Credit Slips

Treatment and the European Perspective: Why Don't We Ask Whether US Debtors in Bankruptcy Have Other Social Problems?

European debt adjustment systems have built in an assumption that people with debt problems also have higher incidence of other social problems—substance abuse, family dysfunction, weak impulse control, and perhaps also mental health problems such as depression and anxiety.  Social work has long been part of their systems for addressing problems of debtors, before and after European countries adopted laws beginning in the late 1980s to give debtors a discharge, generally after completion of rather long repayment plans (to show rehabilitation into more moral ways of behaving, while living at a subsistence level).  The European view has been that other problems drive overindebtedness, which in turn makes those problems worse.

In the US, we don’t seem to be giving much attention to these questions.  Is anyone aware of studies of US debtors in bankruptcy to see if they have higher incidence of other social problems such as those listed above?   And have Europeans empirically studied their theory that deviance drives debt?

Is Greed Good? The Professor vs. The Senator

This is going to be really big picture. It's about the differences between formal economic theory, on the one hand, and ordinary thought about economic questions, on the other. It pits the views of an anonymous college professor (as reported by a freshman student) against the views of a famous US Senator (as reported by CNN). 

I have a 19-year-old son (with a different last name from mine) who is a freshman in college, taking first-year college economics from a teacher who received his PhD at Wharton and worked in various business economics jobs before returning to academe. My son is finding the dismal science, well, uninspiring. He almost dropped the course after the first class because he thought he was being asked to become a true believer and study "theology rather than religion." My husband and I encouraged him to stick it out, and we pointed out that the online syllabus showed that the second lecture was about the question whether economics is the "the dark side," so maybe he was going to get more than one perspective. Here's the e-mail we got home after the second lecture:

Subject:  why economics is the dark side

I thought I'd update you on that lecture you both seemed so excited about.

Prof. [X] explained that Economics is a valuable tool for modeling social interactions, but cautioned against too much faith in the market. He pointed out that unfettered capitalism can lead to the accumulation of capital in the hands of an elite minority, who can use their wealth to influence the creation of political, social, and economic structures that subjugate large portions of the populace and interrupt the free flow of resources to further concentrate power in the hands of the few.

oh wait, no, that's not what he said, that's the truth.

According to Prof. X, many are skeptical of Economics and capitalism for the following reasons:

1) Traditionally, the upper class has scorned participation in business, making commerce the province of a minority without political rights, who become scapegoats for social ills (Jews are the best example of such a group, but Indian and Chinese diasporas are other good examples).

2) Moralists hate economists because they think it's wrong to say people are motivated by greed.

3) Marx is a synthesis of the above two attitudes. Marx was a big ol'  anti-semite, and this explains his skepticism for capitalism (oddly enough, the fact that Marx was a non-practicing Jew didn't really come up).

Ah! intellectual sophistication.  [End of e-mail]

Good Government (Under Threat) Down Under

Australia has a bankruptcy system worth studying. Among other merits, it collects and publishes more facts about its system on line than any other.  http://www.itsa.gov.au/dir228/itsaweb.nsf/docindex/about+us-%3Epublications-%3Epublications?opendocument

Prior to 1996, Australia probably had the most sensible bankruptcy system in the world. Bankruptcy is simple enough there that people can file without paid professionals to help them. Rather than means testing that adds costs and thus bars destitute debtors at the threshold, Australia imposes a "surplus income" payment requirement on debtors who file in bankruptcy and have income above a relatively low threshold. Last year, just over 15 percent of Australian debtors had to pay something to get a discharge, while the rest of debtors weren’t burdened with a complicated "means test" to get into bankruptcy.

There is only one problem with this story; it was too good to be true. In 1996, Australia amended its law to create a "debt agreement" option. It sounded great; family members and neighbors would pitch in to help debtors negotiate with creditors to work out their debts and avoid the "stigma" of bankruptcy. But commercial debt administrators revved up operations to promote this option, and within a few years, they were charging hefty fees and getting a lot of poor people to use it. Well over half of those who proposed debt agreements failed either to get their proposals approved or to complete their plans. Sound familiar?

Is Financial Education a Good Idea and Whose Idea Is It Anyway?

Educators find it hard to be against education, and I am no exception to that rule. But some evidence from JumpStart Coalition, which promotes financial education for young people, is cause for pause. Its last survey of high school students, conducted among 5775 12th graders in 37 states in 2006, found that those who had taken a financial literacy course actually did slightly worse on its financial literacy test than students who had not taken a course. See www.jumpstart.org/fileuptemp/2006GeneralReleaseFinal%202.doc (Thanks to Professor Lauren Willis of Loyola of Los Angeles School of Law for pointing out this information in an excellent presentation on financial literacy education at the Association of American Law Schools annual meeting in NYC earlier this month.)

There are many possible explanations for the JumpStart survey result. JumpStart also found that kids from more affluent families did better on the test. It is not surprising that factors and influences other than taking a course have a lot to do with learning about finances. It is also possible that the courses the students took were not very good, either in the content or teaching methods.

JumpStart’s list of "corporate partners" gives you a pretty good idea of who wants to promote the idea of "financial literacy."  http://www.jumpstart.org/advisor.cfm  The many financial institutions on this long list presumably think financial education will not have much effect on the willingness of consumers to pay lots of interest and fees on high balances of various kinds of debt. Rather than push for financial education, maybe financial institutions should work on offering simpler products that are easier to understand and compare.