The contention that debt cancellation will be inflationary contains a series of flaws. To start with, the value of the reduced debt repayments is so small that the cancellation’s impact will be negligible.
Although the broad estimates of the total amount of canceled debt can be big—some reach hundreds of billions of dollars—these figures derive only from budgeting practices for how credit programs like student loans are recorded. The government and budget analysts calculate a number that is known as “the present discounted value of foregone payments.” This corresponds to a current estimated value not of the lost payments this year, but of those in all future years. In other words, this calculation treats all of the losses from debt cancellation as though they occurred right now in a single year (adjusted for inflation)—a far cry from the reality. Such an accounting procedure can be an appropriate practice for thinking about the government’s long-run balance sheet, but it is a very poor guide for understanding what actually happens to people’s spending.
The inflation hawks compound this error by assuming that the indebted students will take their forgiven debt and go on a spending spree, a splurge of such magnitude that they would have to somehow find someone in the private sector willing to lend them the same amount at low interest rates to finance their extravagance. Economic theory says that these individuals will, at most, consider this an increase in their net wealth—I say “at most” because in many cases, these loans would never have been repaid at all. And economic theory also says that an increase in wealth is spent gradually over the course of a person’s life, not all in one year.
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