Good morning. Thank you Ruth for the introduction and for inviting the Bureau to be a part of this year’s Consumer Empowerment Conference. Consumer Action has graciously invited Bureau employees to speak at this event in years past, and I am honored to continue this tradition. And I am especially happy to return to my roots here in the Midwest.
You know, I thought hard about what I hoped you all might get out of this address. A lot has happened at the Bureau over the past year, and I am sure you want to know where we’re heading. And there have been a fair share of concerns raised, most especially by the consumer advocate community. So I’d like to address some of those concerns. Some have accused us, for instance, of undermining the Bureau’s mission, or putting the financial interests of banks ahead of consumers, or dismantling the agency from within for political gain. Perhaps a fair number of you in the room share some of that sentiment.
That’s okay. It’s healthy to be skeptical. But if that’s the case, it tells me that we need to do a better job communicating with you. You and I may not always agree on every issue, but at a minimum, you should know where we are coming from. You shouldn’t ever have cause to question our motives.
And so let’s start where I think we can all agree. The mission of the Bureau is to protect consumers. We are deeply committed to that mission. Full stop. The fundamental purpose of government is protecting the rights of its citizens. And that means protecting the vulnerable and less fortunate among us. It means making sure consumers aren’t taken advantage of. It means helping them understand complicated financial products so they can make informed decisions. And ultimately, it means helping them climb rungs of the economic ladder so they can better provide for their families and pursue their dreams. This is important work. It is vital work. You have devoted your careers to it.
And so have we as public servants. You know, each and every morning I get up early and leave my wife and sleeping baby to come to work at the Bureau. I often stay late. I am not unique in this regard at the Bureau, and I am not seeking praise or recognition. But I hope it helps illustrate a simple point: I can assure you I would not trade away that precious time with my family if my heart was not in the work we are doing.
So if folks want to believe that we’re somehow trying to harm consumers, that is fine. We have thick skin. But it’s not really productive, because you certainly won’t convince us that that is our intention, and it tends to distract from our shared mission. The harder and more rewarding thing to do is to exchange ideas, to be exposed to different perspectives, and hopefully to learn from one another.
That is why we at the Bureau want to learn from you. We respect the work you do in your communities and for the consumers you seek to serve. Consumer advocates in particular have tremendous knowledge of local issues and concerns that the Bureau needs to hear about. Your perspective helps inform our understanding of what is happening to consumers.
And so I think that maybe the best way to use the remainder of our time today is not to walk through our recent policies and activities. We can certainly continue this conversation and discuss those issues in the future. Instead, what I’d like to do is try to better explain to you how we define consumer protection, and the intellectual principles that motivate our actions. That way you know where we are coming from, and can better help you make sense of where we are going. And I just want to note that the issues I am going to touch on today relate to the normative foundations that will inform our decisions. Yet there are of course a number of statutory requirements Congress has charged the Bureau with executing; to the extent that those requirements allow for discretionary authority, then these principles will help inform the final decision.
So when considering how we go about fulfilling our mission to protect consumers, it is perhaps helpful to understand that we are guided by a presumption in favor of consumer choice. That is our guiding principle. Because when consumers are free to choose among an array of financial products that potentially suit their needs, it creates competition, expands choice, and promotes individual autonomy, and liberty. It’s an environment where everyone is better off. And the Bureau can support that marketplace by making sure consumers have good information and are properly educated about financial products.
Because market transactions are fundamentally about mutually beneficial exchange. When two parties freely bargain with one another, both are made better off. And when our policies align with our guiding principle, the results will be positive for consumers, industry, and the broader economy.
The vision I have just briefly touched on is rooted in three basic principles central to America’s economic strength. First, we recognize that individuals understand what is best for themselves and their families better than D.C. bureaucrats. Second, in complex systems like markets, decentralized decision making and simple rules better address problems than a centralized top-down approach. And finally, economic opportunity is the key to unlocking the American dream. Without a presumption in favor of consumer choice, American economic strength and market activity are significantly diminished and the American dream gets put out of reach for ordinary citizens. In short, without consumer choice the market cannot function, and the American people lose the benefits of the market economy.
