Consumers Need a Watchdog, Not An Ideologue

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We've been critical of the Consumer Financial Protection Agency created by the recent financial regulation law. But now that it's the law of the land, the agency should be organized as usefully as possible. If speculation is correct and Harvard professor Elizabeth Warren is appointed as its first director, it’s possible that the CFPA will unfortunately end up being an ideologically driven, anti-consumer bureaucracy.

In her recently appointed position as Chair of the Congressional Oversight Panel, Warren was charged with monitoring spending in the Troubled Asset Relief Program. Thomas Cooley, dean of the NYU School of Business, documented in Forbes that she used this position to push her own ideological agenda instead of giving a balanced report.

The report essentially argues for nationalization on the grounds that, under government reorganization, bad assets can be removed, failed managers can be ousted or replaced and business segments can be spun off from the institutions. "Depositors and some bondholders are protected, and institutions can emerge from government control with the same corporate identity but healthier balance sheets," the report argues, parroting a position that has been staked out by many prominent economic pundits.

Clearly, this is Elizabeth Warren's particular crusade against the banks, since a majority of panel members dissented from the direction the report took and two refused to sign off on it at all. Her letters to Secretary Geithner and Chairman Bernanke stop just short of attacking them for trying to restart the market for asset-backed securities. These markets have been an important part of the financial intermediation system for decades, funding student loans, consumer credit and small businesses. But Professor Warren has had a long-standing antipathy to consumer credit markets. [Emphasis added]

That Warren is using her position to push her policy views is nothing new. She first got the attention of the Left with her book The Two-Income Trap, which argued the middle-class was getting squeezed by stagnating wages and increased costs for housing, education, and health care. In her research, she presented data in a way which could only been construed as deliberately misleading, as documented by law professor Todd Zywicki in The Wall Street Journal:

Ms. Warren and Ms. Tyagi compare two middle-class families: an average family in the 1970s versus the 2000s (all dollar values are inflation-adjusted). The typical 1970s family is headed by a working father and a stay-at-home mother with two children. The father's income is $38,700, out of which came $5,310 in mortgage payments, $5,140 a year on car expenses, $1,030 on health insurance, and income taxes "which claim 24% of [the father's] income," leaving $17,834, or about $1,500 per month in "discretionary income" for all other expenses, such as food, clothing, utilities and savings.

The typical 2000s family has two working parents and a higher income of $67,800, an increase of 75% over the 1970s family. But their expenses have also risen: The mortgage payment increases to $9,000, the additional car raises the family obligation to $8,000, and more expensive health insurance premiums cost $1,650. A new expense of full-time daycare so the mother can work is estimated at $9,670. Mother's income bumps the family into a higher tax bracket, so that "the government takes 33% of the family's money." In the end, despite the dramatic increase in family income, the family is left with $17,045 in "discretionary income," less than the earlier generation.

The authors present no explanation for why they present only the tax data in their two examples as percentages instead of dollars. Nor do they ever present the actual dollar value for taxes anywhere in the book. So to conduct an "apples to apples" comparison of all expenses, I converted the tax obligations in the example from percentages to actual dollars. [emphasis added]

This led Megan McArdle, the business and economics editor at The Atlantic – who has been a frequent critic of Warren's work on health care, bankruptcy reform and the middle-class – to comment: “Does it matter if we have a regulator who can use data consistently? A lot of commenters seem angry that I would suggest it might. As for me, I don't know which is worse: the notion that Elizabeth Warren understood what she was doing, or the notion that she didn't.”

Her work on medical bankruptcy is no better. Warren has published research for Physicians for a National Health Program, a single-payer advocacy organization, arguing that medical bankruptcy is a much bigger problem than people think it is. McArdle found her methodology seriously flawed. “Yet upon closer examination, it turns out that it is not just wrong, but actively, aggressively wrong. Warren and her co-authors have obscured important and obvious facts that call the integrity of the work into serious question.”

Her thesis is invalid because she takes an extremely broad view of what makes a bankruptcy qualify as “medical.” She finds that people who self-report medical bills as the reason for declaring bankruptcy result in a significant undercount. This is implausible, since common-sense suggests that average people will over-report legitimate sounding reasons like medical bills and undercount less legitimate reasons like bad judgment and overspending. Instead, Warren relied on the ridiculously low threshold of over $1000 in medical debt.

That's a pattern I see over and over in her work. In her (in)famous paper on medical bankruptcies in 2001, Warren and her co-authors defined anyone with $1000 worth of medical bills as having a medical bankruptcy, and used that figure to imply that rising medical bills were pushing people over the financial edge. Now maybe they are, but you sure couldn't prove it with that metric. I hope to hell that no lawyer (Warren is a law professor) would advise a client with no debt but $1,000 worth of medical bills to declare bankruptcy, because doing so would be malpractice.

If we are to have a consumer watchdog like the CFPA, it should work to protect consumers from legitimate problems. It seems a new agency led by Warren might use its authority to push a big-government regulatory agenda.