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Sunday, June 26, 2005

Kelo: I just don't get it.

If you get your legal news from the blawgosphere, you might have had the impression that Thursday's Kelo decision marked an departure from existing precedent, analogous to Bowers v. Hardwick, signaling an end to private property rights -- all in all,  a terrible victory for Walmart and corporate rent-seekers everywhere.

(For contrary views on each of these claims, see SCOTUSBlog's good discussion here,  Jonathan Adler's comments here, and Walter Dellinger here.)  For what is worth, it is my sense that Justice Kennedy's concurrence will encourage significant limitations on what had been fairly plenary local development powers.

Libertarian blawgers in particular make two arguments, both of which confuse me.  First, they are  concerned about eroding the "home-as-castle" principle of home ownership.  Second, they are worried about the Walmart problem -- government captured by corporate interests turning over vast swathes of private property to commercial malls.  (Some attack the "liberal justices" for not being as anti-corporate as those in Kelo's minority; others claim that the liberals are reflexively pro-big government.) 

Here's my problem:  why didn't the libertarian blawgosphere similarly rise in revulsion against the new bankruptcy law?  Far from doing so, many pro-credit card company blawgers made a very big deal of the fact that the bankruptcy legislation was passed by wide margins (evidencing the strength of the personal responsibility norm), notwithstanding that bill's anti-family-home, anti-working-class, crony-capitalism nature. 

I guess I can see some folks saying the following.  People who will lose their homes after the implementation of the new bankruptcy limitation have only themselves to blame for getting sick?! falling into debt.  By contrast, those subject to a taking are guilty only of living under the sovereignty of a captured local, state or national governmental body.  The theme: bankruptcy is for suckers; takings hurt real Americans!

But that argument is confused, given that takings are compensated.  (Now, if you wanted to argue that because of endowment effects, compensation at FMV is insufficient, I'd listen).  But the even deeper weirdness here is that in the takings context, blawgers appear to believe that the government is so very corrupt that it can't help itself from seizing single family dwellings across the land to build Super Walmarts, while in the bankruptcy context some think that it reflects popular will to permit the government to allow credit card companies to foreclose on those same houses. To put it more starkly: how can it be that government-as-regulator is corrupt, but government-as-foreclosing-sheriff isn't?

Prof. Reynolds argues that Kelo will lead to a "sea change in public attitudes."  Maybe.  But if so, it will be because many people have, for whatever reason, seriously distorted the meaning of the decision.  The lack of reaction to bankruptcy legislation shows us that the American public can be occasionally snookered (despite almost always getting the big issues right) when presented with sufficiently technical arguments.  Will we now turn against government-led development for the common-good?  Time will tell.

[UPDATE:  Stuart Buck points out in the comments that some libertarian bloggers, like Prof. Reynolds, were strongly against the bankruptcy bill.  Sorry for overgeneralizing.  I still think, though, that the majority of libertarian blawgs were pro-bill.  See, e.g., the posts of Prof. Zywicki ; this guy; Rasmusen; Right Coast; and Stromata ("that old time libertarian religion is good enough for me.")  Finally, although I'm not going to label Judge Posner as a libertarian, he is surely influential.  And he was pro-bill.]

Posted by Dave Hoffman on June 26, 2005 at 12:00 PM | Permalink


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Tracked on Jun 26, 2005 8:30:10 PM


(sorry, hit post too soon)

the oligopolistic nature of the market means that credit card companies can, and will, set their prices at the maximum that consumers in general are desperate enough to pay, regardless of their bankruptcy risk.

Posted by: Paul Gowder | Jun 27, 2005 2:30:44 PM


the main effect of “pro-debtor” bankruptcy law is to make credit either unavailable to extremely expensive to poor borrowers

Wrong. That's anti-competitive profiteering, not bankruptcy, that's doing that, and bankruptcy "reform" won't correct it. All available evidence is that bankruptcy "reform" will not lower the cost of credit to anyone.

In 2004 the profits of the credit card industry, measured by return on assets, were at their highest since 1988.

At the same time, interest and fees were increasing to consumers. (In comments to posner's blog post on this, I cited the sources.)

