Archives For regulatory reform

The FTC will hold an “Informational Injury Workshop” in December “to examine consumer injury in the context of privacy and data security.” Defining the scope of cognizable harm that may result from the unauthorized use or third-party hacking of consumer information is, to be sure, a crucial inquiry, particularly as ever-more information is stored digitally. But the Commission — rightly — is aiming at more than mere definition. As it notes, the ultimate objective of the workshop is to address questions like:

How do businesses evaluate the benefits, costs, and risks of collecting and using information in light of potential injuries? How do they make tradeoffs? How do they assess the risks of different kinds of data breach? What market and legal incentives do they face, and how do these incentives affect their decisions?

How do consumers perceive and evaluate the benefits, costs, and risks of sharing information in light of potential injuries? What obstacles do they face in conducting such an evaluation? How do they evaluate tradeoffs?

Understanding how businesses and consumers assess the risk and cost “when information about [consumers] is misused,” and how they conform their conduct to that risk, entails understanding not only the scope of the potential harm, but also the extent to which conduct affects the risk of harm. This, in turn, requires an understanding of the FTC’s approach to evaluating liability under Section 5 of the FTC Act.

The problem, as we discuss in comments submitted by the International Center for Law & Economics to the FTC for the workshop, is that the Commission’s current approach troublingly mixes the required separate analyses of risk and harm, with little elucidation of either.

The core of the problem arises from the Commission’s reliance on what it calls a “reasonableness” standard for its evaluation of data security. By its nature, a standard that assigns liability for only unreasonable conduct should incorporate concepts resembling those of a common law negligence analysis — e.g., establishing a standard of due care, determining causation, evaluating the costs of and benefits of conduct that would mitigate the risk of harm, etc. Unfortunately, the Commission’s approach to reasonableness diverges from the rigor of a negligence analysis. In fact, as it has developed, it operates more like a strict liability regime in which largely inscrutable prosecutorial discretion determines which conduct, which firms, and which outcomes will give rise to liability.

Most troublingly, coupled with the Commission’s untenably lax (read: virtually nonexistent) evidentiary standards, the extremely liberal notion of causation embodied in its “reasonableness” approach means that the mere storage of personal information, even absent any data breach, could amount to an unfair practice under the Act — clearly not a “reasonable” result.

The notion that a breach itself can constitute injury will, we hope, be taken up during the workshop. But even if injury is limited to a particular type of breach — say, one in which sensitive, personal information is exposed to a wide swath of people — unless the Commission’s definition of what it means for conduct to be “likely to cause” harm is fixed, it will virtually always be the case that storage of personal information could conceivably lead to the kind of breach that constitutes injury. In other words, better defining the scope of injury does little to cabin the scope of the agency’s discretion when conduct creating any risk of that injury is actionable.

Our comments elaborate on these issues, as well as providing our thoughts on how the subjective nature of informational injuries can fit into Section 5, with a particular focus on the problem of assessing informational injury given evolving social context, and the need for appropriately assessing benefits in any cost-benefit analysis of conduct leading to informational injury.

ICLE’s full comments are available here.

The comments draw upon our article, When ‘Reasonable’ Isn’t: The FTC’s Standard-Less Data Security Standard, forthcoming in the Journal of Law, Economics and Policy.

On July 24, as part of their newly-announced “Better Deal” campaign, congressional Democrats released an antitrust proposal (“Better Deal Antitrust Proposal” or BDAP) entitled “Cracking Down on Corporate Monopolies and the Abuse of Economic and Political Power.”  Unfortunately, this antitrust tract is really an “Old Deal” screed that rehashes long-discredited ideas about “bigness is badness” and “corporate abuses,” untethered from serious economic analysis.  (In spirit it echoes the proposal for a renewed emphasis on “fairness” in antitrust made by then Acting Assistant Attorney General Renata Hesse in 2016 – a recommendation that ran counter to sound economics, as I explained in a September 2016 Truth on the Market commentary.)  Implementation of the BDAP’s recommendations would be a “worse deal” for American consumers and for American economic vitality and growth.

The BDAP’s Portrayal of the State of Antitrust Enforcement is Factually Inaccurate, and it Ignores the Real Problems of Crony Capitalism and Regulatory Overreach

The Better Deal Antitrust Proposal begins with the assertion that antitrust has failed in recent decades:

Over the past thirty years, growing corporate influence and consolidation has led to reductions in competition, choice for consumers, and bargaining power for workers.  The extensive concentration of power in the hands of a few corporations hurts wages, undermines job growth, and threatens to squeeze out small businesses, suppliers, and new, innovative competitors.  It means higher prices and less choice for the things the American people buy every day. . .  [This is because] [o]ver the last thirty years, courts and permissive regulators have allowed large companies to get larger, resulting in higher prices and limited consumer choice in daily expenses such as travel, cable, and food and beverages.  And because concentrated market power leads to concentrated political power, these companies deploy armies of lobbyists to increase their stranglehold on Washington.  A Better Deal on competition means that we will revisit our antitrust laws to ensure that the economic freedom of all Americans—consumers, workers, and small businesses—come before big corporations that are getting even bigger.

This statement’s assertions are curious (not to mention problematic) in multiple respects.

First, since Democratic administrations have held the White House for sixteen of the past thirty years, the BDAP appears to acknowledge that Democratic presidents have overseen a failed antitrust policy.

Second, the broad claim that consumers have faced higher prices and limited consumer choice with regard to their daily expenses is baseless.  Indeed, internet commerce and new business models have sharply reduced travel and entertainment costs for the bulk of American consumers, and new “high technology” products such as smartphones and electronic games have been characterized by dramatic improvements in innovation, enhanced variety, and relatively lower costs.  Cable suppliers face vibrant competition from competitive satellite providers, fiberoptic cable suppliers (the major telcos such as Verizon), and new online methods for distributing content.  Consumer price inflation has been extremely low in recent decades, compared to the high inflationary, less innovative environment of the 1960s and 1970s – decades when federal antitrust law was applied much more vigorously.  Thus, the claim that weaker antitrust has denied consumers “economic freedom” is at war with the truth.

Third, the claim that recent decades have seen the creation of “concentrated market power,” safe from antitrust challenge, ignores the fact that, over the last three decades, apolitical government antitrust officials under both Democratic and Republican administrations have applied well-accepted economic tools (wielded by the scores of Ph.D. economists in the Justice Department and Federal Trade Commission) in enforcing the antitrust laws.  Antitrust analysis has used economics to focus on inefficient business conduct that would maintain or increase market power, and large numbers of cartels have been prosecuted and questionable mergers (including a variety of major health care and communications industry mergers) have been successfully challenged.  The alleged growth of “concentrated market power,” untouched by incompetent antitrust enforcers, is a myth.  Furthermore, claims that mere corporate size and “aggregate concentration” are grounds for antitrust concern (“big is bad”) were decisively rejected by empirical economic research published in the 1970s, and are no more convincing today.  (As I pointed out in a January 2017 blog posting at this site, recent research by highly respected economists debunks a few claims that federal antitrust enforcers have been “excessively tolerant” of late in analyzing proposed mergers.)

More interesting is the BDAP’s claim that “armies of [corporate] lobbyists” manage to “increase their stranglehold on Washington.”  This is not an antitrust concern, however, but, rather, a complaint against crony capitalism and overregulation, which became an ever more serious problem under the Obama Administration.  As I explained in my October 2016 critique of the American Antitrust Institute’s September 2008 National Competition Policy Report (a Report which is very similar in tone to the BDAP), the rapid growth of excessive regulation during the Obama years has diminished competition by creating new regulatory schemes that benefit entrenched and powerful firms (such as Dodd-Frank Act banking rules that impose excessive burdens on smaller banks).  My critique emphasized that, “as Dodd-Frank and other regulatory programs illustrate, large government rulemaking schemes often are designed to favor large and wealthy well-connected rent-seekers at the expense of smaller and more dynamic competitors.”  And, more generally, excessive regulatory burdens undermine the competitive process, by distorting business decisions in a manner that detracts from competition on the merits.

It follows that, if the BDAP really wanted to challenge “unfair” corporate advantages, it would seek to roll back excessive regulation (see my November 2012 article on Trump Administration competition policy).  Indeed, the Trump Administration’s regulatory reform program (which features agency-specific regulatory reform task forces) seeks to do just that.  Perhaps then the BDAP could be rewritten to focus on endorsing President Trump’s regulatory reform initiative, rather than emphasizing a meritless “big is bad” populist antitrust policy that was consigned to the enforcement dustbin decades ago.

The BDAP’s Specific Proposals Would Harm the Economy and Reduce Consumer Welfare

Unfortunately, the BDAP does more than wax nostalgic about old-time “big is bad” antitrust policy.  It affirmatively recommends policy changes that would harm the economy.

First, the BDAP would require “a broader, longer-term view and strong presumptions that market concentration can result in anticompetitive conduct.”  Specifically, it would create “new standards to limit large mergers that unfairly consolidate corporate power,” including “mergers [that] reduce wages, cut jobs, lower product quality, limit access to services, stifle innovation, or hinder the ability of small businesses and entrepreneurs to compete.”  New standards would also “explicitly consider the ways in which control of consumer data can be used to stifle competition or jeopardize consumer privacy.”

Unlike current merger policy, which evaluates likely competitive effects, centered on price and quality, estimated in economically relevant markets, these new standards are open-ended.  They could justify challenges based on such a wide variety of factors that they would incentivize direct competitors not to merge, even in cases where the proposed merged entity would prove more efficient and able to enhance quality or innovation.  Certain less efficient competitors – say small businesses – could argue that they would be driven out of business, or that some jobs in the industry would disappear, in order to prompt government challenges.  But such challenges would tend to undermine innovation and business improvements, and the inevitable redistribution of assets to higher-valued uses that is a key benefit of corporate reorganizations and acquisitions.  (Mergers might focus instead, for example, on inefficient conglomerate acquisitions among companies in unrelated industries, which were incentivized by the overly strict 1960s rules that prohibited mergers among direct competitors.)  Such a change would represent a retreat from economic common sense, and be at odds with consensus economically-sound merger enforcement guidance that U.S. enforcers have long recommended other countries adopt.  Furthermore, questions of consumer data and privacy are more appropriately dealt with as consumer protection questions, which the Federal Trade Commission has handled successfully for years.

Second, the BDAP would require “frequent, independent [after-the-fact] reviews of mergers” and require regulators “to take corrective measures if they find abusive monopolistic conditions where previously approved [consent decree] measures fail to make good on their intended outcomes.”

