Sunday, December 30, 2012

Fiscal Discipline

NOTE: I began this essay last night, so the "tonight" mentioned in the first paragraph is actually Friday, December 28, 2012.

Tonight I happened to catch a little of the local new -- which I usually avoid, as the terribly shallow interpretation it gives for most events annoys me quite quickly1 -- and was informed that the congress and president are working to avert fiscal disaster by a combination of spending cuts and tax increases. (I admit it, during the holiday season, I tend to live in a cocoon and avoid all news, so this was actually a surprise.) Now, I do not know if I agree we are in a position where we face a particularly noteworthy fiscal disaster. We have tremendous problems, but not much worse than in the past few years. Spending is out of control, and inflationary pressures are bad, but we aren't spiraling into hyper-inflation, and, though it would harm whichever party was in power, a bit of a deflationary contraction, provided it really reduced the money supply might actually do some good2. But that is not my topic. Instead, I want to look at their plans, at least in general terms, and ask which particular aspects of fiscal discipline are better or worse for our nation, in general, and given our specific circumstances.

Normally, I would have no objections to an austerity program combining increased revenue with decreased spending.If anything, it is the textbook solution to excessive spending, and certainly the solution conservatives have favored at least since the Reagan years3, or even earlier. The logic is, at least at first glance, unobjectionable. By eliminating any spending increases, and even reducing some expenditures, the cuts put an end to the constant growth which expenditures tend to experience once a government program is launched4. But the true infusion of cash, the wealth with which to pay down the debts will inevitably come from the increased taxes. By putting cash in the hands of the state, now barred from any new spending, and with consumers forced to exercise some austerity, preventing the capital infusion of government payments from having any inflationary effect5, the situation is perfect from paying down debts while keeping government at a reasonable size. And it is the most politically acceptable solution as well. By preventing the state from having to find money for repayment by closing down programs, it eliminates much resistance, while the tax increases are made more publicly acceptable by being coupled with reductions in spending.

And taken in complete isolation, without thought of external desires, political incentives, human volition, long term outcomes and the like, it sounds like a sound proposition. I admit, as I explained in the footnotes, I disagree with some of the economic arguments advanced in its favor, but other than that, if we adopt a very mechanistic model, with very simplistic assumptions, and assume there are few other motives but the balancing of the budget and preservation of existing programs (maybe along with keeping oneself in office), it almost seems to work. But, as should be clear from all those qualifications, the "cet par"6 for this economic proposition is pretty extensive, and bears not even a passing resemblance to reality.

Let us start with some obvious truths, some of which are recognized by those proposing this solution, some which are suggested, but not states, and some which are ignored.

I.Spending cuts are the most certain way to reduce the cost of government. Increased taxes can cause changes in behaviors, resulting in reduced income7, or simple random chance may reduce revenues. If we want to be sure that spending will always be $X less than revenue, the easiest solution is to agree to always spend $X less than revenue, rather than set spending at some value and assume a tax rate of Y% will generate the required income8. Whether we pay for this quarter's spending "as we go" -- as we now do -- or use last period's taxes to pay next period's costs -- as I would prefer we do on a quarterly or yearly basis -- setting spending with reference to revenue, rather than adjusting taxes to cover spending is much easier to do. Spending can be adjusted as we go (as any business owner can attest), we can fire staff, scale back projects, reduce new expenditures and so on. Some statutes may mandate some spending, but much federal spending can be adjusted to meet revenue changes, while adjusting tax rates is a slow process, requiring legislative involvement, and so cannot be done "on the fly". However, there is the other side of this argument, as we shall see next.

II. While spending cuts are more reliable, they are also less popular, especially with politicians, but with much of the public as well. Spending cuts, in practice, mean eliminating some service the government provides, eliminating some jobs, stopping some grants to a college or researcher, cutting scholarships or student loans, closing military bases and so on. When the public is paying a tremendous burden in taxes -- and if they are not dissatisfied with their tax burden, no politician would be pursuing austerity measures9 -- they expect to receive some benefit for that expenditure. Of course, they are willing to make allowance for the imperceptible benefit they receive from the military, police and courts -- unless conditions become so chaotic they feel even those are absent -- and they may be willing to pay if they see the benefit going to others, not just themselves, but in the end, with high taxes they expect the state to provide some commensurate benefit. And so spending cuts disappoint the public, especially when coupled with tax increases, or, at the very least, when not accompanied by tax cuts.

But it is not just the voter who is unhappy with cuts in spending. Those who propose government programs normally believe in those solutions, and do not wish to see the funding they receive cut10. At times they may demand more than they need, in order to ensure in the future cuts will not take away essential resources, they may engage in horse trading at times, accepting cuts to realize gains elsewhere, and they may compromise or manipulate in a hundred other ways, but, for the most part, they do support the spending they request, and so they would much rather see increases in taxes than cuts in spending. If for no other reason than money taken by taxes comes from anonymous strangers, while cuts in spending takes money from their project, as well as reducing both their ability to achieve their goals, and their perceived political influence.

Thus, very few are happy with spending cuts. There are a handful who ardently support any and all reductions to spending, and most of the public is willing to see some absurd example or another eliminated11, or would be happy to see some project they particularly dislike meet its end12 (though most who hold such beliefs have another pet project they would like to see receiving increased funds), but for the most part, public and politician alike are not happy to see the state doing less, whatever their political beliefs.

III. Tax increases are not terribly popular either, but tend to be acceptable the more government seems to be doing, or,barring that, if it appears there is some benefit being received from paying higher taxes. It could be the funding of a generally popular war, disaster relief, offering assistance in a widely supported cause or what have you, the people must feel that higher taxes are being assessed for some purpose, and that their payment is going toward something of some significance. Of course, this all depends as well on the tax increase itself. A trivial increase will often be shrugged off13, without a thought of the reason it has been assessed, while a truly massive increase might be unacceptable to the vast majority, even with several popular justifications. In short, For a substantial increase in taxes to be accepted, it must be justified in some way, with the size of the increase determining what amount of justification is needed, at least until we reach the point where the increase is simply too large to be justified in any imaginable way.

IV. The public is not foolish, they are aware of the many accounting tricks used to make increased funding appear to be a cut, to move spending from one year to another, to make a debt riddled budget appear balanced and the like. However, for the most part, they do not consider such things when considering the federal budget, and so, though they realize that claims should be taken with a grain of salt14, they, for the most part, accept what they are told about budget numbers,making it relatively easy to use accounting and procedural deceptions to make the budget appear other than it actually is.

V. No law is permanent, no promise is eternal, and even the Constitution can be changed. Not only that, but even without changes, there are many ways to look at an issue with a different perspective and find a solution to work around any barrier. I mention this because, specifically, of the faith many FairTax advocates placed in the clause requiring the 17th Amendment be repealed before the FairTax took effect. As I argued in several essays about the FairTax15, while they noticed repeatedly the many ways one could work around restrictions in our present tax code, as well as recognizing that rates and rules could change, for some reason they believed this clause was immutable, an absolute protection against ever seeing the FairTax being collected alongside an income tax. I won't repeat the many counter arguments I made, they can be found at the link above, but I will offer one, a simple point, that being that a personal income tax was collected during the Civil War, long before any amendment made it permissible. So, why would returning to those pre-17th conditions prevent the same thing from happening again?

