Bankruptcy judges consider both value to creditors and harm to employees in deciding whether to liquidate or reorganize firms. This Article proposes to systematize what is currently an ad hoc trade-off by making bankruptcy law explicitly counter-cyclical—that is, placing more weight on preserving employment during times of high unemploy­ment. Although the suggestion that bankruptcy law should consider em­ployment effects runs counter to decades of economic analysis of bankruptcy law, this Article bases its analysis on the traditional law and economics efficiency norm. During times of high unemployment, significant social benefits flow from maintaining employment, as evi­denced by the hundreds of billions of dollars that the government has recently spent to maintain employment. The simple argument of this Article is that when bankruptcy law can preserve employment more cheaply than government spending can, it should do so.


    1. The Broader Debate About Efficient Legal Rules
    2. “Community Concerns”: “Proceduralists” Versus “Traditionalists” in Bankruptcy Law
    1. Background Macroeconomic Literature
    2. Basic Setup
    3. Two Methods for Estimating the Value of Maintaining Employment
    4. Accounting for Context Dependence
    1. Implementation Using § 1112(b) Under Current Statute
    2. Other Means of Implementing Counter-Cyclical Bankruptcy Law Under Current Statute
    3. Statutory Changes to Implement Counter-Cyclical Bankruptcy Law
    1. The Institutional Competency of the Bankruptcy System
    2. Asymmetry with Law Outside of Bankruptcy
    3. Alternative Policies Would Be Superior
    4. Re-Entry into Bankruptcy
    5. Few Bankruptcies Take Place During Times of High Unemployment



Suppose that a bankruptcy judge has two options in a bankruptcy proceeding of a factory. First, the judge could reorganize the factory, resulting in a $1,000,000 payment to creditors and keeping the factory largely intact. Second, the judge could liquidate the factory, resulting in a $1,500,000 payment to creditors and the loss of 1,000 jobs as the factory is shuttered. What should the bankruptcy judge choose? Conventional law and economics analysis dictates shuttering the plant to maximize the return to creditors and thereby maximize efficiency. Contrary to the pre­vailing view in law and economics, this Article argues that during times of high unemployment the judge should instead choose reorganization in order to preserve jobs, despite the lower payment to creditors. Doing so can reduce the suffering caused by unemployment while also reducing costs to taxpayers.

The argument rests solely on economic efficiency. During and around recessions, 1 A “recession,” as used in this Article, is a time when the economy is operating significantly below its potential output, with consequent underutilization of capital and elevated unemployment. It does not mean just a contraction in economic output, as the term is sometimes technically taken to mean. See US Business Cycle Expansions and Contractions, Nat’l Bureau of Econ. Research,
US_Business_Cycle_Expansions_and_Contractions_20120423.pdf [] (last visited Sept. 26, 2016) (“The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy . . . .”).
an inefficiently large number of people are unem­ployed, and both worker surplus (the gain that workers receive over the cost of providing labor) and producer surplus (profits) are lost. Keynesian stimulus programs seek to rectify this inefficiency, increasing employment in two ways. First, stimulus increases employment directly through increased government hiring and spending. Second, Keynesian stimulus does so indirectly through the “Keynesian multiplier.” The Keynesian multiplier refers to the process by which an increase in government spending or reduction in taxes increases consumer spend­ing among beneficiaries of the spending or tax cuts, in turn increasing employment among those who benefit from that increased consumer spending; these newly employed people spend more money because their own incomes have gone up, thereby causing the cycle to repeat it­self. 2 N. Gregory Mankiw, Macroeconomics 262–64 (5th ed. 2003) [hereinafter Mankiw, Macroeconomics]. The government spends to mitigate the pain and reduce the effi­ciency losses of high unemployment in two ways. First, during times of high unemployment, governments typically spend money to increase em­ployment. 3 See, e.g., American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (codified in scattered titles of U.S.C. (2012)). Indeed, the government spent over $800 billion with this goal in mind in the American Recovery and Reinvestment Act of 2009 alone. 4 James Freeman, Editorial, Obama’s Stimulus, Five Years Later, Wall St. J. (Feb. 17, 2015), (on file with the Columbia Law Review). Prior work suggests that it costs $26,000 to create or save a job—and this is on the low end of estimates. See Gabriel Chodorow-Reich et al., Does State Fiscal Relief During Recessions Increase Employment? Evidence from the American Recovery and Reinvestment Act, 4 Am. Econ. J.: Econ. Pol’y 118, 137 (2012). The Obama Administration itself estimates that it spent $125,000 per job. Council of Econ. Advisers, Exec. Office of the President, The Economic Impact of the American Recovery and Reinvestment Act Five Years Later: Final Report to Congress 3, 10 tbl.3 (2014), []. Second, since more people are unemployed at these times, government spending on social-insurance and income-support programs increases. Raising money through taxes to fund Keynesian job-creation efforts and increased payments to unemployed workers, however, distorts incentives to work and save. 5 See Charles L. Ballard et al., General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States, 75 Am. Econ. Rev. 128, 132–33 (1985). This Article argues that, instead of incurring these inefficiencies to increase employment during recessions, in some cases it is more efficient to incur other, but smaller, inefficiencies—in particular, reorganizing rather than liquidating some firms that are more valuable to creditors and owners liquidated. Yes, doing so would reduce returns to creditors and make it less likely that creditors will invest, thereby harming businesses. But preserving jobs through bankruptcy law can sometimes avoid reducing incentives to work and save—a potentially larger inefficiency caused by tax increases to pay for employment-increasing government spending.

If taxes were not distortionary, bankruptcy law ideally would not seek to sustain employment, since tax-funded spending could do so without causing distortion. But in a “second-best” world, where there is already at least one distortion, adding a second distortion does not necessarily in­crease, and can in fact decrease, the total amount of distortion. 6 R.G. Lipsey & Kelvin Lancaster, The General Theory of Second Best, 24 Rev. Econ. Stud. 11, 12 (1956). This Article applies such reasoning, suggesting that bankruptcy law can create an additional distortion by considering employment effects but nonetheless reduce the distortion overall by reducing the distortion from taxation. The Article proposes that bankruptcy law weigh two concerns: (1) the costs to creditors and businesses from preserving jobs through bankruptcy and (2) the taxes necessary to fund programs that promote employment. On the one hand, if—with the goal of preserving jobs—bankruptcy courts do not maximize the return to creditors, creditors will lose more money. Furthermore, future creditors, knowing that courts will do this, will be less likely to lend to businesses, which will suffer correspondingly. One can think of the distortion to lending caused by courts’ consideration of job preservation as an “employment preservation tax” 7 See Professors Thomas Jackson and David Skeel add that promoting economic recov­ery through the appropriate allocation of capital is another benefit of maximizing the value to creditors. Thomas H. Jackson & David A. Skeel, Jr., Bankruptcy and Economic Recovery 17–20 (Univ. Pa. Law Sch. Inst. for Law & Econ., Research Paper No. 13-27, 2013), (on file with the Columbia Law Review). on creditors. On the other hand, if bankruptcy courts do not seek to preserve jobs during recessions, a government seeking to maintain employment will face in­creased expenditures on social-insurance and employment-stimulus pro­grams, which means that the government must at some point raise taxes to fund those obligations. These taxes reduce work and investment and make the economy worse off. The fact that the government must raise funds through distortionary taxes means that even “nonideal” policies may be best when they coexist with other policies like distortionary taxes.

This Article first proposes “counter-cyclical bankruptcy rules” that calibrate how much bankruptcy judges consider the employment effects of a bankruptcy proceeding based on where the economy is in the busi­ness cycle. If labor markets are working properly and unemployment rates are low, then the bankruptcy judge should not consider employ­ment effects and instead focus on maximizing return to creditors. If la­bor markets are not working properly and unemployment rates are high (so that a job saved at a reorganized firm is likely to lead to a reduced unemployment rate), then the bankruptcy judge should return less to creditors in some cases, thereby saving jobs and, in turn, saving the gov­ernment money. The rules this Article proposes have substantial scope for affecting employment and efficiency by way of preserving through bankruptcy both fewer jobs during times of low unemployment and more jobs during times of high unemployment: From 1980 through 2012, there were over 1.7 million business bankruptcy filings, 8 The source of the data for this calculation is Am. Bankr. Inst., Annual Business and Non-Business Filings by Year (1980–2015),
bankruptcy-statistics (follow “Annual and Non-business Filings by Year (1998-2015)” hyperlink) (on file with the Columbia Law Review).
and approximately 1,000 were large, publicly traded corporations that em­ployed over 7.4 million workers before their filings. 9 Those reorganized had at least 2.6 million employees after reorganization. UCLA-LoPucki Bankruptcy Research Database, UCLA Sch. of Law, Cases Table (on file with the Columbia Law Review) (database updated Mar. 10, 2016).

This Article arrives at a kind of midpoint in the debate over the ex­tent to which bankruptcy law should consider “community concerns” beyond the interests of the firm’s owners and creditors, such as those of employees, customers, suppliers, and the local community. 10 See Elizabeth Warren, Bankruptcy Policy, 54 U. Chi. L. Rev. 775, 788 (1987) (arguing that bankruptcy law should have a variety of goals, including community inter­ests); see also Karen Gross, Failure and Forgiveness: Rebalancing the Bankruptcy System 8 (1997) (arguing for inclusion of community interests in the bankruptcy system); Donald R. Korobkin, Rehabilitating Values: A Jurisprudence of Bankruptcy, 91 Colum. L. Rev. 717, 720–21 (1991); cf. Douglas Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. Chi. L. Rev. 815, 824–26 (1987) (arguing bankruptcy policy should maximize returns to creditors). This Article supports some elements of the argument of Professor Elizabeth Warren in this famous debate with Professor Douglas Baird. Legislative history suggests that Congress intended for the bankruptcy process to support employment. 11 When it introduced the current Chapter 11 in 1977, the House Judiciary Committee wrote in its report that:
“The purpose of a business reorganization case . . . is to restructure a business’s finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for its stockholders . . . . It is more economically efficient to reorganize than to liquidate, because it preserves jobs and assets.”
H.R. Rep. No. 95-595, at 220 (1977) (emphasis added). This language has been cited by the Supreme Court to mean that “[t]he fundamental purpose of reorganization is to pre­vent a debtor from going into liquidation, with an attendant loss of jobs and possible mis­use of economic resources.” NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984). The Court also said that bankruptcy courts should “balanc[e] the interests of the affected par­ties—the debtor, creditors, and employees . . . [including] any qualitative differences be­tween the types of hardship each may face.” Id. at 527. Citing the same language, the Court in United States v. Whiting Pools, Inc. said that, “[b]y permitting reorganization, Congress anticipated that the business would continue to provide jobs, to satisfy creditors’ claims, and to produce a return for its owners.” 462 U.S. 198, 203 (1983).
“Traditionalist” bankruptcy scholars like Professor Elizabeth Warren have argued bankruptcy should consider community concerns. 12 Jeff Ferriell & Edward J. Janger, Understanding Bankruptcy § 1.02 (2013) (“A key difference between the proceduralists and the traditionalists concerns whether bankruptcy should be used to advance goals of stakeholders other than creditors.”); Warren, supra note 10, at 788–93 (arguing that bankruptcy law should seek to promote broader commu­nity and distributive interests). In recent decades, though, efficiency-minded law and ec­onomics scholars have questioned this emphasis. These “proceduralists” suggest that bankruptcy should maximize the return to creditors and shareholders. 13 See, e.g., Ferriell & Janger, supra note 12, § 1.02 (“[B]ankruptcy should do noth­ing more than preserve value for creditors by seeking to eliminate the inefficiencies that are inherent in atomistic state collection proceedings.”); Baird, supra note 10, at 822–24 (arguing that bankruptcy policy should seek to maximize returns to creditors). This Article assumes the normative goal of efficiency but finds that pursuing efficiency sometimes supports the argument that bankruptcy should consider employment effects. It also provides support for positions taken by some academics for why the bankruptcy process should consider community concerns.

