Tuesday :: Mar 15, 2005

A Scholarly Google of Bankruptcy Reform

by larre

I suppose everyone except me knew this a long time ago, but Google has a beta test going for Google Scholar, described as a way "to find academic research papers online." I stumbled across it, coincidentally, shortly after reading someone's comment today taking Steve Soto to task for his remarks excoriating any Democratic senator who voted for the so-called Bankruptcy Reform bill. (To which criticism Steve graciously wrote, 'Thank you'.)

With that on my mind, unconsciously, really, I started testing 'Google Scholar' just to see what might pop up in the way of real scholarship about bankruptcy reform -- as opposed to editorializing by industry lobbyists, Screaming Head cable news crap, or endless blogger threads. One item I discovered suggests that Soto may be on to something big and poltically powerful with his toxic warning to any politician -- House or Senate, Republican or Democrat-- who votes for this bill.

The scholarly article I googled was published last year, so it didn't have the benefit of the most recent version of the bill containing a few changes from earlier iterations. But the changes in the bill, as we know, are inconsequential and they do not detract from the article's main scholarly conclusion.

That conclusion, after a moment's additional thought, inspired in my mind this political judgment, phrased in my own words:

Any politician who votes in favor of bankruptcy reform is going on record as being against the values conservatives and liberals alike hold dearest: the entrepreneurial spirit of America and the ideal of opportunity for the small businessman.
Wei Fang and Michelle J. White are the authors of 'Personal Bankruptcy and the Level of Entrepreneurial Activity,' published in volume 46 of the Journal of Law and Econmics in 2003, beginning at page 543. (Warning: pdf format) After slogging through a lot of facts, laws, data, models, surveys, and mathematical equations, they offer an analysis that leads to this scholarly conclusion:
"The most significant change [brought about by the bankruptcy bill] would be that debtors who earn more than the median income level would be barred from filing under Chapter 7 and taking advantage of the “fresh start.” Instead they would have to file under a new and harsher version of Chapter 13, which obliges debtors to use all of their future earnings beyond a not-very-generous Internal Revenue Service formula to repay prebankruptcy debt. The obligation to repay would continue for 5 years after the bankruptcy filing. These reforms are intended to reduce abuse of the bankruptcy system by well-off debtors.

However, our analysis suggests that an unintended consequence of these reforms would be a reduction in the attractiveness of self-employment. Instead of being able to shelter their future incomes and some or all of their assets from creditors if their businesses fail, owners of failed businesses would face heavy taxation of their future earnings to repay their old business debts. Owners of failed businesses would also be discouraged from taking high-paying jobs, because taking a job that pays more than the median income level would prevent them from filing for bankruptcy under the more favorable Chapter 7. And lenders would be loath to lend to once-failed business owners who want to start new businesses, because owners have little incentive to work hard if additional earnings mainly benefit their old creditors. While some self employment ventures under the current bankruptcy law are probably inefficient, the proposed changes in personal bankruptcy procedures make the small-business environment so much tougher that both efficient and inefficient ventures are likely to be eliminated. The result could be a slower rate of growth for the U.S. economy."
-- [emphasis added]

Consider for a moment how this scholarly conclusion will translate in the political world. What would any Republican opponent do with it next year against any incumbent Democratic congressman who voted for so-called 'bankruptcy reform? "He's against small business..... Against encouraging entrepreneurs, who made this nation great ... he cast a vote that actually forces families to become wage slaves.... His vote even makes it attractive to turn down a raise!"

I'm not so sure Steve Soto is wrong. What an irony! The Republican-initiated so-called 'Bankruptcy Reform' bill may be the death of any Democrats who vote for it.

larre :: 10:41 AM :: Comments (10) :: Digg It!