Archives For cost-benefit analysis

As the organizer of this retrospective on Josh Wright’s tenure as FTC Commissioner, I have the (self-conferred) honor of closing out the symposium.

When Josh was confirmed I wrote that:

The FTC will benefit enormously from Josh’s expertise and his error cost approach to antitrust and consumer protection law will be a tremendous asset to the Commission — particularly as it delves further into the regulation of data and privacy. His work is rigorous, empirically grounded, and ever-mindful of the complexities of both business and regulation…. The Commissioners and staff at the FTC will surely… profit from his time there.

Whether others at the Commission have really learned from Josh is an open question, but there’s no doubt that Josh offered an enormous amount from which they could learn. As Tim Muris said, Josh “did not disappoint, having one of the most important and memorable tenures of any non-Chair” at the agency.

Within a month of his arrival at the Commission, in fact, Josh “laid down the cost-benefit-analysis gauntlet” in a little-noticed concurring statement regarding a proposed amendment to the Hart-Scott-Rodino Rules. The technical details of the proposed rule don’t matter for these purposes, but, as Josh noted in his statement, the situation intended to be avoided by the rule had never arisen:

The proposed rulemaking appears to be a solution in search of a problem. The Federal Register notice states that the proposed rules are necessary to prevent the FTC and DOJ from “expend[ing] scarce resources on hypothetical transactions.” Yet, I have not to date been presented with evidence that any of the over 68,000 transactions notified under the HSR rules have required Commission resources to be allocated to a truly hypothetical transaction.

What Josh asked for in his statement was not that the rule be scrapped, but simply that, before adopting the rule, the FTC weigh its costs and benefits.

As I noted at the time:

[I]t is the Commission’s responsibility to ensure that the rules it enacts will actually be beneficial (it is a consumer protection agency, after all). The staff, presumably, did a perfectly fine job writing the rule they were asked to write. Josh’s point is simply that it isn’t clear the rule should be adopted because it isn’t clear that the benefits of doing so would outweigh the costs.

As essentially everyone who has contributed to this symposium has noted, Josh was singularly focused on the rigorous application of the deceptively simple concept that the FTC should ensure that the benefits of any rule or enforcement action it adopts outweigh the costs. The rest, as they say, is commentary.

For Josh, this basic principle should permeate every aspect of the agency, and permeate the way it thinks about everything it does. Only an entirely new mindset can ensure that outcomes, from the most significant enforcement actions to the most trivial rule amendments, actually serve consumers.

While the FTC has a strong tradition of incorporating economic analysis in its antitrust decision-making, its record in using economics in other areas is decidedly mixed, as Berin points out. But even in competition policy, the Commission frequently uses economics — but it’s not clear it entirely understands economics. The approach that others have lauded Josh for is powerful, but it’s also subtle.

Inherent limitations on anyone’s knowledge about the future of technology, business and social norms caution skepticism, as regulators attempt to predict whether any given business conduct will, on net, improve or harm consumer welfare. In fact, a host of factors suggests that even the best-intentioned regulators tend toward overconfidence and the erroneous condemnation of novel conduct that benefits consumers in ways that are difficult for regulators to understand. Coase’s famous admonition in a 1972 paper has been quoted here before (frequently), but bears quoting again:

If an economist finds something – a business practice of one sort or another – that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be very large, and the reliance on a monopoly explanation, frequent.

Simply “knowing” economics, and knowing that it is important to antitrust enforcement, aren’t enough. Reliance on economic formulae and theoretical models alone — to say nothing of “evidence-based” analysis that doesn’t or can’t differentiate between probative and prejudicial facts — doesn’t resolve the key limitations on regulatory decisionmaking that threaten consumer welfare, particularly when it comes to the modern, innovative economy.

As Josh and I have written:

[O]ur theoretical knowledge cannot yet confidently predict the direction of the impact of additional product market competition on innovation, much less the magnitude. Additionally, the multi-dimensional nature of competition implies that the magnitude of these impacts will be important as innovation and other forms of competition will frequently be inversely correlated as they relate to consumer welfare. Thus, weighing the magnitudes of opposing effects will be essential to most policy decisions relating to innovation. Again, at this stage, economic theory does not provide a reliable basis for predicting the conditions under which welfare gains associated with greater product market competition resulting from some regulatory intervention will outweigh losses associated with reduced innovation.

* * *

In sum, the theoretical and empirical literature reveals an undeniably complex interaction between product market competition, patent rules, innovation, and consumer welfare. While these complexities are well understood, in our view, their implications for the debate about the appropriate scale and form of regulation of innovation are not.

Along the most important dimensions, while our knowledge has expanded since 1972, the problem has not disappeared — and it may only have magnified. As Tim Muris noted in 2005,

[A] visitor from Mars who reads only the mathematical IO literature could mistakenly conclude that the U.S. economy is rife with monopoly power…. [Meanwhile, Section 2’s] history has mostly been one of mistaken enforcement.

It may not sound like much, but what is needed, what Josh brought to the agency, and what turns out to be absolutely essential to getting it right, is unflagging awareness of and attention to the institutional, political and microeconomic relationships that shape regulatory institutions and regulatory outcomes.

Regulators must do their best to constantly grapple with uncertainty, problems of operationalizing useful theory, and, perhaps most important, the social losses associated with error costs. It is not (just) technicians that the FTC needs; it’s regulators imbued with the “Economic Way of Thinking.” In short, what is needed, and what Josh brought to the Commission, is humility — the belief that, as Coase also wrote, sometimes the best answer is to “do nothing at all.”

The technocratic model of regulation is inconsistent with the regulatory humility required in the face of fast-changing, unexpected — and immeasurably valuable — technological advance. As Virginia Postrel warns in The Future and Its Enemies:

Technocrats are “for the future,” but only if someone is in charge of making it turn out according to plan. They greet every new idea with a “yes, but,” followed by legislation, regulation, and litigation…. By design, technocrats pick winners, establish standards, and impose a single set of values on the future.

For Josh, the first JD/Econ PhD appointed to the FTC,

economics provides a framework to organize the way I think about issues beyond analyzing the competitive effects in a particular case, including, for example, rulemaking, the various policy issues facing the Commission, and how I weigh evidence relative to the burdens of proof and production. Almost all the decisions I make as a Commissioner are made through the lens of economics and marginal analysis because that is the way I have been taught to think.

A representative example will serve to illuminate the distinction between merely using economics and evidence and understanding them — and their limitations.

In his Nielson/Arbitron dissent Josh wrote:

The Commission thus challenges the proposed transaction based upon what must be acknowledged as a novel theory—that is, that the merger will substantially lessen competition in a market that does not today exist.

[W]e… do not know how the market will evolve, what other potential competitors might exist, and whether and to what extent these competitors might impose competitive constraints upon the parties.

Josh’s straightforward statement of the basis for restraint stands in marked contrast to the majority’s decision to impose antitrust-based limits on economic activity that hasn’t even yet been contemplated. Such conduct is directly at odds with a sensible, evidence-based approach to enforcement, and the economic problems with it are considerable, as Josh also notes:

[I]t is an exceedingly difficult task to predict the competitive effects of a transaction where there is insufficient evidence to reliably answer the[] basic questions upon which proper merger analysis is based.

When the Commission’s antitrust analysis comes unmoored from such fact-based inquiry, tethered tightly to robust economic theory, there is a more significant risk that non-economic considerations, intuition, and policy preferences influence the outcome of cases.

Compare in this regard Josh’s words about Nielsen with Deborah Feinstein’s defense of the majority from such charges:

The Commission based its decision not on crystal-ball gazing about what might happen, but on evidence from the merging firms about what they were doing and from customers about their expectations of those development plans. From this fact-based analysis, the Commission concluded that each company could be considered a likely future entrant, and that the elimination of the future offering of one would likely result in a lessening of competition.

Instead of requiring rigorous economic analysis of the facts, couched in an acute awareness of our necessary ignorance about the future, for Feinstein the FTC fulfilled its obligation in Nielsen by considering the “facts” alone (not economic evidence, mind you, but customer statements and expressions of intent by the parties) and then, at best, casually applying to them the simplistic, outdated structural presumption – the conclusion that increased concentration would lead inexorably to anticompetitive harm. Her implicit claim is that all the Commission needed to know about the future was what the parties thought about what they were doing and what (hardy disinterested) customers thought they were doing. This shouldn’t be nearly enough.

Worst of all, Nielsen was “decided” with a consent order. As Josh wrote, strongly reflecting the essential awareness of the broader institutional environment that he brought to the Commission:

[w]here the Commission has endorsed by way of consent a willingness to challenge transactions where it might not be able to meet its burden of proving harm to competition, and which therefore at best are competitively innocuous, the Commission’s actions may alter private parties’ behavior in a manner that does not enhance consumer welfare.

Obviously in this regard his successful effort to get the Commission to adopt a UMC enforcement policy statement is a most welcome development.

In short, Josh is to be applauded not because he brought economics to the Commission, but because he brought the economic way of thinking. Such a thing is entirely too rare in the modern administrative state. Josh’s tenure at the FTC was relatively short, but he used every moment of it to assiduously advance his singular, and essential, mission. And, to paraphrase the last line of the movie The Right Stuff (it helps to have the rousing film score playing in the background as you read this): “for a brief moment, [Josh Wright] became the greatest [regulator] anyone had ever seen.”

I would like to extend my thanks to everyone who participated in this symposium. The contributions here will stand as a fitting and lasting tribute to Josh and his legacy at the Commission. And, of course, I’d also like to thank Josh for a tenure at the FTC very much worth honoring.


totmauthor —  27 August 2015

by Michael Baye, Bert Elwert Professor of Business at the Kelley School of Business, Indiana University, and former Director of the Bureau of Economics, FTC

Imagine a world where competition and consumer protection authorities base their final decisions on scientific evidence of potential harm. Imagine a world where well-intentioned policymakers do not use “possibility theorems” to rationalize decisions that are, in reality, based on idiosyncratic biases or beliefs. Imagine a world where “harm” is measured using a scientific yardstick that accounts for the economic benefits and costs of attempting to remedy potentially harmful business practices.

Many economists—conservatives and liberals alike—have the luxury of pondering this world in the safe confines of ivory towers; they publish in journals read by a like-minded audience that also relies on the scientific method.

Congratulations and thanks, Josh, for superbly articulating these messages in the more relevant—but more hostile—world outside of the ivory tower.

To those of you who might disagree with a few (or all) of Josh’s decisions, I challenge you to examine honestly whether your views on a particular matter are based on objective (scientific) evidence, or on your personal, subjective beliefs. Evidence-based policymaking can be discomforting: It sometimes induces those with philosophical biases in favor of intervention to make laissez-faire decisions, and it sometimes induces people with a bias for non-intervention to make decisions to intervene.

by Berin Szoka, President, TechFreedom

Josh Wright will doubtless be remembered for transforming how FTC polices competition. Between finally defining Unfair Methods of Competition (UMC), and his twelve dissents and multiple speeches about competition matters, he re-grounded competition policy in the error-cost framework: weighing not only costs against benefits, but also the likelihood of getting it wrong against the likelihood of getting it right.

Yet Wright may be remembered as much for what he started as what he finished: reforming the Commission’s Unfair and Deceptive Acts and Practices (UDAP) work. His consumer protection work is relatively slender: four dissents on high tech matters plus four relatively brief concurrences and one dissent on more traditional advertising substantiation cases. But together, these offer all the building blocks of an economic, error-cost-based approach to consumer protection. All that remains is for another FTC Commissioner to pick up where Wright left off.

Apple: Unfairness & Cost-Benefit Analysis

In January 2014, Wright issued a blistering, 17 page dissent from the Commission’s decision to bring, and settle, an enforcement action against Apple regarding the design of its app store. Wright dissented, not from the conclusion necessarily, but from the methodology by which the Commission arrived there. In essence, he argued for an error-cost approach to unfairness:

The Commission, under the rubric of “unfair acts and practices,” substitutes its own judgment for a private firm’s decisions as to how to design its product to satisfy as many users as possible, and requires a company to revamp an otherwise indisputably legitimate business practice. Given the apparent benefits to some consumers and to competition from Apple’s allegedly unfair practices, I believe the Commission should have conducted a much more robust analysis to determine whether the injury to this small group of consumers justifies the finding of unfairness and the imposition of a remedy.

…. although Apple’s allegedly unfair act or practice has harmed some consumers, I do not believe the Commission has demonstrated the injury is substantial. More importantly, any injury to consumers flowing from Apple’s choice of disclosure and billing practices is outweighed considerably by the benefits to competition and to consumers that flow from the same practice.

The majority insisted that the burden on consumers or Apple from its remedy “is de minimis,” and therefore “it was unnecessary for the Commission to undertake a study of how consumers react to different disclosures before issuing its complaint against Apple, as Commissioner Wright suggests.”

Wright responded: “Apple has apparently determined that most consumers do not want to experience excessive disclosures or to be inconvenienced by having to enter their passwords every time they make a purchase.” In essence, he argued, that the FTC should not presume to know better than Apple how to manage the subtle trade-offs between convenience and usability.

Wright was channeling Hayek’s famous quip: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” The last thing the FTC should be doing is designing digital products — even by hovering over Apple’s shoulder.

The Data Broker Report

Wright next took the Commission to task for the lack of economic analysis in its May 2013 report, “Data Brokers: A Call for Transparency and Accountability.” In just four footnotes, Wright extended his analysis of Apple. For example:

Footnote 85: Commissioner Wright agrees that Congress should consider legislation that would provide for consumer access to the information collected by data brokers. However, he does not believe that at this time there is enough evidence that the benefits to consumers of requiring data brokers to provide them with the ability to opt out of the sharing of all consumer information for marketing purposes outweighs the costs of imposing such a restriction. Finally… he believes that the Commission should engage in a rigorous study of consumer preferences sufficient to establish that consumers would likely benefit from such a portal prior to making such a recommendation.

Footnote 88: Commissioner Wright believes that in enacting statutes such as the Fair Credit Reporting Act, Congress undertook efforts to balance [costs and benefits]. In the instant case, Commissioner Wright is wary of extending FCRA-like coverage to other uses and categories of information without first performing a more robust balancing of the benefits and costs associated with imposing these requirements

The Internet of Things Report

This January, in a 4-page dissent from the FTC’s staff report on “The Internet of Things: Privacy and Security in a Connected World,” Wright lamented that the report neither represented serious economic analysis of the issues discussed nor synthesized the FTC’s workshop on the topic:

A record that consists of a one-day workshop, its accompanying public comments, and the staff’s impressions of those proceedings, however well-intended, is neither likely to result in a representative sample of viewpoints nor to generate information sufficient to support legislative or policy recommendations.

His attack on the report’s methodology was blistering:

The Workshop Report does not perform any actual analysis whatsoever to ensure that, or even to give a rough sense of the likelihood that the benefits of the staff’s various proposals exceed their attendant costs. Instead, the Workshop Report merely relies upon its own assertions and various surveys that are not necessarily representative and, in any event, do not shed much light on actual consumer preferences as revealed by conduct in the marketplace…. I support the well-established Commission view that companies must maintain reasonable and appropriate security measures; that inquiry necessitates a cost-benefit analysis. The most significant drawback of the concepts of “security by design” and other privacy-related catchphrases is that they do not appear to contain any meaningful analytical content.


Nomi: Deception & Materiality Analysis

In April, Wright turned his analytical artillery from unfairness to deception, long the more uncontroversial half of UDAP. In a five-page dissent, Wright accused the Commission of essentially dispensing with the core limiting principle of the 1983 Deception Policy Statement: materiality. As Wright explained:

The materiality inquiry is critical because the Commission’s construct of “deception” uses materiality as an evidentiary proxy for consumer injury…. Deception causes consumer harm because it influences consumer behavior — that is, the deceptive statement is one that is not merely misleading in the abstract but one that causes consumers to make choices to their detriment that they would not have otherwise made. This essential link between materiality and consumer injury ensures the Commission’s deception authority is employed to deter only conduct that is likely to harm consumers and does not chill business conduct that makes consumers better off.

As in Apple, Wright did not argue that there might not be a role for the FTC; merely that the FTC had failed to justify bringing, let alone settling, an enforcement action without establishing that the key promise at issue — to provide in-store opt-out — was material.

