13 Reasons Why Biden's Student Loan "Cancellation" Does a Grave Disservice

After having issues passing bills in Congress, the Democrats had a legislative win: the Inflation Reduction Act (IRA). It was certainly a political win for the Democrats. Given that the IRA is going to make the economy worse off and contains drug pricing regulations that will make us less healthy, I was less than enthused about the legislation. I was hoping that the Biden administration would be done toying around with shoddy policy at least for the summer, but then came August 24. This was when President Biden announced that he would be forgiving $10,000 in student loan debt for borrowers making less than $125,000 (or a married couple jointly filing that makes less than $250,000). There are 43 million Americans holding a total of $1.6 trillion in student loan debt. The goal of Biden's student debt relief is to "provide more breathing room to America's families as they continue to recover from the strains associated with the COVID-19 pandemic." While Biden is passing this off as bold education policy reform, the truth is that his plan is a far cry from actual reform and it comes with multiple drawbacks.

1. Biden's plan disproportionately helps more affluent households. In January 2022, the Left-leaning Brookings Institution released a report finding that Biden's proposal is regressive, regardless of whether it is measured by income, education, or wealth. Regressive is a technical term meaning that it is going to disproportionately benefit those who need welfare the least. This is because middle- and upper-class households are the ones that can best afford a college education for their children. 

While there is some mitigation, Biden's income cap at $125,000 does not negate the regressive nature of the plan. According to the budget model from the highest-ranked business school, the Wharton School at the University of Pennsylvania, 62.2 percent of the student loan "cancellation" is going to benefit households in the top 60 percent. A previous Wharton model had the number at 68.7 percent, but the point is that there is something awry with the government that giving handouts disproportionately to more affluent households is charity. As we will see shortly, it does not make sense to give a handout to those who have greater financial stability to pay off student loans. 

2. College graduates are in better financial shape than the average American to pay back loans. Data from Georgetown University show the difference in lifetime earnings (see below). As we see below, the difference between a college degree and a high school degree can be up to $3 million in lifetime earnings. According to the Right-leaning American Enterprise Institute (AEI), "those with only some college gained a lifetime earning increase relative to someone who only completed high school that is 10 times the average debt incurred." That is forty-fold for someone with a Bachelor's degree (ibid.). In other words, the debt incurred is significantly smaller than the rate of return for acquiring a college degree. 

Not only that, job security for college degree holders is greater. Bureau for Labor Statistics data from 2002 to 2022 show that college degree holders are less likely to be unemployed (see below). In layman's terms, a college education provides the borrower with greater means to pay back the loan. A college degree is an investment. Like any investment, not all investments pay off. A degree in gender studies is not going to have the same rate of return as a degree in computer science or business. However, on average, a college degree holder fares a lot better than someone with a high school degree. Since college degree holders earn more on average and are more likely to remain employed, the argument for student loan "cancellation" is all the weaker. 

3. It is downright unfair. The unfairness is amplified by the regressive nature and the fact that college degree holders on average have better financial footing. There are 97 million Americans over the age of 25 who paid off their college loans (American Enterprise Institute), many of them who made considerable financial sacrifices to pay off the debt. Some deferred going to the hospital, making a home repair, going on vacation, saving for retirement, or making new purchases in order to pay off student loans. Others decided to live in a different city or not-so-nice neighborhood of a large city, attend a less prestigious or less costly university, forego an internship, or work a second job to make sure they could pay their loans. 

There are another 82 million that never went to college (ibid.). Why should these Americans pay for someone else to have an experience they never had? What about parents who made sacrifices to pay for their children's education? Was that for naught? And what about those have staggering debts that have nothing to do with college, such as auto loan debt or mortgages? Student loan "cancellation" gives the proverbial middle finger to those who were financially responsible enough to pay off their student loans while incentivizing financial irresponsibility and recklessness (See Point #10).   

4. Advocates of student loan "cancellation" overstate the problem. This point merits some clarification since I can see someone misconstruing it for "I don't care about the plight of others." As of May 2021, the median education debt was somewhere between $20,000 and $24,500 (Federal Reserve). I use median debt instead of average here because the average was $37,693 (Education Data). What is causing the difference between the average and median is that graduate school programs cause more debt. Using median indicates that 50 percent of student loans are $20,000-$24,500 or less. As we already pointed out in Point #2, college degree holders are in a better position to pay off debt than other Americans. 

As we see below, 63 to 74 percent of undergraduate students do not even take out loans (College Board, 2021, p. 40). The Consumer Finance Protection Bureau shows that over 80 percent pay their loans within 14 years (Gibbs, 2017, p. 11). This is not to say that no one is struggling with student debt or denying the effects that student debt can have on an individual. This is saying that a) most college students do not need to take out debt, and b) student loan debt is manageable for most people (also see Akers, 2019). Drowning in student debt is an exception, not a norm. As such, a targeted debt relief approach to help those in need would be preferable to a broader-based student loan forgiveness. 

5. It will cost taxpayers a pretty penny. It is not as if Biden signing an executive order gives magical powers that makes student loans disappear. The student loan has been lent and spent. The services have been rendered, so it is not exactly as if the debt can be cancelled. The government does not have money of its own. There's a reason why dollar bills have the phrase "This note is legal tender for all debts public and private" printed on them. This scheme will either be paid with taxpayer dollars now or through interest payments in the future. How much will it cost? According to the Wharton School's budget model, it will cost taxpayers $519.1 billion over the next decade. With 148.3 million taxpayers, student loan "cancellation" will cost the average taxpayer over $3,500 dollars. 

6. It undermines the Inflation Reduction Act (IRA). What was the argument the Democrats used to push the IRA through Congress? It "will make a historic down payment on deficit reduction to fight inflation." Forget for a moment that the IRA will not reduce inflation. Democratic Congressmen said that this will reduce the deficit by $300 billion and that the bill is fully funded. As we saw in the previous point, the student loan reduction will cost $519.1 billion. In other words, Biden is willing to erase the first decade of deficit reduction from his signature legislation. This shows that the Democrats are not sincere in wanting to reduce the deficit. 

