Asymmetrical Information

From the desk of Jane Galt:

Good question

Daniel Gross asks this question about Refco:

. . . the company filed for bankruptcy last night.

A question: the company's shares last traded in the pre-market on Thursday, Oct. 13, at $7.90. Was it fair and appropriate for the NYSE to halt trading in its shares, even as news continued to trouble out about the company's woes?

From the desk of Jane Galt:

Dan, I think you forgot something

I often enjoy Daniel Gross's writing for Slate and the New York Times. But this blog post ignores some rather pertinent information:

Bankruptcy filings are on the rise. Andrew Blackman reports in the Wall Street Journal:

Debt-laden consumers across the country are rushing to file for bankruptcy before a tougher bankruptcy law takes effect Oct. 17.
Filings jumped to a record 68,287 from Sept. 26 to Oct. 1 from the normal level of about 30,000, according to Lundquist Consulting Inc. of Burlingame, Calif., which compiles bankruptcy statistics from daily reports by U.S. bankruptcy courts. Filings have risen 14% so far this year from 2004, to more than 1.3 million.

In personal bankruptcy, people who don't have many assets to begin with lose much of what little they have. So much for extending the ownership society.

Meanwhile, at the upper rung of the income ladder, ownership is increasing apace.

Most of that sudden spike in bankruptcy filings seems to be people moving their filings forward, not a radical increase in the underlying level of bankruptcy. It's been a couple of months since I looked at the data, but I've seen no evidence that the Bush administration has presided over any particular increase in bankruptcy other than a secular trend towards increasing bankruptcy that started long before Bush took office, and has much more to do with increasing consumer credit, working mothers, and declining personal savings rates than it does with the policies of this or any other administration.

From the desk of Jane Galt:

Bankruptcy boom

As predicted, bankruptcies are booming ahead of the new law taking effect on October 17th. It'll be interesting to see how much they fall after the law, and who decides not to file.

From the desk of Jane Galt:

Credit catastrophe

One million with ruined credit? That number is surely too high; most people will make their payments. Nonetheless, it's reasonable to assume that there will be many whose credit suffers from Hurricane Katrina--people who forget payments because their house is underwater, people who lose everything and can't afford to meet their debts. It seems logical that creditors and credit agencies would have some system set up for dealing with natural disasters like this, but who knows?

Something Jack Shafer has had the guts to point out is that the people being affected by the hurricane are almost invariably black and poor. I've no doubt there are some closet racists out there telling themselves "look at all those black people looting" as they watch the mayhem on television; I doubt any of them are telling themselves "look at all those black people left for days without food, water, or power in 90 degree heat because they were too poor to evacuate". I myself was thinking "Why the hell didn't all these people leave when they were told?" The answer, Jack Shafer points out, is that it's not so easy when you're poor:

To be sure, some reporters sidled up to the race and class issue. I heard them ask the storm's New Orleans victims why they hadn't left town when the evacuation call came. Many said they were broke�"I live from paycheck to paycheck," explained one woman. Others said they didn't own a car with which to escape and that they hadn't understood the importance of evacuation.

But I don't recall any reporter exploring the class issue directly by getting a paycheck-to-paycheck victim to explain that he couldn't risk leaving because if he lost his furniture and appliances, his pots and pans, his bedding and clothes, to Katrina or looters, he'd have no way to replace them. No insurance, no stable, large extended family that could lend him cash to get back on his feet, no middle-class job to return to after the storm.

It is, of course, no more tragic when a poor person dies than a rich one; the ratio of one life, one death is the dreadful arithmetic we all face alike. But it is more tragic when someone dies because they have nowhere to go, than when only their own bullheaded stupidity is to blame.

From the desk of Jane Galt:

United in the dock

This post by Kevin Drum implies (with an able assist by Senator Chuck Grassley) that United's pension fund was underfunded through gross company malfeasance:

PENSION PROBLEMS....The New York Times reports today that the failure of the United Airlines pension fund was perfectly predictable. In fact, the SEC knew all about it:

Loopholes in the federal pension law allowed United Airlines to treat its pension fund as solid for years, when in fact it was dangerously weakening, according to a new analysis by the agency that guarantees pensions. That analysis is scheduled to be presented at a Senate Finance Committee hearing today.

.... "We saw similar practices and events at Enron, but unfortunately, this time it's perfectly legal," said Senator Charles E. Grassley, the Iowa Republican who is chairman of the finance committee.

....The Pension Benefit Guaranty Corporation found that in 2002, when United was determining how much it had to contribute to its four plans, it calculated that the plans for its pilots and its mechanics each had more money than needed....Those numbers are on file with the Labor Department. But they do not square with the pension numbers United provided to the Securities and Exchange Commission. That agency requires companies to calculate pension values in a different way. At United, that method showed the four pension plans to be only 50 percent funded.

Anytime you see "Enron" and "perfectly legal" together in the same sentence, you just know that something is wrong, don't you?

As Grassley points out, it's not just airlines that are having pension fund problems. The rules regarding pension fund solvency today are about as rigorous as the rules regarding S&L solvency were in the 1980s. My guess is that the end result is going to be about the same too.

Let's go to the tape, shall we?

First of all, Enron's many problems stemmed from violating Generally Accepted Accounting Principles (GAAP) by using a slew of special-purpose vehicles (168 of 'em, if memory serves) to keep liabilities off the books and artificially inflate their profits in order to fool investors. United didn't violate GAAP; that's the stuff they filed with the SEC. They also didn't violate pension-accounting rules; they prepared their numbers just like the PBGC told them to.

But that is a bad way to prepare their numbers, say critics, and I agree (provisionally, since I know nothing about the difference between PBGC standards and GAAP). Nonetheless, unlike Enron, United did not gin up fancy numbers to cover up the fact that they were getting themselves into trouble, or looting the company.

The article makes it sound as if the bad numbers were covering up malfeasance. But this was nothing of the sort. Note the year: 2002. What happened in 2002? Airlines took two big hits: a nasty recession, and a sharp decrease in passengers. That drove their revenues sharply negative at the same time as the collapse of the stock market bubble knocked the stuffing out of their pension fund. This resulted in an underfunded pension plan at exactly the worst time for them to try to top it up.

Now, there are all sorts of problems with how pension plans were managed in the 1990's; management started expecting 10% annual asset growth a year (then a conservative estimate), and consequently, put very little money into their pension plans. They are paying for that now, although not fast enough for my taste--Congress is letting them slow down the rate at which they top up their unfunded plans. While in hindsight, 10% is clearly too high, it's not clear what a good number would be, and certainly the sharpest critics of corporate pensions seem to have very little to offer on that subject. Nor do I see a good way to codify a number if we did all agree, since markets change, and any bright legal line would be certain to fall afoul of reality in some way down the road.

