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A debate has broken out among the four sitting members of the Federal Trade Commission (FTC) in connection with the recently submitted FTC Report to Congress on Privacy and Security. Chair Lina Khan argues that the commission “must explore using its rulemaking tools to codify baseline protections,” while Commissioner Rebecca Kelly Slaughter has urged the FTC to initiate a broad-based rulemaking proceeding on data privacy and security. By contrast, Commissioners Noah Joshua Phillips and Christine Wilson counsel against a broad-based regulatory initiative on privacy.

Decisions to initiate a rulemaking should be viewed through a cost-benefit lens (See summaries of Thom Lambert’s masterful treatment of regulation, of which rulemaking is a subset, here and here). Unless there is a market failure, rulemaking is not called for. Even in the face of market failure, regulation should not be adopted unless it is more cost-beneficial than reliance on markets (including the ability of public and private litigation to address market-failure problems, such as data theft). For a variety of reasons, it is unlikely that FTC rulemaking directed at privacy and data security would pass a cost-benefit test.

Discussion

As I have previously explained (see here and here), FTC rulemaking pursuant to Section 6(g) of the FTC Act (which authorizes the FTC “to make rules and regulations for the purpose of carrying out the provisions of this subchapter”) is properly read as authorizing mere procedural, not substantive, rules. As such, efforts to enact substantive competition rules would not pass a cost-benefit test. Such rules could well be struck down as beyond the FTC’s authority on constitutional law grounds, and as “arbitrary and capricious” on administrative law grounds. What’s more, they would represent retrograde policy. Competition rules would generate higher error costs than adjudications; could be deemed to undermine the rule of law, because the U.S. Justice Department (DOJ) could not apply such rules; and innovative efficiency-seeking business arrangements would be chilled.

Accordingly, the FTC likely would not pursue 6(g) rulemaking should it decide to address data security and privacy, a topic which best fits under the “consumer protection” category. Rather, the FTC presumably would most likely initiate a “Magnuson-Moss” rulemaking (MMR) under Section 18 of the FTC Act, which authorizes the commission to prescribe “rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce within the meaning of Section 5(a)(1) of the Act.” Among other things, Section 18 requires that the commission’s rulemaking proceedings provide an opportunity for informal hearings at which interested parties are accorded limited rights of cross-examination. Also, before commencing an MMR proceeding, the FTC must have reason to believe the practices addressed by the rulemaking are “prevalent.” 15 U.S.C. Sec. 57a(b)(3).

MMR proceedings, which are not governed under the Administrative Procedure Act (APA), do not present the same degree of legal problems as Section 6(g) rulemakings (see here). The question of legal authority to adopt a substantive rule is not raised; “rule of law” problems are far less serious (the DOJ is not a parallel enforcer of consumer-protection law); and APA issues of “arbitrariness” and “capriciousness” are not directly presented. Indeed, MMR proceedings include a variety of procedures aimed at promoting fairness (see here, for example). An MMR proceeding directed at data privacy predictably would be based on the claim that the failure to adhere to certain data-protection norms is an “unfair act or practice.”

Nevertheless, MMR rules would be subject to two substantial sources of legal risk.

The first of these arises out of federalism. Three states (California, Colorado, and Virginia) recently have enacted comprehensive data-privacy laws, and a large number of other state legislatures are considering data-privacy bills (see here). The proliferation of state data-privacy statutes would raise the risk of inconsistent and duplicative regulatory norms, potentially chilling business innovations addressed at data protection (a severe problem in the Internet Age, when business data-protection programs typically will have interstate effects).

An FTC MMR data-protection regulation that successfully “occupied the field” and preempted such state provisions could eliminate that source of costs. The Magnuson–Moss Warranty Act, however, does not contain an explicit preemption clause, leaving in serious doubt the ability of an FTC rule to displace state regulations (see here for a summary of the murky state of preemption law, including the skepticism of textualist Supreme Court justices toward implied “obstacle preemption”). In particular, the long history of state consumer-protection and antitrust laws that coexist with federal laws suggests that the case for FTC rule-based displacement of state data protection is a weak one. The upshot, then, of a Section 18 FTC data-protection rule enactment could be “the worst of all possible worlds,” with drawn-out litigation leading to competing federal and state norms that multiplied business costs.

The second source of risk arises out of the statutory definition of “unfair practices,” found in Section 5(n) of the FTC Act. Section 5(n) codifies the meaning of unfair practices, and thereby constrains the FTC’s application of rulemakings covering such practices. Section 5(n) states:

The Commission shall have no authority . . . to declare unlawful an act or practice on the grounds that such an act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.

In effect, Section 5(n) implicitly subjects unfair practices to a well-defined cost-benefit framework. Thus, in promulgating a data-privacy MMR, the FTC first would have to demonstrate that specific disfavored data-protection practices caused or were likely to cause substantial harm. What’s more, the commission would have to show that any actual or likely harm would not be outweighed by countervailing benefits to consumers or competition. One would expect that a data-privacy rulemaking record would include submissions that pointed to the efficiencies of existing data-protection policies that would be displaced by a rule.