Of course, some may wonder what this has to do with fiscal discipline, and the combination of tax increases and spending cuts in particular, and I would ask that they wait until a little later for complete details, but, until then, I ask they bear in mind how many balanced budget laws have been passed on federal and state levels, and how many were circumvented through various subterfuges, often in the first year they came into effect. We must keep this in mind whenever discussion of the combination of spending cuts and tax increases relies upon nothing more than a promise or a statute. If that is the case, and there are incentives for politicians to do otherwise, especially if citizens also feel it is acceptable to work around the laws, then there is no law which will stop that from happening16.
I believe those are enough points to set the stage for my argument, as I hope what I am going to write will be both straight forward and self-evident, at least once I sketch the basic outline. You see, while I would otherwise agree that the combination of cuts and taxes is a good approach, the problem is that the incentives for politicians, and the sympathies of the tax payers, are such that this reform may actually make matters worse, and most certainly will not do anywhere near as much to balance the budget as some other plans.

The greatest problem should be obvious from point III. The public, though able to understand the arguments for fiscal responsibility, and capable of even being motivated by the need for fiscal responsibility, tends to lose enthusiasm very quickly, and especially quickly when, as is the case with austerity measures, they cannot see any "pay off". They can stay worked up over a war for a long time, as the see the victories, or even the defeats, justifying renewed efforts. They can get behind disaster relief when they see the repairs, and the people saved. They get behind a number of issues, and maintain enthusiasm for some time, but fiscal responsibility is a hard sell, and harder to continue selling. After all, when the best one can show as an outcome is "disaster didn't strike" or "we paid off the debt", there is just little excitement. In political life, a sin everyday life, perhaps even more so, people have a hard time showing enthusiasm for dull, responsible behavior.

And so, though the government may easily pass both types of austerity measures, higher taxes and reduced spending, it is not easy to maintain both. The public, paying more, comes to expect something for their tax payments. And when, instead, they see news reports about paying more and getting less, about how much more past generations had, when they are told (rightly17) they work for the state through the end of July, or longer,they begin to agitate for a tax break, or, if that is not possible, then at least that the government reevaluate its priorities to "give something" to the middle class.

And that demand is music to a politician's ears. After all, the term "middle class" is so nebulous as to be all but meaningless18, and even if it were not, as the Commerce Clause has taught us, any project can be shoehorned into any cause. So it is not hard to paint anyone's favorite pet project as an effort to provide some relief to the belabored tax payers, giving something back.

Nor is it necessary that those politicians doing so are being dishonest. After all, likely by the time the complaints have arisen, the debt has been paid down somewhat, the rate of growth has slowed, and the surplus funds seem larger relative to the remaining debt, making it easier to justify taking a little bit to pay for this or that essential project.

The logic of that last argument demonstrates another problem with attempts to make debt payment permanent, or even continue them over a considerable time. Assuming the surplus from tax increases and spending cuts remains constant, or, as things improve when government debt declines, increase, they will represent an ever increasing percentage of the total debt, making the rate of payment seem to rise rapidly. Of course, in truth, the payments themselves may be constant, but it is easy for a politician to see that rising percentage, and to so present it to the public, and make it seem we have gone to extremes in our fiscal responsibility, and that sufficient funds exist to allow us a little new spending.

Then, of course, there is the other possibility. Should, for whatever reason, the economy show signs of decline19, it is all but inevitable that the many neo-Keynesian economists beloved by government will come forward to blame the slump on decreased government "investment", and suggest some sort of modest spending to revive the economy. Which, should it come to pass, is a sure way to end any spending reforms. After all, if it succeeds, the economists will claim to have proved that the previous level of debt was healthy, and so spending cuts will be discredited and quietly abandoned. (Though, as I shall show shortly, taxes will probably not decline.) On the other hand, should the stimulus fail to help the economy, it will be used to justify a larger stimulus, as clearly the previous effort was too modest. And this argument will be repeated again and again, until the economy finally recovers, again proving their case, and showing that cutting spending was a bad idea20.

Whatever may happen with spending cuts, should they be slowly eroded through exceptions, or made invalid by the accumulation of new spending, or completely demolished by supposed proof that stimulus is needed rather than fiscal responsibility, there is one certainty, taxes will not decline, or will not decline in a substantial way.

As I said above, it is relatively easy to justify taxes to the public, provided you give them something. And in each of the cases mentioned, be it restoring spending that was cut, creating new programs, or the birth of some sort of stimulus plan, the state will have something to show for their tax increases, and thus will, for a time, have no trouble arguing the public is getting their money's worth. And, should the support erode over time, the state can simply enact some new spending,and once again argue that the money is well spent. Unlike the fiscally disciplined position, which has nothing to show but better numbers on a balance sheet, the avoidance of disaster that is impossible to conclusively prove would have come, and a very slow, gradual improvement in the overall economy. And the last can be easily claimed by any other government program, as small, slow improvement always has a million fathers when it comes to the government. The congress when the rise started, the current congress, the current president, every president preceding him, changes to the tax code, what was not changed, the Federal Reserve, the private sector, each and every law, agency, department and individual bureaucrat, and that is just the top of the list. When things improve in a way so gradual no immediate cause is obvious, it is claimed by everyone, and so, though fiscal responsibility brings about such improvement, no one will ever believe it to be true.But the quick jolts of apparent improvement from government spending, or the output of whatever projects are created, those can be seen, and can justify quite a hike in taxes, and thus, whatever eventually eliminates all the spending cuts, or at least reduces them until they nearly vanish, taxes are almost certain to remain as they were21.

Yet that is not the sole problem with this approach. Besides the incentives and public pressures to cut the legs out from under such reforms, there are also many deceptions and government policies which can make spending cuts meaningless. We are all well aware of all the dodges used to meet the technical requirements of balanced budget laws, while falling far short of a truly balanced budget, does anyone think the government will do any less when confronted with any other sort of fiscal discipline?

First, I imagine those confronted with cuts would try to ensure that their pet projects have a level of spending mandated by law. This isn't all that unusual. Welfare programs, for example, must pay recipients who qualify, and at a fixed rate, so no spending cut can be used to reduce that amount. And if projects can be said to include some sort of fixed payments mandated by law, it would obviously be unfair to require the whole department meet some percentage cut, as their mandated spending would mean the cut would fall even harder on the rest of their spending. And so, quite likely, many mandated expenditures would either be exempted, or else the departments in question may be treated differently or exempted entirely.

Second we have the tradition, long known by voters but still not well understood, of calling "cuts" any spending level which falls short of some arbitrarily established expected increase. That is, if my department has a $100 million budget, and I expect 10% growth next year, if the budget allocates me $108 million, I can call it a cut of  1.8%, even though, using this year's spending alone, it was truly an 8% increase. Clearly, the government will, in assessing cuts, be well aware of this, and define cuts precisely. But will the public know which is which? If a department wishes to claim they were hit too hard, they can easily inflate the scale of their losses in new spending. And likewise, if the government as a whole wishes to minimize cuts while still telling the public it is being frugal, it too can avail itself of this subterfuge.

