Thursday, March 10, 2005

The Bankruptcy Bill in Perspective


The bankruptcy-reform bill, as described in an article by Stephen Laboton of The New York Times:
The Senate assured final passage of the first major overhaul of the nation's bankruptcy laws in 27 years on Tuesday....

The bill would disqualify many families from taking advantage of the more generous provisions of the current bankruptcy code that permit them to extinguish their debts for a "fresh start." It would also impose significant new costs on those seeking bankruptcy protection and give lenders and businesses new legal tools for recovering debts.

...The senators...voted 69 to 31 to limit debate and cut off any effort to kill the legislation by filibuster.

Final passage of the measure is now an inevitable formality.


Of course, there's the usual hand-wringing from the usual sources:
"This bankruptcy bill is mean-spirited and unfair," said Senator Edward M. Kennedy, Democrat of Massachusetts. "In anything like its present form, it should and will be an embarrassment to anyone who votes for it. It's a bonanza for the credit card companies, which made $30 billion in profits last year, and a nightmare for the poorest of the poor and the weakest of the weak."
Hmmm....In other words, it's okay for some people to rack up credit-card debt and then dishonor their obligation to repay that debt. (Think of it as a financial Chappaquiddick.) The result, of course, is that other people wind up subsidizing the deadbeats through higher prices and interest rates.

And how does Teddy K. know how much profit credit-card companies ought to make? The market should determine that, not Senator Stumblebum. If the profits of credit-card companies are "too high" it's only because banking regulations restrict competition. But Teddy and his ilk never saw a regulation they didn't like. Teddy has himself to blame for those "high" profits that he finds so offensive.

The bottom line: Bankruptcy reform will make goods, services, and credit somewhat cheaper for responsible citizens. And it will make responsible citizens out of many who otherwise would have racked up too much debt, knowing there was an easy way out it. Seems like a win-win situation to me.

UPDATE: And if you think otherwise, you're just another addict of the regulatory-welfare state. As I have written:
Unless Americans become aware of the extremely high and largely hidden cost of the regulatory-welfare state, they will remain addicted to it. For reliance on government is an addictive drug -- and a very expensive one. We swallow each dose in the hope that it will make us secure, and when that dose doesn't make us secure we swallow another dose, in the hope that that dose will make us secure. And on and on. In the end, we are left with nothing but a costly addiction to government that impairs our liberty therefore ruins our economic health.

What Americans have failed to understand, is that there is less risk of coming to harm in a free-market economy -- where individuals have an incentive to take care of themselves -- than there is of coming to harm in the regulatory-welfare state. (See my series of posts on "Fear of the Free Market," in three parts; my post on "Free Market Healthcare"; and my post on "Why Class Warfare Is Bad for Everyone.") Free people do not stay mired in poverty and tend not to repeat their mistakes, if they are allowed to learn from those mistakes. (See my posts about income inequality.)
The price of addiction (from the same post):
  • Real GDP (in year 2000 dollars) was about $10.7 trillion in 2004.
  • If government had grown no more meddlesome after 1906, real GDP might have been $18.7 trillion (see first chart above).
  • That is, real GDP per American would have been about $63,000 (in year 2000 dollars) instead of $36,000.
  • That's a deadweight loss to the average American of more than 40 percent of the income he or she might have enjoyed, absent the regulatory-welfare state.
  • That loss is in addition to the 40-50 percent of current output which government drains from the productive sectors of the economy.
And that is the price of privilege -- of ceding liberty piecemeal in the mistaken belief that helping this interest group or imposing that regulation will do little harm to the general welfare, and might even increase it.
Those who favor the regulatory-welfare state -- in any of its manifestations -- effectively favor the ill fortune of all their fellow citizens. That is either grossly immoral, grossly ignorant, or grossly stupid -- take your pick.

UPDATE II: Those who believe the canard that medical bills are a major cause of bankruptcy should read this post by Gail Heriot at The Right Coast, and follow the links. Even if medical bills were a major cause of bankruptcy (which they're not), the cause of high medical costs in the United States is an artifact of the regulatory-welfare state:
  • High demand is fuelled by taxpayer-subsidized healthcare facilities, laws mandating access to emergency rooms, and government "insurance" programs (e.g., Medicare and Medicaid). "Free" care and subsidized premiums discourage self-rationing.
  • High demand is further fuelled by tax laws that encourage employers to offer subsidized health-insurance plans, many of which must render certain legally mandated benefits. Self-rationing is discouraged by the low premiums and co-payments that result from employer subsidies.
  • On the supply side, there's restrictive licensing (favored by the various "unions": doctors, hospitals, etc.) and slow FDA approval of new drugs.
Artificially high demand plus artificially low supply equals higher healthcare costs for all, including those persons who actually need healthcare.

