Jan 05, 2022
On December 16, The Capitol Forum hosted a conference call with Luke Herrine to discuss his article “The Folklore of Unfairness,” published recently in the New York University Law Review, which argues that conventional wisdom—which holds that the FTC in the 1970s pursued an expansive notion of its unfairness authority but failed spectacularly—“gets the law and the history wrong.” The full transcript, which has been modified slightly for accuracy, can be found below.
MR. TEDDY DOWNEY: Thank you. Good morning, everyone. Thanks for joining us today. I’m Teddy Downey, Executive Editor here at The Capitol Forum. And today, we’re speaking with Luke Herrine, author of “The Folklore of Unfairness”, published recently in the New York University Law Review. Luke also presented his findings from this paper to commissioners and staff at the FTC. So it’s hard to overstate how influential this paper has been already, at least in my estimation.
A quick note before we get underway. The first 20 minutes or so, we’ll interview Luke. And then we’ll move into a Q&A format where we will entertain questions from the audience. If you have questions, please email them to email@example.com. That’s firstname.lastname@example.org. And a reminder, capitol is spelled with an “o”. So thank you so much for joining us today, Luke.
MR. LUKE HERRINE: Thanks for having me, Teddy.
MR. TEDDY DOWNEY: And there’s a to your knowledge to cover here in the paper, but I’d love to start with why you chose to dig into this topic in the first place.
MR. LUKE HERRINE: Yeah, thanks. So I first became curious about this topic when I had done some work on a couple of consumer protection cases and noticed that a lot of the docs on the Unfairness Doctrine talked about this sort of mysterious time in the late 1970s or right in 1980, when suddenly the Unfairness Authority became its modern form because of some bad things, something called “kidvids” that the FTC did. And it occurred to me that was about the same time where there is a major political shift in the United States towards what a lot of people call liberalism. And I wanted to think about whether there was any connection there and also try to make sense of whether that connection, whether that shift, had anything to do with the fact that Unfairness Authority was basically, in many respects, dead letter, often treated as something marginal. So I wanted to sort of recover that history and think more about what happened there. And as we’ll talk about, I think there is a real deep connection between those two phenomena.
MR. TEDDY DOWNEY: Okay, perfect. And maybe you can start off by telling us what is the myth? Walk us through “KidVid” and the myth around unfairness that developed?
MR. LUKE HERRINE: Sure. So, people tell the story different ways. But there’s a common way of telling the story, and especially a much-cited way of telling the story by a former Director of Consumer Protection at the Federal Trade Commission named Howard Beales, that is much relied on, that basically tells the story of the Federal Trade Commission, as per its early history, mostly relying on deception authorities and unfairness, then starting to become grounds for FTC rulemaking in the 1960s.
And what he says happens there is basically the FTC started to become bolder. And then over time, sort of became more sure of itself and its own moral authority and basically became too big for its britches and started to do things that were both ill-conceived and unpopular. And the sort of apex of this ill-conceived, unpopular set of actions is something called “kidvid”, which is the short sort of Beltway shorthand for the efforts of the FTC to try to regulate advertising to children. And the FTC didn’t sort of specifically determine what they were going to do, but one thing that was considered was actually banning advertising of specifically sugary cereals, not all advertising to children. And this is treated as just sort of the height of FTC paternalism. a very common thing that these narratives point to is the fact that The Washington Post—even the liberal Washington Post, right—called the FTC the national nanny for taking these actions as just an indication of how it wanted to get into people’s homes and make decisions for people and interfere with the relationship between parents and children. So that’s the example of like how the FTC got way too big for its britches. And part of the reason for that is this unfairness authority that’s largely undefined. And then in 1964 had been defined in terms of morality under what’s called the Cigarette Rule.
And so the next stage of the story is basically there’s a backlash. The FTC is given a series a slaps on the wrist, and indeed threatened to be shut down by Congress. Without much analysis of what the forces behind why Congress would do that are sort of supposed to be that Congress has the will of the people. And in response, the FTC narrowed its authority in what’s called the Unfairness Policy Statement. And in narrowing its authority, it sort of figured out that what it had to do to discipline the Unfairness Authority was to interpret it through the lens of basically neoclassical welfare economics or what people like Beales or James Miller, who was the FTC Chair, would just call economics. And specifically thinking about promoting consumer sovereignty. And that was supposed to be the sort of moment where the FTC developed its modern standard, it’s rigorous standard, the one that actually understands how markets work and what the FTC’s role ought to be.
But then as this narrative goes, basically the FTC said, sorry, the Unfairness Standard is dormant for a while. And it starts to be picked back up in a more gingerly way in the late 90s into the modern era. And especially with the rise of tech and figuring out how to do data governance and the like, but with a much more sort of disciplined set of standards. I guess that’s the sort of mainstream story of an FTC gone wrong because of a broad, morally defined Unfairness Standard. And then it goes right when it decides that it can’t use undefined morality, but has to think about consumer sovereignty and reinforcing consumer choice in free markets.
MR. TEDDY DOWNEY: And I want to stay on a couple of these names. You mentioned Howard Beales, Jim Miller. In your paper, you talk about sort of the organized business community that sort of thought up the unfairness authority. Can you talk a little bit more about these people and the businesses and how they kind of got away with this or how they were able to be so effective in sort of neutering this power?
MR. LUKE HERRINE: Yeah, sure. Well, I guess part of the question—and correct me if I’m wrong—is to tell my version of the story, why I think the story’s wrong.
MR. TEDDY DOWNEY: Yeah. Well, let’s just go into why you think the story’s wrong. And then we can kind of come back to these people and can kind of sprinkle them in.
