A Credit Check Hurdle

Did you see this interesting article in the New York Times last week? Another Hurdle for the Jobless: Credit Inquiries:

…Once reserved for government jobs or payroll positions that could involve significant sums of money, credit checks are now fast, cheap and used for all manner of work. Employers, often winnowing a big pool of job applicants in days of nearly 10 percent unemployment, view the credit check as a valuable tool for assessing someone’s judgment.

But job counselors worry that the practice of shunning those with poor credit may be unfair and trap the unemployed — who may be battling foreclosure, living off credit cards and confronting personal bankruptcy — in a financial death spiral: the worse their debts, the harder it is to get a job to pay them off…

“If I see too many negative things coming up on a credit check, it’s one of those things that raises a flag with me,” said Anita Orozco, director of human resources at Sonneborn, a petrochemical company based in Mahwah, N.J. She added that while bad credit alone would not be a reason to deny someone a job, it might reveal poor judgment.

“If you see a history of bad decision-making, you don’t want that decision-making overflowing into your organization,” she said.

Obviously this could cause a death spiral for unemployed people with bad credit. If your credit is bad because you are unemployed, how will you ever get employed to pull up your credit if these checks become common place? I’m interested in this because it touches upon three additional things I’ve been thinking about lately, points I’m not sure yet where I stand.

Unemployment Signals

Would employers let a job go vacant because an otherwise qualified applicant had a bad credit score? Could this cause underemployment more generally? It’s a common move to think that labor markets will naturally find whoever is talented, and they’ll be smart enough to determine the signal from the noise when it comes to applications. I think the idea of limited bandwidth comes into play with recruitment – if people get screened on noise, the position may stay empty. I hear something similar to this with the debate that jobs that our grandparents used to be able to do with a high school education now require a Master’s degree. People say “well, if people with a high school education were really qualified, the market would be buying them up at a discount” – and the logic is airtight enough, but it feels like something is off.

A bleg request – does anyone know any Stiglitz-like informational papers/models were bad signals cause an equilibrium in unemployment? Behavioral papers – ones where HR reps not at all-knowing demigods but human beings with limited bandwidth?

Personal Information

Setting the appropriate boundaries of access to the large amounts of personal information in the digital database age is going to be a one of the larger issues for us to figure out. A thought experiment: Should your credit score be available on an internet dating website? In addition to “send a message”, or “send a woo”, buttons on the profile you are checking out, should there be a “request credit check ($15.99)” button?

In terms of efficiency, knowing the credit score and all relevant bank and credit accounts of someone you are going to go a third date with strikes me as much more relevant than knowing the credit score for someone you are hiring to do data entry. Yet the idea strikes me, and perhaps you, as an invasion of privacy. Why don’t we feel the same revulsion for the data entry job?

Poor Credit as Strategic Action

Where do the great blog posts go when they die? From 11/08, Chumpchanger on walking away from your mortgage:

In story after story about the foreclosure crisis, you will find the implicit idea that borrowers who can afford to pay their mortgage should keep on paying it no matter how much their house sinks in value because they have made a promise to pay and to do otherwise would be an abuse of the system.

Propagating this idea is good for lenders and probably good for taxpayers, but basically, it’s nonsense…In practice, this means that a bank that doesn’t want to get bogged down in a two year long morass has little option but to take back the keys, accept a huge loss, and call it even. Is this an “abuse” of the system? I don’t see how. The loss was something that lenders could have anticipated at least as easily as borrowers. The reality is that ordinary people are lousy at figuring out the ins and outs of real estate transactions. Relying on the one act rule to get out of a mortgage is not to abuse the system–it is to use the system in precisely the way it was intended to be used. The reason that the one act rule exists is that lenders and developers have through the years shown a great deal of ability to maneuver unsophisticated buyers into crummy real estate deals. The reason that the one act rule exists is to put the risk of these deals on the lender, not the buyer. The purpose is to discourage bad underwriting, dishonest marketing, and unjustified price inflation by making it very, very hard for a lender to get back the money if they lent more on a mortgage than a house was worth. The system is designed to let people walk away. California has a system that puts a higher premium on keeping people out of debt slavery than avoiding bank losses. I see nothing wrong with that legislative choice.