Now, why do I think the Bureau should take seriously the benefits of markets? Well, we have a significant amount of evidence demonstrating that markets improve the lives of ordinary people. Two centuries ago the average world income was about $3 a day in today’s money. It’s now $33 a day. And the average American worker today earns about $130 a day. The economist Deidre McCloskey calls this “The Great Enrichment.” It was driven by what she calls “the liberation of ordinary people to pursue their dreams of economic betterment.” 1 That liberation results from the application of the self-evident truth affirmed by our Founding Fathers and generations of Americans since: equality before the law, self-determination, and ordered liberty. Or as their contemporary Adam Smith put it, the practice of “allowing every man to pursue his own interest his own way, upon the liberal plan of equality, liberty, and justice.” 2
The past can guide us moving forward. And the past tells us that economic progress is a product of individual autonomy and free enterprise. We recognize that when individuals decide what’s best for them, it promotes material well-being, treats individuals with respect, embraces personal dignity, and restrains government meddling in our lives. 3 And though economic freedom alone is not sufficient for political freedom, it is unquestionably necessary. 4
But it was not always so clear to everyone that market economies are the way forward. The 20th century demonstrated that, sometimes in brutal and inhumane ways. The travesties experienced in the planned economies of Communist Soviet Union and China are almost unbelievable to imagine. Shortages of food, medicine, and other basic human necessities accompanied by extreme inequality, human rights abuses, and governments terrorizing their people. Indeed, one only needs to look at the news today from Venezuela to get a sense of the devastation planned economies have on their citizenry.
The collapse of planned economies was a product of a variety of ill-informed policies. The efficient and productive allocation of resources requires prices, without which producers are unable to identify consumer demands, needs, and preferences. It is through the price system that knowledge and information are transmitted throughout the economy. Hubris blinded government officials into thinking they could understand people’s needs and distribute economic resources just as well as decentralized actors relying on the price system. And their citizens tragically paid for their arrogance.
The end of the 20th century saw the vindication of market economies, the triumph of capitalism, and the collapse of Soviet communism. But our reliance on markets doesn’t mean the absence of rules and regulations. To function, markets require property rights, contract law, courts of law—and regulatory agencies—all playing a significant role in our economic system.
In fact, one can think of our economic system as a three-legged stool. 5 The first leg is competition through the marketplace. The second is the framework of contract rights, property rights, and related legal obligations executed and enforced through the legal system. The third leg is public agencies. When competition and contract rights cannot adequately restrain market participants who don’t play by the rules, public agencies must help bear the weight of policing the markets.
Now, the role of these regulators is not to replace the market economy, but to reinforce it—to foster competition and protect consumers by ensuring everyone plays by the same rules. In a competitive market, firms offer products based on price and quality, and consumers can compare and decide which products best meet their needs. When a company’s product is not up to par or not as good as a competitor’s, consumers can take their business elsewhere. This market process provides companies feedback about their products and makes them more attuned to consumer demands. 6 It also incentivizes firms to maintain a certain quality about their products, because if they do not their reputation will suffer and consumers will turn away. 7 In this sense, the capacity of markets to self-correct is itself a form of consumer protection.
Honest businesses care about how their products are viewed by their consumers, communities, and peers. There’s an old saying that 80 percent of business comes from 20 percent of your customers. Without repeat business and a good reputation, business sours and owners lose money. But every human institution has its share of bad actors who lack honest, long-term goals. Some are fraudsters or thieves chasing a quick buck. And sometimes, market forces alone cannot weed out the cheats. Instead, doing so requires legal action.
Courts of law and government agencies serve as the primary place of defense and redress for property disputes. While property rights and contract law facilitate competitive markets, they may not be enough when dealing with deceptive con-artists unconcerned with reputation or where it is inefficient for consumers to band together and seek remedies.