The Chamber Speech: A Call for Economic Analysis

In May, Wright gave a speech to the Chamber of Commerce on “How to Regulate the Internet of Things Without Harming its Future: Some Do’s and Don’ts”:

Perhaps it is because I am an economist who likes to deal with hard data, but when it comes to data and privacy regulation, the tendency to rely upon anecdote to motivate policy is a serious problem. Instead of developing a proper factual record that documents cognizable and actual harms, regulators can sometimes be tempted merely to explore anecdotal and other hypothetical examples and end up just offering speculations about the possibility of harm.

And on privacy in particular:

What I have seen instead is what appears to be a generalized apprehension about the collection and use of data — whether or not the data is actually personally identifiable or sensitive — along with a corresponding, and arguably crippling, fear about the possible misuse of such data.  …. Any sensible approach to regulating the collection and use of data will take into account the risk of abuses that will harm consumers. But those risks must be weighed with as much precision as possible, as is the case with potential consumer benefits, in order to guide sensible policy for data collection and use. The appropriate calibration, of course, turns on our best estimates of how policy changes will actually impact consumers on the margin….

Wright concedes that the “vast majority of work that the Consumer Protection Bureau performs simply does not require significant economic analysis because they involve business practices that create substantial risk of consumer harm but little or nothing in the way of consumer benefits.” Yet he notes that the Internet has made the need for cost-benefit analysis far more acute, at least where conduct is ambiguous as its effects on consumers, as in Apple, to avoid “squelching innovation and depriving consumers of these benefits.”

The Wrightian Reform Agenda for UDAP Enforcement

Wright left all the building blocks his successor will need to bring “Wrightian” reform to how the Bureau of Consumer Protection works:

  1. Wright’s successor should work to require economic analysis for consent decrees, as Wright proposed in his last major address as a Commissioner. BE might not to issue a statement at all in run-of-the-mill deception cases, but it should certainly have to say something about unfairness cases.
  2. The FTC needs to systematically assess its enforcement process to understand the incentives causing companies to settle UDAP cases nearly every time — resulting in what Chairman Ramirez and Commissioner Brill frequently call the FTC’s “common law of consent decrees.”
  3. As Wright says in his Nomi dissent “While the Act does not set forth a separate standard for accepting a consent decree, I believe that threshold should be at least as high as for bringing the initial complaint.” This point should be uncontroversial, yet the Commission has never addressed it. Wright’s successor (and the FTC) should, at a minimum, propose a standard for settling cases.
  4. Just as Josh succeeded in getting the FTC to issue a UMC policy statement, his successor should re-assess the FTC’s two UDAP policy statements. Wright’s successor needs to make the case for finally codifying the DPS — and ensuring that the FTC stops bypassing materiality, as in Nomi.
  5. The Commission should develop a rigorous methodology for each of the required elements of unfairness and deception to justify bringing cases (or making report recommendations). This will be a great deal harder than merely attacking the lack of such methodology in dissents.
  6. The FTC has, in recent years, increasingly used reports to make de facto policy — by inventing what Wright calls, in his Chamber speech, “slogans and catchphrases” like “privacy by design,” and then using them as boilerplate requirements for consent decrees; by pressuring companies into adopting the FTC’s best practices; by calling for legislation; and so on. At a minimum, these reports must be grounded in careful economic analysis.
  7. The Commission should apply far greater rigor in setting standards for substantiating claims about health benefits. In two dissents, Genelink et al and HCG Platinum, Wright demolished arguments for a clear, bright line requiring two randomized clinical trials, and made the case for “a more flexible substantiation requirement” instead.

Conclusion: Big Shoes to Fill

It’s a testament to Wright’s analytical clarity that he managed to say so much about consumer protection in so few words. That his UDAP work has received so little attention, relative to his competition work, says just as much about the far greater need for someone to do for consumer protection what Wright did for competition enforcement and policy at the FTC.

Wright’s successor, if she’s going to finish what Wright started, will need something approaching Wright’s sheer intellect, his deep internalization of the error-costs approach, and his knack for brokering bipartisan compromise around major issues — plus the kind of passion for UDAP matters Wright had for competition matters. And, of course, that person needs to be able to continue his legacy on competition matters…

Compared to the difficulty of finding that person, actually implementing these reforms may be the easy part.

Yesterday, the International Center for Law & Economics, together with Professor Gus Hurwitz, Nebraska College of Law, and nine other scholars of law and economics, filed an amicus brief in the DC Circuit explaining why the court should vacate the FCC’s 2015 Open Internet Order.

A few key points from ICLE’s brief follow, but you can read a longer summary of the brief here.

If the 2010 Order was a limited incursion into neighboring territory, the 2015 Order represents the outright colonization of a foreign land, extending FCC control over the Internet far beyond what the Telecommunications Act authorizes.

The Commission asserts vast powers — powers that Congress never gave it — not just over broadband but also over the very ‘edge’ providers it claims to be protecting. The court should be very skeptical of the FCC’s claims to pervasive powers over the Internet.

In the 2015 Order, the FCC Invoked Title II, admitted that it was unworkable for the Internet, and then tried to ‘tailor’ the statute to avoid its worst excesses.

That the FCC felt the need for such sweeping forbearance should have indicated to it that it had ‘taken an interpretive wrong turn’ in understanding the statute Congress gave it. Last year, the Supreme Court blocked a similar attempt by the EPA to ‘modernize’ old legislation in a way that gave it expansive new powers. In its landmark UARG decision, the Court made clear that it won’t allow regulatory agencies to rewrite legislation in an effort to retrofit their statutes to their preferred regulatory regimes.

Internet regulation is a question of ‘vast economic and political significance,’ yet the FCC  didn’t even bother to weigh the costs and benefits of its rule. 