While high profile mergers subject to significant divestiture or other remedial requirements have in appropriate circumstances included monitoring requirements, the tone of this recommendation is to require that far more mergers be subjected to detailed and ongoing post-acquisition reviews.  The cost of such monitoring is substantial, however, and routine reliance on it (backed by the threat of additional enforcement actions based merely on changing economic conditions) could create excessive caution in the post-merger management of newly-consolidated enterprises.  Indeed, potential merged parties might decide in close cases that this sort of oversight is not worth accepting, and therefore call off potentially efficient transactions that would have enhanced economic welfare.  (The reality of enforcement error cost, and the possibility of misdiagnosis of post-merger competitive conditions, is not acknowledged by the BDAP.)

Third, a newly created “competition advocate” independent of the existing federal antitrust enforcers would be empowered to publicly recommend investigations, with the enforcers required to justify publicly why they chose not to pursue a particular recommended investigation.  The advocate would ensure that antitrust enforcers are held “accountable,” assure that complaints about “market exploitation and anticompetitive conduct” are heard, and publish data on “concentration and abuses of economic power” with demographic breakdowns.

This third proposal is particularly egregious.  It is at odds with the long tradition of prosecutorial discretion that has been enjoyed by the federal antitrust enforcers (and law enforcers in general).  It would also empower a special interest intervenor to promote the complaints of interest groups that object to efficiency-seeking business conduct, thereby undermining the careful economic and legal analysis that is consistently employed by the expert antitrust agencies.  The references to “concentration” and “economic power” clarify that the “advocate” would have an untrammeled ability to highlight non-economic objections to transactions raised by inefficient competitors, jealous rivals, or self-styled populists who object to excessive “bigness.”  This would strike at the heart of our competitive process, which presumes that private parties will be allowed to fulfill their own goals, free from government micromanagement, absent indications of a clear and well-defined violation of law.  In sum, the “competition advocate” is better viewed as a “special interest” advocate empowered to ignore normal legal constraints and unjustifiably interfere in business transactions.  If empowered to operate freely, such an advocate (better viewed as an albatross) would undoubtedly chill a wide variety of business arrangements, to the detriment of consumers and economic innovation.

Finally, the BDAP refers to a variety of ills that are said to affect specific named industries, in particular airlines, cable/telecom, beer, food prices, and eyeglasses.  Airlines are subject to a variety of capacity limitations (limitations on landing slots and the size/number of airports) and regulatory constraints (prohibitions on foreign entry or investment) that may affect competitive conditions, but airlines mergers are closely reviewed by the Justice Department.  Cable and telecom companies face a variety of federal, state, and local regulations, and their mergers also are closely scrutinized.  The BDAP’s reference to the proposed AT&T/Time Warner merger ignores the potential efficiencies of this “vertical” arrangement involving complementary assets (see my coauthored commentary here), and resorts to unsupported claims about wrongful “discrimination” by “behemoths” – issues that in any event are examined in antitrust merger reviews.  Unsupported references to harm to competition and consumer choice are thrown out in the references to beer and agrochemical mergers, which also receive close economically-focused merger scrutiny under existing law.  Concerns raised about the price of eyeglasses ignore the role of potentially anticompetitive regulation – that is, bad government – in harming consumer welfare in this sector.  In short, the alleged competitive “problems” the BDAP raises with respect to particular industries are no more compelling than the rest of its analysis.  The Justice Department and Federal Trade Commission are hard at work applying sound economics to these sectors.  They should be left to do their jobs, and the BDAP’s industry-specific commentary (sadly, like the rest of its commentary) should be accorded no weight.

Conclusion

Congressional Democrats would be well-advised to ditch their efforts to resurrect the counterproductive antitrust policy from days of yore, and instead focus on real economic problems, such as excessive and inappropriate government regulation, as well as weak protection for U.S. intellectual property rights, here and abroad (see here, for example).  Such a change in emphasis would redound to the benefit of American consumers and producers.

 

 

On July 10, the Consumer Financial Protection Bureau (CFPB) announced a new rule to ban financial service providers, such as banks or credit card companies, from using mandatory arbitration clauses to deny consumers the opportunity to participate in a class action (“Arbitration Rule”).  The Arbitration Rule’s summary explains:

First, the final rule prohibits covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action concerning the covered consumer financial product or service. Second, the final rule requires covered providers that are involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the Bureau and also to submit specified court records. The Bureau is also adopting official interpretations to the regulation.

The Arbitration Rule’s effective date is 60 days following its publication in the Federal Register (which is imminent), and it applies to contracts entered into more than 180 days after that.

Cutting through the hyperbole that the Arbitration Rule protects consumers from “unfairness” that would deny them “their day in court,” this Rule is in fact highly anti-consumer and harmful to innovation.  As Competitive Enterprise Senior Fellow John Berlau put it, in promulgating this Rule, “[t]he CFPB has disregarded vast data showing that arbitration more often compensates consumers for damages faster and grants them larger awards than do class action lawsuits. This regulation could have particularly harmful effects on FinTech innovations, such as peer-to-peer lending.”  Moreover, in a coauthored paper, Professors Jason Johnston of the University of Virginia Law School and Todd Zywicki of the Scalia Law School debunked a CFPB study that sought to justify the agency’s plans to issue the Arbitration Rule.  They concluded:

The CFPB’s [own] findings show that arbitration is relatively fair and successful at resolving a range of disputes between consumers and providers of consumer financial products, and that regulatory efforts to limit the use of arbitration will likely leave consumers worse off . . . .  Moreover, owing to flaws in the report’s design and a lack of information, the report should not be used as the basis for any legislative or regulatory proposal to limit the use of consumer arbitration.    

Unfortunately, the Arbitration Rule is just the latest of many costly regulatory outrages perpetrated by the CFPB, an unaccountable bureaucracy that offends the Constitution’s separation of powers and should be eliminated by Congress, as I explained in a 2016 Heritage Foundation report.

Legislative elimination of an agency, however, takes time.  Fortunately, in the near term, Congress can apply the Congressional Review Act (CRA) to prevent the Arbitration Rule from taking effect, and to block the CFPB from passing rules similar to it in the future.

As Heritage Senior Legal Fellow Paul Larkin has explained:

[The CRA is] Congress’s most recent effort to trim the excesses of the modern administrative state.  The act requires the executive branch to report every “rule” — a term that includes not only the regulations an agency promulgates, but also its interpretations of the agency’s governing laws — to the Senate and House of Representatives so that each chamber can schedule an up-or-down vote on the rule under the statute’s fast-track procedure.  The act was designed to enable Congress expeditiously to overturn agency regulations by avoiding the delays occasioned by the Senate’s filibuster rules and practices while also satisfying the [U.S. Constitution’s] Article I Bicameralism and Presentment requirements, which force the Congress and President to collaborate to enact, revise, or repeal a law.  Under the CRA, a joint resolution of disapproval signed into law by the President invalidates the rule and bars an agency from thereafter adopting any substantially similar rule absent a new act of Congress.

Although the CRA was almost never invoked before 2017, in recent months it has been used extensively as a tool by Congress and the Trump Administration to roll back specific manifestations Obama Administration regulatory overreach (for example, see here and here).

Application of the CRA to expunge the Arbitration Rule (and any future variations on it) would benefit consumers, financial services innovation, and the overall economy.  Senator Tom Cotton has already gotten the ball rolling to repeal that Rule.  Let us hope that Congress follows his lead and acts promptly.

Today, the International Center for Law & Economics (ICLE) released a study updating our 2014 analysis of the economic effects of the Durbin Amendment to the Dodd-Frank Act.

The new paper, Unreasonable and Disproportionate: How the Durbin Amendment Harms Poorer Americans and Small Businesses, by ICLE scholars, Todd J. Zywicki, Geoffrey A. Manne, and Julian Morris, can be found here; a Fact Sheet highlighting the paper’s key findings is available here.

Introduced as part of the Dodd-Frank Act in 2010, the Durbin Amendment sought to reduce the interchange fees assessed by large banks on debit card transactions. In the words of its primary sponsor, Sen. Richard Durbin, the Amendment aspired to help “every single Main Street business that accepts debit cards keep more of their money, which is a savings they can pass on to their consumers.”

Unfortunately, although the Durbin Amendment did generate benefits for big-box retailers, ICLE’s 2014 analysis found that it had actually harmed many other merchants and imposed substantial net costs on the majority of consumers, especially those from lower-income households.

In the current study, we analyze a welter of new evidence and arguments to assess whether time has ameliorated or exacerbated the Amendment’s effects. Our findings in this report expand upon and reinforce our findings from 2014:

Relative to the period before the Durbin Amendment, almost every segment of the interrelated retail, banking, and consumer finance markets has been made worse off as a result of the Amendment.

Predictably, the removal of billions of dollars in interchange fee revenue has led to the imposition of higher bank fees and reduced services for banking consumers.

In fact, millions of households, regardless of income level, have been adversely affected by the Durbin Amendment through higher overdraft fees, increased minimum balances, reduced access to free checking, higher ATM fees, and lost debit card rewards, among other things.

Nor is there any evidence that merchants have lowered prices for retail consumers; for many small-ticket items, in fact, prices have been driven up.

Contrary to Sen. Durbin’s promises, in other words, increased banking costs have not been offset by lower retail prices.

At the same time, although large merchants continue to reap a Durbin Amendment windfall, there remains no evidence that small merchants have realized any interchange cost savings — indeed, many have suffered cost increases.

And all of these effects fall hardest on the poor. Hundreds of thousands of low-income households have chosen (or been forced) to exit the banking system, with the result that they face higher costs, difficulty obtaining credit, and complications receiving and making payments — all without offset in the form of lower retail prices.

Finally, the 2017 study also details a new trend that was not apparent when we examined the data three years ago: Contrary to our findings then, the two-tier system of interchange fee regulation (which exempts issuing banks with under $10 billion in assets) no longer appears to be protecting smaller banks from the Durbin Amendment’s adverse effects.

This week the House begins consideration of the Amendment’s repeal as part of Rep. Hensarling’s CHOICE Act. Our study makes clear that the Durbin price-control experiment has proven a failure, and that repeal is, indeed, the only responsible option.

