From: "E. Allen Smith" <EALLENSMITH@ocelot.Rutgers.EDU>
Date: Wed, 11 Dec 1996 15:21:08 -0800 (PST)
To: ichudov@algebra.com
Subject: Re: Redlining
Message-ID: <01ICW62Q119GAEL2GZ@mbcl.rutgers.edu>
MIME-Version: 1.0
Content-Type: text/plain


From:	IN%"ichudov@algebra.com" 11-DEC-1996 14:01:18.43

>The problem is, people can choose what credit history they want to have
>(I can be a saver or a spender, for example), but nobody can change the
>color of their skin.

>This is central point of the theory why discrimination based on credit
>histories is OK, while the discrimination based on race is not.

	First, I would point out that redlining does not necessarily
equal credit discrimination based on race; it may mean credit
discrimination based on poverty, which has an unfortunately high
correlation with being a member of some races. (I won't go into the
explanations for why this is the case here; most people who try to
explain it don't take enough factors into account.)
	Second, let's take a look at whether inequalities based on
factors that people cannot change is something that is wrong. This
topic is wider in its application than redlining and credit; one
example important to me in my field is in genetic screening usage for
insurance purposes. (In that case, you've also got that limits on
insurance uses of data when individuals can gather the data in
question mean that someone can predict their own chances of needing
insurance... leading to those who are healthy not purchasing it,
and those who aren't purchasing it.)
	The first topic to mention in this regard is that of privacy.
I believe I am among most people in finding a question about my
behavior (e.g, my sexual activities) significantly more intrusive
than a question about my personal characteristics (e.g., my gender).
But I would hope that everyone would agree that it would be idiotic
and irresponsible not to have someone's payments for insurance vary
with their behavior; this would encourage irresponsible behavior and
discourage responsible behavior.
	The second topic to mention in this regard is that inequality
due to factors one cannot change is a fact of life. This is particularly
true of capitalism (e.g., someone who has a genetic tendency toward
large size will consume more food and thus spend more money on food),
but it is also a problem in any other economic system - economics is
not all of life. Even if one concludes that inequality is wrongful and
needs to be "alleviated", there are many areas more important than
credit on which one would logically start... such as forbidding
merit-based admissions, which are biased in favor of those with higher
IQs. I trust that my audience sees exactly why this idea, and similar
ideas, are ultimately nonsense?
	The third topic is that one commonly applied idea used by the
proponents of absolute equality is that found in Rawls' _Theory of
Justice_, under which the just outcome is said to be found by a group
of people who do not know what situation they will be in. (This is
a vast oversimplification of the book(s) in question, which upon
closer examination may realize the idea I am about to write down.)
The simplistic conclusion is that everyone will want everything to be
the same, since any individual might be in a bad or good situation. But
if you have a choice between 49 dollars and a 50/50 chance of 0 or 100
dollars, you should take the latter. In other words, a situation in
which inequalities exist can still be one that is overall better than
a fully equal situation. There are a number of respects in which
the insurance and credit markets fall under this category. The most
obvious is the direct cost of regulation. Less obvious but perhaps
more important is the uncertainty factor; the use of more data (for
an insurance or credit decision) leads to less uncertainty in
the ultimate outcome, and thus to less risk of unexpected claims
(for insurance) or defaults (for credit). Thus, smaller businesses
(which are also made more possible by lowering other regulatory
costs) can exist in a deregulated insurance or credit market. The
removal of the current ogliopolistic situation in such markets
for the initial insurance or credit grantor would improve prices.
	-Allen