Good afternoon. Thank you all for coming today. Today’s symposium is part of a broader effort on the part of the Bureau to engage experts in various fields on legal and policy issues. An important motivation for the symposia series is to give these legal and policy issues a fresh look, and that is precisely what we are doing and will do. The Bureau has relied on behavioral law and economics in the past—part of the fresh look I just mentioned includes examining how behavioral law and economics should play a role in Bureau policymaking moving forward.
I am incredibly grateful to the panelists—especially Brigitte Madrian who, because of a last-minute withdrawal and her expertise in this area, graciously participated in both panels. And I think I speak for everyone when I say the Bureau as a whole has benefited from the panelists’ written statements and from today’s insightful debate.
As a matter of public policy, the Director’s remarks this morning—including her observations about the value of focusing on market failure—capture the essence of what good government looks like. When articulating and implementing public policy, there is general agreement that a primary motivation for regulation is to address market failure.1
And it cannot be stressed enough that demonstrating a market failure requires more than just general notions of incomplete or asymmetric information. Furthermore, justifying intervention in such a circumstance should require a clear showing that the agency can improve on the status quo and utilize symmetrical treatment of both market and government action—that is, a recognition that markets have costs that may impede desirable outcomes, but government action faces similar if not greater impediments.2
In prior remarks, I have elaborated on the proper role I believe the Bureau should play when crafting consumer protection policy.3 There I emphasized that, rather than attempting to replace market outcomes, the Bureau should focus on regulatory and policy initiatives that reinforce market institutions.4 I also emphasized my view that the Bureau’s guiding principle should be a presumption in favor of consumer choice. During the more than 200 years of American history, ordinary consumers making choices in the marketplace has resulted in them realizing direct and extraordinary benefits that have dramatically improved their lives.
Market-reinforcing activity includes promoting competition and prosecuting unlawful acts or practices that impede or undermine consumer choice.5 Now, some may think that agencies like the Bureau should engage in more prescriptive, market-replacing regulation. In academic settings, some have even argued that financial goods and services are like toasters, requiring agencies like the Bureau to impose heavy-handed prophylactic measures to try to protect consumers. But I believe this view is mistaken.
Today’s symposium, along with the written statements, is helping me evaluate how behavioral law and economics fits into the framework I’ve articulated. To add to today’s discussion, I want to offer a few observations that I hope can move the debate forward and prompt future research. First, regulatory proposals should avoid presenting the choice as between a purportedly ideal government solution and an imperfect market solution; what economist Harold Demsetz referred to as the “Nirvana Fallacy.”6 Indeed, humans by our nature are imperfect so it should not come as a shock to anyone that markets are imperfect. But we should also not forget that governments are made up of humans as well, who are equally imperfect and perhaps have a few of their own biases.7 So, in an imperfect world, we need to critically examine both market and governmental solutions to identify which is best for consumers.
Second, though the debate we have had today often relates back to the concept of “rationality,” no serious thinker on these issues would suggest that humans act with perfect information or that transaction costs in the market are zero. Nor do we expect humans to always choose the efficient solution. The relevant policy issues relate to how consumers adapt to mistakes, whether they can learn from their errors within market settings, and if intervention would create a net beneficial outcome.8
Third, when contemplating a particular intervention, the market failure and the potential problem that is being analyzed should be clearly defined and demarcated. Doing so will enable an agency to tailor a solution to the actual problem – for example, one focused on the consumers actually harmed – without imposing an unnecessarily broad remedy that could undermine the effective functioning of the overall market and potentially undermines consumer welfare.9
Finally, any analysis done regarding the merits of behavioral law and economics must include a discussion about the nature of the interventions being considered. Behavioral economics can potentially inform market-reinforcing regulation. But we should tread very carefully where proposed policies would restrict or change the nature of a private relationship or contract. When government follows this course, it does not politely request that firms change their behavior or seek to convince firms of the propriety of the intervention. It is a legal command, backed by force or the threat of it. While there are many examples in the literature that relate to private or non-government interventions in the marketplace, those examples, importantly, do not involve commands from an agency.10
On this score, 200 years before much of the modern debate on behavioral law and economics began, Adam Smith had many insights into these issues; in fact, in Smith’s ‘Theory of Moral Sentiments’ he used social psychology to better understand the nature of human behavior. Smith observed that we desire mutual sympathy, and because of this desire Smith suggested order can emerge through decentralized processes.11
Smith was also careful to note the important difference between what we would call today private and governmental paternalism.12 Because of local knowledge and the feedback that is generated through private and voluntary iterative interactions, Smith saw generous benefits to private tinkering of what we call today “framing” or “choice-architecture.” On the other hand, Smith was less enthusiastic about centralized control. His thoughts here are best highlighted by what Smith called “the man of system.” Smith wrote that “[the man of system] seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces… have no other principle of motion besides that which the hand impresses upon them.”13
Smith further observed that when the individual’s “principle of motion” diverges from the central authority’s preferences, such instances can have negative consequences on the individual and society more broadly.14 Though Smith incorporated many of today’s modern “behavioral” methods into his analysis, he also noted that the benefits of such methods were highly dependent on whether they were implemented by a centralized authority or through decentralized processes. Smith’s insight, in my view, highlights the importance of Bureau action that is market-reinforcing and promotes competition and choice.