Anyway, the point is that the problem was not malfeasance at United. You could have forced United to account for its pension any way you like and it would not have made one whit of difference to the final outcome, since by the time United's pensions were clearly grossly underfunded, United didn't have any money to put in them. Nor is the government going to indict a company for taking heavy losses in a bear market. All of this ranting about United is just grandstanding.

That said, there are big problems with pension underfunding now, and Congress, out of an understandable fear of accidentally forcing weak firms into bankruptcy, is allowing corporate America to fund its obligations rather too slowly for my taste. But it doesn't exactly rise to the level of criminal--or regulatory--conspiracy.

From the desk of Jane Galt:

One more thing about bankruptcy

A number of people are acting as if bankruptcy were some sort of concession to companies, allowing them to escape paying their debts. But bankruptcy is the legal recognition of a fact: that companies have become insolvent. (In other words, they can't pay their debts). Creditors wouldn't get more without the bankruptcy law; the money ain't there. Rather, bankruptcy law reduces economic risk because it lets creditors know up front approximately what the terms of reorganisation will be.

From the desk of Jane Galt:

What About American Families?

It's a Saturday morning, and here I am, inside, blogging about bankruptcy. Am I a loser, or what? Well, I'm going to a blogger party tonight, honest, and I'm having dinner with Jessica (and won't she be surprised if I don't have time to clean the house because I'm too busy blogging about bankruptcy?) But first, once more into the breach.

In my defense, when I finished writing those articles about bankruptcy, I sighed, and thought, "I have spent a great deal of time learning about this subject, and all of that knowlege is a total waste, since I will never again be called to write about it"* Luckily for me, angry opponents of bankruptcy reform are still seething, giving me an opportunity to deploy my hard-won knowlege. So a big thank you to Battlepanda, who has created an opening with this throwaway line:

I'm also interested in Jane's favorable take of chapter 11 bankruptcy for firms on the grounds that it makes the American economy more resilient. Is she willing to extend the same curtesy to American families?

Now, this is just a little bit odd, because as I made clear in the earlier comments to which Ms Panda is responding, I didn't like the bankruptcy reform bill, despite Todd Zywicki's heroic attempts to persuade me otherwise. I thought a number of provisions were badly structured, and at least one struck me as gratuitously intended to make bankruptcy harder to file: it forced families whose incomes were low enough to file Chapter 7 (which simply discharges all non-secured debts) to nonetheless fill out detailed budgets as if they were going to have to file Chapter 13 (which puts the bankrupts on a partial repayment plan).

But the law ultimately is just not going to have that big an effect. The overwhelming majority of people will still be able to file Chapter 7; they'll just have to go to credit counseling first, and provide tax returns and a driver's license. Their attorney's fees may be a few hundred dollars higher (though since they seem to generally be paying those fees out of assets they're hiding from their creditors, it's hard to tell which way the moral censure should go). And a few of the richer people are going to have to make a payment plan instead of having their debts discharged.

Which brings us, in a roundabout way, to Battlepanda's question: am I willing to extend the same benefits as companies get to American families? Why yes I am! And luckily, American families already get them, so I don't even have to get off my butt and do something about this. Chapter 13--the terrible fate which reform opponents were bewailing--is basically Chapter 11 for humans. The court works out a payment plan, after which the person or the company emerges with its debts discharged.

Bankruptcy is vastly friendlier to consumers than companies in this country, starting with the fact that people who file Chapter 7 (debt liquidation) don't get shot at the end by the bankruptcy judge. When a company files for either liquidation or Chapter 11, a receiver is appointed to watch management like a hawk, auditors pore over the books, and various officials walk around telling management what they may or may not do. Human bankruptcy cases, on the other hand, are generally decided in minutes or hours, by a judge who by and large just takes your word for what you own (with the exception of financial assets, which show up on searches). Companies don't get special exempt asset classes, like houses, furniture, and electronic appliances, that can't be sold to satisfy creditors. And it's a lot easier for a human to start over than a corporation.

A final note: no one seems to have noticed, what with writing all those articles on how we were all about to be thrown out on the street by rapacious credit card companies, but the bankruptcy reform bill actually made Chapter 11 much harder on companies. For one thing, it gutted the ability of management to set up KERPs -- Key Employee Retention Programmes, which pay bonuses to managers who stay on. I'm ambivalent about this; generally the employees who leave during bankruptcy are the ones the company most needs to stay, but these plans can also turn into big management slush funds. But there's no question this is distinctly corporation unfriendly, as are several other major provisions of the bill.

There is an interesting question about bankruptcy, which Battlepanda should have asked, and almost did ask, but ultimately didn't, so I will: should bankruptcy courts take cognizance of the effect that a company's bankruptcy will have on other companies in its industry? In United's case, I don't think that this will make much difference, since the airplanes and the landing slots, which are causing the ruinous overcapacity in the industry, won't go away. But it is an interesting question that I haven't seen addressed as a legal matter. My first instinct is no, they shouldn't, because judges aren't very good economic analysts (nor should they be). Such a provision seems more likely to make us economically worse off, by making bankruptcy protection somewhat arbitrary, and thus increasing corporate risk. But I'd love to see someone comment the other way. I'm sure that I'm not the first person to wonder about this.

From the desk of Jane Galt:

What about Chapter 11? Isn't that a big fat government giveaway?

Er . . . no. There are arguments against Chapter 11, chiefly that it can sustain overcapacity in an industry, forcing serial bankruptcies as companies that were clinging to profitability find themselves unable to compete with competitors who have shed debts, expensive union contracts, and so forth. But this is a practical objection, not a moral one. It's still not "corporate welfare" in the sense that the governthatment gives money to corporations, or releases them from the tax obligations facing the rest of society.

Chapter 11 may in some cases take from private creditors and give to the company, though it's my understanding that in most cases the creditors do better in the long run by having an operating company paying their bills, than collecting the pennies-on-the-dollar that one usually gets out of liquidation. It's more likely to rearrange payments between creditors, favoring those with secured debt (companies usually try to keep making full payments on their equipment loans and mortgages) and vital suppliers over, say, the guy who decorated the corporate headquarters. But as I say, my understanding is that, over the long run, the creditors are actually generally better off. And even if the weren't, this too would not meet the definition of corporate welfare, which has to do with giving public funds to companies.

