The comprehensive takedown of the bankruptcy “reform” arguments that “debt is not the problem, stupid lending is not the problem, bankruptcy is just too easy” will have to wait until early next week. This post, though, should give you a taste of what’s to come. It is the first of many debunkings to come of the inaccurate and misleading core statistical and economic arguments proponents are using to place undue burdens on borrowers in trouble and give a free ride to lenders.

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Todd Zywicki, the academic face of the proponents of bankruptcy “reform,” said THIS at volokh.com on March 14:

(last paragraph)
Two lessons are clear. First, Americans are not “drowning in debt.” Rather, once you adjust for the record-low interest rates of recent years, it is clear that American households are roughly in the same position as they always have been.

Uh, NO (actually, HECK NO), as Marketwatch’s Peter Brimelow and Edwin Rubenstein report (link requires registration):

Americans are devoting a larger share of their disposable income to interest payments today than at the start of any tightening cycle over the past quarter-century.

….American households are leveraged to the hilt — or at least (do households have hilts?) more than they’ve ever been.
Credit card interest rates haven’t come down much, yet this type of debt has risen more than mortgages.

Just to be crystal clear, this graph only charts interest expense and ignores principal, and reflects monthly interest expense divided by monthly disposable income.

Interest rates are lower, but interest expense keeps going up. How can this be? The most likely explanation is that amounts borrowed have simply gone through the roof in the past 10-plus years (you will see proof in THIS POST that they have), more than offsetting the impact of interest-rate reductions, meaning that households ARE NOT “roughly in the same position as they always have been.” The other explanation, which I think can be quickly discarded (ya think?), is that consumers are making billions of dollars in contributions to lenders just for the heck of it.

In spite of this clear data, which has clearly been available for years, Zywicki contends that LOWER interest expense is offsetting the impact of higher debt on family budgets. As you can see, that claim is Grade A baloney (or to be a bit kinder, simply not true). The only open question to me is whether the dramatic debt-level increases and the just-demonstrated higher interest costs have caused an inordinate number of people to reach the “drowning” point. We’ll see in future posts.

Back to Professor Zywicki:

Second, make sure you have the correct data to do the job you are trying to do.

Heh. Indeed.

So, what’s more important, a cash-flow problem that is likely to occur in 12 years or a insolvency problem that will happen in 37 years?

If you’re AP, you talk about the latter, more distant problem first (4th and 5th paragraphs in story):

The Social Security trust fund will exhaust its assets in 2041 instead of 2042 as forecast last year….

Social Security outlays would outstrip tax income in 2017 instead of 2018 as previously forecast, the report said.

Those who think nothing needs to be done to address Social Security’s problems, or even that we can afford to dither for a few more years, need to realize that in 12 years, when benefits exceed collections, something will have to done. Because the “Trust Fund” only has government bonds in it, not some mythical stash of cash, the choices then, in 2017, will be:

- raise taxes

- cut benefits

- borrow money

By that time, it will be way too late to even consider private accounts.

Or, something can be done in this Congressional session. Those who are saying “we won’t talk about solutions until the idea of private accounts are taken off the table” are really saying “we want to run out the clock until we get to the point where the current system is the only choice.”

Trouble is, the current system is not sustainable without dramatic increases in the retirement age (remember when Alan Greenspan proposed continually raising the Social Security retirement age for full benefits?), equally dramatic cuts in benefits, or economy-stifling tax increases (see: Germany, France).

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UPDATE 1: Interesting headline comparisons (on of course the SAME news):

- Reuters (on Yahoo Finance): “Social Security Outlook Unchanged-Trustees”

- Marketwatch.com (link requires registration after 24 hours): “Social Security Outlook Worsens Slightly”

- USA Today: “Report Paints Tough Future for Social Security, Medicare”

- Forbes.com (home page as of 6:15 pm): “Social Security to Go Broke Earlier”

UPDATE 2 (suppressing giggles): Kevin Drum with a little help from another graphically challenged blogger, says not to worry, the outlook is improved–for 2080, because the projected ANNUAL shortfall then will “only” be 5.75% of all payroll vs. the 6% projected in last year’s report. Zheesh. You guys do realize that anything below 0% is negative (a shortfall, a deficit, a black hole because it gets worse and worse in every year on the graph), right? Y’all sure you didn’t run some long-gone Internet start-ups in the late 90s?

UPDATE 3: Kiplinger has a nice balanced overview of the key features and issues of Social Security here. Money quote: “Eventually, someone must touch the third rail, or the entire social security train will come to a screeching halt.” Ya hear that, Kevin?