The student loan forgiveness program recently announced by President Joe Biden stirred up quite the political brouhaha. Progressives praised Biden for helping students burdened by overwhelming student loan debt. Conservatives decried it as an unfair giveaway.
But as with most issues, the popular political debate misses the bigger picture.
The student loan crisis was primarily a problem of the federal government’s own creation. And no matter what you think about the forgiveness program, it fails to address the root of the problem.
In a sense, the student loan crisis was a boom-bust cycle in a microcosm. Economics writer J.R. MacLeod argues that the crisis was the fault of the entire bureaucratic economic-political system.
The following article was originally published by the Mises Wire. The opinions expressed are those of the author and do not necessarily reflect those of SchiffGold or Peter Schiff.
In a market economy, prices are determined by supply and demand: how much of a quantity is being offered and how much value people place on that good relative to other goods. However, with great government power comes the potential for great government irresponsibility: artificially lowering prices for some either through outright money printing or by taxing some to subsidize others.
In the Austrian business cycle theory (hereafter ABCT), lowering prices artificially causes serious trouble in the economy, as the government is directing excessive resources into an area unsupported by accompanying supply and demand. Thus, when the monetary spigot is turned off, these areas are revealed to be insolvent; they were kept afloat only by government-created conditions, causing malinvestment.
Meanwhile, other sectors of the economy were neglected and starved of resources due to the favorable position created by the government elsewhere. A boom turns to bust. The economy experiences a downturn as businesses are liquidated and capital positions are reformed.
This phenomenon can be observed in the modern structure of student loans. In 2010, the US federal government took responsibility for student loans outright, but before then, there had still been significant government participation in this market. Before 2010, student loans were still guaranteed by the federal government, and the government even participated in direct lending alongside banks. Of course, when you subsidize something, you get more of it, and the proportion of young people going to college has grown steadily. We can call this a boom.