There Are Two Sides to Every Debt

Sen. Bernie Sanders of Vermont and Rep. Ro Khanna of California introduced a bill last week that, in their telling, would “eliminate” medical debt.

But there are two sides to every debt: One party’s liability is another party’s asset. And we have a word for taking away people’s assets by force: robbery.

Sanders and Khanna’s legislation would amount to robbing Americans, declaring that debts owed to them are no longer valid or binding. And why should those Americans be made to forfeit their property? Because they did something unforgivable: They helped people to get health care.

And there you have it: American progressivism, 2024 A.D.

The Sanders-Khanna plan—which thankfully has no chance of becoming law anytime soon—would “cancel” something on the order of $250 billion in medical bill debt owed mostly to Americans by other Americans. It would make it illegal to collect medical debts incurred prior to the bill’s enactment. It would censor credit-reporting agencies and forbid them from recording medical debts. And it would, of course, include some payoffs to politically connected institutions and influential constituencies. 

The two gentlemen put out a wonderfully illiterate press release, which includes this just fascinating line: “Unpaid medical bills can ruin credit scores and make it challenging to get a loan, take out a mortgage, or buy a car.” You don’t say? Failing to make good on previous debts makes it less likely that people will lend you money in the future? Well, raise my rent!

Wait until they hear about how interest rates work.

Debt is a wonderful thing with a bad reputation. 

It’s partly the word debt that bothers people: If I were to write that access to credit is a wonderful thing, fewer people would object. But credit and debt are so deeply intertwined as to be in a great many cases essentially the same thing. Debt is a way of pulling forward in time the benefits of one’s income and/or assets. If you are going to make more than enough money to pay for a house over the course of the next 40 years, a mortgage allows you to have the benefit of owning the house now rather than in 40 years. Yes, you pay for the privilege of using someone else’s money to buy a house today, but you get some pretty significant benefits: a place to live, first and foremost. 

You also get the enjoyment that comes from owning your house and thus not having to negotiate with a landlord if you want to paint the bedroom or get new flooring. You get financial relief from having to pay rent, and you get an asset that helps you to build wealth and that may, if you are lucky, appreciate at a rate that exceeds the interest you pay on the debt. Even if your new home doesn’t appreciate that much, building equity is still generally a better deal for you financially than paying rent. Yes, there are costs associated with homeownership, too: insurance, taxes, upkeep, interest, etc. In some cases, these will outweigh the benefits of buying a house. But, in either case, most people who want a house want it soon rather than in 40 years, both because they prefer owning to renting and because of the financial benefits associated with owning. 

That’s an obvious and familiar example, but there are lots of others. Many, many businesses have lumpy income but regular expenses: You may do 90 percent of your business during a few busy months (or even weeks) but have payroll to meet year-round, along with rent, utilities, insurance, and everything else. Or maybe your business gets most of its income on the last day of the month (as an apartment owner does) or in an unpredictable fashion.

You may have heard the jargony phrase “short-term commercial paper,” which refers to promissory notes companies issue to pay for regular operating expenses rather than trying to pay those obligations out of current income. This is really, really helpful if you are, for example, a car dealership: You know about how many cars you can expect to sell in the next quarter, but do you really want to pay for all that inventory up front? You may not even have the cash on hand to do so. You’d much rather get your cars now and pay for them in three months or six months or nine months, after you have sold them and have the money to do so. As I understand it, car dealerships often operate with very modest profit margins, so it’s not like you are going to fund this quarter’s inventory out of the 3 percent profit you made from last quarter’s sales. 

Businesses also make money by being creditors, and not just in the obvious way banks and other lenders do. Imagine that you are a modest provider of building supplies and construction services. Your clients are building houses, and they often don’t have the money to pay for everything they need upfront. In fact, it might be a year or more before you get paid for the goods and services you are providing. If you happen to be sitting on a gigantic pile of money, that’s no big deal. But that isn’t how most businesses—or most people—operate. One thing a business can do is borrow money against its receivables—against the money it is owed by its customers—or even sell those debts outright to a third party, who buys them at a discount that you are willing to pay in exchange for getting your money now and transferring the risk of non-payment (and the trouble and expense of debt collection) to somebody else. 

