The Great Biden YOLO

President Joe Biden pitched a pair of new federal spending and taxation bills on a scale rarely seen, intended to have transformative effects on the economy and the role of government in the economy.

The $2 trillion American Jobs Plan infrastructure spending plan includes rebuilding physical infrastructure such as roads and bridges along with federal boosts to workforce development, in-home care, and domestic manufacturing.

The $1.8 trillion American Families Plan includes targeted tax credits and education spending to benefit middle and lower earners as well as a plan to raise revenue through higher corporate taxes and taxes on higher earners and holders of wealth.

President Biden

If the twin proposals pass with narrow Democratic majorities in the House and Senate, it will herald changes of a piece and on a scale with Lyndon Johnson’s Great Society.

I’m asking myself three questions about these plans. I figure I’m unlikely to sway your fixed opinions either way, but here goes. My three questions are:

Is massive federal government stimulus spending on infrastructure a good idea right now?

Are higher taxes on corporations and wealthy households, combined with targeted tax breaks on lower earners a good idea right now?

Is increasing the federal debt by an additional $4 trillion a good idea right now?

Each of these three questions can be further considered on economic terms, political terms, and moral terms. As a citizen, I’m interested in all of these questions, on all of these terms.

Let’s start with the plan for massive infrastructure spending at this moment in the economic cycle. It’s surprising.

What I mean is that in a sluggish, ailing economy – with let’s say above 10 percent unemployment like the Great Depression or even the Great Recession following 2008 – a massive government stimulus push makes tremendous sense. That’s basic Keynesian economics. 

We’re not in that zone right now. The July 2021 unemployment rate was 5.4 percent. Yes, that unemployment rate is still worse than pre-COVID levels (3.5 percent unemployment in February 2020) but we also haven’t even fully re-opened the economy yet. 

Vaccinations, herd immunity, and the resumption of economic normalcy may naturally get us back to the relatively roaring economy of pre-COVID February 2020, without any further federal stimulus. The stock market is hitting new highs every week. (Yes, I know the stock market is not the economy, but it is a highly visible leading indicator, which is why we refer to it). Real estate prices are, in general, on fire. (Yes, housing is also not the economy, but it is an important and visible subsector of it.) And the latest GDP number was 6.4 annual growth, higher than normal trend. A massive stimulus bill right now feels, at the very least, unprecedented. I harbor strong doubts about the size and the timing of this one.

US_Unemployment
Unemployment through July 2021

What about the American Family Plan for higher taxes on corporations, higher earners, and capital gains taxes? I am here for it. I mean this more as a moral statement than an economic statement, since inequality is a leading problem of our time. But I also think it’s ok economically. First, because we need the additional revenue. Second, because the tax changes merely roll us back to times when the economy also grew strongly under higher corporate and upper income rates. Third, because tax rates and tax policy should alleviate, not exacerbate, inequality.

And the child and family support measures? I believe in expanded pre-K and community college access both morally and as an economic measure. I think poverty alleviation similarly has both moral and economic benefits, and we need to do more of those as well. We’ll be both a richer society and a better society for it.

YOLO

Finally, what about expanding federal debt by $4 trillion more right now? Phew. This is the craziest part of the conversation. A conversation that we’re kind of not even having. Republicans blew their authority and credibility on the issue of fiscal responsibility long ago. 

If Biden gets this passed, it will mark a wholly different direction than the Clinton and Obama presidencies. Despite what critics said at the time and after, the Clinton administration prided itself on shrinking government. They actually balanced the federal budget and set a course for retiring federal debt. That seems forever ago but it was merely the year 2000. In that same spirit, Obama politically hamstrung his signature health care legislation by requiring that it pay for itself and not increase the federal deficit. In hindsight, this lack of generosity probably doomed it in the eyes of the many who needed it most. 

After a career in Congress built on being a deficit hawk, Paul Ryan shepherded a unified Republican Congress and Executive Branch to pass a $1.5 trillion tax cut in 2017, a tax cut that overwhelmingly favored upper earners and corporations. This is the opposite move than a real deficit hawk would make, but Ryan just YOLOd his own reputation for those sweet tax cuts.

