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now inflation is kind of special because one of the economic effects of inflation
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is that it tends to make people less averse to taking on debt the idea is if you have a fixed amount that you're
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promising to repay in the future and you expect more inflation going forward then
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the real value of what you promised to repay it's not going to be quite so large because in the future $1,000 isn't
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going to have the same purchasing power as it does today easy to say that when you have that feeling of being able to
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spend more that's when the potential for the concern around higher levels of debt
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and potential bankruptcy pops up welcome to the ripple effect the podcast that takes you on a journey through the minds
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of Wharton faculty I'm your host Dan Looney and in each episode we'll be
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diving deep into the inspiration behind the groundbreaking research that whon professors have conducted and exploring
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how their findings resonate with the world today well programs like Social Security Medicare unemployment insurance
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and others provide an important safety net for families but how do these programs impact the concern around
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household debt having those programs May deter people from savings as much as they probably should Sasha and darte is
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an assistant professor of Finance here at the waren school she has taking a deeper dive into this and she joins us
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here in studio nice to see you thanks for a few moments today thanks for having me you know this is an
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interesting topic I guess especially because people don't necessarily associate the availability of these
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types of programs to still being able to put away savings I agree I think uh it's not usually the
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first thing that comes to people's mind when you think about the social safety
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net how is that going to impact people's borrowing but it turns out from my research it looks like those programs
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can have uh really large interaction with credit markets and actually a really big part of the social welfare
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benefits from these programs can actually work through credit markets so take us through the research because
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part of it you did some research about the impact of Medicaid and the number of people eligible in a particular area can
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have a direct impact on the usage of things like like credit cards right so in a recent working paper with my
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co-author fellow Wharton Professor Gideon Borstein we study the impact of expanding Medicaid under the Affordable
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Care Act on consumers use of credit card debt in particular now it's not obvious
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from economic theory what you would expect you could get less credit card debt less debt overall and perhaps even
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more safe if for example people when they fall sick if they now have insurance they
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might not need to borrow or to draw down their Savings in order to afford the cost of that care now on the other hand
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people might have a less of a what we would call in economics a precautionary savings motive this is the idea that you
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use your own savings you build up wealth in order to ensure yourself against Adverse Events like job loss or or
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illness in this case and then finally credit Supply might also react to how people's behavior changes after Medicaid
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expands in particular if people now have insurance and they default less often they're in a sense more financially
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resilient and creditors might be more willing to lend to them in terms of you know people feeling like Medicaid it
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helps them feel like they're probably more free to be able to spend in other
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areas right exactly so this is uh this precautionary savings piece of people's
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behavior if you're going to be able to rely on Medicaid when you become sick
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you might have a little bit more leeway to spend even outside of times when you're not necessarily sick because you
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don't need to self-insure that much with your own savings and then so also speak
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to the component about how social insurance programs can actually help creditors as well exactly so when people
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get access to insurance we see for example in our own research people become less likely to default overall in
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particular they are less likely to have debt and collections which is one of the
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worst things that you can have on your credit report report so this reduction in default that's going to make
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creditors more likely we find to approve requests for credit cards people will see an increase in their credit limits
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essentially the supply of credit is reacting to people's improved Financial resilience so those creditors feel more
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amenable to being able to provide these assets to those members of the public that's exactly the idea that's because
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doesn't that kind of open a door they're basically open the opening the door to
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the potential problems that we're talking about here with some of the issues of household Deb yes so in our
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paper we see things running in one particular direction overall we see that Medicaid expands it's overall reducing
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default people's credit scores improve and despite taking on more debt their
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financial capacity their ability to tolerate having a lot of debt that's also improving as a result but if you
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did have an expansion in credit without these improvements to people's Financial
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resilience that's when I would be especially worried about the burden that that debt imposes so is this somewhat
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similar to maybe what we're hearing now about people relying on their credit
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cards in some cases because of the level of inflation they may not have as much money in the bank as they would like to
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so they're using credit cards to replace that this could be part of what we're
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seeing recently with credit cards now inflation is kind of special because one of the economic effects of inflation is
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that it tends to make people less averse to taking on debt the idea is if you have a fixed amount that you're
00:05:26
promising to repay in the future and you expect more inflation going forward then
00:05:31
the real value of what you promis to repay it's not going to be quite so large because in the future $1,000 isn't
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going to have the same purchasing power as it does today easy to say that when you have that feeling of being able to
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spend more that's when the potential for the concern around higher levels of debt
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and potential bankruptcy pops up it's hard to say whether people's Financial
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resilience is necessarily going to be worse overall that's really the key thing to understand whether or not an
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expansion of credit is going to be a good or bad thing so is inflation really helping people to the extent that they
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maybe anticipate that that it will in terms of making their debt affordable how much is the burden of debt that that
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people carry directly tied to not having the cash on hand that can be an enormous