FCC Chairman Tom Wheeler never misses an opportunity to talk about the the Internet as ‘the most important network known to Man.’ So why did he and the previous FCC Chairman ignore requests from other commissioners for serious, independent economic analysis of the supposed problem and the best way to address it? Why did the FCC rush to adopt a plan that had the effect of blocking the Federal Trade Commission from applying its consumer protection laws to the Internet? For all the FCC’s talk about protecting consumers, it appears that its real agenda may be simply expanding its own power.

Joining ICLE on the brief are:

  • Richard Epstein (NYU Law)
  • James Huffman (Lewis & Clark Law)
  • Gus Hurwitz (Nebraska Law)
  • Thom Lambert (Missouri Law)
  • Daniel Lyons (Boston College Law)
  • Geoffrey Manne (ICLE)
  • Randy May (Free State Foundation)
  • Jeremy Rabkin (GMU Law)
  • Ronald Rotunda (Chapman Law)
  • Ilya Somin (GMU Law)

Read the brief here, and the summary here.

Read more of ICLE’s work on net neutrality and Title II, including:

  • Highlights from policy and legal comments filed by ICLE and TechFreedom on net neutrality
  • “Regulating the Most Powerful Network Ever,” a scholarly essay by Gus Hurwitz for the Free State Foundation
  • “How to Break the Internet,” an essay by Geoffrey Manne and Ben Sperry, in Reason Magazine
  • “The FCC’s Net Neutrality Victory is Anything But,” an op-ed by Geoffrey Manne, in Wired
  • “The Feds Lost on Net Neutrality, But Won Control of the Internet,” an op-ed by Geoffrey Manne and Berin Szoka in Wired
  • “Net Neutrality’s Hollow Promise to Startups,” an op-ed by Geoffrey Manne and Berin Szoka in Computerworld
  • Letter signed by 32 scholars urging the FTC to caution the FCC against adopting per se net neutrality rules by reclassifying ISPs under Title II
  • The FCC’s Open Internet Roundtables, Policy Approaches, Panel 3, Enhancing Transparency, with Geoffrey Manne​

The most welfare-inimical restrictions on competition stem from governmental action, and the Organization for Economic Cooperation and Development’s newly promulgated “Competition Assessment Toolkit, Volume 3: Operational Manual” (“Toolkit 3,” approved by the OECD in late June 2015) provides useful additional guidance on how to evaluate and tackle such harmful market distortions. Toolkit 3 is a very helpful supplement to the second and third volumes of the Competition Assessment Toolkit. Commendably, Toolkit 3 promotes itself generally as a tool that can be employed by well-intentioned governments, rather than merely marketing itself as a manual for advocacy by national competition agencies (which may lack the political clout to sell reforms to other government bureaucracies or to legislators). It is a succinct non-highly-technical document that can be used by a wide range of governments, and applied flexibly, in light of their resource constraints and institutional capacities. Let’s briefly survey Toolkit 3’s key provisions.

Toolkit 3 begins with a “competition checklist” that states that a competition assessment should be undertaken if a regulatory or legislative proposal has any one of four effects: (1) it limits the number or range of suppliers; (2) it limits the ability of suppliers to compete; (3) it reduces the incentive of suppliers to compete; or (4) it limits the choices and information available to consumers. The Toolkit then sets forth basic guidance on competition assessments in seven relatively short, clearly written chapters.

Chapter one begins by explaining that Toolkit 3 “shows how to assess laws, regulations, and policies for their competition effects, and how to revise regulations or policies to make them more procompetitive.” To that end, the chapter introduces the concept of market studies and sectoral reviews, and outlines a six-part process for carrying out competition assessments: (1) identify policies to assess; (2) apply the competition checklist (see above); (3) identify alternative options for achieving a policy objective; (4) select the best option; (5) implement the best option; and (6) review the impacts of an option once it has been implemented.

Chapter two provides general guidance on the selection of public policies for examination, with particular attention to the identification of sectors of the economy, that have the greatest restraints on competition and a major impact on economic output and efficiency.

Chapter three focuses on competition screening through use of threshold questions embodied in the four-part competition checklist. It also provides examples of the sorts of regulations that fall into each category covered by the checklist.

Chapter four sets forth guidance for the examination of potential restrictions that have been flagged for evaluation by the checklist. It provides indicators for deciding whether or not “in-depth analysis” is required, delineates specific considerations that should be brought to bear in conducting an analysis, and provides a detailed example of the steps to be followed in assessing a hypothetical drug patent law (beginning with a preliminary assessment, followed by a detailed analysis, and ending with key findings).

Chapter five centers on identifying the policy options that allow a policymaker to achieve a desired objective with a minimum distortion of competition. It discusses: (1) identifying the purpose of a policy; (2) identifying the competition problems caused by the policy under examination and whether it is necessary to achieve the desired objective; (3) evaluating the technical features of the subject matter being regulated; (4) accounting for features of the broader regulatory environment that have an effect on the market in question, in order to develop alternatives; (5) understanding changes in the business or market environment that have occurred since the last policy implementation; and (6) identifying specific techniques that allow an objective to be achieved with a minimum distortion of competition. The chapter closes by briefly describing various policy approaches for achieving a hypothetical desired reform objective (promotion of generic drug competition).

Chapter six provides guidance on comparing the policy options that have been identified. After summarizing background concepts, it discusses qualitative analysis, quantitative analysis, and the measurement of costs and benefits. The cost-benefits section is particularly thorough, delving into data gathering, techniques of measurement, estimates of values, adjustments to values, and accounting for risk and uncertainty. These tools are then applied to a specific hypothetical involving pharmaceutical regulation, featuring an assessment of the advantages and disadvantages of alternative options.