There are more, but I think my point is clear, cuts are easy to negate, to erase with new spending or restored spending on existing projects, or simply to make only on paper through a variety of deceptive practices. However, taxes, once enacted, are far more likely to persist. And so, while it seems sound policy to balance the budget with a combination of cuts and taxes, I would argue instead that our first steps should always be to cut, and cut alone. Only once we have established a clear pattern of fiscal responsibility, once we are used to less spending, smaller government and come to think of the state less as a Swiss Army knife, capable of doing anything and more as a corkscrew, flocking gun or Allen wrench, a special tool of limited uses, only then could e consider raising taxes, and even then, not to allow us to maintain current spending, but only to accelerate the rate at which we pay down our debts, to allow us to avoid losing even more interest and put ourselves on sound footing even more rapidly.

Unfortunately, I doubt this will ever happen. The state is far too comfortable with raising taxes whenever it feels a need, and so even when contemplating fiscal discipline it still follows the behaviors it learned in the era of tax and spend. And since such a combination, when we consider public behavior and the incentives effecting politicians, is likely to result in spending quickly returning to former levels, or even rising, while taxes remain the same, I doubt we will see anything approaching a decline in debt anytime soon.


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1.  I don't mean to sound arrogant here, but I can think of no better description. The short, factual blurbs about actual happenings in the local area are unobjectionable, but it seems they inevitably degenerate into the most simplistic of DNC talking points. If there was a shooting, it is the fault of lax gun control, or parents who dared to own guns. If there is an economic slump, it is due to insufficient government investment, or a poorly managed money supply. If there is any accusation of insider trading or any other charge involving Wall Street, they begin to sound like the hairy man with a loud speaker at the most recent Occupy Whatever rally. So, when I say they are shallow, I mean just that. They are not only partisan and didactic, they do even that using the most superficial and idiotic arguments, the type that embarrass even orthodox liberals. I suppose it is the result of living in a one party state, the faculty for argument tends to atrophy among the true believers. Which would not be a problem were we not situated near Washington, convincing every news reader he or she will be the next big thing in national news (and, sadly, we have sent a number of vapid liberal mouthpieces to CNN and MSNBC) so they feel they must pontificate, despite their obvious limitations. Actually, I think I sound even more arrogant now, rather than less. But trust me, if you were to watch Maryland news for a while, you would begin to describe it in terms quite similar to mine.

2. It is interesting, but this fits with my last post, "Help and Harm", as it is another subject where conventional wisdom and popular expectations are just wrong. (Cf  "When Help Hurts", "When Help Hurts II", "Bad Economics Part 11" and "With Good Intentions".)The contraction of 1981 for example, was seen as a financial crisis, and yet, in truth, it was a good thing, as it allowed for the end of Carter era large scale inflation, and reduced the money supply relative to actual assets. Similarly, the contraction at the end of the Clinton years and beginning of the Bush administration (up to 2001, when other factors became involved), was a sensible reaction to the excesses of the preceding inflationary years. And I think the same is true here. Whoever presides over the inevitable contraction, be it Obama or his successor (unless someone resorts to hyperinflation and sends us into a different crisis), will probably never hold office again, but will do considerable good for the nation. We need to undo the monetary growth and overspending from about 2006 to present, but we cannot do so without come contraction, and the pain involved. See "Hair of the Dog?", "Solving Problems We Created",  "In The Most Favorable Light", "With Good Intentions", "Grow or Die, The Inevitable Expansion of Everything", "Government Quackery", "Life Is Not Fair - And Trying To Make It So Makes Things Worse","Bad Economics Part 19",  "Antibiotics, Automobiles and the Free Market" and "Just What We Don't Need".

3. Granted, this may not have always been the course followed during the era, by Reagan, conservatives in general or the government as a whole, but it was the solution most often proposed by conservatives. Whether it was simply a position adopted for show, or was a true belief they failed to achieve, I leave to the reader, though personally, I accept that most people are relatively honest about their beliefs, even if they often fail to meet those standards they set forth. See "Hypocrisy?", "Deadly Cynicism", "Self-Serving Cynicism and Our Cultural Immaturity", "The Presumption of Dishonesty", "All Life in a Day, or, How Our Mistaken View of History Distorts Our Understanding of Events", "Catastrophic Thinking, The Political, Economic and Social Impact of Seeing History in the Superlative", "The Path of Least Resistance", "Misguided, Deceptive or Evil?", "In Defense of Civil Debate", "The Nature of Evil", "Life Without Villains", "Enemies Into Villains", "Rethinking My Earlier Position", "Three Versions of Evil and the Confusion They Cause", "Tyranny Without Tyrants" and "Missionary Zeal and Human Discord".

4. See "Recipe For Disaster", "The Endless Cycle of Intervention",  "The Cycle of Compassion" and "Grow or Die, The Inevitable Expansion of Everything".

 5. I do not accept that spending can cause inflation. It may cause a transient price increase, but it will not last. True inflation is an entirely monetary event, caused by growth in the money supply, most often under a system of fractional reserve, and normally only under more centralized versions of the same. See "Inflation and Uncertainty", "Bad Economics Part 7", "Bad Economics Part 8", "What Is Money? ", "What Is A Dollar?", "The Gold Question, Not "Why?" But "When?"" and "Bad Economics Part 19". However, as this concern is often expressed by conventional academics outside of the Austrian school (and some of the Chicago school), I feel the need to mention it, even if I find it a silly worry.

6. "Cet par", for those who don't read much economic writing, is short hand for "ceteris paribus", or "all other things being equal". It is used to indicate that only the specified parameters have changed and all other factors have remained constant. In other essays I have laughed at how poorly "cet par" mirrors the real world, sometimes even forcing theorists to ignore changes that are inevitable outcomes of the event they are studying. And, in this case, we must assume that the politicians in question are very highly resistant to change, and do not respond to many incentives offered by this plan, as otherwise the outcome may be quite different, as we shall show soon.

7.Just to offer a few examples: Increased taxation may dilute individual fortunes, resulting in less capital available, slowing business expansion and reducing predicted revenues. Increased taxes may make it more attractive to relocate overseas, invest in tax shelters, invest in tax preferred bonds or foreign companies, or simply cheat on taxes. If the tax system is highly progressive, an additional increase in the marginal jump in rates may make individuals choose not to work extra hours or take pay raises, reducing overall income. Increased rates will certainly reduce disposable income, which will reduce consumer spending, possibly even driving some firms or industries out of business. If the tax increased has any matching components, it may also increase the cost of new hires enough to discourage employing new staff, reducing overall income for the economy.

8. Clearly, any spending plan that involves ongoing expenditures paid by current revenue will involve some guesswork. The best solution would be to tax yearly, or quarterly, and fund the upcoming period with the taxes of the prior period, but for many reasons we moved away from anything resembling that. So, until we are ready for that reform, we must instead estimate income. Still, if we estimate income and use that to set spending, we can easily adjust spending as revenue proves higher or lower. On the other hand, if we commit to a set spending level in advance and pick tax to match, we cannot adjust taxes until the next legislative session, and more likely one or more years after the next legislature meets. So even with estimation, tying spending to revenue, rather than setting taxes to support preordained spending is still more stable.