Bankruptcy and poor credit, and in particular the option to go bankrupt or not pay your bills, is a strategic choice to keep the lenders on the other side honest. We think of it in strictly moral terms – people who don’t pay their bills are monsters etc. etc. But the ability to pay a (huge) penalty and walk away from your bills keeps (or should have kept) lenders from following incredibly terrible deals, using dishonest steering techniques, and justifying it with bad underwriting. It’s like normal game theory – if you don’t have the option to defect, you should expect to get rolled pretty hard by the other party. Co-operation is predicated on the idea that we both have the option to harm each other, and it doesn’t need to be acted upon in order for it to keep both parties in line.

In general, the idea that society would fall apart if we didn’t pay our bills sounds right (and comforting, in a way), but really it wouldn’t. The people on the other side of your bill are well aware that you may not pay, and have set up the contract so that you take a big hit too. If you didn’t pay your electric bill, then you don’t have electricity. You may have scammed the electric company for $100, but now you have no power. Same with your phone bill. The electric company is well aware, and has powerful spreadsheets, considering the loss of that $100, and actually it’s already been written up in their losses through probability and expectation calculations.

Yes I know there are people out there who screw up their credit maliciously or accidently. This isn’t a call to arms to not pay your bills – I would say it is a call to arms to lenders and those that extend credit to set up the terms of your contracts to take into account you might not get paid, and get deposits, have markets post collateral, have people ready to threaten a discontinuation of services, etc., but people already do that. Indeed credit card companies are well-known for following the letter of their contracts ruthlessly, and if neoliberalism requires each of us to self-govern as if we were an entrepreneurial firm, there’s every reason for us to do the same.

What happens if poor credit is no longer a negotiation strategy between a creditor and a lender, but instead a more general form of social control?

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13 Responses to A Credit Check Hurdle

  1. Matt Frost says:

    “What happens if poor credit is no longer a negotiation strategy between a creditor and a lender, but instead a more general form of social control?”

    It would just be a variation on the larger theme of using credit in general as a system of control. Matt Crawford takes this up in his book and in the original article:

    The habituation of workers to the assembly line was thus perhaps made easier by another innovation of the early twentieth century: consumer debt. As Jackson Lears has shown in a recent article, through the installment plan, previously unthinkable acquisitions became thinkable, and more than thinkable: it became normal to carry debt. The display of a new car bought on installment became a sign that one was trustworthy. In a wholesale transformation of the old Puritan moralism, expressed by Benjamin Franklin (admittedly no Puritan) with the motto “Be frugal and free,” the early twentieth century saw the moral legitimation of spending. Indeed, 1907 saw the publication of a book with the immodest title The New Basis of Civilization, by Simon Nelson Patten, in which the moral valence of debt and spending is reversed, and the multiplication of wants becomes not a sign of dangerous corruption but part of the civilizing process. That is, part of the disciplinary process. As Lears writes, “Indebtedness could discipline workers, keeping them at routinized jobs in factories and offices, graying but in harness, meeting payments regularly.”

  2. michaek says:

    ive wondered why the applicant shouldnt have the same access to the credit behavior of their potential employer. maybe the workers don’t want the firm’s poor decision making to spill over into their career.

  3. ben says:

    Not the firm’s credit behavior—the individual employers. Your day-to-day life as an employee is much more affected by the judgment of your immediate superior than it is by the firm’s credit as a whole, so why shouldn’t you get that person’s credit score, as a matter of course, when you get interviewed?

  4. Larisa says:

    There has been some interesting if rather horrifying scholarship on credit ratings, particularly the vast networks of surveillance that feed information into your credit rating, and the power of institutions that use them to judge you. One of the more interesting legal technology activisim is the movement to make sure people’s expunged records stay expunged, in the era of digital surveillance & background checks. The principles behind the expunging of a criminal record have mostly fallen by the wayside without much public comment, which is a pity. But anyway similar issues come up around one’s digital ‘paper trail’ and the ability to find work, rent a house, be approved for a loan, or a host of smaller things necessary for a stable life.

    Unfortunately some of the scholarship about this increased surveillance relies on a pretty narrow view of the basis on which to resist that surveillance – that of personal privacy. I think we’re back to autonomy here, actually.

    The whole thing is simultaneously arbitrary and biased (in terms of what counts for and against you), incredibly invasive, and leading to an actuarial view of humanity and opportunity which is at odds with human dignity and autonomy.