7. It is not economically efficient nor does it help stimulate economic growth. There are some that think that student loan "forgiveness" will generate increased consumption and savings, thereby boosting the economy (Fullwiler et al., 2018). However, it seems that the boost to the economy would be small in comparison to its cost. In 2021, the bipartisan Committee for a Responsible Federal Budget (CRFB) estimated that "cancelling" student loans would create 3-27¢ of economic activity for every dollar spent. If you want more detail on the multiplier effects and economic stimulus aspects of the debate, you can read this well-written report from the Texas Public Policy Foundation here.

8. It does nothing to make higher education more affordable. Forgiving loans is not educational reform. Paying down student loans now does not change the system that drove up college tuition costs, it does not improve the quality of education, nor does it improve educational attainment rates. As I brought up in November 2020, student loan "cancellation" does not target the main culprit of skyrocketing college costs: federal student loan subsidies. As Left-leaning policy analyst Kevin Carey said, "debt forgiveness alone would be like treating a contaminated river without stopping the source of the pollution." Student loan forgiveness is like putting a Band-Aid on a bad case of COVID. 

9. It only provides a temporary decrease in the student debt bubble before it rises again. Because it does not address rising college costs, we are going to run into the same issue in the near future. According to the bipartisan Committee for a Responsible Federal Budget, the student loan debt will return to 2022 level by 2027. The Right-leaning American Action Forum puts it at 2026. What will the government do then? After all, 2026 will be another midterm election that year. Is the government going to do another round of loan forgiveness to placate a certain group of voters? 

10. It creates moral hazard and will most likely cause inflation in the postsecondary education market. In economics, moral hazard is when an economic actor is encouraged to increase their risk (e.g., go to a more expensive school, select more expensive room and board for college, less likely to constrain other living expenses) because someone else is bearing some or all of the negative consequences of their riskier behavior. In the context of student loans, moral hazard means incentivizing future students to take out more loans and do so more recklessly because the government has set the expectation that there will be other rounds of "cancellation" in the future. This is plausible given that student loan "cancellation" does nothing to prevent another loan debt bubble from emerging (See Point #9). 

Such encouragement would boost demand for a college education, which in turn increases the price of college tuition. This goes beyond the inflation for college that has existed for years (College Board). It provides perverse incentives to colleges. Student loan forgiveness will not encourage colleges to lower costs. If the government will bear the costs of student loans no matter what, it will incentivize universities to jack up the sticker price of the college experience so they can get more money for such endeavors as new faculty, recruit new and better students, upgrade facilities. Rather than bring tuition to a more affordable amount, it will provide every incentive to keep college costs sky-high.  

11. The moral hazard will erode lending institutions. The moral hazard goes beyond the borrowers or postsecondary institutions. To quote the Acton Institute, "You took out a loan, therefore you have a fiduciary responsibility to repay it. An institution vetted you for this loan, assessed that you were worthy of the risk, and in taking the loan, you made a commitment. People cannot thrive and societies cannot grow in environments where you can renege on contracts without penalty." Whether you look at the Fraser Institute Economic Freedom Index or the Transparency International Corruption Perceptions Index, one thing that is clear is the soundness of institutions has a strong impact on the quality of life. If our economic transactions and our institutions are based on distrust, corruption, economic stagnation, and social decline become rampant. Think about it for a moment. Access to credit allows to do such things as go to college, buy a car, get a mortgage on a house, and buy a myriad of goods and services. I'm not saying that lending institutions are run by angels, but if we break down this institution, it also affects our quality of life. 

12. There is the distinct possibility that Biden's executive order will increase inflation in the greater economy. There is a reason why 59 percent of Americans believe that student loan forgiveness will increase inflation: because it is plausible. If people are not spending on paying down debt, that frees up dollars to be spent elsewhere. If a significant percentage of those individuals decide to spend that extra cash on goods, that would drive up prices even further, thereby creating more inflation. 

There are Left-of-center economists who believe it will contribute to inflation, including former Obama economic advisors Jason Furman and Lawrence Summers, the latter of whom warned us in early 2021 of the upcoming inflation. This, of course, depends on how individuals react to receiving debt relief. This is why there have not been estimates as of yet to determine the effect on inflation. While we do not know the degree to which it will take place, it is nevertheless conceivable that a significant enough amount will go to consumer spending that will contribute to inflation. 

9-1-2022 Addendum: The bipartisan Committee for a Responsible Federal Budget projects that Biden's student loan "forgiveness" will increase inflation by 15 to 27 basis points next year.  

13. This is an abuse of executive power. Using executive orders is nothing new. Multiple presidents have used them. Abraham Lincoln used one for the Emancipation Proclamation. It's not as if Biden is setting a record. That would go to Franklin D. Roosevelt at over 3,000 executive orders. However, he is blatantly using the executive order to bypass Congress. 

Biden trying to misinterpret the Higher Education Act of 1965, specifically 20 USC §1082(a)(6), to get his way. However, the preamble in the Act limits this power to what Congress authorizes. According to the Constitution (Article 1, Section 7, Clause 7) and other legal statutes (31 USC §1301; Antideficiency Act of 1982), Biden cannot spend money on anything that Congress has not authorized. Legislation would need to be passed by the legislative branch. What a concept! Biden already tried this stunt with the vaccine mandates, the environment (West Virginia v. EPA), and the CDC's eviction moratorium, so I cannot say that I am surprised. Even so, such a power play is problematic because it sets precedent for future presidents to bypass Congress, thereby eroding the balance of power between the legislative and executive branches. 

Conclusion

As we can see, there are multiple issues with student debt "cancellation," ranging from the economic and legal to the educational and moral issues. College is too expensive, that much is true. It is also true that the federal government is the major culprit with its student loan subsidies. Student loan "cancellation" does nothing to fix the problem of rising costs. If anything, it makes the costs higher while incentivizing future generations of borrowers to take on more debt. Not that I am for handing out money like it was hotcakes, but if you are, why do it for college graduates who can better retain a job, earn a higher salary, and have better access to liquidity? I hope that the legally questionable nature of such a move will result in the Supreme Court overturning this loan "cancellation." But if it does not, at least the Biden administration's legacy for higher education is to make college less affordable and accessible for future students.

The "Inflation Reduction Act" Will Not Reduce Inflation, But It Will Have Negative Economic Impact

There is something to be said for the adage "try, try again." In the case of current politics, if you cannot pass the Build Back Better Act, go for a smaller version that is appealing enough to get a slim majority of votes. That is what happened with the Inflation Reduction Act (IRA). The IRA has multiple features, including an extension of Affordable Care Act subsidies, a 15 percent corporate minimum tax, tax credits for zero-carbon energy, more funding for the Internal Revenue Service (IRS), and drug price reforms that will cause more harm. Today, I would like to take a look at the macroeconomic effects of such broad legislation. 

Will the Inflation Reduction Act Reduce Inflation?

You would think with a title like the "Inflation Reduction Act," there would be significant reduction in inflation. At the same time, this would not be the first time that the actual impact of the legislation would be the opposite of what the title suggests. No Child Left Behind ended up leaving behind millions of children. The Affordable Care Act made healthcare less affordable. The Defense of Marriage Act did not defend marriage for everyone that wanted to enter into a consenting relationship with another adult. The Inflation Reduction Act is no exception. The name "Inflation Reduction Act" is a reflection of salesmanship and has nothing to do with reducing inflation. 

The Congressional Budget Office (CBO), which is considered the gold standard for legislative analysis, does not find that the IRA would have significant impact on inflation. For the CBO, it will have negligible impact in 2022. As for 2023, the estimated range is reducing inflation by 0.1 percent to increasing it by 0.1 percent. Penn State's Wharton Business School, which is quite revered in these sorts of analyses, is not any more flattering. The Wharton Business School found that there was no notable reduction in inflation:

The Act would have no meaningful effect on inflation in the near term but would reduce inflation by around 0.1 percentage points by the middle of the first decade. These point estimates, however, are not statistically significant from zero, indicating a low level of confidence that the legislation would have any measurable impact on inflation. 

Corporate Minimum Tax

One of the biggest forms of tax reform in the IRA is on corporate taxes. The IRA imposes a 15 percent book corporate tax on companies that make over $1 billion in profits annually. There are different accounting standards used for reporting income to the government (tax income) versus what is reported to investors (book income). There are instances in which book income is larger than tax income, which means that a corporation very well might pay less in corporate taxes as a result. To quote the Left-leaning Institute on Taxation and Economic Policy (ITEP), "if the total taxes (US and foreign taxes) paid comes to less than 15 percent of those profits, this provision would require them to pay additional tax to raise their effective worldwide tax rate to 15 percent." ITEP calculates that such a provision would generate $223 billion over a decade.

Those on the Left, such as those as ITEP, see this as a step in the right direction because it means addressing corporate tax avoidance. This line of thinking assumes that such a reform would be better for the economy or society. Out of the 0.2 percent decline in the GDP that the Right-leaning Tax Foundation projected, half of that decline is attributable to the corporate tax. As I have brought up before in my analysis of corporate taxes (see here, here, and here), corporate taxes are the least effective form of taxation. The Tax Foundation illustrates how the corporate tax is the most economically damaging way to raise tax revenue. 

Using the unconventional way of raising corporate taxes through book income does not make this tax reform any less damaging. In addition to the issues with corporate taxes generally, this alternative minimum tax (AMT) will affect some industries more than others. According to Tax Foundation analysis on this AMT, industries that will feel disproportionate effects are real estate, utilities, mining, and automobiles. The Joint Committee on Taxation concluded that 49.7 percent of this tax incidence would fall on U.S. manufacturers. 

Furthermore, as the American Action Forum details, the United States had a brief, but failed experiment with taxing bookable income in the late 1980s called Business Untaxed Reporting Profit (BURP). What ended up happening with the BURP adjustment was a detrimental effect on financial reporting. This would not only incentivize using alternative accounting practices to under-report book income, but the loss of information for investors had negative effects. All Biden's 15 percent corporate tax is going to do is stymie the economy while complicating compliance with tax collection efforts. 

Excise Tax on Stock Buybacks

The other major tax reform in the IRA is the 1 percent stock buyback excise tax on U.S. publicly traded corporations. You can read this primer from Congressional Research Service for more information. Essentially, the reason for stock buybacks over paying dividends is the tax preferential treatment. Dividends have a top tax rate of 20 percent, but that is still higher than the zero percent tax for stock buybacks prior to the IRA. Stock buybacks also give stockholders a choice about whether or how to receive distributions. Even so, there is a debate as to whether dividends or buybacks are better for both investors and the company in the long-term. 

In any case, one of the main reasons for this excise tax is to increase U.S. tax receipts from foreign investors. A one percent excise tax is still lower in comparison to a 20 percent tax on dividends. Another reason for this tax is to encourage corporations to invest in their business instead of returning excess cash to investors. However, buybacks do not starve firms of cash for investment, according to a 2019 report from the U.K. government. Another study shows that 95 percent of funds from these repurchases are reinvested in other public companies (Booth, 2022).

While projected to accrue $55 billion in tax revenues over the next decade, the Tax Foundation also expressed concern that it might be less if the dividend payouts are largely remitted to tax-preferred retirement accounts. Plus, the call for a tax ignores multiple benefits of buyback (e.g., reduced transaction costs, orderly market trading, lower market volatility). In short, a buyback excise tax could result in an inefficient allocation of capital over the medium-term by trapping capital in stagnant companies.