Far from being "corporate welfare", in fact, Chapter 11 is to the benefit of Uncle Sam. A liquidated company pays no taxes; nor does one that is losing money. The tax man is senior to all but secured creditors, but from what I understand, in most bankruptcies, there is precious little left after the secured creditors have gotten theirs. Chapter 11 ensures that Uncle Sam gets his back taxes, and then some.

Certainly, in United's case, a forced liquidation doesn't look like it would do the pensioners any good; if you can read a financial statement, go take a look at United's 2004 annual report. You'll observe that after senior creditors and Uncle Sam are paid, there will be precious little available for the pensioners--who, if Battlepanda et al had their way, would be out of a job as well as a pension.

But what about the market says Battlepanda. Don't I care about the market? Why, yes, with a passion seldom found in one so young. But the market is not some abstract entity, a platonic capitalist ideal that exists independant of human thought or action. It operates in a framework of law, which has to decide things like what to do with companies that are unable to pay their bills. There's no shiny libertarian answer to this question, any more than there's a libertarian code governing what to do with people when they die. One has to ask, what's best for society? Which encompasses questions like "What makes creditors best off?" "What is most likely to foster economic growth?" "What causes the least disruption to the lives of everyone who has been involved with this company?" and "What expresses our social values?" I think that "Chapter 11" is, in fact, the best answer to all of these questions. It makes our companies more competitive, and our recessions less violent; it helps creditors, workers, and suppliers; and it expresses the fundamental American belief that past mistakes, or bad luck, should not spell everlasting future doom. We have the easiest corporate and personal bankruptcy in the world, and no coincidentally, we also have the most successful entrepreneurial culture. I think most Americans, left and right, agree that it is a good thing that American citizens and corporations feel free to strike out in new directions without the crippling fear that one mistake could sink them forever.

Forced liquidation, which is common in other countries, is an expression of a social value that I find oppressive: that one must pay for past mistakes no matter how innocently made. In Germany, for example, managers of companies that go bankrupt are liable to be prosecuted for breach of trust; in Britain, managers that allow their companies to stay in business one minute past the point of perfect solvency are personally liable for any debts so incurred. These things are certainly fair, if you look at them one way, but they are also personally, and economically, stifling.

Moreover, they produce an attitude towards personal bankruptcy that most of the liberals getting excercised about Chapter 11 would find horrifying: there is no such thing as Chapter 7 anywhere else in the developed world. In every other country, everyone, no matter how unfortunate, poor, or unworldly, must strip their budgets down to the bare bones in order to pay a portion of their debts over periods that can last ten years or more. If your conduct is less than perfect during that time, the administrator can, and will, deny you a discharge. In Northern Europe, they'll deny you a discharge if they think you ran up the original debt in a profligate or immoral fashion. And all of these laws, draconian by American standards, result from a substantial loosening of the laws -- until about ten years ago, personal bankruptcy didn't exist at all outside of the countries whose legal systems were based on the English Common Law.

So no, it isn't corporate welfare; it's an attempt to deal with the difficult, but inevitable circumstance of companies whose fortunes take an irreperable turn for the worse. It may not be perfect. So few human laws are. But having studied the matter a little, it looks a lot better than the alternative its critics are offering.

From the desk of Jane Galt:

More on the PGBC and corporate welfare

I think I have discovered the source of one of the arguments I've been having about why the Pension Benefit Guaranty Corporation's assumption of United Airlines' pension funds is not corporate welfare.

The PBGC premiums, my interlocutors argue, are too low. This, they say, is corporate welfare.

Why yes, I say, it is. But that doesn't make the pension bailout corporate welfare.

Huh? They say. Let me explain.

Imagine that congress made a law forcing GEICO to underprice car insurance. We can build a simple model in which GEICO has five customers, all of who have a 1-in-5 risk of having an accident, meaning that, on average, there will be one accident in the insurance pool a year.

Now, let's say that the cost of every accident is $500. GEICO should be charging us each $100, which will just cover the cost of the accident. (This assumes, of course, that GEICO neither needs to make a profit, nor can invest the premiums. But this simplified model works perfectly well in this case.)

Let's say that instead, Congress sets the premium at $50. GEICO collects $250 from the five of us. Then my friend and co-insuree Ual (he's from someplace in central Asia you've never heard of) gets into an accident. GEICO, living up to its excellent reputation for service, immediately cuts him a $500 check. GEICO is out $250. If this keeps up, GEICO will need to be bailed out by the congress that forced it to underfund.

Is this $500 worth of welfare to Ual? No; he's paid premiums. Is it $450 worth of corporate welfare? Again no. To see why, look at the payouts with or without the mandatory pricing:

With congressionally-mandated price ceiling: $500 payout - $50 premium = $450 benefit to Ual

Without CMPC: $500 payout - $100 premium = $400 benefit to Ual

Benefit of CMPC to Ual: $450 benefit w/CPMC - $400 benefit w/o = $50

GEICO is out $250, but Ual only got a $50 benefit! Where'd the rest of the money go?

Why into my pockets, and those of the other 3 insurees. We each received a $50 benefit: we were insured for $100 worth of risk (a 1-in-5 chance of suffering $500 worth of damage to our cars) for only $50.

Now, this is complicated in the real world by several things. First, UAL has a higher risk than other companies of going bankrupt, and its pension fund is larger, so the artificially low premiums, capped by congressional fiat, are more valuable to UAL than many other companies. However, that doesn't change the fact that the benefit of lower premiums is several orders of magnitude smaller than the size of the pension bailout, and took place mostly in the fairly distant past. That's why I'm not excercised about the bailout as an example of corporate welfare.

The second complicating factor makes this look even less like an example of corporate welfare: the PBGC payments in no way benefit the company. They benefit the employees.

The PBGC takes over company pension plans when the companies are in bankruptcy. There is no benefit to the company here; the company can discharge its unfunded pension obligations whether or not there is someone to pick up the tab, because bankruptcy is the legal recognition of the existing fact that the company does not, and will not in the reasonably forseeable future, have enough money to meet all its obligations. The number of companies that did, in fact, discharge their unfunded pension obligations in the early 1970s (often after looting the pension funds to stave off bankruptcy) is the reason that the PBGC and the ERISA regulations governing pensions were put in place.

Rather than benefiting companies, the PBGC forces them to pay premiums in order to insure their workers against underfunded pensions in the event of a bankruptcy. Now, I don't say that the PBGC shouldn't do this; I think it's a rather good idea. But it's obvious that the PBGC in fact hurts "the corporation" as an entity, forcing it to pay premiums for insurance against an event that cannot harm the corporation itself--as if congress had passed a law forcing GEICO to collect its premiums from the estates of your deceased neighbours.

