March 24, 2023

  • Paul Krugman has denied claims that President Biden’s student debt relief plan could fuel inflation.
  • The economist noted that the program is small and will be offset by restarting loan repayments.
  • The Nobel laureate also questioned how the plan could outperform the Fed’s efforts to curb inflation.

President Biden’s plan Forgive some student debt The debt owed by millions of Americans has fueled talk that it will fuel inflation, which has soared this year to a 40-year high. Paul Krugman dismissed the criticism this week and laid out why he expects the policy to have a negligible impact on prices.

The entire student loan program generated just $70 billion in 2019, so the debt relief program is unlikely to have a significant impact on household spending or inflation, Krugman noted in a report. New York Times column Thursday.

“We’re talking about tens of billions of dollars a year in a $25 trillion economy,” Krugman wrote. “It’s basically a rounding error.”

The Nobel Prize-winning economist noted that the Biden administration spent $1.9 trillion last year on a U.S. rescue package, which sent stimulus checks to consumers and loans and grants to businesses to help boost the economy. Help them through the COVID-19 pandemic. He estimates that the loan forgiveness program will increase private-sector spending by less than 1/40 of that.

In addition, the Biden administration now plans to resume loan repayments after halting student loan repayments as part of its pandemic aid efforts. In addition, it has not cancelled all outstanding student debt, which means some of the previous $70 billion will continue to flow into its coffers, Krugman said.

The economics professor and author highlighted a Goldman Sachs analysis showing that Biden’s plan would reduce student loan payments from 0.4% to 0.3% of personal income. “Should this fuel inflationary fires?” he joked.

In fact, Krugman wrote, the program could moderately cool the economy, as loan forgiveness would only partially offset the recovery in debt repayments. As such, he expects it to raise inflation by at most one percentage point.

Krugman added that the Fed is now “highly alert” to inflation risks and doubts that the loan forgiveness program could hinder the central bank’s “whatever it takes” to contain price increases.

Given the program’s small size, offset by restarting loan repayments, and the Fed’s current focus on fighting inflation, Krugman said he was baffled that anyone might believe it would accelerate price increases.

“Warnings that debt relief will lead to dangerous inflation is bizarre,” Krugman wrote. “All the dire rhetoric about piling fuel on inflationary fires is bizarre,” he added in an article. twitter thread this week.

read more: 4 experts weigh in on investor expectations for this week’s key Fed meeting in Jackson Hole

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