MR. LUKE HERRINE: Okay. Sure, sure. So yeah, the story touches on things that happen, and it describes accurately many things that happened. But it doesn’t contextualize them and interpret it in the sort of political context in which they took place. And it interprets the sort of moral meaning behind them in a sort of forgone way.
So let me say what I mean. In fact, first of all, the FTC didn’t just start using this unfairness authority in the 1960s and 70s. It was mostly dormant in the 1950s, but that was after a period of using it during sort of an immediate media new deal era. And the reason it didn’t do that in the 1950s as much is because basically the FTC was basically progressives were drummed out of the FTC and it was run by not just business interests, but people who were actively corrupt, including a director who kept up a defense side litigation practice while he was the Chair.
But the rise of unfairness, it is true that the FTC increased its use of unfairness authority and increased its regulatory action, which is not the same thing, right? Many regulatory actions, most regulatory actions in the consumer space, were taken out of the deceptiveness authority during the 1960s and 70s. And the reason it did so was not the FTC became convinced of its own moral authority, though surely many directors of agencies are convinced that their own moral authority, regardless of their place in the political spectrum, but that it was actively pushed to do so by what most people would think of as the Nader rights consumer movement. And a sort of decades long set of campaigns which not only put pressure on the FTC, but change the way Congress thought of consumer issues, even the Nixon administration. I mean, it was the Nixon administration who transformed the FTC in 1971 to kick out a lot of more crony-ist elements, and appointed Miles Fitzpatrick, who was a Republican, who engaged a lot of the rulemaking that are now treated as the FTC going way beyond the pale.
And then when the battle over the scope of whether the FTC had gone too far started over a “kidvid”. The first thing to understand about that is that “kidvid” was very popular and was not just like sort of a whim of the Federal Trade Commission, but had itself been part of an ongoing set of congressional and presidential studies about children’s health. This was originally started with a
series of studies on hunger. But then public health officials realized that actually malnutrition, undernutrition, was a real problem for poor communities. But also, malnutrition, including too much sugar, was a problem in many other households and cavities were just being really discovered. And the FTC was sort of taken up this project, again through the consumer movement putting this issue on the table, but again after a series of studies. And what polling data I’ve seen say the rulemaking was popular. And indeed, like most of the comments that the FTC got, were from people who are very supportive. Rick Perlstein, who has recently written about this, the historian. Actually, most of the conservative movement wrote about this era and talks about newspaper reports reporting shelves and shelves of positive comments.
The real backlash against the rulemaking comes because basically there was a newly organized business lobby over the course of the 1970s, partially in response to the organized consumer movement. There’s this infamous memo by Lewis Powell, who eventually became a Supreme Court justice, about how American business leaders needed to become more organized in their political strategies, which there’s some disagreement about whether that caused or was a part of an effect of this upsurge. But I think there’s good reason to think it caused a lot of reorganization.
And over the course of the 1970s – you know, it’s now familiar for us to think that business just sort of like controls Washington. But at the time, businesses were mostly in regulatory sessions fighting against each other for regulatory favors rather than thinking about themselves in an organized fashion. And especially big businesses and small businesses were not organized together. And over the course of the 1970s, that very much changed. The Business Roundtable was created. Many modern think tanks, the American Enterprise Institute, among others, Heritage Foundation, were created. And this is building on previous efforts of more radical business lobbies to create the sort of intellectual foundations for what I would call neoliberalism and the Chicago School especially. And these things really kicked into high gear and funding over the course of the 1970s and then were explicitly targeted toward consumer protection regulations. Labor was also targeted as well, but in part because consumer protection was really on the agenda and was potentially eating into the profits of businesses in an era when profits were within some crisis because of the stagflation conditions and the like.
So anyway, the Consumer Protection Agency, which the Nader rights movement had been pushing for a long time, for instance, and everyone thought it was going to pass easily, was shut down through some organized and very rapid efforts of the business lobby. That was in 1978, I believe. And then basically, the FTC was next on the target list. And the FTC was totally unprepared for this. I mean, I think Michael Pertschuk, who was head of the FTC, had some sense that there would be some opposition, but not a sense of real shutting down that agency. And “kidvid” was their basic target. And one of the reasons for that is that also the advertising agencies really thought their business model was going to be threatened and advertising agencies tend to have a lot of influence in the public discourse because they pay a lot of money for the newspapers and question.
And so, for instance, the National Nanny Editorial comes from The Washington Post that actually had become more conservative over this time because the publisher thought that it had become too anti-business. And actually, it had developed a business model that was much more focused on advertising revenue. And also, newspapers are often very progressive for a number of things. And then when it comes to regulating advertising, that’s their bottom line.
So anyway, it’s worth thinking about that as a set of angles here as well. All of which is to say, there was a huge business backlash. And the unfairness policy statement was created not as a sort of acceptance of a new humility, but as a way of defending the FTC to do what it was doing. And then later, basically what I would call the neoliberals, who are supported by the business lobby, took over the FTC when Reagan took office. And re-interpreted what that unfairness policy statement was, said that basically now we’re just thinking about everything in terms of sovereignty and neoclassical welfare economics.
This was not the FTC sort of like realizing the error of its ways. I mean, it was rather the very people who were criticizing the FTC as an agency gone insane and not actually thinking about markets properly, just taking over the agency and imposing their vision on the agency. And that’s the sort of vision that’s been passed down. And it’s worth noting that Howard Beales himself was at the agency at the time. He was actually a staffer on “kidvid”. In fact, I have like a study that he wrote as part of the “kidvid” rulemaking process that I got from a FOIA request, which is not opposed. I don’t know what his feelings on “kidvid” at the time were. It was just an empirical study. Of course, he was trained at the University of Chicago and then later on became Director of Consumer Protection, explicitly sort of as a follower of James Miller, who took over the FTC in the 1980s.