Will the IRA Raise Your Taxes?

One of Biden's campaign promises was that he would not raise taxes on those making less than $400,000. According to an analysis from the Tax Policy Center, the net effect of the IRA on after-tax income for middle-class households is effectively zero. This makes sense since the two main tax reforms of the IRA are the corporate income tax and excise tax on corporate stock buybacks previously covered. There are no income tax increases whatsoever in the IRA.  

This is where the story gets more complicated. When you only look at adjusted gross income as the chart above does, then yes, taxes do not increase. However, the effects of the corporate tax or the buyback excise tax have more indirect, but nevertheless measurable, outcomes. This is why the nonpartisan Joint Committee on Taxation has a more inclusive measure of income in its analysis, which includes such factors as employers' contributions to healthcare, the employer's portion of Social Security taxes, and the implicit value of the insurance that Medicare provides. I will use calendar year 2023 as an example (see JTC CY 2023 figures below). With this more inclusive category, people who make under $10,000 and more than $30,000 will indeed experience an increase in taxation. This makes sense considering that corporate tax increases have multiple secondary effects, including that a significant portion of the corporate tax incidence falls on workers. Even if taxes on adjusted gross income will not increase, the working class will indirectly pay taxes elsewhere. 

On the other hand, if you use the JCT's numbers to look further out to the third year and beyond, the net result on tax rates are about as impactful as the projected inflation reduction in the IRA. 

Will the IRA help with the deficit? Technically it will, but not by much.

The other thing that irks me is that the Democrats are passing this bill off as fiscally responsible because the IRA is going to reduce the deficit. They are not wrong on that front. According to the bipartisan Committee for a Responsible Federal Budget (CRFB), the IRA is projected to reduce deficits by $300 billion within the first decade. It is the second decade where those savings will increase to the $1.1-1.9 trillion range, largely depending on whether those ACA subsidies remain permanent or not. 

The accuracy of budgetary projections two decades out is more tenuous than they are one decade out. Even so, if the IRA ends up saving over a trillion over the next two decades as the CRFB projects, let's first keep in mind that it would be an average of $95 billion per annum. Who knows what spending binge the federal government will go on between now and then? Second, this does not account for the fact that the Biden administration drove up the CBO's projection of the 10-year deficit by $2.4 trillion with the American Rescue Plan and the bipartisan infrastructure bill that was passed. And then we would have to cover the remainder of the $6 trillion in borrowing that Congress did with its pandemic spending. This all ignores the bigger picture about the state of U.S. public debt, including that Medicare, Medicaid, and Social Security are all going to be driving federal debt further. I understand that the Democrats were looking for a legislative win shortly before midterm elections, but it doesn't change the fact that whatever deficit reduction that the IRA is projected to generate is a drop in the bucket in comparison to $30.7 trillion in debt the U.S. government has accrued and what additional debt it is likely to accrue.

Conclusion

What will be the macroeconomic effects of the IRA? In spite of its name, the Inflation Reduction Act will do nothing of significance to reduce inflation. The unintended consequences of the corporate minimum tax and the excise tax are going to cause more problems than they attempt to solve. As for reducing deficit spending, its impact is minuscule when looking at the grand scheme. If you needed more economic effects than those listed above, the Tax Foundation uses its model to project a few other effects. In the next decade, the GDP is going to decrease by 0.2 percent, there will be 29,000 fewer jobs, and there will be a 0.1 percent decrease in wages, and there will be a 0.3 percent decrease in capital stock. It would be nice to see legislation with the net effect of helping out the American people, but it seems that Congress is incapable of completing such a task. 

Drug Price Controls in the "Inflation Reduction Act" Will Be Bad for Your Health

Earlier this month, both the House and the Senate passed what is referred to as the Inflation Reduction Act (IRA). President Biden signed the IRA earlier this week, thereby making it law and worth a discussion. The IRA is a budget reconciliation bill that was reduced in size and scope in comparison to the Build Back Better Act that never passed. Even so, this bill [as proposed by the Senate] has multiple provisions, including raising $737 billion in taxes, spending $369 billion on climate change, and $300 billion in deficit. I hope to cover some of these other aspects at another time, but there is one aspect of the IRA that I would like to cover today: prescription drug price reform. 

The three main drug price reforms in the IRA are "allowing Medicare to negotiate select prescription drug prices, limiting drug price growth to inflation, and repealing the Trump-era drug rebate rule." I want to focus on the first two since they are forms of price controls, which refer to legal minimum or maximum prices [typically] mandated by the government for specified goods or services. Much like with other price controls, the Democrats are trying to implement price ceilings on prescription drugs in an attempt to manage their affordability, particularly for senior citizens on Medicare. 

At first glance, it might seem like the government could help out as a result of these de facto price ceilings. The Congressional Budget Office (CBO) projected that the IRA's drug policies will save $287 billion over the next decade.  

Normally, I would heed the CBO's estimation because CBO is generally considered the gold standard in legislative analysis. However, I have my doubts that these reforms would have net positive benefit. One of my main doubts is based on the economy theory of price controls (see analysis from the Federal Reserve Bank of St. Louis here). When the government limits the price of a good or service, it puts the new price below the equilibrium price that the market price (see below). Since the government mandated price is below the equilibrium market price, demand exceeds supply. In other words, the price control creates a shortage. In the pharmaceutical market, this makes even more sense since pharmaceutical companies devoted about 25 percent of its revenue to research and development in 2019 (CBO). Based on mainstream microeconomic theory, a price control will create a shortage of medicine. 