Which brings us around to medical debt. 

In spite of what it may sometimes feel like from the consumer side (ask me sometime how much money goes out the door when you have four children in 20 months—answer: I don’t even know! But it was a lot!) medical practices are not bottomless reservoirs of money. Some doctors make tons and tons of money. I had a doctor in New York who worked on a cash-on-the-barrelhead basis. His motto: “Unless your insurance card says ‘American Express’ on the front, I don’t want to see it.” When I discovered that he owned more than one Ferrari, I suggested I might be paying him too much. He scoffed: “Do you really want a doctor who can’t afford a Ferrari?” But there are all kinds of doctors—and nurses, and nurse practitioners, and technicians, and assistants, and schedulers, etc.—in the medical business, and most of them are not diving into great big heaping piles of gold ducats like Scrooge McDuck. And when those people lend you money—by providing you medical care on the promise that you will pay for it—you should pay them back. 

Generally speaking, people should always pay their debts. I would say that nobody likes a deadbeat, but the American people have already once elected a famously deadbeatish serial bankrupt president and may yet do so again—unless they elect the guy who is running in part on his plan to enable deadbeats who don’t want to pay back their student loans. But those guys are not where you want to look for your moral yardstick. 

We seem to have somehow forgotten that you should pay your debts because you should keep your promises. Instead, we invent implausible moral scenarios in which the person who lent someone else his money to use is the bad guy, the so-called predatory lender—as though there were no predatory borrowers. Or we invent categories of consumption that have a special moral valence to them and insist that debts undertaken for these benefits—education, homeownership, health care, etc.—are somehow invalid. 

Sen. Sanders and Rep. Khanna insist that no one should have to go into debt to pay for health care. Why not? Somebody has to pay for it—nurses and radiology technicians have their own bills to pay, too—and, in most cases, it makes sense that a benefit should be paid for by the person who is enjoying the benefit. Of course, there is room for things like insurance and social insurance programs for uninsurable risks, as well as old-fashioned charity for people we don’t expect to be responsible for their own needs, such as children and some severely disabled people. But ordinary, able-bodied adults should be expected to be more or less responsible for themselves, which means making good on their promises and paying their debts. If you want to shake your fist and protest that we have a stupid health care system, you won’t get too much argument from me. It would be good to know ahead of time whether that procedure is going to cost $4,000 or $400,000, but good luck getting an answer in advance rather than a bill after the fact. There is much in need of reform. 

But that doesn’t mean that you get to walk away from your obligations. 

The Sanders-Khanna proposal has lots of problems, starting with the minor detail that the federal government might not actually have any legitimate power to step in and simply cancel private debt. It is one thing for the federal government to forgive debts owed to the federal government—but there is no obvious constitutional basis for the federal government to forgive debts owed to … well, to you, for example. And though the fact is not widely discussed or understood, credit reporting is ultimately a free-speech issue: Credit-rating agencies are asked for their opinions on the creditworthiness of institutions and individuals, and the government does not get to dictate to them what their opinions are or how they form them. (No, the credit-rating agencies are not always very good at their jobs. But in a free society, people are free to be stupid and wrong and lazy.) But this probably is not a serious proposal: It is left-wing Democrats (I’m lumping in the notionally independent Sen. Sanders) looking to get some profile in election season and signal their willingness to bribe voters with other people’s money. 

The dumbest part of this—and that is saying something!—is that every time the government steps in to provide relief to a class of borrowers at the expense of lenders, it makes lenders less likely to want to lend to those borrowers (and borrowers who are similar to them) in the future. Ultimately, that means higher interest rates, bigger down payments and security deposits, and less access to credit for everybody—but especially for those who have lower incomes and less wealth or who have experienced financial troubles that put them in default on earlier obligations. There’s an old proverb among bankers that you don’t want to lend money to people who need it—the idea being that you’d rather provide financing to moneyed parties who are likely to pay you back without any arm-twisting—but we don’t really want to build a financial system in which the poor have no access to credit. 