9. I do not mean to sound cynical, or suggest politicians act only in their own selfish interest, but politicians are like anyone else on earth, if things are going well in some area of life, if they are content -- of, in the case of politicians, if the voters are content -- they will rarely look into that matter. A few may have time to try to improve on things not broken, and a handful with strong feelings about a specific topic may raise it despite voter indifference, but the system of elections will make such actions unlikely, as those who pursue matters of little interest to the voters, or wasting time on them when other matters are available, will often lose their office. So, until the public feels some discontent over the balance of benefits provided versus taxes levied by the state, politicians are unlikely to worry about spending or taxes. I suppose, if it seems a financial crisis is in the offing, then the matter may arise without voter discontent, but, for the most part, when it seems there is impending disaster, that piques voter interest, and this becomes an issue with voter support once again.

10. It is possible a few propose measures they do not support to achieve other goals, but, for the most part, I accept that those suggesting the government become involved in a matter are truly in agreement with the position they put forth. See "Grow or Die, The Inevitable Expansion of Everything", "In The Most Favorable Light", "With Good Intentions", "Tyranny Without Tyrants", "Perverting Self Interest ", "O Tempora! O Mores!, or, The High Cost of Supposed Freedom", "The Inherent Disappointment of Authoritarianism", "The Right People, The Wrong People and "Just Plain Folks"", "Misguided, Deceptive or Evil?"  and, finally, "The Lie of Environmentalism", the last of which actually deals a specific application, to wit, my examination of the various ranks of the environmentalist movement, along with their goals, real and purported, which, though it finds some suggestion of dishonesty, argues, for the most part, the rank and file believe just what they say.

11. I wrote before that pointing out specific wasteful expenditures is pointless. (See "The Waste Book is a Waste") It generates a brief indignation about a single stupidity, but it also allows those favoring big government to brush it away as an aberration, and then ignore the larger questions about what is and is not a valid expenditure. Yes, it is mad to spend taxpayers' money on researching the effect of beer and garlic on the appetite of leeches, but it is equally improper to spend their money on a massive, intrusive federal bureaucracy. By concentrating on the former, we often manage to obscure the latter, which spends, thousands, tens of thousands, even hundreds of thousands times as much every year.

12. It is always interesting to hear partisans suggest what should be cut, be it liberals seeking the reduction of the military or of "corporate welfare", or conservatives seeking to reduce or eliminate various welfare programs of a more individual variety, along with the Department of Education, Department of Labor, NEA, PBS and HUD. When the topic arises, almost inevitably, left or right, proponent of less government or more, the first sentence about what should be cut will also include the words "would be better spent" and a suggestion of some other area to absorb whatever is saved in the proposed cuts. In short, though most of them do it unknowingly, those who want to eliminate specific parts of the government are not consistently arguing for a reduced state, they often simply wish to shift the money around, to better match their priorities. See "The Single Greatest Weakness", "Doing Something", "Don't Blame the Politicians", "Inspections, Regulations and Bans", "A True Conservative Platform" and "Minimal Reforms".

13.One must recall two things when considering tiny increases. First, what qualifies as insignificant is a function of income and assets, and expectations about their future, so what is trivial in a good economy with much surplus cash, may be unacceptable during hard times. In addition, an increase that was once trivial may be made into an issue should some politician decide to argue the case. For example, the periodic upset over fees remaining from depression era program or the Spanish American War tend to be over rather paltry amounts, but the purpose is so absurd that politicians looking for a cause can make them into issues, regardless of their size.

14. The public, in general, knows that partisan claims about the budget tend to be self-serving, and even claims from administration sources, be they "bipartisan" or an organ of the White House or congress, tend to also promote a position favorable to the government. However, they adopt a position rather like the cynical view of our legal system, that competing liars will uncover the truth. Thus, they imagine that any lie that is too large will be caught and exposed by the opposite party, and so, any claims that are unchallenged, or are only weakly disputed, are close enough to the truth. Unfortunately, while parties may lie for their own benefit, in some regards both parties -- at least in terms of incumbents -- have a shared interest in maintaining government spending, and so they are cooperative liars, not competing ones. Or, to be a bit less harsh, they both have reason to choose numbers that make the government's case that it deserves funding, rather than demonstrate that funding should be cut. (As I argued elsewhere, we need not assign sinister motives. A simple faith in the power of the state to make things better would justify choosing numbers showing government success rather than failure.)

 15. See "Short Reply To Doctor Adams", "Why I Dislike the FairTax" and "Another Reply to Yt_knight".

16. See "Bar Fights, Riots and Drug Markets - The Limits of Law".

17. I am quite happy we have so many who point out how heavy our tax burden is. However, in this specific case, the knowledge they present can easily be used by those who renew spending to argue that the fiscal conservatives are going too far, that we have massive revenues and should be able to support some small new projects, as those who pay so much deserve to get something in return. In fact, this is one of the chronic problems of expansive government, it is always easy to argue that we should pay for something else. See "The Single Greatest Weakness".

18, See "What About Everyone Else?",as well as "The Other 99%", "Obama's Economic Plans Revisited", "Some Questions from the Obama Speech", "Beware Populist Deception" and "Envy Kills II". Of course, I have always wondered at the political obsession with the "middle class", it always struck me as suspect, like the fascination with small business or farmers. I thought the government was supposed to represent all equally, not be the voice of the middle class, business with a low net worth or those who toil in the earth. But, it does sound quite good in soundbites to be the the champion of the middle class, so we will likely hear it forever. See "The World's Oldest Myth", "Bad Economics Part 6", "Fear of the "Big"", "Stupid Quotes of the Day (January 17, 2012)", "The Little Guy Can't Compete" and "Small Business Fetish".

19. It is almost inevitable that at least one sign taken as a negative indicator will appear. As the government spends less, it will have less debt to monetize through the Federal Reserve, and so inflation will slow for a time, leading to signs that the economists will take as "deflationary". And likely, the decreased spending will cause some hardship in sectors of the economy traditionally supported by government spending. However, these deflationary indicators, and slumps in public sector and related industries, will be accompanied by increases in other sectors, and a general stabilization of the currency, so it is hard to sell the situation as a crisis. But, I would imagine, given their own doctrine, and the ease of befuddling the media and public with Keynesian gibberish, these would be sold as harbingers of doom. See "CNN's Keynesian Nonsense", "The Theory That Wouldn't Die", "Spend for the Fatherland, Citizen!", "Environmentalism For The Economy?" , "Why"Negative" Economic Indicators Are A Good Thing", "Bad Economics Part 11" and "Overly Simplified Economics and Confused Interpretations".