In other words, congress has decided to bail out pensioners whose companies go bankrupt, and to stick corporations with part, but not all, of the bill. There may be an argument for sticking them with more of the bill, but (on the assumption that few companies are planning to go bankrupt), not a very strong moral one (I am assuming that ERISA, which forbids companies in trouble from dipping into the pension plan, is still in force; otherwise the PBGC would be corporate welfare.)

Nor, I think, can the decision not to raise what is essentially a tax on pension plans be construed as "corporate welfare" in the same sense that paying Dole to go abroad and market the hell out of its pineapple, or giving oil companies special income tax abatements, is "corporate welfare".

From the desk of Jane Galt:

Is the Pension Benefit Guarantee Corp corporate welfare?

Battlepanda, who seems to be some sort of left-liberal, is interrogating libertarians about the United Airlines bankruptcy, in which it is being allowed to default on its pension funds, thus passing them off to the US government. This will probably result in cuts in benefits for at least the Pilot's union (I believe the maximum annual pension the PBGC will pay is around $40-50K), and of course, a huge bill for the PBGC.

Alex Tabarrok chooses to respond to the recent horrendous decision to let United screw over their employees by jettisoning their pension plans and letting the taxpayers pick up most of the remaining liabilities by making a convoluted jab at Social Security:

A large organization counts on its younger workers and continuing high revenues to fund the pensions and medical care of its retired workers but finds that rising health care costs, longer life-expectancy, and its own inability to control spending force it to cut pension benefits and switch to personal accounts.

Kinda makes you go hmmm...doesn't it?

You know what makes me go "hmmm..."? The lack of honest libertarian analysis on a situation that could really use it -- corporate welfare. Is Alex's hackles not raised by the violation of free-market principles foisted on the business community by the likes of United being kept on life support? Does he not find it distasteful that his tax dollars are going towards honoring United's liabilities so that it can go on, zombie-like, for a few more quarters?

I'm not sure that Angelica quite understands bankruptcy law and the Pension Benefit Guarantee Corporation. The PBGC, while it is grossly underfunded, isn't exactly "corporate welfare"; it's a government-chartered pension insurer, which forces pension plans to pay it premiums (the worse shape their pension/company is in, the higher the premium), and in return regulates the hell out of the pension plans. It is not incorporated for the benefit of the corporations, who do not like either the premiums or the regulation; it is for the benefit of the workers. The PBGC steps in to cover pensions that have already been discharged in bankruptcy or liquidation. It possibly introduces an element of moral hazard, making bankruptcy judges more willing to discharge pension obligations, but it is not corporate welfare in the same way that, say, the Chrysler bailout was (and even that was done for the benefit of autoworker votes, not Lee Iacocca).

Many, perhaps even most, libertarians object to the PBGC on principle. Personally, it's the sort of programme I can live with. Markets and companies change in unpredictible ways, and the PBGC is a way of making sure that those who, in perfectly reasonable good faith, assumed that they would have a corporate pension to support them in retirement, do not end up destitute. It has its economic costs, as do all regulatory institutions, but as with FDIC, I think the benefits in terms of economic stability outweigh them.

I'm not really sure what Battlepanda's objection is. UAL is insolvent--can't meet its debt payments or its pension obligations. Does she think that bankruptcy law should force liquidation? Hard luck for the workers, suppliers, and so forth, no? It's pretty generally recognized that Chapter 11 bankruptcy is one of the great strengths of the American economy, allowing companies in hard times to restructure rather than expire, salvaging something for workers, creditors, and the company. And allowing UAL to at least try to limp along isn't costing the taxpayers anything, as far as I know. The only people who lose out are the stockholders.

Or is she arguing against the PBGC? But should we really just abandon people who made the mistake of depending on their pensions? Tell a 58-year-old stewardess to suck it up and go to phlebotomy school? UAL cannot survive if its pension and debt obligations aren't reduced; it's pensions are underfunded by billions, and the airline is losing something like $1 billion a year. Pension obligations aren't senior to secured debt, and as far as I know, most of UAL's major assets are either security for debt (planes and other major capital equipment) or non-tradeable (landing slots, which I believe revert to the port authority upon liquidation, though I could be wrong about this). Without a Chapter 11 plan in which it sheds its pensions, UAL will have to liquidate; but because the assets tend to be secured, even if UAL does liquidate, the pensions seem to get little more than they have now. Meanwhile, all the employees who just lost their pensions also lose their jobs.

There are real issues with these sorts of bankruptcies--for one thing, UAL's new and improved balance sheet may allow it to compete harder, forcing already-tenuous companies like Northwest and Delta to follow suit. But I don't think that corporate welfare can be rightly said to be among them.

From the desk of Jane Galt:

How can a "trust fund" go "bankrupt"?

How can I argue, my critics ask, that the trust fund is going to go bankrupt, when I don't even believe there is a trust fund?

But I'm not arguing that the trust fund is going bankrupt. I think that the trust fund is a political fiction, as is its purported bankruptcy.

But at least it's a consistent fiction. Democrats are trying to argue, on the one hand, that the trust fund is real, and on the other hand, that it is not going bankrupt. These are mutually incompatible. For the trust fund to exist, the Social Security Administration must be an independant entity of the US government. Unless the programme is changed, in 2042 that independant entity will not have enough money coming in to cover the benefits it has promised to pay out. That entity will be insolvent--in common parlance, bankrupt.

(So why isn't the government bankrupt now demand some of my critics. Because, my little chickadees, unlike the SSA, the government can borrow money. And it can borrow money because the market knows that if it needs to, it can raise taxes or cut spending--again, unlike the SSA. The SSA is an entity with fixed revenues and fixed obligations which are getting ready to diverge sharply, in the wrong direction.)

If I don't think the system is going bankrupt, why do I want to reform it?

Well, I don't, all that much. I'm not one of those libertarians who believes, either for economic or ideological reasons, that Social Security represents The End of the World as We Know It. Social Security isn't really a hobby horse of mine, and it certainly doesn't get me worked up in a lather the way, say, school choice does.

Nonetheless, I think we have a very large general budget problem, caused in large part by our demographic problem. Most of that demographic problem is caused by Medicare, but a sizeable chunk--in the neighbourhood of $6-10 trillion, or approximately 30 years worth of Bush's tax cuts--is caused by Social Security.

