The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act means there will be a new sheriff in town: a director for the newly established Consumer Financial Protection Bureau. The CFPB is intended to serve as an independent watchdog empowered to regulate bank and nonbank financial institutions providing services and products to consumers. White House signals suggest that President Obama will nominate Harvard University's Elizabeth Warren to head the new agency.
Her candidacy for the post has drawn support from 141 fellow professors who recently signed a letter encouraging President Obama to nominate Warren because, "[i]n both her scholarship and her public service, Professor Warren draws her conclusions from careful analysis of data." Unfortunately we are forced to disagree. We are concerned that Warren has exhibited a tendency to serve preset policy goals in some of her academic research.
For example, Congress is currently considering the Medical Bankruptcy Fairness Act, a proposal largely justified by two studies coauthored by Warren that claim that most personal bankruptcy filings are caused by medical debt. This finding, however, is the result of a host of survey design errors and poor statistical techniques. The papers, published in 2005 and 2009, rely on surveys of bankruptcy filers from public court records for 2001 and 2007, respectively. In the first paper Warren and her co-authors conclude that more than 50% of the 1,000 debtors surveyed had filed for bankruptcy due to medical reasons, but those surveyed included people with any sort of addiction, including uncontrolled gambling problems.
Presumably in response to criticism, the 2009 study excludes gamblers and addicts but still manages to conclude that more than 60% of bankruptcy filings are due to medical reasons. The finding is particularly striking because, as the study acknowledges, only 29% of respondents believed their bankruptcies were caused by medical bills. Warren and her co-authors reach their total of 62% by adding people who lost weeks of work due to illness, reported more than $5,000 in medical bills or reported any medical problems of self or spouse. It requires a great leap of logic, however, to assert that these problems caused the bankruptcy filings in every instance.
The studies also suffer from what economists and statisticians call "selection bias," which means that the sample is not random. An unbiased study along these lines would require a "control group" of people with medical debts who did not file for bankruptcy. That would enable researchers to see when and why medical debts drive a household to file for bankruptcy. Including only people who file for bankruptcy exaggerates the importance of any kind of debt, including medical debt. And finally, the Warren studies do not allow for the possibility that other household characteristics, such as an individual's work status, marital status, income and other kinds of debt, could have influenced the bankruptcy filing.
Warren's findings deviate markedly from the substantial economics literature that uses proper statistical techniques to study the link between medical debt and bankruptcy. For instance, professors David Dranove and Michael Millenson estimate that only about 17% of bankruptcies are caused by medical debt. The Department of Justice found that just 10% of households had large medical debts relative to income and according to the Panel Study of Income Dynamics, a longitudinal survey tracking households since 1968, only 9% of households claimed medical bills as the primary reason for filing.
In fact, while bankruptcy filings have increased by 25% since 2000, medical debts have not changed significantly as a share of total debt over this period, according to the Survey of Consumer Finances, which uses a nationally representative sample of more than 4,000 households and is considered the definitive source for information on household finances.
Warren's findings, based on research of dubious academic standards, exaggerate the magnitude of the problem and affect policymakers' ability to make informed, unbiased decisions regarding pending legislation. Yet perhaps because of the Harvard label attached to the papers or dismay over the plight of medically distressed households, far too many in Washington seem willing to accept these findings without question.
It is troubling to think that the person responsible for this distortion may become the first director of the CFPB, an agency that will establish critical new rules affecting nearly all Americans. While Warren's academic affiliation and her achievement as a bestselling author on personal finance are impressive, these accomplishments do not, of themselves, qualify her for this post.
A candidate's eligibility should be based on his or her proven ability and willingness to consider all facts fairly and put forward proposals for the larger good of the country. Given Elizabeth Warren's questionable and seemingly biased research methods, we believe she would be the wrong choice for such a powerful job.
Alex Brill is a research fellow and Aparna Mathur is a resident scholar at AEI.