And so we can talk about these individual characters, but it’s worth noting that the story that I’m telling is the story that the people who, at the time, thought the FTC was a legitimate tell about what happened. It’s sort of like the winner’s history. And so thinking about this, what actually happened at that time as a struggle over narrative in part, is important to think about to sort of re-tell the narrative of what happened and what the FTC can and can’t do now.
MR. TEDDY DOWNEY: Yeah, I do want to stay on these people and this winner’s history. I mean, who is telling this I interviewed Jim Miller recently because of our story on these zombie votes precedent, which he created a precedent for. He was very vocal in telling stories about how effective he was in changing the FTC. I’d love to hear your take on Jim Miller, Howard Beales, anyone else. You mentioned someone who kept a defense practice while they were at the FTC. Any other names of people who were really important intellectually to this transformation.
MR. LUKE HERRINE: Sure, yeah. So I guess maybe three people worth talking about are Jim Miller, Tim Muris and Howard Beales. Jim Miller became the Chair of the Commission when Reagan took office and for the first few years, and then he moved onto OIRA. And as a real
proponent, as an early proponent of cost-benefit analysis, which folks know the regulatory history will know that the Reagan administration is really the one that, under Jim Miller, is the one who sort of imposed cost-benefit analysis on presidential agencies with the original executive order in that effect. And Jim Miller, was not educated at Chicago, but clearly a Chicago School economist and thought of himself as part of that movement which understood itself—and some portions of it still understand itself today—as fighting for free markets under the idea that basically you should let capitalists decide what to do and consumers will discipline them through the competitive process. And we can talk about what that actually entails intellectually, but that’s the basic sort of thrust. And that’s why consumer sovereignty has this sort of ideological dimension is that if consumers know what’s best for themselves, then they can feel empowered.
So anyway, Jim Miller believed very strongly in that and believed very strongly that the FTC was running afoul of that. And, in fact, he wrote a book while he was chair. Actually, there’s a collection of his writings that sort of are very explicit about this, which I think are actually intellectually quite confused. But in any case, so he was on the Reagan transition team. He wrote a transition memo that talked about taking away, reducing the unfairness authority, taking away some of its powers. And then Reagan basically gave him his pick of agencies, and he chose the FTC because he thought it was the most important to get under control. And in short, that’s in part because a lot of people in the business lobby thought it was important to get it under control. I don’t know exactly what all his connections were there.
But in any case, Tim Muris became Director or Chair of the Commission under the second Bush administration. But I believe—I should have gone back and checked this stuff—but I believe worked under Miller. And during this sort of fight over the FTC in the late 1970s, co-edited a book that brought together a lot of the leading lights of that early sort of more radical stage of law and economics to reflect on the Federal Trade Commission’s authority. And in that book, in the conclusion of that book, you know, a lot of actually the studies are more—they’re not sort of that radical. They sort of talk about different tradeoffs and the radicalism. Sort of you have to read between the lines, but Muris is very explicit that the FTC basically should—Congress should say—this is before Congress did actually defund the FTC. Like basically, you’re not getting any money unless you start using welfare economics to understand – to conceptualize your authority. So anyway, at that time, he was at the—I think it was the University of Florida, the Law and Economics Institute run by Henry Manne, which eventually they moved, which was the sort of a center for developing—for like spreading pro-market, as it were, or pro-capitalism, I would say, reasoning through the legal profession. So Henry Manne trained generations of lawyers in law and economics, which, as recent studies have shown, really moved the judiciary to the right.
And so that’s where Maris was when he wrote this book and when he edited this book. And then that’s where it came from. And, in fact, Muris, under Bush, revitalizes the unfairness authority in a way, but in this sort of much more narrow, understood way. And Muris, by the way, is not an economist, but a lawyer. And Beales is sort of his, you know, they’ve co-written and also Beales
was his Director of Consumer Protection. And he’s an economist, not a lawyer. So they sort of are each other’s economist/ lawyer pair.
And I should also say about Muris that when he’s not in office, he’s consulting. He’s consulting on the defense side, which is, of course, a common thing to do. But he’s also consulting on presidential campaigns and the like because he sees himself as a highly political actor, even though, of course, he’s pretending the politics of the FTC are FTC neutrality in some sense. But neutrality and business in a particular way.
So yeah, I guess those are some of the folks I would point to that are connected as part of this set of movements. For what it’s worth, my understanding is that a lot of these people are just understood—I mean, the politics is not always explicit among people in the FTC. Like these are just understood and celebrated by the FTC as like great leaders of the agency. And indeed, Muris and Bill celebrate the fact that they supervised the most popular FTC rulemaking, which was the No Call Rule which they were required by Congress to do. So it’s interesting to sort of locate them politically when often they’re not treated as sort of politicizing the FTC. They’re treated as de-politicize the FTC. But I want to argue that that comes from a particular political angle.
MR. TEDDY DOWNEY: And in terms of just staying on the real history, what do you think the progressives that founded the FTC actually thought about the concept of unfairness? What was their real goal there? And we’ve talked about how it’s perverted, but what was the real vision there?
MR. LUKE HERRINE: Well, there’s two moments. There’s the original creation of the FTC, which gives it the authority over unfair methods of competition. And then there’s the creation of the UDAP authority, Unfair or Deceptive Acts or Practices Authority, in 1938, which explicitly gives the FTC authority over consumer protection, even though it had implicitly already been given that authority by practice and by courts.
