Democrats have the chance to prevent an economic calamity

“The US is currently projected to hit its existing debt ceiling sometime in 2023, according to the Bipartisan Policy Center. While raising the ceiling should be relatively straightforward, it’s become a contentious process — and an opportunity for the minority party to extract policy concessions or score political points. Both parties have used debt ceiling increases to their advantage, but Republicans have done so much more frequently in recent years.
In 2011, for example, Republicans balked on suspending the debt limit and refused to move forward until President Barack Obama agreed to key spending cuts, concessions they ultimately secured. The US got so close to default that year, however, that Standard and Poor’s downgraded the country’s credit rating.

Political experts note that this disagreement marked one of the first times it seemed like lawmakers were actually willing to go over the edge, despite the economic chaos that could ensue. Were the US to actually default, that would likely downgrade the dollar and lead to a recession.

While a default has never happened, Republicans’ behavior in 2011 — and their current rhetoric — suggests that they’re more open to the possibility and taking such fights to that point.

Democrats, including in the White House, are reportedly considering preempting this worst-case scenario by tackling the debt ceiling this winter, according to Axios. The White House has denied that such conversations are happening.

There are also still questions about what a debt ceiling bill could look like. While some lawmakers including Sen. Jeanne Shaheen (D-NH), and a group of prominent House Democrats, have expressed support for doing away with the debt ceiling altogether, others, like Biden and Sen. Bernie Sanders (I-VT), have opposed taking this route. That’s likely because such talks still offer an opportunity to evaluate spending, and because it could be a useful tool for Democrats should the GOP hold the White House and Congress.

In lieu of getting rid of the debt limit altogether, there’s been growing pressure on Democrats to consider increasing it to such a high value that there isn’t likely to be a standoff over the issue in the short term.”

Biden’s Student Debt Relief Plan Will Worsen Inflation

“even though student debt relief might not look like spending the way we traditionally think of it—the government isn’t cutting checks or awarding grants here, the way it did in the American Rescue Plan, for instance—economically, it will function the same way.
Because money is fungible, student loan borrowers will effectively now have extra discretionary income equal to whatever they would have had to pay towards that $10,000 in loans. That might sound great, but remember that the standard definition for inflation is what happens when a larger supply of money is chasing the same amount of goods and services. Money that would have been spent paying back loans will, upon the conclusion of the repayment moratorium, remain circulating in the regular economy. Ending the repayment moratorium without passing forgiveness would’ve been deflationary by returning U.S. dollars to Treasury.”

Inflation Hits 8.2 Percent After Another Month of Sharply Rising Prices

“Inflation continued burning a hole in Americans’ wallets last month.
Prices rose by an average of 0.4 percent overall, driven primarily by rising costs for housing, food, and medical care. According to the newly released data from the Bureau of Labor Statistics, prices rose by 8.2 percent overall during the last 12 months ending in September. Food prices have climbed by 11.2 percent in the past year, while energy prices are up by a whopping 19.7 percent despite falling by about 2 percent in September.”

“Particularly worrying is that so-called core CPI, which filters out more volatile categories like food and energy prices, rose by 0.6 percent last month. In other words, inflation is widespread throughout the economy and no longer contained to the categories that were driving the phenomenon a year ago. Far from being transitory, inflation now seems to be a deeply rooted problem.”

“rising interest rates needed to combat inflation will rebound onto the federal balance sheet by making the federal debt more expensive. Even when interest rates were at or near historical lows, interest payments on the national debt were on course to become one of the largest segments of the federal budget within the coming decade. Higher interest rates mean the government will have to spend a significantly larger amount of revenue on simply managing the existing debt—a nasty feedback loop that makes the government’s already untenable fiscal situation considerably worse.”

Opinion | Biden’s Student Loan Forgiveness is Wrong. Here’s How to Handle College Debt Instead.

“President Joe Biden made millions of Americans up to $20,000 richer by excusing them from repayment of money they had borrowed, costing taxpayers hundreds of billions of dollars.
The recipients aren’t the poorest Americans, the neediest, the unluckiest, the most indebted or those serving our nation most nobly. They qualify, rather, because they borrowed money for college.”

“many of those receiving relief borrowed to finance graduate degrees like JDs and MBAs — a group hardly in need of financial help, but one that will remember this giveaway come November. But from afar, this choice looks absurd. As of June, American households held more than $4.5 trillion in consumer debt (excluding home mortgages), most of which was not student loans. According to the Federal Reserve, fewer than 1 in 4 households have student-loan debt, and it is more common among those with higher incomes. By what logic is “borrowed money for college” a sensible standard for selecting the recipients of unprecedented public beneficence?

