Sep 30, 2010
Reforming Government: Congressional Republicans Haven't Changed & Can't Bring the Change We Need
Grading the Governors - A new Cato Institute report on the fiscal best and worst
Assistant Sec for International Markets and Development Marisa Lago Introductory Comments for Eurofi Panel Discussion of "Prospects of future G-20 discussions and Expected impacts for the EU"
Why Congressional intelligence is an oxymoron
Treasury Deputy Secretary Neal Wolin Written Testimony before the Senate Banking Committee on "Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act"
McDonald's May Drop Health Plan - the law ripples through the real world
Distrust in U.S. Media Edges Up to Record High
Conservatives: The Bipartisan Fight Against the Obama Tax Hikes
Statement by the President on the House Approval of the James Zadroga 9/11 Health and Compensation Act
In Elizabeth Warren We Trust? - The unaccountable head of the new Consumer Financial Protection Bureau has repeatedly used shoddy data to push policies she favors
By Todd Zywicki
WSJ, Sep 30, 2010
The Obama administration has promised that the Federal Reserve's new Consumer Financial Protection Bureau will be independent from politics, a model of regulatory expertise grounded in sound data and economics. Naming Harvard Law Prof. Elizabeth Warren as de facto agency head undermines both goals.
By appointing another White House czar to avoid Senate confirmation, the administration politicized the powerful new bureaucracy from its birth. And by appointing an individual with a track record of using questionable research to advance policy ends, it has jeopardized the second goal as well.
Consider Ms. Warren's much-ballyhooed study on the alleged link among health problems, medical expenses and personal bankruptcy filings. Published in the February 2005 issue of Health Affairs, the report was timed to head off bipartisan bankruptcy legislation that was enacted later that year. Ms. Warren and her co-authors claimed that "at least" 46% of personal bankruptcy filings in 2001 (the year from they collected the data) were the result of "medical causes," and that this represented a 23-fold increase over 20 years.
Both conclusions are extremely suspect. First, the study provided an implausibly broad definition of "medical bankruptcy"—including any filer who reported uncontrolled gambling, drug or alcohol addiction, or the birth or adoption of a child.
Equally dubious, the authors classified a bankruptcy as having a "major medical cause" if the individual had accumulated more than $1,000 in out-of-pocket medical expenses (uncovered by insurance) over the course of two years prior to filing—regardless of income, and even if the debtor did not cite illness or injury among the reasons for bankruptcy.
In 2001, average per capita out-of-pocket medical expenses were $683. During the two-year period Ms. Warren and her co-authors studied, in other words, Americans spent an average of $1,366 on uninsured medical expenses, or 30% more than their threshold definition of a "major medical cause." There was no larger context for their threshold figure: A debtor with $1,001 in uncovered medical expenses and $50,000 on a Saks card would constitute a "medical bankruptcy" in their study.
The claim of a 23-fold increase in medical bankruptcies was based on a comparison of their 2001 data with Ms. Warren's research in a 1981 study—which appears to count only those who self-reported as having filed bankruptcy for medical reasons. This is a completely different and much narrower definition of "medical bankruptcy" than the one she used 20 years later, and obviously inflates the increase.
In contrast to Ms. Warren's studies, a battery of analysis, including research done by the Department of Justice's Executive Office of the United States Trustee (which oversees the administration of bankruptcy cases), and by Daniel Dranove and Michael Millenson of Northwestern University, concluded that fewer than 20% of bankruptcies are caused by health problems or medical expenses.
Last year Ms. Warren and her co-authors were back with an even more dramatic study, in the American Journal of Medicine, timed to promote President Obama's health-care reform law. Drawing on 2007 filings, the authors concluded that 62% of bankruptcy filings were the result of medical issues and that the odds that a bankruptcy had a medical cause had doubled between just 2001 and 2007. This study was also flawed.
After Congress made it harder for people to skip out on their debts in 2005, the number of bankruptcy filings plummeted. In 2001, the year Ms. Warren used for the first study, there were 1,452,030 personal bankruptcy filings; in 2007 there were 822,590. Even if we are to accept the methodologies of the two studies for the sake of argument, there were 670,838 "medical bankruptcies" in 2001 and 510,828 medical bankruptcies in 2007—a drop of 160,000 per year. Yet Ms. Warren's article nowhere acknowledges that the absolute number of bankruptcies and purported medical bankruptcies declined.
Concerns about Ms. Warren's presentation and interpretation of data have been longstanding. As I wrote in these pages in August 2007, her book "The Two-Income Trap" willfully ignores the obvious in her own data: that spiraling taxes—and not living expenses—were a major cause of middle class financial woes.
Similarly, reports of the Congressional Oversight Panel of the Troubled Asset Relief Program (TARP)—a panel of which she was chair—uniformly treated home foreclosures as the result of bank fraud and the bullying of helpless homeowners. Fraud and bullying there was, but her panel consistently ignored the many foreclosures that have resulted from a homeowner's strategic decision to walk away from a house whose value has fallen below the amount still owed on the mortgage. Economists and housing analysts widely agree that a substantial number of defaults occur for this reason. That reality is largely absent from the TARP panel's reports.
The head of the Consumer Financial Protection Bureau is one of the most powerful bureaucratic positions ever created in the American political system. It can regulate or ban almost every consumer credit product in the country, yet it is beyond Congress's power of the purse because its budget is guaranteed as a percentage of the Fed's annual revenues. Under normal circumstances, the Senate would have the opportunity to ask Ms. Warren to explain the way in which she has sometimes interpreted data in her research before entrusting her with control of the agency.
By doing an end-run around the confirmation process, the Obama administration has eliminated our opportunity to find out. And by installing the head of the agency as an assistant to the president inside the White House, it has insulated her from meaningful congressional oversight.
Mr. Zywicki teaches bankruptcy and contracts at the George Mason University School of Law, and is the co-editor of the University of Chicago's Supreme Court Economic Review.
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