20. I have discussed this "heads I win, tails you lose" approach a number of times. See "Government Quackery", "Rewarding Failure","Inescapable Logic", "The Cycle of Compassion", "Recipe For Disaster", "The Endless Cycle of Intervention" and "Grow or Die, The Inevitable Expansion of Everything". I also discussed the other element, the method of trying a "solution" over and over until the result matches predictions, and then claiming success, in my essay It Takes But One Victory. What amazes me is how obviously dishonest this approach is when one gives it a moment's thought, and yet many, including critics, seem to fail to notice, and actually accept such arguments when presented to them.

21. It is conceivable some politician will grandstand about offering tax relief and make some trivial cuts in the tax rates for a few middle income brackets. But, for the most part, I would imagine this sort of fiscal reform is far more likely to be undone by reducing spending cuts, rather than reducing taxes.

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POSTSCRIPT

One step I did not mention here, but one that will be essential should we ever desire to enact true spending reform, is a change to our monetary system. It is too complex to discuss here, and so I shall probably write a separate post about the topic, but, to explain briefly. Our present monetary system relies upon government debt to provide backing for our currency, the way gold once did. If we end the era of chronic, massive debt, and keep within our means, there simply will not be enough debt for the Federal Reserve to function as its legal structure requires. Of course, no one truly believes government debt in any way provides real security for our currency, so it could easily be eliminated, but for the laws. Still, if we stop our habit of deficit financing, or even reduce the scale of debt to a more manageable size, we will need to find a new way to establish reserves to back out currency. I would obviously argue for a return to gold, but I somehow doubt it will happen. But, gold or not, if we become responsible in government financing, we will need a new basis for our currency. (See "Inflation and Uncertainty", "Bad Economics Part 7", "Bad Economics Part 8", "What Is Money? ", "What Is A Dollar?", "The Gold Question, Not "Why?" But "When?"", "Monetary Issues Made Simple Part I", "Monetary Issues Made Simple Part II", "Stupid Quote of the Day (January 7, 2012)", "Wolf or Sheep", "The Inflation Engine", "Those Greedy Bankers", "Explaining Past Crashes" and "Bad Economics Part 19".)

Thursday, December 27, 2012

Help and Harm

It is a sad truth of our times that many economic principles are either not understood at all or poorly understood at best. I admit, our time has definitely seen a small improvement, with a few more people coming to understand that certain policies, such as minimum wage laws, cannot produce the benefits promised, but alongside such gains, we have much greater losses. The most notable being the near total agreement of right and left on a number of completely erroneous beliefs. The best example is likely the commonly held belief that the gold standard is impossible to implement in a modern economy1, though in that particular case, the pro-gold position is done little good by the support it receives from the political fringe2. Similarly, both sides seem relatively agreed on the need for government regulation of the stock market3, of pharmaceuticals and other medical matters4, of retirement planning5, even of health insurance6. Matters which were once quite contentious, it appears both sides have come down in favor of the belief that state intervention is needed to protect us from ourselves, or from anonymous predators7.

I hardly have the time today to take on all such mistaken beliefs, so I have chosen instead to address an issue which is considered largely settled, so much so that not just right and left, but even most conventional historians, journalists, and the man on the street are in complete agreement. That is the belief that lenient bankruptcy laws tend to help the "little guy", the everyman, the ordinary worker, while strict laws about discharging debts tend to favor only banks and lenders. I know it is commonly accepted, held as an expression of "common sense"8, but it is completely and totally wrong, and I hope to prove as much. And, along the way, to also take a quick look at related matters, such as the banning of "pay day" loans, caps on interest rates and other "pro-consumer" and "pro-borrower" measures which, again, are anything but9.

The conventional wisdom is, simply put, that bankruptcy laws help out the "little guy", the common man, and harm bankers and other plutocrats, and the more lenient the laws, the easier it is to discharge a debt for part of its value, or over an extended period, the better it is for the common man. It has become such a common belief that I doubt one in every hundred randomly chosen people would disagree with this description.

Unfortunately, it is completely wrong, and not just wrong in the way you would expect. Obviously, anyone familiar with my blog will expect me to say that by destroying capital markets, bankruptcy laws do damage to the economy, and thus harm everyone, that is what most probably anticipate, but beyond that general harm, these laws also do direct harm to those they purport to benefit. In fact, with the exception of a narrow category of borrowers -- not all of whom match the "everyman" image -- there is almost no one who receives benefit enough from bankruptcy laws to offset the harm.

As it is expected, let us begin with the most obvious argument, at least from anyone sharing my economic views. That being the damage done to the economy as a whole by crafting laws which allow debts to be discharged at less than full value, including interest if paid over time10. Following that, we will look at a few more specific types of harm done to specific categories of borrowers and lenders, and, in closing, ask who receives benefit from bankruptcy laws, and to what degree, so we can decide whether or not there is anyone who receives more benefit than harm from this sort of bankruptcy law.

We should begin, obviously, at the beginning, defining what bankruptcy laws are, why they are needed -- if they are -- and what I mean by lenient and stringent laws.

Lending and borrowing is an essential part of the capitalist system. Without the ability to borrow from others, it would be very difficult to start new ventures, or even expand existing ones. Perhaps existing firms, or existing owners, in any case, could pool their wealth and launch new ventures, and maybe some less wealthy, but successful, employees could manage to accumulate enough wealth to start a modest venture of their own, but for the most part, business creation would be much slower, and restricted to a much smaller pool -- mostly made up of those already well to do -- were it not for lending11. In addition, though it has a bad name among many, consumer credit is also an important part of the economy. Prior to the creation of consumer credit, it was difficult for potential home buyers to break into the market, as without a mortgage, it is very difficult to accumulate sufficient funds to become a home owner, especially while one is simultaneously paying rent. Then there is the sort of borrowing that is more traditionally called "consumer credit", borrowing for cars, for expensive electronics, jewelry and so on. While many find this practice harmful, it actually allows new inventions to more rapidly pass from the "rich man's toy" stage, through the "luxury" phase and into common use. Where, before, purchases had to be made by those with considerable disposable income, now people with much less wealth can purchase the same goods, leading to earlier development of economies of scale and making goods commonplace much more rapidly. We can see this in how this works in our time by comparing the relatively long time it took, say, video tapes, to become commonplace, versus the rapid drop in prices we saw for DVD players, or the time it took portable phones to become widespread (from the 80's to the later 90's), versus the spread of PDAs and their many modern forms.

But all of that is the subject for a very different essay. Let us just say, to keep things simple, that borrowing and lending is very important for capitalism, both for business formation and consumption. A free, modern economy could exist without lending, but it would be quite different, and wealth would probably remain concentrated in a few hands for much longer12. And, with lending being such an important part of the economy, it is essential to establish some means to make debts enforceable13. Of course, it could be done privately, by establishing private arbitrators and requiring posting bonds to ensure payment. Such a system is conceivable, but would be problematic, as to be entirely reliable it would require posting of bonds equal to the total value of the contract, making credit much harder to obtain. Thus, our present solution of civil courts backed by the enforcement power of government may be a more flexible solution, as the penal power of the government ensures payment without requiring resort to huge bonds or other sureties14.

However, borrowing does present one problem not commonly found in other civil matters, and that is the simple truth that most borrowing is done because the individual does not have sufficient cash on hand, or other liquid assets, to raise the amount borrowed. Thus, there is always the risk an individual will be unable to pay back money borrowed, and, even when all assets are liquidated, that some portion of the debt shall remain unpaid15.

