Wolfers on Loan Forgiveness = Analytical Fail

Let us start off this post by saying that Justin Wolfers is a very intelligent person. Not that it is 100% dispositive, but the professor has his own page on the Wharton website chock full of fancy titles and publications. And if being a professor at Penn wasn't enough, those perusing his vitals will also note associations with institutions like Stanford, Princeton, Brookings and the Federal Reserve. In short, he is not the sort of individual that we have any business going toe to toe with on economic analysis. However, there is something in his recent Freakonomics post 'Forgive Student Loan? Worst Idea Ever.' that just isn't sitting right from our perspective.

The issue of student loan forgiveness is a touchy one with passionate advocates on either side. Unlike other debts, student loans cannot be discharged in bankruptcy. Sometimes even death doesn't erase the burden. The individuals signing the papers for debts which can exceed six figures are often young, uninformed and naive/overly optimistic about post-graduation employment possibilities. And those who take the debts on are often forced to start paying them back when they are just starting out in entry-level positions and are therefore most financially insecure. There is also a significant percentage of the population which ascribes to the idea that forgiveness is morally acceptable because the loans were made by predatory corporations in the first place.

On the other hand, college is statistically a good gamble over the long-term as lifetime earning potential will largely overshadow the downside of loan repayment. And those taking the loans, while young, are no younger than those we ask to die for our country. Loanees have the tools at their disposal to understand the burdens they are taking on. Finally, countering the 'corporations are just out to get us' argument would be the contrasting moral obligation line of reasoning; essentially that paying back debts is a responsibility, and shirking that responsibility is not fair to society.


Most of the arguments above can be fitted loosely into two different political philosophies. To erase any ambiguity most of those who advocate for loan forgiveness tend to support Democrats while those with Republican leanings tend to be against the idea. Of course, this is not hard and fast. Many people I know with liberal leanings of course feel responsible for their debts. And, some I know who consider themselves to be conservatives would probably be happy to have their debts erased. However, it tends to be organizations like Moveon.org and legislators with a D after their names who typically support forgiveness plans with Republican legislators poo-pooing such notions.

While I cannot claim to know Wolfers' political leanings, he is overwhelmingly sides with what we are describing as the 'Republican' viewpoint on this issue. To be clear, and despite having an obscene amount of debt as a result of a recent three-year break from the workforce, I am as well, almost entirely due to the moral responsibility argument (though I can't lie...there is some appeal in knowing that these burdens could be wiped out Fight Club style). I knew that I would have a big bill to pay after graduation; my cost/benefit analysis nonetheless tilted in favor of taking it on.

In other words, Wolfers and I agree philosophically that those who take on debt burdens should be responsible for them. In his words:

This is a bunch of kids who don’t want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive. Moreover, if these guys succeed, others will try, too. And we’ll just get more spending in the least socially productive part of our economy—the lobbying industry.

However, while I can agree with his political/philosophical analysis, Wolfers' economic analysis leaves something to be desired. Again, in his words:

This is the worst macro policy I’ve ever heard of. If you want stimulus, you get more bang-for-your-buck if you give extra dollars to folks who are most likely to spend each dollar. Imagine what would happen if you forgave $50,000 in debt. How much of that would get spent in the next month or year? Probably just a couple of grand (if that). Much of it would go into the bank. But give $1,000 to each of 50 poor people, and nearly all of it will get spent, yielding a larger stimulus. Moreover, it’s not likely that college grads are the ones who are liquidity-constrained. Most of ‘em could spend more if they wanted to; after all, they are the folks who could get a credit card or a car loan fairly easily. It’s the hand-to-mouth consumers—those who can’t get easy access to credit—who are most likely to raise their spending if they get the extra dollars.

Wolfers has to be underestimating the multiplier effect that extra dollars for graduates could have. Perhaps this is because he seems to be conflating two groups; those who have student debts with those who have an education. While the Venn diagram for those two groups obviously has a very fat middle, there are many more college graduates than individuals with loan debts. For example, some graduates had help from parents, or scholarships, or have simply paid their loans back already. Those individuals are most likely to be in the positive financial situation that Wolfers describes above; he seems to be talking about older, well-established college grads. His description does not match those who have most recently graduated (and thus have the debt to forgive in the first place).

This latter group is more statistically likely to be in their 20's and just 'starting out.' Many of them do live hand to mouth with savings rates approaching zero. Particularly in the current economy, they are not necessarily able to get credit, or even jobs. To the extent that they can find work, they are typically making purchases on furniture, work clothing and cars. They are likely to be spending any discretionary money on entertainment, such as bar trips, restaurants and vacations. While these items are all more or less defensible from a financial responsibility standpoint, they all undoubtedly contribute to, and have a multiplier effect on, the economy.

To me, a cleaner macro argument would center on the idea that the economic system could possibly come closer to collapsing if student debts were written off than it ever did due to bad housing loans. Or that the federal government backing up trillions of dollars if forgiven debts would make the economy so bad that those whose debts were forgiven would be jobless anyway, leading to a downward spiral worse than the country finds itself in now. Both are economically supportable hypotheses due to the absolute dollars figures that are thrown around in the forgiveness scenario.

Despite his exceptional economic chops, it is clear that Mr. Wolfers would have a stronger argument by avoiding the dismal science in this situation. His moral argument that debts are a responsibility as well as others that suggest that forgiveness creates moral hazard and is just bad educational policy ring much stronger than his macro arguments. Perhaps his time at Wharton has put him out of touch with the realities of average college grads, perhaps his obvious academic acumen enabled him to avoid the bitter taste of student debt. Maybe he is just looking for an economic argument to boost his political one. However, in the end it is clear that his economic analysis undermines his argument more than underpins it.