The Covid Rescue Act is just a start. Next up: exploding debt.

Before President Biden signed the 630 page $1.9 trillion American Rescue Plan Act of 2021, Democrats focused most of their public messaging on the $1400 checks that would be going out to everybody and their brother (and sister). Who doesn’t like free money, the Democrats figured. After President Biden signed the bill, Democrats shifted some of their messaging to highlighting an expansion of the child tax credit (CTC).

Before the new law, the CTC allowed qualifying families to reduce their income tax bills by up to $2,000 for each child through age 16. The new law increases the credit to $3,000 a child and makes parents of 17-year-olds eligible to for the 2021 tax year. The credit rises to $3,600 for children under the age of 6 as of the end of 2021.

For a qualifying family with one child, the previous credit would have cut a $5,000 tax bill to $3,000. Under the new law, the credit will cut the tax bill to $2,000, and to $1,400 if the child is under age 6. The benefit amount will gradually diminish for single filers earning more than $75,000 per year, or married couples making more than $150,000 a year.

Though framed as an expansion of the current tax credit, it is essentially a guaranteed income for families with children, because it will provide most parents a monthly check of up to $300 per child. That’s because unlike the current program, where the money is distributed annually as a tax reduction or check, the new program will send out monthly checks to provide a more stable cash flow.

Kiplinger illustrated the program by assuming a family of five with three children ages 12, 7 and 5. Assuming the family qualifies for the higher child credit and doesn’t opt out of the advance payments, they could get $800 per month from the IRS from July through December 2021, for a total of $4,800. They would then claim the additional $4,800 in child tax credits when they file their 2021 return next year.

But neither the Democrats nor the media are talking about how much the benefit will cost. You have to be a very aggressive, persistent searcher to find a number. 

According to the Joint Committee on Taxation, the CTC expansion in President Biden’s rescue bill will cost a whopping $110 billion just in 2021. 

But that probably won’t be the final cost because Democrats want to make the new CTC program permanent. Left-leaning groups are already lobbying for permanency. 

“Substantially increasing the CTC on a permanent basis would help secure economic stability for working families, reduce inequality, and sustainably boost economic growth,” says one such organization, the Center for American Progress. “It would be one of the most effective investments we can make as a society.”

Democrats have already introduced bills in the House and Senate to make the CTC changes permanent. 

The Committee for a Responsible Federal Budget figures the ultimate price tag of the $1.9 trillion American Rescue Plan Act could be twice as high if some of the policies in the bill are extended beyond their presumed expiration dates, substantially increasing deficits and debt.

As Jared Bernstein, a top economic advisor to Biden told the Wall Street Journal last month, “When you’re worried about fiscal sustainability, the things that hurt you are not the temporary measures,” Mr. Bernstein said in an interview late last month. “It’s the things that are permanent [and] that aren’t paid for.”

On March 22, 2021, the New York Times reported that President Biden’s advisers were expected to present a proposal to him recommending a series of bills that would propose a $3 trillion economic package. This would be in addition to extension of the so-called temporary tax cuts meant to cut poverty that are already on the books, which could cost an additional billions of dollars. 

Since neither the Democrats nor Republicans seem much concerned about exploding deficits and debt, it’s doubtful that policies in the American Rescue Plan Act that lawmakers decide to make permanent or the cost of the $3 trillion package will be fully offset with tax increases or spending restraint.

“In addition to trying to make permanent some of the temporary provisions in the package, Democrats hope to spend trillions of dollars to upgrade infrastructure, reduce the emissions that drive climate change, reduce the cost of college and child care, expand health coverage and guarantee paid leave and higher wages for workers,” The New York Times reported.

Hang on. It’s going to be a rough, and expensive, ride. 

Cancelling student debt: Another bad idea from the “free stuff” crowd

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness,” Charles Dickens wrote in A Tale of Two Cities. Thousands of Oregon college graduates in the class of 2019 probably felt the same way.

