Embrace legitimate cost–benefit analysis, recognize that much of it is not legitimate

From Federal Trade Commission Privacy Law and Policy, Chapter 12:

The FTC is surrounded by critics who urge that Agency actions must be more “rigorous” or based in the “sound economic policy” of cost–benefit analysis. There is some merit to this argument. As Peter Schuck explains, cost–benefit analysis has much to offer policy-makers.39 Consumer advocates remain wary of it for the wrong reasons – they tend to dismiss it categorically. If they took up the challenge, they would quickly find that so many analyses presented as “rigorous” to the Commission are anything but sound. Consider these examples.

Cost–benefit analysis and telemarketing

Former Chairman James Miller, representing the “Consumer Choice Coalition,” appeared at a commission roundtable to deliver a cost–benefit analysis of tele- marketing regulations and the DNCR.40 A major portion of the analysis con- cerned predictive dialers, a technology that allows telemarketers to ring many numbers at once, and then assign a telemarketer to whomever picks up first. This increases efficiencies for telemarketers – to the tune of billions according to Miller et al. Yet, there is also an externalized cost to predictive dialers: so-called “abandoned calls,” the problem of a ringing telephone with no one on the other end, known as a “dead-air” call. Depending on how predictive dialers are configured, they could ring up to sixteen numbers at once, potentially interrupt- ing fifteen people with abandoned calls. The FTC took an extensive record in the proceeding, including from small business owners who commented that a dead- air call cost them real money, because the calls interrupted work. Others felt harassed or even felt fear from the fact that their telephone rang so often with no caller on the line.

The Miller et al. analysis, however, omitted any examination of the costs of this interruption. Miller et al. should have included some miniscule amount to account for the costs of these calls to consumers. The problem was not that people’s time could not be calculated. In the same analysis, Miller et al. looked at pre-acquired account number telemarketing, a practice where the telemarketer buys the consumer’s credit card number in advance of the sale.41 This practice saves con- sumers time at least when a purchase is made, as consumers do not need to reach for their wallet when making purchases. The analysis estimated that sharing billing information with telemarketers saves an average of seventy-five seconds per call. If the information were not shared, they argued, it would impose almost $1.5 billion in costs to telemarketers.

The myopia of Miller et al.’s analysis becomes clear when considering another, unaccounted-for but obvious cost of giving billing information to telemarketers: unauthorized charges. If telemarketers have consumers’ billing information, they can make charges without obtaining consumer consent. Recall from Chapter 9 that a single bank had to process more than 95,000 refunds because of unauthorized pre- acquired account number charges. Because a call to a bank to reverse a charge can cost banks dozens of dollars in call support, fraudulent charges can impose massive costs on consumers and businesses.

Miller’s cost–benefit analysis is typical of the quality of work often presented by academics at the Commission: it only counts costs and benefits that support a deregulatory agenda. Miller et al. could have calculated costs of the externalities of telemarketing practices defended. They chose not to.

Fair Credit Reporting Act (FCRA) amendments

Recall from Chapter 10 that preemption of state law in the FCRA was set to expire in 2004. The financial services industry vigorously sought to renew the preemption, and the FTC obliged. The FTC endorsed the industry’s request for permanent preemption rather than a sunset that would force Congress to revisit consumer reporting some time in the future. The FTC made permanent preemption its first policy recommendation rather than fix then-obvious problems in the FCRA. The FTC’s fawning, uncritical assessment of the financial services industry with the subsequent credit bubble and crash is one of the reasons why Congress created a separate agency for financial consumer protection and stripped the FTC of some of its authority in the area.42

The AEI–Brookings Joint Center for Regulatory Studies produced an economic analysis typical of the era. The author participated in a workshop for the AEI–Brookings monograph, an event where financial services representatives were invited to share their thoughts about the benefits of information sharing. Written by Professors Fred Cate and Michael Staten, along with Robert Litan and Peter Wallison, the monograph valorized the policy goals of the bankers and discounted privacy concerns. Rising household and revolving debt presented “no evidence that they pose any major risk to the banking system.” The quartet praised the rise of subprime lending and securitization. The very rise of credit markets serving the underserved, and the availability of personal information were proof themselves of its goodness and essential soundness.

At the time, privacy advocates wanted more controls over “prescreened” offers of credit, as discussed in Chapter 10. Readily available evidence showed that these offers made it easy to steal others’ identities. Prescreened credit offer processing is often fully automated, meaning that the applications undergo no human review.

One prankster even ripped one up, reassembled it, and managed to get a bank to send him a card at a different address. To remediate this problem, the FTC had to create a “red flag” rule requiring the rather obvious precaution that creditors should exercise care when receiving an altered, forged, or destroyed and reassembled application. Identity theft experts even recommended that consumers opt out of all prescreened offers in order to avoid fraud.

The AEI–Brookings quartet dealt with the fraud problem by parroting the views of the financial services industry. At the time, the industry blamed identity theft on consumers: “it seems that most cases of identity theft involve a friend, family member, or coworker.” What was their support for this position? The group cited a two-page-long statement reflecting the personal experiences of an official from a bank.43 Even that statement, if fully read, undermined the AEI–Brookings position, as the same banker also testified that it is “extremely easy” to commit fraud and this could be done by going through another’s mail. Security breach notification laws would later make the “blame it on the victim” strategy impossible to maintain, as credit card information is regularly stolen and sometimes pressed into the service of fraud. But the security breach laws, a state legislature innovation, came too late for Congress to rethink the FCRA. The FTC could have endorsed a sun-setting preemption, an approach Congress adopted in 1996.44 Congress ultimately enshrined permanent preemption into the FCRA, making it unlikely that the law will be updated unless a major emergency arises.

Public choice critiques

Public choice scholars have generated great insights into the pathologies of government, including the problem of agency capture. Public choice critique is often centered on agencies clearly in need of a shake-up. In the context of the FTC, however, these critiques generally miss the mark and are the products of the author’s established ideological commitment. McCraw observed, “Even in some of the best scholarship on regulation, failure has often been applied not merely as a conclusion but also as a premise, a tacit assumption hidden behind apparently scholarly explanations presented in theoretical forms: the theories of capture, of public choice, of taxation by regulation, and several others.”45 Some public choice work lends insight into the FTC, but some of it borders on conspiracy theory46 or, to put it more generously, simple naıvete.

A Hoover Institution volume published on the FTC from the public choice perspective alleges a long list of pathologies shared between Congress and the FTC. At one point, the editors conclude, “these four papers confirm the suspicions of those who have doubted that independent regulatory agencies such as the FTC are truly independent in formulating and executing regulatory policy.”47 The reality is that no institution is fully independent of its purse strings, and that, in any case, the FTC has rebuffed Congressional objections on many matters. Chapters 1–3 recounted many such examples of independence, including the meatpacking report, investigations into the insurance industry, and the rules surrounding cigarettes, flammable baby blankets,48 funeral practices, telemarketing, and used-car sales.49 When the FTC acts independently, public choice scholars are likely to switch tactics and characterize the Agency as unbalanced.

Methodologically, the Hoover volume, several papers from which are discussed in Chapter 5, relies upon post hoc reasoning;50 ignores counterarguments; assumes that the FTC’s mission is entirely economically motivated, rather than animated by concerns of fairness or small-business interests;51 and otherwise suffers from general weaknesses in methods.52

There are many good reasons to be skeptical of public choice theory narratives of the FTC. Daniel A. Bring, analyzing the inception of the Agency, concluded that it is difficult to identify a prime private-sector beneficiary from the creation of the FTC.53 This lack of primary beneficiary undermines public choice explanations for creation of the FTC. Considering more recent agency activity, over the course of many interviews with FTC staff, Robert A. Katzmann concluded that both popular public choice and liberal critiques of the Agency were too simplistic.

Katzmann focused his lens on the operating reality of the Commission and found that many factors led the Agency to not always act coherently on a policy front. For instance, while economists may think the FTC should bring a certain case, institutional concerns raised by lawyers about losing cases and creating bad precedent could override neatly prescribed economic policy ideals. Katzmann identified other considerations: the atmosphere of collegiality, which sometimes leads to compromise; different attitudes toward taking a reactive or proactive posture regarding problems in the economy; and disagreements between the Bureau of Economics and other arms of the Agency.

In fact, whether led by Republicans or Democratic Commissioners, the Agency has at times urged Congress not to expand its budget, staff, and mission. In not requesting more power, the FTC invites the vitriol of liberal groups.

The public choice notions concerning self-interested attempts to obtain power are also insensitive to the personal reasons why lawyers may forgo very high salaries in the private sector in order to work for a government agency, often for their entire career. Arguments concerning agency capture do not explain the vigorous rulemaking the FTC has pursued in areas including cigarettes, the funeral rule, and telemarketing.

The Beltway libertarians

The “marketplace of ideas” does not soften nor does it correct academic cost– benefit and other analyses for several reasons. Reports prepared for the Commission are sometimes “consulting work” and politely ignored by other faculty. Perhaps guided by lawyerly norms of confidentiality, authors of consult- ing work sometimes do not disclose corporate sponsorship of their research. Mainstream academics may see the work as policy entrepreneurship, and know not to touch it, because engaging with it is not considered serious. Consulting work sometimes is never published, academically or otherwise, and it disappears from the internet shortly after being delivered to the Commission. Consumer groups lack the resources to counter it, in part because it often is presented in the moment, often on the same day of a public event.

The loud parroting of “rigorous” economic analysis by “Beltway libertarians” further skews the public debate. The Beltway libertarians are members of a business liberty movement, one that promotes a radical free-market agenda and equates any policing of business activity as a violation of fundamental freedoms.54 These advo- cates want criminal procedure-like process for regulatory matters. Beltway libertarians are heavily funded by information-intensive companies, and these groups do the dirty rhetorical work that companies cannot without losing face in Washington.

Information policy debates suffer from the same dynamics as public controversies surrounding climate change. In their 2010 book, Merchants of Doubt, Professor Naomi Oreskes and Erik Conway connected the dots among different waves of libertarian-inspired regulatory attacks. The duo show that the same scientists were paid by industries to spread confusion and to oppose a variety of unrelated regulatory efforts concerning tobacco, climate change, and energy policy. The groups that Oreskes and Conway studied are active in information privacy as well. Technology companies, many of which are trying to create sustainably powered data centers and other environmentally responsible infrastructure, fund the same groups that denied any need to take action for the environment.

Beltway libertarians complain about specific FTC actions in hysterical terms, while devoting almost no ink to powers exercised by the state against individuals in their role as citizen. The Beltway libertarians are not civil libertarians; they are commercial libertarians.

As designed by Congress, the FTC was supposed to provide a quick and reliable alternative to litigation in the federal courts. It reflected a spirit from an earlier time in US history, where the FTC could take a less punitive posture, and businesses would swallow its medicine and move on.

Libertarians are able to leverage business frustration with the FTC. At the same time, it is not clear that business patrons of the libertarian movement share55 or understand its radicalism.56 The true libertarian believers would go far beyond big businesses’ agenda, smashing regulations and institutions that main- stream businesses’ support. This happened in the 1980s, when even advertisers were surprised at and opposed the Reagan-administration FTC agenda against substantiation. And it is happening today in a challenge to the FTC’s 2012 case against the hotel chain Wyndham Worldwide Corporation. In the case, the FTC sued the hotel chain after it suffered a series of security breaches. The FTC found that Wyndham was not following basic security precautions, and the FTC found this both deceptive and unfair. In the challenge, the Chamber of Commerce and other conservative legal activists have argued that Section 5 is unconstitutionally vague, that the FTC does not have standing to sue Wyndham under Article III, and that the FTC should have to plead its cases very specifically. Wyndham lost an interlocutory appeal at the Third Circuit on its constitutional claims,57 and, as of this writing, the case continues on in district court.

As frustrated as some technology companies are with the FTC, few would find it wise to turn the regulatory clock back a century. If Wyndham’s constitutional claims had been successful, it would have been a disaster for the business community and for consumers. Wyndham would have beaten an insignificant security case, while the libertarians would have struck at the heart of the regulatory state. All agencies that rely on some “unfairness” authority would be undermined. Their ability to act when Congress is silent, and how they act would all be called into question. Wyndham would be the first footnote in other challenges to tear down social regulations that clash with libertarian worldviews – things like clean air and water regulations, workplace safety rules, and efforts to ensure network neutrality.

Businesses would suffer because a Wyndham victory would require the Commission to engage in rule-making even on issues where there is broad social agreement, such as security of personal information. Problems that all participants acknowledge as actionable would fester in the marketplace, as the Agency struggled with its Magnuson–Moss rule-makings. The result of rule- making would be a security rule similar to the Gramm–Leach–Bliley Act – a two-page-long document that requires companies to have “reasonable” security measures. A Wyndham victory would even harm businesses internationally because it would mean that the FTC could no longer police privacy. Feeding EU frustration, a Wyndham victory would make it impossible for the FTC to enforce any successor to the US–EU Safe Harbor agreement.

Solving the Beltway academic conundrum

The Beltway libertarians’ intent is to slow down government action using a political pretense that has broad political appeal, at least in the abstract. The libertarians paint a patina of limited-government, free-market principle atop an agenda that is other- wise simply self-interested. Recognizing the Beltway libertarians as just an instrument of the business lobby is the first step to disarming them.

The second step is to start helping the FTC fend off the Beltway libertarians. Alone, the FTC cannot do it, in part because of its need to remain in the center during political debates. Practically speaking, the FTC needs consumer advocates and others, including academics, to analyze libertarian work, and give context to its deficits.

Finally, consumer advocates are generally unwilling to acknowledge the role of cost–benefit analysis in regulation, particularly where the right being evaluated is a fundamental or human right. Advocates are also suspicious that calls for cost–benefit analysis are attempts to slow down the Agency. But consumer advocates should overcome resistance to cost–benefit analysis. If consumer advocates only would take up these analyses and engage them seriously, the deficits of these “rigorous studies” would become clear quickly. Furthermore, if cost–benefit analysis took costs – particularly transaction costs – to consumers seriously, such analyses are likely to support consumer protection. As the discussion of telemarketing above showed, the only way the industry could justify its conclusions was to completely omit costs to the consumer in its cost–benefit analysis.

Cost–benefit analysis need not paralyze the Agency. As was shown in the 2015 Wyndham case, the Third Circuit did not require extensive economic analysis to come to the obvious conclusion that Wyndham should have invested in more security precautions.58 Courts more generally will defer to the Agency’s expertise and will not require it to engage in make-work.