When the W. Bush and Trump administrations massively increased federal debt despite the Republican party’s claim to favor fiscal responsibility and limited government, Democrats seemed to have internalized a whole different approach to government debt. Democrats are no longer willing to self-limit as they did in the past. At this point they are daring the cowards and hypocrites in the Republican party to stop them.

I honestly don’t know what to think about $4 trillion in additional deficit spending. We’re in total YOLO territory. It feels like the Washington DC version of lots of things I don’t understand about money in 2021, like GameStop, Bitcoin, SPACs, and NFTs. The assumptions we long held about fundamentals and financial gravity don’t seem to hold anymore.

 “It’s different this time” are frequently called the four most dangerous words in finance. It’s been different for a while when it comes to deficit spending, as the laws of financial physics are seemingly suspended. I don’t get it. I continue to worry about gravity.

A version of this post ran in May 2021 in the San Antonio Express News.

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Paul Ryan wrecks his reputation on the way out the door

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Past Student Loan Forgiveness Failure

I do not expect President Biden to actually use executive powers to eliminate large chunks of student loan debt, although it appears from news reports that he’s strongly considering it. One in five Americans has student loan debt, and our $1.6 trillion collective balance is higher than our total credit card debt balances.

I neither expect it, nor do I favor it. My objections, briefly summarized:

  1. Debt cancellation favors higher income folks, as high debt correlates with high income. 
  2. It seems poorly targeted for eliminating inequalities. 
  3. It is complicated by the obvious political perceptions of unfairness: People who already paid off their debts, people who never took out debt in the first place, and people who will take out debt in the future all have a potential complaint. That’s a lot of constituencies who may feel broad debt forgiveness is unfair to them. 

To state the obvious: When one in five Americans suffer under the burden of student loan debt, four in five do not. 

The future “fairness” perceptions around debt forgiveness depends on whether forgiveness feels societally “earned.” A case can be made that public sector workers – think military, police, fire, educators – deserve a shot at forgiveness following a period of service. That feels less controversial.

Interestingly, programs already exist – in theory – for this type of public sector worker student loan forgiveness, primarily the Public Service Loan Forgiveness created in 2007 and the Temporary Expanded Public Service Loan Forgiveness program passed in 2018. The promise of the program was that borrowers who made ten straight years of on-time payments – and worked for ten years in public sector jobs – would have their remaining loan balances forgiven. The second program was passed by Congress in 2018 to make up for failures of the first program. Then the second program failed.

A study by the General Accounting Office (GAO) from 2019 attempted to explain why only 1 percent of applicants to the Temporary Expanded Public Service Loan Forgiveness Program received forgiveness. 

The OMB found the application process confusing to the point of impossible. They cited the Education department’s outreach as insufficient. The department’s own website did not provide information on debt forgiveness. Private sector servicers were not obligated to provide information about loan forgiveness. These all likely contributed to the failure of the program.

Michael Lewis – author of Moneyball, Liar’s PokerThe Big Short and The Undoing Project among others – is probably our country’s best financial journalist.1 His podcast “Against The Rules,” offered an explanation on the failure of public sector loan forgiveness, even before that OMB report was issued. 

In Lewis’ second podcast episode, which first aired in April 2019, he explored the ways in which giant student loan-servicing company Navient steered borrowers away from qualifying for loan forgiveness.

Specifically, Navient encouraged borrowers to take advantage of forbearance if they experienced hardships. Unfortunately, forbearance meant that borrowers could no longer qualify for public service loan forgiveness at the end of ten years. The ten-years-of-payments clock would restart, a fact apparently not mentioned or emphasized by Navient employees.

In addition, Navient’s call center workers were highly discouraged from spending enough time to walk consumers through the complex steps they needed to follow. Lewis points out that Navient was paid per account, and would lose accounts if borrowers qualified for forgiveness. Also, spending too much time on the phone with borrowers cut into Navient’s profitability.