The issues highlighted by today’s symposium have far reaching implications on the nature of good government and human agency. Today’s symposium has helped move that conversation forward. I want to again thank the panelists for their contributions today.
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.
1A regulatory action may also be necessary because of a statutory or judicial directive. See OMB Circular A-4.
2See R. H. Coase, The Federal Communications Commission, 2 J. L. & ECON. 1 (1959) and R. H. Coase, The Problem of Social Cost, 3 J. L. & Econ. 1 (1960) (discussing the logical importance of symmetrical analysis of regulatory regimes and explaining that though the costs of the price system were positive, the costs of government action were also positive. The question is which regime produces the greatest net benefits for society).
3Brian Johnson, Toward a 21st Century Approach to Consumer Protection (Nov. 2018).
4See Todd J. Zywicki, Market-Reinforcing versus Market-Replacing Consumer Finance Regulation, in REFRAMING FINANCIAL REGULATION: ENHANCING STABILITY AND PROTECTING CONSUMERS (Hester Peirce and Benjamin Klutsey, eds 2016).
5For example, the core purpose of proscribing unfair or deceptive acts or practices is to “protect consumer sovereignty by attacking practices that impede consumers’ ability to make informed choices.” J. Howard Beales III & Timothy J. Muris, FTC Consumer Protection at 100: 1970s Redux or Protecting Markets to Protect Consumers? 83 George Washington Law Review 2157 (2015).
6Harold Demsetz, Information and Efficiency: Another Viewpoint, 12 J.L. & ECON. 1, 1 (1969).
7See Todd J. Zywicki, The Behavioral Economics of Behavioral Law & Economics 5 Rev. of Behavioral Economics 439 (2018). See also Niclas Berggren, Time for a Behavioral Political Economy, Rev. Austrian Econ. (2012) (“Our main findings are that 20.7% of all articles in behavioral economics in the ten journals contain a policy recommendation and that 95.5% of these do not contain any analysis at all of the rationality or cognitive ability of policymakers. In fact, only two of the 7 articles in behavioral economics with a policy recommendation contain an assumption or analysis of policymakers of the same kind as that applied to economic decision-makers. In the remaining 5 articles, policy recommendations are proffered anyways.”)
8See e.g., Armen Alchian, Uncertainty, Evolution, and Economic Theory 58 J. POL. ECON. (1950).
9Indeed, it should be emphasized that even where consumers exhibit “irrational” tendencies, the standard laws of economics can still hold. Gary S. Becker, Irrational Behavior and Economic Theory, 70 The Journal of Political Economy 1 (1962).
10Richard Thaler & Cass R. Sunstein, Libertarian Paternalism 93 Am. Econ. Rev. 175, 177 (2003) (“Consider the problem facing the director of a company cafeteria who discovers that the order in which food is arranged influences the choices people make. . . . Putting the fruit before the desserts is a fairly mild intervention. A more intrusive step would be to place the desserts in another location altogether, so that diners have to get up and get a dessert after they have finished the rest of their meal. This step raises the transaction costs of eating dessert, and according to standard economic analysis the proposal is unattractive: it seems to make dessert-eaters worse off and no one better off. But once self-control costs are incorporated, we can see that some diners would prefer this arrangement, namely, those who would eat a dessert if it were put in front of them but would resist temptation if given a little help”); for a critique of Thaler and Sunstein, see Daniel B. Klein, Status Quo Bias 1 ECON J. WATCH 260 (2004) (“it seems odd to drag the terms ‘libertarian’ and ‘paternalism’ into matters like dessert placement. What they speak of could be more accurately, if less provocatively, addressed using such terms as benevolence, discipline, delegation, propriety, help, cooperation, and so on. The terms ‘libertarian’ and ‘paternalism’ reside naturally in discussions of political affairs and particularly in issues involving coercive government policy.”)
11See James R. Otteson, THE OXFORD HANDBOOK OF FREEDOM (2018) (“One reason Smith can be optimistic about the development of relatively beneficial decentralized social orders—that is, orders not administrated by central authorities—is precisely because he believes we all feel the pull of the desire for mutual sympathy of sentiments.”)
12Id. (“The state is discharged from superintending the beneficent actions in which people should engage not only because it is incompetent to do so—such matters cannot be determined in the abstract or from afar, so dependent is proper beneficence on local details of particular situations—but also because people’s natural desire for mutual sympathy of sentiments will already do the job as well as can be hoped. The patterns of localized moral judgment become like prices: they convey information (about people’s expectations, their tolerances, their willingness to go along with novelty, and so on) that are responsive to people’s particular circumstances and exploit people’s knowledge of those circumstances in a way that no distant third party, however intelligent or well intentioned, could possibly do.”)
13Smith, The Theory of Moral Sentiments Part VI.ii.2.17.
14Id. (“If those two principles [individual preference and central authority’s preference] coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserable, and the society must be at all times in the highest degree of disorder”).