Shameless Americans?

The debate about the relationship between declining stigma in the United States and increased personal bankruptcy filings has always confused me for at least two reasons.  First, if stigma was on the decline in the late 1990s and early 2000s among us shameless Americans, a glance around the world reveals that we were (and are) not alone.  For example, one would think that Japan might represent a highly traditional, honor-focused society where stigma would powerfully inhibit sloughing off responsibility.  Yet, from 1998 to 2003, the number of filings for personal bankruptcy in Japan (roughly equivalent to U.S. Chapter 7) rose from just over 100,000 to just over 240,000.  The filing rate thus grew from just over 0.8 filing per 1000 residents in Japan to 1.90 filings per 1000 (falling back to about 1.45 per 1000 by 2005).  This is far behind the 5+ “non-business” filings per 1000 residents in the U.S. at the height of the pre-BAPCPA era, but to see the 2.4 X growth rate in Japanese filings in the six years from 1998 to 2004, one must look more than twice as far back in time in the United States (1990 to 2003, from 660,796 to 1.6 million).  I’m sure there’s something statistically misleading about my amateurish attempt at comparison here, but the Japanese figures offer a rather surprising perspective on the decline of stigma, in my view.

The same can be said of comparable Asian and European countries, by the way.  The personal bankruptcy rate in Hong Kong spiked dramatically from 0.66/1000 in 2000 to over 3.5/1000 in 2002 and 2003 before settling back to just under 1.5/1000 in 2006.  Total individual filings in Germany have risen steadily by about 25%-30% per year through the 2000s to a rate of just over 1.5/1000 in 2006.  Austria, the Netherlands, and Belgium have seen slightly smaller but sustained growth in filings in recent years, settling in at roughly 0.8 to 0.9 filings per 1000 residents.  The French system is more complex than the others, so the number of total filings is a bit misleading, but the rate in France exceeds 3.0/1000, with about one-third of these ultimately receiving some sort of formal, coercive relief (including something very similar to U.S. Chapter 7).  On the one hand, these rates are far below the stratospheric U.S. rates of the mid-2000s.  But on the other hand, we have had personal bankruptcy for over 100 years, while Europe and Asia have adopted similar systems only in the past 10-20 years (not to mention a host of other economic and cultural differences).  Given time, the filing trajectories in these countries seem to be headed inexorably in our direction.  Is there a worldwide dearth of personal shame?

Second, for those who assert that a decline in stigma causes these upward trends in bankruptcy filings, it seems to go without saying that a decline in stigma is bad.  The same sort of argument seems to have been made (and is still made) about more liberal divorce laws, declining stigma, and increasing rates of divorce.  Maybe my perspective is shockingly morally neutral, but I view both upward filing trends as positive!  I would much rather that people be freed from both legal and societal inhibitions to seeking relief from destructive debt and marriage than be forced to endure them on the basis of some a priori “it’s just wrong” rationale.  Indeed, who can forget Mark West’s wonderful paper exploring the potential effect of bankruptcy law in Japan to lessen the stigma of financial failure and reduce pressure to solve such problems through suicide!  Long live the decline of stigma!

To be fair, the “decline of stigma” folks seem to suggest that there is nothing other than shamelessness driving the upward trend in bankruptcy filings:  “After all, look how great the overall economy has been.”  I believe this sort of proposition is nothing more than irresponsible and misleading use of aggregate statistics and countrywide averages (though what do I know?), but in any event, the fact that stigma seems to be on the decline most everywhere seems to me to complicate and enrich the discussion.

Comments

[anon]

Is the argument that the stigma of filing bankruptcy is declining or that the stigma of racking up debt is declining? Even if its the former, there is still a link to increased consumer spending.

Do you think a decline in the stigma of overborrowing is good? To the extent stigma serves as a restraint on overconsumption, its got to be good, right?

[Jason Kilborn]

Anon, my distinct sense is that the concern is with a decline in stigma associated with seeking "an easy way out." Indeed, the detractors of "excessive" personal bankruptcy filings seem to argue that we DON'T have a problem with excessive borrowing at all. I think I agree with you that some sort of inhibition on borrowing "too much" would be desirable; the problem is it's very hard to determine when enough borrowing becomes too much. Our economy depends in large part (66%) on robust consumer spending, including credit spending. Though certainly some people have trouble resisting the urge for instant gratification where sober reflection would counsel against, that's a relatively minor problem, in my view. Jay Westbrook, Elizabeth Warren, and Terry Sullivan (among others) have demonstrated time and again that personal bankruptcy generally is NOT the result of simple overconsumption. It results from reasonably well-planned credit consumption followed by job loss, medical disaster, divorce, or some other unexpected trigger that throws off the previously reasonable planning. Bottom line--just like many marriages will expectedly fail as a result of inevitable changes in personality (etc.) over time, many seemingly reasonable debt levels will lead to insolvency as a result of inevitable and unforeseen changes in income or expenses. My point is that an artificial notion of "stigma" against seeking relief from such destructive situations is in decline around the Western world and is desirable.

[OkieLawyer]

If you consider the fact that all of the other countries that have been studied have national health care systems, and many of them have very strong unemployment benefits, and if you consider the fact that medical costs and loss of income probably represent about 65% of all American bankruptcies, the number of bankruptcies per 1000 would be comparable in all countries.

The point I am trying to make is that, analyzing the data with cultural and support systems in the other countries, Americans are apparently not much more prone to file for bankruptcy protection than people in other countries.

The bankruptcy policy in the U.S. has been based on "economic dynamism" vs. the policy of "social stability" for most, if not all, of Europe and possibly Japan and Hong Kong. The fact is that bankruptcy has acted as our social "safety net." The pre-BAPCPA bankruptcy code has been credited by some economists as being the basis of quick economic recoveries after recessions. Having a restrictive bankruptcy code and having very few social programs is only a recipe for increased financial misery for those who need the most help during financial downturns.

[Jason Kilborn]

OkieLawyer--you said it much better than I could have! Here, here! Oddly enough, however, the European social safety net is not nearly as thick as we in the United States often believe. Even in places like Sweden, with a famously generous "cradle to grave" welfare system, the financial challenges of the early 1990s created unemployment problems--and in some cases even health care problems--to which the welfare system was not by design prepared to respond. Many (if not most) of the European filings are triggered by unemployment or major medical disaster, too, though you are certainly right to observe that the intensity and scope of such problems is worse in the United States as a result of our paltry social support systems. I'm not sure differences in the social safety nets explain the fivefold difference in filing figures (I'm actually researching around the edges of that question now), but your observation is certainly important to bear in mind. Thanks!