The logic is uniquely American, and incredibly harmful. It is captured well in the familiar Hollywood trope of a teenager, discovering his family’s financial troubles, conceding gloomily that he can abandon his first-choice school and attend the state university nearby, only for a determined parent to insist: No, we will find a way.

In America, this is meant to be inspiring. But the statistics suggest it’s more likely to be a tragic mistake.”

“Students who enroll in college are more likely to drop out or graduate into jobs that don’t require their degrees than they are to travel the expected college-to-career path. Research also suggests that what school you attend just doesn’t matter all that much: For men, school selectivity has no effect on future earnings; for women, more selective schools lead to more hours worked and lower marriage rates.”

“On average, colleges in America consume more than $25,000 per student per year — second only to Luxembourg among developed economies and more than twice the spending in countries like Denmark, France and Germany. The focus on elite private colleges is especially harmful: While we constantly conflate the cost of the “college experience” with affording an “Ivy League education,” median tuition for an in-state, four-year public university is still only $8,300 per year. Every child in America can pay his or her own way at a perfectly good college for about half the income from a part-time, minimum-wage job.”

“America should embrace the banality of the student loan as just one form of debt among many — chosen by some for purposes of investment, and by others for what amounts to conspicuous consumption, exploited by sellers of a product with variable quality. As luck would have it, America has a very good legal system for governing regular debt, complete with structures for managing risk on all sides, options for sellers to provide credit themselves if no one else will, and equitable relief for those who make commitments they cannot keep.

The keystone is our uniquely lenient bankruptcy system. Unlike in most other countries, the typical American can go to court, declare himself insolvent, hand over some remaining assets, default on his remaining debts and return home to a house exempted from the proceedings. This choice is by no means an easy one — his credit score plummets and borrowing becomes more difficult and costly; friends and neighbors are likely to notice, along with anyone who runs a background check in the future; feelings of failure and accompanying shame are common. Thus, while Americans file for bankruptcy far more frequently than Europeans, the occurrence is sufficiently rare that consumer credit remains widely available and affordable. The cost of bankruptcy is low enough to encourage risk taking and ensure that someone who truly needs a fresh start can get one, but high enough that most who can avoid it will do what they can to steer clear.

This is the option that should be available to all student-loan holders.

Continuing the desacralization of student debt, we should eliminate the labyrinth of government grants, loans, subsidies and guarantees that assert an open-ended public commitment to financing anything a university can think to charge for. Public support should come at the state level through funding of state university systems and at the federal level through a simple, means-tested grant that covers, say, 50 percent of the median state’s four-year public university tuition. Tying the grant value to the median state would prevent individual schools from extracting more money by raising tuition. Costs of room and board would be excluded. Young adults not enrolled in college do not expect the public to pay for their housing or food; neither should those enrolled.”

“Where would students find additional funding for more expensive options? A private loan market would likely exist but, absent the guarantees and subsidies, credit would be scarce and expensive. Borrowers would tend to have limited credit history and few assets. Lenders would be poorly positioned to evaluate the likelihood of successful repayment. The prospect of discharge in bankruptcy would add further risk. These obstacles are features, not bugs. Loaning large amounts of money to teenagers with uncertain prospects and no collateral is a bad idea for lenders because it is a bad idea, period. Finding ways to make it sufficiently attractive to saddle those teenagers with the loans does no one (besides college administrators) any favors.

Fortunately, institutions exist with the capital to finance all the necessary borrowing, the information to assess the wisdom of borrowing to enroll, the resources to help students succeed and the incentives to make the system work. Those institutions, of course, are the colleges themselves. Just as sellers provide financing for cars, capital goods and sometimes real estate, colleges should be expected to finance the education they provide. Instead of cashing tuition checks before freshman orientation has begun, and leaving the student to someday pay back a third-party lender, colleges should receive tuition from their students after the fact, when those students have been launched into careers that allow them to afford the payments.

This shift would initially require institutions without large endowments to borrow working capital for providing today an education that would be paid for tomorrow. But most institutions will have sufficient fixed assets to secure the loans, and the federal government could play a role if needed in guaranteeing that financing — with default leading promptly to liquidation.

Meanwhile, students who made the choice to borrow under the old system would continue to repay those debts if they can, and would have the option to declare bankruptcy if they cannot. Such bankruptcies would cost the federal government much less than Biden’s broad-based loan forgiveness, and would help the transition to a better system and mindset rather than Biden’s doubling down on the broken one.