If you really want to relieve the medical debts of poor people, then the best thing to do is to write them checks so they can pay their debts off themselves: Easy-peasy—except that then you’d have to account for the spending in the budget rather than pretend like debt relief is a magical program that has no costs.

But telling medical providers that they cannot collect debts owed to them is another way of telling them that they cannot provide medical care that hasn’t been paid for in advance. That may be an unintended consequence, but it is not an unforeseeable one. 

If that’s an Economics for English Majors entry, then it must be time for …

Words About Words

Related to the previous item. I have read some very dumb things in the Washington Post—dumb things for which the newspaper has recently been awarded a Pulitzer Prize, in fact!—but, holy moly, this is the kind of dumbness that leaves me … dumbstruck. 

In a piece headlined “5 myths about Social Security as the program faces a funding crisis,” personal-finance columnist (!) Michelle Singletary undertakes a tour de force of abject buffoonery. The column begins:

Myth No. 1: Social Security is, or will be, ‘bankrupt.’ Words matter.

Words matter is pretty much our motto around here, and it is true that Social Security will not be bankrupt in the legal sense, because we don’t have any bankruptcy law that covers federal programs. But Singletary argues something very different: “The program is financed by payroll taxes, so as long as workers pay into the system, money will always come in.” Okay. And, then: 

Even if Congress fails to act, there will be enough projected income coming in to cover 79 percent of scheduled benefits.

“We’re not bankrupt,” [Social Security Administration chief actuary Steve] Goss said. “We’re not without money. We just wouldn’t have that reserve to make up the full 100 percent.”

… It’s possible changes in the law could reduce the future level of scheduled benefits, but one thing you should not worry about is whether the money will be paid when you are ready, Goss said.

Do you know what we call it when you have income but not enough to pay your obligations, so you go through a legal process by means of which you don’t pay the full 100 percent but some lower figure, such as 79 percent? Bankruptcy. What Singletary is saying is a “myth” is literally how bankruptcy proceedings work. 

(Also, this piece seems to have been edited by a drunk baboon, with sentences clearly out of order, e.g.: “Think of the Social Security Trust Funds like your savings account, Goss said. And the bank then repays you, with interest, when you make a withdrawal.” Wha?) 

(No offense to my dear friends in the baboon-American community.)

Words matter. 

Singletary also insists that the program’s finances are going to work themselves out because … everybody wants them to! Seriously. She writes: “Because so many Americans rely on Social Security, it’s not going anywhere.” As though the fact that people rely on Social Security changed anything about its underlying finances. 

The unfunded liabilities of Social Security and Medicare today amount to $73 trillion over the next 75 years—almost $1 trillion a year through the end of the 21st century. As Romina Boccia notes over at the Cato Institute, under current policy “debt would exceed 500 percent of GDP by 2098,” which means that current policy ain’t gonna last forever. Making good on the unfunded liabilities of our major entitlements would mean raising almost another 4 percent of GDP in taxes—forever—just to keep the status quo funded for two federal welfare programs that disproportionately benefit relatively well-off people.

The thing about running a government on a debt basis is that people have to believe in your story—that’s one meaning of the word credit—“believe,” from the same root as creed.

When the choice comes down, as it ultimately will, to the question of which howling mob Washington wants to face—the bond market or grandmas expecting the Social Security benefits they have been promised—somebody is going to be paid and somebody is going to get stiffed. 

My money is on the bond market getting paid.

Elsewhere …

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In Conclusion 

One of the ugliest parts of the criminal case currently underway against Donald Trump was the effort of the former president’s lawyers to use the fact that Stormy Daniels (whose real name is Stephanie Clifford) has appeared in pornographic films to morally discredit her. I’m libertarian about this stuff, and I think of the pornography business the way I think about the heroin business: I wouldn’t outlaw it, but I don’t think it is good for people. That being said, do you know who also has appeared in pornographic films? Donald Trump, who had cameos in three softcore porn films released by Playboy. Unlike Daniels, he did not perform any actual sexual deeds in his porn films. And isn’t that just like Trump? Looking for a payday while adding nothing to the basic value proposition of the product. Such as it is.