And so, in the first case, Congress was really thinking in terms of antitrust. It wasn’t thinking in terms of consumer protection. But the logic it was thinking in terms of was basically reacting to the fact that the Supreme Court had narrowed the ambit of the Sherman Antitrust Act. And that after the first couple of decades of the enforcement of that act, actually consolidations of firms increased dramatically and all kinds of—what people in Congress and the populist and progressive coalitions who were pushing them perceived to be—unfair practices, were allowing firms to become big at the expense of rivals. And the thought of banning unfair methods of competition—and this phrase is said all over the legislative history—is checking monopoly in its embryo. And the thought was supposed to be businesses getting big by developing more efficient production processes is one thing. But a lot of these businesses—and I’m just saying what the perception was at the time. I think this is actually correct in many ways, but it’s much more complicated empirically and we can have that discussion another time. But the thought was that big businesses got big through all kinds of shady practices, practices like paying retailers to recommend their products,
paying retailers to not recommend other products, industrial espionage, putting up signs that said that their rivals’ products were junk, not identifying who said that. Just like sort of saying this is the national cash register companies that did this and they said that cash register is junk. And they put that sign around in magazine, for instance.
And those are understood to be ways of gaining market power that were not based on legitimate means. And the thought was that if you ban unfair methods of competition and you don’t define that—the thought was that we have some examples. Defining was considered as an option. We have some examples. But we know businesses are innovative and we also know that community norms can change. So if we create a Commission that’s like quasi-judicial and supervised by the judiciary, but not itself the judiciary, which we know has basically been opposed to the goals of the antitrust statutes as they were perceived by Congress, which was supposed to be a much more decentralizing of power. Like if we have an agency that defines these norms and enforces them, we can both prevent companies from using shady tactics to gain power and create a more stable business environment so that it’s not this constant disruption of the consolidation.
And so that’s unfair methods of competition. And one notion there was like this deceiving customers. I mean, the original notion of unfair competition is passing off one’s goods as in others. Basically, you make a cola and you make your bottle look like Coca-Cola and you call it like Koca-Kola with a “K”, that’s what original unfair competition is and still what it is under a sort of trademark law. So there was always this notion that there’s a relationship between attracting customer business in an illegitimate way and unfair methods of competition. And that became explicit over the course of FTC enforcement, in part because those are relatively easy cases to bring, I think.
And then when the UDAP authority was created by another sort of progressive coalition-—this time the New Deal Liberal Coalition—it was in response to (1) the set of court decisions that had called into question whether the FTC could bring consumer protection actions if they couldn’t show competitive injury. And I think actually the state of the document was much more ambiguous than a lot of people say it is. But in any case, that was definitely a question. But I think more importantly, and the reason it ultimately came to the table, was that there was increasing concern about the power of advertising to basically manipulate people into buying things that (1) they didn’t need, (2) they weren’t actually evaluating the quality of. And this is in response to sort of the first round of the consumer movement, the creation of Consumer Reports and the like, which were highly popular best sellers. Well, I guess the creation of the FDA is really the first round, but this is maybe the second round.
And so basically, actually originally the Congress was considering giving the FDA much more expanded authority, basically to allow the FDA to pull drugs and food products off the shelves using a much more powerful authority than the FTC to prevent deceptive advertising practices. But basically, the business was sufficiently powerful in Congress to divert that away from the FDA,
which was then very progressive. It was under the authority of Rex Tugwell at Agriculture, and give that power. And then basically, the FTC opportunistically was like, oh, we’ll do that. We’re sort of a more neutral actor with their sell. And so that’s how they got the UDAP authority. Which that phrase came from an FTC report from earlier that decade.
And again, the thought there was that the FTC should start to police business practices towards consumers. And specifically to prevent businesses from deceiving consumers certainly. But I think also in the background there’s this notion of manipulating consumers. And so there is this direct line that one can draw from where that authority came from to “kidvid”, right? To policing advertising practices to manipulate specifically especially vulnerable consumers to prevent them from becoming also consumers for life who are unable to critically inquire against advertising. So that’s where these statutes came from.
MR. TEDDY DOWNEY: And so you’ve got the real history. You’ve got the alternative history. The people with the alternative history have seemingly won out today. What’s the solution going forward to sort of undo this?
MR. LUKE HERRINE: Yeah. Well, I think one part of this—the easiest part of the solution is to be more honest with ourselves about the political nature of the FTC. The FTC always acts within a political space and a relatively sort of like unambitious or what you might call sort of like. I don’t know, like normal science. FTC sort of just like leaving things more or less as they are, but policing really the most egregious actions. It’s one type of way of doing the politics of market regulation. It often exists in a context of either business ascendancy or, well, really, that’s it, business ascendancy. But also sort of less appetite for more ambitious change.
So you can see that the 1950s are one example of this. There’s this overlap between this like – well, first of all, the interwar period is an example of this. Between World War I and World War II. There’s a very big focus on return to normalcy, which often means deferring to business interests. Also, by the way, the FTC again was run by a highly sort of ideologically pro-business, pro big business, Humphrey, Humphrey’s executor. And the 1950s are like this. And then the 1980s to the present are like this in many ways. Which is a big sort of notion of we need normal politics, which really means we need to defer to business on a whole lot of different issues. And so that politics is always going on and the FTC is embedded in this.
So I think that reframes the question not so much [inaudible], but how do we figure out a sort of like neutral way to determine which practices are unfair. I’ll say a little bit more about the unfairness authority in a second. But more like we need to think about I think it opens up some questions like how does the FTC respond? How does it manage the different constituencies that have an interest in things that it does? And in particular, if you like me believe that the FTC should be focused on—should be somewhat antagonistic to business, somewhat, if not very, antagonistic to business, which doesn’t mean like going after business for the sake of going after it. But knowing that
business has an enormous amount of power, has an interest in manipulating the FTC in its direction so that it can use its own power to shape markets in its image. And, of course, I’m presenting business as a monolith here, especially the most powerful businesses. And business has, in many ways, acted as a monolith since the alignment of the 1980s. Knowing all of those things means that I think the FTC needs to think about how to cultivate other market participants, both smaller businesses, if it’s thinking about how market power operates on sort of the production distribution side and consumers and consumer movement.