Colleges dependent on their own alumni’s future earnings to fund their operations would face a radically different set of incentives than today’s.”

The Biden Administration’s Proposed Policy To Reduce Student Debt Is Only Going To Make the Problem Worse

“At first glance, all of these loan forgiveness programs may seem to have merit. But they are all trying to paper over problems that the federal government created and that will continue to exist after the new rules go into effect. Forgiving billions of dollars in student loans means billions of federal dollars went to poorly run schools and students who were, in many cases, unprepared for college. While those students may deserve some kind of debt relief—and which very few of them can receive through bankruptcy—the Education Department continues to issue loans to unprepared students in order to attend poorly run schools.

The expansion of benefits offered by the PSLF program spells unique problems for taxpayers and future borrowers alike. Expanding eligibility to more kinds of “public service” workers, including employees of private companies and private contractors, is expected to cost over $13 billion in the next 10 years.

As with debt forgiveness for borrowers who are misled by their schools, PSLF on its face sounds like a good idea. If a student decides to take a career in public service—an essential but presumably low-paying job—then, after 10 years of payments, that student will be rewarded for his service by having a set amount of his remaining loan balance paid. However, those who work in the public sector often have the best job security, health care, and pensions among America’s middle-class workers.

What’s more, many professions counted as “public service” are some of the highest-paying positions in the entire job market. Physicians employed by nonprofit hospitals, for example, are eligible for PSLF. However, whether a cardiologist works for a nonprofit or a for-profit hospital, his yearly salary will likely top $400,000. Thus, prospective physicians can take on hundreds of thousands of dollars in debt for medical school, and only pay a fraction of the amount borrowed, while accruing millions of dollars in income over the course of their careers.

When academic deans can assure students that a large debt burden can be discharged by working for a nonprofit or the government after graduation, they can more easily justify exorbitant tuition costs. After all, why worry about borrowing a massive sum if you won’t have to repay it? The PSLF solution to high debt burdens for public sector workers has only aggravated the problem and will continue to. Once the government pours funding in the form of debt relief into the market for specific degrees, schools end up using these funds to justify hiking prices, thus generating a bigger student debt crisis. In turn, this enlarged crisis cries out for more government funding.

The solution to runaway student debt inflation is for the government to stop subsidizing tuition hikes. While limited debt relief for defrauded or disabled borrowers makes sense, the federal government needs to start making policy proposals that will attack the student debt crisis at its source—the cost of college attendance.

Student loan debt is a real and pressing problem for America’s poorest borrowers, but it is merely an inconvenience for millions of others, including many beneficiaries of PSLF. Solving the college cost problem in the long term requires getting the government out of the lending business.”

A Wonky Evisceration of Biden’s Bad Deficit Math

“Biden’s administration did nothing to bring about the deficit’s decline. Credit really goes to large increases in tax revenues as the economy rebounded combined with the decision by Sens. Kyrsten Sinema (D–Ariz.) and Joe Manchin (D–W.Va.) and their Republican colleagues to block Biden’s expensive “Build Back Better” proposal. BBB would have made permanent many of the emergency programs created or expanded during the pandemic, and had it passed, government spending and deficits would be heading even higher than they are today.

That said, the still-too-close-to-$1 trillion deficit for FY 2022 is inexcusably large. More worrisome is the cost that we taxpayers must shoulder because of the pre- and post-COVID-19 deficits. According to that same Treasury report, in May, the U.S. government paid $56 billion in interest payments on its debt, up from $44 billion in April. As of now, total interest payments for this year are $311 billion. With four months still to go on this figure, we can assume a total interest cost for FY 2022 of at least $500 billion.

This is just the beginning. Before the pandemic and the inflation unleashed by irresponsible government spending and easy money, the Congressional Budget Office projected that in 2050, interest payments on U.S. debt would consume 8 percent of GDP and 40 percent of government revenue. These projections assumed modest increases in interest rates over a long-term period. However, as of today, the short-term figures look optimistic as inflation and the Federal Reserve’s response to it are boosting interest rates.”

“It’s expensive for sure, but it is also a vicious cycle if the interest is paid for with yet more borrowing. More borrowing raises total interest payments. In addition, if one believes (as I do) that most of our current inflation is rooted in recent fiscal irresponsibility, then more borrowing to pay for more interest will only add more fuel to the inflation fire.

Finally, as the average interest rate on marketable debt approaches 2 percent, we are getting close to the threshold that some left-leaning economists say should trigger concerns about the size of government debt.”

