Professor Jeffrey Sachs and Professor John Helliwell discuss how governments can benefit from the first-ever Global Happiness Policy Report.
Month: February 2018
The Sanders Institute Talks: Student Loan Debt
Dr. Jane O’Meara Sanders sits down with Sanders Institute Founding Fellow and economist Dr. Stephanie Kelton to talk about Dr. Kelton’s new report on the macroeconomic effects of student loan debt cancellation in the United States.
More than 44 million Americans are caught in a student debt trap. Collectively, they owe nearly $1.4 trillion on outstanding student loan debt. Research shows that this level of debt hurts the US economy in a variety of ways, holding back everything from small business formation to new home buying, and even marriage and reproduction. It is a problem that policymakers have attempted to mitigate with programs that offer refinancing or partial debt cancellation. But what if something far more ambitious were tried? What if the population were freed from making any future payments on the current stock of outstanding student loan debt? Could it be done, and if so, how? What would it mean for the US economy?
This report seeks to answer those very questions and several important implications emerge from this analysis.
A one-time policy of student debt cancellation, in which the federal government cancels the loans it holds directly and takes over the financing of privately owned loans on behalf of borrowers, results in the following macroeconomic effects (all dollar values are in real, inflation-adjusted terms, using 2016 as the base year):
The policy of debt cancellation could boost real GDP by an average of $86 billion to $108 billion per year. Over the 10-year forecast, the policy generates between $861 billion and $1,083 billion in real GDP (2016 dollars).
Eliminating student debt reduces the average unemployment rate by 0.22 to 0.36 percentage points over the 10-year forecast.
Peak job creation in the first few years following the elimination of student loan debt adds roughly 1.2 million to 1.5 million new jobs per year.
The inflationary effects of cancelling the debt are macroeconomically insignificant. In the Fair model simulations, additional inflation peaks at about 0.3 percentage points and turns negative in later years. In the Moody’s model, the effect is even smaller, with the pickup in inflation peaking at a trivial 0.09 percentage points.
Nominal interest rates rise modestly. In the early years, the Federal Reserve raises target rates 0.3 to 0.5 percentage points; in later years, the increase falls to just 0.2 percentage points. The effect on nominal longer-term interest rates peaks at 0.25 to 0.5 percentage points and declines thereafter, settling at 0.21 to 0.35 percentage points.
The net budgetary effect for the federal government is modest, with a likely increase in the deficit-to-GDP ratio of 0.65 to 0.75 percentage points per year. Depending on the federal government’s budget position overall, the deficit ratio could rise more modestly, ranging between 0.59 and 0.61 percentage points. However, given that the costs of funding the Department of Education’s student loans have already been incurred (discussed in detail in Section 2), the more relevant estimates for the impacts on the government’s budget position relative to current levels are an annual increase in the deficit ratio of between 0.29 and 0.37 percentage points. (This is explained in further detail in Appendix B.)
State budget deficits as a percentage of GDP improve by about 0.11 percentage points during the entire simulation period.
Research suggests many other positive spillover effects that are not accounted for in these simulations, including increases in small business formation, degree attainment, and household formation, as well as improved access to credit and reduced household vulnerability to business cycle downturns. Thus, our results provide a conservative estimate of the macro effects of student debt liberation.
To read the full report click here.
Trump’s Big Buyback Bamboozle
Trump’s promise that corporations will use his giant new tax cut to make new investments and raise workers’ wages is proving to be about as truthful as his promise to release his tax returns.
The results are coming in, and guess what? Almost all the extra money is going into stock buybacks. Since the tax cut became law, buy-backs have surged to $88.6 billion. That’s more than double the amount of buybacks in the same period last year, according to data provided by Birinyi Associates.
Compare this to the paltry $2.5 billion of employee bonuses corporations say they’ll dispense in response to the tax law, and you see the bonuses for what they are – a small fig leaf to disguise the big buybacks.
If anything, the current tumult in the stock market will fuel even more buybacks.
Stock buybacks are corporate purchases of their own shares of stock. Corporations do this to artificially prop up their share prices.
Buybacks are the corporate equivalent of steroids. They may make shareholders feel better than otherwise, but nothing really changes.
