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Americans owe almost $1.5 trillion in student loans, with the average borrower owing more than $38,000. About 85% of this debt is owed to the federal government.

This past Monday, Sen. Elizabeth Warren (D., Mass.), who is running for president, proposed forgiving roughly half of those obligations as part of her plan to make higher education more affordable. Her proposal would completely eliminate student debt for most borrowers, especially those with lower incomes and those who failed to graduate with at least a college bachelor’s degree.

“The greater ability to save and build assets entailed by a lower debt load would generate additional wealth [and] would likely entail consumer-driven economic stimulus” through “improved credit scores, greater home-buying rates and housing stability, higher college-completion rates, and greater business formation,” according to the academics at Brandeis University who studied the proposal for Warren.

A new research paper on the Great Depression explains why this might work—and why the logic applies to much more than just student debt. The study, by Joshua Hausman and Paul Rhode of the University of Michigan and Johannes Wieland of the University of California, San Diego, focuses on the beginning of the recovery in early 1933.

Between March and July of that year, manufacturing production rose by 67% on a seasonally adjusted basis. U.S. factory output returned to its mid-1930 level in the space of four months. It remains the most dramatic growth spurt in the history of the data.

The improvement in the industrial economy coincided with an almost equally dramatic improvement in the agricultural economy: Farm prices rose by 41% over the same period. By the middle of 1936, both farm prices and manufacturing output had doubled relative to their lows at the beginning of 1933.

The economists’ argument is that the sharp increase in farm prices directly caused much of the recovery in manufacturing. Farmers had suffered disproportionately in the depression. Mortgages taken out in the 1920s were impossible to service after agricultural incomes collapsed. The resulting defaults broke the rural banking system and deprived creditworthy borrowers of access to finance, with compounding effects on housing, autos, and overall economic activity.

As Franklin D. Roosevelt put it during his 1932 presidential campaign, “The depression in the manufacturing industry of the country is due chiefly to the fact that agricultural products generally have been selling below the cost of production.” His proposed solution problem was higher farm prices, which would increase “the purchasing power in the domestic market of nearly half of all our people” and stabilize the rural banking system.

Almost immediately after FDR was elected, he devalued the dollar against gold to boost commodity prices. Deposits in the rural banking system began rising rapidly relative to urban banks. Spending also grew much more at rural general-merchandise stores than at urban department stores.

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The clearest difference, however, was in vehicle sales. Hausman and his colleagues found that the bulk of the additional spending came from the parts of the country most exposed to changes in agriculture prices, mainly Texas and the Great Plains. “By contrast,” they write, “in the Northeast and Mid-Atlantic, car sales and farm product value increased only modestly.”

Shifting dollars from cities to the countryside made everyone better off, even though farmers did much better, because they were more likely to spend the money. City dwellers had to pay somewhat more for food but nevertheless benefited because farmers bought more than enough cars, trucks, and refrigerators to compensate. That lifted urban incomes, and encouraged even more spending on manufactured goods.

Thus, “redistribution to farmers significantly increased economy-wide spending,” Hausman et al. write. They estimate that as much as 60% of the total increase in U.S. manufacturing production in this period can be explained by the impact of higher farm prices.

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The broader implication is that changes in the distribution of income can have substantial macroeconomic consequences. The 2007-09 downturn was concentrated in places where people had borrowed heavily against their homes when prices were rising and then were forced to cut back as prices fell and credit standards were tightened. Unlike in the Great Depression, there was no effort to transfer income to those borrowers, which helps explain the sluggish pace of the recovery.

Since 2011, 35% of the increase in U.S. household debt can be explained by student borrowing. Such debt cannot be discharged in bankruptcy. Unlike a mortgage or a vehicle loan, there is no corresponding asset that can be sold to reduce the debt burden. While student debt poses no risk to the financial system, Federal Reserve researchers have found that it depresses homeownership and entrepreneurship.

Warren’s plan is unfair to married people because they hit her proposed household income cap before higher-income singles. It is also unfair to those who have already repaid their obligations. Yet many U.S. states, including Colorado, Florida, North Dakota, Utah, and Texas, agree with the underlying logic motivating her proposal. Within the past few years, they have begun offering to pay off federal student loans to attract graduates and boost their local economies.

Regardless of whether it is fair, these state governments expect the fiscal cost to be lower than the gains from having more people working, spending, and investing. The evidence from the Great Depression suggests that they have a point.

Write to Matthew C. Klein at matthew.klein@barrons.com