Chapter seven outlines the steps that should be taken in submitting a recommendation for government action. Those involve: (1) selecting the best policy option; (2) presenting the recommendation to a decision-maker; (3) drafting a regulation that is needed to effectuate the desired policy option; (4) obtaining final approval; and (5) implementing the regulation. The chapter closes by applying this framework to hypothetical regulations.

Chapter 8 discusses the performance of ex post evaluations of competition assessments, in order to determine whether the option chosen following the review process had the anticipated effects and was most appropriate. Four examples of ex post evaluations are summarized.

Toolkit 3 closes with a brief annex that describes mathematically and graphically the consumer benefits that arise when moving from a restrictive market equilibrium to a competitive equilibrium.

In sum, the release of Toolkit 3 is best seen as one more small step forward in the long-term fight against state-managed regulatory capitalism and cronyism, on a par with increased attention to advocacy initiatives within the International Competition Network and growing World Bank efforts to highlight the welfare harm due to governmental regulatory impediments. Although anticompetitive government market distortions will remain a huge problem for the foreseeable future, at least international organizations are starting to acknowledge their severity and to provide conceptual tools for combatting them. Now it is up to free market proponents to work in the trenches to secure the political changes needed to bring such distortions – and their rent-seeking advocates – to heel. This is a long-term fight, but well worth the candle.

Today, in Michigan v. EPA, a five-Justice Supreme Court majority (Antonin Scalia, joined by Chief Justice John Roberts, and Justices Anthony Kennedy, Clarence Thomas, and Samuel Alito, with Thomas issuing a separate concurrence) held that the Clean Air Act requires the Environmental Protection Agency (EPA) to consider costs, including the cost of compliance, when deciding whether to regulate hazardous air pollutants emitted by power plants.  The Clean Air Act, 42 U. S. C. §7412, authorizes the EPA to regulate emissions of hazardous air pollutants from certain stationary sources, such as refineries and factories.  The EPA may, however, regulate power plants under this program only if it concludes that such regulation is “appropriate and necessary” after studying hazards to public health posed by power-plant emissions, 42 U.S.C. §7412(n)(1)(A).  EPA determined that it was “appropriate and necessary” to regulate oil- and coal-fired power plants, because the plants’ emissions pose risks to public health and the environment and because controls capable of reducing these emissions were available.  (The EPA contended that its regulations would have ancillary benefits (including cutting power plants’ emissions of  particulate matter and sulfur dioxide) not covered by the hazardous air pollutants program, but conceded that its estimate of benefits “played no role” in its finding that regulation was “appropriate and necessary.”)  The EPA refused to consider costs when deciding to regulate, even though it estimated that the cost of its regulations to power plants would be $9.6 billion a year, but the quantifiable benefits from the resulting reduction in hazardous-air-pollutant emissions would be $4 to $6 million a year.  Twenty-three states challenged the EPA’s refusal to consider cost, but the U.S. Court of Appeals for the D.C. Circuit upheld the agency’s decision not to consider costs at the outset.  In reversing the D.C. Circuit, the Court stressed that EPA strayed well beyond the bounds of reasonable interpretation in concluding that cost is not a factor relevant to the appropriateness of regulating power plants.  Read naturally against the backdrop of established administrative law, the phrase “appropriate and necessary” plainly encompasses cost, according to the Court.

In a concurring opinion, Justice Thomas opined that this case “raises serious questions about the constitutionality of our broader practice of deferring to agency interpretations of federal statutes.”  Justice Elena Kagan, joined by Justices Ruth Bader Ginsburg, Stephen Breyer, and Sonya Sotomayor, dissented, reasoning that EPA “acted well within its authority in declining to consider costs at the [beginning] . . . of the regulatory process given that it would do so in every round thereafter.”

Although the Supreme Court’s holding merits praise, it is inherently limited in scope, and should not be expected to significantly constrain regulatory overreach, whether by the EPA or by other agencies.  First, in remanding the case, the Court did not opine on the precise manner in which costs and benefits should be evaluated, potentially leaving EPA broad latitude to try to reach its desired regulatory result with a bit of “cost-benefit” wordsmithing.  Such a result would not be surprising, given that “[t]he U.S. Government has a strong tendency to overregulate.  More specifically, administrative agencies such as EPA, whose staffs are dominated by regulatorily-minded permanent bureaucrats, will have every incentive to skew judicially-required “cost assessments” to justify their actions – based on, for example, “false assumptions and linkages, black-box computer models, secretive collusion with activist groups, outright deception, and supposedly ‘scientific’ reports whose shady data and methodologies the agency refuses to share with industries, citizens or even Congress.”  Since, as a practical matter, appellate courts have neither the resources nor the capacity to sort out legitimate from illegitimate agency claims that regulatory programs truly meet cost-benefit standards, it would be naïve to believe that the Court’s majority opinion will be able to do much to rein in the federal regulatory behemoth.

What, then, is the solution?  The concern that federal administrative agencies are being allowed to arrogate to themselves inherently executive and judicial functions, a theme previously stressed by Justice Thomas, has not led other justices to call for wide-scale judicial nullification or limitation of expansive agency regulatory findings.  Absent an unexpected Executive Branch epiphany, then, the best bet for reform lies primarily in congressional action.

What sort of congressional action?  The Heritage Foundation has described actions needed to help stem the tide of overregulation:  (1) require congressional approval of new major regulations promulgated by agencies; (2) establish a sunset date for federal regulations; (3) subject “independent” agencies to executive branch regulatory review; and (4) develop a congressional regulatory analysis capability.  Legislative proposals such as the REINS Act (Regulations from the Executive in Need of Scrutiny Act of 2015), would meet the first objective, while other discrete measures could advance the other three goals.  Public choice considerations suggest that these reforms will not be easily achieved (beneficiaries of the intrusive regulatory status quo may be expected to vigorously oppose reform), but they nevertheless should be pursued posthaste.

