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Former Vice President Joe Biden was criticized for his record on everything from school busing to the federal budget during Thursday night’s Democratic primary debate. His history with the consumer bankruptcy code received less attention, but that may soon change.

In 2002, a Harvard Law School professor named Elizabeth Warren excoriated the then-senator from Delaware for supporting legislation that would make it harder for consumers to discharge debt in bankruptcy. Her research showed that most people declare bankruptcy because of job loss or unexpected medical bills, so limiting their access to debt relief would remove a crucial safety net and threaten the “economic survival” of millions of Americans.

Despite these warnings, the Bankruptcy Abuse Prevention and Consumer Protection Act eventually became law in 2005, thanks in part to Biden’s advocacy. While bankruptcies spiked just before the new rules came into effect, the number of U.S. consumers filing for protection from creditors fell by more than half from 2004 to 2006. The law was so effective at discouraging Americans from filing for bankruptcy that 20% fewer people sought debt relief in 2008-11—the worst downturn since the Great Depression—than in 2001-04.

New research from Adrien Auclert of Stanford University, Will Dobbie of Harvard University, and Paul Goldsmith-Pinkham of Yale University suggests that this worsened the downturn and hampered the recovery. While some creditors did better than they would have under the pre-2005 rules, consumers unable to access debt relief were forced to cut their spending on new goods and services, which ended up making everyone poorer. A more-generous bankruptcy regime could help the U.S. weather future recessions better, to the benefit of investors.

The study focused on Chapter 7 bankruptcy, which still allows certain debtors to reduce some of their unsecured obligations—particularly credit-card debt and personal loans, but not student debt—in exchange for forfeiting a certain amount of assets. The specific amount is determined by the states. Some, such as Texas, are extremely friendly to debtors. Borrowers there can keep all of their home equity after declaring Chapter 7, for example, in addition to other assets. Others, such as Pennsylvania, require debtors to forfeit almost everything they own, including the entire value of their homes, in exchange for protection from creditors.

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Most states set their policies in the late 19th century, which means that the variation across state lines is effectively random. There is no consistent relationship between the ways states treat bankruptcy and how they treat unemployment benefits, for instance, nor are there are any “income or demographic differences between more and less generous areas,” the authors note.

These differences allowed Auclert and his colleagues to measure the macroeconomic impact of different bankruptcy regimes. The Kansas City metro area, for example, straddles the state line separating Kansas, which has one of the most debtor-friendly bankruptcy regimes in the country, and Missouri, which has some of the worst rules for debtors.

In Jackson County, Mo., which contains the bulk of the people on the eastern side of the state line, the unemployment rate rose by five percentage points from the end of 2007 to the beginning of 2010. The jobless rate did not return to its 2007 level until the middle of 2015. By contrast, the jobless rate in Johnson County, Kan., which has about the same population and sits on the western side of the border, rose by only three percentage points and had dropped back to its 2007 level by the end of 2013.

Auclert and his colleagues tracked these differences in employment across America’s thousands of counties, comparing sectors sensitive to local conditions, such as retail and restaurants, against those that are affected by global demand, such as manufacturing. During a recession, one would expect people who make capital goods for export to the rest of the world to lose their jobs at similar rates regardless of whether they live in a state friendly to debtors or creditors, but the impact of those job losses on their neighbors would depend in part on the generosity of the local bankruptcy regime.

The economists sorted counties by a variety of factors, including income, homeownership rates, changes in house prices, and demographics, to isolate the effect of the bankruptcy rules. In the years before the financial crisis, retail and restaurant employment rose and fell at similar rates in otherwise similar counties, regardless of how they treated debtors.

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By 2008, however, a divergence developed, with people in comparable counties in pro-debtor states such as Kansas and Texas doing significantly better than residents of pro-creditor states such as Missouri and Louisiana. Auclert and his colleagues estimate that the most generous provisions raised local employment rates by more than a percentage point compared with the most draconian regimes. That extra employment meant more people who could buy goods and services produced in other parts of the country, which helped mitigate the national downturn.

Auclert and his colleagues estimate that “debt forgiveness provided during the Great Recession increased aggregate employment by almost two percent at the end of 2009.” While that is better than an alternative world without debtor protections, the economists note that the U.S. could have done significantly better by boosting debt relief during the downturn. That’s something for Congress to think about as it debates whether to allow borrowers to discharge student debt in bankruptcy.

Write to Matthew C. Klein at matthew.klein@barrons.com