Mediaboss Marketing

Text size

About the author: Glenn Hubbard is theRussell L. Carson professor of economics and finance at Columbia University and author of The Wall and the Bridge, published this year by Yale University Press. He was chairman of the Council of Economic Advisers under President George W. Bush.

The decision by the Biden administration to forgive substantial amounts of federal student loans gave progressives heartburn as being insufficiently generous. Conservatives, for their part, decried both the budget cost and the actions distributional consequences and continued reverberances. Economists have weighed in with concerns about fairness (beneficiaries having attended college versus many taxpayers who did not), moral hazard (the prospect of forgiveness may increase demand for non-economic college choices), and inflation (from additions to aggregate demand in an economy already bearing the inflationary consequences of excess demand). These concerns are valid, but they belie a bigger economic and political problem.

The student-loan debt-relief blunder isnt a one-off, but the most recent riff from a policy approach that fails both at articulating an economic narrative and understanding the economys workings. A successful economic policy both closes the loop of the narrative of the problem it is trying to solve and takes into account market response. Failing to do so is to lose the thread and face unintended, if straightforward-to-anticipate, market consequences.

The student-loan-forgiveness action lost the thread. The underlying economic narrative is the opportunity value in education in raising skills for Americans in the contemporary economy. That narrative could well be associated with a supply-side expansion of that opportunity for more Americans, or through new support for training. The administrations blunderbuss does neither. Instead, it effects a redistribution for previous recipients of educational services and uncertainty about the likelihood of future such redistributions.

On Monday, the Congressional Budget Office estimated that the Biden administrations plan will cost $400 billion over 10 years. That amount is about one and one-half times the 10-year budget cost of a significant federal block grant to states proposed by Amy Ganz, Austan Goolsbee, Melissa Kearney, and me. The grant would target community colleges, which are essential institutions in developing skills. It would improve access to community college and students rate of completion once enrolled. We estimated that such a block grant could close the completion gap between two-year college students aged 18 to 24 and their peers at four-year institutions by 2030. In that time it would also increase the share of Americans aged 25 to 64 with a college degree or other high-quality credential to the level equivalent to the share of jobs reflecting advanced skills. Such a supply-oriented initiative embodies fairness, while avoiding windfalls according to whether one saved for or debt-financed a college education.

Student loan forgiveness also abstracts from how underlying higher education markets work. Loan forgiveness and the prospect of it in the future raise the demand for college, raising the price of a college education, all else equal. (The block-grant approach to community-college reform, by contrast, would not. Neither did the land-grant colleges historically.) Economists have warned for decades that some forms of financial aid to students raise tuition costs, dampening their effectiveness in raising the quantity of educational services. Addressing the legitimate concerns about the costs of higher education requires a broader approach than simply raising demand.

The recently enacted Inflation Reduction Act offers another example of losing the economic thread. The new law has little to do with combatting inflation. That narrative is better centered on resolving supply-chain dislocations and reducing excess demand from loose fiscal and monetary policy. Instead, the act focuses on many spending initiatives of the earlier and failed Build Back Better Act, including various tax-based subsidies to green initiatives for alternative energy and its uses. But a policy narrative for climate change should center on the underlying externality (an unpriced social cost of carbon) via imposing a carbon price through a tax or cap-and-trade system, as well as support for basic research on alternatives to fossil fuels and associated technologies. The Inflation Reduction Acts approach to climate policy isnt just indirect, in the form of subsidies, it also raises policy concerns about corporate welfare. While the externality-and-research approach allows markets and innovation to adjust over time, and emphasis on generous subsidies alone, say for electric vehicles, could lead to excess demand for key minerals, with little policy focuseconomic or geopoliticalon their supply.

The Inflation Reduction Acts health care provisions offer yet another example. The Inflation Reduction Act and the Affordable Care Act define health policy goals as access by expanding subsidies for health insurance. In doing so they also lose the thread. The economic policy narrative in health policy is to improve value and efficiency in the provision of health care. That narrative in health policy calls for market reforms in health care and insurance and for reform going beyond greater subsidies to demand. From the Massachusetts health care reform through the Affordable Care Act and its extensions, subsidies boost demand and the well-being of individuals who are newly receiving access. But those measures also raise the costsabsent supply-side reformsof health insurance and health care for many individuals.

These deficiencies both in present economic policies and their conception leave an opportunity for a new framework with a clear narrative and an understanding of markets. Key components include ways to help more Americas bridge the gap between traditional skills and those needed in the contemporary economy, support for basic and applied research to drive innovation and its diffusion, immigration reform that balances needs for additional talent with concerns for opportunities for lower-skilled Americans, health-care reform that improves the working of markets for both care and insurance, examination of the governance of technology to balance privacy concerns and innovation, and a concerted program to attack the rising cost of living not by fiat or price regulation, but by tackling policy-induced inefficiency in markets for housing, education, and health care.

Such an approach maintains the threadclosing the loop, not leaving a loose end to pull.

Guest commentaries like this one are written by authors outside the Barrons and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback toideas@barrons.com.

More:
Biden's Student Loan Policy Has Lost the Thread - Barron's