Technically, yes, public service sector workers could apply for loan forgiveness, but Navient’s own financial incentives were to not offer the best advice to borrowers. 

navient
Not a great reputation!

If you enjoy making yourself angry at a big consumer finance institution, you’ll want to listen to the podcast. These types of perverse incentives also probably explain a big part of why so few public sector employees qualified for loan forgiveness. 

One obvious conclusion we could make is that if President Biden pursues loan forgiveness for public sector workers, or more universally, we should hope he either replaces or makes massive improvements to this failed program.

Like a lot of what happens with consumer finance, the issue is not so much that it is impossible to avoid traps and to properly navigate borrowing. The real issue is that the burden of doing the right thing has been shifted entirely to an unsophisticated consumer. Could that consumer do all the right things? Maybe. But it’s unlikely. Specifically, as we’ve seen, it’s about 1 percent likely.

As a starting point, I’m usually in favor of “personal responsibility” when it comes to our finances. We should learn what we can, and try our best to solve our own problems. 

But when less than one percent of people qualify for an extraordinary benefit like loan forgiveness, it’s not right to make personal responsibility the watchword for navigating consumer finance. Instead, it’s probably a case for better design of the program. And better regulation. And for putting the burden of success on the companies and governments – who understand the products best – rather than on consumers, who understand financial products poorly.

Tony Isola, a money manager and consistently astute commentator on bad financial products, recently dubbed the student loan servicers the “murder hole of consumer finance.” That’s a pretty good turn of phrase.

The Trump administration extended the pause on mandatory student debt payments, initially passed through the April 2020 CARES Act, until January 31 20201. A $1.6 trillion debt reckoning is upon us.

A version of this post ran in the San Antonio Express News.

Please see related post

The Burden of Understanding Should Be On The Companies

See related book reviews of Michael Lewis books:

The Big Short

Liar’s Poker

The Undoing Project

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  1. Oh, stop it. You’re too kind. But, really, Lewis is the best.

Student Loan Forgiveness – Not Holding My Breath

This past summer, during two different personal financial consulting sessions for two separate 30-somethings, I was struck by something both clients said about their student loans balances. One carried $120,000 in debt, the other about $40,000. I worried about their sizable student loan. They did not. 

Both said, in effect, “I’m not going to pay off my student loans early because if Biden wins my loans will probably be taken care of.” 

I was stunned. That is not at all what I expected to happen this past summer. Biden won, but it is still not at all what I expect from his administration. 

Biden

An estimated 44 million Americans carry an estimated $1.5 trillion in student loan debt. The student loan debt burden is higher than credit card debt. Since the pandemic-relief CARES Act passed in April 2020, borrowers have had the option to defer student loan debt payments without interest accruing until December 31, 2020. Absent further action, student loan payments become due again in a few weeks. This backburner financial concern just became a frontburner issue.

Despite its newfound urgency, the apparent belief by some in a future student loan jubilee – far more widespread than I had previously imagined – seems misguided. 

The belief doesn’t come from nowhere, however.

As President-elect, Joe Biden raised hopes on this front, specifically by calling for up to $10,000 in student loan debt forgiveness for graduates who pursue public service. His campaign also called for specific income-adjusted payment plans. He has proposed that if you make less than $25,000 per year, you could defer payments without accruing interest. Above $25,000 in income, borrowers could pay 5 percent of “discretionary income” toward debt, with a promise of forgiveness 20 years from now after full payment compliance. The income-calculation math already begins to sound quite complicated with this second proposal regarding disposable income-adjusted payment plans. 

Besides complicated math, the politics is complicated too. How would such a bill pass? Could it be achieved through executive order, or would Congress need to pass a law?

We can easily imagine what people on different sides of the political aisle say in this debate. Trump’s Education Secretary Betsey DeVos bashed the idea as a “truly insidious notion of government gift giving.” 

student_loan_debt_burden

On the other side, leading Democratic Senators such as Chuck Schumer and Elizabeth Warren have argued that President Biden has the authority to cancel up to $50,000 in student loan debt through executive action. 