“the budget deficit might be smaller than at the height of the pandemic, and that is a good and predictable thing. But it’s no cause for celebration as interest rates and servicing costs could push us into worrisome territory sooner than we think.”

A $4.4 billion US destroyer was touted as one of the most advanced ships in the world. Take a look at the USS Zumwalt, which has since been called a ‘failed ship concept.’

“Despite their cost, the Zumwalts have been plagued by equipment problems. Soon after its commissioning in 2016, the USS Zumwalt broke down in the Panama Canal. The second ship in its class, the USS Michael Monsoor, failed during sea trials the following year.

As a 2018 report from Military Watch Magazine noted the Zumwalts “suffered from poorly functioning weapons, stalling engines, and an underperformance in their stealth capabilities, among other shortcomings.”

“They have almost entirely failed to fulfill the originally intended role of multipurpose destroyer warships, while the scale of cost overruns alone brings the viability of the program into question even if the destroyers were able to function as intended,” the outlet said.

The Zumwalts lack several vital features, including anti-ship missiles, anti-submarine torpedoes, and long-range area-air defense missiles, the military expert Sebastian Roblin wrote in a 2021 National Interest article. Roblin called the destroyers an “ambitious but failed ship concept.”

And, noted Roblin, their weaponry wasn’t cheap. The ship’s long-range land-attack projectile guided shells cost roughly $800,000 each — about the same price as a cruise missile. The munitions were eventually canceled, considered too pricey to merit producing.

Roblin said the Zumwalt was produced based on “unrealistic” estimates that banked on minimal cost, despite coming in 50% over budget.”

Don’t Wait! The National Debt Is Only Getting Worse

“the Congressional Budget Office (CBO) attempted to attach some math to the difficult policy decisions that lie ahead. Regardless of when lawmakers decide to address the $30 trillion national debt, just stabilizing it (that is, implementing policies to stop it from growing relative to the nation’s economy as a whole) will require that “income tax receipts or benefit payments change substantially from their currently projected path.”

In short, taxes will have to go up and government services—including benefits from programs like Social Security and Medicare, the health insurance program for the elderly—will likely have to be reduced.

That’s hardly a new set of prescriptions. Debt-watchers have been warning for years that benefit cuts and tax increases will likely be needed to have any realistic shot at managing America’s long-term debt. (And, remember, we’re talking about what’s needed to merely stabilize the debt, not reduce or eliminate it).”

“If policy makers wait until the end of the decade to raise taxes and cut spending, the best-case scenario would leave the debt hovering around 120 percent of GDP over the long term. Waiting longer means higher debt levels forever and more severe consequences.”

“A larger amount of debt translates into reduced economic growth in the long run, as the cost of interest payments on the debt consumes dollars that could otherwise be put to productive use. As the CBO notes, persistently high levels of debt can also put upward pressure on interest rates and make it more difficult to combat inflation.”

Biden administration eases student loan forgiveness through income-based repayment plans

“The Biden administration on Tuesday announced changes to federal student loan repayment plans that will make it easier for millions of borrowers to have their debts forgiven after being required to pay for 20 or 25 years.

Education Department officials said they would make a one-time revision to millions of borrower accounts to compensate for what they called longstanding failures of how the agency and its contracted loan servicers managed the income-driven repayment programs. Democrats and consumer groups have been calling on the Biden administration to enact such a policy in recent months.

The income-driven repayment programs are designed to provide loan forgiveness to borrowers who have been making payments tied to their income for at least 20 or 25 years. But few borrowers have successfully received relief under those plans, which Democrats have long promoted as an important safety-net for struggling borrowers.”

“The Education Department said it would make a one-time adjustment to borrower accounts to provide credit toward loan forgiveness under income-driven repayment for any month in which a borrower made a payment. Officials will credit borrowers regardless of whether they were enrolled in an income-driven repayment plan.”

“Department officials said they would credit borrowers for months in which borrowers were in long-term forbearances or any type of deferment before 2013. But borrowers will not receive automatic credit for months in which they were in default or enrolled in shorter-term forbearances or certain types of deferments after 2013.”

“The Education Department said the changes lead to “immediate debt cancellation” for at least 40,000 borrowers under the Public Service Loan Forgiveness program and “several thousand” borrowers under income-based repayment programs.

A further 3.6 million borrowers will receive at least three years of retroactive credit towards loan forgiveness under income-driven repayment. The credit will be automatically applied to borrower accounts, regardless of whether a borrower is currently enrolled in an income-driven repayment plan”