We have seen how price ceilings in other markets create unintended consequences. One example is that of rent control. Imposing the price ceiling of rent control creates a housing shortage, increasing housing costs in the uncontrolled areas, disincentivizes landlords to take care of rental units under rent control, and disincentivizes building new housing. Another example is price gouging laws during natural disasters. Rather than help out those who are needy, these price gouging laws end up prolonging the harm caused by the natural disaster because they muffle the market signals that would inform producers that an area needs goods.   

The prescription drug market is not an exception. The United States currently leads in research and development for biopharmaceuticals, but that was not always the case. Up until the 1990s, Europe was the leader in R&D. What changed that dynamic? According to a report from economic consultants at ndp research, price controls were the major culprit of this lag in biopharmaceutical innovation (Pham and Donovan, 2020). 

What was the result of such price regulation in Europe? A report from the National Bureau of Economic Research concluded that it resulted in "about $5 billion in foregone R&D spending, 1680 fewer research jobs, and 46 foregone new medicines. Prospective long-horizon costs for the EU are estimated at between ten and 20 times these costs....these policies essentially trade off the health and employment opportunities of future generations for cost savings for current pharmaceutical customers (Golec and Vernon, 2006)." Research from consultancy Vital Transformation also shows that price controls in the European market resulted in 14 percent less venture capital funding for startups, a 7 percent decrease in biotech patents, a 9 percent decrease in biotech start-up funding relative to the U.S., and an 8 percent increase of delay in access to medicine (Schulthess and Bowen, 2021). As such, it would not surprise me that the price controls in the IRA would backfire in a few ways similar to what happened in Europe:

• Increased health spending. While the CBO calculated that the price controls would save money, a couple of economists from the University of Chicago begged to differ (Philipson and di Cera, 2022). As these economists point out, price ceilings create shortages because researchers are incentivized to sell less. This creates loss offsets, which is how much health care spending increases as a result of fewer drugs in the market. This makes sense since drugs tend to alleviate the need for surgeries and hospitalizations. As such, the authors' calculation is that price controls would actually increase health care spending by $50.8 billion over twenty years. That might come out to about $2.5 billion extra over two decades, but it is still worth pointing out since these price controls were meant to lower healthcare costs, not increase them. 
• Less research and development to develop new drugs in the future. The CBO estimated that the IRA would make it so that 15 fewer new drugs would be introduced to the market. This would be a modest estimate considering that CBO does not "predict what kind of drugs would be affected or analyze the effects of forgone innovation on public health." Remember those economists in the previous bullet point? They estimated that 135 fewer new drugs would be produced as a result of the price controls. 
• Fewer new drugs means more dead people. The reduction in drug development will reduce quality of healthcare in the future because we will have access to fewer cures. What does having 135 fewer drugs mean for healthcare? Economists at University of Chicago answered that question in a November 2021 brief when Congress was toying with the idea of price controls for the Build Back Better Act (Philipson and Durie, 2021). They found that the 135 fewer new drugs as a result of the price controls would generate a loss of 331.5 million life years in the U.S. over a 20-year timespan. To put that number in context, 331.5 million life years is 31 times the amount of lives that COVID-19 took at the time of the report's publication in November 2021. In contrast to CBO reporting, the University of Chicago economists were at least transparent about its analysis and methodology. 

Postscript

Economist Milton Friedman once said that one of the greatest mistakes in public policy analysis is to judge policies by their intention rather than their result. In spite of their stated intention, price controls are shown to increase overall healthcare costs. They come with other unintended consequences, including less available medicine, lower research and development spending, less jobs on the biopharmaceutical sector, fewer new drugs on the market, and more dead people. While the drug price controls will be more limited in scope, unintended consequences such as these bother me when combined with the fact that the United States is one of the only developed countries that does not have drug price controls. Implementing these price ceilings will stifle innovation not only for the United States, but for patients across the world. These price controls are not going to stick it to pharmaceutical companies as much as they will the patient who needs improved medical access. There are better ways to fix this country's medical system, but one thing is for certain: price controls are a prescription for medicine shortages, higher costs of drugs, and more death. 

We Should Not Shame the Obese, But We Should Not Celebrate or Glorify Obesity Either

Bill Maher has been a political commentator that has fascinated me over the years. When I was younger, I did not care as much for Maher's comedic style or content. As I became older, I have come to appreciate Maher as a comedian. One reason is that as I became more libertarian, I better understood the nuances of this world and was able to understand where Maher was coming from. Another factor is that the mainstream Left has moved much more to the Left in the past decade. While Maher identifies more with the Left, he has on multiple occasions called out the Left for abandoning its more traditional roots (e.g., freedom of speech, tolerance) and buying into inane, crazy ideas that would have been considered extreme only a few years ago. 

What makes Maher special is that he is one of the only political commentators that self-identifies as a liberal and is willing to stand up to the crazier elements that exist within the U.S. Left. Maher's criticisms are those that I find myself agreeing with much more than I am disagreeing these days. Look no further than last week's episode of Real Time with Bill Maher where he lambasted the fat acceptance movement (see below). Maher did not hold any punches back. He said that body positivity is used to mean "I'm perfect the way I am because I'm me." He called it "Orwellian how often positivity is used to describe what is not healthy." Maher went as far to say that "If you are participating in this joyful celebration of gluttony that goes on now, you have blood on your hands, full stop."

 

I want to get into why Maher is right about the calamity that we face with the high amounts of obesity in this country. But first, I want to preface by saying that the obese should not be shamed. I would not simply argue that from a moral stance of human decency, but also as a public health stance. Shame is not an effective public health strategy. When was the last time you changed your mind on something because someone berated you and made you feel awful for existing? Don't all raise your hands at once. 

