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Study Economics Before Writing About It

I realize I've missed most of the brouhaha about recent changes in bankruptcy law. I wasn't very interested in the subject and didn't follow it. So I don't have anything to say about the legislation that was recently passed and sent to the President's desk.

Today I stumbled across an article written at least a week ago (why oh why doesn't everyone date their articles?) judging from an editor's comment. It was easy to tell the author had an agenda, which I'm fine with, but it was also easy to tell the author wasn't studied in economics. That, I'm not fine with.

If you're making an economic argument, you should know what you're talking about. The portion I thought was over the line was on the article's second page:

Proponents of the bill, including its sponsor, have argued that it will relieve honest Americans from having to pay the "bankruptcy tax."

"In their view, the cost of credit card defaults is passed along to the rest of those who use credit cards, in the form of higher interest rates," the professors explain. But this so-called tax just does not exist, say the educators: "The average interest rate charged on consumer credit cards has declined considerably over the last dozen years," they point out. "More importantly, between 1992 and 1995, the spread between the credit card interest rate and the risk-free six-month Treasury bill declined significantly and remained basically constant through 2001. At the same time, the profitability of credit-card-issuing banks remains at near-record levels."

Poof. There goes the whole rationale for passing the bill in the first place, and with it the illusion that credit card companies suffer losses when consumers with financial hardships file for bankruptcy under Chapter 7. The credit card companies aren't really losing money; they're just not making as much as they could if everybody had the wherewithal to pay their bills.

The article didn't state whether the "group of 92 professors at prestigious universities" were economics professors. I find it hard to believe that any were. (A more charitable, and possibly more correct, interpretation is that the professors were just noting the facts and the journalist was putting words in their mouth by writing "does not exist, say the educators" before their quote. Alas, I can't check her sources, because she didn't provide a link or citation.)

The reasoning of the bill proponents was correct: Defaults cause higher interest rates. The facts (assuming that they're true) that credit card rates have declined and profitability has held up are not inconsistent with the argument that defaults cause higher interest rates.

A more precise statement of what was called the "bankruptcy tax" is that defaults cause interest rates to be higher than they otherwise would have been. An economist looking at the theory and the facts would quickly and easily say that credit card interest rates would be even lower than they are today if there were fewer defaults.

No doubt this journalist sees herself as a consumer advocate. This is a good example of a person advocating something, out of ignorance, that will frustrate their goals. If concern for the poor is paramount, and the poor have credit card debt, then lower interest rates are an extremely powerful way to help them. (After all, a far larger number of poor people pay credit card interest than will file for bankruptcy.)

The ultimate example of people advocating something that will achieve the opposite of their goals is, of course, those few honest believers in socialism.

Tiny Island