It is the possibility of one's assets falling short of one's liabilities that is behind the concept of bankruptcy laws. In a fully unregulated system, without any such laws16, each creditor would be paid as they brought suit, and the case was decided. Those who came too late to the game would end up having to wait for future payments, while earlier claimants would enjoy full payment. And, as for those later payments, all those having claims against the debtor would each demand full satisfaction, resulting in endless court battles over the assets which become available. Courts could agree to appoint a receiver to parcel out the available funds, but in many individual cases the cost would be prohibitive.

And thus, bankruptcy laws were born. Some still involved receivers, or the possibility of receivers17, but for the most part, personal bankruptcy for those of normal assets involved nothing more than regular, formulaic payments to creditors, to ensure each received fair compensation, and that all were also paid some portion of the remaining debt as assets became available. Some early laws involved additional, related matters, such as acceptable interest rates on postponed payments, formulae for figuring a fair amount to retain for living expenses and the like, but, for the most part, basic bankruptcy laws are nothing more than simple systems for reconciling the competing demands of multiple creditors without recourse to the courts or actively involved receivers.

Such as system is, to my mind, completely unobjectionable. Were there no such systematic rules, then we would be confronted by either endless court challenges, suit being filed each time the debtor came into any money, or else the courts would have to rule on each individual case, creating a schedule of payments and the like, creating tremendous work for judges. It makes sense, as an administrative matter, for the courts, or the legislature on behalf of the courts, to create a means to resolve quickly the questions for routine problems commonly encountered. Yes, in some cases, the courts will need to hand down individual rulings because of unusual circumstances, but thanks to administrative laws such basic bankruptcy rules, the courts can be spared considerable work, and, as they are funded through the state, individual can be spared considerable costs.

The problems arise when the laws go beyond the simply administrative matters, deciding when a given debt will be paid to whom, and instead begin to interfere with the debt itself, either allowing an individual to discharge a debt by payment of less than full value, or even by setting the rate of interest which can be charged on debts which are in the process of payment18. When this happens, we are leaving administrative law and entering into actual exercise of full government power, specifically deciding whether or not we can deprive someone of his property rights -- in this case the creditor's claim to repayment. Which is what I mean when I speak of "lenient" laws. In the case of bankruptcy, stringent laws are those which respect all property rights, as well as the right to contract, and limit themselves to arbitrating between creditors as to assignment of payments, as well as ensuring the debtor retains enough from his earnings to pay for his living expenses19. As soon as the law departs form this baseline, and begins to tamper with the contract, or forgive debts in part or whole, even begins to take measures such as establishing rates of interest, then I call the laws lenient, with leniency increasing as the meddling becomes more prominent. As should be obvious, I consider such lenient bankruptcy laws, in contrast to the administrative function of stringent bankruptcy laws, as unwarranted extensions of government20, and, as with all such actions, the action has considerable consequences, which we shall now examine in a very general way.

The immediate consequences of such laws are obvious, some people with money available to borrow will withdraw that money from the market, and others, as the ability to discharge debts for less than full value adds to the risk of lending, will raise the cost of the money they lend, either by increasing interest rates, or, if that is impossible due to laws21, they will assess fees or other interest surrogates, and, if even that option is unavailable, they will simply tighten the requirements to qualify for any loan, leaving money available at the same cost, but making it much more difficult to obtain.

Clearly, such changes would have a harmful effect on the economy as a whole, rich and poor, lender and borrower alike. With money more costly, growth will be slowed. New firms will not be started, existing firms will not be expanded. Consumer credit tends to contract even more swiftly than commercial credit, and so consumer spending will fall as well, accelerating the contraction as revenues decline. The market will eventually adjust to the laws, but as the increased uncertainty about lending will remain, costs will always be higher for money, resulting in a chronically more sluggish and slow growing economy. After some time, people will no longer notice as the condition become the new "normal", but that does not mean harm has not been done, and is not currently taking place.

However, there is also more direct harm for borrowers, specifically, those supposedly receiving benefit from more lenient bankruptcy laws.

The most obvious is that such borrowers may no longer be able to become borrowers. When the cost of borrowing rises, or qualifications are increased, or both, often the first to feel the effects are the "little guys" these laws supposedly favor. And so, while the laws, when passed, may favor those currently holding debts (though we shall see whether this is true or not), the future effect will clearly be detrimental, as lenders become less likely to lend to those whose assets and income are close to the required payments, making default more likely, and interest rates and fees rise to cover the losses incurred by lenders whose borrowers defaulted22. Those fortunate enough to qualify will certainly see much higher interest rates, as well as fees, but will also likely find they are required to repay in a much shorter period than before, as uncertainty makes longer term loans ever less attractive.

Yet the harm hardly stops there. What many who favor lenient personal bankruptcy fail to note is that banks are hardly the personal property of a handful of plutocrats. In modern times, most are publicly owned, and, as most "little guys" have pensions or some other retirement plan based in part or whole on stocks -- not to mention the heavy investment of the middle class in stocks in recent times -- many banks have "little guys" as majority shareholders. Thus, when banks see profits fall due to lenient bankruptcy, or due to the need to reduce outstanding loans to avoid future losses, they will find their retirement, or investments, returning much less than they once did. Not to mention that the overall economic decline, mentioned above, will exacerbate this tendency, depressing their other stocks, while economic slowing farther depresses the value of bank stocks.

Nor is that all. Many "little guys" are also self-employed, or own small businesses. And many of them have customers who are either other "little guys" or small, sole proprietor enterprises that might be in part or in whole covered by personal bankruptcy rules23. Should they extend any sort of credit to these individuals, then it is quite likely that lenient bankruptcy laws will end up costing them money, in the role of big, bad "creditor", in order to benefit the "little guy" debtor.

All of which highlights the problem with many bankruptcy laws, both personal and corporate, as well as other policy decisions about money and credit, the assumption that borrowers are all lower and middle class private individuals, while lenders are all rich fat cats is simply absurd. In fact, it likely never was true, or, if it was, it has become less and less so since the industrial revolution. Certainly, at our current level of wealth, much of the economy is actually owned by the middle, and through pensions, even lower, class, while considerable debt is held by the wealthy, as well as large companies. Favoring the debtor often ends up giving what benefit it does24, not to some everyman, but to corporations, wealthy borrowers and others populist supporters of lenient bankruptcy tend to paint as villains.

Bankruptcy laws are not alone in this regard. Time and again laws intended to help "the little guy" have done precisely the opposite. Then again, in many cases this outcome should have been obvious. For example, many states have banned high interest, short term "pay day" loans on the grounds that they exploit poor people in need of immediate money. However, this neglected the simple fact that those taking such loans took them precisely because they desperately needed money, and so the ban did not help these people , but rather made their problems worse by leaving them even fewer options, pushing them to either take recourse to even less desirable solutions, or else suffer the consequences their lack of funds would entail25.