The truth is that shaming does not work (e.g., Ho et al., 2015; Costa and Kahn, 2013). Shaming did not get skeptical people to wear face masks in 2020 or get hesitant people to get the COVID vaccine in 2021. Shaming does not work as a strategy for smoking cessation or getting someone to stop drinking. Shaming did not work as a tactic during the heyday of the HIV/AIDS epidemic in the 1980s. Shaming is more than merely ineffective. If anything, shaming can make things worse. The Canadian Medical Association Journal shows how shaming worsened health outcomes for HIV, obesity, and fetal alcohol syndrome (Duong, 2021). A study from the University of California-Los Angeles (UCLA) shows that shame makes smokers more likely to smoke (Cortland et al., 2020).

Why does shame prove to generally be ineffective in a public health context? To quote neurologist Caroline Leaf, "Shame is a very negative emotion that challenges a person's identity and tends to make people feel defensive or aggressive, or make them withdraw to protect themselves. Shame essentially tells someone they are bad, as opposed to making them feel that they may be doing something that will have negative consequences." That explains why more often than not, shaming people in a public health context leads them to hide or not disclose their behavior. Shame is not the way to go in terms of public health. It is not going to incentivize healthier behaviors. But what about obesity? The question on this topic is not whether shame should be used, but the debate has become whether we should normalize and make obesity an acceptable life choice on a societal level. 

Those who are activists for fat acceptance (see below), they think that stigmatizing fat is the problem. A 2021 article from Cosmopolitan tried to depict obesity as healthy, which is amusing considering that the satire website Babylon Bee satirized the idea a few months earlier. In spite of what fat acceptance activists would argue, my issues with obesity have nothing to do with fatphobia, thin privilege, or whichever term that the woke like to use to deflect criticism. As we will see shortly, obesity has significant, negative impacts on physical health. 

I can imagine a criticism along the lines of "the Body Mass Index (BMI) is not perfect, ergo obesity is not an issue." That argument is half-right: the BMI is not a perfect measurement. For example, muscle weighs more than fat. A wide receiver for a football team who is all muscle could be considered under the BMI. On the flip side, you can take it in the other extreme direction with unhealthy thinness, whether that is bulimia or anorexia. At the same time, the BMI is still a good proxy for metabolic health. 

The idea of "healthy at every size" is a myth. The truth of the matter is that there is a large evidence base showing that health issues are linked to obesity. There is a reason for that. A meta-analysis of 72 cohort studies from the BMJ showed that indices of central fatness (including BMI) are significantly associated with a higher all-cause mortality risk (Jayedi et al., 2020). And here is an older meta-analysis of 97 studies from Journal of the American Medical Association saying the same thing (Flegal et al., 2013). 

Maher is right to point out that one of the first things that you do when visiting the doctor is stepping on the scale and getting your weight checked. A list from the National Institutes for Health (NIH) shows how obesity elevates the risk for multiple diseases, including type 2 diabetes, heart disease, stroke, sleep apnea, metabolic syndrome, fatty liver disease, osteoarthritis, gallstones, cancer, and kidney disease. In 2019, the New York Times said that "poor diet is the leading cause of mortality in the United States."

If you need a more contemporary example, let us examine COVID and obesity. If you have a problem walking up a few stairs, imagine how an upper respiratory disease such as COVID could wreak havoc on your health. We do not have to imagine. The CDC says that obesity can triple your likelihood of being hospitalized from COVID and that the obese are 1.42 times more likely to have severe COVID if hospitalized. The British Medical Journal found that those who were physical active were much less likely to be hospitalized from COVID (Sallis et al., 2021). Obesity was second only to age as the largest factor in COVID morbidity, according to a 2022 study from The Lancet. If more people took care of their personal health, fewer would have died in this pandemic. 

You are probably wondering why I care about the topic of obesity. My political philosophy leads me to believe that as long as you are not hurting, harming, or directly affecting anyone with your personal decisions, I do not care what you do. That is the nonaggression axiom in a nutshell. If you want your diet to consist of McDonald's, Twinkies, and a whole array of processed foods, that is your dietary choice. If you want to be vegetarian or vegan, go for it. If you decide to drink raw milk or eat genetically modified foods, that is "your body, your choice." I have applied this philosophy to more than dietary choices. I believe that it applies to freedom of speech, freedom of religion, owning a firearm, marrying whichever consenting adult (or adults) you would like, selling your own organs for cash, and a whole host of choices. 

I care about this issue for two reasons. The first reason is just because I believe you have the freedom to do something does not mean I personally agree with certain life choices. I can believe that an adult can get married to whatever consenting adult they want, but I do not believe that polygamy is a good idea. The same goes for having children before getting married. Regular exercise, a sound diet, and good sleep are still three essential components of a healthy lifestyle. Keeping alcoholic consumption within moderation is healthier than binge drinking. Winston Churchill might have smoked multiple cigars a day and made it to his eighties, but daily cigar smoking is not a healthy habit. The less you smoke, the better. To quote Maher again, "No one pretended there was positivity in smoking. You're not a freedom fighter because you want to keep eating donuts." As already illustrated, being obese does not make for a healthy lifestyle. 

This leads to the second reason why I care. We have a major problem because fatness is not fitness. According to the CDC, 41.9 percent of Americans are obese and 73.6 percent are overweight. When a large portion of the population decides to partake in unhealthy decisions, those decisions lead to poorer health outcomes. Those poorer outcomes result in increased demand for healthcare services, as we see with a U.S. study (Cawley et al., 2021), as well as a Danish study showing that obese people have about double the healthcare costs that non-obese people have (Spanggaard et al., 2022). What happens when you drive up the demand for a good or service? The price of that good or service increases. That is the Law of Demand. In other words, the society-level perpetuation of obesity affects me because millions of obese people needing more healthcare services skyrockets the healthcare costs for me and every other American who decides to live healthily enough to not be obese. 

