Loan Forgiveness = Dem Victory in 2012?

If the volume of traffic that made its way to our recent posting on loan forgiveness is any indication, it is clearly a very hot topic right now. Based on the comments and feedback we received, it is also one that invokes very strong opinions in people. Most notably, some of our readers shared stories about how they have taken decades to dig out from under heavy loan burdens. Some of these readers indicated their belief that the government should step in and do something about these burdens, with outright forgiveness, debt ceilings and maximum payback periods all being mooted as possibilities. Though loan forgiveness is not something that I would typically advocate for, some of our commenters provided numbers suggesting potential forgiveness programs could be cheaper in real dollar terms than the stimulus plans were (or indeed potential future stimulus plans would likely be). The current state of affairs which sees the federal government owning much of the outstanding student debt also ensures that write-offs wouldn't directly hurt lenders, many of whose balance sheets are just recovering from the financial crisis. Even many detractors would have to agree that there would be undoubted economic benefits from forgiveness, at least at the individual level. Our original reason for posting about this topic was Professor Wolfers' assertion that any multiplier effect from loan forgiveness would be negligible, a statement we heartily disagreed with (while agreeing with his larger premise that forgiveness wouldn't be a good idea no less!). Many of our readers agreed through personal anecdotes that the multiplier would be much higher than Wolfers believes. Paraphrasing one reader, there is a lot that many of us could do with an extra $800 every month, and I am not referring to putting it in a savings account with a 1% APYs. Though some (including yours truly) believe that loan forgiveness is wrong on moral responsibility grounds the potential economic benefits that could be realized by some substantial percentage of the population simply being able to spend more are compelling. And, to be honest, this moral high ground feels a lot less steady after it was unceremoniously eroded by the actions that the US government has already taken in bailing out banks and corporate interests. After all, if American citizens, albeit through their elected officials, are collectively willing to bail out bankers who took unnecessary risks, why not lend a hand to those who have tried to better themselves through higher education only to find life getting in the way of their ability to pay the price. At least that is the logic of some in the pro-forgiveness crowd. Of course, there is a downside. In broader terms, it would increase an American debt burden which has already led to a credit rating cut. This is unlikely to appeal to a very vocal group of Americans who are against government spending in any form. Though the burgeoning debt is an incredibly sensitive and highly debated topic on both the political and economic fronts, it is almost impossible to know what adding a few hundred billion to the national debt would do. Some people believe that it would be bad. It also seems likely that it would set an unwelcome precedent for future loan takers in the inevitable event of another recession down the line. This moral hazard argument was noted by Mr. Wolfers as well, and we feel that it is more compelling than his multiplier-underpinned macro analysis. However, while loan forgiveness is debatable as sound economic strategy, it is almost undeniable that for one group, it could be a good political strategy come 2012. As noted in the original forgiveness post, most advocates for loan forgiveness tend to be connected to the Democratic party. With President Obama's flagging approval ratings and claims that he has abandoned his liberal ideals running roughshod over reelection hopes, there are worse things that he could do than advocate for loan forgiveness. While it would hardly be a slam-dunk to get such a plan through Congress, loan forgiveness in some form might be more palatable to Republicans than another straight stimulus plan, especially with Tea Partiers breathing down their necks. A plan developed with Republicans might be a little more heavy on total debt caps or maximum payback periods than straight forgiveness, but this would nonetheless have an immediate and measurable impact on the monthly take-home of many Americans, and that can't do anything but help Mr. Obama's reelection bid. Whether or not you believe that loan forgiveness is sound economic strategy, moral or even possible is almost irrelevant. If President Obama's team believes that proposing a forgiveness plan will energize the base, and perhaps even the economy itself, heading into next fall you can expect it to be an increasingly hot topic of conversation whether you like it or not.

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