The solution to the minuscule problem of bankruptcies caused by medical bills -- and to the real problem of high medical costs -- isn't laxer bankruptcy laws, it's less government interference in health care.

UPDATE III: The inestimable David Broder, reliable purveyor of leftish conventional wisdom, doesn't like the bill (my comments bolded in brackets):

This "reform," which parades as an effort to stop folks from spending lavishly on themselves and then stiffing their creditors by filing for bankruptcy protection, is a perfect illustration of how the political money system tilts the law against average Americans....[It is an effort to discourage deadbeat-itis, whatever else it may be. You can't take that away, David. As for the "political money system," money always talks; the answer to "money in politics" isn't the impossible dream of less money, it's less government power.]

Few policy battles draw enough public and press interest for the legislators to feel real scrutiny — Social Security being a current example. Most are in a netherworld, where media coverage is cursory and interest groups' pressure determines the outcome. That's how bankruptcy reform made it through the Senate, and why it will soon pass the House and be signed into law by President Bush. [Oh, do you really think so? Smacks of sour grapes to me. Lots of things get passed by Congress without a lot of media coverage. You win some, you lose some.]

The recent decade's rise in the number of bankruptcy cases has been dramatic, and it is not difficult to find cases of abuse. But most bankruptcy petitions are filed by people with real financial problems, often the result of family illness, divorce or loss of jobs. [But "they hired the money," as Silent Cal used to say. Personal responsibility implies prudent planning.] This bill will make it harder for everyone — chiselers and innocent victims alike — to get a clean start on their future without the overhang of mounting interest payments on unpaid credit cards and other debt...[As I said above: good. There'll be one less moral hazard on the golf course of life.]

[W]hen an amendment was offered to restrict so-called "asset protection trusts," used by wealthy individuals to shelter their portfolios from creditors, it was rejected. Five states — Alaska, Delaware, Nevada, Rhode Island and Utah — have changed their laws to let people who live anywhere in the country establish trusts of unlimited size that cannot be reached by federal bankruptcy proceedings. The amendment would have limited this "millionaires' loophole" to $125,000.

But Sen. Charles Grassley of Iowa, the bill's chief sponsor, intent on blocking any amendment that might prove indigestible in the House, said, "This is an issue that just needs more time for us to determine whether there is an abuse that needs to be corrected." With no more debate, it was rejected.

These amendments came from the liberal camp — senators such as Edward Kennedy, Russ Feingold, Richard Durbin and Charles Schumer — and were easily dismissed by the Republican majority. Even more instructive was what happened when a conservative, Republican Sen. John Cornyn of Texas, tried to put a little balance into the bill.

As attorney general of Texas, Cornyn said the Enron bankruptcy case "opened my eyes to a very real abuse in the current bankruptcy system," the loophole that allows corporations to go "judge-shopping" for jurisdictions with permissive standards. Enron, which had 7,500 employees in Houston, filed for bankruptcy in New York, where it had 57 workers, because New York, along with Delaware, is known as being lenient on big business.

Congress recently passed a law restricting plaintiffs in class-action suits from judge-shopping in the state courts, and Cornyn argued that it should also require corporate bankruptcy cases to be filed in their principal place of business. Citing cases of Polaroid, K-Mart, WorldCom and Enron, he said the judge-shopping loophole "serves to unfairly enable corporate debtors to evade their financial commitments."

No one rose to dispute Cornyn. So what happened? He withdrew the amendment, without a vote, "out of respect to the managers of this bill who say that amendments to this bill would endanger its ultimate passage." [I agree that no one should get a special break when it comes to honoring debt. Absolutely, no question. But let's take half a loaf rather than none. The present version of bankruptcy reform may not be perfect, but it's a step in the right direction. The alternative of no reform is worse, unless you're a class-baiting liberal like Broder.]