Here is some food for thought on the economic costs. A report from Research Triangle Institute (RTI) International shows the global impact of obesity. Some economic costs in the RTI report include increased absenteeism, reduced productivity while at work, early retirement. This RTI report, by the way, found that obesity-attributable diseases killed cause five million deaths and 160 million disability-adjusted life years globally. In its report, the World Bank adds the costs of significantly increased mortality, increased disabilities, and reduced length of disability-free healthy living across the life cycle. The Milken Institute found in its 2020 study that in 2016, chronic diseases driven by obesity in the U.S. cost $480.7 billion in direct health care costs and $1.24 trillion in indirect costs due to loss of economic productivity. This total cost of $1.7 trillion was the equivalent of 9 percent of the U.S. GDP. 

Bill Maher is right in that there is an unfortunate trend of "rewriting science to fit ideology or just to fit what you want reality to be." We have seen it with anti-vaxxers, lockdown lovers, and those who despise genetically modified food, to name a few. We should not ignore overwhelming evidence about the economic and health costs of obesity simply because it is inconvenient or difficult to hear. It does not do anyone any favors to sugar-coat the truth (or food for that matter). 

Up until a few years ago, it was indisputable that obesity came with considerable health and economic costs. Yet fat celebration is what we get for a society that indulges in self-entitlement, feeling good for its own sake, emotional fragility, and thinking that life should be a piece of cake. Guess what? Life has always been a struggle. As Maher pointed out, cake was delicious in 1969 and yet people somehow had better impulse control. It takes time and effort to go and exercise. It takes discipline to follow a diet or exercise regiment. It takes impulse control to not eat compulsively, smoke, or drink too much alcohol. The whole premise behind personal development is that you are not fine just the way you are and there is always room for self-improvement. It should not matter if there is more processed food or if more people sit at a desk for eight hours at work. Anything worthwhile in life takes time, patience, effort, and discipline. Healthy habits, discipline, self-control, and prudence used to be considered values, but not in a country where self-gratification is more important than self-improvement. 

Framing it in terms of discrimination and social justice while telling people they are "fine just the way they are" does not help the obese. When you tell people they are "fine just the way they are" and those people buy into fat acceptance, they are 85 percent less likely to lose weight, according to research from the Obesity Society (Muttarak, 2018). Rather than embolden the obese to live happier, healthier lives, the cognitive dissonance behind fat positivity makes matters worse. 

Maher was spot-on by saying that we have reached the point where acceptance became enabling. I remember watching Family Guy in 2005 when it satirized the fat positivity movement with the episode The Fat Guy Strangler (see clip above). Times are so upside-down that satire has become reality less than twenty years after the release of that episode. There was a time when we used to at least try to be fit and healthy and society praised those who succeeded. To paraphrase Maher, our society has devolved to the point where letting yourself is a point of pride and improving upon yourself (in this case, with fitness) is being vilified. 

What we should be doing is being respectful of obese individuals while encouraging them to make necessary life changes to be healthier. One should find a healthy self-acceptance that does not glorify obesity or shame fitness. Yet multiple industries, including food, health, and clothing, have a cash cow by making more money off of people who are obese. The media is not catastrophizing it when it should be. Obesity has many negative implications for public health and the economy at large, plain and simple. We should act more healthily like our lives depend on it because in terms of longevity and quality of life, our lives do depend on it. To quote Maher one last time, when we as a society are "lying about it and making excuses, it is psychologically telling ourselves that letting ourselves go is the best we can do." A society that propagates the lie that "all shapes are healthy" does so at its own peril. 

Is the U.S. Economy in a Recession as of Summer 2022? Probably.

This past week, the Bureau of Economic Analysis announced that the gross domestic product (GDP), which is a frequently used measure for economic growth, declined 0.9 percent in the second quarter of 2022. In the first quarter of 2022, the GDP decreased by 1.6 percent. According to the BEA, the reasons for the decline in real GDP include decreases in private inventory investment, residential fixed investment, federal government spending, state and local government spendings and nonresidential fixed investment that were partly offset by increases in exports and imports." Why does this bit of economic news matter? Because two quarters of negative GDP growth is a widely regarded rule of thumb to indicate that the economy is in a recession. 

In response to the news about the GDP, the Biden administration flatly denied in a press release last Thursday that we are in a recession. I could understand why Biden would want to make such a claim. There is a decidedly political element to such a reaction. The United States is in an election cycle with about three months until the midterm elections. Things have not been going great since Biden entered the White House. Even the Biden administration's overreacting to COVID notwithstanding, inflation started rising to a 40-year high shortly after Biden entered the White House (more on that later). There is a war going on in Ukraine. Crime has been rising across the country. There is a baby formula shortage that has not abated. Now there is concern over monkeypox. There is no shortage of issues and challenges that face the White House. One of the last things Democrats want to deal with right now is the "r-word." It would also explain why the Republicans are all too keen to declare this a recession. So are we in a recession or not? 

We want an answer now because politics are driving us to answer the question. Even so, the answer to that is trickier than one might think. Since 1948, an organization called the National Bureau of Economic Research (NBER) has been dubbed the arbiter of declaring when a recession takes place. NBER looks at more than whether there are two quarters of GDP decline. With the GDP itself, it also looks at the depth and diffusion of the economic downturn. As for other metrics, NBER also takes into account such factors as employment, personal income, and industrial production. GDP should be a metric, but not the only one. 

The incompleteness of the GDP is a concept I understand. In 2014, I criticized the GDP as a metric. Although I said it was still the best single metric we had, I did point out its obvious limits. The GDP is an imperfect but still widely used measure. NBER waits a bit longer to collect more data before declaring a recession, which means if it declares a recession, it most probably will not happen before the elections. Even so, every time since 1948 that there has been two quarters of GDP decline, NBER has declared a recession. Also, the Gramm-Rudman-Hollings Act of 1985 includes a clause that defines a recession as two quarters of declining GDP. The reason I bring this Act up is because it is not an academic debate or an argument over semantics. This Act is important because the recession clause has been used subsequently in other legislation to enact measures that determine policy during a recession. If that were not enough, Biden's economic adviser Jared Bernstein admitted in 2019 that a recession includes two quarters of GDP decline, as did the Washington Post in 2015. 

