In television land this is pilot season, a month-long period of frantic production, economically significant because “everybody works in pilot season.” At this point, the new shows have been pitched, those that have a chance at succeeding have been approved for pilot production, and casting is under way. It is a happy time for workers in an industry where employment is notoriously spotty.
Many of the television pilots will be sitcoms, and their scriptwriters will pay their own debt to Richard Sheridan, the immensely popular 18th century English playwright who could be called the “father of the modern situation comedy.” Several of his plays still attract audiences, but the most popular is probably “The School for Scandal” – a comedy of “quick, hide behind the sofa” concealments, overheard conversations, disguised characters, misdirected affections and triumph of young love that would fit comfortably into many of today’s sitcoms.
There is something comic in itself about today’s writers paying a debt to Sheridan, for he was famous for accumulating debts, not paying them. At one point, he simply refused to give any more money to his creditors because, as he said, “paying only encourages them.” Not surprisingly, given Sheridan’s attitude, he wrote in a part for a rich uncle to masquerade as a loan shark, called in those times a “usurer.”
But if our ideas about comedy haven’t changed all that much over the two centuries or so since “The School for Scandal,” our attitudes toward debt, interest, usury and bankruptcy have changed a lot.
They will probably change even more as the new bankruptcy law goes into effect. Passed by both the Senate and the House and awaiting President Bush’s signature, the new law will force many individual debtors to file for bankruptcy under Chapter 13 rather than Chapter 7. A Chapter 7 bankruptcy is essentially a court supervised liquidation of an individual’s assets to pay off his or her debts, while a Chapter 13 bankruptcy requires meetings with creditors and a plan to pay off the obligations.
It isn’t exactly clear what the purpose of the new bankruptcy law is. Possibly it is an effort to encourage people to use credit more wisely by making it more difficult to walk away from debts and start a new life. Possibly it is intended to discourage people from seeking bankruptcy at all.
The new law has its critics. Some believe that it is the product of years of intense lobbying, and campaign financing, by the credit card industry. Perhaps so, but it seems to banks and other lenders that debtors often have a Sheridan-like attitude toward the debts they have run up, and simply refuse to pay, taking refuge in bankruptcy if collection efforts become too annoying. And if you have ever worked on accounts receivable of any sort – commercial or personal – you could certainly understand why lenders feel the way they do. Collection processes are bound up in legal procedures that encourage lenders to “write off” all but the larger accounts that outweigh the costs of getting paid back.
Given this clash of attitudes about lending and borrowing, it isn’t surprising that most of the debate over bankruptcy reform in Congress over the last eight years has been centered on largely anecdotal and subjective images of people abusing credit vs. irresponsible and predatory credit card lenders.
From an economics perspective, though, the consumer credit issue is less a matter of attitudes than it is about mathematics.
Looking at an ordinary credit card statement (big name card from a big name bank), for example, reveals that the interest rate charged on the outstanding balance is 27.49 percent – a rate that might tempt a cardholder to see what the mob or the local unaffiliated loan shark would charge.
The reason the rate is so high is that credit card companies have been expanding their market to higher-risk customers. That is all well and good, but the effect has been a massive transfer of money from the productive, good credit sector, which pays its bills, to the less productive, poor credit sector, which doesn’t. The higher interest rates insulate the banks from financial risk in this transfer, but it is difficult to believe the result is good for the economy.
So the work of Congress on this issue is not done. The bankruptcy reform bill will not fundamentally change the structure of consumer credit nor will it slow down the counterproductive transfer of funds to subsidize higher-risk lending. It may, in fact, actually increase it. The next step for Congress is to examine whether a revival of usury laws limiting interest rates would rebalance thrift and credit in our economy – and improve our productivity and our lives at the same time.
James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101,” which appears monthly in The Snohomish County Business Journal.
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