Similarly, laws which limit interest rates, though promoted as being beneficial to the same "little guy" are harmful in the same way. This, because interest is capped, the lender will want to lend only to those matching a certain risk profile. Since our "little guy" presumably has a larger debt to equity ratio, he will seem a greater risk, and the interest cap is more likely to leave him disqualified. And thus, far from being beneficial, the law will simply deny him the option of borrowing.

I could go on, but I think I have covered enough of the subject to come to a conclusion. In the long run, it appears, given the overall harm to the economy, as well as the reduction in borrowing options and the destruction of the lending industry, lenient bankruptcy laws are quite damaging, so much so that even those receiving the benefit of debt forgiveness enjoy more harm than good.

In an earlier essay, I had postulated that these laws were of benefit to one group, those who routinely defaulted on loans, and this would default enough times to gain more benefit than loss. However, on second thought, event hey would likely not receive enough benefit. If they truly default frequently, the tightening of credit I mentioned would make it impossible for them to continue borrowing and, as a result, they would not be able to gain any additional benefit, leaving them int he same situation as the rest of us.

Thus, I can honestly say, as far as I can tell, in the long term, taking all benefit and all harm into consideration, there is simply no one who receives a net benefit from lenient bankruptcy laws. Unless you consider the populist demagogues and politicians who ride such issues into office, or personal wealth and fame. They may receive enough benefit to offset the harm done, but, if so, they are unique in this regard. 

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1. See "Inflation and Uncertainty", "Bad Economics Part 7", "Bad Economics Part 8", "What Is Money? ", "What Is A Dollar?", "The Gold Question, Not "Why?" But "When?"", "Monetary Issues Made Simple Part I", "Monetary Issues Made Simple Part II", "Stupid Quote of the Day (January 7, 2012)", "Wolf or Sheep", "The Inflation Engine", "Those Greedy Bankers", "Explaining Past Crashes" and "Bad Economics Part 19".

2. Sadly, a number of libertarian issues have become popular among fringe groups, making the public see many legitimate positions as untenable. As I discussed with states' rights being confused with racism in "The Civil War", the gold standard and opposition to central banking in particular have seen this happen to them. Then again, many of the valid arguments against business regulation, especially those specifically against mandatory medical licensing, have been taken over by those promoting quack cures, making it difficult to promote such positions without being mistaken for a proponent of bizarre medical beliefs. And the same is true for those who put forth legitimate criticisms of our tendency to turn every behavior into a psychiatric disorder. Thanks to Scientologists and others using such legitimate criticisms to promote their own beliefs, it is difficult to offer valid criticisms without seeming to be pushing various other concepts. (See "Mental Illness",  "Medical Regulations", "Medical Regulation II", "Brilliant but Wrong" and the postscripts to "The Role of Money" and "The End of USAID?".)

3. See "Et Tu, Town Hall?",  "How To Blame the Free Market",  "Perverting Self Interest " and "Slieght of Hand".

4. See "Medical Regulations", "Medical Regulation II", "Standing By My Principles", "Drug Legalization", "Who Does It Harm?", "It Doesn't Matter to ME...". and "Guns and Drugs".

5. See "Social Security is Not Insurance", "Critique of a Congressional Reform", "The Insurance Sham", "The Presumption of Dishonesty" and "How Not To Argue About Social Security". Note that the Republicans, and even most mainstream conservatives, while arguing about the many problems of Social Security, rarely promote eliminating it entirely, but instead favor mandatory, coercive investment in 401k/403b equivalents, basically arguing the state is right to force us to save for retirement, and in mandating a minimum amount.

6. See "The Absurdity of Mandatory Insurance", "Preexisting Conditions", "Public Funding is Government Control ", "Private and Public Coexisting", " Who Will Decide", "Shameless Self-Promotion", "The Devil is in the Definitions (And Assumptions)", "Redefining Insurance... To Actually BE Insurance", "The Insurance Sham", "Government Efficiency", "High Cost of Medical Care", "Medical Reform, An Overview", "My Health Care Plan", "True Insurance Reform", "A Different Look at "Health Care Reform"", "Of Wheat and Doctors", "Bad Economics Part 10" and "You Gotta Have Faith". While the right opposes ObamaCare and other universal health schemes, they are also almost unanimous in supporting Medicare/Medicaid, though they may quibble over who should receive benefits. Of course, this is why the left is winning in the war for universal insurance. As I argued in "Inescapable Logic", "Hard Cases Make Bad Law" and "Costs and Benefits", whoever holds the most consistent position wins. So, if the right supports mandatory care, and so does the left, then the left wins by being more consistent in supporting universal care rather than the right's more limited plan.

7. We love to imagine people are being preyed upon by some anonymous evil plutocrats, but somehow can never name specific predators. It is akin to the left's belief that a mysterious incompetent majority needs our help to live properly, while all the voters to whom they speak are somehow in the competent minority that will make these decisions. See "Those Other People", "Our View of Our Fellow Citizens", "Seeing People As Stupid", "Appealing to Arrogance", "The Citizen Dichotomy", "In A Nutshell", "Cognitive Dissonance Part 2", "Changing Incentives", "Three Types of Supporters of Big Government", "Bad Economics Part 9", "The Right Way", "The Other 99%", "Capitalism and Its Consequences" and "Liberalism, Its Origins and Consequences".

8. The entire concept of "common sense" has been the subject of many posts in the past, see "The Lunacy of "Common Sense"", ""Seems About Right", Another Lesson in Common Sense and Its Futility", "A Look at Common Sense", "Res Ipsa Loquitur", "The Shortcomings of Pragmatism", "Pragmatism Revisited", "Pragmatism Revistied, Again", "The Plural of Anecdote is Not Data", "Rules of Grammar and Pragmatism", "The Problem of the Small Picture", "Keyhole Thinking", "Impractical Pragmatists", "In Defense of Zero Tolerance, or, An Examination of Law, Common Sense and Consistency", "No Dividing Line", "The Consequences of Bad Laws" and "Questions of Law and Questions of Fact".

9. I have addressed these topics before in somewhat lengthy articles, but I felt they deserved at least a little renewed attention. For those interested in my past thoughts, please read "To Correct Debra Saunders", "Debt", "Living Beyond Their Means", "Excuse Me?", "When Help Hurts", "Environmentalism For The Economy?" , "Why"Negative" Economic Indicators Are A Good Thing", "Bad Economics Part 11", "Defending Freedom?", "Overly Simplified Economics and Confused Interpretations", "Shoplifting, Redlining and Kleptocrats" and, though a slightly different issue, "Who Will Decide","Saving Us From Lower Prices", "Price Gouging", "Put Your Money Where Your Mouth Is, Or The Logical Implications of Price Gouging Laws", "Clarifying a Reality of Capitalism" and ""True" Prices", which describe how efforts to prevent price gouging produce similarly paradoxical results. (At least paradoxical in the sense of producing results opposite of those claimed by proponents.) Other, general analysis of similar matters can be found in "Bad Economics Part 19",  "Why We Lose", "When Help Hurts", "When Help Hurts II", "Government Quackery", "Inflexibility and Bureaucracy" and "With Good Intentions".

