Greece, US student loans, and the shifting ethos of debt forgiveness

In Europe, cash-strapped Greece is at a crossroads between cutting a deal with foreign creditors or cutting out of the euro zone. In America, the burden of student loans has become a major issue for the budding 2016 presidential race – with one candidate announcing this week a plan for “immediate relief” for college-loan borrowers.

These two news headlines, although distinct from each other in many ways, point to a common theme: Across at least part of the developed world, a political battle is under way between advocates of fiscal rectitude and forces of fiscal populism.

And by some indications, the populists may be gaining ground.

“The world has moved to the point of agreeing that inequality per se is a problem that needs to be dealt with,” says Angel Ubide, an economist and senior fellow at the Peterson Institute for International Economics in Washington.

One prominent sign is that the concept of outright debt forgiveness is being discussed as a part of the hoped-for solution in Greece and for some Americans struggling with big debts left over from college. And some economists say America’s disappointingly slow recovery from the recession would have been stronger if greater emphasis had been placed on debt relief for “underwater” mortgage borrowers – many of whom still have loan balances higher than the current value of their homes.

Beyond that, in the campaign for the Democratic presidential nomination in 2016, the popularity of left-wing candidate Sen. Bernie Sanders of Vermont has surprised many (including rival candidate Hillary Clinton), as he pairs a call for high taxes on the rich and on Wall Street with the goal of free college for all.

Outside the US, Europe has edged away from an emphasis on fiscal “austerity,” or the focus on containing public-debt levels in a bid to ensure strong economic prospects for the future. And on a global level, the International Monetary Fund (IMF) also has been evolving from an austerity focus toward a more nuanced approach, encompassing concerns about inequality and the notion that fiscal stimulus packages can be in the toolkit for helping troubled nations.

All this doesn’t mean the policies of advanced nations will be swinging wildly to the left.

For one, Greece may end up capitulating to creditors, to avoid the severe shock to its banking system that would come with a repudiation of its membership in the European Union.

And Senator Sanders is unlikely to become the next US president. He and former Maryland Gov. Martin O’Malley (the one with a new student debt plan this week) may pull Mrs. Clinton toward the left during the primary campaign, but they remain long shots to beat her for the nomination.

It’s also notable that in recent elections, Britain and America affirmed support for conservative legislators.

Still, the broader story appears to be that in this post-recession era, income inequality is demanding political attention alongside questions of economic growth, and debt relief is on the agenda alongside the traditional concerns of creditors and fiscal watchdogs.

Against this backdrop, Greece has become a symbolic focal point – for now at least – of this policy battle.

“The conflict [between Greece and its creditors] is a proxy” for this larger global tussle, Mr. Ubide wrote on the Peterson Institute’s website. “The political war is over populist and nationalistic policies aimed at addressing the economic cost of the long and severe recession.”

Two changes explain why this conflict is coming to the fore, Ubide says in a phone interview. First, evidence of widening inequality within advanced nations has increased in recent years. Second, more economists have begun leaning toward the view that these high levels of inequality are harming economic growth.

Those currents of thought are paralleled by the visceral evidence voters see in their own bank accounts and family lives.

• Even with their diplomas and swelling college debts, Americans age 18 to 29 face an unemployment rate of 9.6 percent as of July, close to twice the national average. Youth unemployment is even higher in Europe, at 23 percent as of the final quarter of 2014. In Greece, fully half of all young people are unemployed.

• The people hit hardest by the Great Recession, in terms of lasting declines in family net worth, have been low-income households, according to US data tracked by the Federal Reserve. The housing bust also hit African-Americans particularly hard.
• Two-thirds of adults in 10 advanced nations, from the US and Japan to Germany and other European nations, say they expect today’s children to be worse off financially than their parents, according to global polling by the Pew Research Center released last fall.
• Some of the very countries with high levels of debt – Greece, Spain, Italy, France – also show large majorities saying that inequality is a “very big problem,” according to the Pew polling.

This suggests that any new policies aimed at reducing inequality may involve difficult political trade-offs, or the financial risk that comes with still higher debt. (Concern about inequality is also high in the US, with 46 percent saying it’s a very big problem.)

Even Republican candidates finding the issue hard to ignore, although they aren’t necessarily embracing income redistribution as an overt goal.

“Many young people are graduating with mountains of debt for degrees that will not lead to jobs,” Sen. Marco Rubio of Florida said in a speech this week. “And many who need higher education the most – such as single parents and working adults – are left with few options that fit their schedules and budgets.”

Meanwhile, backers of Senator Rubio's rival Jeb Bush have adopted the organizational name “Right to Rise,” a nod to the stalling of upward mobility that many Americans perceive as a social problem.

Republicans say the answer to this problem hinges, first and foremost, on reviving economic growth, albeit with some new attention to ensuring that the fruits of growth are widely shared. And empathy for Americans struggling with high debt loads, for them, is matched by calls to bring down the overall level of government debt.

Rubio, for example, alleged on Wednesday that Obama administration policies on student debt offer some “generous forgiveness that may be fiscally unsustainable in years ahead.” In the same breath, though, he pitched his own way of addressing student-debt burdens, a bipartisan bill to promote income-based repayment programs for debtors. And he says that unleashing more competition in higher education put a cap on the trend of skyrocketing tuition costs.

Democratic candidates are appealing to many millennials with proposals to make higher education – viewed by many Americans as the best ticket to jobs with decent wages – accessible to all comers. In announcing his proposal for free public-university tuition for those who meet enrollment standards, Sanders said the overall economy won’t be ready to prosper “if, every year, hundreds of thousands of bright young people cannot afford to go to college, and if millions more leave school deeply in debt."

Governor O’Malley sought to outmaneuver Sanders with his own proposal for “debt-free” college for all, plus generous refinancing terms for existing student loans that, next to mortgages, are the biggest source of consumer debt.

Yet on the left, too, policies aimed at helping people of low and moderate incomes are balanced by the recognition that prosperity hinges on overall economic growth.

“Nations need to ensure both that economic growth takes place and that it is broadly shared,” says a major report, co-written by former Treasury Secretary Lawrence Summers. Don’t be surprised to hear the Clinton campaign echoing that report from the Center for American Progress.

In Europe, similar themes are on display. Populist parties have gained new prominence since the recession. In Britain, conservatives have embraced a “living wage” policy – though one that falls short of what their opponents would like to see.

Germany is the bastion of fiscal discipline, donning the role of tough cop on the continent since worries about the finances of Greece and some other nations began to surface in 2009. But concern about a possible debt crisis spreading beyond Greece have eased in part as institutions like the IMF and European Central Bank have gone beyond a focus on simple austerity. Those institutions have become focused on stimulating economic growth and fighting the risk of deflation in the euro zone – not just on demanding spending cuts or tax hikes in high-debt nations.

It’s helpful to remember that this kind of wrangling over debt and inequality is nothing new.

How and whether to pay debts from the Revolutionary War was a major issue in the founding of the American republic, for instance. (The Founding Fathers ultimately chose to pay up.) And Europe has seen massive swings between socialism and free-market economics since the 1800s. Greece – not to mention Germany after World War I – has defaulted before.

This time, again, old realities hold true. Not all debts get repaid in full, but deep troubles can come to nations that completely lose face with creditors. For Greece, now is a moment of reckoning that’s being watched around the world.