And indeed the FTC of the 1970s, we didn’t talk about this. But one of the things that really got the code of businesses was that Congress created a way to pay money, mostly for consumer advocates, to come and advocate in front of the FTC because it was called intervenor funding, precisely because the notion was that disorganized, and relatively less resourced, consumers need a leg up in advocating at the agency, to both bring issues to the fore of the agency and to frame issues in a way that it wasn’t just what the business lobbyists were saying.
So there’s a whole set of questions there about how the FTC can do that. Like how does the FTC manage constituencies? How does the FTC, if it’s going to do something more ambitious, like it seems like it wants to now? How does it think about how its regulatory actions are going to shape the political environment? So I think, for instance, if the FTC, as it did in the 1970s, acts in a way that targets many businesses across industries and from different sizes, and, in fact, often with the most burden on smaller businesses, it’s going to be more likely to get opposition than if it splits the interest of business with antitrust action for instance.
So that’s one set of things to consider. And I think it’s also worth thinking that one of the reasons the Federal Trade Commission is buffeted in this way, like the political climate is always going to shape an administrative agency. It shapes all administrative agencies to some degree. But one of the reasons that it’s such a dramatic shaper of the Consumer Protection Authority of the of the Federal Trade Commission is that the Federal Trade Commission has enormously broad authority over many markets, largely discretionary, with some narrower grant of authority. But the UDAP authority and unfair methods of competition authority are very broad and then leave it up to the agency to define. And then meanwhile, it actually has relatively weak enforcement powers and is deeply underfunded relative to the scope of its authority. Which creates this dynamic where basically what happens is there’s this period of quiescence and then all of these potential problems build up. And then there’s like a period of resurgence. And then it creates a backlog because there’s not enough funding. There’s not enough staff. It takes time to get people onboard to change the mission of the agency. And then meanwhile, there’s counter mobilization and how long it takes varies.
So one way to think about that is in thinking about how businesses require a sort of reforming, how Congress views the agency, (1) either splitting up the agency or splitting up the authority of the agency by c
a residual unfairness authority and give broad authority. But it does create the sort of mischief when combined with other funding, underfunding. And then like in addition to that fact, the FTC should have much more money and many more resources, and it should be a much more continuous thing, how much money and resources the FTC has. As we know, the Consumer Financial Protection Bureau has a good amount of resources and an independent source of funding, but is still subject to political winds. So that’s not a solution, but that’s one set of things to think about.
And then I guess the final thing I would say with respect to unfairness authority, and in some ways this is the narrowest point, is one of the reasons to do this history is to point out that the unfairness policy statement, yes, it is different than the Cigarette Rule, and in many ways it’s narrower. It doesn’t require consideration of cost onto business. But there’s nothing in the rule itself that requires a cost benefit analysis in the sort of classic sense, in the quantitative Caldor Hitchcockian sense. And indeed, courts have said that it doesn’t have to be quantitative. James Miller disclaims that. Congress, when it was considering putting the unfairness policy statement in 1994, in the actual statutes said qualitative is fine.
And so the unfairness policy statement, the unfairness rule, is actually, I think, much broader and more malleable than we think of it as. And there’s no like strong limitation in courts or in the unfairness policy statement itself that can’t be got around with a little bit of rethinking about what that rule means. I have particular thoughts about what that might mean, but I think I encourage both litigators at the state level and FTC officials and staff to think creatively about it. I mean, I know that Rohit Chopra, for instance, thought about unfairness as a way to police discrimination. And the Student Borrower Protection Center has made recommendations along those lines. I think that’s very clearly a possibility under the unfairness standard. So I think there’s much more scope for ambition. Now, of course, how to think about that ambition requires a sort of political considerations that I was talking about. But there are ways to think about that. And I think it’s a much more useful and interesting way to think about it than to think about unfairness as somehow promoting an ideal version of markets in which consumers are sovereign, which I think is a fantasy.
MR. TEDDY DOWNEY: And let’s talk about rulemaking and enforcement, because those are the things, even with limited resources, they can control. Should they do a new rule? Should they clarify anything? And in terms of enforcement priorities, is there anything that you’re seeing from the FTC revitalizing this unfairness authority? It does strike me that Chair Khan talked a lot about—and Commissioner Chopra before her and while she was there—going after big companies with their Consumer Protection Act powers, not focusing on small frauds anymore, but really taking on bigger problems, creating bigger societal issues, bigger companies. Is that a step in the right direction? What else do you want to see from an enforcement agenda and rulemaking agenda?
MR. LUKE HERRINE: Yeah. So with respect to the first question, the easy way to answer it is that the unfairness policy statement is not just a policy statement anymore. It’s in Section 5 of the FTC Act because it was amended by Congress. So I don’t think any sort of regulation on defining
the unfairness of that is going to do much. I think that would really have to be up to Congress and there could be some role for doing interpretive documents. But I don’t think the original and fairness policy statement is actually that narrowing. So I talk about that. I argue for that in more detail in the article, and I hope to do more of that in forthcoming work.
If I were to start from scratch, I wouldn’t make this a three-pronged test. But I don’t think it’s as limiting as it has been treated as. And then I think actually that has implications for the Consumer Financial Protection Bureau as well because I think the abuse of authority is often treated as making up the distance. But I don’t think the abuse of authority actually goes that much further in any case,
In terms of the substantive regulatory agenda, I actually think in many ways that’s the central question about unfairness historically is whether it should be about small, occasional fraud, like of the most egregious sort or restructuring, like rethinking, reimposing standards of fairness that forces of competition for money, for people who have money, move us away from and.