Moreover, subsequent federal court challenges to a final FTC rule likely would put forth the consumer and competitive benefits sacrificed by rule requirements. For example, rule challengers might point to the added business costs passed on to consumers that would arise from particular rule mandates, and the diminution in competition among data-protection systems generated by specific rule provisions. Litigation uncertainties surrounding these issues could be substantial and would cast into further doubt the legal viability of any final FTC data protection rule.

Apart from these legal risk-based costs, an MMR data privacy predictably would generate error-based costs. Given imperfect information in the hands of government and the impossibility of achieving welfare-maximizing nirvana through regulation (see, for example, here), any MMR data-privacy rule would erroneously condemn some economically inefficient business protocols and disincentivize some efficiency-seeking behavior. The Section 5(n) cost-benefit framework, though helpful, would not eliminate such error. (For example, even bureaucratic efforts to accommodate some business suggestions during the rulemaking process might tilt the post-rule market in favor of certain business models, thereby distorting competition.) In the abstract, it is difficult to say whether the welfare benefits of a final MMA data-privacy rule (measured by reductions in data-privacy-related consumer harm) would outweigh the costs, even before taking legal costs into account.

Conclusion

At least two FTC commissioners (and likely a third, assuming that President Joe Biden’s highly credentialed nominee Alvaro Bedoya will be confirmed by the U.S. Senate) appear to support FTC data-privacy regulation, even in the absence of new federal legislation. Such regulation, which presumably would be adopted as an MMR pursuant to Section 18 of the FTC Act, would probably not prove cost-beneficial. Not only would adoption of a final data-privacy rule generate substantial litigation costs and uncertainty, it would quite possibly add an additional layer of regulatory burdens above and beyond the requirements of proliferating state privacy rules. Furthermore, it is impossible to say whether the consumer-privacy benefits stemming from such an FTC rule would outweigh the error costs (manifested through competitive distortions and consumer harm) stemming from the inevitable imperfections of the rule’s requirements. All told, these considerations counsel against the allocation of scarce FTC resources to a Section 18 data-privacy rulemaking initiative.

But what about legislation? New federal privacy legislation that explicitly preempted state law would eliminate costs arising from inconsistencies among state privacy rules. Ideally, if such legislation were to be pursued, it should to the extent possible embody a cost-benefit framework designed to minimize the sum of administrative (including litigation) and error costs. The nature of such a possible law, and the role the FTC might play in administering it, however, is a topic for another day.

The U.S. House this week passed H.R. 2668, the Consumer Protection and Recovery Act (CPRA), which authorizes the Federal Trade Commission (FTC) to seek monetary relief in federal courts for injunctions brought under Section 13(b) of the Federal Trade Commission Act.

Potential relief under the CPRA is comprehensive. It includes “restitution for losses, rescission or reformation of contracts, refund of money, return of property … and disgorgement of any unjust enrichment that a person, partnership, or corporation obtained as a result of the violation that gives rise to the suit.” What’s more, under the CPRA, monetary relief may be obtained for violations that occurred up to 10 years before the filing of the suit in which relief is requested by the FTC.

The Senate should reject the House version of the CPRA. Its monetary-recovery provisions require substantial narrowing if it is to pass cost-benefit muster.

The CPRA is a response to the Supreme Court’s April 22 decision in AMG Capital Management v. FTC, which held that Section 13(b) of the FTC Act does not authorize the commission to obtain court-ordered equitable monetary relief. As I explained in an April 22 Truth on the Market post, Congress’ response to the court’s holding should not be to grant the FTC carte blanche authority to obtain broad monetary exactions for any and all FTC Act violations. I argued that “[i]f Congress adopts a cost-beneficial error-cost framework in shaping targeted legislation, it should limit FTC monetary relief authority (recoupment and disgorgement) to situations of consumer fraud or dishonesty arising under the FTC’s authority to pursue unfair or deceptive acts or practices.”

Error cost and difficulties of calculation counsel against pursuing monetary recovery in FTC unfair methods of competition cases. As I explained in my post:

Consumer redress actions are problematic for a large proportion of FTC antitrust enforcement (“unfair methods of competition”) initiatives. Many of these antitrust cases are “cutting edge” matters involving novel theories and complex fact patterns that pose a significant threat of type I [false positives] error. (In comparison, type I error is low in hardcore collusion cases brought by the U.S. Justice Department where the existence, nature, and effects of cartel activity are plain). What’s more, they generally raise extremely difficult if not impossible problems in estimating the degree of consumer harm. (Even DOJ price-fixing cases raise non-trivial measurement difficulties.)

These error-cost and calculation difficulties became even more pronounced as of July 1. On that date, the FTC unwisely voted 3-2 to withdraw a bipartisan 2015 policy statement providing that the commission would apply consumer welfare and rule-of-reason (weighing efficiencies against anticompetitive harm) considerations in exercising its unfair methods of competition authority (see my commentary here). This means that, going forward, the FTC will arrogate to itself unbounded discretion to decide what competitive practices are “unfair.” Business uncertainty, and the costly risk aversion it engenders, would be expected to grow enormously if the FTC could extract monies from firms due to competitive behavior deemed “unfair,” based on no discernible neutral principle.

