Why Elizabeth Warren's New Bankruptcy Study is So Bad

So why am I so angry about Elizabeth Warren's study? Aren't I just miffed because, as one commenter put it, she has "failed to present her results in the way most congenial to libertarian ideology?"

Er, no. The world is full of studies that do this. I get mad at only a minority of their authors. I am mad, first of all, because Elizabeth Warren is not a third-year statistically illiterate policy analyst at a health care advocacy group. She's a professor at Harvard, and the head of the Congressional TARP oversight panel. This conveys a certain responsibility to present data in the most illuminating way, not in the way that will induce journalists to say things that aren't true.


And they have done just that. Read a sampling of the stories about this study on Google News. It's clear that none of the authors of the stories I've read understand that we're talking about a smaller absolute number of medical bankruptcies, representing a larger proportion of a much smaller overall number:  that this increase in the proportion could at least as easily have been driven by less need for non-medical bankruptcy, than by bigger, scarier medical bills. Indeed, many of the stories indicate that medical bankruptcies have risen since 2001, which is not true even according to Warren's figures.

I submit that the study is designed to get that result from journalists. Readers have responded that my criticism is out of line, because after all, they only talk about the proportion, so who am I to say they're misleading the readers?

Yes, but why do they only talk about the proportion?  In general, economics papers talk about absolute numbers whenever they can, and use proportions only when things like changes in income and inflation make comparisons between years too difficult.  I submit that we want to know, not whether medical bankruptcies are a bigger or smaller proportion of overall bankruptcies, but whether more people are being pushed into bankruptcy by their medical bills.  To take the extreme absurd case, if only one person had declared bankruptcy in 2007, but that one person had had huge medical bills, would this be a sign that we need national health care?

We can measure the absolute number of medical bankruptcies, and the changes in income, GDP, and population between 2005 and 2007 were too small to much affect these.  Therefore, the appropriate measure was the absolute number.  The proportion would have been an interesting inclusion.  And it would have been the basis for a different, fascinating study:  the relative "stickiness" of medical bankruptcies.  But it was not the obvious choice if you are going to use one or the other.  That is, unless you are determined to give the impression that rising medical bills are pushing ever-more people into bankruptcy.

Warren's defenders in my comments seem to think that this is simply libertarian bluster--after all, what we're concerned about is whether medical bills are driving the post 2005 increase.  But, as Warren surely knows, it is very unlikely that medical bills are driving either the post-2005 increase in bankruptcies, or a post 2005 increase in medical bankruptcies. 

Let's review the history.   In 2005, Congress passed a law changing the bankruptcy rules. There were a number of different changes to the code, but for our purposes, the relevant changes* are these:

  • It became more difficult to do rapid serial filings
  • Debtors were required to enter debt counseling before they filed
  • Attorneys had to sign off on the debtor's claims
  • Debtors had to provide pay stubs and tax returns
  • Debtors whose income, after allowable expenses, was higher than the median for their area, had to file Chapter 13 instead of Chapter 7.  This means they'd be forced into a five-year repayment plan.

In practice, these modestly increased the barriers to filing bankruptcy, and I was against them at the time.  (Still am.)  But overall, the barriers were not particularly costly.  The requirement for high-income filers to enter Chapter 13 is theoretically the most onerous, but in practice, it affects almost no one.  In 2005, it was widely estimated that 80% of filers were below their state's median income, and the allowable expenses are pretty generous.  To return to an earlier story, Patty Barreiro, who I wrote about the other week, filed bankruptcy despite a household income above $150,000.

But the hype about the bankruptcy barriers was formidable.  This seems to be why so many people rushed to file in 2005--basically, everyone who thought they might end up in bankruptcy hurried to complete their filing before the law took effect in October 2005.  And afterwards, filings stayed low, much to the puzzlement of bankruptcy experts.  Everyone had expected some fall simply because 2006 and 2007 bankruptcies had been shifted forward into 2005, and a slight decrease due to the small percentage of filers who were really abusive or fraudulent.  But the sustained decrease puzzled everyone.  It simply hadn't gotten that much harder to file bankruptcy.

Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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