And when that happens, the Bureau will step in to prevent or remediate fraud, deception, and other violations of law. Bad actors in the financial sphere hurt consumers and honest businesses. They drain sales from those who play by the rules and can stain the reputation of entire business sectors, undermining the credibility of the marketplace and leading consumers to doubt its integrity. Indeed, when regulators provide clear and simple rules and reinforce the rule of law, it helps facilitate a productive marketplace where lenders want to lend and borrowers want to borrow. Where there are mutual gains from trade. Where everyone is better off.
So what are the various components of consumer protection? I see three main approaches to government intervention when it concerns consumer protection: first, requiring disclosures by businesses that inform consumers about their products and services; second, combating unlawful acts or practices by market participants, including and especially those that are discriminatory; and finally, command-and-control intervention that restricts the prices, terms, and products that can be offered. The first two approaches are market-reinforcing interventions. The third, command-and-control product design, is not.
Unfortunately, public debate often conflates command-and-control interventions with market-based solutions. A common refrain, for example, is that a lender forced a consumer to take a loan on terms the consumer did not want. But if a lender coerced a consumer to purchase a product or used deceptive practices, that is unlawful behavior and it should be punished. And often, the complainant simply dislikes the product or the interest rate being charged and may couch the argument in terms of fraud to create the impression the product is or should be unlawful.
We must remember that respecting the dignity and autonomy of each person means respecting the decisions each person makes. Substituting our judgment for that of the consumer or nudging them in the direction of our preferred outcome smacks of paternalism. And it takes us down the path of command-and-control that I just referenced–where consumers are worse off, have limited financial choice, and suffer unnecessary hardship.
Let me provide a bit more detail about how the Bureau’s new leadership views each of the three consumer protection approaches I just mentioned. I will begin with disclosures.
As I mentioned earlier, competition is necessary for a marketplace to function efficiently. Disclosure-based regulation reinforces market processes by ensuring consumers have access to truthful and understandable information. These types of disclosures allow consumers to more efficiently compare similarly-situated consumer products among different lenders and decide whether the product fits their needs.
Beginning with the pioneering work of George Stigler, economists began seriously studying the economics of consumer search costs and information asymmetries. 8 Economists concluded that where information is costly to acquire or disseminate, there may be an adverse effect on prices which on occasion could lead to price disparities across companies and/or consumers. Regulatory agencies responded to this line of research by removing regulatory prohibitions on advertising by lawyers, dentists, optometrists, and other medical professions. 9 Similarly, Congress passed the Truth in Lending Act, which mandates uniform disclosures for certain types of credit. This in turn makes it easier and less expensive for consumers to inform themselves about products and services and compare apples to apples across products and providers. This promotes competition by allowing consumers to more efficiently compare what’s offered.
But at some point—like any economic good—the additional disclosure of information is not justified by the marginal cost. A lot of you here likely know what I am referring to. No one wants to read dozens of pages of disclosures or try to navigate through complicated terms and legal disclaimers. And most consumers will not read disclosures that are too long and tedious. No doubt, many of you have clicked past software terms or service agreements or thrown away a multi-page disclosure because they were too long and tedious to read. That’s why we need smart and efficient disclosures that make it easier for consumers to understand financial products; so consumers can make the best decision for themselves and their family and not have critical information be drowned out. And we also recognize that educating consumers about good financial practices also has real world benefits.
So the Bureau is helping to lead the charge toward efficient and effective disclosures that respect consumer autonomy and leverage the economy’s high-tech advances. For instance, the Bureau’s new Office of Innovation has proposed creating a BCFP Disclosure Sandbox to encourage companies to conduct trial disclosure programs. Most of you probably know a sandbox is a controlled environment where regulated enterprises can test innovative products or services on a limited scale and scope. We expect these trial disclosures to deliver meaningful results to consumers, and under the proposed policy, the Bureau may grant waivers for disclosures or delivery mechanisms that improve upon existing methods with respect to cost-effectiveness, increased consumer understanding, or otherwise. And your group serves an important role by helping the Bureau better understand what types of disclosures are working for consumers. That local knowledge better informs our understanding of current practices and facilitates improvements in policy.