Error costs and calculation problems also strongly suggest that monetary relief in FTC consumer-protection matters should be limited to cases of fraud or clear deception. As I noted:

[M]atters involving a higher likelihood of error and severe measurement problems should be the weakest candidates for consumer redress in the consumer protection sphere. For example, cases involve allegedly misleading advertising regarding the nature of goods, or allegedly insufficient advertising substantiation, may generate high false positives and intractable difficulties in estimating consumer harm. As a matter of judgment, given resource constraints, seeking financial recoveries solely in cases of fraud or clear deception where consumer losses are apparent and readily measurable makes the most sense from a cost-benefit perspective.

In short, the Senate should rewrite its Section 13(b) amendments to authorize FTC monetary recoveries only when consumer fraud and dishonesty is shown.

Finally, the Senate would be wise to sharply pare back the House language that allows the FTC to seek monetary exactions based on conduct that is a decade old. Serious problems of making accurate factual determinations of economic effects and specific-damage calculations would arise after such a long period of time. Allowing retroactive determinations based on a shorter “look-back” period prior to the filing of a complaint (three years, perhaps) would appear to strike a better balance in allowing reasonable redress while controlling error costs.

There is little doubt that Federal Trade Commission (FTC) unfair methods of competition rulemaking proceedings are in the offing. Newly named FTC Chair Lina Khan and Commissioner Rohit Chopra both have extolled the benefits of competition rulemaking in a major law review article. What’s more, in May, Commissioner Rebecca Slaughter (during her stint as acting chair) established a rulemaking unit in the commission’s Office of General Counsel empowered to “explore new rulemakings to prohibit unfair or deceptive practices and unfair methods of competition” (emphasis added).

In short, a majority of sitting FTC commissioners apparently endorse competition rulemaking proceedings. As such, it is timely to ask whether FTC competition rules would promote consumer welfare, the paramount goal of competition policy.

In a recently published Mercatus Center research paper, I assess the case for competition rulemaking from a competition perspective and find it wanting. I conclude that, before proceeding, the FTC should carefully consider whether such rulemakings would be cost-beneficial. I explain that any cost-benefit appraisal should weigh both the legal risks and the potential economic policy concerns (error costs and “rule of law” harms). Based on these considerations, competition rulemaking is inappropriate. The FTC should stick with antitrust enforcement as its primary tool for strengthening the competitive process and thereby promoting consumer welfare.

A summary of my paper follows.

Section 6(g) of the original Federal Trade Commission Act authorizes the FTC “to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” Section 6(g) rules are enacted pursuant to the “informal rulemaking” requirements of Section 553 of the Administrative Procedures Act (APA), which apply to the vast majority of federal agency rulemaking proceedings.

Before launching Section 6(g) competition rulemakings, however, the FTC would be well-advised first to weigh the legal risks and policy concerns associated with such an endeavor. Rulemakings are resource-intensive proceedings and should not lightly be undertaken without an eye to their feasibility and implications for FTC enforcement policy.

Only one appeals court decision addresses the scope of Section 6(g) rulemaking. In 1971, the FTC enacted a Section 6(g) rule stating that it was both an “unfair method of competition” and an “unfair act or practice” for refiners or others who sell to gasoline retailers “to fail to disclose clearly and conspicuously in a permanent manner on the pumps the minimum octane number or numbers of the motor gasoline being dispensed.” In 1973, in the National Petroleum Refiners case, the U.S. Court of Appeals for the D.C. Circuit upheld the FTC’s authority to promulgate this and other binding substantive rules. The court rejected the argument that Section 6(g) authorized only non-substantive regulations concerning regarding the FTC’s non-adjudicatory, investigative, and informative functions, spelled out elsewhere in Section 6.

In 1975, two years after National Petroleum Refiners was decided, Congress granted the FTC specific consumer-protection rulemaking authority (authorizing enactment of trade regulation rules dealing with unfair or deceptive acts or practices) through Section 202 of the Magnuson-Moss Warranty Act, which added Section 18 to the FTC Act. Magnuson-Moss rulemakings impose adjudicatory-type hearings and other specific requirements on the FTC, unlike more flexible section 6(g) APA informal rulemakings. However, the FTC can obtain civil penalties for violation of Magnuson-Moss rules, something it cannot do if 6(g) rules are violated.

In a recent set of public comments filed with the FTC, the Antitrust Section of the American Bar Association stated:

[T]he Commission’s [6(g)] rulemaking authority is buried in within an enumerated list of investigative powers, such as the power to require reports from corporations and partnerships, for example. Furthermore, the [FTC] Act fails to provide any sanctions for violating any rule adopted pursuant to Section 6(g). These two features strongly suggest that Congress did not intend to give the agency substantive rulemaking powers when it passed the Federal Trade Commission Act.

Rephrased, this argument suggests that the structure of the FTC Act indicates that the rulemaking referenced in Section 6(g) is best understood as an aid to FTC processes and investigations, not a source of substantive policymaking. Although the National Petroleum Refiners decision rejected such a reading, that ruling came at a time of significant judicial deference to federal agency activism, and may be dated.