Now, it's possible to argue, and some have, that the Social Security problem is pretty trivial; over the next 75 years, they say, social security payouts go from 4.35 percent of GDP in 2003 to somewhere between 5.35 to 9.08 percent of GDP in 2075, with a median estimate of 6.65 percent. A mere 3.73 percent increase, at the highest!

There's an element of innumeracy here: the change is, of course, not a 3.73% change, but an 85% increase in spending on Social Security, which is already an enormous programme. The median estimate represents a 53% increase in spending. Current revenues are higher than outlays: 4.97%, in 2003. While the low estimate would mean we barely need to raise taxes, that median "best guess" estimate means your payroll taxes would have to rise by 33%--an extra 4% of your income going to one programme. But since we're already spending that extra revenue on other things, unless we cut those programmes, the better number is a 53% increase, or just under 7% of your income. Doesn't sound like much? If you make $50K, that's an extra $3,500 a year. I don't know about y'all, but the budget at Stately Galt Manor is tight enough that a missing $3,500 would mean foregoing something pretty critical, like food, shelter, or clothing. I don't really feel like I should have to take in a roommate at aged 50 so that my slight elders can make their greens fees.

Want to pay for it out of income taxes? Federal tax haul seems stuck at around 20% of GDP. Income taxes would have to go up by more than 10%. And god help us if people live longer, or productivity growth slows, or both, bringing us to that 9% number. Even assuming no deadweight loss from additional taxes--a heroic assumption--income taxes would have to rise by roughly 30% just to finance Social Security; alternatively, we could more than double the payroll tax.

Can we do this? Probably; Europe already does--and consequently, their pensions really are unsustainable. But it will put immense strain on our budget. (Which won't matter because Medicare will have caused the budget to implode like Paris Hilton's dignity, but that's another rant). Also, it will undoubtedly push more people into working off the books in order to avoid their social security taxes--making both our tax system, and our workers, less secure.

More importantly, why should we? I'll be drummed right out of the Fervent Libertarian Journalist's club, but I see a real role for government in protecting people from the risks of bad planning, or insufficient income to fund retirement. A welfare transfer to those who've had bad luck is undoubtedly necessary. But why on earth should we continue with this mad attempt of the middle class to get rich by picking its own pocket?

Social security as it is currently configured has a number of bad political/economic effects. It encourages people to retire early. The illusory "trust fund" gives congress several hundred billion dollars of income to play with every year even while accruing massive unfunded liabilities for Social Security and Medicare. It seems to discourage not only private saving, but also having children--the free rider problem writ on a society-wide scale. Social security, in short, seems to take money that would have been saved by investing in the private sector, and spend it instead on farm subsidies and underutilised light rail systems. It's not nearly as progressive as a welfare programme funded out of general revenues would be.

The current system also deludes workers into saving less than they need to by providing the entirely false illusion that they are earning benefits with their "contributions". If they realised that the current system is underfunded, and that they have absolutely no legal entitlement to their benefits, they might save more. Private accounts would alter this.

I understand why liberals object--they think that without the middle-class entitlement, benefits at the bottom would be cut. Perhaps, though I think the evidence for that proposition is pretty underwhelming. But this does not strike me as a sufficiently compelling reason to avoid reforming the system. Trying to implement a huge boondoggle system of cross-subsidies in order to maintain benefits for the relatively small number of elderly poor is using a chainsaw to attack a gnat--you're more likely to put an end to yourself than the problem.

A system of forced savings, on the other hand, funnels money into productive private investments, even if you (as I would) force participants to index, and move their savings into progressively safer investments over their life cycle. Backed up by a system of welfare for the unlucky/immiserated, it is more progressive than the current system, at least as safe, forces workers to plan their retirements instead of depending on the government, and reduces deadweight loss from taxation at least somewhat. What's not to love?

From the desk of Jane Galt:

Morally Bankrupt?

Matthew Yglesias repeats a claim I've heard from a lot of people who don't understand the meaning of insolvency:

Is the liberal media killing Social Security privatization?

Russ Mitchell of CBS Evening News wouldn't even give the president credit for facts that are indisputable. According to Mitchell, "Mr. Bush said he's open to any good idea to fix a system he claims is heading for bankruptcy." Bush doesn't have to "claim" the system is going bankrupt. According to the Social Security Administration trustees, benefits paid to retirees will exceed payroll taxes collected by 2017. By 2041 the system will be totally broke.

Of course, I'm not happy with that kind of reporting either. Every time the President gives a speech claiming the system is heading for bankruptcy, I'd like to see news services report, "Speaking today in Canton, Ohio, the President repeated his misleading claim that Social Security is headed for bankruptcy. In fact, even after Social Security's trust fund is exhausted (projected by the Social Security administration to happen in 2041, and by the Congressional Budget Office to happen in 2052) tax revenues will suffice to pay seventy percent of scheduled benefits."

Sadly for Matthew and others using this argument, Social Security would still be bankrupt (technically, insolvent--in the US, bankruptcy is generally undertaken voluntarily, as a way of escaping insolvency--but the words are used interchangeably by lay people) in the circumstances he describes.

The belief that bankruptcy means you have no cash is wrong, and further, makes no sense. Oh, bankrupt individuals often do try to wait until they have no cash--why give things to creditors when you don't have to? The liens will be just as dischargeable as the unsecured debts. Bankrupt companies, however, generally have to declare bankruptcy when their long-term cash flow becomes insufficient to meet their bills (though not, of course, until management has executed every Hail Mary Pass it, its family members, and the psychic who works down the street, can think of).

USAir, for example, is not "bankrupt" in the sense that it hasn't any money coming in or going out; it is bankrupt in the sense that it couldn't meet its future obligations with its future cashflows. Much like . . . why, Social Security. So Matthew's preferred formulation would, in fact, be wrong, just like the one that the National Review is objecting to.

From the desk of Jane Galt:

The Economics of Bankruptcy

If you're interested in the economic aspects of bankruptcy--and I'd argue that you should be much more interested in this than, say, whether Capital One is or is not the worldly embodiment of pure evil--then you should read this excellent post by William Sjostrom.

Y'all thought I was joking about how busy I was with bankruptcy, didn't you? Little did you dream . . .

From the desk of Jane Galt:

Who's to blame for bankruptcy?

I have to say, for all that I do wonder how credit card executives sleep at night, I find the consumer advocates' attempt to blame peoples' indebtedness on them pretty unconvincing.

This is partly because those opposing bankruptcy tried to have it both ways: "people going into bankruptcy are desperate, not deadbeats" and "it's the credit card company's fault anyway for lending them too much money".