One part of thinking about generous student debt forgiveness is whether it efficiently achieves what I understand is the goal Schumer and Warren seek. They want to level the economic playing field. They want a student debt policy that would tend toward economic equality.

Enter, data. Economists at the University of Chicago argue in a November 2020 whitepaper “The Distributional Effects of Student Loan Forgiveness” that student debt forgiveness mostly does not achieve that goal of greater equality.

The benefits of universal student loan forgiveness, of the type Schumer and Warren advocate, would skew mostly to upper income people. 

The economic effect of universal student loan forgiveness is what economists call “regressive,” meaning it benefits higher earning folks far more than lower earning folks. The economists estimate that debt forgiveness like this would be almost six times more beneficial to borrowers in the top decile of earners than borrowers in the lowest decile of earners.

Why is that? The biggest reason is that higher student loan totals actually correlate with higher incomes. So on average, the people who get the biggest benefit from large student loan forgiveness are, on average, higher earners. This basic finding should at least give us pause that the Schumer and Warren proposals are an effective means of achieving their goal of reducing inequality.

In addition, intuitively, we can see that people who do not attend any college – frequently, lower earners – would receive none of the $10,000 to $50,000 benefit advocated among Biden’s supporters.  

I understand if you are reading this while feeling broke and needing $40,000 in loan forgiveness, that debt forgiveness does not feel personally regressive to you. It would in fact feel really good. I get it. But public policy isn’t about your specific situation. It is, at best, about achieving collective goals through fairness and efficiency. 

We already have in place certain programs for student loan forgiveness. The current version of loan forgiveness for public sector employees is something called the Temporary Expanded Public Service Loan Forgiveness. 

The Government Accountability Office (GAO) issued a report last year which says that Secretary Devos’ department appears to have hewed closely to her personal beliefs, rejecting 99 percent of applications to this program. Clearly, that isn’t working in its current form.

The University of Chicago economists point out that expanding income-based student loan deferral and forgiveness could be accomplished through existing programs, although clearly under different leadership and expanded criteria for approval. Under scenarios they study, the benefits of loan forgiveness could be shifted down from top earners to middle earners under certain circumstances. It still remains the case, however, that folks who do not borrow for higher education – likely the same ones suffering at the bottom economic rungs of society – do not benefit from student loan forgiveness programs.

Considering the political side, it seems that universal or even generous student debt forgiveness is a lot more controversial than its proponents think it is. Unless it is framed carefully, higher education student loan forgiveness will make many people very angry. Recalling my conversations from this past summer, I got the sense that these borrowers considered debt forgiveness non-contentious. I doubt it.

Certain types of student loan forgiveness are not politically contentious. Military service veterans – and their children too – receive extraordinarily generous tuition waivers or educational subsidies. Military benefits like this are not controversial, although the financial benefit per person is somewhat staggering. My wife benefitted from a loan forgiveness program for her $180,000 of medical school debt, by qualifying for and pursuing a medical research career valued by the National Institute of Health. Certain types of work following education can seemingly transform our perceptions of socialistic “government gift giving” to patriotic “thank you for your service.”

It feels like the issue is not so much debt forgiveness as a concept, but rather whether forgiveness feels earned and societally useful. If Biden does pursue these policies, he will have to convince skeptics about the earned and societally useful part, as well as address the regressive nature of universal student debt forgiveness.

A version of this post ran in the San Antonio Express News.

Please see related post:

The Effective Nationalization of Student Loans

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Biden Tax Proposals

I am attempting to model good financial writer behavior by inserting some actual boring tax policy discussion into presidential politics. From what I can glean from media over the past year, the presidential race was declared an entirely policy-free zone. But we should care a lot about boring tax policies!

Now that Biden is heading to the Presidency 1 what the heck did he promise in terms of tax policy changes?

Biden’s proposals on two headline tax rates essentially indicate a rollback of marginal tax rates to Obama-era levels.

For individual taxpayers, Biden proposes a 39.6 percent top tax rate. That’s up from the current 37 percent. This represents a return to the top income tax rate in effect through 2017.