In short, all of this hand-wringing over privacy is largely a tempest in a teapot — especially when one considers the extent to which the White House and other government bodies have studiously ignored the real threat: government misuse of data à la the NSA. It’s almost as if the White House is deliberately shifting the public’s gaze from the reality of extensive government spying by directing it toward a fantasy world of nefarious corporations abusing private information….

The White House’s proposed bill is emblematic of many government “fixes” to largely non-existent privacy issues, and it exhibits the same core defects that undermine both its claims and its proposed solutions. As a result, the proposed bill vastly overemphasizes regulation to the dangerous detriment of the innovative benefits of Big Data for consumers and society at large.

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In a previous Truth on the Market blog posting, I noted that the FTC recently revised its “advertising substantiation” policy in a highly problematic manner.  In particular, in a number of recent enforcement actions, an FTC majority has taken the position that it will deem advertising claims “deceptive” unless they are supported by two randomized controlled tests (RCTs), and (in the case of food and drug supplements) will require companies to obtain prior U.S. Food and Drug Administration (FDA) approval for future advertising claims.  As I explained in a Heritage Foundation Legal Memorandum, these and other new burdens “may deter firms from investing in new health-related product improvements, in which event consumers who are denied new and beneficial products (as well as useful information about the attributes of current products) will be the losers.  Competition will also suffer as businesses shy away from informational advertising that rewards the highest quality current products and encourages firms to compete on the basis of quality.  Furthermore, the broad scope of these requirements is in tension with the constitutional prohibition on restricting commercial speech no more than is necessary to satisfy legitimate statutory purposes.” (NOTABLY, Commissioner Maureen Ohlhausen has argued against categorically imposing a two RCTs requirement in all cases , explaining that “[i]f we demand too high a level of substantiation in pursuit of certainty, we risk losing the benefits to consumers of having access to information about emerging areas of science and the corresponding pressure on firms to compete on the health features of their products.”  Commissioner Joshua Wright has also opined “that a reflexive approach in requiring two RCTs as fencing-in relief might not always be in the best interest of consumers.”)

In a January 30, 2015 decision, POM Wonderful, LLC v. FTC, the D.C. Circuit took an initial step that may help rein in FTC enthusiasm for imposing a “two RCTs” requirement on future advertising by a firm.  The FTC ruled in 2013 that POM Wonderful, a producer and seller of pomegranate products, violated the FTC Act by making advertisements that suggested POM products could treat, prevent, or reduce heart disease, prostate cancer, and erectile dysfunction.  According to the FTC, the ads were false and misleading because POM lacked valid and adequate scientific evidence to substantiate its claims.  (The FTC determined that scientific findings cited by POM, based on over $35 million of pomegranate-related research, had not been supported by subsequent studies.)   The FTC entered a cease and desist order that barred POM from making future disease claims (claims that its products treat, prevent, or reduce a disease) about its products without “competent and reliable” scientific evidence.  Specifically, the FTC’s order required that such future claims be supported by at least two RCTs.  (NOTABLY, Commissioner Ohlhausen disagreed with the majority’s view that two RCTs were warranted and would have required only one RCT, regarding that study in light of other available scientific evidence.)

POM appealed to the D.C. Circuit, which unanimously held that there was no basis for setting aside the FTC’s finding that many of POM’s ads made false or misleading claims; that there was no First Amendment protection for deceptive advertising; and that requiring an RCT was not too onerous and did not violate the First Amendment.  The court concluded that “the [FTC] injunctive order’s requirement of some RCT substantiation for disease claims directly advances, and is not more extensive than necessary to serve, the interest in preventing misleading commercial speech”, consistent with the test for evaluating commercial speech enunciated by the Supreme Court in Central Hudson.  The court, however, also held that “a categorical floor of two RCTs for any and all disease claims . . . fails Central Hudson scrutiny”.  The court stressed that the FTC “fails to demonstrate how such a rigid remedial rule bears the requisite ‘reasonable fit’ with the interest in preventing deceptive speech.”  Significantly, the court also enunciated a strong policy justification, rooted in First Amendment commercial speech concerns, for precluding a categorical “two RCTs” rule:

“Requiring additional RCTs without adequate justification exacts considerable costs, and not just in terms of the substantial resources often necessary to design and conduct a properly randomized and controlled human clinical trial.  If there is a categorical bar against claims about the disease-related benefits of a food product or dietary supplement in the absence of two RCTs, consumers may be denied useful, truthful information about products with a demonstrated capacity to treat or prevent serious disease.  That would subvert rather than promote the objectives of the commercial speech doctrine.”

Accordingly, the court modified the FTC’s order to require that POM possess at least one RCT in support of future health-related advertising claims.  Assuming that the D.C. Circuit’s POM decision is not appealed and remains in force, future advertisers investigated by the FTC will have stronger grounds to resist FTC efforts to impose “two or more RCT” requirements as part of a decree.