After years of hard work, they had finally earned their degrees. But 54% graduated with student loan debt. The average debt – $27,542. If it was any consolation, they were not alone. About 45 million Americans (13.7% of the U.S. population) are dealing with federal and/or student loan debt that totals about $1.7 billion.

But fear not, debtors, liberal politicians have been falling all over themselves with plans to help bail you out.

In May 2020, Reps. Peter DeFazio (D-OR) and Earl Blumenauer (D-OR) called upon House Speaker Pelosi and Minority Leader Kevin McCarthy to prioritize long- term relief in any future COVID-19 response in the form of at least $30,000 in one-time student loan debt cancellation for all federal student loan borrowers 

In September 2020, U.S. Senators Ron Wyden (D-OR) and Jeff Merkley (D-OR) introduced a resolution  outlining a plan for the next president to use existing authority under the Higher Education Act to cancel up to $50,000 in individual federal student loan debt for Federal student loan borrowers.

Before the Nov. 3, 2020 election, Joe Biden and Kamala Harris called for student loan forgiveness of up to $10,000, and if a student found a job that paid less than $125,000 after graduation, all their student loan debt would be forgiven.

And then there are all the progressive think tanks, unions and special interest groups lined up behind the debt cancellation idea.

In November, a coalition of 236 mostly progressive groups, including the American Federation of Teachers and the National Education Association, sent a letter to President-elect Biden calling on him to cancel student debt using his executive powers on the first day he takes office. Casting their lobbying as a racial justice issue, the letter said, “The ​disproportionate impact​ of student debt on borrowers of color exacerbates existing systemic inequities and widens the racial wealth gap.” 

The progressive Roosevelt Institute, adopting the “No crisis should go to waste” philosophy,  is calling for the cancellation of student, housing, and medical debt as part of a massive covid-recovery plan. Framing student debt as “a product of and a contributor to our country’s shameful racial wealth gap,” the Institute wants student loan forgiveness to go hand in hand with a commitment to funding tuition-free public colleges and universities.

That’s what the most ardent advocates of student loan cancellation are really pushing for – free college, with somebody else, usually simply called “rich people,” covering the cost.

Sen. Elizabeth Warren (D-MA) argued on Nov. 17, 2020 that forgiving student loans would be the “single biggest stimulus we could add to the economy” in these difficult times. And the New York Times said, “Both sides of the debate acknowledge that tackling the $1.7 trillion in student debt nationwide, which is spread among more than 43 million borrowers, would go far toward jump-starting the economy.” But a lot of economists don’t agree. 

The Committee for a Responsible Federal Budget says the stimulus benefits would be minimal and aimed at those who least need the help. Total student loan debt may be atrociously high, but borrowers often pay back their loans over 10, 15, or even 30 years, so debt cancellation would increase their available cash for injection back into the economy by only a fraction of the total loan forgiveness. “Stimulus dollars that are spent rather than saved provide a stronger boost to near-term economic output,” the Committee has said. 

Continuing current student debt relief policies, including deferring payments and interest, are preferable, as well as income-driven repayment programs under which monthly payments are determined based on a borrower’s income, not the amount of debt. After 20 to 25 years, the remaining debt is forgiven.  

Recently released data from the U.S. Department of Education shows that the national default rate (A federal student loan is considered to be in default if payment is late by 270 days) for FY2017 was 9.70%.  Massachusetts had the lowest loan default rate – 5.83%; Mississippi had the highest –  15.19%.

Oregon had 6,477 borrowers, 10.71% of the total, in default. The Oregon schools with the highest default rate, 7.80%, were Eastern Oregon University and the Pacific Northwest College of Art. The Brookings Institute is predicting a “looming student loan default crisis” that could see 40% of student loan borrowers nationally in default by 2023.

Yes, some of this debt has accrued because of lax government lending standards. As the Wall Street Journal reported on Nov. 23, 2020. “The government lends more than $100 billion each year to students to cover tuition at more than 6,000 colleges and universities. It ignores factors such as credit scores and field of study, and it doesn’t analyze whether students will earn enough after graduating to cover their debt.”

