How inflation and moral hazard are at stake in Supreme Court

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.