So it’s not clear to me entirely what the current FTC’s agenda is. I have certain things that I can read from the work of certain of the commissioners previous. And some of the actions they’ve taken, some of the investigations they’ve taken on that, I think are good. I don’t have a clear sense of like a set of priorities. So I don’t want to say like good or bad. I mean, I guess what I want to say is like more. I mean, I think we need to see some more action. But I think a move in that direction is exactly the right sort of thing. It’s like why at least two of the—probably all three of the Democratic commissioners were appointed. I think there’s a clear sense in Congress, a new sense of like needing to impose norms on tech in a way that actually has some bipartisan support in a bizarre way that one doesn’t want to poke at too much.
So that’s good. And then what I would like to see in terms of substantive rules would be something like – well, we can get into specific questions because there’s a whole lot of different areas. And I’m like less expert in tech than I’m sure many of the people here. But one thing I would say is that it’s important that the FTC also think about the full scope of its authority (1) as an enforcement agency, (2) as a rule maker, and (3) as an interlocutor with Congress. The FTC originally grew out of sort of the idea of advising Congress on how to make more—it’s often said, well, okay. The FTC shouldn’t set policy and like substantive reorder a market. The FTC shouldn’t decide whether the pay for service model or have companies surveil your every action and sell your data model should prevail, right? If we’re going to do a big shift, even if we think it’s unfair to do it the current way, that should go through Congress or something like that. And I think there’s some merit to that type of claim.
But in the meantime, the FTC can start and have enough investigations and do enough crackdowns and highlighting all the sorts of problems that come with current business models such that it raises the issue and sort of directs the scope of debate and forms the scope of debate in a way that otherwise would not be. And I think that’s an underappreciated aspect of the FTC’s authority. And
it’s very much something that it does. It can go hand-in-hand with enforcement, right? Because articulating what is unfair and thinking about which enforcement actions to bring requires mapping out industries and talking about what is really problematic. So I guess that’s the sort of not fully satisfying, but maybe hopefully generative response that I would give.
MR. TEDDY DOWNEY: I want to talk a little bit about—you bring up some points about business being kind of monolithic when they lobby these types of things. But Commissioner Chopra, in particular, with the Made in USA rules and things like that, in terms of the enforcement priorities, you’re really distinguishing between businesses, some that are operating in good faith and they are losing business to companies that are not. I mean, just sort of the core of what you were talking about before where there’s a point here to actually systematically be going after companies that are competing unfairly. They’re benefiting from maybe unfair methods of competition, but it sort of boils down to the same thing. They’re sort of unfairly benefiting. Tell me about, from a holistic competitive point of view, not just a consumer welfare point of view. Because if you just look at consumer welfare, well, it’s not that big of a deal. It’s a lower priced thing from China, even if it isn’t made in the USA, right? Where you’re like, well, I mean, you lied about it being from the USA. So someone who wants it to be from the USA and support USA businesses may be being tricked. And so is that really the difference between the real history of the FTC authority on unfairness versus—is that a good way to for our layperson to think about like what’s the difference between the outcome of the enforcement goals and how do we distinguish between thinking about what a good enforcement action is? Or is this in the new sort of broader lens or sort of more holistic lens? Or the one that was intended for the FTC versus the sort of Chicago school version?
MR. LUKE HERRINE: Yeah, there’s a not total overlap, but there’s a deep resonance between the unfair methods and the Unfair or Deceptive Acts or Practices authority with respect to consumer basic practices. Which is that when a business practice that treats—either deceives consumers or makes money from consumers in some way that we think is inappropriate—and we can define inappropriate in a variety of ways. One can be even something that’s not deceptive at all, but something like developing risk-based models of lending that, while they can expand access to lending, create highly different prices for different types of consumers rather than sort of across subsidies.
And we can think, well, once businesses do that, like once a business starts to conquer more of a market doing that, they take business from other businesses. It’s a method of competition in a world in which that’s how we run our economy, or most parts of our economy, is through competitive practices. If a business can win consumers, can win business, through a method like that right through preventing—I mean, you might call it preventing adverse selection, but it also prevents the possibility of lower income consumers from getting better credit on better terms. That moves the market in a direction. As it were, limits the scope of choices that consumers have. And either outcome would limit the scope of choices. It’s not like every possible world can be enacted. It’s like the market turned in one direction or another. And that is exactly the in some ways like creates this
deep harmony between the two authorities, which again doesn’t always overlap in every case. But one reason to subsequently police business practices is to allow businesses that have a particular notion of what is the appropriate way to treat customers to succeed, which, of course, itself reinforces a market that accords to those standards.
So you can think of a lot of difference. I mean, I’ve actually been thinking and gathering examples of this. Let me just give a more concrete example. The model of credit card issuance that involves a lot of hidden fees and trying to get consumers to pay the least amount so that they’re just paying interest and then revolving their credit card was rejected as an immoral way to treat your customers and a long-term, irrational way to treat your customers by banks of the 1970s. The guy who came up with the idea of that model couldn’t sell it to many banks. So he had to create a non-bank bank basically, through a pen company. And then he started to capture more of the market. And then many more people who issued credit cards, banks who issued credit cards, fell in line because they were losing market share.
And so if, at the time, there had been a crackdown, it would have promoted at the same time, to the extent that you think it’s unfair to like misrepresent or manipulate consumers into paying only the lowest interest rate, which is long-term irrational for consumers in many ways, do you accept that seems unfair or potentially deceptive? It also serves the unfair method of competition because it means that all of these businesses that would rather make money through a more transparent way of dealing can’t do so. Or they feel pressure not to do so.
