Bryce Covert has an interesting column in the NYT arguing that Equifax and the other two private credit agencies be replaced with a public system. There does seem to be a good case here.

After all, what do we get from competition in this story? As Covert points out, the credit agencies don't work for consumers, they work for the people who buy the data. This means that they don't really have much incentive to ensure their information about us is accurate and to make sure their systems are not hacked.

What is difficult understand is how current laws allow these agencies to be profitable. Suppose these credit agencies were held liable for their mistakes. If a person is denied a job or is unable to buy a home because of an erroneous credit report, this would seem to warrant tens of thousands of dollars in damages.

Covert tells us that one in four credit reports contain a major error. Suppose that leads to 100,000 people a year to suffer serious consequences, that would be less than 0.25 percent of the people with serious errors in their report. If the average damages come to $15,000 (including legal fees), this would run to $1.5 billion in annual damage payments. If 1.0 percent of the people with erroneous reports suffered consequences, it would come to $6 billion a year.


In terms of breaches, we don't know how much damage people will suffer from the most recent one but suppose we just give a nominal amount, say $100, to each of the 140 million victims. This would come to $14 billion. If people suffer serious damage in the form of stolen identities leading to phony credit charges and stolen assets, the damages would be hugely higher.

The revenue (not profits) of the three credit agencies is $10 billion a year, If these companies faced liability in accordance with the actual harm caused by preventable errors, it is difficult to see how they could stay in business. This raises the question of what sort of legal liability the credit agencies face.

As I understand the law (lawyers reading this are welcome to correct me), the credit rating agencies enjoy conditional privilege which exempts them from the same libel standards as the rest of us. If they mistakenly pass along information that keeps us from getting a job or a house, they don't face liability. They only become liable if we inform them of the mistake and they refuse to correct it.

This is important because it would imply that "nationalizing" this credit rating function might be less a case of big bad government stepping in than a situation that would follow from just taking away the special privileges enjoyed by these private businesses. If they were held accountable for the harm caused by passing along inaccurate information in the same way that others would be (suppose you wrongly claimed your doctor had performed surgery while drunk), they would probably not be able to stay in business.

In all sorts of situations, the right likes to conceal the ways in which the government structures the market in ways that redistribute income upward. This is the point of my book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer (it's free). They like to pretend that the enormous inequality that we see in the economy was just the result of the natural working of the market.

This is not true. Markets are not created by god: we have to establish rules that determine how and where they will exist. In this case, we structured the law in a way that allows companies to make lots of money by selling people's credit histories. We can structure the law differently so that this is not likely to be a profitable line of business. In that case, we would need a public entity to keep files of people's credit histories.