Credit Information Reporting: Why Free Speech is Vital to Social Accountability and Consumer Opportunity by Daniel B. Klein
Social Accountability Mechanisms Someone known as a gossiper is someone thought to gossip too much. But everyone gossips to some extent. Everyone chats with coworkers, neighbors, and friends. Gossiping is often part of doing one's job. Gossip serves the vital function of creating accountability. Usually when people interact, there is no referee overseeing the interaction. If one party fails to meet his or her obligations, the other party is the only person able to report it. Reporting the failure helps to form a reputation on the chiseler and creates accountability against chiseling. Anthropologist Sally Engle Merry writes that "the individual seeks to manage and control the information spread about him or her through gossip" (p. 275). One way to avoid a reputation for chiseling is not to chisel. Civilized society depends on accountability mechanisms such as gossip. No one denies that many individuals will meet their obligations even if no social mechanisms exert accountability: people do have a conscience and a sense of honor. But where do these virtues come from? They are not endowed at birth. We are not born saints, and few of us die saints. Without some external system of accountability, people do not cultivate the practices and habits necessary to develop internal accountability. Before learning honor we learn prudence. Moreover, the extent of our obligations is often unclear to us, even to the most scrupulous among us. Our knowledge of what is expected, what is customary, and what is in any particular situation appropriate depends on the signals that accountability mechanisms provide us. We might be willing to do good but unsure which actions are good. And even if most of us had a strict sense of honor, without social accountability mechanisms, a few wanton souls could greatly manipulate and upset civil society. Indeed, there will always remain people who act irresponsibly and fail on their obligations -- a fact we must candidly recognize if we are to understand why social accountability mechanisms are necessary. Such mechanisms not only police our own scruples, they also protect us against deliberate predation. A kind of gossip is practiced by the media. Television and newspaper journalists tell of good deeds and wicked, thereby creating reputations that give rise to rewards and punishments. Accountability also works in the realm of scholarship and science. Peers evaluate and gossip about scholarly products at professional conferences and seminars and in professional journals and books. Yet another accountability mechanism is the criminal justice system. Policemen go undercover, detectives ask questions, attorneys cross-examine, and witnesses make public testimony. The community hears the details of private transactions. Court decisions are finally reached, penalties are applied, and criminal records are made public. All social accountability mechanisms work to reward good behavior and punish bad behavior. To function effectively they must obtain information about who did what to whom. They ask questions, assess the validity of responses, and judge the credibility of character. Sometimes they infringe on civil liberties. All social accountability mechanisms collide with privacy, although each does so to a different extent. Another social accountability mechanism is the credit reporting agency (or credit bureau). Creditors, employers, landlords, and insurers are interested in making opportunities available to consumers as prospective credit users, employees, tenants, and insurance policyholders, but only if they can obtain information on trustworthiness. Creditors, employers, etc., pay credit bureaus for information about consumers, especially information about whether they have met past credit obligations. In America the credit-reporting business is dominated by three large companies: Equifax, Experian, and TransUnion. They work through more than 500 local offices and contracted affiliates. Through their local offices and affiliates, they receive information from virtually every creditor. Hence, the flow of information is two-way. Credit bureaus also help marketers identify consumers likely to be interested in their products. Examples of such marketers include L. L. Bean, the National Braille Press, the Children's Television Workshop (Sesame Street Magazine), and the Sierra Club. Credit bureaus assemble marketing lists for such companies and organizations. Policy Issues Concerning Credit Reporting Agencies The credit reporting industry is the subject of much controversy. Consumers in general know very little about how credit reporting works, and tend toward suspicion (see Dunkelberg, Johnson, and DeMagistris 1979). Some are actively critical of the credit bureaus. Some consumer activists, journalists, and public officials charge that credit bureaus violate people's privacy, report false or incomplete information, share information with inappropriate parties, and fail to respond to consumer inquiries and disputes. Critics claim to be protecting consumers from losing out on opportunities such as mortgages or car loans. The range of information included on credit reports is smaller than many suppose. Credit reports usually include only the following kinds of information:
Reports do not include information about one's lifestyle, religion, political affiliation, driving record, medical history, etc., -- some of the things that a casual acquaintance might come to know. The Fair Credit Reporting Act (passed in 1970 and amended in 1996) specifies that credit reports may be purchased only by those with a "permissible purpose," notably creditors, employers, landlords, and insurers. Terms of strict confidentiality surround the use of reports by these parties. One need not fear that neighbors are reading one's credit report. About ten thousands of creditors supply information to credit bureaus each month. Credit bureaus virtually always report that information faithfully. In rare cases, faithful reporting is erroneous reporting, because creditors occasionally supply inaccurate information. The creditor may have failed to record or update actual payments or delinquencies by consumers. The errors of others surface in reports assembled by the bureaus, who bare the brunt of complaints. Errors in the broadest sense occur for many reasons: public records are faulty, consumers neglect to have their mail forwarded, consumers misplace bills, out-going mail fails to find its way to the mail box, mail is improperly delivered, mail is improperly forwarded, and so on. When a consumer disputes information in the credit report, a verification process begins. The dispute is usually submitted in writing. The verification process flows from the consumer to the bureau to the creditor and back again. Consumers with valid complaints have good cause to feel some frustration, but one must realize that credit bureaus do not know beforehand whether a complaint is valid or spurious. If they revised their records to satisfy every complaint received by phone, scam artists would claim to be the victim of errors. The 1996 Amendments to the federal law require that the bureau verify disputed information within 30 days or delete it from the records. Barry Connelly, President of Associated Credit Bureaus, claims that in most cases disputes are verified or resolved within two weeks. When adverse information is verified and the consumer feels that there is more to the story, he may enter a brief statement to be included in the record (usually limited to 100 words). Also, when a consumer disputes information with the creditor, the creditor must report the account information as "in dispute". Credit reporting services are restricted by state and federal laws. Critics continually seek to add further restrictions. Restrictions on the books and on the agenda include measures to do the following:
The 1996 Amendments include many of these restrictions; it is 50 pages in length. Lawsuits and policy initiatives concerning credit bureaus are multitudinous and can be expected to go on without end. Credit reporting has been made into a major public issue only in the last ten years, but now the issue is here to stay. Credit bureaus are organized as for-profit businesses; they are regulated as businesses; they are criticized by consumer activists who routinely attack businesses. They are faulted for being interested in profits but not in consumers. Compared to other business firms, such as McDonald's, General Motors, or Microsoft, credit bureaus do play an important role in decisions that affect consumers' lives. And they do impinge on privacy. But other large business firms are not social accountability mechanisms. The critics only dimly recognize that credit bureaus, aside from being businesses, are social accountability mechanisms. Credit bureau's infringement on privacy and the incidence of erroneous information ought to be compared to that of other social accountability mechanisms: gossip, the media, the courtroom. In such a comparison, the credit bureaus may serve as paragons of reliability and discreetness. They convey only the most pertinent information to only the most relevant parties in a highly standardized, impersonal, and professional manner. An understanding of accountability illuminates the far-reaching benefits made possible by credit bureaus. Credit bureaus make opportunity -- credit, employment, housing, insurance -- more available and more affordable to everyone in society. Credit bureaus make opportunity possible by creating accountability in society. Because institutions such as credit bureaus are part of the foundation of civil society, the policy debate over their operation is of paramount importance. Once we understand the importance of credit bureaus as a kind of social accountability mechanism, we are more inclined to regard the criticisms leveled against them to be unreasonable and even fundamentally inconsistent. To some extent social accountability mechanisms can be honed to greater accuracy and precision, yet there remains a fundamental tension between making information more perfect and making it more dependent on the privacy and permission of the individual consumer. If laws guaranteed complete privacy, our freedom of speech would be annihilated. Specifically, we would be prohibited from warning others about those who failed to meet their obligations. (Or worse: Imagine how you would feel if victims in your neighborhood had to respect the privacy of a babysitter who molests children.) We would be inauspiciously silenced. It is unreasonable to demand more perfect information and more devotion to privacy. The two goals conflict. The need for accountability mechanisms in credit is underscored by the startling increase in filings for personal bankruptcy, which tripled between 1986 and 1997 (Connelly 1997). Credit bureaus serve two kinds of functions. First, as social accountability mechanisms, they help businesses decide whether a consumer's application should be approved. The charge against them in this connection is that consumers are sometimes denied credit or other opportunity because of inaccurate adverse information. Second, as a marketing scout, credit bureaus compile lists for marketers. The charge in this connection is that the privacy of the consumer is invaded. This chapter explores in turn each function of the credit bureau and suggests that restrictions in both areas of activity are likely to have a negative impact on consumers. Origins and History of Credit Bureaus The connection between credit reporting and gossip is not only conceptual, it is historical. Before credit bureaus existed, creditors, merchants, and landlords had to rely on word-of-mouth, letters of reference, and other forms of gossip