  5. Not the Mike You're Looking For says:

    The Stiglitz paper on unemployment is, Carl Shapiro and Joseph Stiglitz, “Equilibrium Unemployment as a Labor Discipline Device,” American Economic Review 74 (June 1984): 433-44, http://www.jstor.org/stable/1804018. However, it’s not directly on point. The article argues that employers pay above the strictly market-clearing wage to discourage workers from “shirking.”

    There *may* be something more closely related in “The Causes and Consequences of The Dependence of Quality on Price,” Journal of Economic Literature 25 (Mar. 1987): 1-48, which is a literature review, but I think it’s still going to be limited to the role of wages. (It’s been awhile since I read it.)

    Unfortunately, I don’t have my game theory text handy, but I have a feeling that most of them are going to concern themselves with the “shirking” question–that is, incentives while employed, rather than screening or pooling applicants.

  6. Not the Mike You're Looking For says:

    Haven’t read it, but this looks promising:

    Michael Spence, “Job Market Signaling,” Quarterly Journal of Economics 87 (Aug., 1973): 355-374, http://www.jstor.org/stable/1882010

    He also has a book.

  7. chrismealy says:

    Bowles and Gintis have a generalized approach they call “contested exchange” that works like the labor discipline deal. The basic idea is to introduce the concept of power into economic exchange. The power comes from one side’s power to stop trading (contingent renewal). You only get that power by overpaying (enforcement rent). You need that power to enforce contracts when enforcement isn’t costless (and it rarely is). That also means markets don’t clear (take that, Walras). One nice feature of the contested exchange approach is that if you dial down the enforcement costs to zero you get the regular general equilibrium model back. Anyway, the model applies all kinds of contracts: laborer/employer, borrower/lender, consumer/producer, etc. And to come back around, the ubiquitous power dynamics across all markets in shapes the preferences and norms of individuals and society.

    They’ve written it up in a dozen different places. This isn’t the best version, but it’s free:

    As for applying that to the original question, beats me. I’m not that smart.

    btw, there’s a Bowles reading group revving up soon. Everybody’s invited!

  8. Mike says:

    Great stuff here in comments. I’ll check out the papers, advance Crawford’s book on my “to-read” list, and start to look into the stuff expunged records. I really appreciate the smart comments I get on this blog. Thanks!

  9. q says:

    I haven’t read any of the papers, but I’d assume that the fact that damaging your credit rating has unknown consequences is a kind of deterrent.

    It’s a kind of proxy for reputation, or it seems that way to me.

  10. Ed says:

    Agree with first comment. Debt is already a powerful form of social control. Why is university education free (or nearly so) in many countries but not in the US? Because, of course, if you graduate without $35,000-$100,000 in student loans to service, you’re not willing to desperately cling to whatever employment you can find no matter how poorly they treat you, how much they expect you to work overtime off the clock, and how little they pay you.

    I see this as a logical next step to the “internships before jobs” trend from the early 90s. What does that accomplish? Well, it winnows out the people who aren’t from families wealthy enough to support them while they work for free in New York City for a year. Branding people with poor credit with a scarlet letter on the job market is just another step in the direction of ensuring that social class barriers are rigidly enforced in the market.

  11. Pingback: ginandtacos.com » Blog Archive » THE SCARLET DEBTOR

  12. kevin says:

    Where you have not gone, where you must go to solve all these problems is Family Law, which, in one way or another, has evolved over several thousand years to control markets. Shift your demographic data. Family Law turns savings and investment into consumption, and magnifies the volatility of speculation. Social control has not changed much since the writing of Genesis. It is misdirection that is increased.

    Durable family formation results in durable durable goods orders, which results in durable jobs. Fatten up the cattle, then take them in to slaughter. The quickest path to profit is getting your competitors to fight each other, and ignore you.

    Simply turn it on and off like a spigot.

    Ever take a look at the credit report after a divorce, and what happens to all those resources?

    The power to grant power is an awful thing.

  13. kevin says:

    I’ll give you one more:

    The people who create wealth are not the people who distribute credit, and the people who distribute credit have locked themselves out of the new economy because they cannot direct credit without disabling the system while several billion people watch.

    We are all simply waiting while the pressure increases and the container shrinks. They have run out of geography. At some point, the old families will tire of this agency nonsense and invest directly in the virtual economy. How much of the old system blows up depends on how long they wait.

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