Larry Summers Warns of Recession, Slams Student Loan Debt Relief

President Obama’s former U.S. Treasury Secretary Larry Summers has warned that America is fast heading toward recession under Joe Biden.

Summers issued the warning while blasting the Democrats’ push for student loan debt relief.

He described the debt forgiveness as a “regressive” policy that mostly benefits high-income households.

In a series of tweets, the former director of the National Economic Council (NEC) in the Obama administration stated that “all serious economists” agree that debt reduction is “regressive.”

“Key point,” he wrote.

“You need to look at payments not debt burdens since many are already enabled to service at low rates.

He added that policymakers need to reform subsidies “to institutions that rip students off.”

Summers also thinks a good start to altering post-secondary student lending is to substitute loans with grants.

Recently, President Joe Biden extended the moratorium on student loan payments, which Summers believes is “highly problematic” when judged on its economic effects.

“Relief also promotes spending in the near term when the economy is clearly supply constrained thereby contributing to inflation pressures,” he argued.

The Brookings Institution, an economic research think tank, published a report in October 2020 that assessed who owed most of the student loan debt.

Using data from the Federal Reserve’s Survey of Consumer Finances, the group revealed that high-income households accounted for a considerable share of student loan debt and monthly out-of-pocket student debt payments.

The highest-income 40 percent of households owed close to 60 percent of the outstanding education debt and made nearly 75 percent of the payments, Brookings noted.

But the lowest-income 40 percent of households possessed about a fifth of the outstanding debt and made just 10 percent of the payments.

In addition, the 2019 Fed data reported that households with graduate degrees owed 56 percent of the outstanding education debt, while 3 percent of households with doctorate or professional degrees held one-fifth of the post-secondary debt.

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“It should be no surprise that higher-income households owe more student debt than others,” the think tank wrote. “Students from higher-income households are more likely to go to college in the first place. And workers with a college or graduate degree earn substantially more in the labor market than those who never went to college.”

A November 2020 Chicago Booth poll found that economists overwhelmingly agreed that student loan debt relief is “net regressive.”

The Chicago Booth Review posted an in-depth report in December 2020, purporting that “canceling student-loan debt could exacerbate U.S. economic inequality.” Instead, the authors contended that tying student loan repayments to income levels “could provide more targeted relief.”

Some public policymakers also assert that it would be a waste of federal resources since it would fail to help the tens of millions of Americans who did not attend university or college and do not have national student debt.

Others disagree, including the Roosevelt Institute, a New York City-based left-leaning think tank.

Researchers projected that canceling $50,000 in federal student debt would give the top 10 percent of U.S. households an average of $562 in benefits. But the bottom 10 percent of households would enjoy close to $15,000 in benefits.

“Contrary to common misperceptions, careful analysis of household wealth data shows that student debt cancellation … would provide more benefits to those with fewer economic resources and could play a critical role in addressing the racial wealth gap and building the Black middle class,” the report said.

Student loan debt has exploded this century, climbing to $1.752 trillion in the third quarter of this year.

Inflation and a Recession

Summers has also chimed in on the most pressing issue facing many Americans today: Inflation.

The administration has promised that inflation would subside over the next 12 months because of its actions, from tapping strategic oil reserves to investigating anti-consumer practices.

The latest recommendation involves employing anti-monopoly laws.

But the Harvard economist thinks exploiting anti-trust regulations to reduce 39-year high inflation is a reflection of “science denial” on the part of the White House.

“The emerging claim that antitrust can combat inflation reflects ‘science denial,’” Summers wrote.

“There are many areas like transitory inflation where serious economists differ.

“Antitrust as an anti-inflation strategy is not one of them.”

He also recently warned about a looming recession threat stemming from inflation dangers.

“If I thought we could sustainably run the economy in a red-hot way, that would be a wonderful thing, but the consequence—and this is the excruciating lesson we learned in the 1970s—of an overheating economy is not merely elevated inflation, but constantly rising inflation,” Summers said in an interview on a Bloomberg Economics podcast.

“That’s why my fear is, that we are already reaching a point where it will be challenging to reduce inflation without giving rise to recession.”

Many Americans are worried about the same economic downturn amid rampant price inflation.

According to a CNBC All-America Economic Survey in October, 47 percent believed there would be a recession in 2022, up 13 percent from before the pandemic.

But the Federal Reserve Bank of New York’s U.S. Recession Probability stands at less than 7 percent.

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By Nick R. Hamilton

Nick has a broad background in journalism, business, and technology. He covers news on cryptocurrency, traditional assets, and economic markets.

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