to assess the trustworthiness of a consumer. Everyone had to do his own gossiping: information had to be gathered, interpreted, formatted, stored, retrieved, and transmitted. Creditors and others could gather information on regular customers and local parties, but their information, and, hence, their confidence, was limited. They made opportunity available only to those who were thoroughly screened. Robert H. Cole, author of Consumer and Commercial Credit Management (8th ed., 1988), explains that, without credit bureaus, credit itself was very limited: "credit bureaus grew and developed slowly prior to World War II. Prior to World War II, few retailers sold on credit, and those that did confined their credit business to well-known customers" (Cole 1988, 184). Creditors kept their own accounts and engaged in information exchanges with each other, sharing lists of names known to be poor credit risks. But criss-crossing exchanges are inefficient. Far more efficient is a centralized agency that serves as a hub to all creditors and merchants. The hub-and-spoke pattern of information flow greatly reduces the redundancy, inconsistency, and unnecessary variation in communication. In the case of commercial credit reporting -- that is, reporting on whether merchants and companies are reliable in meeting obligations to wholesalers and suppliers -- the evolution was earlier and somewhat different. In the 1800s, wholesalers selling on credit relied on word-of-mouth, information exchange with other creditors, and letters of recommendation. Wholesalers and suppliers in cities kept accounts on their own buyers. In Manhattan during the 1830s, Lewis Tappan handled the credits in his brother's wholesale silk business and developed extensive credit records in their line of business (Brisco and Severa 1942, 159). Tappan recognized that this aspect of their wholesale business could be extended to other suppliers who needed information. By hiving off the credit-information activity and serving many suppliers, Tappan realized what economists call "scale economies" and helped to found the business of credit reporting in the United States (see Norris 1978, 10-20). Tappan contracted with agents and correspondents throughout the country to "gossip" about the solvency, prospects, and character of local businesses. He established an information hub that could rapidly service new inquiries and add new information. Tappan's agency later became known as R. G. Dun & Co., and merged in 1933 with The Bradstreet Company to form Dun & Bradstreet, which now dominates the field of commercial credit reporting. In the case of consumer credit reporting, the same potential for scale economies was present. In the twentieth century the exchanging of credit information was hived off to separate organizations, but usually local merchants' associations and other cooperative organizations, not business firms (Brisco and Severa 1942, 105f). As Cole says, "In the past, most credit bureaus were community cooperative or nonprofit associations operated for the benefit of the users. Others were owned by local chambers of commerce, which operated them for the benefit of their members" (Cole 1988, 186). A national association called Associated Credit Bureaus (ACB) was organized in 1937. Today virtually every consumer credit bureau is a member of ACB. Why did commercial credit bureaus develop directly as for-profit enterprises, while consumer credit bureaus evolved through a phase of not-for-profit service? The answer, no doubt, has to do with the more personal nature of consumer credit information. The authors of the 1942 textbook Retail Credit write: It must be remembered that handling retail [consumer] applications is a more delicate task than that of checking wholesale or bank [commercial] credits. Individual customers shopping for their personal requirements are less willing to furnish complete credit information than the businessman seeking wholesale goods or a bank loan. Individuals are easily offended when too many questions are asked, or when they learn that an investigation is being made regarding them. (Brisco and Severa 1942, 156) In dealing with consumer information, a cooperative organization, such as a merchants' association, arouses less suspicion and resentment than does a for-profit business. Furthermore, at its inception, a credit bureau may face a significant collective action problem in getting businesses to participate, and cooperative appeals may have been especially effective (Klein 1992). Even today, in Tampa, San Antonio, and elsewhere, the local affiliates of the three industry giants are cooperative associations. It was only after decades of development by cooperative organizations that consumer credit reporting was ready to operate on a commercial, for-profit basis. During the 1950s, 60s, and 70s, with the boost of new technologies in communications, big companies entered the field by buying up the operations of regional organizations. TRW (now Experian), for example, broke into the business by taking over the Michigan Merchants' Credit Association. Experian, TransUnion, and Equifax have worked to integrate regional operations and have developed a highly uniform, nationwide service. The histories of other social accountability mechanisms show a similar pattern of development -- from informal gossip to local associations to efficient integrated systems serving a great society (see Klein 1997b, 3-7). Although most credit bureaus today operate on a for-profit basis, their fundamental function has not changed: providing information so that two parties, who may be perfect strangers, can trust each other and engage in mutually advantageous exchange. Two Types of Error Suppose credit bureaus are made to pay consumers exorbitant damages for inaccurate adverse information in credit reports. The result may be information that is less complete and less accurate. The point is shown in Figure 1.
