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now inflation is kind of special because
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one of the economic effects of inflation
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is that it tends to make people less
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averse to taking on debt the idea is if
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you have a fixed amount that you're
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promising to repay in the future and you
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expect more inflation going forward then
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the real value of what you promised to
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repay it's not going to be quite so
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large because in the future $1,000 isn't
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going to have the same purchasing power
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as it does today easy to say that when
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you have that feeling of being able to
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spend more that's when the potential for
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the concern around higher levels of debt
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and potential bankruptcy pops up welcome
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to the ripple effect the podcast that
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takes you on a journey through the minds
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of Wharton faculty I'm your host Dan
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Looney and in each episode we'll be
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diving deep into the inspiration behind
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the groundbreaking research that whon
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professors have conducted and exploring
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how their findings resonate with the
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world today well programs like Social
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Security Medicare unemployment insurance
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and others provide an important safety
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net for families but how do these
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programs impact the concern around
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household debt having those programs May
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deter people from savings as much as
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they probably should Sasha and darte is
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an assistant professor of Finance here
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at the waren school she has taking a
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deeper dive into this and she joins us
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here in studio nice to see you thanks
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for a few moments today thanks for
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having me you know this is an
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interesting topic I guess especially
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because people don't necessarily
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associate the availability of these
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types of programs
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to still being able to put away savings
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I agree I think uh it's not usually the
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first thing that comes to people's mind
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when you think about the social safety
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net how is that going to impact people's
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borrowing but it turns out from my
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research it looks like those programs
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can have uh really large interaction
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with credit markets and actually a
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really big part of the social welfare
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benefits from these programs can
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actually work through credit markets so
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take us through the research because
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part of it you did some research about
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the impact of Medicaid and the number of
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people eligible in a particular area can
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have a direct impact on the usage of
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things like like credit cards right so
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in a recent working paper with my
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co-author fellow Wharton Professor
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Gideon Borstein we study the impact of
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expanding Medicaid under the Affordable
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Care Act on consumers use of credit card
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debt in particular now it's not obvious
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from economic theory what you would
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expect you could get less credit card
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debt less debt overall and perhaps even
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more safe
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if for example people when they fall
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sick if they now have insurance they
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might not need to borrow or to draw down
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their Savings in order to afford the
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cost of that care now on the other hand
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people might have a less of a what we
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would call in economics a precautionary
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savings motive this is the idea that you
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use your own savings you build up wealth
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in order to ensure yourself against
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Adverse Events like job loss or or
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illness in this case and then finally
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credit Supply might also react to how
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people's behavior changes after Medicaid
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expands in particular if people now have
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insurance and they default less often
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they're in a sense more financially
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resilient and creditors might be more
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willing to lend to them in terms of you
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know people feeling like Medicaid it
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helps them feel like they're probably
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more free to be able to spend in other
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areas right exactly so this is uh this
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precautionary savings piece of people's
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behavior if you're going to be able to
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rely on Medicaid when you become sick
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you might have a little bit more leeway
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to spend even outside of times when
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you're not necessarily sick because you
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don't need to self-insure that much with
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your own savings and then so also speak
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to the component about how social
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insurance programs can actually help
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creditors as well exactly so when people
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get access to insurance we see for
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example in our own research people
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become less likely to default overall in
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particular they are less likely to have
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debt and collections which is one of the
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worst things that you can have on your
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credit report report so this reduction
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in default that's going to make
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creditors more likely we find to approve
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requests for credit cards people will
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see an increase in their credit limits
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essentially the supply of credit is
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reacting to people's improved Financial
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resilience so those creditors feel more
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amenable to being able to provide these
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assets to those members of the public
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that's exactly the idea that's because
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doesn't that kind of open a door they're
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basically open the opening the door to
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the potential problems that we're
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talking about here with some of the
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issues of household Deb yes so in our
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paper we see things running in one
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particular direction overall we see that
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Medicaid expands it's overall reducing
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default people's credit scores improve
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and despite taking on more debt their
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financial capacity their ability to
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tolerate having a lot of debt that's
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also improving as a result but if you
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did have an expansion in credit without
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these improvements to people's Financial
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resilience that's when I would be
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especially worried about the burden that
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that debt imposes so is this somewhat
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similar to maybe what we're hearing now
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about people relying on their credit
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cards in some cases because of the level
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of inflation they may not have as much
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money in the bank as they would like to
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so they're using credit cards to replace
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that this could be part of what we're
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seeing recently with credit cards now
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inflation is kind of special because one
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of the economic effects of inflation is
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that it tends to make people less averse
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to taking on debt the idea is if you
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have a fixed amount that you're
00:05:26
promising to repay in the future and you
00:05:28
expect more inflation going forward then
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the real value of what you promis to
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repay it's not going to be quite so
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large because in the future $1,000 isn't
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going to have the same purchasing power
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as it does today easy to say that when
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you have that feeling of being able to
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spend more that's when the potential for
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the concern around higher levels of debt
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and potential bankruptcy pops up it's
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hard to say whether people's Financial
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resilience is necessarily going to be
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worse overall that's really the key
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thing to understand whether or not an
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expansion of credit is going to be a
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good or bad thing so is inflation really
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helping people to the extent that they
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maybe anticipate that that it will in
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terms of making their debt affordable
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how much is the burden of debt that that
