Bankruptcy and Economic Recovery

Abstract

To measure economic growth or recovery, one traditionally looks to metrics such as the unemployment rate and the growth in GDP. And in terms of figuring out institutional policies that will stimulate economic growth, the focus most often is on policies that encourage investment, entrepreneurial enterprises, and reward risk-taking with appropriate returns. Bankruptcy academics that we are, we tend to add our own area of expertise to this stable — with the firm belief that thinking critically about bankruptcy policy is an important element of any set of institutions designed to speed economic recovery. In this paper, written for a book entitled "Restructuring Financial Infrastructure to Speed Recovery" to be published by the Brookings Institution, we outline the crucial role we believe bankruptcy plays in advancing a robust economy, while also identifying several areas in which we believe bankruptcy law — and practice — could be improved so as to enhance bankruptcy’s role in economic growth, including its recovery from periods of recession. Along the way, we suggest that a standard (and appropriate) baseline metric for successful economic policies, namely employment, if carried outside its macro focus so as to become an independent bankruptcy policy (as it often is), carries with it — usually inadvertently — the potential to undermine bankruptcy’s key role in facilitating economic growth.

Keywords: Bankruptcy, corporate reorganization, economic growth, employment, risk taking, incentive distortion, economic failure, financial failure, purpose of bankruptcy, asset mobility, delayed case commencement, use of assets. saving jobs, Chrysler bailout

JEL Classification: G33, H81, J63, J68, O43