In our penultimate article in the series on Dean Baker’s The Conservative Nanny State, we examine his discussion on bankruptcy, so-called tort reform, and “takings.”

Bankruptcy : A Nanny State Protection for Me But Not You, But Where is Personal Responsibility?

Bankruptcy has long been a feature of Anglo-American law, owing to creditors’ need for a lawful, orderly way of involuntarily dispossessing debtors, all merchants, of properties and freedom in the late sixteenth century.  In the United States, most bankruptcy laws passed within the first half of the nineteenth reflected this philosophy, exhibited in court battles wherein state-directed debt relief remained under debate.  With the ascent of the Whig party in the 1840 elections, the federal government established voluntary bankruptcy protections in an 1841 act; the government repealed the act a mere two years later, but the philosophy clearly was shifting.  By 1867, debts of the confederate states left northern states clamoring for more legislation.  It turns out that the many pushes for changes to bankruptcy laws often follow an economic downturn, generally at the request of large creditors; this ping-pong persisted well into the twentieth century, with repeal efforts following any slight accommodation for debtors.  In 1910, Congress offered corporations voluntary mechanisms for voluntary debt discharge, something fought vehemently by creditors hoping for harsher provisions.  For twenty years, the battle waged on, edging finally into the Great Depression during Herbert Hoover’s administration.  As expected, creditors and debtors alike rushed to the nanny state for new protections in light of unforeseen, devastating economic realities.  By 1938, sufficient support was available to pass the Chandler Act, named for its primary advocate Congressman Walter Chandler, Democrat from Tennessee, reviewed in an article appearing in The Fordham Law Review in 1940.  Though we’ll pass over the technical details, suffice it to say the Chandler Act represented a study-driven overhaul aimed at updating the Nelson Act of 1898.  For forty years, minor changes appeared here and there, until the passage of the Bankruptcy Reform Act of 1978, a culmination of ten years of hearings and studies, replacing the Nelson Act entirely.  In the years to follow, Congress continued adjustments here and there, representative of the dual difficulties in corporations and creditors fighting to further ensnare debtors while often suffering the same fate themselves.  The complete history is quite interesting, and one can find a worthy read in Charles Jordan Tabb’s The History of the Bankruptcy Laws of the United States.

Dr. Baker’s discussion focuses more on the most recent overhaul of bankruptcy law, the constructively-named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  Nanny state apologists suggest individuals who file for bankruptcy are irresponsible spend thrifts who deserve to suffer, but shareholders can escape such difficulties through mechanisms described above.  Well understood is that medical bills sit nicely in the plurality of causes, as described in a report in 2013 by CNBC.  Baker frames the issue quite effectively, describing the large jump in total credit card debt from $100 billion in 1980 to $800 billion in 2004, the time of his writing.  Value Penguin reports more recent statistics gathered from the Census Bureau and the Federal Reserve, exhibiting a peak of $900 billion at the time of the financial crisis, a slump, but later exceeding the 2004 level as of 2016.  Baker argues that the explosion of this kind of volatile debt indicates

that the risk of default on these
loans was not a serious obstacle
to credit card lending[.]

Further, according to Jeremy Simon while writing for CreditCards.com , the so-called bankruptcy reform passed in 2005, misleadingly called “Bankruptcy Abuse Prevention and Consumer Protection Act,” increases the deluge of credit offers to recent filers of bankruptcy : the longer waiting period and tighter restrictions for a subsequent filing offers these sharks the opportunity to bathe in the blood of consumers.

Baker attacks the absurd bankruptcy reform from a different perspective : first, true proselytes of the free market should not want government protection for lenders who make bad choices; in a free market, they would naturally default themselves.  Second, this very protection expands conservative nanny state’s role in the economy rather significantly by empowering it further as a debt collector, contravening further the argument that smaller government is a genuine objective.  As suggested above, the leap in national credit card debt in recent years can’t possibly follow the capacity for repayment, so these lending institutions generally need not concern themselves with stated objectives of offering credit; upon failure to collect bad debts, they can, as Noam Chomsky says, “run cap in hand to the nanny state.”  The bankruptcy bill is one such startling example, though the ugliest hypocrisy of all followed with the bank bailout during the financial crisis : banks need the government to help them crush consumers, but when they run aground, they require a big, powerful state to save them.

