I’ve been sitting on this great post about reforms to US bankruptcy laws and how they fit into the general pattern of risk being shifted from business to workers and to ordinary people in general. But I waited too long and Paul Krugman’s already written it. So go and read his piece, and then, if you want, you can look at the things I was going to write that Krugman hasn’t said already.
First, if you’re looking for reading on this general topic, let me recommend “When All Else Fails : Government as the Ultimate Risk Manager, ” (David A. Moss), which I reviewed here Moss shows how both bankruptcy and limited liability were (correctly) viewed as significant departures from laissez-faire when they were introduced in the 19th century. Of course, there’s no hint that the sacred status of limited liability is going to be challenged any time soon.
Second, given the rising trend in bankruptcy, this is going to affect a lot of people, quite possibly most people, at some time. Currently, more people go bankrupt than get divorced every year and, although the number has declined marginally with the economic recovery, the underlying trend is clearly upward. The proposed reforms are unlikely to change this. Although the bill will make bankruptcy a less attractive option for people who are already in difficulty, this demand side effect will be more than offset by the increased willingness of credit card companies and other lenders to lend to people with precarious repayment capacity.
Finally, while Krugman is probably right in describing the target of the reformers as a system of debt peonage, my long exposure to Dickens (and more recently to Patrick O’Brien) leads me to think that the large and powerful incarceration lobby might get in on the act here – anyone for debtors’ prison ?