The U.S. Supreme Court’s April 2021 decision in AMG Capital Management v. FTC further bolsters the “statutory structure” argument that Section 6(g) does not authorize substantive rulemaking. In AMG, the U.S. Supreme Court unanimously held that Section 13(b) of the FTC Act, which empowers the FTC to seek a “permanent injunction” to restrain an FTC Act violation, does not authorize the FTC to seek monetary relief from wrongdoers. The court’s opinion rejected the FTC’s argument that the term “permanent injunction” had historically been understood to include monetary relief. The court explained that the injunctive language was “buried” in a lengthy provision that focuses on injunctive, not monetary relief (note that the term “rules” is similarly “buried” within 6(g) language dealing with unrelated issues). The court also pointed to the structure of the FTC Act, with detailed and specific monetary-relief provisions found in Sections 5(l) and 19, as “confirm[ing] the conclusion” that Section 13(b) does not grant monetary relief.

By analogy, a court could point to Congress’ detailed enumeration of substantive rulemaking provisions in Section 18 (a mere two years after National Petroleum Refiners) as cutting against the claim that Section 6(g) can also be invoked to support substantive rulemaking. Finally, the Supreme Court in AMG flatly rejected several relatively recent appeals court decisions that upheld Section 13(b) monetary-relief authority. It follows that the FTC cannot confidently rely on judicial precedent (stemming from one arguably dated court decision, National Petroleum Refiners) to uphold its competition rulemaking authority.

In sum, the FTC will have to overcome serious fundamental legal challenges to its section 6(g) competition rulemaking authority if it seeks to promulgate competition rules.

Even if the FTC’s 6(g) authority is upheld, it faces three other types of litigation-related risks.

First, applying the nondelegation doctrine, courts might hold that the broad term “unfair methods of competition” does not provide the FTC “an intelligible principle” to guide the FTC’s exercise of discretion in rulemaking. Such a judicial holding would mean the FTC could not issue competition rules.

Second, a reviewing court might strike down individual proposed rules as “arbitrary and capricious” if, say, the court found that the FTC rulemaking record did not sufficiently take into account potentially procompetitive manifestations of a condemned practice.

Third, even if a final competition rule passes initial legal muster, applying its terms to individual businesses charged with rule violations may prove difficult. Individual businesses may seek to structure their conduct to evade the particular strictures of a rule, and changes in commercial practices may render less common the specific acts targeted by a rule’s language.

Economic Policy Concerns Raised by Competition Rulemaking

In addition to legal risks, any cost-benefit appraisal of FTC competition rulemaking should consider the economic policy concerns raised by competition rulemaking. These fall into two broad categories.

First, competition rules would generate higher error costs than adjudications. Adjudications cabin error costs by allowing for case-specific analysis of likely competitive harms and procompetitive benefits. In contrast, competition rules inherently would be overbroad and would suffer from a very high rate of false positives. By characterizing certain practices as inherently anticompetitive without allowing for consideration of case-specific facts bearing on actual competitive effects, findings of rule violations inevitably would condemn some (perhaps many) efficient arrangements.

Second, competition rules would undermine the rule of law and thereby reduce economic welfare. FTC-only competition rules could lead to disparate legal treatment of a firm’s business practices, depending upon whether the FTC or the U.S. Justice Department was the investigating agency. Also, economic efficiency gains could be lost due to the chilling of aggressive efficiency-seeking business arrangements in those sectors subject to rules.

Conclusion

A combination of legal risks and economic policy harms strongly counsels against the FTC’s promulgation of substantive competition rules.

First, litigation issues would consume FTC resources and add to the costly delays inherent in developing competition rules in the first place. The compounding of separate serious litigation risks suggests a significant probability that costs would be incurred in support of rules that ultimately would fail to be applied.

Second, even assuming competition rules were to be upheld, their application would raise serious economic policy questions. The inherent inflexibility of rule-based norms is ill-suited to deal with dynamic evolving market conditions, compared with matter-specific antitrust litigation that flexibly applies the latest economic thinking to particular circumstances. New competition rules would also exacerbate costly policy inconsistencies stemming from the existence of dual federal antitrust enforcement agencies, the FTC and the Justice Department.

In conclusion, an evaluation of rule-related legal risks and economic policy concerns demonstrates that a reallocation of some FTC enforcement resources to the development of competition rules would not be cost-effective. Continued sole reliance on case-by-case antitrust litigation would generate greater economic welfare than a mixture of litigation and competition rules.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Jerry Ellig was a research professor at The George Washington University Regulatory Studies Center and served as chief economist at the Federal Communications Commission from 2017 to 2018. Tragically, he passed away Jan. 20, 2021. TOTM is honored to publish his contribution to this symposium.]

One significant aspect of Chairman Ajit Pai’s legacy is not a policy change, but an organizational one: establishment of the Federal Communications Commission’s (FCC’s) Office of Economics and Analytics (OEA) in 2018.

Prior to OEA, most of the FCC’s economists were assigned to the various policy bureaus, such as Wireless, Wireline Competition, Public Safety, Media, and International. Each of these bureaus had its own chief economist, but the rank-and-file economists reported to the managers who ran the bureaus – usually attorneys who also developed policy and wrote regulations. In the words of former FCC Chief Economist Thomas Hazlett, the FCC had “no location anywhere in the organizational structure devoted primarily to economic analysis.”