A creditor relays a piece of adverse information about a consumer to the credit bureau, which decides whether to include or exclude the information in the consumer's credit report. The information may be accurate or inaccurate. If the information is accurate, the correct decision is to include the information (the case corresponds to the northwest corner of the figure). If the information is inaccurate, the correct decision is to exclude the information (corresponding to the southeast corner of the figure). But the bureau never knows for certain whether the information is accurate. It deals with billions of bits of information and must weigh two types of error -- both of which are to some extent inevitable. If the information is inaccurate and the bureau includes it, corresponding to the northeast corner, an inaccuracy (of sorts(1)) enters the record and the consumer is apt to suffer. Yet if the bureau excludes the information, it risks a second type of error: omitting accurate information (corresponding to the southwest corner of the figure). If bureaus are made to pay exorbitant damages for the first kind of error, their response will be to omit more information, increasing the incidence of the second type of error. Creditors, employers, etc., would know less about consumers and would have less confidence in transacting. They would make opportunity less available. Opportunity would disappear even for consumers who had used credit responsibly. Restrictions on free speech would eliminate opportunity for the trustworthy and the untrustworthy alike. Furthermore, exorbitant damages may encourage scams. It may be only one consumer in 10,000 who would consider such a scam, but such a consumer could make himself appear the victim of credit-card fraud, all the while intending to "win the lottery" in court as a hapless consumer who suffered from the first kind of error. Exorbitant damages create these hazards and lead to higher prices and higher interest rates paid by all. By focusing exclusively on one type of error, critics engage in asymmetric thinking. If bureaus are made to pay exorbitant damages to consumers harmed by the inclusion of inaccurate information, why shouldn't bureaus also be made to pay damages to businesses harmed by the exclusion of accurate information? Placing symmetrical responsibility would put the credit bureaus in a no-win situation and might strangle the goose that lays the golden eggs. There is another asymmetry in the complaints against credit bureaus: given that credit bureaus make possible much of the opportunity that consumers enjoy, why should consumers be able to sue credit bureaus when reports have errors, but not have to pay rewards to credit bureaus when reports do not have errors? Critics are asserting, in essence, that consumers are entitled to having their credit report maintained without serious inaccuracies, but, symmetrically, one could assert that credit bureaus are entitled to rewards from consumers when reports are accurate. It is wiser to drop the entitlement mentality and think in terms of contractual obligations. Consumer Opportunity Depends on Accountability Mechanisms Restrictions on free speech and free commerce have many consequences. In Economics in One Lesson, Henry Hazlitt writes that those like the consumer activists "are presenting half-truths. They are speaking only of the immediate effect of a proposed policy or its effect upon a single group." The great challenge is to supplement and correct "the half-truth with the other half." But to consider all the consequences of a proposed policy, Hazlitt says, "often requires a long, complicated, and dull chain of reasoning" (1979, 18). Only by seeing consequences that are unintended and nonobvious can policymakers really serve consumers. The art of economics is elucidating these consequences. Suppose Consumer B seeks credit. His financial position is sound but not obviously strong. His credit history involves no failings, but sometimes he is late in paying bills. He applies for a loan. If the credit report is accurate and complete, the creditor will approve the application. If the credit report is erroneous and contains some inaccurate adverse information, the creditor will turn down the application. To protect Consumer B from an unfair outcome, consumer activists propose safeguards. But they overlook how the proposed safeguards can influence several more basic decisions that affect Consumer B -- and other consumers. In order for Consumer B to be considered for credit, certain institutions, practices, and preceding decisions must be in place. Let's go backward in time, one step at a time. Prior to reading the erroneous credit report, the creditor has in hand Consumer B's application. At that point he decides either to turn down the application or to proceed to the purchase of Consumer B's credit report. In making that decision, the creditor weighs the strength of the application, which indicates Consumer B's financial position. But several other factors also figure into the decision to purchase the credit report:
In all these ways, Consumer B might suffer the same basic outcome: not getting credit. In these three cases, difficulty befalls Consumer B by the hand of those who have appointed themselves to protect him. As we trace the reasoning back farther, we find that the harm of "protection" falls wider. If credit reports are more expensive, more costly to handle, and less informative, a business that had been giving credit might decide to withdraw from doing so. Again, the result is no credit for Consumer B. But not only Consumer B. All the consumers who used credit from that business will lose. Furthermore, in rare cases it will happen that the business, say, a retail store, shuts down operations altogether. It no longer provides goods and services to consumers, nor jobs to workers. The consequences of the proposed restrictions, therefore, go far beyond the protection that is intended. Our story of Consumer B is embedded in the wider view provided by Figure 2. Most of the decision tree concerns the decisions of a business owner. The business may be any kind of organization that might enter into trusting relationships with consumers and use credit reports in deciding whether to do so.
The diverse trustworthiness of consumers is represented by Consumer A, who is very trustworthy, Consumer B, who is pretty trustworthy, and Consumer C, who is not trustworthy. If the business trusts all three, only the first two meet their obligations. As shown at the bottom of the decision tree, when a consumer meets his obligations, the business adds 1 to its total payoff. When a consumer fails in his obligations, the business gets an associated -1. Start at the top of the tree and suppose the business were to go forward. What would be its total payoff? It starts by deciding to operate in business as, say, a retail store or small apartment house. It then deliberates as to whether to make a practice of taking applications from consumers who are not local or well known to the owners or their associates. The business needs to see a credit report before trusting an unfamiliar consumer. In deciding to make a practice to take such applications, the business gets an associated -1 representing the cost of making arrangements with credit bureaus, subscribing to the service, handling applications, and exposing itself to related lawsuits. The business then receives applications from the three consumers. In each case it proceeds to purchase a credit report, getting an associated -0.1 for each report purchased. Upon reading the reports, the business decides to trust only Consumers A and B (not Consumer C). The two trusted consumers meet their obligations satisfactorily. The total payoff for the business is as follows:
The payoff (0.7) is what the business achieves by proceeding down the decision tree. At its second decision point (point Y), it could alternatively have chosen to operate its business without making a practice of trusting unfamiliar consumers. In the current story, we assume that the business has accurate expectations about there being one consumer of each degree of trustworthiness. At point Y the business is essentially choosing between 0.5 and 0.7. It proceeds down the tree bringing opportunity and benefits to Consumers A and B. Each credit report costs 0.1, but several restrictions would increase the cost of reports. Laws imposing penalties or liabilities on credit bureaus, specifying procedure for bureau operation, specifying how consumer inquiries and disputes are to be handled, and requiring bureaus to give free reports to consumers all would increase the bureaus' cost of providing the service. Such laws would probably increase the price of reports. If the business incurred a cost of 0.2 for each report, it would no longer find it advantageous to order credit reports and would not consider taking applications from unfamiliar consumers such as A, B, and C. The cost to the business might go up to 0.2 per report, not because of a price increase, but because of an increase in paperwork. Some of the restrictions specify how businesses are to notify consumers of credit decisions. The legal specification of protocol creates inconveniences, reduces flexibility, and chokes off opportunities to enhance efficiency. Furthermore, legally mandated protocol exposes businesses to lawsuits in which plaintiffs claim that protocol was not properly followed. Scam artists learn to exploit such formalities, and lawyers ferret out hapless consumers whose "rights" have been violated. The result again is business withdrawal and loss of benefits for Consumers A and B. If credit bureaus are exposed to liability for including adverse information on reports, the accuracy of which can never be absolutely established, they will expunge more adverse information, including some accurate information. The deterioration in quality could lead the business to reject Consumer B's application even when it purchases the corresponding credit report. Furthermore, consumers in general become less circumspect in meeting their obligations, because they know that adverse information is less reliably reported. The quality deterioration could lead the business to withdraw from considering applications from unfamiliar consumers. Suppose the business is a homeowner whose children have grown and moved out, leaving several empty rooms in the house. He considers converting the house into three units and renting out two. There are millions of potential homeowners-cum-landlords who could expand the supply of housing and reduce its price. The decision of some potential landlords will be affected by minor