Click on the following links to read:

Full Paper

Fact Sheet

Summary

On February 22, 2017, an all-star panel at the Heritage Foundation discussed “Reawakening the Congressional Review Act” – a statute which gives Congress sixty legislative days to disapprove a proposed federal rule (subject to presidential veto), under an expedited review process not subject to Senate filibuster.  Until very recently, the CRA was believed to apply only to very recently promulgated regulations.  Thus, according to conventional wisdom, while the CRA might prove useful in blocking some non-cost-beneficial Obama Administration midnight regulations, it could not be invoked to attack serious regulatory agency overreach dating back many years.

Last week’s panel, however, demonstrated that conventional wisdom is no match for the careful textual analysis of laws – the sort of analysis that too often is given short-shrift by  commentators.  Applying straightforward statutory construction techniques, my Heritage colleague Paul Larkin argued persuasively that the CRA actually reaches back over 20 years to authorize congressional assessment of regulations that were not properly submitted to Congress.  Paul’s short February 15 article on the CRA (reprinted from The Daily Signal), intended for general public consumption, lays it all out, and merits being reproduced in its entirety:

In Washington, there is a saying that regulators never met a rule they didn’t like.  Federal agencies, commonly referred to these days as the “fourth branch of government,” have been binding the hands of the American people for decades with overreaching regulations. 

All the while, Congress sat idly by and let these agencies assume their new legislative role.  What if Congress could not only reverse this trend, but undo years of burdensome regulations dating as far back as the mid-1990s?  It turns out it can, with the Congressional Review Act. 

The Congressional Review Act is Congress’ most recent effort to trim the excesses of the modern administrative state.  Passed into law in 1996, the Congressional Review Act allows Congress to invalidate an agency rule by passing a joint resolution of disapproval, not subject to a Senate filibuster, that the president signs into law. 

Under the Congressional Review Act, Congress is given 60 legislative days to disapprove a rule and receive the president’s signature, after which the rule goes into effect.  But the review act also sets forth a specific procedure for submitting new rules to Congress that executive agencies must carefully follow. 

If they fail to follow these specific steps, Congress can vote to disapprove the rule even if it has long been accepted as part of the Federal Register.  In other words, if the agency failed to follow its obligations under the Congressional Review Act, the 60-day legislative window never officially started, and the rule remains subject to congressional disapproval. 

The legal basis for this becomes clear when we read the text of the Congressional Review Act. 

According to the statute, the period that Congress has to review a rule does not commence until the later of two events: either (1) the date when an agency publishes the rule in the Federal Register, or (2) the date when the agency submits the rule to Congress.

This means that if a currently published rule was never submitted to Congress, then the nonexistent “submission” qualifies as “the later” event, and the rule remains subject to congressional review.

This places dozens of rules going back to 1996 in the congressional crosshairs.

The definition of “rule” under the Congressional Review Act is quite broad—it includes not only the “junior varsity” statutes that an agency can adopt as regulations, but also the agency’s interpretations of those laws. This is vital because federal agencies often use a wide range of documents to strong-arm regulated parties.

The review act reaches regulations, guidance documents, “Dear Colleague” letters, and anything similar.

The Congressional Review Act is especially powerful because once Congress passes a joint resolution of disapproval and the president signs it into law, the rule is nullified and the agency cannot adopt a “substantially similar” rule absent an intervening act of Congress.

This binds the hands of federal agencies to find backdoor ways of re-imposing the same regulations.

The Congressional Review Act gives Congress ample room to void rules that it finds are mistaken.  Congress may find it to be an indispensable tool in its efforts to rein in government overreach.

Now that Congress has a president who is favorable to deregulation, lawmakers should seize this opportunity to find some of the most egregious regulations going back to 1996 that, under the Congressional Review Act, still remain subject to congressional disapproval.

In the coming days, my colleagues will provide some specific regulations that Congress should target.

For a more fulsome exposition of the CRA’s coverage, see Paul’s February 8 Heritage Foundation Legal Memorandum, “The Reach of the Congressional Review Act.”  Hopefully, Congress and the Trump Administration will take advantage of this newly-discovered legal weapon as they explore the most efficacious means to reduce the daunting economic burden of federal overregulation (for a subject matter-specific exploration of the nature and size of that burden, see the most recent Heritage Foundation “Red Tape Rising” report, here).

So I’ve just finished writing a book (hence my long hiatus from Truth on the Market).  Now that the draft is out of my hands and with the publisher (Cambridge University Press), I figured it’s a good time to rejoin my colleagues here at TOTM.  To get back into the swing of things, I’m planning to produce a series of posts describing my new book, which may be of interest to a number of TOTM readers.  I’ll get things started today with a brief overview of the project.

The book is titled How to Regulate: A Guide for Policy Makers.  A topic of that enormity could obviously fill many volumes.  I sought to address the matter in a single, non-technical book because I think law schools often do a poor job teaching their students, many of whom are future regulators, the substance of sound regulation.  Law schools regularly teach administrative law, the procedures that must be followed to ensure that rules have the force of law.  Rarely, however, do law schools teach students how to craft the substance of a policy to address a new perceived problem (e.g., What tools are available? What are the pros and cons of each?).

Economists study that matter, of course.  But economists are often naïve about the difficulty of transforming their textbook models into concrete rules that can be easily administered by business planners and adjudicators.  Many economists also pay little attention to the high information requirements of the policies they propose (i.e., the Hayekian knowledge problem) and the susceptibility of those policies to political manipulation by well-organized interest groups (i.e., public choice concerns).

