Why Ordinary People Bear Economic Risks and Donald Trump Doesn’t
Thirty years ago, on its opening day in 1984, Donald Trump stood in a dark topcoat on the casino floor at Atlantic City’s Trump Plaza, celebrating his new investment as the finest building in Atlantic City and possibly the nation.
Last week, the Trump Plaza folded and the Trump Taj Mahal filed for bankruptcy, leaving some 1,000 employees without jobs.
Trump, meanwhile, was on Twitter claiming he had “nothing to do with Atlantic City,” and praising himself for his “great timing” in getting out of the investment.
In America, people with lots of money can easily avoid the consequences of bad bets and big losses by cashing out at the first sign of trouble.
The laws protect them through limited liability and bankruptcy.
But workers who move to a place like Atlantic City for a job, invest in a home there, and build their skills, have no such protection. Jobs vanish, skills are suddenly irrelevant, and home values plummet.
They’re stuck with the mess.
Bankruptcy was designed so people could start over. But these days, the only ones starting over are big corporations, wealthy moguls, and Wall Street.
Corporations are even using bankruptcy to break contracts with their employees. When American Airlines went into bankruptcy three years ago, it voided its labor agreements and froze its employee pension plan.
After it emerged from bankruptcy last year and merged with U.S. Airways, America’s creditors were fully repaid, its shareholders came out richer than they went in, and its CEO got a severance package valued at $19.9 million.
But American’s former employees got shafted.
Wall Street doesn’t worry about failure, either. As you recall, the Street almost went belly up six years ago after risking hundreds of billions of dollars on bad bets.
A generous bailout from the federal government kept the bankers afloat. And since then, most of the denizens of the Street have come out just fine.
Yet more than 4 million American families have so far have lost their homes. They were caught in the downdraft of the Street’s gambling excesses.
They had no idea the housing bubble would burst, and didn’t read the fine print in the mortgages the bankers sold them.
But they weren’t allowed to declare bankruptcy and try to keep their homes.
When some members of Congress tried to amend the law to allow homeowners to use bankruptcy, the financial industry blocked the bill.
There’s no starting over for millions of people laden with student debt, either.
Student loan debt has more than doubled since 2006, from $509 billion to $1.3 trillion. It now accounts for 40 percent of all personal debt – more than credit card debts and auto loans.
But the bankruptcy law doesn’t cover student debts. The student loan industry made sure of that.
If former students can’t meet their payments, lenders can garnish their paychecks. (Some borrowers, still behind by the time they retire, have even found chunks taken out of their Social Security checks.)
The only way borrowers can reduce their student debt burdens is to prove in a separate lawsuit that repayment would impose an “undue hardship” on them and their dependents.
This is a stricter standard than bankruptcy courts apply to gamblers trying to reduce their gambling debts.
You might say those who can’t repay their student debts shouldn’t have borrowed in the first place. But they had no way of knowing just how bad the jobs market would become. Some didn’t know the diplomas they received from for-profit colleges weren’t worth the paper they were written on.
A better alternative would be to allow former students to use bankruptcy where the terms of the loans are clearly unreasonable (including double-digit interest rates, for example), or the loans were made to attend schools whose graduates have very low rates of employment after graduation.
Economies are risky. Some industries rise and others implode, like housing. Some places get richer, and others drop, like Atlantic City. Some people get new jobs that pay better, many lose their jobs or their wages.
The basic question is who should bear these risks. As long as the laws shield large investors while putting the risks on ordinary people, investors will continue to make big bets that deliver jackpots when they win but create losses for everyone else.
Average working people need more fresh starts. Big corporations, banks, and Donald Trump need fewer.