This Article does not take a position on whether bankruptcy law should consider employment effects more or less than it already does overall but rather proposes what bankruptcy law should target when it does so. In particular, this Article offers a method and the relevant data for implementing a simple cost-benefit rule that constrains the current ad hoc judicial discre­tion exercised in considering employment effects. Many law and economics scholars of bankruptcy law believe there is a “pro-reorganization” or “procontinuation bias” in bankruptcy law as it stands. 14 See Edward R. Morrison, Bankruptcy Decision Making: An Empirical Study of Continuation Bias in Small-Business Bankruptcies, 50 J.L. & Econ. 381, 392–411 (2007) (describing the conventional view of continuation bias and showing evidence inconsistent with that view in a sample of Illinois bankruptcies). For other accounts arguing that there is a procontinuation bias, see Julian R. Franks & Walter N. Torous, A Comparison of the U.K. and U.S. Bankruptcy Codes, 6 J. Applied Corp. Fin. 95, 101 (1993) (arguing that the U.S. bankruptcy system is systematically prodebtor because it has “strong incentives to maintain the firm as a going concern even when it is worth more in liquidation”); Lynn M. LoPucki, The Debtor in Full Control—Systems Failure Under Chapter 11 of the Bankruptcy Code?, 57 Am. Bankr. L.J. 99, 106–07 (1983) (noting that, under former ver­sion of Chapter 11, bankruptcy prcoeedings could not be for the sole purpose of liquidation). This Article argues that when unemployment is high, this tendency toward reorganization, consistent with apparent congressional intent, is appropriate; a job saved in bankruptcy will increase overall employment, reduce hardship for workers, and save the government money.

This Article proceeds as follows. Part I situates this Article in the de­bate between the “traditionalists” and “proceduralists” in bankruptcy law and also, more broadly, in the debate about “efficient” legal rules. Part II develops an efficiency-based normative framework for assessing when bankruptcy judges should take into account the employment effects of bankruptcy. Part III explains how these rules could be implemented in practice. Part IV gives an example calculation of how a bankruptcy judge could evaluate the benefits of preserving jobs through reorganization. Part V responds to potential critiques.

I. Efficient Bankruptcy Law and Efficient Legal Rules


The debate over whether bankruptcy should aim to maximize share­holder and creditor returns is part of the broader debate over whether legal rules or taxes (or, in this case, tax-funded programs) should be used to achieve social goals. 15 The debate has largely been framed in terms of “redistribution,” but the choice is equally relevant here. Important articles in the debate are Louis Kaplow & Steven Shavell, Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income, 23 J. Legal Stud. 667, 674–76 (1994) (arguing that legal rules should be “efficient,” and all redistribution should take place through the income tax) and Chris William Sanchirico, Taxes Versus Legal Rules as Instruments for Equity: A More Equitable View, 29 J. Legal Stud. 797, 805–06 (2000) (arguing that it can be efficient to redistribute through legal rules). Taxes distort behavior, reducing incentives to invest and work, thereby wasting about $0.33 with each marginal dollar raised. 16 See Ballard et al., supra note 5, at 135 (finding that marginal welfare cost from raising a dollar of tax revenue is $0.33, assuming a savings elasticity of 0.4 and a labor sup­ply elasticity of 0.15). However, by the “one-third rule,” if deviating from an “efficient” legal rule results in a distortion that costs less than one-third of the amount of money that no longer needs to be raised through taxes, then a court should adopt that deviation. 17 Zachary Liscow, Note, Reducing Inequality on the Cheap: When Legal Rule Design Should Incorporate Equity as Well as Efficiency, 123 Yale L.J. 2478, 2482–83 (2014). Indeed, that is the efficient legal rule. Using terminology developed in other work, this Article argues that what some might consider an “efficient” bankruptcy rule—maximizing return to shareholders—is actually merely an “i-efficient” legal rule. 18 Id. at 2483, 2487 (defining an i-efficient rule as a “rule that is efficient (i.e., wealth-maximizing based on individuals’ willingness to pay) in the narrow ‘internal-to-legal-rule’ context”). That is, it is efficient only internally to the relations between firms and their creditors, investors, and other parties that underlie bankruptcy law. But it is not efficient considering the global effects of the rule, such as placing unemployed workers on programs for which taxpayers pay. This Article takes as its goal global efficiency, defined as the wealth produced by the entire economy, including the costs of other spending and tax programs impacted by legal rules the bankruptcy system has adopted.

B. “Community Concerns”: “Proceduralists” Versus “Traditionalists” in Bankruptcy Law

The debate in bankruptcy law about “efficiency” has been between “traditionalists,” who support consideration of “community concerns,” 19 “Community concerns” are conceptually distinct from the idea of shareholder representation in corporate governance. This Article proposes a remedial, not a structural, point. and “proceduralists,” who want bankruptcy law to maximize the value of the assets leaving bankruptcy. The traditionalists, in part, point to congressional language that indicates promoting employment was a goal of bankruptcy law. 20 See supra notes 10–12 and accompanying text (discussing bankruptcy law traditionalists). Indeed, the Supreme Court has found that there is a “congressional goal of encouraging reorganizations.” 21 United States v. Whiting Pools, Inc., 462 U.S. 198, 204 (1983) (finding that property seized by the IRS prior to filing a reorganization petition must be turned over to the debtor under 11 U.S.C. § 542(a) (2012) and relying on congressional intent as evinced in legislative history, H.R. Rep. No. 95-595, at 367–68 (1977); S. Rep. No. 95-989, at 82 (1978)). So the traditional­ists argue that bankruptcy judges should act to preserve employment in the name of these broad non-efficiency-based criteria.

In contrast, the proceduralists argue that bankruptcy law should maximize the value of the firm exiting bankruptcy. They have argued that there has traditionally been a pro-reorganization or procontinuation bias relative to the efficient baseline. 22 See supra note 14. They point to the same Supreme Court cases and legislative history cited by the traditionalists as evidence of that bias. Law and economics scholars have argued that several bankruptcy rules lead to an inefficient procontinuation bias. 23 See Yeon-Koo Che & Alan Schwartz, Section 365, Mandatory Bankruptcy Rules and Inefficient Continuance, 15 J.L. Econ. & Org. 441, 462 (1999) (arguing that the prohibition in § 365(e)(1)(A) of the Bankruptcy Code on ipso facto clauses is inefficient and may lead to firms continuing inefficient projects). Legislative history here supports the goal of reorganiza­tion. The Senate Report on the section says that the presence of ipso facto clauses “fre­quently hampers rehabilitation efforts.” S. Rep. No. 95-989, at 59. For example, Professors Yeon-Koo Che and Alan Schwartz argue that the prohibition in § 365(e)(1)(A) of the Bankruptcy Code on “ipso facto clauses,” which excuse the solvent party from performance of a contract when the other party becomes insolvent, is inefficient. 24 Che & Schwartz, supa note 23, at 462.

This Article does not claim that there should be more reorganiza­tions relative to the status quo but rather that courts should time properly over the business cycle those reorganizations driven by a concern for em­ployment. When applying the normative framework of the proceduralists (i.e., pursuing efficiency), there should be some concern for employ­ment. Moreover, this concern should be considered within the context of the economy’s current place within the business cycle. 25 Since the normative framework is efficiency, issues of fairness do not come into play for those who have the bad luck of being creditors to a business that goes bankrupt during a time of high unemployment and therefore receive less under counter-cyclical bankruptcy rules. This Article is actually largely supportive of the law and economics literature criticizing procontinuation policies. It supports counter-cyclical and context-dependent employment-sustaining decisions rather than rules with a consistent procontinuation bias like ipso facto clauses that are “baked in” to bankruptcy law 26 See Che & Schwartz, supra note 23, at 442. and that effectively “juice” the firm at the expense of creditors at all times.

II. Model of Bankruptcy and Employment

A. Background Macroeconomic Literature

This Article is also part of a small, but growing, literature on how law should respond to macroeconomic concerns. For example, Professor Yair Listokin makes a forceful argument that the lack of macroeconomic con­siderations in tax law is quite problematic. 27 See Yair Listokin, Equity, Efficiency, and Stability: The Importance of Macroeconomics for Evaluating Income Tax Policy, 29 Yale J. Reg. 45, 49–50 (2012). In another example of this emerging literature, this author has drawn two counterintuitive conclu­sions about how taxes should change during recessions: To increase em­ployment and ensure that those who most need jobs get them, tax cuts should favor employers, not employees, and the government should en­courage marginal workers to leave the labor force by subsidizing nonem­ployment. 28 Zachary Liscow & William Gui Woolston, How Income Taxes Should Change During Recessions, 70 Tax L. Rev. (forthcoming 2017) (on file with the Columbia Law Review). The intuition for the result is as follows: If recessions effectively result in a wage floor and therefore rationing of a fixed number of jobs, then subsidizing employers will create more jobs, while subsidizing employees will draw more marginal workers into the labor force without creating more jobs, making those who really need jobs compete with those who receive little surplus from working. By similar reasoning, subsidizing nonemployment draws marginal workers out of the labor force, making it easier for those who place a high value on attaining employment to get one of the fixed number of jobs available. Id. (manuscript at 4). Finally, although not primarily focused on how varying macroeconomic conditions should affect the law, Professors Jonathan Masur and Eric Posner discuss how cost-benefit analysis could take into account regulations’ effects on employment. 29 See Jonathan S. Masur & Eric A. Posner, Regulation, Unemployment, and Cost-Benefit Analysis, 98 Va. L. Rev. 579, 582 (2012) (arguing that cost-benefit analysis should consider employment effects). This is the first paper that asks how bankruptcy should respond to macroeconomic concerns and the first to suggest how courts could take into account such concerns.

This Article relies on an understanding of the economy and labor markets that differs from the traditional model in law and economics, which typically assumes that labor markets are “neoclassical.” In neoclassical labor markets, prices (e.g., wages) adjust so that supply equals demand. 30 See Neva Goodwin et al., Principles of Economics in Context 219–21 (Routledge 2015) (2014) (describing the market-clearing mechanism of labor markets under neoclassical model). There are no “frictions” in finding new jobs; that is, it does not take time or effort for an employer and an employee to find each other. Under these circumstances, it would be pointless to preserve firms with liquidation value greater than reorganization value. This would penalize creditors without improving circumstances for workers as a whole. Laid-off workers would simply immediately find new jobs. Some may have lower wages because their skills are no longer in as much de­mand, but there is no efficiency reason to keep them employed in their previous jobs. No market failure justifies deviating from the outcome that maximizes the value of the firm, and no positive externality results from keeping a worker in the job. 31 In neoclassical labor markets, there may be individuals who are unwilling to work for the market wage. Those persons exit the labor force. See id. (describing neoclassical labor markets generally). The key difference between neoclassical labor mar­kets and those considered here is that there is a set of workers who would be willing to work at the prevailing wage but are unable to find a job. There is an excess supply of work­ers, which does not happen in neoclassical labor markets because the wage decreases until enough workers have exited the labor force to equilibrate the supply and demand of workers.

This Article builds on insights from macroeconomics showing that departing from these neoclassical assumptions reverses these conclu­sions. 32 See infra notes 34–35 (describing how sticky information or sticky wages can im­pact reallocation). Although no specific model is required for the results here, these macroeconomics models provide useful conceptual frameworks for understanding how the results might arise. In general, bankruptcy serves the important function of reallocating capital and labor to more produc­tive uses. 33 See Jackson & Skeel, supra note 7, at 5–6 (explaining the effectiveness of bank­ruptcy law at reallocating assets to productive uses); see also Lucia Foster, John Haltiwanger & C. J. Krizan, Market Selection, Reallocation and Restructuring in the U.S. Retail Trade Sector in the 1990s, 88 Rev. Econ. & Stat. 748, 748–49 (2006) (noting the im­portance and dynamics of reallocation). But this result does not necessarily apply in recessions. Whether due to sticky information, 34 See N. Gregory Mankiw & Ricardo Reis, Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve, 117 Q.J. Econ. 1295, 1296 (2002) (introducing the sticky-information model). sticky wages, 35 Sticky wages are traditionally assumed in the Keynesian model. See David Romer, Advanced Macroeconomics 242–44 (3d ed. 2006) (presenting a modern rendition of the Keynesian model). or some other cause, reallocation does not work as well during recessions. Capital is underuti­lized. Workers lose their jobs and then become unemployed; they are not reallocated. One way to understand this phenomenon is through the presence of sticky wages. Labor demand falls, but wages do not. As a re­sult, when workers are laid off, they are not re-employed. The economy stays in a recession, so capital too is underutilized. This market failure may justify “interference” with the value-maximizing role of bankruptcy.

