Should Potential Employers have Access to Credit Scores ?
Oh good, Kevin Drum and Matthew Yglesias disagree. This is bound to be interesting.
Drum remembers the good old days when liberals had less respect for the standard results of simple neoclassical economic models.
The specific issue is that firms are using credit scores to decide who to hire. This can trap some people as they can’t improve their credit score without a job and can’t get a job with their current credit score. Kevin Drum thinks the practice should be banned. Matthew Yglesias isn’t sure.
But at the same time I try to adhere to the principle I outlined here and resist the urge to call for regulating the business practices of private firms when the issue isn’t pollution or some other case where the externalities are clear. After all, it seems like either this credit check business is a sound business practice (in which case allowing it is making the economy more efficient and ultimately building a more prosperous tomorrow) or else it’s an unsound business practice (in which case competition should drive it out).
That is actually a pretty radical position. I wonder what clear externality the 64 civil rights act addressed. I’m quite sure Yglesias doesn’t think what he seemed to assert, but I want to figure out what he had in mind.
Drum responds “More important is the fact that we liberals shouldn’t view the relationship between businesses and individuals as solely economic transactions” and gives an example
Here’s an example. Back in 1968, Congress passed the Truth in Lending Act. Among other things, it made credit card companies liable for charges on stolen credit cards over $50. In a purely economic sense, there’s really no excuse for this.
Ah how naïve. There is always an excuse based on economic theory (with the assumption of full rationality) for any policy. I view any assertion to the contrary as a personal challenge. This one is easy. Drum argues that the regulation creates a moral hazard problem as we are more careless with our wallets. I see his moral hazard and raise him an adverse selection (Hint: adverse selection is a great tool for justifying regulations as market outcomes are inefficient if there is adverse selection).
So let’s say everyone is better off with the regulation so the most wallet guarding yet not risk averse person is willing to pay extra to the bank in exchange for this protection. That doesn’t mean that this will be the market outcome. Let’s say a credit card company introduces a new card with the $50 limit. It will attract all the people who can’t keep track of their wallets. It will also attract people who commit a rare kind of fraud giving their card to an accomplice, having the accomplice buy stuff and then reporting it lost. There aren’t many of those, but there are enough that the extra interest (or other fees) that the company would have to charge would drive away everyone but the fraudsters and the most absent minded yet risk averse (I raise my hand). So the new product would enter the adverse selection death spiral.
The only solution is to force everyone to buy the protection which everyone wants if the fee is the actuarially fair fee for 100% coverage. Oh look, that’s the current law. That was easy. No sweat, no equations.
I mean Kevin you consider the health care reform debate and recall how forcing people to buy insurance, whether they want it or not, can be Pareto improving in a standard economic model.
Now on the original topic, I side with Drum. I think there is an externality. If people are rendered unemployable, maybe because of their fecklessness maybe because of their unluckiness there are externalities. For one thing the standard argument for laissez faire assumes we are totally selfish and absolutely needs that assumption to get the result. If desperate unemployable people cause others pain, then there is an externality. Another simpler externality is crime. People who are excluding from employment have little to lose from turning to crime. That’s an externality.
I’m pretty sure Yglesias’s idea is that both of these are arguments for redistribution from rich to poor and that such redistribution is more efficiently obtained by taxing and transferring. First, self esteem can’t be transferred. Good examples for the children can’t be transferred either. More importantly, there is no way that the feckless poor are getting much in the USA. You make policy with the electorate you have not the electorate you want. US voters are very willing to regulate business. They are totally unwilling to transfer money to people who firms don’t want to employ, because they seem to be irresponsible.
Assuming a social planner who taxes and transfers optimally is like assuming regulators can’t be captured or assuming that CO2 doesn’t cause global warming. That’s not the world we live it. I think we have to transfer however we can and that includes hiding information from potential employers. The loss in efficiency is a social loss only if one assumes that income distribution doesn’t matter (or assumes that there are optimal lump sum taxes and transfers which is an oxymoron). The link clicking reader will notice that my arguments are pretty much orthogonal to Drum’s.