How to Regulate endeavors to provide both economic training to lawyers and law students and a sense of the “limits of law” to the economists and other policy wonks who tend to be involved in crafting regulations.  Below the fold, I’ll give a brief overview of the book.  In later posts, I’ll describe some of the book’s specific chapters. Continue Reading…

Yesterday the Chairman and Ranking Member of the House Judiciary Committee issued the first set of policy proposals following their long-running copyright review process. These proposals were principally aimed at ensuring that the IT demands of the Copyright Office were properly met so that it could perform its assigned functions, and to provide adequate authority for it to adapt its policies and practices to the evolving needs of the digital age.

In response to these modest proposals, Public Knowledge issued a telling statement, calling for enhanced scrutiny of these proposals related to an agency “with a documented history of regulatory capture.”

The entirety of this “documented history,” however, is a paper published by Public Knowledge itself alleging regulatory capture—as evidenced by the fact that 13 people had either gone from the Copyright Office to copyright industries or vice versa over the past 20+ years. The original document was brilliantly skewered by David Newhoff in a post on the indispensable blog, Illusion of More:

To support its premise, Public Knowledge, with McCarthy-like righteousness, presents a list—a table of thirteen former or current employees of the Copyright Office who either have worked for private-sector, rights-holding organizations prior to working at the Office or who are  now working for these private entities after their terms at the Office. That thirteen copyright attorneys over a 22-year period might be employed in some capacity for copyright owners is a rather unremarkable observation, but PK seems to think it’s a smoking gun…. Or, as one of the named thirteen, Steven Tepp, observes in his response, PK also didn’t bother to list the many other Copyright Office employees who, “went to Internet and tech companies, the Smithsonian, the FCC, and other places that no one would mistake for copyright industries.” One might almost get the idea that experienced copyright attorneys pursue various career paths or something.

Not content to rest on the laurels of its groundbreaking report of Original Sin, Public Knowledge has now doubled down on its audacity, using its own previous advocacy as the sole basis to essentially impugn an entire agency, without more. But, as advocacy goes, that’s pretty specious. Some will argue that there is an element of disingenuousness in all advocacy, even if it is as benign as failing to identify the weaknesses of one’s arguments—and perhaps that’s true. (We all cite our own work at one time or another, don’t we?) But that’s not the situation we have before us. Instead, Public Knowledge creates its own echo chamber, effectively citing only its own idiosyncratic policy preferences as the “documented” basis for new constraints on the Copyright Office. Even in a world of moral relativism, bubbles of information, and competing narratives about the truth, this should be recognizable as thin gruel.

So why would Public Knowledge expose itself in this manner? What is to be gained by seeking to impugn the integrity of the Copyright Office? There the answer is relatively transparent: PK hopes to capitalize on the opportunity to itself capture Copyright Office policy-making by limiting the discretion of the Copyright Office, and by turning it into an “objective referee” rather than the nation’s steward for ensuring the proper functioning of the copyright system.

PK claims that the Copyright Office should not be involved in making copyright policy, other than perhaps technically transcribing the agreements reached by other parties. Thus, in its “indictment” of the Copyright Office (which it now risibly refers to as the Copyright Office’s “documented history of capture”), PK wrote that:

These statements reflect the many specific examples, detailed in Section II, in which the Copyright Office has acted more as an advocate for rightsholder interests than an objective referee of copyright debates.

Essentially, PK seems to believe that copyright policy should be the province of self-proclaimed “consumer advocates” like PK itself—and under no circumstances the employees of the Copyright Office who might actually deign to promote the interests of the creative community. After all, it is staffed by a veritable cornucopia of copyright industry shills: According to PK’s report, fully 1 of its 400 employees has either left the office to work in the copyright industry or joined the office from industry in each of the last 1.5 years! For reference (not that PK thinks to mention it) some 325 Google employees have worked in government offices in just the past 15 years. And Google is hardly alone in this. Good people get good jobs, whether in government, industry, or both. It’s hardly revelatory.

And never mind that the stated mission of the Copyright Office “is to promote creativity by administering and sustaining an effective national copyright system,” and that “the purpose of the copyright system has always been to promote creativity in society.” And never mind that Congress imbued the Office with the authority to make regulations (subject to approval by the Librarian of Congress) and directed the Copyright Office to engage in a number of policy-related functions, including:

  1. Advising Congress on national and international issues relating to copyright;
  2. Providing information and assistance to Federal departments and agencies and the Judiciary on national and international issues relating to copyright;
  3. Participating in meetings of international intergovernmental organizations and meetings with foreign government officials relating to copyright; and
  4. Conducting studies and programs regarding copyright.

No, according to Public Knowledge the Copyright Office is to do none of these things, unless it does so as an “objective referee of copyright debates.” But nowhere in the legislation creating the Office or amending its functions—nor anywhere else—is that limitation to be found; it’s just created out of whole cloth by PK.

The Copyright Office’s mission is not that of a content neutral referee. Rather, the Copyright Office is charged with promoting effective copyright protection. PK is welcome to solicit Congress to change the Copyright Act and the Office’s mandate. But impugning the agency for doing what it’s supposed to do is a deceptive way of going about it. PK effectively indicts and then convicts the Copyright Office for following its mission appropriately, suggesting that doing so could only have been the result of undue influence from copyright owners. But that’s manifestly false, given its purpose.

