Saturday, 10 February 2018

Cancelling student debt is stimulatory. So what?

A very silly paper has just been published by the Levy Economics Institute entitled “The Macroeconomic Effects of Student Debt Cancellation”. One of the basic points made is that if student debt is  wiped out and government prints loads of money and hands it the universities or banks who lose out because they’re no longer getting money from debt repayment, the effect will be stimulatory: i.e. demand will be raised and jobs created (assuming the economy is not yet at capacity).

The flaw in that idea is that stimulus will occur WHATEVER group of people or organisations government gives money to. Makes no difference whether the money is given to Wall Street bankers, winos and drug addicts or old ladies with blue rinses – the effect will be the same: demand rises. That however is not an argument for handing money to old ladies with blue rinses, or any other group.

Note that that is not, repeat not to say that student debt should not be cancelled. The pros and cons of doing that are quite separate from the very silly and obvious point that handing out loads of money will raise demand.

Even if the above student debt cancellation is funded via a general rise in tax instead of being funded via money printing, there could easily be a rise in demand, but that is still irrelevant. If money is taken off people or organisations with a low propensity to spend and given to people and organisations with a higher propensity to spend, the effect is clearly a rise in demand. An example of that is taxing the rich and giving the money to the poor.

But the same point applies there as made a couple of paragraphs above. That is, while there may well be good reasons for raising taxes on the rich and giving more to the poor, the above “propensity” point is not one of those “good reasons”.

The multiplier.

The Levy paper attaches much importance to the so called “multiplier”: that’s the ratio of increased GDP resulting from some increase in spending compared to the size of the latter increased bout of spending.

To the naïve (and that includes the Levy authors) it might seem that the larger the rise in GDP for a given dollop of increased spending the better. The flaw in that argument is that stimulus or if you like “printing money and spending it” costs nothing in real terms. Thus if two dollars have to be created and spent for each dollar increase in GDP rather than one dollar of “print and spend” it really doesn’t matter because printing dollars (or creating them via keyboard strokes) costs nothing. As Milton Friedman put it, "It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances."

For more on the nonsense that is the multiplier, see my article on that subject: “The Multiplier is Irrelevant.”

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