This is just a small step in badly-needed reforms, however.  Even a single RCT is unnecessarily onerous in many market settings (and, in my view, ignores the teachings of Central Hudson).  More broadly, as I have previously argued, the FTC should rethink its entire approach and issue new advertising substantiation guidelines that state the FTC:  (1) will seek to restrict commercial speech to the smallest extent possible, consistent with fraud prevention; (2) will apply strict cost-benefit analysis in investigating advertising claims and framing remedies in advertising substantiation cases; (3) will apply a reasonableness standard in such cases, consistent with general guidance found in a 1983 FTC policy statement; (4) will not require clinical studies be conducted in order to substantiate advertising claims; (5) will not require that the FDA or any other agency be involved in approving or reviewing advertising claims; and (6) will avoid excessive “fencing in” relief that extends well beyond the ambit of the alleged harm associated with statements that the FTC deems misleading.  Enactment of such guidelines may be a long-term project, requiring a change in Commission thinking, but it is well worth pursuing, in order to advance both free commercial speech and consumer welfare.

Last week, the George Washington University Center for Regulatory Studies convened a Conference (GW Conference) on the Status of Transatlantic Trade and Investment Partnership (TTIP) Negotiations between the European Union (EU) and the United States (U.S.), which were launched in 2013 and will continue for an indefinite period of time. In launching TTIP, the Obama Administration claimed that this pact would raise economic welfare in the U.S. and the EU through stimulating investment and lowering non-tariff barriers between the two jurisdictions, by, among other measures, “significantly cut[ting] the cost of differences in [European Union and United States] regulation and standards by promoting greater compatibility, transparency, and cooperation.

Whether TTIP, if enacted, would actually raise economic welfare in the United States is an open question, however. As a recent Heritage Foundation analysis of TTIP explained, a TTIP focus on “harmonizing” regulations could actually lower economic freedom (and welfare) by “regulating upward” through acceptance of the more intrusive approach, and by precluding future competition among alternative regulatory models that could lead to welfare-enhancing regulatory improvements. Thus, the Heritage study recommended that “[a]ny [TTIP] agreement should be based on mutual recognition, not harmonization, of regulations.”

Unfortunately, discussion at the GW Conference indicated that the welfare-superior mutual recognition approach has been rejected by negotiators – at least as of now. In response to a question I posed on the benefits of mutual recognition, an EU official responded that such an “academic” approach is not “realistic,” while a senior U.S. TTIP negotiator indicated that mutual recognition could prove difficult where regulatory approaches differ. I read those diplomatically couched responses as signaling that both sides opposed the mutual recognition approach. This is a real problem. As part of TTIP, U.S. and EU sector-specific regulators are actively engaged in discussing regulatory particulars. There is the distinct possibility that the regulators may agree on measures that raise regulatory burdens for the sectors covered – particularly given the oft-repeated motto at the GW Conference that TTIP must not reduce existing levels of “protection” for health, safety, and the environment. (Those blandishments eschew any cost-benefit calculus to justify existing protection levels.) This conclusion is further supported by public choice theory, which suggests that regulators may be expected to focus on expanding the size and scope of their regulatory domains, not on contracting them. To make things worse, TTIP raises the possibility that the highly successful U.S. tradition of reliance on private sector-led voluntary consensus standards, as opposed to the EU’s preference for heavy government involvement in standard-setting policies, may be undermined. Any move toward greater direct government influence on U.S. standard setting as part of a TTIP bargain would further undermine the vibrancy, competition, and innovation that have led to the great international success of U.S.-developed technical standards.

As a practical matter, however, is there time for a change in direction in TTIP negotiations regarding regulation and standards? Yes, there is. The TTIP negotiators face no true deadline. Moreover, as a matter of political reality, the eventual U.S. statutory adoption of TTIP measures may require the passage by Congress of “fast-track” trade promotion authority (TPA), which provides for congressional up-or-down votes (without possibility of amendment) on legislation embodying trade deals that have been negotiated by the Executive Branch. Given the political sensitivity of trade deals, they cannot easily be renegotiated if they are altered by congressional amendments. (Indeed, in recent decades all major trade agreements requiring implementing legislation have proceeded under TPA.)

If the Obama Administration decides that it wants to advance TTIP, it must rely on a Republican-controlled Congress to obtain TPA. Before it grants such authority, Congress should conduct hearings and demand that Administration officials testify about key aspects of the Administration’s TTIP negotiating philosophy, and, in particular, on how U.S. TTIP negotiators are approaching regulatory differences between the U.S. and the EU. Congress should make it a prerequisite to the grant of TPA that the final TTIP agreement embody welfare-enhancing mutual recognition of regulations and standards, rather than welfare-reducing harmonization. It should vote down any TTIP negotiated deal that fails to satisfy this requirement.

In my just published Heritage Foundation Legal Memorandum, I argue that the U.S. Federal Trade Commission (FTC) should substantially scale back its overly aggressive “advertising substantiation” program, which disincentivizes firms from providing the public with valuable information about the products they sell.  As I explain:

“The . . . [FTC] has a long history of vigorously combating false and deceptive advertising under its statutory authorities, but recent efforts by the FTC to impose excessive ‘advertising substantiation’ requirements on companies go far beyond what is needed to combat false advertising. Such actions threaten to discourage companies from providing useful information that consumers value and that improves the workings of the marketplace. They also are in tension with constitutional protection for commercial speech. The FTC should reform its advertising substantiation policy and allow businesses greater flexibility to tailor their advertising practices, which would further the interests of both consumers and businesses. It should also decline to seek ‘disgorgement’ of allegedly ‘ill-gotten gains’ in cases involving advertising substantiation.”

In particular, I recommend that the FTC issue a revised policy statement explaining that it will seek to restrict commercial speech to the minimum extent possible, consistent with fraud prevention, and will not require onerous clinical studies to substantiate non-fraudulent advertising claims.  I also urge that the FTC clarify that it will only seek equitable remedies (including injunctions and financial exactions) in court for cases of clear fraud.