This means that all the economic theories are being wrongly applied here: credit card profits are not being passed onto consumers. Under normal economic theory, those increased profits should be passed on, because of competitive pressures, led to decreased prices. In fact, the opposite happened over a sixteen year period.

Hence the market is not competitive. Barriers to entry are very high (one has to have a massive amount of capital to enter the credit card biz). It's an oligopolistic market,

Posted by: Paul Gowder | Jun 27, 2005 2:29:11 PM

Actually, once you understand that the main purpose of any bankruptcy law is to circumvent private credit contracts (or to limit the pool of enforceable credit contracts), you’ll see that libertarians are perfectly consistent in supporting bankruptcy reform and opposing takings at the same time. And once you understand that the main effect of “pro-debtor” bankruptcy law is to make credit either unavailable to extremely expensive to poor borrowers, you’ll get less sympathetic to the claims that bankruptcy reform is harmful to the “family home.”

First, recall that reducing the chance that the creditor will collect the debt ex post increases interest rates, collateral requirements, and reduces the availability of credit ex ante. We have plenty of empirical evidence to this: banks are going out of their way to tailor the terms of credit ex ante to the borrower’s estimated ability to pay ex post, and use very fancy actuarial statistics models to estimate whether the borrower will default or file for bankruptcy.

That is, in the world without bankruptcy law, we would see a full range of credit contracts. (1) You could agree that you will repay your debt in full if and only if you retain an over-100K-per-year job for at least ten years. Few people would be willing to lend to you; the interest rate will be quite high, and you will likely be required to post a collateral. (2) Or you could agree that you will repay your debt if you retain *any* job at least ¾ of the time. The terms and availability of credit will be substantially more attractive. (3) Or you could agree to repay if you are physically capable to work, whether or not you are actually employed. Your interest rate will be lower still. (4) Finally, you could agree that you will repay in full as long as you are alive, no matter what. Your terms of credit would be the most attractive.

Now notice that some of these options have functional equivalents -- e.g., you could agree to the option #4, plus buy disability insurance, and you’ll get a functional equivalent of the option #3. In other words, by asking for a more lenient debt forgiveness contract, the debtor is buying an insurance policy from the creditor. In the option #2, debtor is buying an employment insurance policy from the creditor; in the option #1, debtor is buying an employment-and-high-wage insurance policy from the creditor.

Who benefits the most from the option #4? Basically people who can’t afford to buy an insurance policy from creditors – people who need lower interest rates, who don’t have good credit histories, don’t have collateral. That is, the poor, the young, and the immigrants.

What bankruptcy law does is it makes most of these options legally unenforceable. Even if you prefer the option #4 to get the most attractive terms of credit (or to get a credit at all), you simply can’t. The government wouldn’t enforce that contract, so the bank won’t offer it to you. The government also won’t enforce much of the option #3 and #2; sometimes, not even the option #1. (I am vastly oversimplifying, but the point is valid).

That is, the existence of the bankruptcy law limits the freedom of contracting parties to agree to the terms of credit that most closely fit the needs of the borrower. And as the bankruptcy law gets more “debtor-friendly” ex post, it invalidates more credit contracts ex ante, and therefore not only becomes more anti-libertarian, but also forces more borrowers into higher interest rates and collaterals – or simply makes them unattractive as borrowers and forecloses the credit market from them altogether.

That’s why libertarians don’t like bankruptcy laws and why they insist on making bankruptcy laws less “debtor-friendly” ex post.

As a final note: I would recommend to think twice before trusting a certain Harvard academic and writing that most consumer bankruptcies are caused by illness. The particular academic promoting this view is (1) widely believed to have, hmm, severe political biases, and (2) her findings are, hmm, not uncontroversial among serious bankruptcy scholars. When an empiricist never finds anything that contradicts his/her political views, you can be sure something is going wrong.

Posted by: Kate Litvak | Jun 27, 2005 8:43:50 AM

Here's my problem: why didn't the libertarian blawgosphere similarly rise in revulsion against the new bankruptcy law?

The most well-known libertarian blogger -- Glenn Reynolds -- was against the bankruptcy bill, and said so all the time (often linking to other conservative/libertarian bloggers with the same view). Check out: here, here (and the many links therein); here; here; here; here; here; and here.

Posted by: Stuart Buck | Jun 26, 2005 10:37:20 AM

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