aspects of the venture. If credit reports are expensive, involve hassles, or involve legal or procedural uncertainties, the homeowner might decline to make accommodations available. In the decision tree, the owner decides at the initial decision point not to operate in business at all. (Suppose the payoff of not operating were, in this case, 0.6 rather than zero.) If credit reports were more affordable, easier to use, or of higher quality, he would have made housing available to consumers. There are yet other ways that hardship befalls consumers because of restrictions. If credit reports are more expensive or less informative, then businesses that trust consumers will be operating at higher cost and suffering more losses from delinquencies, defaults, and other failures to meet obligations. Increases in the cost of doing business translate into higher prices for consumers. When consumers get credit -- which will be less often -- they will pay higher interest rates. When they get housing, they will pay higher rental rates. When they get employment, they will receive lower salaries. The injury to each consumer may be small, but that small injury must be multiplied by the great number of consumers who are affected. And increased business costs may affect the prices of any of the items a creditor sells. If Sears, for example, has higher costs because credit reports are more expensive or because more accounts go delinquent, all Sears customers may pay higher prices at Sears. Tracing out the results of the proposed restrictions shows that the consequences go far beyond the intended effect. The exercise does not pretend to quantify the consequences. It is meant to illustrate a fuller range of consumer consequences. In advocating restrictions, consumer activists do not attempt to demonstrate that their proposed restrictions will do more good than harm. They tend not to even acknowledge harm. In my opinion the restrictions, extant and proposed, do or will harm consumers. Everyone involved in these transactions has an interest in consummating them. It is not to the advantage of a business that a trustworthy consumer is wrongly denied credit or other form of opportunity. Such a result would be a loss not only for the consumer but also for the business. And it is not to the advantage of the credit bureau to furnish reports with errors. All parties have clear incentives to make the information correct. (Don't believe the drumbeat of animadversion issuing from activist organizations and replayed in the press, e.g., Mierzwinski 1990, 1991; Golinger and Mierzwinski 1998; Consumers Union 1991. For a detailed criticism of such animadversions, see Klein and Richner 1992.) If additional restrictions on credit reporting were to spare a few consumers hardship, it would do so by placing greater hardship on consumers as a whole. The social accountability mechanisms that serve consumers and businesses alike depend on layers of institutions and practices. Consumer activists pretend that those institutions and practices will go on keenly serving consumers even when hamstrung by restrictions. They take for granted many of the blessings of the modern economy. Privacy and the Issue of Marketing Lists Many companies, especially those conducting business on the Internet, now accumulate information about their customers and sell marketing lists to other businesses. The issue is often couched in terms of "privacy," but whatever consumer resentment exists probably has more to do with businesses profiting in new ways without giving the consumers a "cut." Over time, this resentment will likely subside as consumers become more sophisticated about the information byproducts of their interactions with vendors, and figure out ways to get a larger cut of that byproduct (Hagel and Rayport 1997). Meanwhile, activists, citing practice in Europe, seek to restrict free speech in the name of privacy. In European Union countries, consumers have to opt-in in order to be included in list-making services (Singleton 1998, 5; Branscomb 1994, 181-82). Instead of the European "opt-in" rule, credit bureaus in America practice an "opt-out" rule: by notifying the three credit bureaus, consumers can exclude themselves from all mailing lists generated by the bureaus. Activists have long attacked credit bureaus for making personal information available to marketers, who send offers and advertisements -- "junk mail." A Consumers Union salvo against credit bureaus, for example, is entitled, "What Are They Saying About Me?" (Consumers Union 1991). Activists play upon the paranoia of consumers and voters, who know little of how the system actually works. A knowledge of the situation suggests that the privacy issue is really a red herring (at least as far as the credit bureaus are concerned). And the proposed free-speech restrictions would hurt consumers, as they do in Europe. What does L. L. Bean or the Sierra Club really find out about consumers from credit bureaus? Practically nothing. Such marketers specify consumer characteristics and request a list of individuals who match those characteristics (or some combination of them). For example, the characteristics may be number of credit cards, zip code of residence, or positive payment history. The characteristics may be refined and detailed, but the marketer never sees credit reports. Indeed, the