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Debt to the Future

posted by Jonathan Lipson

This will be my final Credit Slips post. I want to thank the keepers (and the audience) for indulging me. I've enjoyed posting here, and hope that it's been useful and perhaps interesting for some of you.

Looking Backwards; Looking Forwards

My first posts were largely backwards-looking, in the sense that they were about a case (Gheewalla) that was flawed in part because it was burdened by the logic of a fairly ancient doctrine (the "trust fund" cases). Indeed, I think problems of financial distress are often backwards-looking:  You lent me a dollar yesterday, which I can (or cannot) repay today. To be sure, we spend a good deal of energy thinking about how much better the future will be depending on the bankruptcy result you're looking for (the debt is paid or discharged). But debts are usually the product of prior behavior.

Which is why a new symposium issue of the University of Chicago Law Review is so interesting. Entitled Intergenerational Equity and Discounting, it is in general about how to calculate the costs and benefits of big decisions today that might have no impact until the distant future. The key example is usually global warming: Most of us are not likely to live to see the moment in the future when there is atmospheric payoff from levying a carbon tax, abiding by the Kyoto Protocols, or whatever else we might do today that saves the planet for later generations.

The authors in the symposium do not generally write in bankruptcy or commercial law (with the exception of Eric Posner), so do not discuss these problems in those terms. But really, what we are talking about is a future debt, an obligation to the distant future, that may be payable today (or in the near future). The problem of intergenerational equity is figuring out how to come up with fair and efficient decisional rules about what that debt and those payments should be.

Two Intergenerational Inequities

In fact, I think there are two kinds of intergenerational equity that should concern us. One is the REALLY BIG PICTURE that is the subject of the Chicago Law Review Symposium. The other involves significant disparities in wealth between generations in the United States today, and the vector of those disparities.

The Fed's Survey of Consumer Finances for 2004 notes that median "wealth" (real net worth) for those ages 55-64 rose over 28% between 2001 and 2004, while falling 16% during the same period for those ages 35-44. A recent story in USA Today (of all places) details how much wealthier Baby Boomers are--and will likely remain--than their successors. Of course, we should hit our wealth peak in our late 50s or early 60s. Salaries should be high; debts should be low. So, the wealth of the older folks is probably less troubling than the lack of it in the younger folks. The culprits? The usual suspects: Credit card debt, student debt, home mortgage debt.

The problem is that layered into this will be public subsidies for retirees. Today's poorer young adults will not only be in debt longer, but will be paying the social security and Medicare tabs of baby boomers beginning in the next several years. Those boomers will likely live longer and consume more than their predecessors. This means succeeding generations will be financing a larger dole longer, all the while having already mortgaged a good portion of their own future income.

These and related phenomena have led Boston University economics professor Laurence Kotlikoff to argue that the United States as a nation is on its way to bankruptcy. Not surprisingly, intergenerational inequity, like wealth disparities in general, are becoming hotter political issues. Paul Romer, the Stanford economist who (correctly, in the eyes of many) told us that the right mix of ideas, markets and technology could lead to dramatic increases in wealth, now tells the New York Times that wealth inequality is our greatest challenge.

I wish I could conclude with some brilliant solution to these problems. But I haven't come up with any (yet). While I am probably more optimistic than many about the ability of markets to solve some of these problems, there are enough market failures to warrant better (if not more) governmental intervention. At least in the U.S., I suspect the keys will be fairly mundane (if difficult) things like reforming the educational, criminal justice, tax and credit distribution systems to produce more people who are more effective market participants.

All of which goes well beyond the business of bankruptcy as we conventionally discuss it. But my view (and here's my final shameless self-promotion) is that bankruptcy is not merely a problem of private loss allocation, but a significantly public problem. Any given debtor or creditor will experience the pain of bankruptcy where it counts--in the pocketbook. But the decisions we make about loss allocation rules--like decisions we make about the debts we owe the future--have broad and deep public ramifications. We've probably spent more than enough time talking about the private nature of bankruptcy and financial distress. We should start to spend more time talking about its public features.

If you'd like to discuss these or other bankruptcy or business-law related matters, feel free to contact me at jlipson@temple.edu. In the meantime, I leave you with the immortal words of Chevy Chase and Jane Curtain: "Good Night, and Have a Pleasant Tomorrow.

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