Two positive externalities result from keeping workers employed. First, the government does not have to incur spending on items like unemployment insurance required for unemployed workers; due to long unemployment durations, this spending is unusually high during reces­sions for each job lost. 36 Henry S. Farber, Job Loss in the Great Recession: Historical Perspective from the Displaced Workers Survey, 1984–2010, at 1–2 (IZA, Discussion Paper No. 5696, 2011) (on file with the Columbia Law Review) (noting the length of unemployment duration). Second, as John Maynard Keynes argued in the first half of the twentieth century, keeping one worker employed results in a “multiplier,” through which increased spending by one employed worker results in more employment, further increasing spending and therefore employment. 37 See Mankiw, Macroeconomics, supra note 2, at 262–64 (illustrating how govern­ment purchases cause a “multiplier”). Thus, spending a dollar to keep a worker employed is worth more than a dollar in increased economic output. 38 Note that Keynesian views, though widely held among economists, are not univer­sally held. See, e.g., Robert J. Barro, Opinion, Government Spending Is No Free Lunch, Wall St. J. (Jan. 22, 2009), (on file with the Columbia Law Review).

This effect does not occur during times of low unemployment. At times and places of “low” unemployment, there are still unemployed workers. When a liquidated firm then lays off workers, they will still be unemployed for some period of time. However, this “frictional” employ­ment results in what economists call the “natural rate of unemployment,” defined as the level of unemployment resulting from job-matching fric­tions in “normal” times, when the economy is neither stressed nor over­heated. 39 See Mankiw, Macroeconomics, supra note 2 at 155–58, 175 (defining the natural rate of unemployment). It ought not be addressed through bankruptcy law because there is little reason to think that preserving the jobs in a bankrupt firm would actually increase overall employment: That frictional employment is to a large extent inevitable, and preserving more jobs at bankrupt firms would do little to reduce it. 40 See id. at 159 (“Some frictional unemployment is inevitable in a changing economy.”). Rather, without the Keynesian multiplier that results when the economy is operating below its normal capacity and employment is above the natural rate, it is not worth the loss to creditors and the distortion to creditor behavior that results from preserving jobs at the expense of creditors. That distortion itself is likely to reduce em­ployment. For the same reason, there are costs to having employment protections that make it difficult to lay off workers, as such protections may actually increase unemployment. 41 See, e.g., Daron Acemoglu & Joshua D. Angrist, Consequences of Employment Protection? The Case of the Americans with Disabilities Act, 109 J. Pol. Econ. 915, 917, 929–32 (2001) (using the Americans with Disabilities Act to show that employment protec­tions, at least in this context, can increase unemployment for the affected group).

A separate issue in deciding when and where bankruptcy law should consider employment is whether it ought to consider employment in places of high unemployment when the national unemployment rate is low. This is an interesting question, but one that is beyond the scope of this Article, since the underlying economic causes of the localized unem­ployment are less clear. This Article will examine the presence of temporarily high unemployment rates in certain locations as a reason to consider employment effects more strongly, but it will use an elevated national unemployment as the trigger for purposes of counter-cyclical bankruptcy rules.

B. Basic Setup

To understand how to implement counter-cyclical bankruptcy rules, compare the costs and benefits of preserving a job through reorganiza­tion instead of liquidation in bankruptcy. 42 This analysis considers only a binary choice between liquidation and reorganiza­tion. It does not consider the possibility that preserving some jobs in a firm may be cheaper than preserving other jobs, which could lead to conclusions like partial reorganizations. The first key variable is the average cost of preserving a job for a year (a “job-year”) through bank­ruptcy , which this Article defines as the difference between the liquidation value  and the reorganization value  of a firm, divided by the number of job-years in the economy preserved by reorganizing instead of liquidating . 43  is based on the employment after reorganization, not before, which is im­portant since reorganizations often result in layoffs. To be clear, both and  consider only the return to creditors and, if relevant, equity. Thus,


In some bankruptcies  will be large, either because of the large dif­ference between liquidation and reorganization value or because of the small number of workers whose jobs are preserved. In other bankruptcies  will be small, either because of a small difference between liquidation and reorganiza­tion value or because a large number of workers’ jobs are preserved. The key concern for a bankruptcy judge or policymaker is the level of  below which firms should be reorganized despite the loss to creditors. Law and economics scholars have generally argued that whenever  is greater than 0, the firm should be liquidated.

In deciding on this threshold level of , some government actor—a bankruptcy judge or otherwise—should compare the efficiency cost of the loss to creditors with the benefits of preserving employment for  workers. Presented below are two methods for measuring the benefits of preserving employment.

C. Two Methods for Estimating the Value of Maintaining Employment

1. Method One: The Shadow Value of Maintaining Employment. — The first method for estimating the value of a saved job uses the “shadow value” of a job that is implied by the amount the government recently spent to maintain employment. 44 One paper taking a similar approach is Orley Ashenfelter & Michael Greenstone, Using Mandated Speed Limits to Measure the Value of a Statistical Life, 112 J. Pol. Econ. 226, 227 (2004) (using the preferences revealed by speed limits adopted by political pro­cesses to measure the value of a statistical life). That is, a way to determine the value to the government of maintaining employment is to see how much it actu­ally spent to do just that. Presumably the government would take into account all benefits—aggregate stimulus, increased tax payments, avoided social-insurance and income-support payments, and anything else that members of Congress believe is important to their constituents. The analysis here focuses on the value of preserving a job during the Great Recession through the American Reinvestment and Recovery Act. Estimates of the amount that the government spent to preserve a job vary widely, from an estimate of $26,000, 45 Chodorow-Reich et al., supra note 4, at 137. up to the Administration’s own esti­mate of $125,000, 46 The Council of Economic Advisers published a report stating that the Recovery Act saved or created an average of 1.6 million jobs a year for four years, produced by about $800 billion in spending through the end of 2013. Council of Econ. Advisers, supra note 4, at 10 tbl.3. Dividing $800 billion by the the product of 4 and 1.6 million yields $125,000 per job-year. For simplicity, this calculation ignores discounting. and congressional Republicans’ estimates of an infi­nite cost. 47 See Did the Stimulus Create Jobs?, (Sept. 27, 2010), [] (quoting Republican can­didates who claim that the economic stimulus package did not create or save any jobs). The claim that the Recovery Act saved or created zero jobs amounts to a claim of an infinite cost, since dividing cost by the number of jobs created or saved is infinite if the claimed number of jobs is zero. This analysis implicitly makes two rather heroic assumptions: first, that the government was optimizing; second, that it knew (or had a good guess about) the cost of its actions. Nevertheless, the government’s best guess in 2009 may be the best guess now. Since the Administration’s estimate of $125,000 to maintain a job-year is the official estimate and is rather high (despite the Administration’s incentives to make it seem low), this Article will use this figure as a baseline assumption.

By this calculation, a firm should be reorganized when the efficiency cost resulting from paying less to creditors is less than the efficiency cost resulting from , the government spending to create or preserve a job for a year. That is, a firm should be reorganized when:


Taking the right-hand side of the inequality first, the efficiency cost of government spending to create a job-year is equal to (a) the gross cost of raising a dollar of government funds minus (b) the social value of the spending (of course, beyond the benefits of job preservation, which are present on both sides of the inequality). The gross cost of raising a dollar to preserve a job is a well-studied concept in economics, known as the marginal cost of public funds (MCPF), 48 See, e.g., Alan J. Auerbach & James R. Hines Jr., Taxation and Economic Efficiency, in 3 Handbook of Public Economics 1347, 1385 (Alan J. Auerbach & Martin Feldstein eds., 2002). which is equal to the extra dol­lar raised plus the distortion to working and investing that results from raising that dollar of revenue. Then the social value of the good (e.g., a road), service (e.g., medical care), or transfer payment (e.g., Social Security payment) provided must be subtracted from the MCPF to find the efficiency cost. This Article defines  as the value of public spending, ignoring the benefits of job preservation. Thus, the relevant comparison is that a firm should be reorganized when:


Turning to the left-hand side of the inequality, the efficiency cost arising from the reduced payments to the creditors comes from two com­ponents. First, future creditors are less likely to lend to businesses since they know that they may lose out if there is a bankruptcy, harming busi­nesses and causing another distortion. 49 Note that this distortion would likely be somewhat mitigated by the reduced wages that employers could pay to employees with counter-cyclical bankruptcy rules. Since workers would value the increased insurance over keeping their jobs in recessions, they would demand lower wages, making businesses more profitable and making creditors more willing to lend. But second, the creditors in the bankruptcy at hand get less money. That money is lost to the world. That is, there is a crucial difference between the efficiency cost of reorganizing a firm that is worth more when liquidated and taxing to pay for job crea­tion. In the case of an “inefficient” reorganization, no equivalent public good, service, or transfer is provided. Assets are simply deployed in a manner that reduces returns to creditors—pure deadweight loss (again, ignoring the benefits of job gains, which government spending also pro­duces). Hence, no equivalent of the value of government spending should be subtracted from the cost to creditors. Therefore, because there is no offsetting gain from spending apart from the employment benefits, the efficiency cost of the “inefficient” reorganization is the full cost of the financial loss to creditors plus the cost of the distortion to their behavior.

To implement the rule in practice, these values need to be esti­mated. As noted earlier, the MCPF is a well-studied estimate. The best estimate is that it costs society about $1.33 for the government to raise a dollar of revenue. 50 Ballard et al., supra note 5, at 135 & tbl.3 (estimating a marginal excess burden of $0.33 per additional dollar of tax revenue raised, for a total cost of $1.33 to society). Estimating  is more difficult, since the spending could take many forms. Determining the value of government transfers is easy: The value of a lump-sum payment to an individual of one dollar is simply one dollar (again, ignoring any employment-creating benefits). Assessing the value of a road is harder; it could range from zero dollars for a “road to nowhere” to more than a dollar for a valuable public good. 51 Presumably, though, roads of sufficient value would have been built before the recession. This Article conservatively assumes as an illustrative baseline that the value of a dollar of government spending is a dollar, since this is true for at least the large portion of government stimulus spending used for tax rebates.

Estimating the left-hand side of the equation involves somewhat more guesswork. The efficiency cost of changing firms’ investment behav­ior ex ante in anticipation of lower returns upon bankruptcy is not well known. 52 Indeed, the effects could be heterogeneous, as they differentially affect different types of creditors, investors, and borrowers. In the lead up to a potential recession, this proposal could tighten credit to firms at risk of bankruptcy because the proposal would reduce expected payouts from those firms to creditors in the case of bankruptcy. Such an impact might reduce the extent to which bankruptcy judges should seek to reorganize rather than liquidate firms in the name of preserving employment because tightening credit could worsen a recession. However, these lower returns are essentially an expected tax on creditors. Though the ratio of the creditor distortion to the MCPF will be part of a parameter in the formula, as a baseline illustration, assume for simplicity that the “tax” resulting from paying less back to firms is equal to the MCPF, which incorporates the financial loss to creditors and the resulting distortion to their behavior.

In this Article,  represents the ratio of the distortion from general taxation (i.e., the MCPF minus the value of government spending) to the distortion from the “tax” on creditors. In general, then, a firm should be reorganized when


Under the illustrative assumptions used here, a = 0.25. 53 The reason is that  implies, following the argument above, that . Consider that it costs $1.33 to transfer a dollar of government-raised money, which has a dollar of non-job-related bene­fits, while (by assumption) it costs $1.33 to transfer a dollar from creditors, which has no non-job-related benefits. Thus,  implies that . Rearranging and simplifying yields . Thus,  Put differently, the ratio of costs from raising a dollar of government-raised money compared to raising a dollar through transferring one from creditors is .

The next step to understanding when a firm should be reorganized is to determine , the number of job-years of employment that results from preserving a firm. Two types of jobs can be preserved: direct and indirect jobs. Direct jobs are those directly saved at the firm (and its com­petitors). Indirect jobs are those that result from the Keynesian multi­plier, whereby those employed consume goods and services, resulting in additional employment.

To measure the direct employment effects of a layoff, one must con­sider at least two ancillary effects. First, more workers may be hired else­where as the products that would have been sold by the liquidated firm are produced elsewhere. Second, laid-off workers compete with other unemployed workers for a limited number of jobs, making it harder for those other unemployed workers to get jobs. Assume as a baseline that these two effects just offset each other, so that the number of jobs saved at a firm is a good approximation of the total direct jobs created in the economy. This assumption will be valid in some contexts but not in oth­ers. For example, if the firm went bankrupt due to foreign competition, then at least in the short run few American workers may be hired as a result, since foreign producers would be picking up the slack. In that case, the true total effect on unemployment may be underestimated, be­cause the laid-off workers from the bankrupt firm would be competing with and increasing the unemployment rate for existing unemployed workers without the bankruptcy creating any new jobs at other American producers.