Money spent on buybacks isn’t reinvested in new equipment, research, or factories. Buybacks don’t add jobs or raise wages. They don’t increase productivity. They don’t grow the American economy.
Yet CEOs love buybacks because most CEO pay is now in shares of stock and stock options rather than cash. So when share prices go up, executives reap a bonanza.
At the same time, the value of CEO pay from previous years also rises, in what amounts to a retroactive (and off the books) pay increase – on top of their already humongous compensation packages.
Big investors also love buybacks because they increase the value of their stock portfolios. Now that the richest 10 percent of Americans own 84 percent of all shares of stock (up from 77 percent at the turn of the century), this means even more wealth at the top.
Buybacks used to be illegal. The Securities and Exchange considered them unlawful means of manipulating stock prices, in violation of the Securities Acts of 1933 and 1934.
In those days, the typical corporation put about half its profits into research and development, plant and equipment, worker retraining, additional jobs, and higher wages.
But under Ronald Reagan, who rhapsodized about the “magic of the market,” the SEC legalized buybacks.
After that, buybacks took off. Just in the past decade, 94 percent of corporate profits have been devoted to buybacks and dividends, according to researchers at the Academic-Industry Research Network.
Last year, big American corporations spent a record $780 billion buying back their shares of stock.
And that was before the new tax law.
Put another way, the new tax law is giving America’s wealthy not one but two big windfalls: They stand to gain the most from the tax cuts for individuals, and they’re the big winners from the tax cuts for corporations.
This isn’t just unfair. It’s also bad for the economy as a whole. Corporations don’t invest because they get tax cuts. They invest because they expect that customers will buy more of their goods and services.
This brings us to the underlying problem. Companies haven’t been investing – and have been using their profits to buy back their stock instead – because they doubt their investments will pay off in additional sales.
That’s because most economic gains have been going to the wealthy, and the wealthy spend a far smaller percent of their income than the middle class and the poor. When most gains go to the top, there’s not enough demand to justify a lot of new investment.
Which also means that as long as public policies are tilted to the benefit of those at the top – as is Trump’s tax cut, along with Reagan’s legalization of stock buybacks – we’re not going to see much economic growth.
We’re just going to have more buybacks and more inequality.
The Next Big Fight Of Social Security, Medicare, And Medicaid
Fresh off passing massive tax cuts for corporations and the wealthy, Trump and congressional Republicans want to use the deficit they’ve created to justify huge cuts to Social Security, Medicare, and Medicaid.
As House Speaker Paul Ryan says “We’re going to have to get… at entitlement reform, which is how you tackle the debt and the deficit.”
Don’t let them get away with it.
Social Security and Medicare are critical safety-nets for working and middle-class families.
Before they existed, Americans faced grim prospects. In 1935, the year Social Security was enacted, roughly half of America’s seniors lived in poverty. By the 1960s poverty among seniors had dropped significantly, but medical costs were still a major financial burden and only half of Americans aged 65 and over had health insurance. Medicare fixed that, guaranteeing health care for older Americans.
Today less than 10 percent of seniors live in poverty and almost all have access to health care. According to an analysis of census data, Social Security payments keep an estimated 22 million Americans from slipping into poverty.
Medicaid is also a vital lifeline for America’s elderly and the poor. Yet the Trump administration has already started whittling it away by encouraging states to impose work requirements on Medicaid recipients.
Republicans like to call these programs “entitlements,” as if they’re some kind of giveaway. But Americans pay into Social Security and Medicare throughout their entire working lives. It’s Americans’ own money they’re getting back through these programs.
These vital safety nets should be strengthened, not weakened. How?
1. Lift the ceiling on income subject to the Social Security tax. Currently, top earners only pay Social Security taxes on the first $120,000 of their yearly income. So the rich end up, in effect, paying a lower Social Security tax rate than everyone else. Lifting the ceiling on what wealthy Americans contribute would help pay for the Baby Boomers retirements and leave Social Security in good shape for Millennials.
2. Allow Medicare to negotiate with drug companies for lower prescription drug prices. As the nation’s largest insurer, Medicare has tremendous bargaining power. Why should Americans pay far more for drugs than people in any other country?