And make no mistake why: For its narrative to work, PK needs to define the Copyright Office as a neutral party, and show that its neutrality has been unduly compromised. Only then can Public Knowledge justify overhauling the office in its own image, under the guise of magnanimously returning it to its “proper,” neutral role.

Public Knowledge’s implication that it is a better defender of the “public” interest than those who actually serve in the public sector is a subterfuge, masking its real objective of transforming the nature of copyright law in its own, benighted image. A questionable means to a noble end, PK might argue. Not in our book. This story always turns out badly.

Last week, the Internet Association (“IA”) — a trade group representing some of America’s most dynamic and fastest growing tech companies, including the likes of Google, Facebook, Amazon, and eBay — presented the incoming Trump Administration with a ten page policy paper entitled “Policy Roadmap for New Administration, Congress.”

The document’s content is not surprising, given its source: It is, in essence, a summary of the trade association’s members’ preferred policy positions, none of which is new or newly relevant. Which is fine, in principle; lobbying on behalf of members is what trade associations do — although we should be somewhat skeptical of a policy document that purports to represent the broader social welfare while it advocates for members’ preferred policies.

Indeed, despite being labeled a “roadmap,” the paper is backward-looking in certain key respects — a fact that leads to some strange syntax: “[the document is a] roadmap of key policy areas that have allowed the internet to grow, thrive, and ensure its continued success and ability to create jobs throughout our economy” (emphasis added). Since when is a “roadmap” needed to identify past policies? Indeed, as Bloomberg News reporter, Joshua Brustein, wrote:

The document released Monday is notable in that the same list of priorities could have been sent to a President-elect Hillary Clinton, or written two years ago.

As a wishlist of industry preferences, this would also be fine, in principle. But as an ostensibly forward-looking document, aimed at guiding policy transition, the IA paper is disappointingly un-self-aware. Rather than delineating an agenda aimed at improving policies to promote productivity, economic development and social cohesion throughout the economy, the document is overly focused on preserving certain regulations adopted at the dawn of the Internet age (when the internet was capitalized). Even more disappointing given the IA member companies’ central role in our contemporary lives, the document evinces no consideration of how Internet platforms themselves should strive to balance rights and responsibilities in new ways that promote meaningful internet freedom.

In short, the IA’s Roadmap constitutes a policy framework dutifully constructed to enable its members to maintain the status quo. While that might also serve to further some broader social aims, it’s difficult to see in the approach anything other than a defense of what got us here — not where we go from here.

To take one important example, the document reiterates the IA’s longstanding advocacy for the preservation of the online-intermediary safe harbors of the 20 year-old Digital Millennium Copyright Act (“DMCA”) — which were adopted during the era of dial-up, and before any of the principal members of the Internet Association even existed. At the same time, however, it proposes to reform one piece of legislation — the Electronic Communications Privacy Act (“ECPA”) — precisely because, at 30 years old, it has long since become hopelessly out of date. But surely if outdatedness is a justification for asserting the inappropriateness of existing privacy/surveillance legislation — as seems proper, given the massive technological and social changes surrounding privacy — the same concern should apply to copyright legislation with equal force, given the arguably even-more-substantial upheavals in the economic and social role of creative content in society today.

Of course there “is more certainty in reselling the past, than inventing the future,” but a truly valuable roadmap for the future from some of the most powerful and visionary companies in America should begin to tackle some of the most complicated and nuanced questions facing our country. It would be nice to see a Roadmap premised upon a well-articulated theory of accountability across all of the Internet ecosystem in ways that protect property, integrity, choice and other essential aspects of modern civil society.

Each of IA’s companies was principally founded on a vision of improving some aspect of the human condition; in many respects they have succeeded. But as society changes, even past successes may later become inconsistent with evolving social mores and economic conditions, necessitating thoughtful introspection and, often, policy revision. The IA can do better than pick and choose from among existing policies based on unilateral advantage and a convenient repudiation of responsibility.

Neil TurkewitzTruth on the Market is delighted to welcome our newest blogger, Neil Turkewitz. Neil is the newly minted Senior Policy Counsel at the International Center for Law & Economics (so we welcome him to ICLE, as well!).

Prior to joining ICLE, Neil spent 30 years at the Recording Industry Association of America (RIAA), most recently as Executive Vice President, International.

Neil has spent most of his career working to expand economic opportunities for the music industry through modernization of copyright legislation and effective enforcement in global markets. He has worked closely with creative communities around the globe, with the US and foreign governments, and with international organizations (including WIPO and the WTO), to promote legal and enforcement reforms to respond to evolving technology, and to promote a balanced approach to digital trade and Internet governance premised upon the importance of regulatory coherence, elimination of inefficient barriers to global communications, and respect for Internet freedom and the rule of law.

Among other things, Neil was instrumental in the negotiation of the WTO TRIPS Agreement, worked closely with the US and foreign governments in the negotiation of free trade agreements, helped to develop the OECD’s Communique on Principles for Internet Policy Making, coordinated a global effort culminating in the production of the WIPO Internet Treaties, served as a formal advisor to the Secretary of Commerce and the USTR as Vice-Chairman of the Industry Trade Advisory Committee on Intellectual Property Rights, and served as a member of the Board of the Chamber of Commerce’s Global Intellectual Property Center.

You can read some of his thoughts on Internet governance, IP, and international trade here and here.