The number of direct jobs preserved then must be converted into a number of direct job-years preserved, since some employees quickly find jobs and others do not. The way to estimate the total effect on unemploy­ment is to follow laid-off workers and see how long they stay unem­ployed. 54 Labor economists calculate this using the Kaplan-Meier survival curve. See Bruce D. Meyer, Unemployment Insurance and Unemployment Spells, 58 Econometrica 757, 762–66 (1990) (applying the Kaplan-Meier survival curve to unemployment). Ideally, one would estimate time to re-employment for workers laid off due to bankruptcy, since workers laid off under such circum­stances may stay unemployed for longer than those let go for other rea­sons. Workers laid off due to bankruptcy may be unemployed for longer, both because their skills are less likely to be in demand and because the local labor market may be glutted with unemployed workers; alterna­tively, they may be unemployed for a shorter period of time because the layoffs are less likely to be tied to poor performance. The best available evidence, though, is on “displaced” workers—that is, those laid off be­cause their plant or company closed or moved, their position or shift was abolished, there was insufficient work, or a similar reason. 55 Farber, supra note 36. This analysis constructs this estimate of fifty weeks as fol­lows: Farber shows that 43.7% of workers had been re-employed by the time of the survey; they had an average unemployment duration of 13.4 weeks. Id. at 37–38 app. at tbls.10 & 12. The remaining 56.3% of workers were not re-employed at the time of the survey. Id. at 37 app. at tbl.10. Since the survey asked if workers had been laid off over the previous three years, the approximate average unemployment duration of these workers is 1.5 years. Of course, this is a substantial underestimate of the true duration of unemployment, since this account does not count any unemployment after the date of the survey. Weighting 13.4 weeks and 1.5 years by the appropriate fractions yields an average unemployment duration after dis­placement of 49.8 weeks. Work by la­bor economist Henry Farber shows that workers laid off during the Great Recession had an average unemployment duration after layoff of at least fifty weeks; many workers laid off then still had not been re-employed when they were surveyed years later. 56 See supra note 55 and accompanying text. Note that “unemployed” includes those who exit the labor market, which is not the customary way of counting those who exit labor markets. The Article labels as  the average unemployment duration avoided by directly preserving a job through reorganization.

The indirect employment effects then need to be added to these di­rect employment effects. Prior work estimates the size of this Keynesian “multiplier” during the Great Recession to be around two. 57 See, e.g., Chodorow-Reich et al., supra note 4, at 138. That is, every worker directly employed results in another worker indirectly employed. The number of workers directly employed as a result of reorganizing in­stead of liquidating is denoted  and the multiplier is denoted . Estimates of the effect of government spending on employment already include the indirect jobs, so no multiplier should be added to the government spending side of the equation. Accordingly, a firm should be reorganized when




where  is the value of preserving a direct job at a firm through reorganization. That is, a firm should be reorganized when the cost of preserving a job there (L-R)/D is less than the value of persving a job there (J.

Using the baseline set of assumptions that (1) “taxing” creditors and taxpayers yields the same distortion; (2) a dollar of taxpayer spending is valued at a dollar; (3) the only benefit of reorganizing firms when L > R  is job creation (yielding, along with (1) and (2), alpha = 0.25); (4) the num­ber of job-years resulting from a reorganization instead of liquidation is equal to the fifty weeks of unemployment for each worker who would have been employed by the reorganized firm (l = 50/52) ; (5) the jobs multiplier m equals two; and (6) the government’s “shadow value” of a job during the recession G is $125,000 per job, then J = $60,096. 58 See infra Table 1. That is, a firm is worth preserving when the cost per direct job to creditors is less than $60,096. 59 This analysis leaves out other potentially relevant factors. For example, the “tax” that creditors face is collected during the recession, which may be more disruptive than taxes collected years after the recession, when taxpayers are likely to pay the bill for stimu­lus programs. Of course, one can make different assumptions and better estimates may arise, but the framework remains useful even if the particular numbers are changed.

a. Application to the Chrysler Bankruptcy. — The Chrysler bankruptcy provides an illustrative application of Method One. 60 In re Chrysler LLC, 405 B.R. 84 (Bankr. S.D.N.Y. 2009), aff’d, 576 F.3d 108 (2d Cir. 2009), vacated sub nom. Ind. State Police Pension Tr. v. Chrysler LLC, 558 U.S. 1087 (2009), vacated and appeal dismissed sub nom. In re Chrysler LLC, 592 F.3d 370 (2d Cir. 2010) (mem.) (per curiam). Admittedly, the Chrysler case is much more complicated than the binary choice between reorganization and liquidation to preserve jobs, as it involved a govern­ment bailout (at least temporarily using taxpayer money) and a questionable distribution to creditors. 61 In particular, the Chrysler bankruptcy has been criticized for violating the statu­tory prioritization of creditor repayment. See, e.g., Barry E. Adler, A Reassessment of Bankruptcy Reorganization After Chrysler and General Motors, 18 Am. Bankr. Inst. L. Rev. 305, 306 (2010) (“It may seem . . . that money otherwise available to repay . . . secured creditors was withheld by the purchaser to satisfy unsecured obligations owed the UAW.”); Mark J. Roe & David Skeel, Assessing the Chrysler Bankruptcy, 108 Mich. L. Rev. 727, 733 (2010) (“Unsecured retiree claims were promised well over 50 cents on the dollar, along with control of the New Chrysler, and unsecured trade creditors were promised full pay­ment. The secured creditors, however, were getting 29 cents on the dollar.”). Nevertheless, Chrysler’s bank­ruptcy proceedings have been widely viewed as exhibiting a procontinua­tion bias, and an estimate using this methodology of the value of maintaining its employment during the Great Recession is instructive of the significant stakes involved in counter-cyclical bankruptcy rules. 62 See Roe & Skeel, supra note 61, at 767 (discussing the issues associated with the Chrysler bankruptcy). Af­ter its bankruptcy, Chrysler had over 40,000 employees. 63 Chrysler had 47,326 employees on December 31, 2009, though these were not all in the United States, which is why the 40,000 figure is a more accurate estimate of their over­all U.S. employment. Chrysler Grp. LLC, Annual Report (Form 10-K), at 25 (Dec. 31, 2012), []. Assuming that all of those employees would have been laid off with a liquidation, with an average unemployment spell of fifty weeks and a cost per job of about $60,000, the value of this maintained employment is $2.4 billion. Under this analysis, if Chrysler had been worth up to $2.4 billion more liqui­dated than reorganized, it still would have been efficient to reorganize.

The estimate for Chrysler could be a substantial under- or overesti­mate. It may be an underestimate because Chrysler may have an unusu­ally large supply chain, which may have yielded many more layoffs. Indeed, Ford argued in favor of the bailout of Chrysler and GM in part in order to maintain this industrial ecology. 64 Jon Healey, Ford’s CEO Has No Regrets About Call for Bailout, L.A. Times (Apr. 19, 2012), []. In addition, because Chrysler was such a large employer, the glut of workers would have been unusually large and geographically concentrated, 65 See Our Locations, Fiat Chrysler Autos.,
OurBusiness/OurLocation/Pages/home.aspx [] (last visited July 29, 2016) (showing that all U.S. plants are located in Illinois, Ohio, Michigan, and Indiana).
likely leading to especially pro­longed unemployment. On the other hand, it may be an overestimate because distinct pieces of Chrysler may have maintained their operations following liquidation. Also, foreign and domestic car producers operat­ing in the United States may have quickly ramped up production—and employment—to make up for the loss of Chrysler. However, unless the job-loss estimate is far too low, the large magnitude of the value of the jobs at stake is clear.

2. Method Two: The Bottom-Up Approach. — An alternative to using the “shadow value” approach is to reconstruct the social benefit of saving a job based on the components of that social benefit. This is the approach of Method Two; however, even if Method One is used, it is instructive to understand what underlies the value of these job-preserving expendi­tures. This value primarily comes from two sources: from avoiding other government expenditures and from Keynesian stimulus. 66 Note that the “worker’s surplus” that is maintained by sustaining employment is implicitly included in the forgone cost of Keynesian stimulus. When jobs are rationed and too “few” people are employed, spending one dollar to preserve a job preserves worker’s surplus—that is, the difference between the amount that the worker is paid and the amount she would be willing to be paid to take the job. With workers willing to work at prevailing wages but unable to find jobs, this worker’s surplus is left on the table because of the unemployment. Thus, the value of Keynesian stimulus would reflect this benefit of sustaining employment.

First, when a worker becomes unemployed, she is served by a wide variety of programs. 67 This section covers only federal programs. State programs would add additional expenditures. She is usually eligible for unemployment insurance, which pays a certain fraction of a laid-off worker’s wages. 68 Mankiw, Macroeconomics supra note 2, at 160 (“Although the precise terms of the program differ from year to year and state to state, a typical worker covered by unem­ployment insurance in the United States receives 50 percent of his or her former wages for 26 weeks.”). If the individual is poor enough and meets asset tests, she may be eligible for: Supplemental Security Income, which provides income for the very poor; the Supplemental Nutrition Assistance Program, which provides food assistance for the very poor; Medicaid, which provides health insurance for the very poor; and Temporary Assistance for Needy Families, which provides cash assistance for poor families. 69 See generally Shelley K. Irving & Tracy A. Loveless, U.S. Census Bureau, Dynamics of Economic Well-Being: Participation in Government Programs, 2009–2012: Who Gets Assistance? 1–3 (2015),
publications/2015/demo/p70-141.pdf [] (Presenting data on the “par­ticipation and characteristics of people who received benefits from . . . means-tested assistance programs”).

Moreover, with regard to lower-income individuals, the government collects less tax revenue, especially as individuals become eligible for the Earned Income Tax Credit. After a waiting period, workers may be eligible for Social Security Disability Insurance (SSDI), which provides payments to individuals who can claim a disability; there is strong evi­dence that individuals who used to work but who get laid off often sign up for benefits under SSDI. 70 See generally Dan Black, Kermit Daniel & Seth Sanders, The Impact of Economic Conditions on Participation in Disability Programs: Evidence from the Coal Boom and Bust, 92 Am. Econ. Rev. 27, 47 (2002) (examining the relationship between labor-force participation and use of SSDI benefits). Adding these various components together for workers who are unemployed for an average of at least fifty weeks likely yields substantial sums for the government. These sums could be estimated using the Survey of Income and Program Participation, which tracks government payments to individuals and even distinguishes be­tween those laid off due to bankruptcy and other reasons. 71 Survey of Income and Program Participation, U.S. Census Bureau, http:// [] (last vis­ited July 29, 2016).
As used below, S represents the total expected social-insurance and safety-net-pro­gram costs per worker. 72 The partial funding of social-insurance programs by state and local governments raises the question of whether federal expenditures should be treated differently from state expenditures for purposes of calculating the MCPF. This Article takes the view of global efficiency—that is, federal and state expenditures should be treated the same, notwithstanding the fact that state programs may have a different MCPF. An alternative approach might incorporate the generosity of programs like Medicaid and unemployment insurance in the state in which workers live.

These forgone government expenditures provide only a lower bound on the value of preserving employment because we must also ac­count for Keynesian stimulus effects. During recessions, governments often try to maintain and increase employment for Keynesian reasons. The value of preserving firms teetering on the edge of liquidation is particularly strong when there is a lack of “shovel-ready” projects. Even President Barack Obama acknowledged that it was difficult finding such projects to get money out the door and people employed. 73 David Jackson, Obama Jokes About ‘Shovel-Ready Projects,’ USA Today (June 13, 2011, 6:07 pm),
obama-jokes-about-shovel-ready-projects/1#.UxDdc_ldVUU []. The goal of having shovel-ready projects also motivates Martin Shubik’s proposal to have experts prepare a list of shovel-ready projects in case a recession should hit. See Martin Shubik, Levy Econ. Inst. of Bard Coll., A Proposal for a Federal Employment Reserve Authority 2 (2009), [].
Having the firm already in place makes it a particularly good pressure point for main­taining employment because the firm is able to do so without the lag in spending and employment that often results from government programs. The government is willing to pay a certain amount of Keynesian stimu­lus—call this number —purely to avoid the harms from low employ­ment levels, including the loss in economic output and harm to those who cannot find jobs.

Under this approach, the government would compare the efficiency costs of not maximizing the value to creditors with the efficiency costs of raising the funds for social-insurance payments  and Keynesian stimu­lus : 74 Keynesian stimulus  only includes spending that is justified by its stimulus-generating effect, not spending justified on the basis of reducing government expendi­tures. To count job-creation costs justified on the basis of avoiding government expendi­tures would be to count those expenditures twice.


Or, following the same reasoning as in the previous subsection, a firm should be reorganized when:


Though this is a good formula for understanding the components underlying the more comprehensive measure described in Method One, the measurement difficulties for Method Two are substantially greater than for Method One. Thus, while Method Two is useful for decompos­ing the “shadow value” used in Method One into its two components, the remainder of the Article focuses on Method One.

D. Accounting for Context Dependence

This Article argues that bankruptcy law should act to preserve em­ployment when the unemployment rate is high. This section explores the conditions under which employment-preserving bankruptcy rules should come into effect. It describes how a policymaker could measure , the “shadow value” of preserving a job through bankruptcy in Method One. Economic theory suggests that when unemployment is high, sustaining employment and spending has a Keynesian multiplier, which does not exist when unemployment is low. 75 See supra note 31 (describing the functioning of supply and demand in neoclassical labor markets). The positive externality for other workers of keeping workers employed exists when unemployment is high but not when it is low. Thus, to determine times when overall unemploy­ment can be reduced through bankruptcy law, a judge or policymaker should measure the unemployment rate for the labor market relevant for a worker in a particular time, place, and line of work. Fortunately, as this section emphasizes, the information necessary to make such measure­ments is available to decisionmakers on a timely basis.

The first input into the relevant unemployment rate that a worker faces is the national unemployment rate. 76 Headline unemployment rates typically do not include among the unemployed the “discouraged” workers who have left the labor market due to the poor state of the economy. See Labor Force Characteristics from the Current Population Survey, Bureau of Labor Statistics, [
C7GZ-YKQ4] (last visited July 29, 2016). Some believe that these work­ers should be included in the unemployment rate. See, e.g., Christopher Matthews, The Unemployment Report Wasn’t Rigged, but It’s Not Accurate, Either, Time (Oct. 16, 2012), (on file with the Columbia Law Review) (arguing that the number of discouraged workers is an important macroeconomic employment statistic). However, their absence does not matter for this analysis as long as the percentage of workers who are discouraged at a given measured unemployment rate is the same across different recessions.
The overall macroeconomy is the primary driver of unemployment and thus an important indicator for how much a job saved in bankruptcy will reduce overall unemployment. Furthermore, workers can change location and professions, so looking beyond the worker’s narrow context is important. Fortunately, unemploy­ment data are publicly released and available to bankruptcy judges or other policymakers with little lag, thereby making nearly current infor­mation available to decisionmakers and improving the quality of deci­sionmaking. In particular, the Bureau of Labor Statistics releases its estimate of the national unemployment data for the middle of the previous month on the first Friday of each month. 77 In addition, the unemployment data are not revised subsequently. The unemploy­ment data come from the Current Population Survey of individuals, which is complete by the time the unemployment data are released. Labor Force Statistics from the Current Population Survey, Bureau of Labor Statistics,
LNS14000000 [] [hereinafter Bureau of Labor Statistics, Current Labor Force Statistics] (last visited July 29, 2016). At the same time the unemployment data are released, data on employment are released. See Current Employment Statistics, Bureau of Labor Statistics, [
RP5Q-LJQX] (last visited July 29, 2016). These data come from a survey of establishments, and these numbers are revised over the coming two months based on a census of establishments. BLS Information, Bureau of Labor Statistics,
bls/empsitquickguide.htm [] (last visited Aug. 19, 2016).

The second input into the unemployment rate that a worker faces is the timing in the business cycle: The level of the unemployment rate alone is not a sufficient piece of information. Focusing on reducing unemployment is more important at the beginning of the recession, when there are more months in the near term with high unemployment. Although neither bankruptcy judges nor anyone else has a crystal ball showing how unemployment will change with time, the Federal Reserve’s unemployment forecasts give an indication of future economic conditions. 78 A recent projection is available at: Advance Release of Table 1 of the Summary of Economic Projections to Be Released with the FOMC Minutes, Bd. of Governors of the Fed. Reserve Sys., [] (last visited July 29, 2016).

A third consideration is the appropriate geographic definition of the “macroeconomy.” Over time, people move to places of low unemploy­ment from places of high unemployment. 79 See, e.g., Christopher A. Pissarides & Jonathan Wadsworth, Unemployment and the Inter-Regional Mobility of Labour, 99 Econ. J. 739, 753 (1989). But, especially in the short run, the United States does not have one national labor market but ra­ther many submarkets. So bankruptcy law needs to choose the relevant macroeconomy, which may be as disaggregated as the metropolitan area or as aggregated as the whole country. Which is more appropriate de­pends on the relevant labor market for the worker, and that in turn de­pends on how mobile workers are. Precisely determining how to weigh local versus national unemployment rates is beyond the scope of this Article. Both, however, are relevant to this Article given limited mobility. Estimates of local unemployment rates are also available at a high frequency and with little lag. The Bureau of Labor Statistics releases state and metropolitan-area unemployment estimates for the previous month in the middle of the following month. 80 Local Area Unemployment Statistics, Bureau of Labor Statistics, http://www.bls.
gov/lau/news.htm [](last visited July 29, 2016) (providing local-area unemployment statistics).

Finally, the type of worker who would be laid off should also play a role in determining the contexts in which employment-preserving bank­ruptcy law would be most valuable. Just as there is not one national labor market geographically, there are distinct labor markets for different types of workers. For example, in the recent downturn, job prospects for high-skilled workers were substantially stronger than those for low-skilled workers. 81 See, e.g., Anthony P. Carnevale & Nicole Smith, Georgetown Univ. Ctr. on Educ. & the Workforce, The Midwest Challenge: Matching Jobs with Education in the Post-Recession Economy 4 (2011), [http://] (highlighting that job prospects coming out of the 2008 recession were more favorable for skilled workers with postsecondary credentials).
Thus, in such a downturn, government expenditures on high-skilled workers will tend to be lower and the macrostimulus benefits from preserving their jobs will be lower, since they are likely to be employed relatively quickly even without help from bankruptcy law. 82 In addition, poorer workers have a higher marginal propensity to consume, lead­ing to greater macrostimulus benefits. See John Maynard Keynes, The General Theory of Employment, Interest, and Money 126 (1964) (noting that the multiplier is larger in poorer communities). Data on unemployment rates by type of worker are available as quickly as the national unemployment rate. In the same first-Friday-of-the-month data release, the Bureau of Labor Statistics also releases unemployment by sector, race, sex, age, educational attainment, and other features that could be taken into account by bankruptcy law. 83 See Press Release, Bureau of Labor Statistics, Employment Status of the Civilian Population 25 Years and Over by Educational Attainment,
news.release/empsit.t04.htm [] (last visited July 29, 2016) (providing unemployment data by educational attainment); Press Release, Bureau of Labor Statistics, Unemployed Persons by Industry and Class of Worker, Not Seasonally Adjusted, [] (last visited July 29, 2016) (providing unemployment data by industry); Labor Force Statistics from the Current Population Survey, Household Data Seasonally Adjusted: A-10. Unemployment Rates by Age, Sex, and Marital Status, Seasonally Adjusted, Bureau of Labor Statistics, [
4AS7-9AL9] (last visited July 29, 2016) (providing unemployment data by age, sex, and marital status).

III. Implementing Counter-Cyclical Bankruptcy Law

This Article argues for bankruptcy law’s inclusion of a targeted con­cern for employment preservation, not the general pro-reorganization policy supported by the Supreme Court and some bankruptcy scholars. 84 See supra notes 11–12 and accompanying text (noting pro-reorganization policy announced by Supreme Court and citing scholars that support such a policy). Thus, ideally pro-reorganization features would not be “baked in” to the system regardless of the state of the economy. This section proposes ways in which the bankruptcy system could incorporate counter-cyclical bank­ruptcy rules.

A. Implementation Using § 1112(b) Under Current Statute

One important point at which bankruptcy judges choose between liquidating and reorganizing a firm arises when a party in interest files a motion to convert from a reorganization to a liquidation for “cause” un­der § 1112(b). 85 11 U.S.C. § 1112(b) (2012). This section provides that, “on request of a party in interest,” a court may convert a Chapter 11 case to a Chapter 7 case for cause, depending on what “is in the best interests of creditors and the estate.” 86 Id. § 1112(b)(1). “Cause” is then defined in § 1112(b)(4). 87 Id. § 1112(b)(4). One commonly in­voked type of “cause” is that there will be “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.” 88 Id. § 1112(b)(4)(A). The judge has substantial discretion over the mean­ing of “reasonable.” 89 See George P. Fletcher, The Right and the Reasonable, 98 Harv. L. Rev. 949, 981 (1985) (noting that reasonableness invites both consideration of diverse normative criteria and substantial discretion). Although the statute does not suggest an explicit comparison of the liquidation and reorganization values, the macroeco­nomic context should enter the calculus for defining when the probabil­ity of rehabilitation crosses the threshold of reasonableness; that probability could be lower in times when preserving employment is important. 90 Macroeconomists argue that it is important that inefficient firms disappear so that more efficient firms take their place. For example, Professors Ricardo J. Caballero, Takeo Hoshi, and Anil K. Kashyap argue that loans from Japanese banks to firms that would have been insolvent absent these loans prolonged the Japanese stagnation that be­gan in the early 1990s. Ricardo J. Caballero, Takeo Hoshi & Anil K. Kashyap, Zombie Lending and Depressed Restructuring in Japan, 98 Am. Econ. Rev. 1943, 1944 (2008). This option does not include long-term subsidies—or indeed, any subsidies at all. After restructuring, the firm will have to remain solvent to avoid going into bankruptcy again.

Structural bias in bankruptcy law leads to firm managers filing “too many” reorganization petitions, effectively giving judges the opportunity to choose which should be liquidations and which reorganizations. Firm managers file the vast majority of bankruptcy filings, and they tend to prefer Chapter 11 reorganizations over Chapter 7 liquidations. 91 See infra note 92 and accompanying text (noting that managers are incentivized to file Chapter 11 bankruptcy). This preference creates an agency problem that drives the structural bias in favor of reorganization petitions. Since firm managers wish to keep their jobs, and managers are more likely to keep their jobs in a reorganization than in a liquidation, it is widely believed that there is a strong bias to­ward filing using Chapter 11 instead of Chapter 7, even when the reorganization value is less than the liquidation value. 92 See, e.g., Jackson & Skeel, supra note 7, at 25. The conversion of Chapter 7 to Chapter 11, covered by § 706, is unlikely to be a very important lever, since few potential candidates for counter-cyclical bankruptcy rules are likely to file under Chapter 7. Creditors who believe that the firm is worth more liquidated than reorganized then file a § 1112(b) motion, allowing bankruptcy judges an opportunity to pre­serve firms and employment. Without this structural bias, bankruptcy judges would have fewer opportunities to preserve firms in which liquida­tion value is greater than reorganization value.

Section 105 vests judges with additional discretionary authority to implement counter-cyclical bankruptcy rules. 93 11 U.S.C. § 105. This section, on the “Power of Court,” appears to give bankruptcy judges extraordinary power. Section 105(a) reads, in its entirety:

The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determina­tion necessary or appropriate to enforce or implement court or­ders or rules, or to prevent an abuse of process. 94 Id. § 105(a).

On its face, this provision gives judges broad discretion, though the provision is still delimited by the Bankruptcy Code and used sparingly. 95 For example, in In re Kmart Corp., Judge Easterbrook noted that § 105 provides the power to “implement rather than override,” so judges’ actions must advance provisions of the statute and cannot contradict the code. 359 F.3d 866, 871 (7th Cir. 2004). Overall, given the text of the statute, its legislative history, and Supreme Court rulings, 96 See Baker Botts v. ASARCO, 135 S. Ct. 2158, 2169–70 (2015) (stating that bank­ruptcy courts have “broad discretion to decide what constitutes ‘reasonable compensa­tion’”); Law v. Siegel, 134 S. Ct. 1188, 1194 (2014) (“A bankruptcy court has statutory author­ity to ‘issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of’ the Bankruptcy Code . . . it may also possess ‘inherent power . . . to sanction “abusive litigation practices.”’” (quoting 11 U.S.C. § 105(a); Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375–76 (2007))); United States v. Whiting Pools, Inc., 462 U.S. 198, 204 (1983) (noting the broad scope of the bankruptcy estate). it seems likely that judges have discretion to implement counter-cyclical bankruptcy rules.

In light of these provisions, this Article’s proposal actually constrains judicial discretion rather than expands it. Bankruptcy judges already con­sider the effects of employment when deciding petitions under § 1112. 97 See, e.g., In re 1701 Commerce, LLC, 477 B.R. 652, 659 n.23 (Bankr. N.D. Tex. 2012) (ordering the continuation of a bankruptcy stay to protect the public interest, based in part on judicial notice of the importance of the estate to local economic development); see also In re Surgical Assocs., Inc., No. 13–10081–R, 2013 WL 1176233, at *6 (Bankr. N.D. Okla. Mar. 21, 2013) (denying a § 1112 motion partly because a potential dissolution of the debtor would “jeopardiz[e] . . . the economic futures of 39 employees” and again not mentioning the state of the economy). They invoke the goals of job preservation and value to creditors, which may conflict, but do so in a way that does not rigorously consider the value of a saved job. 98 See, e.g., 1701 Commerce, 477 B.R. at 658–59; see also Surgical Assocs., 2013 WL 1176233, at *6. This Article offers a systematic way for bankruptcy judges to address this trade-off. It recommends procedures through which judges would consider whether the bankruptcy takes place during a time of high unemployment and suggests a method for measurement. A systematic approach would cabin the discretion bankruptcy judges cur­rently have to consider employment.

Finally, implementing counter-cyclical bankruptcy rules through § 1112(b) need not dramatically complicate bankruptcy trials. Under § 1112(b), experts for creditors and management already present infor­mation on the valuation of the firm and the likelihood of rehabilitation. 99 Robert F. Reilly, Valuation Analyst Guidelines Related to Bankruptcy Expert Reports and Testimony, 29 Am. Bankr. Inst. J. 60, 60 (2010). Implementing counter-cyclical bankruptcy rules only calls for a few addi­tional pieces of information that a judge could input into a standard for­mula: the number of employees working at the firm, the state of the na­tional and local economy, the timing in the business cycle, and the types of workers. 100 See supra section II.C (explaining the factors useful for deciding whether a given firm is worth preserving); infra Table 1 and accompanying text (applying these factors, along with example assumptions, to a particular context). The analysis admittedly involves some parameters that are difficult to measure exactly, but the educated guesswork involved need not greatly complicate the proceedings. Management’s experts (who will tend to favor reorganization) and creditors’ experts (who will tend to favor liquidation) can add this small amount of information to their existing testimony. 101 Another point at which a bankruptcy judge could conceivably implement coun­ter-cyclical bankruptcy rules is under § 1129, which determines when a judge shall confirm a bankruptcy reorganization plan. Before confirmation, a judge could demand that a plan involve fewer layoffs, for example. The judge’s statutory authority to demand such a change, however, is quite limited. Under § 1129(a)(11), a plan must be feasible; the sec­tion requires that “[c]onfirmation of the plan is not likely to be followed by liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan.” 11 U.S.C. § 1129(a)(11). It seems difficult to argue then that a judge could demand more employment in the name of feasibility when such increases in employment are, if anything, likely to reduce the feasibility of the plan. When choosing between two plans that satisfy the conditions of § 1129, however, the judge could consider employment implications.

B. Other Means of Implementing Counter-Cyclical Bankruptcy Law Under Current Statute

Section 1112(b) is just one part of the bankruptcy code that judges can use to implement counter-cyclical bankruptcy rules. In practice, after a bankruptcy survives a § 1112(b) motion—and even before—there are many opportunities in which bankruptcy judges can and do promote reorganization. At virtually each stage of the bankruptcy proceeding, judges exercise discretion in ways that make reorganization more or less likely. These decisions will affect the value of the reorganized firm, at the expense of various other parties whose ex ante incentives are distorted by the knowledge that they may face cancellation of their contractual rights in the bankruptcy proceedings.

Take the recent example of the bankruptcy of Patriot Coal, a mining company operating in a high-unemployment industry (coal mining), in a high-unemployment time (early 2013), in a high-unemployment place (Appalachia). 102 In re Patriot Coal Corp., 493 B.R. 65 (Bankr. E.D. Mo. 2013). A key issue in the bankruptcy was whether Patriot Coal could cancel the collective bargaining agreement of its unionized employees, roughly a third of its total employees, under sections 1113 and 1114 of the bankruptcy code. In deciding to grant Patriot Coal’s mo­tion to reject its collective bargaining agreement, the bankruptcy judge said that among the questions affecting the court’s decision was the out­come for “the current employees; the fate of the rank and file . . . coal miners.” 103 Id. at 130. The court also asked, “What effect will this Court’s ruling have on local economies, particularly those in mining communities that thrive on the patronage of those affected by the outcome of the 1113/1114 Motion?” 104 Id. at 80. In answering these questions, the judge argued:

If Debtors liquidate, the overwhelming majority of Debtors’ cur­rent employees . . . will be unemployed. There is no question that even today, numerous miners remain unemployed from the liquidation of Debtors’ former competitors, and Debtors’ employees would add to this joblessness. If . . . Debtors liqui­date, state and federal governments will likely be left to remedy the carnage . . . . 105 Id. at 137.

In rejecting the union’s collective bargaining agreement, the firm’s unionized employees and pensioners lost, but the firm’s employees over­all, government finances, and the local economy won. The rejection transformed the company from one in which the liquidation value was greater than the reorganization value to the reverse, and the company has now successfully emerged from bankruptcy reorganized. 106 Id. at 130 (finding that rejecting the collective bargaining agreement was neces­sary to avoid liquidation); Jacqueline Palank, Court Approves Patriot Coal’s Bankruptcy-Exit Plan, Wall St. J. (Dec. 17, 2013, 12:18 pm),
SB10001424052702303949504579264270807341770 (on file with the Columbia Law Review).
Counter-cyclical bankruptcy rules justify such actions under the right economic circumstances.

Bankruptcy judges already make many similar decisions. The court can effectively set a higher or lower threshold for marginal cases in decid­ing when to lift the “automatic stay,” which prevents other parties from exercising their contractual rights so that the debtor can have time to reorganize. 107 11 U.S.C. § 362 (2012). When staying other parties’ repossession of assets requires the availability of the debtor’s assets to pay off the other parties and the court therefore prevents other parties from exercising their contractual rights, the court can be more or less stringent in requiring “adequate protection.” 108 Id. §§ 361–364. The court also plays a substantial role in deciding when the debtor can use, sell, or lease property. 109 Id. § 363. The list of similar decisions a bankruptcy judge must make continues throughout much of the bankruptcy process. The key point is that bankruptcy judges can and do make decisions to help firms reorganize at the expense of other parties’ contractual rights.

C. Statutory Changes to Implement Counter-Cyclical Bankruptcy Law

An alternative to adopting counter-cyclical legal rules within the cur­rent bankruptcy code is to change the statute, thereby opening up a broad range of options. Any of the options discussed below would ad­dress the weakness of the proposals above that, although there are strong biases in favor of a reorganization plan being proposed, such a plan must in fact be proposed for a bankruptcy judge to have the opportunity to alter her rulings to favor maintaining employment at the appropriate times. Exploring these options fully is beyond the scope of the Article, but a few possibilities are worth mentioning. First, the government could spend money to preserve companies in the name of employment. This would effectively remove the distortion to creditor lending and increase the burden on taxpayers, although by a smaller amount than would result from typical government stimulus programs. 110 This result flows naturally from the analysis in the Article. In the same way that the loss to creditors is less than the amount that the government would have to pay through conventional programs to sustain employment, the government could pay the creditors to preserve the firm for an amount less than it would conventionally spend. These are precisely the cases the analysis above attempted to distinguish from cases in which maintaining employment is not worth it. One concern might be that this spending could create a moral hazard for firms or result in windfalls, especially if political considerations matter for decisionmakers. 111 “Moral hazard” is the name for the response of actors to knowledge that they will be compensated if something bad happens to them. Actors engaging in moral hazard choose to adopt more of a behavior that could lead to the bad outcome—for example, a driver engaging in moral hazard drives more dangerously if she knows that car insurance will pay to fix the car if an accident occurs. See, e.g., Tom Baker, On the Genealogy of Moral Hazard, 75 Tex. L. Rev. 237, 238–39 (1996) (defining the concept of moral hazard and investigating its genealogy). In this Article’s case, firms might make more risky bets with the knowledge that they could get government financing if they fail.

A second possibility is to give the government priority in voting for bankruptcy reorganization plans in order to lend additional support to plans when it would be efficient to preserve jobs but creditors may not opt to do so. 112 Another possible statutory change would be to explicitly introduce public-interest considerations into a judge’s decision to approve a plan, as is the case for antitrust settle­ments under the Tunney Act. 15 U.S.C. § 16(e) (2012). The government could become a pseudo-creditor in bankruptcy proceedings. Or the government’s right could be limited to proposing a reorganization plan. However, while giving the government a voice would allow it to encourage the reorganization of the firm, add­ing another voice could complicate already very litigious proceedings and invite some of the same problems arising from the proposal to use government expenditure to preserve companies. A third possibility is to give the employees themselves the opportunity to propose a reorganiza­tion plan or priority in voting for a bankruptcy plan commensurate with the job-preserving benefits. This possibility could follow other proposals for giving employees a vote in order to promote efficient bankruptcy on other grounds. 113 In particular, Professor Anthony J. Casey has suggested that the “option-preserv­ing” priority given junior creditors like employees maximizes efficiency in the face of the incentives that drive senior creditors to maximize their own gain at the expense of junior creditors. See Anthony J. Casey, The Creditors’ Bargain and Option-Preservation Priority in Chapter 11, 78 U. Chi. L. Rev. 759, 792–96 (2011) (discussing the option-preservation priority mechanism); see also Donald S. Bernstein & James E. Millstein, ABI Commission: Redemption Option Value Explained, 34 Am. Bankr. Inst. J. 10, 11, 57 (2015) (discussing the implementation of such a proposal). However, such an approach may create the same issues that would arise if the government were awarded a priority vote in these proceedings. 114 In addition to playing a role in reorganization, the government or employees could play a role in § 363 asset sales.

IV. Example Application

To illustrate how this methodology of taking into account macroeco­nomic context in bankruptcy proceedings would work, consider two cases in which judges exhibited an explicit goal of promoting reorganization. Both cases were filed in the first half of 2013, when unemployment was still elevated in the United States but with variations among industries and locations. 115 Press Release, Bureau of Labor Statistics, The Employment Situation—June 2013, at 1, tbl.A-14 (July 5, 2013),
07052013.pdf [] (noting “the unemployment rate [for June] was un­changed at 7.6 percent”); Press Release, Bureau of Labor Statistics, Regional and State Employment and Unemployment—June 2013, at 1–2 (2013), http:// [] (reporting regional and state variation in unemployment rates).
In one case, the efficiency considerations that underlie counter-cyclical bankruptcy rules support the outcome; in the other, they do not. First, in the Patriot Coal case described in section III.B above, the court considered the effects of “highly likely loss of jobs of those who need them most—the rank and file [workers]” 116 In re Patriot Coal Corp., 493 B.R. 65, 138 (Bankr. E.D. Mo. 2013). and made decisions that promoted reorganization. The judge found that the reorganization saved the “overwhelming majority” of Patriot Coal’s 4,200 employees from unemployment and noted the very high unemployment rate for miners in Appalachia, where Patriot Coal mined. 117 Id. at 90, 137 (noting that eleven of Patriot Coal’s mining complexes were in the Appalachia region). With such a large number of workers facing such a difficult macroeconomic environment, the liquidation value of the firm would have to be substantially higher than the reorganization value for liquidation to be efficient. 118 Although the case materials do not give specific values, it must be that the liquidation and reorganization values were similar, since just the value of the collective bargaining agreement was enough to shift Patriot Coal from a firm with liquidation value greater than reorganization value to the reverse.