But subsidizing people who run up large college loan debts penalizes those who took their responsibility seriously and acted responsibly, James B. Meigs wrote in City Journal, a publication of the Manhattan Institute for Policy Research, a free-market think tank. That leaves a lot of people feeling like chumps, he says. “…the chumps of modern America feel that the life choices they’re most proud of—working hard, taking care of their families, being good citizens—aren’t just undervalued, but scorned,” Meigs wrote. As Jeff Jacoby, a Boston Globe columnist put it, “…a massive bailout of borrowers would be unfair to countless families that saved and worked to pay for college, to say nothing of those who responsibly repaid their loans.”

Then there’s the “moral hazard” of cancelling student debt. It might encourage students to continue running up risky big loan balances on the assumption that their debts will be forgiven at some point. That would cause a distortion of borrowing decisions, making them insensitive to the ability to repay. 

Of course, what if higher education institutions see that it makes sense to continually raise prices because the government will absorb any losses down the road. But that’s another problem.

Why did Senator Ron Wyden try to bail out union pensions?

Senator Ron Wyden (D-OR) tried to pull a fast one last month to help out the United Mine Workers of America union.

While Congress, the country and the media were fixated on the twists and turns of efforts to rescue the Highway Trust Fund, Wyden and some other members of Congress pursued an entirely different agenda, using the Trust Fund legislation to bail out the underfunded United Mine Workers of America’s pension plan.

Senator Ron Wyden (D-OR)

Senator Ron Wyden (D-OR)

When the Senate Finance Committee, which Wyden chairs, first reported out a Highway Trust Fund bill it slipped in a provision advocated by Senator Jay Rockefeller (D-W.Va). The provision called for $2.7 billion of the funds to be raised to be diverted to help bail out the underfunded pension plan for retired coal miners.

Congressional efforts to bail out the United Mine Workers health and pension plans have been going on for decades.

A 1992 law authorized the transfer of interest accruing to the unspent balance of the Abandoned Mine Reclamation Fund to help for the United Mine Workers health care fund. That was followed by 2006 amendments to the Abandoned Mine Reclamation Program, which provided transfers of general funds to insure the solvency of the Mine Workers health care plans.

This time, however, Wyden’s committee proposed paying for the union rescue with a gimmick called “pension smoothing” that has been roundly criticized by liberals and conservatives alike as nothing more than a sham.

Pension smoothing lets corporations delay contributions to their employee pension plans. Because pension deposits are tax-deductible, postponing them raises corporations’ taxable income and, therefore, increases tax payments to the government.

The problem is the increased revenues from the smoothing period will be largely offset later when corporations will pay less in taxes in years when they rebuild their pension plans to make up for the underfunding period.

In other words, Wyden’s committee proposed using illusory revenue from a corporate pension gimmick to save a failing union pension plan.

The Committee for a Responsible Federal Budget excorciated both the Senate Finance Committee and the House Ways & Means Committee for using the ruse.

But there was little public debate on the $2.7 billion union rescue plan. Compare that with the furor surrounding President Obama’s request for $3.7 billion to deal with the surge of children from Central America crossing the southwest border into the United States.

Maybe Wyden, Rockefeller and the measure’s other supporters thought their union bail-out would succeed because it was in a must-pass bill.

Maybe Wyden acceded to adding the bail-out money because he knows his seat is safe no matter what.

Maybe Wyden did it as a going-away-gift to Rockefeller, who’s retiring from the senate at the end of this term.

Or maybe, even though Wyden knows pension smoothing is a farce, he could, as a liberal, care less about the growing national debt when there are favors to be granted.

Thankfully, though, his gambit failed. A Highway Trust Fund bill that transfers $10.8 billion to the Fund finally passed on July 31st after the Senate accepted a House version without the miners’ pension provision. Obama signed the law on August 8th.

But don‘t think that means the end of attempts to bail out the union miners’ pension plan. Members of Congress surely have other tricks up their sleeve.

You’ve got to watch them every second.