But these cannot both be true. If people really needed the money, to put food on the table or shoes on the kids, then it's hard to argue that they would have been somehow better off without the credit cards. And if they spent the money on things they didn't need, well then surely most of the responsibility has to lie on their shoulders?

Mark Kleiman gets around this problem by arguing that you've got two villains here--the tempters and the tempted--and it's unfair to punish only the tempted. Fair enough, except that I don't exactly understand how requiring people to fulfil contracts they've undertaken is "punishment". The consumer advocates spend a lot of time talking about punishment, especially "punishing" the credit card companies for their "abusive lending tactics". This makes no sense to me. You can't "punish" a corporation; what you can do, if you think it a good idea, is make laws requiring them to curtail their lending. But those sorts of laws reek of arrogant paternalism, with their presumption that a large class of people can't be trusted with credit. Also, the sources that poor people turn to for credit when they can't get credit cards are even worse: loan sharks, pawn shops, payday lenders. The cure is worse than the disease.

The other problem with saying we shouldn't punish the temptee unless we also punish the tempter is, of course, that none of the people making this argument have any interest in punishing the temptee. Would consumer advocates claiming that the bill was unfair because it did nothing about "abusive lending practices" actually be happy if we made consumer bankruptcy more punitive, and also came down hard on the credit card companies? No, of course not--they only want to punish the tempter, like people who want to go after drug dealers but not drug users. There's possibly a "least cost" argument in favour of this strategy, but morally it's hard to argue people who borrow money they have no reasonable hope of repaying are somehow less culpable than the fellows who lent them the rope with which to hang themselves. To say otherwise is to deny moral agency to a huge swathe of our citizenry, which raises the question: why are we letting such moral lackwits vote?

The bankruptcy bill was flawed in many ways. But the way that both sides made it into a moral issue about "cracking down on abuse" and making people, or credit card companies, "take responsibility" for their behaviour, leaves me cold. Bankruptcy strikes me as an eminently practical matter; can people pay their debts, and if not, how do we settle matters with the least pain and the best economic effect? There are better and worse ways to determine who can pay what, and what economic and social effects are best--but people seemed to have no interest in anything but punishment. As far as I'm concerned, punishment is what criminal law is for. If you're not going prosecute people, then it's best to give up ideas about punishing them for some alleged wrongdoing.

(I should note that in Europe, unlike America, judges will actually look at what you've spent the money on, and may well deny you bankruptcy protection if you've spent it frivolously. That's punishment. But practically speaking, what's the point? Whether I charged prescription drugs or a trip to France, my creditors are out the money; if I can't pay it, it doesn't do them much good to deny me formal discharge of my debts. The European system incurs a lot of costs in search of justice, plus most Americans would be outraged if judges started getting to decide whether they really needed that extra case of Miller Lite.)

From the desk of Jane Galt:

How much bankruptcy fraud is there?

The true answer seems to be that no one knows. The best number out there is from the FBI, which sets it at around 10%, but government bureaucrats have been known in the past to pull numbers out of thin air in order to comply with the regulatory mania for quantitative precision in the face of uncertainty. The American Bankruptcy Institute, which is roughly neutral, estimates it's more like 3.5%. And these folks have done a study which I won't vouch for, but which is certainly entertaining reading:

We gathered a random sample of Chapter 7 petitions in 24 states, all filed the same day: June 5, 2002. It was the day in the middle of the worst year for filings. Our sample size was about 7.9% of all the Chapter 7 filings of that day.

All the cases we studied were successfully discharged.

We created a database of asset, debt, income, and living expense numbers and looked at the statistical results. We also did something judges don’t always do: We read some of the petitions carefully.

The FBI estimates that 10% of bankruptcy filings involve fraud of some kind. But fewer than 0.1% of filers are convicted. And our statistical analysis suggests that even the 10% fraud estimate is probably low.

For instance, in what amounts to a wild supposed coincidence, nearly one-third of filers say they spent their very last cash on their legal and filing fees.

Among individual petitions, one after another stretched credibility to its limits. We illustrate with 30 case studies, all pretty clear stuff. Check James, who had $800,000 of unsecured debt but claimed the assets he acquired were gone after being struck by lightning. Russ in California had no job, no income, and no cash but somehow maintained his monthly gym membership. Brian owed money on a hot tub he claimed was stolen (by a gang of patient thieves, apparently; it takes hours to drain one and at least six large men to lift the shell.)

Bob and Susan had $120,000 of annual income but couldn’t pay their debts for one big reason: $826 per month they spent on a SeaRay boat. Still, they reaffirmed the boat loan. Alexis filed, owing only $2,088 in total debt, even though she had a good job and could have paid half the debt with what she spent on lawyer and filing fees.

That last case, by the way, is malpractice by her bankruptcy lawyer; you should never, ever consider filing bankruptcy for a sum that you could pay back in a couple of years by working one shift a week at McDonalds. Those sorts of bankruptcies are far more costly to the "abuser" than the credit card companies.

But that brings up the question: what is fraud? Most of us would agree, I think, that there is a difference between, say, not listing your grandmother's engagement ring among your assets, and "forgetting" to mention a boat, some rolexes, a rembrant sketch and a numbered bank account in Switzerland. When the FBI says that 10% of cases involve fraud, how many of those cases are the former, and how many the latter?

That matters, because as with all social policy, there is a tradeoff between catching the guilty and persecuting the innocent. Living, as we do, in an imperfect world, having to make do with bankruptcy courts staffed with human beings rather than angels, we must deal with the fact that eliminating more fraud also means denying just relief to more innocents. If 10% of bankruptcy filings involve gross abuse of the process, then perhaps it's worth it. On the other hand, if 1% of filings involve gross abuse, and 9% involve people trying to hang onto a couple hundred bucks of extra stuff, then is it worth punishing the innocent in order to root this out?

From the desk of Jane Galt:

More on the bankruptcy bill

Two pieces from The Economist on our new bankruptcy bill, one comparing American bankruptcy law to Europe's, and the other on the relationship between entrepreneurship and personal bankruptcy (the latter requires a subscription). The first touches on the corporate side, which has been largely ignored in this debate, partly because the changes on the consumer side are much more radical, and partly because the corporate lobbies opposing the changes are a lot less popular and publicity-savvy than the consumer advocates pounding on the changes to personal bankruptcy. The Wall Street Journal's article has more detail, god bless it:

To speed up business bankruptcies, the measure specifies that companies filing for Chapter 11 protection will have a limit of 18 months to offer a reorganization plan. The bankruptcy code currently gives business filers the exclusive right to file their own reorganization plans within four months, but judges normally grant numerous extensions that allow companies to control the process for years.

