The essence of Josh Wright’s FTC tenure was to ensure that benefits outweigh costs; the rest is commentary

Geoffrey Manne —  27 August 2015

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.

Geoffrey Manne