October 28, 2006
On Bankruptcy Posted by Fredric Smoler at 07:10 PM EST John Steele Gordon writes that it “might be noted that the United States has also been a leader in socializing risk. It has just chosen to more fully socialize other risks than what Messrs. Zeitz and Smoler have referred to. For instance, the laws of both personal bankruptcy and limited liability (incorporation) have long been much more generous to the risk takers in this country than is the norm elsewhere. These laws have had the effect of transferring risk from entrepreneurs to creditors (who, presumably, know the risks they are taking—that’s their job, after all—and charge interest accordingly). Business failure has always been judged a mere misfortune in this country but is often regarded as a matter almost of moral turpitude elsewhere. This has surely been no small factor in making the United States the most entrepreneurial and innovative culture on earth, and also the richest.” This is wisely said, although partial, possibly in two senses of that word. It is true that American bankruptcy law was designed to give ordinary people a second chance, and was not as tender of the interests of capital as was the case in Europe. But it is interesting to note that the Republican Congress’s recent “reform” of bankruptcy law, a very high priority for the credit card companies, shifted a lot of risk back onto debtors, so that the great and exceptional protection Americans have traditionally given to debtors has significantly eroded. Another perspective on the intersection of the concerns expressed in American bankruptcy law and the protection we give to corporations: Recent developments in American law and regulation have allowed corporations to avoid some of their pension obligations to retired workers. This does work to shelter debtors, although not in a particularly egalitarian way: We now allow retired and sick steel workers, for example, to take it on the chin. This means that pensioners—in a sense, of course, creditors—are now taking on increased risk, which is being shed by capital and management. This seems a dubious achievement, and I do not think it is what the generous originators of American bankruptcy law had in mind.
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