marketer usually does not see the list. The credit bureau is not eager to share its stock in trade. It guards the exclusivity of the information. Most lists go to a third-party fulfillment house, which handles the marketer's catalogs and sends the catalogs out to consumers on the list. In those cases, only the fulfillment house sees the list. How can credit bureaus know that the fulfillment house doesn't resell the list? The credit bureau seeds each list with decoy names and addresses. If catalogs other than those associated with the original order show up at the decoy address, the credit bureau knows that the fulfillment house cheated on the contract. The fulfillment house is then subject to penalties or loss of repeat business from the credit bureau -- notice how reputational mechanisms cascade throughout the system to assure promise-keeping and discreetness. The suppleness of contract allows men and women in commerce and industry to overcome problems in ways far more creative than dreamt of by interventionists. It is mildly annoying sometimes to find our mailbox stuffed with advertisements and catalogs. But "opt-in" requirements (a la Europe) would be a restriction on free speech. It would impose a burden on consumers who gain from commercial information. Because opting in would call for added time, attention, and effort, many consumers would simply miss the opportunity to opt in. The default option would be nonparticipation. Often they would miss out on information to improve their condition. Indeed, it is by virtue of prescreening services provided by credit bureaus that the credit-card industry is as competitive as it is: competitors offer consumers lower interest rates, no annual fees, rebates, and tie-in services like frequent-flier awards. In 1991, Consumers Union wrote in their magazine, Consumer Reports: "[R]eaders said that they enjoy reading catalogs from different companies." Although everyone has a certain disdain for "junk mail" (especially when the mailbox contains no packages or love letters), catalogs help consumers to discover and acquire available products without leaving home. They are especially valuable to the disabled, the elderly, parents with families to look after, and people without cars. Consumers Union acknowledges the benefits of list-making services:
Unlike a government monopoly, a private, competitive delivery service would strive to spare its customers the burden of unwanted materials. There would be an opt-out option at the most relevant and opportune point: delivery. Customers would notify the delivery company that unsolicited commercial mail is not to be delivered. Such an arrangement would benefit not only the customer, but also the sender and the delivery company. We see this happening with the Internet. Net servers screen out e-mail junk mailers ("spammers"). The United States Postal Service is government owned and privileged against competition; socialism does a characteristically poor job of responding to consumer preferences. If consumers were able to choose whether unsolicited catalogs would be delivered, the majority would probably accept them and feel less resentment about receiving them. The small portion of American consumers who are upset by junk mail need only contact the three credit bureaus to remove their names from the lists they generate. (Each of the three bureaus has a toll-free opt-out number and will provide the caller with the toll-free numbers of the other two.) As stated previously, privacy is mainly a red herring. But even if infringements on privacy were serious, we should be wary of the privacy activists. They are peddling restrictions that do not provide coherent principles and which upset other vital principles. The activists often suggest that consumer information should be treated as the property of the consumer. But people cannot rightly be said to own information about themselves. Pure information is not a form of property and hence cannot be owned. As Solveig Singleton says,
Information exists only in as much as a thinking human mind reacts to certain external events. External events may be influenced by legal rules, but to think of information itself as someone's property is incoherent. The same goes for "privacy," as the term is used in these debates. As Robert Cole writes in his textbook on credit management: "[since the federal law passed in 1971,] a clear and definable [idea] of privacy has eluded governmental and private organizations" (Cole 1988, 8). Legal rules may treat the external events which go into the creation and conveying of information. But before searching for restrictions on freedom, let us ask: Does the freedom of contract provide an effective framework for dealing with privacy issues? People can form contracts that specifically forbid their trading partners from reconveying information. The concerns about "privacy" become issues of confidentiality. Illegitimately reconveying the information would then be a breach of contract -- a failure to live up to a promise -- not a misuse of someone's property. Contract provides a coherent principle. A system of freedom (including freedom to compete in mail delivery) would accommodate consumers' preferences about receiving junk mail and learning of products. In seeking to Europeanize information services in America, activists tend