveniently is hidden in the Appendix:

Appendix: Uncertainty in Estimates Our estimates come with a significant degree of uncertainty.

Translation: “Our estimates are WAGs (Wild Ass Guesses) designed to scare you.

The ranges (in our) estimates reflect uncertainty over three components: the budgetary cost of forgiving the loans, the demand multiplier associated with reduced loans payments, and the reduction in the effectiveness of a multiplier in an economy operating at or above potential.

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There is also uncertainty about the decrease in repayment as a result of cancellation, though it does not contribute to the range of the estimates. 

Translation: !t is a guess, based on a guess, multipied by a guess, swayed by our own biases, and distorted by the phases of the moon in August. In short, we threw darts at a dartboard from 100 feet away, and moved the board so that the darts would hit exactly where we wanted.

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And that, dear friends, is known as CRFB conservative science. Enjoy the experience.

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Rodger Malcolm Mitchell

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Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell ………………………………………………………………………………………………………………………………

THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

1. Monetary Sovereignty describes money creation and destruction.
2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps: Ten Steps To Prosperity:

1. Eliminate FICA
2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
3. Social Security for all
4. Free education (including post-grad) for everyone
5. Salary for attending school
6. Eliminate federal taxes on business
7. Increase the standard income tax deduction, annually. 
8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
9. Federal ownership of all banks
10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY