Archives For regulatory humility

In a recent NY Times opinion piece, Tim Wu, like Elizabeth Holmes, lionizes Steve Jobs. Like Jobs with the iPod and iPhone, and Holmes with the Theranos Edison machine, Wu tells us we must simplify the public’s experience of complex policy into a simple box with an intuitive interface. In this spirit he argues that “what the public wants from government is help with complexity,” such that “[t]his generation of progressives … must accept that simplicity and popularity are not a dumbing-down of policy.”

This argument provides remarkable insight into the complexity problems of progressive thought. Three of these are taken up below: the mismatch of comparing the work of the government to the success of Jobs; the mismatch between Wu’s telling of and Jobs’s actual success; and the latent hypocrisy in Wu’s “simplicity for me, complexity for thee” argument.

Contra Wu’s argument, we need politicians that embrace and lay bare the complexity of policy issues. Too much of our political moment is dominated by demagogues on every side of policy debates offering simple solutions to simplified accounts of complex policy issues. We need public intellectuals, and hopefully politicians as well, to make the case for complexity. Our problems are complex and solutions to them hard (and sometimes unavailing). Without leaders willing to steer into complexity, we can never have a polity able to address complexity.

I. “Good enough for government work” isn’t good enough for Jobs

As an initial matter, there is a great deal of wisdom in Wu’s recognition that the public doesn’t want complexity. As I said at the annual Silicon Flatirons conference in February, consumers don’t want a VCR with lots of dials and knobs that let them control lots of specific features—they just want the damn thing to work. And as that example is meant to highlight, once it does work, most consumers are happy to leave well enough alone (as demonstrated by millions of clocks that would continue to blink 12:00 if VCRs weren’t so 1990s).

Where Wu goes wrong, though, is that he fails to recognize that despite this desire for simplicity, for two decades VCR manufacturers designed and sold VCRs with clocks that were never set—a persistent blinking to constantly remind consumers of their own inadequacies. Had the manufacturers had any insight into the consumer desire for simplicity, all those clocks would have been used for something—anything—other than a reminder that consumers didn’t know how to set them. (Though, to their credit, these devices were designed to operate as most consumers desired without imposing any need to set the clock upon them—a model of simplicity in basic operation that allows consumers to opt-in to a more complex experience.)

If the government were populated by visionaries like Jobs, Wu’s prescription would be wise. But Jobs was a once-in-a-generation thinker. No one in a generation of VCR designers had the insight to design a VCR without a clock (or at least a clock that didn’t blink in a constant reminder of the owner’s inability to set it). And similarly few among the ranks of policy designers are likely to have his abilities, either. On the other hand, the public loves the promise of easy solutions to complex problems. Charlatans and demagogues who would cast themselves in his image, like Holmes did with Theranos, can find government posts in abundance.

Of course, in his paean to offering the public less choice, Wu, himself an oftentime designer of government policy, compares the art of policy design to the work of Jobs—not of Holmes. But where he promises a government run in the manner of Apple, he would more likely give us one more in the mold of Theranos.

There is a more pernicious side to Wu’s argument. He speaks of respect for the public, arguing that “Real respect for the public involves appreciating what the public actually wants and needs,” and that “They would prefer that the government solve problems for them.” Another aspect of respect for the public is recognizing their fundamental competence—that progressive policy experts are not the only ones who are able to understand and address complexity. Most people never set their VCRs’ clocks because they felt no need to, not because they were unable to figure out how to do so. Most people choose not to master the intricacies of public policy. But this is not because the progressive expert class is uniquely able to do so. It is—as Wu notes, that most people do not have the unlimited time or attention that would be needed to do so—time and attention that is afforded to him by his social class.

Wu’s assertion that the public “would prefer that the government solve problems for them” carries echoes of Louis Brandeis, who famously said of consumers that they were “servile, self-indulgent, indolent, ignorant.” Such a view naturally gives rise to Wu’s assumption that the public wants the government to solve problems for them. It assumes that they are unable to solve those problems on their own.

But what Brandeis and progressives cast in his mold attribute to servile indolence is more often a reflection that hoi polloi simply do not have the same concerns as Wu’s progressive expert class. If they had the time to care about the issues Wu would devote his government to, they could likely address them on their own. The fact that they don’t is less a reflection of the public’s ability than of its priorities.