There are degrees of appropriateness. A streetcar driver, crossing guard, or fast food worker is unlikely to have many opportunities to rip off employers or customers to any great extent. Asking about their credit score seems sort of intrusive and pointless. On the other hand an employer who needs to hire someone who handles money or other liquid assets in an environment without verifiable audit trails — an ATM repair guy for example — would seem to have a reasonable need to know about employee credit problems.
I don’t think anyone should have access to a person’s credit scores unless the person has applied to them for a loan or credit line. Period. That includes not only potential employers, but financial firms looking to use the info for marketing purposes, cell phone companies, etc. No waivers permitted, as opening that door makes it nearly impossible to refuse. What’s next? Should potential employers be able to gain access to your medical records to ensure you’re healthy and can work any amount of overtime thrown at you? Our society has already excessively blurred the line between our personal lives and our work lives.
Credit information should have something vaguely HIPPA like attached to it.
There’s definitely not enough control over credit reporting now. The default should be concealment and it should take specific authorization (rather than disclosure based authorization in the small text) for release of credit information to ANYONE.
The kind of pre-approved credit products thing has to stop, especially since every time they hit you for pre-approval they zap your rating down a bit.
I’m kind of a privacy hawk though, so I don’t really expect that to happen.
I don’t get it. If 5 people would like to be hired and only 1 position is available, how does the end result (1 employed and 4 not) lead to any more desperation if the FICO scores were known by the employer than if they weren’t? Even in aggregate, we still end up with a certain number of millions of people without a desired job. The problem in the country is that there aren’t enough jobs being offered. Credit score thing is pretty much zero-sum anyway – for every position where this is used as one of the hiring evaluation elements, some applicant is helped.
Owe somebody money — out of work; disbaled — WELCOME TO THE WORLD OF THE AMERICAN NEGRO IN THE 1950’S: cannot get a job; cannot rent an apartment; maybe cannot even open a bank account to put your money in. What in the world is there for progressives to think about?
Who regulates and scrutinizes the credit bureaus? They are notorious for having corrupt files — old info, false info, reports from the neighbours, whatever. These files are hard to clean up, and could be re-corrupted at any time.
They are supposed to be private, but for a person applying for a dozen jobs a week, such privacy becomes a fantasy.
Why on earth there hasn’t been a class action suit regarding the lousy quality of this crucial resource boggles my mind.
Noni – This is an excellent point. I battled this issue for many years, since 1) I am a junior and 2) my father had bad credit. There was even a predictable pattern – he would have a credit card or loan for many years, as long as it was current it would (correctly) show up only on his credit report. The moment it became delinquent it would magically migrate to MY credit file. I’d call the credit bureau, and again, the response was predictable – “well, this account has your name (minus the Jr.) and according to our records at one point you lived at this address (yeah, like a decade prior, when I was still a minor) so it appears to be your debt (nevermind that the DOB was off by 30+ years and the SSNs didn’t match)”. It would take months of wrangling with the creditors and the credit bureaus to get the erroneous information removed and then it had a stubborn habit of re-appearing down the road. These firms should be made LIABLE for reporting erroneous information.
Yglesias: “After all, it seems like either this credit check business is a sound business practice (in which case allowing it is making the economy more efficient and ultimately building a more prosperous tomorrow) or else it’s an unsound business practice (in which case competition should drive it out).”
Does not follow. It is a criterion for selection. It accomplishes that task. Even if we assume that it is irrelevant, that does not mean that competition will drive it out. Competitors who ignore it would only have an advantage because of not spending the time, money, and effort to obtain and use the information. That advantage might be illusory if using credit scores saved time, money, and effort by streamlining the selection process.
I agree Rich, some liability for incorrect information is needed as many reports are quite sloppy. A credit watch service can be valuable to help revent surprises when misinformation does pop up with no warning going to happen until credit is refused.
I think credit reports should be used for the purpose they were created for, nothing else.
Our recent history shows the sloppy use of credit reports.
People could get a mortgage without but can’t get a job because of a mistake in the report.