Biden also proposes a 28 percent corporate tax rate, an increase from the current 21 percent corporate tax rate. Still, 28 percent represents a lower corporate tax rate than the United States had on the books between 1994 and 2017.

Biden’s most common campaign slogan with respect to taxes was that people making less than $400,000 per year will not pay higher taxes. Obviously, by implication, he’s warning us (promising us?) that higher income folks will see a rise in their taxes. This rise comes most clearly from targeted changes that would affect the wealthy, and/or the more highly-compensated among us.

For individuals making more than $400,000 per year, Biden proposes a 12.4 percent payroll withholding tax specifically for Social Security. I think that’s mostly where Biden’s $400,000 claim comes from since it’s a new, and clear, tax hike. 

More subtly, but probably more importantly, Biden proposes taxing capital gains more highly in certain cases. Taxes on money made from selling appreciated assets – capital gains – are potentially more important to wealthy folks than taxes on earned income. Biden’s plan would charge higher capital gains taxes for households that make more than $1 million per year. 

Currently, capital gains tax rates are lower than earned income tax rates. Which, if you ask me, has a lot more to do with who funds political campaigns than it has to do with the moral or economic merits of taxing wealth at a lower rate than income, or any other justification for rewarding capital over labor. Biden’s proposal doesn’t upset that apple cart – this traditional tax-code preference for capital over labor. Rather, it says that if you make more than $1 million per year, you don’t get a tax break just because you make money on your wealth rather than on your labor. I’m probably wrong to think this but I feel like if you earn over a million dollars per year, you can survive (maybe, barely) paying a regular tax rate like the people who make a living through their labor. Call me a Socialist, whatever.

Also in the category of tax proposals applying to the few, but sadly not me: Biden has proposed that people worth between $50 million or more would pay a 2 percent wealth tax, rising to a 6 percent tax rate for those with a $1 billion net worth. This seems terribly unfair. Specifically, unfair in the sense that I wouldn’t get to pay that tax. I aspire to pay that tax some day. I want to be in a position to pay that tax. And, I will promise to not complain about it, when the time comes. You can hold my feet to the fire on that one.

Vox_on_Biden_taxes
Graphic from Vox, December 2019

Another Biden proposal affects folks who inherit wealth. This proposal is captured by the phrase “eliminating stepped-up basis,” and the meaning is that inherited assets would not continue to enjoy a massive tax break. Like the capital gains tax proposal, this is a targeted tax change that has huge implications for wealthy heirs as well as the folks who do estate planning. It has very few implications for non-wealthy people who do not inherit highly appreciated assets.

Finally, Biden has not specifically made estate tax proposals, but he did sign off on some Biden/Sanders “unity” principles in July 2020, including rolling back estate taxes to 2009 levels. Those 2009 estate tax levels were set by the Socialistic Bush/Cheney administration.

There are a few other detailed tax credits and exemptions, but that covers most of Biden’s big tax proposals.

Now, the Political Reality

After January 2021, there’s a strong chance that the Senate remains in Republican hands, making most of Biden’s tax proposals backburner issues.2

Sweeping tax reform is also not something I’ve noticed is a priority for Democrats. Between COVID emergency stimulus, health care plans, and a Green New Deal, tax reform isn’t really on-brand for the 2021 Democratic Party.  Still, we should at least understand where the incoming President’s head is at, with respect to tax reform.

Joe_Biden

A version of this post ran in the San Antonio Express News.

Please see related posts:

Let’s have an adult conversation around taxes

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  1. Barring the unlikely success of Trump’s slow attempt at a coup. Which, I don’t know, might work. But I hope it doesn’t.
  2. As of this writing two Georgia Senate run-off races will happen in January. Democratic candidates would have to win both to allow for a 50-50 split in the Senate (tie-broken by Vice President Kamala Harris). It feels like something as complex as comprehensive tax reform is unlikely to pass with this kind of squeaker of a vote majority, even in the unlikely event that Democrats win both races.