II. Jobs had no monopoly on simplicity

There is another aspect to Wu’s appeal to simplicity in design that is, again, captured well in his invocation of Steve Jobs. Jobs was exceptionally successful with his minimalist, simple designs. He made a fortune for himself and more for Apple. His ideas made Apple one of the most successful companies, with one of the largest user bases, in the history of the world.

Yet many people hate Apple products. Some of these users prefer to have more complex, customizable devices—perhaps because they have particularized needs or perhaps simply because they enjoy having that additional control over how their devices operate and the feeling of ownership that that brings. Some users might dislike Apple products because the interface that is “intuitive” to millions of others is not at all intuitive to them. As trivial as it sounds, most PC users are accustomed to two-button mice—transitioning to Apple’s one-button mouse is exceptionally  discomfitting for many of these users. (In fairness, the one-button mouse design used by Apple products is not attributable to Steve Jobs.) And other users still might prefer devices that are simple in other ways, so are drawn to other products that better cater to their precise needs.

Apple has, perhaps, experienced periods of market dominance with specific products. But this has never been durable—Apple has always faced competition. And this has ensured that those parts of the public that were not well-served by Jobs’s design choices were not bound to use them—they always had alternatives.

Indeed, that is the redeeming aspect of the Theranos story: the market did what it was supposed to. While too many consumers may have been harmed by Holmes’ charlatan business practices, the reality is that once she was forced to bring the company’s product to market it was quickly outed as a failure.

This is how the market works. Companies that design good products, like Apple, are rewarded; other companies then step in to compete by offering yet better products or by addressing other segments of the market. Some of those companies succeed; most, like Theranos, fail.

This dynamic simply does not exist with government. Government is a policy monopolist. A simplified, streamlined, policy that effectively serves half the population does not effectively serve the other half. There is no alternative government that will offer competing policy designs. And to the extent that a given policy serves part of the public better than others, it creates winners and losers.

Of course, the right response to the inadequacy of Wu’s call for more, less complex policy is not that we need more, more complex policy. Rather, it’s that we need less policy—at least policy being dictated and implemented by the government. This is one of the stalwart arguments we free market and classical liberal types offer in favor of market economies: they are able to offer a wider range of goods and services that better cater to a wider range of needs of a wider range of people than the government. The reason policy grows complex is because it is trying to address complex problems; and when it fails to address those problems on a first cut, the solution is more often than not to build “patch” fixes on top of the failed policies. The result is an ever-growing book of rules bound together with voluminous “kludges” that is forever out-of-step with the changing realities of a complex, dynamic world.

The solution to so much complexity is not to sweep it under the carpet in the interest of offering simpler, but only partial, solutions catered to the needs of an anointed subset of the public. The solution is to find better ways to address those complex problems—and often times it’s simply the case that the market is better suited to such solutions.

III. A complexity: What does Wu think of consumer protection?

There is a final, and perhaps most troubling, aspect to Wu’s argument. He argues that respect for the public does not require “offering complete transparency and a multiplicity of choices.” Yet that is what he demands of business. As an academic and government official, Wu has been a loud and consistent consumer protection advocate, arguing that consumers are harmed when firms fail to provide transparency and choice—and that the government must use its coercive power to ensure that they do so.

Wu derives his insight that simpler-design-can-be-better-design from the success of Jobs—and recognizes more broadly that the consumer experience of products of the technological revolution (perhaps one could even call it the tech industry) is much better today because of this simplicity than it was in earlier times. Consumers, in other words, can be better off with firms that offer less transparency and choice. This, of course, is intuitive when one recognizes (as Wu has) that time and attention are among the scarcest of resources.

Steve Jobs and Elizabeth Holmes both understood that the avoidance of complexity and minimizing of choices are hallmarks of good design. Jobs built an empire around this; Holmes cost investors hundreds of millions of dollars in her failed pursuit. But while Holmes failed where Jobs succeeded, her failure was not tragic: Theranos was never the only medical testing laboratory in the market and, indeed, was never more than a bit player in that market. For every Apple that thrives, the marketplace erases a hundred Theranoses. But we do not have a market of governments. Wu’s call for policy to be more like Apple is a call for most government policy to fail like Theranos. Perhaps where the challenge is to do more complex policy simply, the simpler solution is to do less, but simpler, policy well.

Conclusion

We need less dumbing down of complex policy in the interest of simplicity; and we need leaders who are able to make citizens comfortable with and understanding of complexity. Wu is right that good policy need not be complex. But the lesson from that is not that complex policy should be made simple. Rather, the lesson is that policy that cannot be made simple may not be good policy after all.

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.