Establishment of OEA involved four significant changes. First, most of the FCC’s economists (along with data strategists and auction specialists) are now grouped together into an organization separate from the policy bureaus, and they are managed by other economists. Second, the FCC rules establishing the new office tasked OEA with reviewing every rulemaking, reviewing every other item with economic content that comes before the commission for a vote, and preparing a full benefit-cost analysis for any regulation with $100 million or more in annual economic impact. Third, a joint memo from the FCC’s Office of General Counsel and OEA specifies that economists are to be involved in the early stages of all rulemakings. Fourth, the memo also indicates that FCC regulatory analysis should follow the principles articulated in Executive Order 12866 and Office of Management and Budget Circular A-4 (while specifying that the FCC, as an independent agency, is not bound by the executive order).

While this structure for managing economists was new for the FCC, it is hardly uncommon in federal regulatory agencies. Numerous independent agencies that deal with economic regulation house their economists in a separate bureau or office, including the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Surface Transportation Board, the Office of Comptroller of the Currency, and the Federal Trade Commission. The SEC displays even more parallels with the FCC. A guidance memo adopted in 2012 by the SEC’s Office of General Counsel and Division of Risk, Strategy and Financial Innovation (the name of the division where economists and other analysts were located) specifies that economists are to be involved in the early stages of all rulemakings and articulates best analytical practices based on Executive Order 12866 and Circular A-4.

A separate economics office offers several advantages over the FCC’s prior approach. It gives the economists greater freedom to offer frank advice, enables them to conduct higher-quality analysis more consistent with the norms of their profession, and may ultimately make it easier to uphold FCC rules that are challenged in court.

Independence.  When I served as chief economist at the FCC in 2017-2018, I gathered from conversations that the most common practice in the past was for attorneys who wrote rules to turn to economists for supporting analysis after key decisions had already been made. This was not always the process, but it often occurred. The internal working group of senior FCC career staff who drafted the plan for OEA reached similar conclusions. After the establishment of OEA, an FCC economist I interviewed noted how his role had changed: “My job used to be to support the policy decisions made in the chairman’s office. Now I’m much freer to speak my own mind.”

Ensuring economists’ independence is not a problem unique to the FCC. In a 2017 study, Stuart Shapiro found that most of the high-level economists he interviewed who worked on regulatory impact analyses in federal agencies perceive that economists can be more objective if they are located outside the program office that develops the regulations they are analyzing. As one put it, “It’s very difficult to conduct a BCA [benefit-cost analysis] if our boss wrote what you are analyzing.” Interviews with senior economists and non-economists who work on regulation that I conducted for an Administrative Conference of the United States project in 2019 revealed similar conclusions across federal agencies. Economists located in organizations separate from the program office said that structure gave them greater independence and ability to develop better analytical methodologies. On the other hand, economists located in program offices said they experienced or knew of instances where they were pressured or told to produce an analysis with the results decision-makers wanted.

The FTC provides an informative case study. From 1955-1961, many of the FTC’s economists reported to the attorneys who conducted antitrust cases; in 1961, they were moved into a separate Bureau of Economics. Fritz Mueller, the FTC chief economist responsible for moving the antitrust economists back into the Bureau of Economics, noted that they were originally placed under the antitrust attorneys because the attorneys wanted more control over the economic analysis. A 2015 evaluation by the FTC’s Inspector General concluded that the Bureau of Economics’ existence as a separate organization improves its ability to offer “unbiased and sound economic analysis to support decision-making.”

Higher-quality analysis. An issue closely related to economists’ independence is the quality of the economic analysis. Executive branch regulatory economists interviewed by Richard Williams expressed concern that the economic analysis was more likely to be changed to support decisions when the economists are located in the program office that writes the regulations. More generally, a study that Catherine Konieczny and I conducted while we were at the FCC found that executive branch agencies are more likely to produce higher-quality regulatory impact analyses if the economists responsible for the analysis are in an independent economics office rather than the program office.

Upholding regulations in court. In Michigan v. EPA, the Supreme Court held that it is unreasonable for agencies to refuse to consider regulatory costs if the authorizing statute does not prohibit them from doing so. This precedent will likely increase judicial expectations that agencies will consider economic issues when they issue regulations. The FCC’s OGC-OEA memo cites examples of cases where the quality of the FCC’s economic analysis either helped or harmed the commission’s ability to survive legal challenge under the Administrative Procedure Act’s “arbitrary and capricious” standard. More systematically, a recent Regulatory Studies Center working paper finds that a higher-quality economic analysis accompanying a regulation reduces the likelihood that courts will strike down the regulation, provided that the agency explains how it used the analysis in decisions.

Two potential disadvantages of a separate economics office are that it may make the economists easier to ignore (what former FCC Chief Economist Tim Brennan calls the “Siberia effect”) and may lead the economists to produce research that is less relevant to the practical policy concerns of the policymaking bureaus. The FCC’s reorganization plan took these disadvantages seriously.

To ensure that the ultimate decision-makers—the commissioners—have access to the economists’ analysis and recommendations, the rules establishing the office give OEA explicit responsibility for reviewing all items with economic content that come before the commission. Each item is accompanied by a cover memo that indicates whether OEA believes there are any significant issues, and whether they have been dealt with adequately. To ensure that economists and policy bureaus work together from the outset of regulatory initiatives, the OGC-OEA memo instructs:

Bureaus and Offices should, to the extent practicable, coordinate with OEA in the early stages of all Commission-level and major Bureau-level proceedings that are likely to draw scrutiny due to their economic impact. Such coordination will help promote productive communication and avoid delays from the need to incorporate additional analysis or other content late in the drafting process. In the earliest stages of the rulemaking process, economists and related staff will work with programmatic staff to help frame key questions, which may include drafting options memos with the lead Bureau or Office.

While presiding over his final commission meeting on Jan. 13, Pai commented, “It’s second nature now for all of us to ask, ‘What do the economists think?’” The real test of this institutional innovation will be whether that practice continues under a new chair in the next administration.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Mark Jamison is the Gerald L. Gunter Memorial Professor and director of the Public Utility Research Center at the University of Florida’s Warrington College of Business. He’s also a visiting scholar at the American Enterprise Institute.]

Chairman Ajit Pai will be remembered as one of the most consequential Federal Communications Commission chairmen in history. His policy accomplishments are numerous, including the repeal of Title II regulation of the internet, rural broadband development, increased spectrum for 5G, decreasing waste in universal service funding, and better controlling robocalls.

Less will be said about the important work he has done rebuilding the FCC’s independence. It is rare for a new FCC chairman to devote resources to building the institution. Most focus on their policy agendas, because policies and regulations make up their legacies that the media notices, and because time and resources are limited. Chairman Pai did what few have even attempted to do: both build the organization and make significant regulatory reforms.

Independence is the ability of a regulatory institution to operate at arm’s length from the special interests of industry, politicians, and the like. The pressures to bias actions to benefit favored stakeholders can be tremendous; the FCC greatly influences who gets how much of the billions of dollars that are at stake in FCC decisions. But resisting those pressures is critical because investment and services suffer when a weak FCC is directed by political winds or industry pressures rather than law and hard analysis.

Chairman Pai inherited a politicized FCC. Research by Scott Wallsten showed that commission votes had been unusually partisan under the previous chairman (November 2013 through January 2017). From the beginning of Reed Hundt’s term as chairman until November 2013, only 4% of commission votes had divided along party lines. By contrast, 26% of votes divided along party lines from November 2013 until Chairman Pai took over. This division was also reflected in a sharp decline in unanimous votes under the previous administration. Only 47% of FCC votes on orders were unanimous, as opposed to an average of 60% from Hundt through the brief term of Mignon Clyburn.

Chairman Pai and his fellow commissioners worked to heal this divide. According to the FCC’s data, under Chairman Pai, over 80% of items on the monthly meeting agenda had bipartisan support and over 70% were adopted without dissent. This was hard, as Democrats in general were deeply against President Donald Trump and some members of Congress found a divided FCC convenient.

The political orientation of the FCC prior to Chairman Pai was made clear in the management of controversial issues. The agency’s work on net neutrality in 2015 pivoted strongly toward heavy regulation when President Barack Obama released his video supporting Title II regulation of the internet. And there is evidence that the net-neutrality decision was made in the White House, not at the FCC. Agency economists were cut out of internal discussions once the political decision had been made to side with the president, causing the FCC’s chief economist to quip that the decision was an economics-free zone.

On other issues, a vote on Lifeline was delayed several hours so that people on Capitol Hill could lobby a Democratic commissioner to align with fellow Democrats and against the Republican commissioners. And an initiative to regulate set-top boxes was buoyed, not by analyses by FCC staff, but by faulty data and analyses from Democratic senators.

Chairman Pai recognized the danger of politically driven decision-making and noted that it was enabled in part by the agency’s lack of a champion for economic analyses. To remedy this situation, Chairman Pai proposed forming an Office of Economics and Analytics (OEA). The commission adopted his proposal, but unfortunately it was with one of the rare party-line votes. Hopefully, Democratic commissioners have learned the value of the OEA.

The OEA has several responsibilities, but those most closely aligned with supporting the agency’s independence are that it: (a) provides economic analysis, including cost-benefit analysis, for commission actions; (b) develops policies and strategies on data resources and best practices for data use; and (c) conducts long-term research. The work of the OEA makes it hard for a politically driven chairman to pretend that his or her initiatives are somehow substantive.

Another institutional weakness at the FCC was a lack of transparency. Prior to Chairman Pai, the public was not allowed to view the text of commission decisions until after they were adopted. Even worse, sometimes the text that the commissioners saw when voting was not the text in the final decision. Wallsten described in his research a situation where the meaning of a vote actually changed from the time of the vote to the release of the text:

On February 9, 2011 the Federal Communications Commission (FCC) released a proposed rule that included, among many other provisions, capping the Universal Service Fund at $4.5 billion. The FCC voted to approve a final order on October 27, 2011. But when the order was finally released on November 18, 2011, the $4.5 billion ceiling had effectively become a floor, with the order requiring the agency to forever estimate demand at no less than $4.5 billion. Because payments from the fund had been decreasing steadily, this floor means that the FCC is now collecting hundreds of billions of dollars more in taxes than it is spending on the program. [footnotes omitted]

The lack of transparency led many to not trust the FCC and encouraged stakeholders with inside access to bypass the legitimate public process for lobbying the agency. This would have encouraged corruption had not Chairman Pai changed the system. He required that decision texts be released to the public at the same time they were released to commissioners. This allows the public to see what the commissioners are voting on. And it ensures that orders do not change after they are voted on.