Any discussion on bankruptcy leads to consideration of the International Monetary Fund (IMF), a financial agency designed to protect financial institutions in international exchanges.  Baker describes some of the history, particularly how the IMF originally regulated exchange rates under the Bretton Woods system until 1973; the IMF thereafter played the role of international debt collector.  We’ve discussed Bretton Woods before, an international framework designed by Harry Dexter White and John Maynard Keynes in 1944 to prevent repeats of the Great Depression.  For nearly thirty years, the United States experienced tremendous economic growth with no recessions.  In 1971, Richard Nixon eliminated the dollar’s status as a commodity currency, or currency based on gold, transmuting our bills into fiat currency, or currency by governmental decree.  With that and other unilateral decisions in what historians call Nixon Shock.  Though a more thorough treatment of the history of Bretton Woods is instructive (see Chomsky’s discussion), suffice it to say that both purposes of the IMF serve at the pleasure of the nanny state, though the latter day purpose as debt collector serves the financial sector more directly.  Free of the Bretton Woods regulatory apparatus, the financial sector has become extremely wealthy with unrestricted flow of capital diminishing regulation.  The IMF, to Baker’s point, imposes harsh austerity (discussed in a previous post) on nations if they refuse to meet terms imposed by creditors; that is, the IMF protects collectively foreign investors, much like that institution we’re taught is so destructive : the union.  Baker says it best, arguing that

[i]n a free market, there is no place
for a supranational institutional
like the IMF to rewrite the rules to
ensure that creditors are protected.

In a more competitive environment, any creditor could loan any nation needed funds, easily undercutting adversary firms with lower interest rates.  Creditors instead unionize through the IMF to drive nations into bankruptcy.  Baker argues that risk is the business of lenders, and they should suffer the consequences for making bad choices.

Fat Lawyers Gave You McDonald’s Coffee Lawsuit

Baker takes up the topic of tort reform, a favorite windmill the quixotic chicken-littles of the nanny state frequently fan in the faces of the public.  We’re told frequently that greedy lawyers and ne’er-do-wells are robbing hardworking industrialists blind, and that the nanny state must artificially curtail the requisite damages paid by these innocent business elites.  It’s most reminiscent of Ronald Reagan’s inane, racist complaint that “welfare queens” are driving “welfare Cadillacs”.  In fact, the conservative nanny state caters to a host of fascinating topics losing the good hard-working conservatives hours of sleep at nightly, including criminal innocence-by-insanity, lazy people loafing off disability benefits, and, most recently, insistence that illegal immigrants are committing vicious, hideous crimes, a blatant and highly destructive lie repeated ad nauseum by Donald Trump.  It turns out, quite expectedly for anyone willing to devote a paltry few minutes to research, that none of these would-be blights on society actually exist to any appreciable extent.  In fact, tax fraud by wealthy elites is a far more pervasive problem than any of the strawmen aforementioned.

And yet these myths leave an indelible imprint on the impressionable minds of the nanny state’s protectors.  Take torts for instance; Baker describes two stories I remember growing up hearing, the black woman who sued McDonald’s for burning her with coffee, and the story of a property owner sued by an intruder who was injured on the owner’s property in the course of a burglary.  Astonishingly powerful is the propaganda surrounding the cases, as we in a poorer segment of society literally would fall over ourselves to defend the honor of McDonald’s and this property owner.

I happened upon the McDonald’s case again during a legal presentation at Southern Methodist University; the legal scholar offered a piece of the case I hadn’t heard in my household : the woman only asked for medical coverage from McDonald’s, as they had received hundreds (more likely thousands) of complaints through the years that coffee served at 180 degrees Fahrenheit is dangerously hot.  Baker points out one more piece of the puzzle : McDonald’s served their coffee at such a high temperature to mask the bad taste of a cheap brew, thereby increasing profits while distributing the cost to burned consumers.  Again, this is reminiscent of the Ford Pinto case we discussed previously.