Next, consider the bankruptcy of Surgical Associates, Inc., an Oklahoma surgical practice. 119 In re Surgical Assocs., Inc., No. 13–10081–R, 2013 WL 1176233 (Bankr. N.D. Okla. Mar. 21, 2013). In that case, the bankruptcy judge refused to grant a § 1112 motion to dismiss, partly out of concern for “jeopardiz­ing . . . the economic futures of [the company’s] 39 employees.” 120 Id. at *6. However, the unemployment rate in the health care sector was low, 121 The unemployment rate in the education and health services sector in April 2013 was 4.4%. Unemployment Rate—Education and Health Services, Private Wage and Salary Workers, Bureau of Labor Statistics,
data_tool=XGtable [] (last visited July 29, 2016).
and surgeons faced almost no unemployment. 122 The unemployment rate for surgeons and physicians in 2012 was 0.8%. John F. Sargent, Jr., Cong. Research Serv., R43061, The U.S. Science and Engineering Workforce: Recent, Current, and Projected Employment, Wages, and Unemployment 9 (2014), []. Additionally, Oklahoma had a low unemployment rate of five percent in February 2013, when the motion to dismiss was filed. 123 Press Release, Bureau of Labor Statistics, Regional and State Employment and Unemployment (Monthly) News Release (Mar. 29, 2013),
news.release/archives/laus_03292013.htm [].
Given that these workers faced very strong job-market prospects, reorganizing the firm in the name of employment was inefficient, harming creditors and benefitting workers little. With these facts, even if the liquidation value was only a small amount greater than the reorganization value, liquidation would still be the appropriate remedy.

Applying this methodology to a specific hypothetical case demon­strates its value in allowing a judge to quantitatively distinguish whether considering employment effects is appropriate, as in the Patriot Coal case, or inappropriate, as in the Surgical Associates case. 124 Compare In re Patriot Coal Corp., 493 B.R. 65, 137 (Bankr. E.D. Mo. 2013) (not­ing that if the debtors liquidate, the majority of their employees will lose their jobs), with In re Surgical Assocs., 2013 WL 1176233 at *6 (denying a motion to dismiss partly because the debtor’s dissolution would “jeapordiz[e] the . . . economic futures of 39 employees”). Suppose that a judge sought to adopt the view advocated in this Article and applied it through § 1112(b). 125 See supra section III.A for how § 1112(b) could be used. A similar analysis could be done using other provisions of the Bankruptcy Code, as explained in section III.B, or through changing the law, as explained in section III.C. This section offers a hypothetical analysis of this methodol­ogy using an editable program that takes into account various factors, which are listed in Table 1 along with the assumptions, data, and sources used. Definitively developing such a calculation is beyond the scope of the Article, but an example illustrates the implementation of counter-cyclical bankruptcy rules.

Overall, the goal is to compare the benefits with the costs of preserv­ing a job through bankruptcy. To calculate the benefits, one must take into account the economic conditions that the laid-off workers (and oth­ers affected by the liquidation) would face over the period that workers are affected by the decision to liquidate. Recall from section II.C.1 that the value of a preserved direct job during the recession, , was estimated as $60,096, which depends upon the ratio of distortion between taxation and reducing payments to creditors , the conversion between direct jobs preserved and job-years created directly , the Keynesian multiplier , and the shadow value of a job during a reces­sion . 126 A more complicated model might take into account the value of preserving jobs as the unemployment rate changes over time following a bankruptcy and the full distribu­tion of the duration of averted unemployment, but this analysis does not consider those factors. Also, for simplicity, this Article ignores discounting, which is likely not a significant factor over the time ranges considered here. The key in applying this number or one like it to a given situa­tion is to make the value appropriate to the particular state of the economy. Thus, this section demonstrates how to vary this number depending upon , which this Article defines as the unemployment rate for affected workers, and then applies the method to the illustrative situa­tion that begins the Article.

This benefit of a job preserved then needs to be compared to the cost of a job preserved through bankruptcy, . As described in section II.C.1, the numerator of the formula is the difference between liquida­tion value ) and reorganization value ( ), and the denominator is the number of jobs directly preserved by reorganizing rather than liquidat­ing the firm ( ).

Figure 1 shows this comparison between the benefit and cost of pre­serving a job. If the reorganization value is greater than the liquidation value (i.e., the cost of a job saved is negative), the firm should definitely be reorganized. At the other extreme, if the cost of a job saved is greater than , the firm should definitely not be reorganized. In the middle, though, when the cost of a job saved is between 0 and , counter-cyclical bankruptcy rules make a difference.

Figure 1: Optimal Reorganization as a Function of Cost of Preserving a Job


Turning to measuring the benefit of preserving a job , the analysis depends upon measuring the unemployment rate for affected workers. To measure this rate, one must make several choices; other decisions would also be reasonable. In the calculations presented here, four factors affect : the national average unemployment rate, the unemployment rate of the state in which the firm’s workers are employed, the unemploy­ment rate of individuals with characteristics (in this case, educational at­tainment) typical of the firm’s workers, and the expected future unemployment rate.

The unemployment rate must then be translated into the value of a preserved job. To calculate  as a function of  over this time period, the $60,096 value per job for the most recent recession is pegged to an unemployment rate of 9.45%, which was the average unemployment rate of 2009–2010. 127 Labor Force Statistics from the Current Population Survey, Bureau of Labor Statistics, []  (last visited July 29, 2016). This value per job is then phased out to zero dollars as the unemployment rate drops to the “natural rate of unemployment.” 128 In particular, this value is linearly scaled out as the unemployment rate for af­fected workers drops from the unemployment rate during the recession of 9.45% to the natural rate of unemployment. For the natural rate of unemployment, the estimate of 6.20% by Professors Douglas Staiger, James H. Stock, and Mark Watson is used. 129 Douglas Staiger, James H. Stock & Mark W. Watson, How Precise Are Estimates of the Natural Rate of Unemployment, in Reducing Inflation: Motivation and Strategy 195, 199 (Christina D. Romer & David H. Romer eds., 1997),
c8885.pdf [] (providing a standard citation on the natural rate); see also Thomas B. King & James Morley, In Search of the Natural Rate of Unemployment, 54 J. Monetary Econ. 550, 556 (2007) (providing a more recent estimate). Note that there is evidence that the natural rate varies with time, which this analysis ignores.
At this un­employment rate, the value of a job saved is zero.

To apply this framework, suppose Acme Corp. is located in Michigan, typically employs high-school graduates with no college education, and went bankrupt in February 2009. In March 2009, a judge is deciding whether to liquidate or reorganize the firm in a § 1112(b) motion. First, the judge would need to calculate the value of a job saved , which de­pends upon the unemployment rate for affected workers . The infor­mation with which to calculate  is available from two sources. These data, along with the relevant assumptions and sources, are listed in Table 1. From the Bureau of Labor Statistics, a bankruptcy judge would know that the national unemployment rate in February 2009 was 8.3%, 130 Bureau of Labor Statistics, Current Labor Force Statistics, supra note 77. The historical and present national unemployment rates are available at the Bureau of Labor Statistics’s website. Id. Note that the Bureau of Labor Statistics only provides estimates to the tenths, not the hundredths, of a percentage point. Id. the unemployment rate in Michigan was 12.0%, 131 Press Release, Bureau of Labor Statistics, Regional and State Employment and Unemployment (Monthly) News Releases (Mar. 27, 2009),
news.release/archives/laus_03272009.htm [].
and the unemployment rate of high-school graduates with no college education was 8.5%. 132 Data Retrieval: Labor Force Statistics (CPS), Bureau of Labor Statistics, (on file with the Columbia Law Review) (last visited Sept. 26, 2016) (follow “Table A-4. Employment status of the civilian population 25 years and over by educational attainment” hyperlink; then select all under “Not Seasonally Adjusted” and “Seasonally Adjusted”; then select “Retrieve Data”). To estimate the “effective current unemployment rate” ( in Table 1), these three numbers are averaged to 9.6%. The expected future unemploy­ment rate over the duration was between the 8.65% expected rate in 2009 and the 8.15% expected rate the following year in 2010, according to the Federal Reserve. 133 Bd. of Governors of the Fed. Reserve Sys., Minutes of the Federal Open Market Committee on January 27–28, 2009,
fomcminutes20090128ep.htm [].
For this analysis, the expected future rate of unemployment (  in Table 1) is the average of these two figures. Averaging the current unemployment rate and the expected future unemployment rate yields an unemployment rate of affected workers  of 9.00%.


Table 1: Sample Calculation for Bankrupt Firm in February 2009

Variable Value Data Source / Derivation
Baseline Value per Job Preserved
Ratio of distortion from tax on taxpayers versus creditors ( ) 0.25 Ballard et al. and assumptions
Average unemployment duration of displaced worker (in years) ( ) 0.96 Farber
Keynesian multiplier ( ) 2 Chodorow-Reich et al.
Value of a job-year ( ) $125,000 White House Council of Economic Advisers
Baseline value per job preserved $60,096 Multiply the 4 previous values
Effective Current Unemployment Rate
Current national unemployment rate 8.3% Bureau of Labor Statistics
Current local (Michigan) unemployment rate 12.0% Bureau of Labor Statistics
Current unemployment rate for typical worker (high-school graduates with no college education) 8.5% Bureau of Labor Statistics
Effective current unemployment rate 9.6% Average the 3 previous values
Forecasted Unemployment Rate
Forecasted unemployment rate in current year 8.65% Federal Reserve
Forecasted unemployment rate in next year 8.15% Federal Reserve
Forecasted unemployment rate 8.40% Average the 2 previous values
Scaledown Factor for Value per Job Preserved
Unemployment rate associated with baseline    value 9.45% Unemployment rate during Great Recession
Unemployment rate for affected workers 9.00% Average current  and forecasted unemployment
Natural rate of unemployment 6.20% Staiger et al.
Scaledown factor for value per job preserved 86.15% Formula
Value of a job preserved in February 2009 $51,775 Multiply baseline  by scaledown factor

The assumptions of section II.C.1 of a Keynesian multiplier  of 2, a ratio of the distortion from increasing taxes to the distortion from reduc­ing payments to creditors  of 0.25, 134 The calculations assume that the distortion from the government raising the revenue to save a job is equal to the distortion from “taxing” creditors to save a job—that is, the ratio of the distortion from the “creditor tax” to the MCPF is one. The calculations also assume that a dollar of government spending produces something worth a dollar, while the difference between liquidation value and reorganization value is pure waste. and a conversion of direct employ­ment into preserved job-years of 0.96 (or 50/52) yield an estimated value per job during the recession of $60,096 (  in Table 1). 135 See supra note 59 and accompanying text. An unem­ployment rate for affected workers of 9.00% yields a scaledown factor (  in Table 1) of 86.15% by which to multiply the baseline value per job preserved (  in Table 1) of $60,096, which is associated with a 9.45% un­employment rate. Multiplying the baseline value per job preserved by the scaledown factor yields a  of $51,775. 136 Another parameter that could be changed in the calculation is how this number is scaled down. Here, the figure was scaled down linearly, but it could be scaled down more quickly or slowly. Or an entirely different method of calculating it could be used.

When considering whether to convert Acme Corp.’s bankruptcy proceedings into a Chapter 7, the judge should then compare this bene­fit of preserving jobs to the costs of preserving a job, as calculated by es­timating the liquidation value , reorganization value , and the number of workers that Acme Corp. employs. For this calculation, return to the figures in this Article’s initial example. Suppose that the liquida­tion value of Acme Corp. is $1,500,000, the reorganization value is $1,000,000, and the number of jobs preserved is 1,000. The cost of a job saved is therefore $500, which is far less than the value of a job saved of $51,775. This firm should be reorganized, producing $51,775,000 of value and avoiding the distortion resulting from $125,000,000 in gov­ernment expenditures at a cost of $500,000 to creditors. Different as­sumptions would yield different numbers, but this example illustrates how the benefits of preserving a firm can greatly exceed the costs of doing so.

V. Responding to Potential Critiques

A. Institutional Competency of the Bankruptcy System

Though, as described earlier, counter-cyclical bankruptcy rules need not be implemented through the current bankruptcy system, 137 See supra section III.C. a natural critique of implementing them through the current system is that bank­ruptcy judges lack the necessary competence. For example, Professor Schwartz notes “[a]s an example of bankruptcy’s comparative disadvantage, bankruptcy courts do not have access to local labor market information, but state unemployment offices do,” thereby making the latter a superior institution for reducing unemployment. 138 Alan Schwartz, A Contract Theory Approach to Business Bankruptcy, 107 Yale L.J. 1807, 1819 (1998). There are several responses to this argument.