Welcome Neil!

There must have been a great gnashing of teeth in Chairman Wheeler’s office this morning as the FCC announced that it was pulling the Chairman’s latest modifications to the set-top box proposal from its voting agenda. This is surely but a bump in the road for the Chairman; he will undoubtedly press ever onward in his quest to “fix” a market that is flooded with competition and consumer choice. But, as we stop to take a breath for a moment while this latest FCC adventure is temporarily paused, there is a larger issue worth considering: the lack of transparency at the FCC.

Although the Commission has an unfortunate tradition of non-disclosure surrounding many of its regulatory proposals, the problem has seemingly been exacerbated by Chairman Wheeler’s aggressive agenda and his intransigence in the face of overwhelming and rigorous criticism.

Perhaps nowhere was this attitude more apparent than with his handling of the Open Internet Order, which was plagued with enough process problems to elicit a call for a delay of the Commission’s vote on the initial rules from Democratic Commissioner Rosenworcel, and a strong rebuke from the Chairman of the House Oversight Committee prior to the Commission’s vote on the final rules (which were not disclosed to the public until after the vote).

But the same cavalier dismissal of public and stakeholder input has plagued the Chairman’s beleaguered set-top box proposal, as well.

As Commissioner Pai noted before Congress in March:

The FCC continues to choose opacity over transparency. The decisions we make impact hundreds of millions of Americans and thousands of small businesses. And yet to the public, to Congress, and even to the Commissioners at the FCC, the agency’s work remains a black box.

Take this simple proposition: The public should be able to see what we’re voting on before we vote on it. That’s how Congress works, as you know. Anyone can look up any pending bill right now by going to congress.gov. And that’s how many state commissions work too. But not the FCC.

Exhibit A in Commissioner Pai’s lament was the set-top box proceeding:

Instead, the public gets to see only what the Chairman’s Office deigns to release, so controversial policy proposals can be (and typically are) hidden in a wave of media adulation. That happened just last month when the agency proposed changes to its set-top-box rules but tried to mislead content producers and the public about whether set-top box manufacturers would be permitted to insert their own advertisements into programming streams.

Now, although the Chairman’s initial proposal was eventually released, we have only a fact sheet and an op-ed by Chairman Wheeler on which to judge the purportedly substantial changes embodied in his latest version.

Even Democrats in Congress have recognized the process problems that have plagued this proceeding. As Senator Feinstein (D-CA) urged in a recent letter to Chairman Wheeler:

Given the significance of this proceeding, I ask that you make public the new proposal under consideration by the Commission, so that all interested stakeholders, members of Congress, copyright experts, and others can comment on the potential copyright implications of the new proposal before the Commission votes on it.

And as Senator Heller (R-NV) wrote in a letter to Chairman Wheeler this week:

I believe it is unacceptable that the FCC has not released the text of this proposal before Thursday’s vote. A three-page fact sheet does not provide enough details for Congress to conduct proper oversight of this rulemaking that will significantly impact both consumers and industry…. I encourage you to release the text immediately so that the American public has a full understanding of what is being considered by the Commission….

Of course, this isn’t a new problem at the FCC. In fact, before he supported Chairman Wheeler’s efforts to impose Open Internet rules without sufficient public disclosure, then-Senator Obama decried then-Chairman Martin’s efforts to enact new media ownership rules with insufficient process in 2007:

Repealing the cross ownership rules and retaining the rest of our existing regulations is not a proposal that has been put out for public comment; the proper process for vetting it is not in closed door meetings with lobbyists or in selective leaks to the New York Times.

Although such a proposal may pass the muster of a federal court, Congress and the public have the right to review any specific proposal and decide whether or not it constitutes sound policy. And the Commission has the responsibility to defend any new proposal in public discourse and debate.

And although you won’t find them complaining this time (because this time they want the excessive intervention that the NPRM seems to contemplate), regulatory advocates lamented just exactly this sort of secrecy at the Commission when Chairman Genachowski proposed his media ownership rules in 2012. At that time Free Press angrily wrote:

[T]he Commission still has not made public its actual media ownership order…. Furthermore, it’s disingenuous for the FCC to suggest that its process now is more transparent than the one former Chairman Martin used to adopt similar rules. Genachowski’s FCC has yet to publish any details of its final proposal, offering only vague snippets in press releases… despite the president’s instruction to rulemaking agencies to conduct any significant business in open meetings with opportunities for members of the public to have their voices heard.

As Free Press noted, President Obama did indeed instruct “agencies to conduct any significant business in open meetings with opportunities for members of the public to have their voices heard.” In his Memorandum on Transparency and Open Government, his first executive action, the president urged that:

Public engagement enhances the Government’s effectiveness and improves the quality of its decisions. Knowledge is widely dispersed in society, and public officials benefit from having access to that dispersed knowledge. Executive departments and agencies should offer Americans increased opportunities to participate in policymaking and to provide their Government with the benefits of their collective expertise and information.

The resulting Open Government Directive calls on executive agencies to

take prompt steps to expand access to information by making it available online in open formats. With respect to information, the presumption shall be in favor of openness….

The FCC is not an “executive agency,” and so is not directly subject to the Directive. But the Chairman’s willingness to stray so far from basic principles of transparency is woefully inconsistent with the basic principles of good government and the ideals of heightened transparency claimed by this administration.