The Consumer Attorneys of California offer a good read on the McDonald’s case; suffice it to say a 79 year-old woman spilled the coffee on her thighs, burning herself so badly that she required skin grafting.  McDonald’s, putting customers first, refused to help her until a court compelled them to make up for their mistakes.  The case of the burglary really was about a high school student climbing on the roof of a gym on school property, and a skylight, painted over, gave way when he stepped on it.  A court correctly asserted that public facilities ought to have better protections in place.

Both of these cases are rare instances in which a court awards damages for torts, or wrongs leading to civil liability.  It turns out that less than three percent of civil cases ever lead to a jury trial, as most are decided much earlier, generally through settlement.  It’s revealing to consider a favorite of the tort reformists, medical malpractice.  In the last four decades, tort reform aimed at streamlining the malpractice liability system has managed to shift larger and larger profits into the pockets of insurance companies; Kenneth Thorpe, professor at Emory, published an article in Health Affairs discussing trends in states adopting caps on medical damages, finding a statistically significant decrease in premiums but inconclusive on whether the liability system is genuinely deterring substandard care.  Further, it might come as a surprise that few victims of malpractice actually sue; a Harvard study published some years ago found that only one in eight victims ever leverage the court system.  More recent work appearing in Medscape suggests the number is closer to one in twelve, and that doctors have at their disposable proven means of reducing the probability of lawsuits.  Interestingly, members of my family have had opportunities here and there to sue for malpractice, yet they never did, often citing the “litigious” nature of society, a win for propagandists.

Baker continues the discussion with a partial explanation of the more general costs associated with the current legal system, and that standardizing law and removing much arcane procedure could drive down prices.  But he contends, I think correctly, that limiting fees for lawyers’ services contravenes market ideology.  Fighting corporations is nasty business, as anyone who’s ever had to deal with a medical insurance company knows.  And despite what nanny state conservatives may tell us, the deck is very heavily stacked in their favor.

He also points to the importance of punitive damages, in that suing and punishing a corporation for endangering the public is, in fact, a public service.  It’s hard to even quantify the damage done by McDonald’s broiling hot coffee policy, all in the name of profits.  I’m reminded of all the time one waits on hold when trying to reach customer service for any company, be it cell phone providers, internet providers, or, as mentioned before, insurance companies.  In the interest of profits, these companies understaff their departments, using badly recorded music and automated menus to delay customers for several minutes, sometimes hours.  These hidden costs, or externalities, don’t directly figure into their budgets, as someone else pays that price.  Punishing them for bad service seems perfectly in keeping with market ideology.

Takings : Gimme More, Take Less…

Baker ends the chapter with a short discussion on “takings,” or costs exacted by the government in exchange for property confiscation or laws and regulations which reduce the value of property.  That is, so-called property owners, or corporations, might be quite unhappy when the government enforces regulation limiting how much they can pollute on their property, perhaps cutting down profits or lessening the value of owning the property.  And yet, when government intervention substantially increases the value of property through infrastructure and habitat clean-up, property owners happily accept the benefits without a direct repayment to the taxpayer.  For instance, farmland along the major interstate near my hometown, Interstate 35, was not particularly valuable before the interstate was constructed.  Commercial zones along the interstate are quite a boon for landowners, as gas stations become quite important along long stretches of highways.

The major point here is that nanny state conservatives dislike any regulatory action diminishing property value but freely accept every last penny they can bilk from beneficial government action.  Baker nicely suggests that true devotees of market ideology ought to accept freely that lessening of property values due to government intervention is a cost of doing business, and if they were savvier customers, they’d have foreseen it, harkening to the dogma of personal responsibility they hold so dear.

Next time, we’ll conclude this series with a brief summary of Baker’s discussion on small businesses and taxes.