40 James C. Miller III, Jonathan S. Bowater, Richard S. Higgins, & Robert Budd, An Economic Assessment of Proposed Amendments to the Telemarketing Sales Rule, June 5, 2002 (on file with author).
41 See Chapter 9.
42 Kirstin Downey, FTC at 100: The Agency in recent times to infinity and beyond!, 869 FTC:WATCH (March 13, 2015).
43 Identity Theft, Hearings before the House Subcommittees on Telecommunications; Commerce, Trade, and Consumer Protection; and on Environment and Hazardous Materials of the House Committee on Commerce, 106 Cong. 1 sess. (April 22, 1999) (Statement of Charles A. Albright, chief credit officer, Household International, Inc.).
44 Paul M. Schwartz, Preemption and Privacy, 118(5) YALE L. J. 902 (2009).
46 The author has encountered the following reasoning in researching this book: The FTC is the agent
of large enterprises, creating regulations to help large businesses squash small ones; the FTC uses small-business rhetoric to justify actions that help large businesses; the FTC Act was passed to benefit monopolies and help them control smaller, cutthroat firms; the FTC employees increase complexity of regulations so that they can command high prices when they leave the Agency for private practice, etc.
47 Robert J. Mackay, James C. Miller III, & Bruce Yandle, Public Choice and Regulation: An Overview, in PUBLIC CHOICE & REGULATION: A VIEW FROM INSIDE THE FEDERAL TRADE COMMISSION (Robert J. MacKay, James C. Miller III, & Bruce Yandle eds., 1987).
48 After the Flammable Fabrics Act was amended to strengthen it, a powerful Congressman (a member of the appropriations committee) threatened the Agency, urging it to make a determination that baby blankets are not clothes, and thus not subject to the act’s requirements. Then-Chairman Paul Rand Dixon bent to the will of the member, concerned that the FTC’s funding would dry up otherwise. Commissioner Philip Elman dissented from the Agency’s position, and publicity surrounding it caused baby blankets to be considered clothing for purposes of the act. NORMAN I. SILBER, WITH ALL DELIBERATE SPEED, THE LIFE OF PHILIP ELMAN (2004).
49 “At one time or another during the Commission’s legislative travail, at least one congressional committee or house voted overwhelmingly to abort virtually every major FTC rule making, case or investigation that that had aroused the concern of affected industries or even individual companies.” MICHAEL PERTSCHUK, REVOLT AGAINST REGULATION: THE RISE AND PAUSE OF THE CONSUMER MOVEMENT 73 (1982).
50 An article in this volume concludes that advertising substantiation enriched large advertising firms by analyzing such companies’ stock prices after mention of the substantiation doctrine in the Wall Street Journal. However, firms were engaging in substitution years before the study period, and other factors could explain why large advertising firms profited during the study period.
51 An article in this volume alleges that large advertisers favor substantiation because it hurts smaller rivals. While for some that may be true, it could just as well be true that these advertisers are offended by false advertising and believe that it hurts the entire industry.
52 An article in this volume concludes that FTC fines are regressive and anti-small business, but the study period ends in 1981 (when the coeditor of the volume James C. Miller takes the helm of the FTC), while the work was not published until 1984. The N is only 57, and the authors note that most cases in the study period were brought against large businesses. The cutoff date for the study is especially strange, given that the Miller FTC reversed course and sued far more smaller advertisers (thus targeting smaller businesses). Ross Petty, in his 1992 study of the FTC, found that the Reagan-era leadership focused on national advertisers in only 10 percent of cases, but that, overall, case selection was much more rational and effective. FTC Advertising Regulation: Survivor or Casualty of the Reagan Revolution?, 30(1) AMER. BUS. L. J. 1 (1992).
53 Danny A. Bring, The Origins of the Federal Trade Commission Act: A Public Choice Approach (1993) (Ph.D. dissertation, George Mason University).
54 Many Beltway libertarians are groomed by George Mason University’s (GMU) School of Law. Professor Steven Teles frames GMU’s law school as a project of activist conservative legal thinkers who found that placing scholars in top schools resulted in them becoming more moderate. GMU was a place where “libertarian professors could hone their ideas without the compromises associated with elite institutions.” STEVEN M. TELES, THE RISE OF THE CONSERVATIVE LEGAL MOVEMENT (2008). GMU has been used as a kind of academic front for Google’s activities. See Tom Hamburger & Matea Gold, Google, Once Disdainful of Lobbying, Now a Master of Washington Influence, WASH. POST, April 12, 2004. (“Facing a broad and potentially damaging FTC probe, Google found an eager and willing ally in George Mason University’s Law & Economics Center.”)
55 The idea of an anything-goes, rugged-individualist California ignores the role of big government, railroads, and aerospace/defense companies in its creation; see JOAN DIDION, WHERE I WAS FROM (2003); GERALD NASH, THE FEDERAL LANDSCAPE: AN ECONOMIC HISTORY OF THE TWENTIETH-CENTURY WEST (1999). (“The size and scale of the new federal [military] establishments were unprecedented. Congress poured more than $100 billion into western installations between 1945 and 1973 . . . The military-industrial complex was the West’s biggest business in the cold war years.”)
56 See, for example, Paulina Borsook’s 2000 book in which she observed that the “technolibertarian” movement fundamentally rejects social contract. PAULINA BORSOOK, CYBERSELFISH: A CRITICAL ROMP THROUGH THE TERRIBLY LIBERTARIAN CULTURE OF HIGH-TECH (2000).
57 FTC v. Wyndham Worldwide Corp., No. 14-3514 (3d. Cir. Aug. 24, 2015).

58 FTC v. Wyndham Worldwide Corp., No. 14-3514 (3d. Cir. Aug. 24, 2015).