also to Europeanize consumption opportunities and living standards. American consumers are much better served by the safeguarding and revitalizing of the American custom of free speech, free enterprise, and opportunity, along with a tort system that responds to errors arising from negligence or contract breach. Concluding Comments The norms and culture of our society are rooted in and dependent upon information about our doings. Our communities exist in large part by generating, managing, and utilizing information. The stories of our lives are forms of information. We can find meaning in those stories only if they are shared with and engaged by others. In a vast society like the United States, opportunity depends critically on strangers. But strangers will trust each other only if they can find indications of trustworthiness. Credit bureaus evolved in this country upon the principles of free speech and free enterprise. In the early days the bureaus were run as cooperative organizations. As they developed into for-profit enterprises, they continued to be discreet and professional in the sharing of consumer information. Credit bureaus have a strong incentive to maintain exclusive control of the information and have developed neat ways of achieving that goal. An understanding of how the institutions actually work reveals that credit bureaus rarely make errors and impinge only trivially on privacy. Credit reporting is akin to gossip in that it gathers, interprets, formats, stores, retrieves, and transmits information. It generates reputations on individuals and provides the assurance necessary to get strangers to cooperate. It is a social accountability mechanism, and all social accountability mechanisms necessarily collide with privacy. But as a social accountability mechanism, credit reporting is remarkably discreet. Compared to the sensational tactics of the press, the entrapment and wiretapping practiced by police, the public disclosure of legal testimony, and the taintedness of gossip, credit reporting should be deemed a remarkably unintrusive and dignified means of promoting responsible behavior in society. Activist groups like U.S. Public Interest Research Group and Consumers Union smear credit bureaus for being irresponsible gossipers, but they pay no attention to the social accountability function that that accusation would imply. In other words, they liken credit reporting to gossip only to underscore the unfavorable likeness, which is rather remote, while ignoring the favorable likeness, which is significant and of critical importance. Their criticisms show little sense of fairness or proportion. The role of Consumers Union is particularly ironic. In their advocacy wing they attack credit bureaus as irresponsible gossipers, yet in their product reporting wing they engage in a very similar activity. Consumer Reports "gossips" at great length about manufacturers and their products -- basing their statements to a great extent upon unverified "hearsay" from their subscribers -- and often with flare and a touch of invective. God bless Consumer Reports and free speech. Notice that Consumers Union does not stand up for liabilities for magazine errors and "privacy rights" when it comes to gossiping about the makers, rather than the buyers, of products. The activists are promoting slogans and agendas that do not provide coherent principles for law, expectations and social interaction. Privacy is not a coherent legal maxim. The appropriateness of privacy claims is dependent on the particular situation and context of communication. Hence, privacy can scarcely be "protected" by regulations issued by remote government agencies and legislatures. The attempt to do so creates red tape, kills opportunity and breeds litigation. As activists make headway in imposing restrictions, the coherent and highly beneficial principles of freedom of contract, confidentiality agreements, and freedom of speech become ever more eroded. The impact on consumer opportunity and well-being has been indicated in this essay. The impact on the culture and the polity goes further. Endnote 1. Suppose the creditor tells the credit bureau the consumer did not pay her bill and the bureau includes the information. Whether the credit report contains an error depends on how one interprets a credit report. A first interpretation is that the credit bureau is stating that the consumer did not pay her bill, in which case the bureau's statement is inaccurate. A second interpretation is that the credit bureau is stating that the creditor has said that the consumer did not pay her bill, in which case the bureaus' statement is accurate. Given that those reading credit reports understand that credit bureaus essentially just relay the information they receive, there is a strong case for saying that the bureau is not making an inaccurate statement. Analogously, when a newspaper reporter writes: "Jackson says Jones stole the car," if Jones did not steal the car but Jackson said he did, the reporter is making an accurate statement. The distinction here may seem shifty, but for the chained conveyance of billions of bits of information whose final accuracy can never be known with certainty, it becomes important to distinguish between the different possible sources of errors.
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