10. Bankruptcy laws do not need to allow individuals to pay less than full value to be lenient. if they require payment of the debt in full, but allow it over time without payment of interest, or at a rate of interest below market, they are still lenient. But we shall discuss this in the essay proper, so I will not go into detail.

11. Although banks, and many critics of consumer credit, tend to treat mortgages differently, I would argue, unless the mortgage is for a business use, it is still a form of consumer credit. We are purchasing the house for use, just like a car or a flat screen TV. Yes, ti retains value, but if you buy a car that later becomes a "classic", it may be worth more than the purchase price at some point as well, that does not mean car loans are not consumer credit.

12. I discussed this in a way in "A Great Quote", "The Irrationality of Government Redistribution" and "The Benefits of Inequalities of Wealth", when talking about inheritance laws and other wealth distribution. To summarize it briefly, even though it may seem massive accumulations of wealth help only the rich, by providing great sums to lend to start new ventures, large fortunes help the poor as well, since otherwise they would lack the source of funding to launch ventures to take them out of poverty. And the rich have every incentive to loan to these individuals, as their success adds to the fortunes of the rich, making everyone benefit.

13. See "In Praise of Contracts". Regular readers may notice that the sentences following address my recurring interest in private settlement of civil disputes versus government run civil courts. (Though it avoids the very difficult topic of torts, which is the one area where private adjudication is a thorny issue.)

14. I do not say this makes our system ideal, just more flexible and more favorable to economic growth. As many readers know, this is a question I have considered from time to time, though I have never written a comprehensive examination of the matter. I will write on this one day at length, but for now I think, due to the issue of torts, and the bond requirements, 

15. This uncertainty about any payment postponed to a future date is one of the elements explaining "time preference", that is the general tendency to demand more money if a payment is in the future rather than immediate. This, in turn, is a crucial part of many theories of interest. See "A New Look At Intervention".

16. When I describe the system with bankruptcy laws as "regulated" I do not mean to imply there is anything inherently improper in such laws. In truth, I view bankruptcy laws more as administrative matters, codifications of judicial practice when dealing with discharge of debts, and, as such, are not exactly exercise of government power, so much as the exercise of judicial authority, simply establishing a fixed procedure to eliminate the need for a separate ruling in each case. Of course, once we move beyond the assignment of payments and move into debt forgiveness, or even fixing of interest, then it becomes more questionable, but that is our central topic, so I will leave it for later in the essay.

17. Of course, on paper, even simple "do it yourself" bankruptcies involve receivers, but in most cases they are simply there pro forma, and have little or nothing to do with the bankruptcy. When I speak of "receivers" in this context, I do not mean the names included on bankruptcy forms, but rather receivers who are actively involved, making frequent decisions about the acceptability of payments and the like.

18. I can see one circumstance in which such rules would be appropriate. In a fully free system, interest would be assessed at the rate specified in the contract for late payments. If such a rate was not specified, and there were no provisions in the contract for payment of interest in bankruptcy proceedings, I could see the courts establishing a way to determine a fair rate of interest upon remaining debt. The best would probably be to use the rate common for similar contracts, either with the same firm, or within the same industry, but if that proved impossible, then the court would probably want to establish means for determining a fair rate of interest for loans in general. However, I could only see the court establishing interest rates in cases such as this, fixing rates contrary to the contracted rate would represent an interference with property rights, as well as right to contract.

19. This is the most difficult part of bankruptcy, but an essential element. Clearly, the court cannot allow creditors to simply strip the debtor of his entire paycheck until his debts are discharged, as he needs to eat, and pay for shelter, as well as care for any family he might have, and the like. So, whether resolved through a specific court ruling, fixed on a case by case basis by a receiver, or determined by formula in a bankruptcy law, the allowance for living must be part of every bankruptcy. (A similar issue is which assets may be ordered liquidated to settle debts. This is a complex question, as it is rightly also part of any bankruptcy law, since we cannot leave an individual homeless and naked while expecting him to continue to earn to discharge remaining debts, but modern laws have become rather generous in what can be retained. Ideally, the law should be rather limited in its exemptions, forcing an individual to convince the court to retain more than basic housing and transportation. But that the explanation for that position, as well as the matter as a whole, is another issue for another essay.)

20. Of course, the argument here is not about whether or not this is a proper use of government, but whether or not such laws do more harm than good. Still, as I have noticed that unwarranted government interference tends to always produce such paradoxical outcomes, I felt it worthwhile to point out that in this topic as well the rule continues to hold true.

21. It is interesting that, while we look down upon medieval states as somehow primitive for passing usury laws making all lending for interest illegal, we still maintain similar laws, making certain rates of interest disallowed. (A topic we shall cover in passing.) However, such laws do exist in many, or most, modern states, putting a cap upon possible interest increases, making dodges such as "fees" and the like attractive to lenders, especially those catering to high risk borrowers.

22. Though it is concerned mostly with an unrelated matter, inflation, the essay "Inflation and Uncertainty" explains quite well how uncertainty can increase costs, as well as making certain actions impossible. It provides a good model for the results of lenient bankruptcy, as increasing uncertainty raises the cost of borrowing, as well as preventing some from borrowing at all.

23. Sole proprietorships, partnerships and the like are difficult to discuss when talking about personal bankruptcy, as what will and will not be covered depends on a lot of particulars. However, in many cases, a personal business, unincorporated, with assets kept mingled with the owner's, then personal bankruptcy will likely cover at least some of the debts, if for no other reason than it may be impossible to determine if specific debts are personal or business.

24.  As I have stated, I do not think there is any net benefit to lenient bankruptcy laws. However, what I mean here is the short term or immediate benefit, that is, the forgiveness of debts and the like.

25. Many of these laws intended to save people from themselves ignore the fact that people generally accept bad solutions because nothing better is available. (Likely because those promoting such solutions look down upon "the masses" and feel them incapable of making sound choices for themselves.) People take high interest loans because they are in a situation where they need money badly enough that the interest is the lesser of two evils. By eliminating that option, the state does not eliminate the problem for which they need the money, it simply pushes them into worse choices, or else leaves them with no solution at all. See "When Help Hurts".

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POSTSCRIPT

I managed to go eight days on vacation, for the first time in the history of this blog and its predecessor on Townhall. It may not seem much of an achievement, but I have real trouble staying silent most of the time, so for me it is quite surprising.

And, on an unrelated note, allow me to explain one change that has taken place in my posts. I have always written at great length, and included numerous notes, but it does seem my footnotes have proliferated recently. But there is a good reason. In the past, I normally included links in the text. However, over time, I decided the links broke up the flow too much, and, at least with the color scheme on Townhall, made the paragraphs rather unattractive and somewhat intimidating. So, rather than link inside the text, I moved them into footnotes. In so doing, I have made it appear I have dramatically increased the number of notes, while, in truth, I am no more verbose, and no more -- though no less -- discursive, I simply moved the citations to another location.

I think that is it for irrelevant comments. I hope everyone enjoyed their holidays, and have a good new year. I may be writing a bit less in the following week, as I am filling in for some vacationing fellow employees, but I will still be posting. No more vacation for the moment, though, now that I know I can keep from writing for several days, I may take another some time in the future.