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uh burden so if you do not have the cash to afford your debt payments typically people they then go delinquent so they
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start to miss some of their payments and that that debt it can continue to build
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up over time uh some types of debt it continue it can for example like credit card debt it can continue to build
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interest so the overall burden can grow and then when people are finding themselves with a overwhelming amount of
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debt that's when they might seek something like debt relief through bankruptcy but I also notice you have
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looked at in the past uh the level of bankruptcy and how it's tied to bias within the within the public as well yes
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so I have some ongoing research that tries to uh both document and understand the reason behind racial disparities and
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the access to the debt relief that bankruptcy provides where did that start from where did that Genesis start from
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in terms of wanting to look at that so there were really two big motivating factors the first is that bankruptcy is
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an important source of debt relief for us households in fact if you actually compare the scale of the wealth
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transfers uh in terms of the debt forgiveness that bankruptcy gives people if you compare that to other social
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insurance programs it's bigger than a lot of them it's on car with programs
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like unemployment insurance or even larger uh in most of the years of unemployment insurance the second
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motivating factor beyond the importance of bankruptcy is that there's a big body
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of financial research that finds that there's a lot of racial disparities in
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financial Market outcomes so we wanted to see is bankruptcy also one of these areas where you also see racial
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disparities and there was more of an impact on black Americans than there would be in regards to white Americans
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as well correct exactly so we found for example that uh now there's two different types of bankruptcy chapters
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about 70% of people file Chapter 7 now in that chapter black filers are about three percentage points more likely to
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be dismissed that might not sound like a lot but there's uh not a lot of uh dismissal that means uh getting uh you
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go through all the trouble of the bankruptcy process but then you don't get the your cases thrown out you don't
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get the one good part of the bankruptcy which is the debt relief and that's about double uh the Baseline rate for
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for nonblack filers now in Chapter 13 we see an even larger and absolute term disparity in Chapter 13 black filers are
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about 16 to 17 percentage points more likely to have their case dismissed which gives them about a 20% relatively
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higher rate of dismissal but can we determine why the numbers are the way they are in terms of black filers versus
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white filers it's really difficult to to get at this so we have to use a a clever
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bit of econometrics in order to try and say something about bias now the reason that it's challenging is when you see a
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disparity this could be due due to unobserved variables that we're not controlling for for example if black
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filers have a greater risk of losing their job in the future uh that could make it hard for them to complete some
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of the requirements in Chapter 13 and that might explain some of the disparities so it could just be these
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unobservable non-controlled for characteristics versus actual bias so the Crux of our approach to overcome
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this is we look at differences in the black white dismissal Gap among black decision makers in the bankruptcy
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process these would be the bankruptcy trustees versus white decision makers in the process and the idea is when we do
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this differencing and comparing we can kind of net out these omitted factors and what we're left with is how these
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two groups make decisions differently right but for blacks that uh either file for uh chapter 7 or chapter 13 and they
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don't get approved to the level that they want to that just adds another layer of angst for them in terms of
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trying to get out from under that level of debt exactly so when these black filers are not getting access to
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bankruptcy this can have uh really negative uh economic and even Health consequences there's work by uh will
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Doby and his co-authors for example that finds that uh in a they exploit a really
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nice uh nice in a statistical sense uh a natural experiment uh that led to some people receiving chapter 13 debt relief
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some people didn't get it and what they found is that the ones who got the debt
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relief they were more likely to be employed they had higher income in the future they were more more likely to be
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homeowners in the future and they even had improved mortality in the future so if there's a disparity a racial
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disparity in access to debt relief there could be pretty far-reaching consequences from this suffice it to say
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that the research that you've done on the on this topic shows that there are
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probably quite a few adjustments that could be made in terms of how this process goes the structure of it in
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order to kind of improve the process for all Americans correct I I see that I think our research what it does is it
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helps illuminate uh some areas where there's more room for investigation I think it highlights possible Avenues of
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policies or other changes that we could make if we want to improve and give more
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equal access to bankruptcy this could be things like uh for example in Chapter 13
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there's a lot more subjective decision-making on the part of the chapter 13 bankruptcy trustees they have
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a really hard mathematical problem where they have to try and forecast a person's
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income over the next five years so that's a that can be a difficult task and when there's subjectivity there's
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more scope for bias potentially to influence how they handle cases so trying to remove some of that
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subjectivity and Sh maybe automating uh more parts of the bankruptcy process that's one Avenue that I can say for
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sure it would work but it would be useful for researchers to explore so is there a next natural step that you want
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to investigate in this process yeah I think uh uh one I think investigating uh ways that uh introduce the use of
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algorithms for example to maybe Aid in the decision-making process this is something that's been done in other more
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of the uh criminal areas of the law where for example with respect to sentencing and things like that and
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seeing if this is something that can reduce bias in bankruptcy that would be useful for researchers to investigate
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Sasha great to meet you thanks very much for coming in appreciate your time today
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thank you thank you Sasha and darte who is assistant professor of Finance here at the Wharton School thank you for
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listening to the ripple effect we hope you found this episode informative and engaging don't forget to subscribe and
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