For instance, Owens Corning Corp. of Toledo, Ohio, has been operating under bankruptcy protection since late 2000 because of asbestos claims.

Now, if a business doesn't have its own reorganization plan within 18 months, creditors can step in with their proposal.

"Lawyers who advise companies, which are considering filing Chapter 11, may recommend that it would be desirable to do it now" before the bill goes into effect, said Philip Corwin, an outside attorney for the American Bankers Association.

A new provision also requires companies operating under bankruptcy protection to commit within 210 days after the filing whether to continue lease arrangements. This will particularly affect retailers that have expensive leases, including space in shopping malls. The provision is meant to prevent companies from avoiding rent payments during bankruptcy proceedings and then canceling leases after reorganization.

The measure also restricts special bonuses from being paid to retain executives during bankruptcy proceedings.

. . . but if you're really consumed with curiosity about the changes in corporate bankruptcy, this is one of the best explanations I've read.

From the desk of Jane Galt:

Reading comprehension test

Can you find the error this selection from the New York Times' article on the bankruptcy reform bill that passed last night?

"It feels like we've been waiting as long to pass bankruptcy reform as Washington spent trying to get baseball back in town," said Steve Pfister, the senior vice president for government relations at the retail federation. "The House hit one out of the park today. Now we're just waiting for President Bush to cross home plate by signing this bill into law."

Mr. Pfister said the legislation would lower costs for all consumers because they wind up making up the difference on the unpaid debts of those who abuse the system.

But others disagreed.

Opponents of the legislation said that the move by Congress was a harsh attack on the poorest and most needy and came just one day after the House adopted a measure of huge potential benefit to the wealthiest when it voted to eliminate the estate tax.

"The G.O.P. is practicing Robin Hood in reverse," said Representative John Conyers Jr. of Michigan, the ranking Democrat on the House Judiciary Committee. "Last night they repealed the estate tax, a gift to the wealthiest individuals in our society. Today they pushed through the special-interest bankruptcy bill, punishing the very poorest members of society. This shows all the world that all of that talk about values in the last election was just that - talk."

In fact, 73 Democrats joined the 229 Republicans in voting to approve the measure. It was opposed by 125 Democrats and Bernard Sanders of Vermont, the lone Independent in the House.

The legislation had been opposed by many bankruptcy law professors and judges who testified in recent months that it was unnecessary and would create more problems than it would solve. They said that it would impose new obstacles on many middle-income families seeking desperately needed protection from creditors, and that it would take far longer for those families to start over after suffering serious illnesses, unemployment and other calamities.

In a letter to Congress two months ago, 104 bankruptcy law professors predicted that "the deepest hardship" would "be felt in the heartland," where the filing rates are highest -Utah, Tennessee, Georgia, Nevada, Indiana, Alabama, Arkansas, Ohio, Mississippi and Idaho. A study conducted by legal and medical specialists at Harvard University of 1,771 personal bankruptcy filers in five federal courts found that about half were forced into bankruptcy because of heavy medical costs.

(Find the answer by clicking below)

Yes, students, that's right . . . none of the people quoted in the second half of the selection actually disagree with Mr Pfister. Mr Pfister has said that this will lower costs for all consumers by reducing bankruptcy. The people the second half quotes say that the burden will "punish the very poorest members of society", " impose new obstacles on many middle-income families seeking desperately needed protection from creditors", and "be felt in the heartland", none of which have anything to do with costs to consumers. If one says that deregulating trucking "lowers costs for all consumers", this is not contradicted by the fact that some truckers will be worse off after the change.

Now, conceivably, one could have found someone to argue (as many bankruptcy attorneys are), that some group of consumers will actually be paying higher costs because several provisions in the bill will cause attorney fees to rise. But while the people quoted in the second section undoubtedly disagree with Mr Pfister's unstated implication that the new bankruptcy law is a great thing for America, nothing they've said actually disagrees with anything he stated.

From the desk of Jane Galt:

Interesting bankruptcy chart

Sounds like an oxymoron, doesn't it? But this one, from the American Bankruptcy Institute (the closest thing one gets to a neutral source in this astonishingly charged debate), shows that the aggregate level of debt payments as a percentage of income don't seem to be related to the number of bankruptcies. The right-hand scale is a little silly, but it's still worth taking a look at.

From the desk of Jane Galt:

More on bankruptcy

Don't miss Dave Tepper's take--he used to be a bankruptcy attorney.

From the desk of Jane Galt:

You asked for it

A number of y'all have emailed me asking what I think about the bankruptcy reform that is currently wending its way through congress. Contrary to what you might think, opinions on bankruptcy reform aren't unifrom across conservatives and libertarians. Instapundit, for example, is disgusted by the lending practices of big credit card banks like CapitalOne, lending money to people who have a high probability of getting into trouble. On the other hand, Volokh conspirator Todd Zywicki is for it, and if you're at all interested in the topic, his posts on bankruptcy are a must read:

Bankruptcy and attorney advertising

Bankrupcty and credit cards

Bankruptcy and medical expenses

Bankruptcy and the non-dischargeability of abortion-related torts

On recent changes in the bankrupcty environment

On systemic abuse of bankruptcy

Mr Zywicki basically argues that the system is broken, increasingly characterised by strategic abuses that shield assets from creditors, or run up debts the borrower has no intention of paying, and that bankruptcy reform is a necessary fix.

Josh Marshall has a special blog about it, starring Elizabeth Warren, probably our nation's most high-profile bankruptcy attorney. Ms Warren & co-bloggers take the opposite view, arguing that most bankruptcy is caused not by people who are willing to be deadbeats, but nice, ordinary law-abiding citizens caught in a trap:

The story of bankruptcy today is the story of modern America. As tough as it is for many to accept, Americans are not in a frenzy of overconsumption. The research of Professor Warren and others has revealed that we actually spend less on non-necessities, thanks to falling prices for clothing, restaurant dining, and other purchases. Americans today have less disposable income than they had a generation ago, as more of our income is spent on housing, health care, and transportation.

Americans spend more money on their homes than a generation ago because house-shopping for families is as much about the school district as it is about the home itself. Our failure to provide equal access to quality schools has produced a bidding war between middle class families for homes in good school districts, which in turn results in working families buying more expensive houses than their incomes would have allowed a generation ago. In turn, as families move away from cities in search for better school districts, they end up spending more on their car and gasoline.