The FCC demonstrated its independence under Chairman Pai. In the case of net neutrality, the three Republican commissioners withstood personal threats, mocking from congressional Democrats, and pressure from Big Tech to restore light-handed regulation. About a year later, Chairman Pai was strongly criticized by President Trump for rejecting the Sinclair-Tribune merger. And despite the president’s support of the merger, he apparently had sufficient respect for the FCC’s independence that the White House never contacted the FCC about the issue. In the case of Ligado Networks’ use of its radio spectrum license, the FCC stood up to intense pressure from the U.S. Department of Defense and from members of Congress who wanted to substitute their technical judgement for the FCC’s research on the impacts of Ligado’s proposal.

It is possible that a new FCC could undo this new independence. Commissioners could marginalize their economists, take their directions from partisans, and reintroduce the practice of hiding information from the public. But Chairman Pai foresaw this and carefully made his changes part of the institutional structure of the FCC, making any steps backward visible to all concerned.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Tim Brennan, (Professor, Economics & Public Policy, University of Maryland; former FCC; former FTC).]

Thinking about how to think about the coronavirus situation I keep coming back to three economic ideas that seem distinct but end up being related. First, a back of the envelope calculation suggests shutting down the economy for a while to reduce the spread of Covid-19. This leads to my second point, that political viability, if not simple fairness, dictates that the winners compensate the losers. The extent of both of these forces my main point, to understand why we can’t just “get the prices right” and let the market take care of it. Insisting that the market works in this situation could undercut the very strong arguments for why we should defer to markets in the vast majority of circumstances.

Is taking action worth it?

The first question is whether shutting down the economy to reduce the spread of Covid-19 is a good bet. Being an economist, I turn to benefit-cost analysis (BCA). All I can offer here is a back-of-the-envelope calculation, which may be an insult to envelopes. (This paper has a more serious calculation with qualitatively similar findings.) With all caveats recognized, the willingness to pay of an average person in the US to social distancing and closure policies, WTP, is

        WTP = X% times Y% times VSL,

where X% is the fraction of the population that might be seriously affected, Y% is the reduction in the likelihood of death for this population from these policies, and VSL is the “value of statistical life” used in BCA calculations, in the ballpark of $9.5M.

For X%, take the percentage of the population over 65 (a demographic including me). This is around 16%. I’m not an epidemiologist, so for Y%, the reduced likelihood of death (either from reduced transmission or reduced hospital overload), I can only speculate. Say it’s 1%, which naively seems pretty small. Even with that, the average willingness to pay would be

        WTP = 16% times 1% times $9.5M = $15,200.

Multiply that by a US population of roughly 330M gives a total national WTP of just over $5 trillion, or about 23% of GDP. Using conventional measures, this looks like a good trade in an aggregate benefit-cost sense, even leaving out willingness to pay to reduce the likelihood of feeling sick and the benefits to those younger than 65. Of course, among the caveats is not just whether to impose distancing and closures, but how long to have them (number of weeks), how severe they should be (gathering size limits, coverage of commercial establishments), and where they should be imposed (closing schools, colleges).  

Actual, not just hypothetical, compensation

The justification for using BCA is that the winners could compensate the losers. In the coronavirus setting, the equity considerations are profound. Especially when I remember that GDP is not a measure of consumer surplus, I ask myself how many months of the disruption (and not just lost wages) from unemployment should low-income waiters, cab drivers, hotel cleaners, and the like bear to reduce my over-65 likelihood of dying. 

Consequently, an important component of this policy to respect equity and quite possibly obtaining public acceptance is that the losers be compensated. In that respect, the justification for packages such as the proposal working (as I write) through Congress is not stimulus—after all, it’s  harder to spend money these days—as much as compensating those who’ve lost jobs as a result of this policy. Stimulus can come when the economy is ready to be jump-started.

Markets don’t always work, perhaps like now 

This brings me to a final point—why is this a public policy matter? My answer to almost any policy question is the glib “just get the prices right and the market will take care of it.” That doesn’t seem all that popular now. Part of that is the politics of fairness: Should the wealthy get the ventilators? Should hoarding of hand sanitizer be rewarded? But much of it may be a useful reminder that markets do not work seamlessly and instantaneously, and may not be the best allocation mechanism in critical times.

That markets are not always best should be a familiar theme to TOTM readers. The cost of using markets is the centerpiece for Ronald Coase’s 1937 Nature of the Firm and 1960 Problem of Social Cost justification for allocation through the courts. Many of us, including me on TOTM, have invoked these arguments to argue against public interventions in the structure of firms, particularly antitrust actions regarding vertical integration. Another common theme is that the common law tends toward efficiency because of the market-like evolutionary processes in property, tort, and contract case law.

