Nobel laureate Paul Krugman shoots down claims that Biden's student-debt relief plan will fuel inflation
REUTERS/Brendan McDermid
- Paul Krugman rejected claims that President Biden's student-debt relief plan could fuel inflation.
- The economist noted the program is small and will be more than offset by loan payments restarting.
- The Nobel laureate also questioned how the plan could trump the Fed's efforts to curb inflation.
President Biden's plan to forgive a portion of the student debt owed by millions of Americans has sparked claims that it will fuel inflation, which has already surged to a 40-year high this year. Paul Krugman dismissed that criticism this week, and laid out why he expects the policy to have a negligible effect on prices.
The entire student-loan program only generated $70 billion in 2019, so the debt-forgiveness plan is unlikely to have a material impact on household spending or inflation, Krugman pointed out in a New York Times column on Thursday.
"We're talking about tens of billions a year in a $25 trillion economy," Krugman wrote. "That's basically a rounding error."
The Nobel Prize-winning economist noted the Biden administration spent $1.9 trillion last year on the American Rescue Plan, which handed stimulus checks to consumers and loans and grants to businesses to help them weather the COVID-19 pandemic. He estimated the loan-relief plan would increase private-sector spending by less than 1/40 as much as that initiative.
Moreover, the Biden administration now plans to resume student-loan repayments after halting them as part of its pandemic-aid efforts. Also, it isn't canceling all outstanding student debt, meaning some portion of the previous $70 billion will keep flowing into its coffers, Krugman said.
The economics professor and author highlighted a Goldman Sachs analysis showing Biden's plan would reduce student-loan payments from 0.4% of personal income to 0.3%. "This is supposed to feed the fires of inflation?" he joked.
In fact, the plan is likely to modestly cool the economy, as the loan relief will only partly offset the resumption of debt repayments, Krugman wrote. As a result, he expects it to raise inflation by a fraction of a percentage point, at most.
Krugman added the Federal Reserve is "hyperalert" to inflation risks right now, and expressed doubt that a loan-relief plan could hinder the US central bank's "whatever it takes" approach to curbing price increases.
Given the small scale of the program, that it's being more than offset by the restart of loan repayments, and the Fed's focus on fighting inflation right now, Krugman said he was puzzled that anyone could believe it would accelerate price increases.
"Warnings that debt relief will be dangerously inflationary are bizarre," Krugman wrote. "All the scary talk about heaping fuel on the inflationary fire is peculiar," he added in a Twitter thread this week.
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