The Daily Caller

The Daily Caller
President Barack Obama and presidential nominee to serve as the first director of the Consumer Financial Protection Bureau (CFPB), former Ohio Attorney General Richard Cordray, laugh as the president make a joke that all of Cordray?s answers at his confirmation hearings will be in the form of a question being a five-time Jeopardy champion and a semi-finalist in the Tournament of Champions, Monday, July 18, 2011, in the Rose Garden of the White House in Washington.  (AP Photo/Manuel Balce Ceneta) President Barack Obama and presidential nominee to serve as the first director of the Consumer Financial Protection Bureau (CFPB), former Ohio Attorney General Richard Cordray, laugh as the president make a joke that all of Cordray?s answers at his confirmation hearings will be in the form of a question being a five-time Jeopardy champion and a semi-finalist in the Tournament of Champions, Monday, July 18, 2011, in the Rose Garden of the White House in Washington. (AP Photo/Manuel Balce Ceneta)  

Lessons from the 1980s: The FTC and the role for economics in policymaking

Photo of James C. Cooper
James C. Cooper
Director of Research & Policy, Law & Economics Center

A broad statutory mandate without an objective guidepost is a recipe for regulatory overreach. This cocktail nearly killed the Federal Trade Commission. Economic analysis was the thing that saved it. Although the FTC has evolved into a competition and consumer protection agency respected around the world, it would be wise to remember its past as it moves forward with an aggressive privacy and data security agenda. The FTC’s past experience, moreover, should resonate with those who are charged with getting the newly-formed Consumer Financial Protection Bureau off the ground.

The FTC was born nearly 100 years ago when law-makers felt that the Sherman Act’s was inadequate to the task of addressing undesirable business conduct.  Congress endowed the FTC with an undefined mandate to police “unfair acts and practices” and “unfair methods of competition.” Absent external limitations, determining exactly which conduct fits the definition of  “unfair” becomes a largely subjective exercise; unfairness is in the eye of the beholder.

That’s exactly what happened in the 1970s when, armed with a new rule making power and a Supreme Court blessing of an expansive definition of “unfair,” the FTC embarked on a frenzy of industry rulemaking, and it attempted to remake the automobile and breakfast cereal industries. Perhaps the most prominent example of this regulatory overreach was an attempt to ban advertising to children, which prompted the Washington Post to dub the FTC the “National Nanny.” These activist policies resulted in severe public criticism and Congressional rebuke, including legislated limitations on its power to regulate and serious calls to eliminate the FTC entirely.

In 1981, Chairman James C. Miller – the only PhD economist to serve as Chairman – revolutionized the way the FTC exercised its broad regulatory mandate, bringing economic science to the forefront of policy-making considerations. In the 1980s, the FTC issued a series of statements on unfairness, deception, and advertising substantiation that anchored its consumer protection authority to the concrete notion of consumer harm, as informed by sound economic theory and empirical evidence.

As the new book, The Regulatory Revolution as the FTC: A Thirty-Year Perspective on Competition and Consumer Protection illustrates, this new approach resuscitated the FTC and allowed it to grow into a world-class competition and consumer protection agency.

Remembering the lessons of the past is particularly relevant today.  The FTC has used its broad statutory mandate to become the de facto national privacy and data security regulator. Furthermore, last year’s Google investigation and the FTC’s recent foray into the standard-essential patents fray suggest a renewed enthusiasm to expand its relatively undefined antitrust authority. In both areas, consumers would be well-served if the FTC employs economic analysis to focus only on conduct that threatens real harm.

The history of the FTC’s fall and resurgence also is relevant to a new agency with a similarly nebulous statute – the Consumer Financial Protection Bureau, which is charged with preventing “unfair, deceptive, and abusive” acts. The CFPB would be wise to follow the FTC’s lead by allowing economics to guide its enforcement and rule-making.

It already has a head start, as Congress codified some of the limitations on the FTC’s unfairness power – a practice must be likely to cause substantial consumer harm that is not outweighed by countervailing benefits – in the CFPB’s statute. In addition, the CFPB would be doing consumers a favor by explicitly adopting the FTC’s unfairness statement that further elucidates the type of conduct likely to be considered unfair, and by issuing its own statement clarifying the meaning of “abusive.” Using its team of economists to provide an independent voice on policy-making will further provide discipline as the limits to the CFPB’s undefined mandate are explored.

Vague authority poses a danger to consumers even in the hands of the most well-meaning public servants. The experience of the FTC has shown that economics – both sound theory and empirics – is the perfect anecdote to this hazard.