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people carry directly tied to not having
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the cash on hand that can be an enormous
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uh burden so if you do not have the cash
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to afford your debt payments typically
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people they then go delinquent so they
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start to miss some of their payments and
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that that debt it can continue to build
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up over time uh some types of debt it
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continue it can for example like credit
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card debt it can continue to build
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interest so the overall burden can grow
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and then when people are finding
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themselves with a overwhelming amount of
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debt that's when they might seek
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something like debt relief through
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bankruptcy but I also notice you have
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looked at in the past uh the level of
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bankruptcy and how it's tied to bias
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within the within the public as well yes
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so I have some ongoing research that
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tries to uh both document and understand
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the reason behind racial disparities and
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the access to the debt relief that
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bankruptcy provides where did that start
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from where did that Genesis start from
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in terms of wanting to look at that so
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there were really two big motivating
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factors the first is that bankruptcy is
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an important source of debt relief for
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us households in fact if you actually
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compare the scale of the wealth
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transfers uh in terms of the debt
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forgiveness that bankruptcy gives people
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if you compare that to other social
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insurance programs it's bigger than a
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lot of them it's on car with programs
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like unemployment insurance or even
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larger uh in most of the years of
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unemployment insurance the second
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motivating factor beyond the importance
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of bankruptcy is that there's a big body
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of financial research that finds that
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there's a lot of racial disparities in
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financial Market outcomes so we wanted
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to see is bankruptcy also one of these
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areas where you also see racial
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disparities and there was more of an
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impact on black Americans than there
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would be in regards to white Americans
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as well correct exactly so we found for
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example that uh now there's two
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different types of bankruptcy chapters
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about 70% of people file Chapter 7 now
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in that chapter black filers are about
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three percentage points more likely to
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be dismissed that might not sound like a
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lot but there's uh not a lot of uh
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dismissal that means uh getting uh you
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go through all the trouble of the
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bankruptcy process but then you don't
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get the your cases thrown out you don't
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get the one good part of the bankruptcy
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which is the debt relief and that's
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about double uh the Baseline rate for
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for nonblack filers now in Chapter 13 we
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see an even larger and absolute term
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disparity in Chapter 13 black filers are
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about 16 to 17 percentage points more
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likely to have their case dismissed
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which gives them about a 20% relatively
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higher rate of dismissal but can we
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determine why the numbers are the way
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they are in terms of black filers versus
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white filers it's really difficult to to
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get at this so we have to use a a clever
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bit of econometrics in order to try and
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say something about bias now the reason
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that it's challenging is when you see a
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disparity this could be due due to
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unobserved variables that we're not
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controlling for for example if black
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filers have a greater risk of losing
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their job in the future uh that could
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make it hard for them to complete some
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of the requirements in Chapter 13 and
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that might explain some of the
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disparities so it could just be these
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unobservable non-controlled for
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characteristics versus actual bias so
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the Crux of our approach to overcome
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this is we look at differences in the
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black white dismissal Gap among black
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decision makers in the bankruptcy
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process these would be the bankruptcy
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trustees versus white decision makers in
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the process and the idea is when we do
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this differencing and comparing we can
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kind of net out these omitted factors
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and what we're left with is how these
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two groups make decisions differently
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right but for blacks that uh either file
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for uh chapter 7 or chapter 13 and they
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don't get approved to the level that
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they want to that just adds another
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layer of angst for them in terms of
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trying to get out from under that level
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of debt exactly so when these black
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filers are not getting access to
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bankruptcy this can have uh really
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negative uh economic and even Health
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consequences there's work by uh will
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Doby and his co-authors for example that
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finds that uh in a they exploit a really
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nice uh nice in a statistical sense uh a
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natural experiment uh that led to some
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people receiving chapter 13 debt relief
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some people didn't get it and what they
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found is that the ones who got the debt
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relief they were more likely to be
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employed they had higher income in the
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future they were more more likely to be
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homeowners in the future and they even
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had improved mortality in the future so
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if there's a disparity a racial
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disparity in access to debt relief there
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could be pretty far-reaching
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consequences from this suffice it to say
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that the research that you've done on
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the on this topic shows that there are
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probably quite a few adjustments that
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could be made in terms of how this
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process goes the structure of it in
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order to kind of improve the process for
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all Americans correct I I see that I
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think our research what it does is it
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helps illuminate uh some areas where
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there's more room for investigation I
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think it highlights possible Avenues of
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policies or other changes that we could
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make if we want to improve and give more
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equal access to bankruptcy this could be
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things like uh for example in Chapter 13
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there's a lot more subjective
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decision-making on the part of the
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chapter 13 bankruptcy trustees they have
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a really hard mathematical problem where
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they have to try and forecast a person's
00:11:24
income over the next five years so
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that's a that can be a difficult task
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and when there's subjectivity there's
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more scope for bias potentially to
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influence how they handle cases so
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trying to remove some of that
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subjectivity and Sh maybe automating uh
00:11:39
more parts of the bankruptcy process
00:11:41
that's one Avenue that I can say for
00:11:43
sure it would work but it would be
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useful for researchers to explore so is
00:11:47
there a next natural step that you want
00:11:49
to investigate in this process yeah I
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think uh uh one I think investigating uh
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ways that uh introduce the use of
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algorithms for example to maybe Aid in
00:12:01
the decision-making process this is
00:12:03
something that's been done in other more
00:12:05
of the uh criminal areas of the law
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where for example with respect to
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sentencing and things like that and
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seeing if this is something that can
00:12:13
reduce bias in bankruptcy that would be
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useful for researchers to investigate
00:12:18
Sasha great to meet you thanks very much
00:12:19
for coming in appreciate your time today
00:12:22
thank you thank you Sasha and darte who
00:12:24
is assistant professor of Finance here
00:12:26
at the Wharton School thank you for
00:12:28
listening to the ripple effect we hope
00:12:30
you found this episode informative and
00:12:32
engaging don't forget to subscribe and
00:12:34
leave us a review so that we can
00:12:36
continue to bring you the best Insight
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