And so there’s a sense in which you can make sense of that in either theory. But that way of thinking about seeing markets as not just if you think that can always be undone through some act of consumer choice, oh, well. Yeah, sure. Like some businesses do that. But other businesses can offer different credit card models and they sort each other out. Well, actually, no, that’s not really how it works because of the whole structure of cross-subsidy and how business models—different streams of revenue support each other.
So anyway, that could be a different way to think about the market. So I think there is a deep logic to that. I’m not sure it’s sort of like the key to uncovering—because you still have to ask the question of what is an appropriate way to treat a consumer? You know, what sorts of things should consumers have to bear? And what sort of things should be prohibited?
MR. TEDDY DOWNEY: What is the biggest—what’s the danger—what is the worst part about the alternative history in terms of what it does to the FTC staff thinking about their job? Is it just the lack of rigor that you just mentioned? That it’s like obviously not a right way to think about how humans behave and markets work. What’s your big takeaway about why this is such a dangerous and problematic—and you mentioned radical—change by the Chicago Schools?
MR. LUKE HERRINE: Yeah, I think the basic thing that I would say is that I haven’t talked to a lot of FTC staff about this. But those who I’ve talked to, whenever “kidvid” comes up, there’s a sort of like collective trauma around “kidvid”. There’s this notion that like—and similar to like real trauma, it’s like anything you do that approximates the thing that brought on trauma, whether it’s physical or emotional trauma, like you’ve got to stay away from that. It’s like tender. And there’s a general sense, I think among many, I think there’s like an inherited like passed down story at the FTC, whether it’s the Beales version of the story or whether it’s sort of [inaudible], like whatever we did there was bad. That like the FTC can’t get too big for its britches. And especially like the FTC has to be careful about unfairness authority that leads the FTC to make, I think, make irrational decisions, right? I think substantively bad decisions, but also decisions that don’t sort between what actually is a good or a bad practice or what actually is going to be the right enforcement priorities, basically just to avoid getting too close to the edge.
And I think that confronting the history and what really happened in history and then which encourages us to think carefully about actually what actions are likely to push whose buttons opens up space for a more, I think, rational and logical and moral, right? But moral not in a way of like morally just being whatever you happen to think, but moral is like a considered view about the proper way to treat people and how to balance interests as a way of doing regulation.
And so, for instance, I think if we don’t just say, hey, anything that might be like a little beyond what previous unfairness jurisprudence said is going to be a problem for us. But rather something like, well. but separate out (1) how far beyond it is the doctrine and analyze whether we can defend this [inaudible]. And I think there’s a huge amount of scope for flexibility. And (2) again, who actually is going to be opposed to this? And (1) is that a problem that we want to avoid and just avoid that regulation and probably do something else? But (2) maybe we want to have that fight. And if we want to have that fight, what does that mean, right? Who’s going to be on which side? Like playing that out a little bit more. Rather than sort of just saying, well, in fairness, we know we can’t do that much with that. Or we know when we take too big a step, that becomes politically problematic. Because that’s exactly the sort of, I think, like fear that reinforces inaction.
MR. TEDDY DOWNEY: And it’s kind of interesting. I guess we can close with this by getting your reaction to this. It’s kind of interesting. I think most people who think about people working in government and at the FTC and looking at the sort of manipulative practices, unfair ways to treat consumers, they just say, well, what is the right thing to do here? And to your point, morally it’s like what is a right and just action in light of this practice? It doesn’t seem like that’s the question that they’re principally asking themselves, which is a little shocking. But also, like have some sense of whether or not the this would be—to your initial point, like banning advertising of sugary snacks to kids. I mean, as a parent of two young kids, it doesn’t seem that crazy. Just thinking about how I think about limiting how much sugar my kids eat. And you mentioned it was popular, but would this be like actually popular and resonate with the citizenry and even some small businesses that want to do things the right way?
And then lastly, is it consistent with what the president talked about in terms of if your president has this sort of vision? I mean, we have this competition executive order, which sort of lays out an interest by the president in having markets that operate fairly, I would suppose. And in some respects, if they’re competitive, that does perhaps indicate that they’ve been working well or properly or fairly. But none of those seems like questions that are really coming up with the typical person. I mean, I don’t want to put say bad things about the FTC, but it seems like those would be better guiding principles. What’s your take on that?
MR. LUKE HERRINE: Yeah. Well, so I guess always the question with consciously directing markets with particular moral principles in mind is that there’s always some level of disagreement. And that leads to conversation because it’s going to be one way or another. It’s not like just because you’re raising the issue, like suddenly—it’s not like the market doesn’t have a moral resonance when you’re not raising the issue, but raising the issue does bring up the conversation. So that’s always the reason to be cautious or it’s a sort of sound explanation for being cautious.
But I guess what I would say is this is actually (1) we do see a fair amount of like moral judgments that are often implicit. For instance, the directive of the administration to have the FTC investigate rising prices and supply chains caused by market power is if there’s an implicit moral judgment there about—and exactly what the details of the moral judgment are, we would have to hash out. But like, you can’t charge too much money for something. (1) Because you have power over it. Although, power is pervasive throughout the market. But (2) because like in emergency situations, and especially when a crisis creates opportunities for people in certain bottlenecks to make money, it is wrong—we think—for those firms to increase their profit margins at the expense of consumers. It might be different if their own costs are going up and they pass on that cost. We think maybe that’s okay. We might think that is or isn’t okay, depending on how we think about the preexisting cost structure or whatever. But definitely, like just targeting profit margins, knowing that you can do so because supply chains are broken, is a moral judgment. And it also has these macroeconomic implications, which also have a particular resonance,
So I do think there’s something there and it doesn’t have to be like, I mean, I don’t know whether what the cost and benefit of framing that as like this is wrong, and here’s our moral theory about it, I think there’s a real question there. But anyway, I do think that you can go beyond that individual case and with respect to the cases like regulating advertising to children and specifically of sugary cereals. I have the same intuition as you did, which is one of the reasons that I came to this project to bring this full circle. It just seems crazy to me that it was like so obviously wrong to many people that regulating advertising of sugary cereals would be bad or paternalistic. It seems very intuitive to me that children are much more vulnerable and less able to sort between what’s real and what’s not and less able to manage impulse control, and it helps parents in enforcing their own goals. It doesn’t actually stop anybody from having sugar if they want it, whether you think that’s good or bad.
