One of the longest-standing and most contentious debates in Washington, D.C., has been over reform of the rules that govern individual bankruptcy. Supporters of bankruptcy reform have spent the past decade pushing legislation to crack down on what they view as abuses of the system. And throughout this period Elizabeth Warren has been the most forceful voice against restricting access to bankruptcy for individuals. Through her strong advocacy of the view that bankruptcy is not a choice, but rather an outcome of bad luck, she has provided intellectual leadership to a movement that held fundamental bankruptcy reform at bay. This battle was won by advocates of tighter bankruptcy rules, however, with the passage last April of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Yet Warren soldiers on. In this passionately argued analysis, written with her collaborator Amelia Tyagi, Warren claims that the story of the “over-consuming” American that motivated bankruptcy reform is simply wrong. Americans are stretched thinner than in the past because of the rising costs of fixed obligations such as a mortgage or health insurance, she argues. Indeed, she calculates that all of the rise in disposable household income that was produced as families moved from the single-earner model of the 1970s to the dual-earner model of the 21st century was devoted to fixed obligations, with a fall in real terms in the funds available for discretionary spending.

There is much truth in what Warren writes. The expenditures that she considers fixed, such as health care and housing, have risen much faster than the prices of goods purchased with disposable income, such as clothing and food. Yet her analysis misses a fundamental point: these higher expenditures are buying higher-quality products and a better standard of living. The question is not whether we are buying better stuff (we certainly are); the question is who should pay for it. And on this count Warren’s position is misguided.

For example, Warren considers the rise in household expenditures on vehicles a fixed expenditure, arguing that more cars are required as the share of two-earner households rises. Yet the number of cars owned by U.S. families has grown much more rapidly than has the number of workers: in 1960, there were 0.64 cars per worker in the United States, and by 2000 there were 0.88 cars per worker. How did 1960s households make do with fewer cars per worker? By carpooling, taking public transportation, or using other approaches that may have been less comfortable, but which were more economical.

Or consider housing. It is true that housing prices have risen rapidly, particularly in fast-growing cities. This rise has been particularly noticeable relative to rent: the ratio of the national median price to national median rent has increased almost 20 percent. But while buying is becoming more expensive relative to renting, home-ownership rates continue to rise, financed by ever-increasing leverage on the part of buyers. Once again, the presumption is that American families are entitled to own a home, even if buying one is financially imprudent.

The expenditure that Warren has highlighted most in her past work is medical care. The costs of health care have outpaced the growth in personal income for four decades and counting, with no sign of abating. As a result, health-insurance costs have risen rapidly as a share of earnings. The costs of individual health care for the uninsured have risen even further, since the uninsured are shut out of discounts available only to the insured. As Warren’s innovative analysis of bankruptcy caseloads has shown, the majority of bankruptcy cases were caused, at least in part, by illness or medical debts.

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Yet even this part of the story is more subtle than Warren acknowledges. The cost of health care has risen rapidly, but this reflects an equally rapid improvement in what is being purchased by that health care. As Joseph Newhouse asked back in 1992, how many of us would willingly purchase 1950s health care at 1950s prices? Indeed, recent analysis by Newhouse, David Cutler, and their collaborators suggests that the quality-adjusted price of health care has actually fallen over time, as we buy much better health with our health dollars. Moreover, despite the rapid rise in health-insurance costs, the health-insurance policies held by most Americans remain extremely generous, with coverage of virtually every health-care need at small out-of-pocket costs to the patient.

Thus, while the costs of living in the U.S. have risen, so has the quality of life. If individuals can spend less time commuting and more with their families, can own a home of their own, and can afford new life-saving medical technologies, then society is richer. The problem that analysts like Warren continue to miss, however, is that someone has to pay the bills. Our standard of living ultimately can only rise as fast as our incomes. The question simply comes down to who should pay those bills.

In Warren’s view, it is the credit-card companies, or perhaps the government through richer social-insurance programs—but not the consumer. The consumer is a helpless victim of the rising costs of living, and the credit-card companies make record profits by exploiting the need of consumers to finance those costs. But this position misses two key points. First, no one is forcing consumers to have shorter commutes, own their own homes, or have very generous health insurance. Consumers are making those choices, and, as with any choice, it seems reasonable to think that consumers should pay, at least in part, for that privilege.

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Second, if a credit-card holder defaults, someone else ultimately pays. Warren claims that it is the shareholders in credit-card companies who pay for bankruptcy costs, but there is no evidence to that effect. The credit-card market is highly competitive, and in a competitive market it is consumers who should benefit when the cost of doing business (e.g., bankruptcies) falls. Indeed, the one existing study on this topic suggests that more lenient bankruptcy rules lead to higher interest rates for borrowers. Thus, bankruptcy by some borrowers may simply hurt others who are willing to pay their bills but cannot afford higher interest charges.

I wholeheartedly agree with Warren and other critics of the credit-card industry that many practices need to be reformed, with increasingly transparent information on “teaser rates” and regulations against underage credit-card solicitation. And it is a shame that Congress missed the chance to bundle many of these real reforms with changes to the bankruptcy rules, which would have been an appropriate legislative tradeoff. That said, the bankruptcy legislation was not the unbridled evil that opponents make it out to be. The main goal of the legislation was to take a share of consumer bankruptcies out of Chapter 7, in which the debts are discharged against existing (usually very small) assets, and into Chapter 13, in which the debts are paid back over time through an effective tax on income. This tax on income is unlikely to recover the entire foregone debt, but it will recover more than under Chapter 7. It does not seem, in principle, problematic to make individuals pay back the cost of their excess borrowing, particularly if it helps lower interest rates for other lenders.

Ultimately, society’s desire for a constantly rising standard of living means sharing the burden between individuals and the government. If we are concerned that credit-card companies are exploiting consumers, then by all means we should address that, and we should undertake any efforts possible to ensure a competitive credit-card market that passes the benefits of reform-induced savings to consumers in the form of lower interest rates. If we are concerned that society is placing too much of the risk of medical care on individuals, then we should address that through reforms in the health-care sector that lower costs or shift them to the government. But making it easy for individuals to live beyond their means and then shirk the consequences is not the answer.