The Evidence Against Banks Doesn't Prove Bias

A recent Federal Reserve Bank of Boston study says that banks discriminate against black and Hispanic applicants for mortgages. Although this study stimulated the Comptroller of the Currency to announce plans to ferret out such discrimination against minorities, it is flawed and does not provide persuasive evidence of bias against blacks or other groups in the mortgage market.

Discrimination in the marketplace is a serious problem that hurts minorities, but the use of invalid methodology is no help in fighting it. In my book The Economics of Discrimination, I set out principles for determining whether there is actual discrimination against minorities in labor, housing, or consumer markets. In essence, discrimination in the marketplace consists of voluntarily relinquishing profits, wages, or income in order to cater to prejudice. An employer discriminates when he refuses to hire applicants from a group even though they would produce more profit than those who are hired. Employees discriminate if they refuse to work alongside members of a group even though they can earn more by doing that. The corollary here is that if a company chooses not to hire members of a group, its decision may not be discriminatory if hiring others who are cheaper or more productive results in more profits.