Last week, The Wall Street Journal ran a story by reporter Josh Mitchell, with a headline asking an alarming question: “Is the U.S. Student Loan Program Facing a $500 Billion Hole? One Banker Thinks So.”
That’s a large and worrisome number. Surely a hole that large is exactly the sort of thing we don’t want our government to be facing, and if a banker is concerned it must be very serious indeed.
The banker in question, a former JPMorgan executive brought in by Donald Trump’s Secretary of Education Betsy DeVos, had examined the federal student loan program and determined that the government was making overly rosy assumptions about future repayment. He found “a growing gap between what the books said and what the loans were actually worth, requiring cash infusions from the Treasury to the Education Department long after budgets had been approved and fiscal years had ended,” and warned that the department faced “potentially hundreds of billions in losses.”
“The federal budget assumes the government will recover 96 cents of every dollar borrowers default on,” Mitchell wrote. This banker, Jeff Courtney, put that figure closer to just 51 to 63 cents.
Now, for a private lender, like a bank, this projected shortfall would indeed be a ticking time bomb. The bank might be in danger of insolvency (unless, of course, it was rescued by a federal government that could give the bank an emergency cash infusion and take those bad loans off its hands). But there’s no real danger of a federal Cabinet-level department becoming insolvent. The Treasury Department is already in the habit of making up the Education Department’s budgetary shortfalls.
So what is the problem again? Typically for a news outlet like the Journal, the story describes this potential shortfall as what “taxpayers” would be “on the hook for,” but obviously, we all know that that is not how federal budgeting works. Taxes could rise for certain people for certain reasons, but no one will receive an itemized bill for this uncollected debt. And as for that large, catastrophic number ($500 billion!) that might never be paid back, it amounts to less than one year of a national defense budget that “taxpayers” are similarly “on the hook for.” (The Journal’s editorial board recently complained that the Biden administration’s proposed 2022 $715 billion Pentagon budget, while an increase in real terms, nonetheless represents an unconscionable decline in the defense budget as share of gross domestic product. “Taxpayers” are not mentioned in the editorial.)
The story, then, is that the government might not collect some debt, even if it currently pretends, for budgetary reasons, that it definitely will, and, as a result, the deficit may rise to levels higher than the current estimates predict. For a committed conservative, such as DeVos, that situation is inherently scandalous. For everyone else, that could only ever become a problem in the future, and only if that future deficit has some negative effect on the overall economy, which is not very likely considering the entire recent history of federal deficits and economic growth.
That state of affairs may explain why articles like the one in the Journal so often invoke “taxpayers,” as if everyone would have to write personal checks to cover the Department of Education’s shortfall: because without imagining taxpayers as victims of government deficits, it’s hard to point to anyone actually harmed by a government department giving unrealistic estimates of future revenues.
Except in this story, there are actual victims: the people who hold debt that the government doesn’t realistically expect to collect in full but who are bled for payment regardless. As Courtney’s report found, because of the importance of these loans to the department’s balance sheet, the government keeps borrowers on the hook for the loans even if they will never be able to repay all of the money they owe, often by placing borrowers on a repayment plan tied to their income. (As the economist Marshall Steinbaum has explained, the “income driven repayment,” or IDR, program is framed as a means of helping borrowers, but in reality, it “exerts a significant drag on their financial health, to no apparent purpose” by forcing them to “make less-than-adequate payments for many years before their debt is finally cancelled.”) The victim of such a scheme isn’t taxpayers, it’s debtors.
There’s one particular portion of The Wall Street Journal’s story that the public should treat as a moral and political scandal (the emphasis here is mine):
One instance of how accounting drove policy came in 2005 with Grad Plus, a program that removed limits on how much graduate students could borrow. It was included in a sweeping law designed to reduce the federal budget deficit, which had become a concern in both parties as the nation spent on wars in Iraq and Afghanistan and as baby-boomer retirement was set to raise Social Security and healthcare outlays.
A key motive for letting graduate students borrow unlimited amounts was to use the projected profits from such lending to reduce federal deficits, said two congressional aides who helped draft the legislation.
Each change was publicly justified as a way to help families pay for college or to save the taxpayer money, said Robert Shireman, who helped draft some of the laws in the 1990s as an aide to Sen. Paul Simon (D., Ill.) and later was deputy under secretary of education in the Obama administration.
But how agencies such as the Congressional Budget Office “score” such changes—determine their deficit impact—“is a key factor in deciding whether a policy is adopted or not,” Mr. Shireman said. “The fact that it saved money helps enact it.”
To explain this more plainly, Democrats helped sacrifice a generation of students to the deficit god, in exchange for meaningless numbers in a report, because CBO scores are more real to senators than flesh-and-blood people.
This is the sort of depravity that deficit obsessions produce. The Iraq War needed to be “paid for” with the future earnings of students who, lawmakers imagined, would eventually be rich, even as many of the same lawmakers voted to cut taxes on already-rich people. Now the debt of the still-not-rich students can’t be forgiven because of its importance to the federal government’s predicted future earnings. And politicians and commentators in thrall to deficit politics still paint the situation as a morality tale, in which the borrowers are irresponsible for having the debt and the government would be irresponsible to forgive it. After all, think of the poor taxpayers.
The early days of the Biden administration led some to believe we were finally free of this incoherent political mode, where dubious predictions in CBO reports dictate the limits of the politically possible and determine who will be arbitrarily punished for the sake of limiting the size of a program in a speculative 10-year budget projection. The proof that Democrats had learned their lesson was one major piece of legislation, the American Rescue Plan, designed to respond to a unique emergency.
More recently, the administration, and some of its allies in Congress, have signaled strongly that they’re returning to the old ways. The American Prospect’s David Dayen has reported that the White House is determined to “pay for” its infrastructure plans, and Treasury Secretary Janet Yellen is apparently leading the charge to ensure the infrastructure spending is “offset.” This will have the likely effect of limiting the scope of the plan, once again sacrificing material benefits for the sake of estimates and predictions from the CBO.
The Biden administration seems to be determined to go about this without violating its pledge not to raise taxes on any American making less than $400,000 (a threshold meant to define the upper limit of “middle class” despite being comically higher than the Obama administration’s similar $250,000 limit for tax hikes). It has floated increasing IRS enforcement and raising the capital gains tax for the wealthiest Americans. Both are fine ideas. But the best thing about taxing the rich is not that you can use their money for infrastructure, it’s that doing so reduces their political and economic power. That’s also the reason why it’s so difficult for Washington to do it.
The complete incoherence of the current Democratic position on spending and deficits is summed up well in another Wall Street Journal story, where Montana Senator Jon Tester was quoted saying, “I don’t want to raise any taxes, but I don’t want to put stuff on the debt, either.… If we’re going to build infrastructure, we have to pay for it somehow. I’m open to all ideas.”
“Open” to “all ideas” but unwilling to tax the rich, and unwilling to allow a CBO report to show a larger deficit as a result of needed spending: This is more or less precisely the dynamic that led student loan debt to explode in the United States, and it’s the zombie worldview that threatens any chance of this government averting a multitude of political, economic, and ecological disasters.