So anyway, I do think there’s a certain sense of like avoiding the moral inquiry as moral inquiry does lead us to these bizarre places where it’s like, well, why is that problematic? Actually, let’s think about whether that’s problematic or not. I think that’s a much more useful and interesting way to think about regulation generally, but also the FTC specifically.
MR. TEDDY DOWNEY: I actually want to ask you one more question. I’m sorry to keep you over. But I think a lot of this kind of impulse – we’re sort of a little bit implying that some of these business practices are kind of like judgment calls was to whether or not they’re egregious or are just obviously should be illegal or enforced by the FTC. But I’ve been investigating alleged corporate malfeasance for my whole career. And I would say now more than ever, the aggressive sort of harmful business practices in a wide range of industries is just like so overt. It’s not like they’re hiding it. Companies don’t hide these types of practices anymore and when they’re found out, they’re sort of ashamed. There are a number of practices, a number of industries, a number of companies, that are massively profitable, very well known, sort of out in the open with their conduct, and they just keep doing it. I would argue at some level there are plenty of businesses, plenty of fraud out there, that is not a judgment call.
Does that make it easier for the FTC, at least right now, just given the era that we’re in, that there is just a lot of kind of big, scam oriented, fraudulent oriented consumer rip offs as the sort of core business model?
MR. LUKE HERRINE: Yes, I think clearly, yes. And I would say furthermore that as you think about the political balance of the FTC and how the FTC builds political coalitions around itself, it’s exactly by targeting that sort of conduct that’s both egregious and has real implications for more than like a small group of defrauded people, which policing that behavior is also important. Like fly by night scams should not exist. But broadly harmful, egregiously wrong and obviously wrong behavior, policing that stuff is how the FTC builds up its legitimacy as an agency, as an agency with moral authority.
And I think there is a sort of politics of moral authority that has to happen. And I think that doing that sort of stuff is the type of thing that the FTC can do to then build a groundwork for suggesting deeper moral reorganization of one or another industry on the ground that may or may not be unpopular. I mean, let’s remember “kidvid”, as we said, was popular. A lot of people have the same moral intuitions and thought it was appropriate, but a small group of powerful people did not. But there was this disagreement. And so getting into that ground of where there is disagreement requires, I think, building the sort of foundation of moral authority and thinking about it and not just—there is a real point and there’s a reason that the Beales critique has bite intuitively, which is that it shouldn’t be bureaucrats imposing their own vision of what is appropriate for people on the world. Bureaucrats should be connected. They should have expertise about what’s actually happening, about how people are manipulated or not and the like. But they have to be connected
with how people in the world are understanding the products they’re engaged with, the markets they’re engaged with. And that is both, I think, strategically important because it builds a sort of constituency, but also important for good governance for like getting a sense of what people do think is immoral and inappropriate in markets and taking that really seriously.
MR. TEDDY DOWNEY: And does a lot of that moral authority also come from those sort of politically appointed positions? At least those people are sort of accountable and picked by a president elected supposedly more in touch with those type of values or at least entrusted with those type of things and ostensibly leading these bureaucrats.
MR. LUKE HERRINE: So, yeah, right. Well, theoretically, it does. In practice, whether that’s happened or not, I mean, it’s a harder question, partly with the way the FTC is designed with these staggered elections or staggered appointments. But also, so appointment is part of it. And we can talk about the design of the FTC another time. But another part of it is that the FTC, as I said, has a discursive relationship with Congress and, first of all, has a direct and could have a more direct relationship with people in the world.
One of the things the FTC has done in the past and could do more of in the present is really put resources into more local offices that start to build not just enforcement practices, but like ongoing relationships with different community members to get a sense of what’s going on. There’s pretty good examples of that and investigations of that, of like the D.C. office in the 1960s.
But now finally, there’s this relationship to Congress, which is that, I mean, there’s a sense in which Congress is sending a very clear message to the FTC after the “kidvid” rulemaking. Whether we think that it’s political and whether it was representing the right interests and what the forces were that shaped Congress in making that decision, I think then that’s another set of questions. But that is another way for there to be calibration at the FTC about what the appropriate direction is. And some of that is like enacting new, more narrow statutes or more sort of robust enforcement authorities. Some of that is like the FTC does investigation and brings it to Congress.
But thinking about the FTC as not just like in its own world, deciding its priorities, but like doing that while knowing that it’s part of an ongoing process and will formation and taking that process seriously, which is also potentially a process of building support for its views if it can get that support, but also a process of getting feedback. Of course, that’s harder in an environment where many of the channels of will formation in our country are deeply captured by business lobbies, including the courts. But I think that’s a better vision of what a regulatory agency that manages huge parts of the economy ought to be. And the steps we take to get there is a much more interesting question than how do we make this agency bulletproof through neutrality?
MR. TEDDY DOWNEY: Well, I can talk about this all day. I can’t thank you enough for doing this. Super interesting paper. Everyone should read it. We’ll have the transcript for everyone as well. But thank you so much for doing this. Really, really interesting stuff.
MR. LUKE HERRINE: Thanks, Teddy. Thanks for having me.
MR. TEDDY DOWNEY: All right. And thanks to everyone for joining us today. This concludes the call.