This perspective is a useful reminder that the benefits of markets should always be “compared to what?” In one familiar case, the benefits of markets are clear when compared to the snail’s pace, limited information, and political manipulability of administrative price setting. But when one is talking about national emergencies and the inelastic demands, distributional consequences, and the lack of time for the price mechanism to work its wonders, one can understand and justify the use of the plethora of mandates currently imposed or contemplated. 

The common law also appears not to be a good alternative. One can imagine the litigation nightmare if everyone who got the virus attempted to identify and sue some defendant for damages. A similar nightmare awaits if courts were tasked with determning how the risk of a pandemic would have been allocated were contracts ideal.

Much of this may be belaboring the obvious. My concern is that if those of us who appreciate the virtues of markets exaggerate their applicability, those skeptical of markets may use this episode to say that markets inherently fail and more of the economy should be publicly administered. Better to rely on facts rather than ideology, and to regard the current situation as the awful but justifiable exception that proves the general rule.

Last June, in Michigan v. EPA, the Supreme Court commendably recognized cost-benefit analysis as critical to any reasoned evaluation of regulatory proposals by federal agencies.  (For more on the merits and limitations of this holding, see my June 29 blog.)  The White House (Office of Management and Budget) office that evaluates proposed federal regulations, the Office of Information and Regulatory Affairs (OIRA), does not, however, currently assess independent agencies’ regulations (the Heritage Foundation has argued that independent agencies should be subjected to Executive Branch regulatory review).  This is most unfortunate, because the economic impact of independent agencies’ regulations (such as those promulgated by the Federal Communications Commission, the Consumer Financial Protection Bureau, among many other “independent” entities) is enormous.

Recent research lends strong support to the case for OIRA review of independent agency regulations.  As former OIRA Administrator Susan Dudley (currently Director of the George Washington University Regulatory Studies Center) explained in recent testimony before the Senate Homeland Security and Government Affairs Committee, independent agencies have done an extremely poor job in evaluating the economic effects of their regulatory initiatives:

“The Administrative Conference of the United States recommended in 2013 that independent regulatory agencies adopt more transparent and rigorous regulatory analyses practices for major rules.  OIRA observed in its most recent regulatory report to Congress that “the independent agencies still continue to struggle in providing monetized estimates of benefits and costs of regulation.”  According to available government data, more than 40 percent of the rules developed by independent agencies over the last 10 years provided no information on either the costs or the benefits expected from their implementation.”

This poor record provides strong justification for legislative proposals (such as, the Independent Agency Regulatory Analysis Act of 2015 (S. 1607), which explicitly authorizes presidents to require independent regulatory agencies to comply with regulatory analysis requirements.  They also lend further support to congressional proposals (such as the REINS Act, which passed the House in August 2015) that would require congressional approval of new “major” regulations promulgated by federal agencies, including independent agencies.  For a more extensive discussion of the costs of overregulation and needed regulatory reforms, see the Heritage Foundation’s memorandum “Red Tape Rising: Six Years of Escalating Regulation Under Obama.

There is also a substantial constitutional argument that pursuant to the U.S. Constitution’s Executive Vesting Clause (Article II, Section 1, Clause 1) and Take Care Clause (Article II, Section 3), the President could direct that OIRA review independent agencies’ regulatory proposals, but an assessment of that interesting proposition is beyond the scope of this commentary.

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.

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.

As I mentioned in my previous post, there is a strong effort to regulate the use of information on the web in the name of “privacy.” The basic tradeoff that drives the web is that firms use information for advertising and other purposes,and in return consumers get lots of things free.  Google alone offers about 40 free services, including the original  search engine, gmail, maps, and the increasingly popular android operating system for mobile devices. Facebook is another set of free services. There are hundreds of others, all ultimately funded by advertising and the use of information.  Any effort to regulate information is going to change the terms at which these services are offered.

To justify regulation, two conditions must be met.  First there must be some market failure.  Second, there must be at least an expectation that the benefits of the proposed regulation will outweigh the costs.  In a market economy, we generally put the burden of proof on those proposing regulation, since the default assumption is that markets provide net benefits.  Proponents of regulating the use of information on the internet have met neither of these burdens.

One main justification for regulation is that people do not want to be tracked. I discussed this issue in my previous post.  Let me just add that, while people express a desire not to be tracked, in practice they seem quite willing to trade information for other services.  The other issue is identity theft — the possibility that information will be misused for illegitimate purposes.  Tom Lenard and I have written extensively about this issue. The bottom line, however, is that consumers are not liable for much if any of the costs of identity theft, and since firms must bear these costs there is no obvious market failure.

With respect to the second issue, there has been virtually no effort to undertake any cost benefit analysis of the proposed regulations.  However, if there were such an analysis, it is unlikely that regulations would be cost justified since the benefits of the free stuff are huge and the costs are small at best.  While it is conceivable that some tweaking would pass a cost-benefit test, it is very unlikely that any regulation which could get through the political process and then be administered by an agency such as the FTC would in fact pass this test.  Moreover, the proposed regulations, such as a “do not track” list or shifting from opt out to opt in are well beyond “tweaking” and might fundamentally change the terms of the tradeoff.

The bottom line is this:  Privacy advocates act as if privacy is free.  But increased privacy means reduced use of information, and no one has shown that altering the terms of this tradeoff would be beneficial to consumers.