Having never been participant in The Credit Card Society renders a poor credit score, and potentially denial of employment. Just as the Insurers’ drug testing screens out the peace freak who may take a puff on a Saturday night and the job goes to a drunk, meth-head or CNN/Faux News zombie drunk out their pea-brains on Ambien, Prosaic, Viagra and crotch-shots Kool-Aid, pre-employment credit checks penalize those who haven’t played the bankers game by the bankers rules, who’ve lived the American Tradition handed down through the generations of frugality, good conscience, and “In God We Trust, All Others Pay Cash”. Where the All Time Winner has us by the balls.
Oregon has outlawed the practice, though it is, un-surprisingly, “under appeal”.
And yet you are ok with public universities asking their applicants whether they are black, white, latino etc? Oh you say that is so that public universities can stick it to the white middle-class male? That discrimination is perfectly acceptable.
“The problem in the country is that there aren’t enough jobs being offered.”
Are you hiring? And what wages do you pay?
Actually the government will have your medical records soon enough and will tell you whether or not it you deserve to receive a certain treatment based on whether the operation would be a benefit to society.
Want to post a political ad? Accept donations as a nonprofit? Open a bank account in Switzerland? Oh that is right, the left is the party of f*** privacy!
Update on UBS secret bank accounts: Swiss Court ruling on release
The UBS banking secrecy case is one that never stops providing sustenance for a tax blog. First we had the revelations about thousands of secret accounts that had not been handled as required under UBS’s qualified intermediary agreement, and a deferred prosecution on the basis of an agreement to hand over thousands of account names. Then we had the step back, as the Swiss objected that the handover would would violate Swiss laws on banking secrecy and a Swiss court ruled in agreement. After much feinting and shifting, the Swiss parliament ratified the agreement, essentially making it a legally binding treaty between the two countries.
Under the agreement, US account holders were given the right to challenge the turning over of their account information under Swiss law. I’ve wondered how that would turn out. It seemed that if the agreement is now legally binding, it would be quite difficult for a US account holder to construct a case that would nonetheless merit a decision protecting the client information.
Well, now we know. On July 15, the Swiss Federal Administrative Tribunal issued a ruling rejecting the US complainant’s challenge to a decision to hand account details to US authorities. See the ruling, made public for the first time today, here (in German). According to BNA, there are about 100 additional challenges awaiting a ruling from the same court–“a court spokesman said that …the large marority are similar to the case decided by the court on July 15.”
That’s good news. Cheating on taxes shouldn’t pay. The decision means that US taxpayers who had hoped to use the court as a shield are likely not to succeed and they will now face large penalties, likely of several times the full amount in the accounts.
Just certain accounts.
The Swiss courts rolled over because the U.S. blackmailed them. You are right that “certain accounts” will be turned over. Kennedy’s, Bushies,and Clintonites will get a carve out leaving their assets protected (like they should be). The U.S. government provides no services protecting money that is housed in Swittzerland, besides Obama’s Empire (formerly Bush’s Empire, formerly Clinton’s Empire) which has military bases all over the world.
The U.S. is the only country in the developed world that requires its citizens pay taxes on income earned outside the U.S.
Maybe one day we will come out of the dark ages and abolish such stupidity.
I assume now it is whether you can pay, without regard to costs under the current system?
Send more names…the circle of carve outs can’t be that small.
Given the way the upper echelons are behaving, they do stick it to a lot of people.
Thank God Oregon has banned this idiotic practice. This has no bearing on whether you can do the job.
There are all kinds of intrusive questions employers, especially school districts, ask in order to screen people out (and in the case of school districts I am not talking about license revocations or criminal convictions but dumb questions about whether you have ever been written up or terminated when the employer was clearly in the wrong but the teacher could not afford to fight them in court). This invasion of privacy needs to be looked into.
By the way, WHO is appealing this law? I find NOTHING on a Google search.
Having lousy credit doesn’t mean you are more likely to steal–that has been refuted in studies.
Why is it that you hate poor black people so much? Is it because your simplistic minds are incapable of handline a two-stage process. You can not see how a cause and effect leads to the effect being a cause of another effect?
You got a smackdown here…. http://www.marginalrevolution.com/marginalrevolution/2010/07/beyond-fico.html#comments
And because your blog is not as noteworthy as the others, you did not even get metnioned (double slap in in the face).