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.