First, bankruptcy judges already exercise a tremendous amount of discretion and take employment effects into account. 139 See Nicola Gennaioli & Stefano Rossi, Judicial Discretion in Corporate Bankruptcy, 23 Rev. Fin. Stud. 4078, 4078 n.1 (2010) (“For example, U.S. Chapter 11 leaves bankruptcy courts discretion on issues such as first-day orders, refinancing, exten­sions of exclusivity, appointments of trustees, and the final approval of a reorganization plan.”); Stuart C. Gilson, Managing Default: Some Evidence on How Firms Choose Between Workouts and Chapter 11, 4 J. Applied Corp. Fin. 62, 64–65 (1991) (“[T]he Bankruptcy Code effectively requires judges to set corporate operating policies . . . [mean­ing] judges have broad powers to influence how the firm’s assets are managed.”); Harvey R. Miller, The Changing Face of Chapter 11: A Reemergence of the Bankruptcy Judge as Producer, Director, and Sometimes Star of the Reorganization Passion Play, 69 Am. Bankr. L.J. 431, 433 (1995) (“In contrast to the debtor-in-possession, the role of the bankruptcy judge has come almost full circle to be equivalent to the role played by the judge under the Bankruptcy Act, augmented by the power to take numerous actions sua sponte.”). Bankruptcy judges sit in equity. By § 105, they explicitly have tremendous power to implement the goals of the bankruptcy code, 140 11 U.S.C. § 105 (2012). which—legislative history suggests—includes preserving employment. 141 See supra note 11.

More importantly, observers already believe that bankruptcy judges exercise their discretion in a way that favors the continuation of the firm. 142 See Gennaioli & Rossi, supra note 139, at 4078–80 (presenting a model that sug­gests judicial discretion plays a substantial role in creating “systematic pro-debtor bias in the bankruptcy code”); Troy A. McKenzie, Judicial Independence, Autonomy, and the Bankruptcy Courts, 62 Stan. L. Rev. 747, 777–78 (“On bankruptcy-specific questions, bank­ruptcy judges enjoy significant discretion.”); Morrison, supra note 14, at 392–93 (“Traditional accounts of Chapter 11 . . . argue that the bankruptcy process is biased in favor of preserving businesses that are economically distressed and should be liquidated immediately.”); see also supra note 97 (providing decisions applying § 1112(b) that consider employment effects). Finally, for Supreme Court cases suggesting that bankruptcy should favor continuation of the firm, see supra note 11. Hence, the counter-cyclical bankruptcy rules do not require judges to exercise any discretion that they do not already exercise but instead only to exercise it more effectively; such rules require that judges put a thumb on the scale in favor of reorganization in times of high unemployment and that they refrain from doing so in times of low unem­ployment. The crucial data on unemployment rates are readily availa­ble, 143 See supra notes 76–83 and accompanying text (describing availability and nature of unemployment data). and I suggest a method of applying the data so that the proposal actually constrains judicial discretion.

Finally, even conceding that it might be undesirable for bankruptcy judges to have the additional burden of judging the state of the macroe­conomy, the right question is not whether bankruptcy judges are good decisionmakers for this purpose. Rather, the question is whether they are the best available decisionmakers in this arena. It might be better to have an omniscient and benevolent social planner decide which firms must stay in existence via reorganization, but no such institution exists. We are left with the institutions we have—and, therefore, if taxpayers are to save a substantial amount of money at relatively little expense to creditors and no statutory changes are made, then bankruptcy judges ought to be the ones to implement counter-cyclical bankruptcy rules. Indeed, the desire to keep bankruptcy law and job-creating government programs simple is appropriate—but it may be worth some sacrifice in simplicity to pursue other worthwhile goals. 144 For additional arguments in the debate over judicial competence in the context of bankruptcy, see Douglas G. Baird, Bankruptcy’s Uncontested Axioms, 108 Yale L.J. 573, 585–86 (1998) (describing the “proceduralist” argument in support of a limited role for judges); Ted Janger, Crystals and Mud in Bankruptcy Law: Judicial Competence and Statutory Design, 43 Ariz. L. Rev. 559, 593–96 (2001) (supporting a more expansive role for judges).

B. Asymmetry with Law Outside of Bankruptcy

Another potential critique of this Article’s proposal is that outside of bankruptcy, firms can liquidate as much as they please, regardless of bankruptcy law’s attempts to preserve firms intact if they enter bank­ruptcy. This proposal would then yield an asymmetry between counter-cyclical rules within bankruptcy and the absence of such rules outside of bankruptcy, causing different treatment for similar firms inside and out­side of bankruptcy. Such an asymmetry could deter use of the bankruptcy system, with its associated orderly procedures, and instead encourage settlement of affairs outside of the bankruptcy system. There are two re­sponses to this critique.

First, the scope of the asymmetry may be rather limited, since firms that would ideally be affected by counter-cyclical rules are likely to enter the bankruptcy system; therefore, few firms that would have been realistic candidates for reorganization under counter-cyclical bankruptcy rules will liquidate outside of bankruptcy. The reason for the limited scope of the asymmetry is that counter-cyclical bankruptcy rules are likely to affect a firm with similar reorganization and liquidation values—a firm that, in other words, is a close candidate for being reorganized. This class of firms is likely to enter bankruptcy because those making the decision to enter the system have a preference for reorganization, so that they can keep their jobs 145 See Jackson & Skeel, supra note 7, at 24–25 (noting that firms and their employ­ees have incentives to prefer reorganization over liquidation). and reorganization is easier within the bankruptcy sys­tem. Indeed, the automatic stay and other hallmark features of bank­ruptcy are designed to solve the collective action problem that arises when creditors pick apart a potentially viable firm. 146 See Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors’ Bargain, 75 Va. L. Rev. 155, 160 (1989) (noting that resolving such collective action problems is a “principal justification” for bankruptcy law). In other words, the combination of the advantages of bankruptcy for reorganizations and the pro-reorganization bias of management likely means that, in practice, counter-cyclical bankruptcy rules would produce little asymmetry inside and outside of bankruptcy, since few firms outside of bankruptcy would have been reorganized on the basis of such rules had they entered bankruptcy.

Second, as with the issue of institutional competence, the ideal tool for solving this problem may not exist. All else equal, having similar poli­cies inside and outside of bankruptcy may be ideal. But if that is not an option while having counter-cyclical bankruptcy rules, then it may be best to have different treatments inside and outside of bankruptcy. Some inefficiency could arise from a small number of firms being discouraged from entering bankruptcy due to counter-cyclical bankruptcy rules—and that efficiency should be taken into account in the rules. But the fact that it would be too onerous to implement similar policies outside of bank­ruptcy because the government lacks tools to do so does not mean that it is undesirable to include such rules within bankruptcy law.

C. Alternative Policies Would Be Superior

It may be more efficient for bankruptcy law to preserve employment during recessions than to have laid-off employees rely upon the welfare state and government stimulus programs given their attendant costs to the taxpayer. This is not a sufficient argument for implementing counter-cyclical bankruptcy rules if there is another option that would be supe­rior to either such bankruptcy rules or existing government programs. For example, some have argued that job-training programs would be more effective in helping those unemployed due to bankruptcies. 147 See Eric A. Posner, The Political Economy of the Bankruptcy Reform Act of 1978, 96 Mich. L. Rev. 47, 53–54 (1997) (suggesting that no scholar has shown that reorganiza­tion more effectively mitigates social harm than the welfare state). However, job training does not help those who cannot find jobs. Indeed, empirical evidence suggests the limited effectiveness of such policies over the time horizon relevant for sustaining employment during a reces­sion. 148 See David Card, Jochen Kluve & Andrea Weber, Active Labour Market Policy Evaluations: A Meta-Analysis, 120 Econ. J. F452, F453 (2010) (“Classroom and on-the-job training programmes are not particularly effective in the short run, but have more positive relative impacts after two years.”). Others have suggested that unemployment offices can help the unemployed find jobs. However, this assistance appears to be of little help. Interviews with unemployment counselors suggest that, even with a lot of effort, it can be difficult to find a job during a recession; there simply are not enough jobs to go around, and more help on the job market will not change that. 149 See Truman F. Bewley, Why Wages Don’t Fall During a Recession 341–43 (1999).

The existence of a policy that would be more efficient than counter-cyclical bankruptcy rules at reducing costs to the government from unemployment cannot be ruled out. However, it is unclear where the silver bullet would come from. Congress’s effort to reduce unemploy­ment during the Great Recession was certainly not perfect, but it repre­sents a good guess of the policies that can be used to reduce unemployment during recessions—and the program was very expen­sive. 150 See Alan S. Blinder & Mark Zandi, How the Great Recession Was Brought to an End 3 (2010), [http://] (tabulating congressional expenditures in response to the Great Recession).
Congress simply did not find cheap ways of sustaining employ­ment. And this “good guess” is the very set of programs used in this Article as a measure of costs. The key point is that such programs impose a cost on taxpayers, and in some cases, that burden can be reduced sub­stantially through bankruptcy law at relatively little cost to creditors.

D. Re-Entry into Bankruptcy

Fourth, one might be concerned that firms with a greater liquida­tion value than reorganization value are likely to fall back into bank­ruptcy. Indeed, these so-called “Chapter 22s” (because of the second Chapter 11 filing) are quite common, perhaps partly due to the existing “pro-reorganization” bias in bankruptcy law. 151 See Edward I. Altman, Evaluating the Chapter 11 Bankruptcy-Reorganization Process, 1993 Colum. Bus. L. Rev. 1, 6; Edward I. Altman et al., Post-Chapter 11 Bankruptcy Performance: Avoiding Chapter 22, 21 J. Applied Corp. Fin. 53, 53–54 (2009). However, from the perspective developed in this Article, re-entry into bankruptcy after reor­ganization is not necessarily a bad thing. Even if the factory eventually liquidates, delaying the time at which its workers enroll in Medicaid and other government programs is valuable, especially if the original bank­ruptcy proceedings occurred at the trough of a recession. In addition, some reappearances make sense even in good times. Whether or not a firm will succeed is usually uncertain, so many firms that have a positive expected value will file again. But, during recessions, even more of those firms should stay around—and then refile later, during better economic times, because of their positive employment effects in the short run. 152 A related concern might be the § 1129 requirement that, for a judge to approve a plan of reorganization, the judge must find that “the plan is not likely to be followed by the liquidation, or the need for further financial reorganization.” 11 U.S.C. § 1129(a)(11) (2012). However, as described in section III.B, after the variety of steps that judges take in the name of promoting reorganization, firms affected by counter-cyclical bankruptcy rules are likely to exit in a relatively strong position and will likely not face liquidation upon exit.

E. Few Bankruptcies Take Place During Times of High Unemployment

A final potential critique is that few bankruptcies take place during times of high unemployment. It is true that the unemployment rate is often low. However, as Figure 2 shows, bankruptcy filings are strongly counter-cyclical; there are many more when the unemployment rate is high. 153 Labor Force Statistics from the Current Population Survey, Databases, Tables & Calculators by Subject, Bureau of Labor Statistics,
LNU04000000 (on file with the Columbia Law Review) (select “1980” in “From” date field; then select “2012” in “To” date field; then select “Go” hyperlink) (last visited Sept. 27, 2016).
As a result, the fraction of bankruptcies that occur when the economy is in a recession is higher than the fraction of time that the economy is in a recession. Also, even if only a small fraction of bankrupt­cies are affected, the stakes are large, as the Chrysler example showed. 154 See supra notes 60–65 and accompanying text. Preserving jobs through bankruptcy during recessions has the potential to save the government considerable resources and substan­tially increase efficiency.

Figure 2: Business Bankruptcy Filings and Unemployment Rate



This Article argues that an efficient bankruptcy law should seek to preserve employment during recessions. Preserving jobs when the unem­ployment rate is high reduces the need for government expenditures on social-insurance payments and leads to Keynesian multipliers, which in­crease overall employment and efficiency in the economy. Without any change in the law, judges could implement such a counter-cyclical rule using § 1112(b) and other sections of the Bankruptcy Code. Or Congress could enact statutory changes to permit government expenditures on reorganizations or grant the government quasi-creditor status in bank­ruptcy proceedings. This Article has also discussed relevant factors like the local and forecasted unemployment rates and shown that data are readily available to help consider these factors. This Article does not ar­gue that, on average, bankruptcy law should be any more employment-preserving than it is now or that judges should have more discretion. Ra­ther, this Article argues that, during times of high unemployment, judges or other policymakers should use the method proposed herein to sustain employment in some cases. These counter-cyclical bankruptcy rules con­strain judicial discretion in the interest of greater efficiency. Outside of recessions, this Article supports the traditional law and economics argu­ment that bankruptcy law should maximize the return to creditors.

More broadly, the Article suggests a framework for thinking about macroeconomic considerations in the law. The methodology for measur­ing the shadow value of a job saved could be applied to other areas of the law. For example, the goal of preserving jobs more cost-effectively during times of high unemployment could inform cost-benefit analysis of regula­tions. Such policies would increase efficiency, help encourage economic recovery, and maintain employment for workers desperately in need of jobs.