Design Principles for Consumer Protection Legislation (Guest Blog Post)

by guest blogger Samuel Becher, Victoria University of Wellington, New Zealand

[Eric’s note: I’m pleased to share this guest blog post from Prof. Samuel Becher, whose work has been mentioned on this blog before. This post is based on Prof. Becher’s new article, Unintended Consequences and the Design of Consumer Protection Legislation.]

It is a common belief that progress is often achieved by transformative policies that significantly advance society in meaningful ways. But big bangs and overnight solutions are rare. Often, the devil is in the details, and the mundane merits more consideration. This may explain why consumer protection legislation – even when well-intended – frequently fails to provide the desired results and sometimes may be counterproductive.

Consider, for instance, tax increases on beer, which are likely to reduce demand and consumption. However, while taxing beer reduced consumption by teenagers, it resulted in them consuming more cannabis (See John DiNardo and Thomas Lemieux, Alcohol, Marijuana, and American Youth: The Unintended Consequences of Government Regulation, 20 J. Heal. Econ. 991 (2001)). Likewise, reducing the consumption of cigarettes may lead to an increase in obesity rates.

Or consider food labeling, which many consumers do not understand and do not attempt to read. Aside from being costly and perhaps inefficient, such labeling may have another negative side-effect. Manufacturers realize that the packaging becomes a potential source of information for consumers. Thus, they often transform the packaging into another source of enticing marketing – one that will attract consumers’ limited attention. This may worsen the problems associated with information disclosures.

Protective legislation may harm a wide range of consumers, not just poor, disadvantaged, or inexperienced consumers. For example, a 2016 study found that after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, mortgage providers reduced credit to middle-class households by 15%. As a result, many middle-class households were pushed out of that market. At the same time, the study found that credit for wealthy households increased by 21%, while leaving credit for poor consumers unchanged (See Francesco D’Acunto & Alberto G. Rossi, Regressive Mortgage Credit Redistribution in the Post-Crisis Era).

Another example of pro-consumer legislation that may backfire is cooling-off periods, which allow consumers the right to cancel or exit a transaction. These rights are often traps in disguise. Consumers entering into transactions, assuming they can change their minds, often do not realize how unlikely it is that they will actually use the cooling-off provision. For starters, consumers are likely to be overly optimistic and confident regarding their willingness to pursue their rights. From yet another perspective, due to the endowment effect, they are likely to over-value what they have already purchased and succumb to inertia and the status quo. Moreover, the mere option to rescind a transaction and change one’s mind is likely to undermine consumers’ satisfaction and well-being (for more on that, see Barry Schwartz, The Paradox of Choice (2004); Daniel Gilbert, Stumbling on Happiness (2006)).

There are various reasons why consumer protection legislation may go astray. One reason is poor legislative design. First, while consumer protection legislation tends to be sweeping, a lot can be said in favor of making gradual moves (for a general and accessible discussion, see “In Praise of Incrementalism” (Freakonomics podcast – October 26, 2016)).  Gradual progress – Festina lente – is wise; it’s relevant to many walks of life, including long-term saving, dieting, meeting sporting challenges, and completing writing projects (compare John Kay, Obliquity: Why Our Goals Are Best Achieved Indirectly (2010)). Such an approach has been adopted, for instance, by the Finnish government with respect to Universal Basic Income (for more on that experiment see here). In proper cases, it should also be implemented in the regulation of consumer markets (compare Eric Goldman’s discussion about states as “laboratories of experimentation,” The Long-Term Promise of Privacy Federalism, Part II).

Second, employing a multi-disciplinary, empirical, and evidence-based approach to legislation can yield much benefit. Engaging people with diverse viewpoints promotes a more holistic approach, which is better suited to successfully solve complex problems. An interdisciplinary approach decreases the problems associated with a legislature’s lack of institutional expertise. It also allows more arguments to be balanced and considered in the process of lawmaking. Interestingly, the move towards evidence-based decisions has gained momentum in medicine and business. Adopting a similar approach in the regulatory context may often be beneficial.

Third, it is important to remember that what we believe to be accurate and correct today may turn out to be untrue within a few years (Cf. Samuel Arbesman, The Half Life of Facts: Why Everything We Know Has an Expiration Date (2004)). To supplement an evidence-based regime, it is worth adopting a modest decision-making process. This can include consumer protection laws that contain automatic sunset provisions.

Lastly, legislation in general and consumer law legislation in particular suffers from “noise” and is not an exact science. It is typically influenced by various players and driven by diverse motivations. In light of the biases, noises, and pressures that characterize the legislation process, diffusing and delegating some legislative responsibility to administrative agencies and consumer organizations may be sensible.

Inevitably, the legislative process generates some mistakes. As markets become more complex and multi-dimensional, the need to develop consumer law and bring it up-to-speed becomes increasingly important. Though not a panacea, a nuanced and unassuming approach to consumer law policy – one that benefits from healthy skepticism – seems worth considering. In spite of the challenges that such an approach entails, it should not be viewed as a misplaced faith in political utopia (see Maureen Ohlhausen’s remarks, Regulatory Humility in Practice).