The response to the pandemic, which included unprecedentedly expansionary monetary and fiscal policy, created such unusual economic conditions that wading through macroeconomic indicators can be a challenge. Plus, macroeconomics has many moving parts with multiple indicators (see AIER's Leading Indicators Index to give you an idea). Nevertheless, I want to give it a go at looking at some main macroeconomic indicators beyond the GDP. 

Let's start with job growth since it was a point that Treasury Secretary Janet Yellen brought up. Job growth has averaged at around 400,000 jobs for the past year, according to Bureau of Labor Statistics (BLS) data (see below; figures are in thousands). For Yellen, a recession is a "broad-based weakness in the economy," which is not something that would take place if job growth were at the rate it is. Yellen does have a point in the sense that recessions typically perpetuate unemployment. As unemployment rises, demand and output decrease. With more unemployed people and fewer jobs, that would mean less work and money to spend. 

Thankfully, that is not the situation we have. While job openings have slightly dropped (BLS), there are still about two job openings for each unemployed person in the U.S. The main issue with using unemployment as a predictor is because those sorts of job losses happen mid-recession (i.e., unemployment is a lagging indicator). Plus, we should also consider that there have been recessions that have had growing or stabilized payroll employment numbers, including December 2007 to March 2008; January to April 1980; November 1973 to October 1974; and December 1969 to April 1970. 

At the same time, job growth in this scenario can be masking labor market issues, a point I made when criticizing the official unemployment rate. One issue is with respect to the labor force participation rate. If a larger percentage of the population has given up on looking for a job and left the labor market, then how reliable is the official unemployment rate if it is not capturing these individuals? As data from the Federal Reserve Economic Data (FRED) shows, the labor force participation rate continues to remain below pre-pandemic levels, even as jobs are more plentiful. 

In addition to the labor force participation rate, the labor market shows signs of weakness because real wages are dropping (FRED). What could explain the job growth and wage declines is that employees are willing to take lower wages in order to not become unemployed. A nominal increase in wages does not do much if inflation is eating away at purchasing power. Speaking of which....

At least in U.S. terms, inflation has been off the charts. The United States has experienced 8.6 percent inflation over year in May 2022 (BLS), a rate that we have not seen since the 1970s. Even when you remove food and energy from the Consumer Price Index (CPI), the numbers are far from flattering. To combat the high inflation, the Federal Reserve is raising interest rates. Part of raising interest rates is that it makes borrowing money more expensive. As such, a potential downside of raising the interest rates too quickly is the increased likelihood of a recession. 

I have to wonder about some consumption and production metrics. On the one hand, durable goods orders is a good indicator of whether the manufacturing sector is doing well. Based on FRED data, durable goods orders are still increasing. 

On the other hand, consumer sentiment is sinking. The University of Michigan Survey of Consumers has been measuring consumer sentiment since the 1960s. As you can see below (grey indicates recessionary period), a downward trend in consumer sentiment commonly indicates that we are heading into a recession. The reason for this is not because of clairvoyance but because having a large sample size to determine how consumers feel like spending provides a good proxy for economic conditions. 

The Left-leaning Economic Policy Institute brings up a point about consumption that could mitigate the Consumer Sentiment Index. Per EPI's argument, a better metric than GDP would be domestic demand growth (also known as final sales to domestic producers). This metric measures spending from consumers, businesses, and the government that filters out inventory volatility. By this metric, only the second quarter was an issue because there was a plateau in Q2 (FRED). My reply to that argument is that as is illustrated by the data below, this metric does not do a good job of acting as a leading indicator of a recession. 

If you feel like sidestepping the argument above, how about taking a look at the yield curve? A yield curve is a comparison of interest rates for short-term and long-term debt instruments, normally bonds. There are times when the short-term rates rise above long-term ones. However, if that temporary blip turns into a curve that is known as an inversion, that is taken as a signal that the economy is not doing well. As I pointed out in 2018 in my primer on yield curves, an inverted yield curve has predicted every recession in the past 60 years. What makes an inverted yield curve scary is its predictive power. And guess what? As the New York Times points out, we are in the middle of an inverted yield curve right now. 

The last metric I want to cover is the Leading Economic Index (LEI). The LEI is created by the nonprofit association called The Conference Board, who mainly serves Fortune 500 clients. The LEI takes into account multiple factors, including GDP, unemployment, yield curve, manufacturing, retail, stock prices, and unemployment claims. A rising LEI score indicates the economy is faring well, whereas a falling score indicates worsening conditions. According to its latest LEI press release, the LEI is going downward, which indicates that the economy is getting worse. 

While some of the indicators deliver a mixed picture, there are enough macroeconomic trends that are worrisome. We are certainly in a stage of economic decline, no question about that. Whether it ends up technically being a recession, even if brief and shallow, is something that time will be able to tell. What I find most problematic is that there are three strong indicators that are signaling a recession: declining GDP, a decrease in consumer sentiment, and an inverted yield curve. These indicators make me inclined to think we are most likely either in a recession or that we are well on our way to being in a recession. 

Regardless of the ink being spilled over the quibbling of the definition of "recession," you don't need a thermometer to know that it's hot outside, much like you don't need an advanced degree in economics or public policy to know that there is something awry with the economy. A CNN poll a couple of weeks ago found that 64 percent of Americans believe we are in a recession, which included 56 percent of Democrats. Whether you call it a recession or not, what matters is that Americans are hurting financially and they know it. Unless the Biden administration can come up with some actual policy solutions instead of partaking in semantic sophistry, the state of the economy is going to be on many voters' minds and not in a way favorable to the powers that be.