3. Finally, reduce overall health costs and create a stronger workforce by making Medicare available to all. There’s no excuse for the richest nation in the world to have 28 million Americans still uninsured.
We need to not just secure, but revitalize Social Security and these other programs for our children, and for our children’s children. Millennials just overtook Baby Boomers as our nation’s largest demographic. For them — for all of us — we need to say loud and clear to all of our members of congress: Hands off Medicare, Medicaid, and Social Security. Expand and improve these programs: don’t cut them.
The Macroeconomic Effects Of Student Debt Cancellation
More than 44 million Americans are caught in a student debt trap. Collectively, they owe nearly $1.4 trillion on outstanding student loan debt. Research shows that this level of debt hurts the US economy in a variety of ways, holding back everything from small business formation to new home buying, and even marriage and reproduction.
It is a problem that policymakers have attempted to mitigate with programs that offer refinancing or partial debt cancellation. But what if something far more ambitious were tried? What if the population were freed from making any future payments on the current stock of outstanding student loan debt? Could it be done, and if so, how? What would it mean for the US economy?
This report seeks to answer those very questions. The analysis proceeds in three sections: the first explores the current US context of increasing college costs and reliance on debt to finance higher education; the second section works through the balance sheet mechanics required to liberate Americans from student loan debt; and the final section simulates the economic effects of this debt cancellation using two models, Ray Fair’s US Macroeconomic Model (“the Fair model”) and Moody’s US Macroeconomic Model.
Several important implications emerge from this analysis. Student debt cancellation results in positive macroeconomic feedback effects as average households’ net worth and disposable income increase, driving new consumption and investment spending. In short, we find that debt cancellation lifts GDP, decreases the average unemployment rate, and results in little inflationary pressure (all over the 10-year horizon of our simulations), while interest rates increase only modestly. Though the federal budget deficit does increase, state-level budget positions improve as a result of the stronger economy. The use of two models with contrasting long-run theoretical foundations offers a plausible range for each of these effects and demonstrates the robustness of our results.
A one-time policy of student debt cancellation, in which the federal government cancels the loans it holds directly and takes over the financing of privately owned loans on behalf of borrowers, results in the following macroeconomic effects (all dollar values are in real, inflation-adjusted terms, using 2016 as the base year):
The policy of debt cancellation could boost real GDP by an average of $86 billion to $108 billion per year. Over the 10-year forecast, the policy generates between $861 billion and $1,083 billion in real GDP (2016 dollars).
Eliminating student debt reduces the average unemployment rate by 0.22 to 0.36 percentage points over the 10-year forecast.
Peak job creation in the first few years following the elimination of student loan debt adds roughly 1.2 million to 1.5 million new jobs per year.
The inflationary effects of cancelling the debt are macroeconomically insignificant. In the Fair model simulations, additional inflation peaks at about 0.3 percentage points and turns negative in later years. In the Moody’s model, the effect is even smaller, with the pickup in inflation peaking at a trivial 0.09 percentage points.
Nominal interest rates rise modestly. In the early years, the Federal Reserve raises target rates 0.3 to 0.5 percentage points; in later years, the increase falls to just 0.2 percentage points. The effect on nominal longer-term interest rates peaks at 0.25 to 0.5 percentage points and declines thereafter, settling at 0.21 to 0.35 percentage points.
The net budgetary effect for the federal government is modest, with a likely increase in the deficit-to-GDP ratio of 0.65 to 0.75 percentage points per year. Depending on the federal government’s budget position overall, the deficit ratio could rise more modestly, ranging between 0.59 and 0.61 percentage points. However, given that the costs of funding the Department of Education’s student loans have already been incurred (discussed in detail in Section 2), the more relevant estimates for the impacts on the government’s budget position relative to current levels are an annual increase in the deficit ratio of between 0.29 and 0.37 percentage points. (This is explained in further detail in Appendix B.)
State budget deficits as a percentage of GDP improve by about 0.11 percentage points during the entire simulation period.
Research suggests many other positive spillover effects that are not accounted for in these simulations, including increases in small business formation, degree attainment, and household formation, as well as improved access to credit and reduced household vulnerability to business cycle downturns. Thus, our results provide a conservative estimate of the macro effects of student debt liberation.
To read the full report click here.