We all know about the state of health care costs in this country. Insurance has become more costly and out-of-pocket expenses great as more people join plans with coverage gaps. Too often, families in medical emergency are forced to start paying medical bills with credit cards just to pay for necessary procedures. We have already noted that over half of bankruptcies are due to medical emergency, and when combined with job loss, death, and divorce, the proportion of bankruptcies due to emergency rises to nearly 90 percent.

In short, people are being driven into bankruptcy at the rate of 1.5 million a year because, already financially squeezed by rising home, health car, and car costs, unforeseen emergency pushes them over the precipice. This is a compelling story, and one that Democrats like Joe Biden, Tom Carper, Mary Landrieu, and Ben Nelson ignore at their peril. The grass roots of the party proved more tolerant of such cynicism in the past, but if the contributions of MBNA, American Express, and others continue to be valued above the welfare of working families, they may discover that this formula for victory has a short shelf life.

What do I think?

Well, I think that the TPM explanation is not very convincing. Don't get me wrong, I think Ms Warren is a great populariser of the bankruptcy issue, and her book, The Two Income Trap, should be in the library of anyone who's interested in the problem of bankruptcy. I think that Ms Warren has identified a real phenomenon: two income couples, rather than reaping all the benefits of the wife's additional income, have increasingly found themselves in a bidding war with other couples with children for a limited number of houses near good schools. This has sucked up a great deal of the second income. Moreover, a one income family used to have a sort of safety net in the form of Mom, who could drop housework to become a nursemaid, emergency aid worker, or temporary wage earner. This cushioned the family downturns. Now, when a two-income family is spending up to the limits of the two salaries (and as mentioned above, they have to to make sure junior gets a decent education), they have much less flexibility if there is a sudden illness in the family, a problem with one of the children, or a job loss.

But I don't believe that that is, as Ms Warren and co-bloggers imply, all or even most of the story. She routinely vastly inflates her statistics in order to paint a picture of ordinary families increasingly squeezed by circumstances beyond their control. To take just one example, she claims in her book that housing consumtion hasn't increased very much in the last few decades: by less than 1 room per house. But that's a pretty big increase, when the starting average was near 5 rooms. Moreover, she fails to note that household size has dropped precipitously, from an average of 3.35 persons per household in 1960 to 2.57 per house hold in 2003. If housing has gone from an average of 5.2 rooms to an average of 5.9 (I'm dredging thse latter numbers up from memory), that represents an increase of almost a full room per person. That's a lot of extra housing consumption.

Her academic work has the same sort of sizeable omissions that bias the results. She's the author of the recently famous study showing that 50% of all bankruptcies were caused by medical bills. You should read the Zywicki post I linked above, but to summarise here, this "finding" was generated by attributing any bankruptcy in which the filer had more than $1,000 in out-of-pocket expenses in the last 12 months to medical bills. That's ridiculously lax, and indeed, only 28% of the respondants attributed their trouble to medical problems. Given that medical bills are by far the most attractive reason to claim for your bankruptcy (compared to other major causes like divorce, compulsive gambling, and total financial irresponsibility), it seems unlikely that there's a special "hidden" kind of medical bankruptcy so subtle that the people filing don't realise that medical woes were the source of their problems. Furthermore, the study seems to have implied that medical bills were the main problem, when loss of income due to illness plays at least as great a role.

Finally, while I have some sympathy for the fact that it costs a lot of extra money, in childcare fees and extra clothes, advocates of this idea stretch it way too far. A second car gets used for things other than commuting, as do many of the extra clothes. Restaurant meals are a choice, not a necessity . . . my mother raised two kids in a small apartment without them, while working full time. And liberal bankruptcy advocates tend to gloss over the fact that one of the very top causes of bankruptcy is divorce--and no scheme enacted is going to make it as easy to support two households as one on the same income.

Now, what about those credit card companies?

Well, they're evil.

They make half their income by surprising people with enormous penalties and usurious interest rate changes if they forget to pay their phone bill one month. Their most lucrative clients are the ones who have borrowed too much, who are paying hefty interest charges every month but never see much downward movement in the balance. Some of their tactics would make a loan shark blush. A credit card company is a finely-tuned system for relieving the ignorant or unlucky of every last penny they own without even taking the manly risk of holding them up at gunpoint.

On the other hand, I am deeply uncomfortable with the notion that poor people would somehow be better off without access to credit. Most bankruptcy tales of woe start off with a catastrophe; the credit card debt enters the picture as people use their credit lines to try to patch a gaping hole that has opened up in their cash flow. Would someone who needs a cash advance to make the rent really be better off without that credit card, so he can't "get himself in over his head?"

I know how easy it is to do it. I graduated from business school with nearly $100K of student loans, and a nice chunk of change on my credit cards that was supposed to be paid off with the lucrative consulting job that strung me along and finally dumped me without ever starting work. (This happened to my entire associate class, not just me, she pointed out defensively; I was not being singled out). For a couple of years after graduation, my whole life was nothing but massive debt payments, as I lived with my parents and shoved every spare dime I had into getting that debt down. This is not a period of my life that I remember fondly, and I am deeply sympathetic to people who find themselves in a tough spot. But I also know that I was at least in part the architect of my own fate. B-school students, with their high income expectations, live very well on borrowed money; I could have taken fewer trips, gone without a car, and in other ways cut down my debt load considerably. Why should my creditors be the ones to pay the price for my folly?

(I know, I know--student loans aren't dischargeable in bankruptcy. I'm making a general point.)

Moreover, there's ample evidence that a sizeable percentage of bankruptcy filers engage in quite a lot of strategic behavior in the run-up to bankruptcy. Indeed, Ms Warren encourages it, telling people to run up unsecured debts while paying the mortgage. (This is very good advice). And it's hard to argue that people with, say, gambling problems or a drug addiction, are somehow "victims" going into bankruptcy.

So where does that leave us? The credit card companies are evil, but many of the people declaring bankruptcy aren't exactly paragons of virtue. On whose side am I?

Neither, really. I don't buy the legend of blameless bankrpts, but I have no interest in helping credit card companies change the law so they can squeeze that last elusive drop of blood from their victims. I'm against the bankruptcy reform not because I think that one side or the other is getting shafted, but because I think that easy bankruptcy is one of the great unrecognized strengths of the American economic system. Easy bankruptcy is what frees people to be entrepreneurs, to take risks without fearing that one wrong move will destroy them forever.

I understand that bankruptcy reformers think that they can target the deadbeats without touching the merely excessively daring, but I'm not so sure. And while the abuses of the system may be morally outrageous, I don't see that they're particularly damaging. Capital One and its ilk seem to be getting along pretty well without our help. I'd be happy to leave it that way.