Daily Local News (West Chester, PA)

How inflation and moral hazard are at stake in the Supreme Court

- By Tom Hudson

Inflation is not a constituti­onal issue, yet it will be on the docket of the U.S. Supreme Court in the week ahead.

Legally speaking, the justices will hear arguments in two cases regarding President Joe Biden’s effort to cancel hundreds of millions of dollars of college student loan debt. The cases focus on executive branch powers.

Financiall­y speaking, the ultimate decisions this summer will reverberat­e through the broader economy and millions of household budgets.

That’s why it’s worth the attention of investors, regardless of whether they have student loans themselves.

In 2022, Biden announced he was erasing up to $20,000 of federal student loans for qualified borrowers. That’s $400 billion in borrowing that would no longer have to be paid back. Economic opponents argue it’s a shadow $400 billion stimulus. A “sweeping action of great economic and political significan­ce” is how the states challengin­g the cancellati­on described it in their Supreme Court filing.

The Biden administra­tion argues it has the right to tear up the IOUs and that reinstatin­g them would cause “economical­ly vulnerable borrowers” to be left in the lurch, “unable to make financial decisions with an accurate understand­ing of their future repayment obligation­s.”

First, the court must decide if the plaintiffs in the two cases have standing — that is, would be hurt by the Biden student loan cancellati­on plan. Then the justices will have to decide if the cancellati­on is legal under a 2020 law.

To be fair, President Donald Trump was the one who first suspended student loan paybacks when the COVID-19 pandemic began. Biden made a campaign promise to cancel some of the debt. He did so and has been challenged in court by a handful of states and borrowers.

The moral hazard of this effort is not on trial here either. However, like inflation, it is present. There was plenty of outrage 15 years ago when Congress approved the bailout of banks and other financial firms that were teetering because of making home loans that went bad. Opponents argued that the rescue did not punish lenders, essentiall­y rewarding them despite their role in creating the problem.

Colleges and universiti­es are in a similar spot here. Higher education is not being asked to take a haircut if some government student loans are forgiven. Taxpayers are. Regardless of whether you support or oppose the effort to reduce a former college student’s debt burden, it will reduce cash flows to the federal government by more than $300 billion over the next 10 years, according to the Department of Education. Some of that will be offset by the taxes generated when former students use their freed-up cash to buy homes, refrigerat­ors and vacations.

The fight over student loan repayments comes as the president and the Republican House majority appear deadlocked on efforts to raise the debt ceiling before the “X” date, perhaps as soon as June, when the federal government could default on its debt.

The judicial branch does not make monetary or fiscal policy. It is charged with balancing those policies with the law. Inflationa­ry forces may not be on the judicial scale, but they are on the economic scale.

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