But when disclosures or other business practices are designed to mislead, additional measures must be taken to combat unlawful acts or practices by market participants.
Historically, consumers seeking redress for typical consumer complaints—e.g., product quality, fraud, or assurance—sought refuge through common law suits for breach of contract or fraud. 10 But as the 20th century unfolded, the cost of bringing a private suit was increasingly prohibitive because the cost of litigation dwarfed whatever damages the consumer could likely demonstrate. 11 Congress sought to remedy the situation and created the Federal Trade Commission. And after some early growing pains, Congress amended FTC’s enabling statute to prohibit “unfair or deceptive acts or practices in…commerce”. 12 And of course, Congress created the Bureau almost ten years ago to carry out this tradition in the consumer finance space.
Federal and state consumer protection laws have typically focused narrowly on consumer welfare and are directed at misleading or confusing information about products and services. 13 Indeed, the development of these laws focused on prohibiting the dissemination of information that was misleading or could create a likelihood of confusion. As former FTC Commissioner Joshua Wright put it, “the consumer welfare focus reinforces market principles because consumers revealed preferences best demonstrate consumer desires, and consumer welfare is increased when consumers are better able to satisfy their desires through transparent and accurate transactions.” 14
Providing disclosures and policing market participants for unlawful practices are two approaches to consumer protection that promote a general presumption in favor of consumer choice. Unfortunately, in recent years we have seen a resurgence in discredited regulatory choices that paternalistically restrict and prohibit certain financial products. The rallying cry was for so-called “plain vanilla” credit products designed in Washington. Predictably, these paternalistic policies raise prices, hamstring competition, and constrain consumer choice.
What we sometimes hear from command-and-control advocates is that loans are like toasters. 15 The government does not allow you to purchase a toaster that has a significant chance of burning down your house—the argument goes—and therefore the government should similarly prohibit you from purchasing a financial product that could potentially cause you financial harm. 16 Indeed, advocates of this regulatory approach often seek one-size-fits-all solutions.
But this analogy is fundamentally flawed. A broken toaster—one that catches on fire, or simply does not toast bread very well—does little good for anybody. So let’s think about what a toaster is and what purpose it serves; well, it is a machine that converts electrical energy into thermal energy, and it has one purpose, which is to lightly burn a piece of bread.
But what about a financial loan? Well, it is an exchange of promises that permits a borrower to consume something sooner rather than later. The loan can be used to consume and effectuate a theoretically infinite number of products, services, and goals. You may want to start a business or purchase a car. But try using a toaster for something other than its singular purpose, like fishing, and you’ll appreciate its limitations. A defective toaster isn’t good for anyone other than maybe a scrap metal dealer. A loan, on the other hand, can conceivably be good for some people some of the time, even if it is not good for all people all the time. Because the individual shopping for the loan understands her financial circumstances better than a regulator ever could, attempting to regulate consumer credit like a toaster will tend to restrict that individual’s financial options and reduce consumer welfare overall.
Having examined the legitimate components of consumer protection, we should examine the principles that should govern our policy making generally. Our vision recognizes that unintended and unseen consequences can cause serious problems for consumers. And it also recognizes that the marketplace generates products and ideas that could never have been thought of by a single mind, much less a regulator. Mainstream economists understand this simple yet powerful theme. Adam Smith sought to explain why some nations at the time were creating wealth at levels never seen before. For example, Smith observed that “[the division of labor] is not originally the effects of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.” 17
In other words, institutions emerge through human action, not human design. 18
The vision I am putting forward today seeks to reinforce market exchange with market enhancing rules that promote choice and competition. Regulators cannot simply assume away the natural propensities of individuals by ignoring likely responses to regulatory interventions or superimposing their own normative ideals on others. Nor can they ignore the realities of market exchange. It is only through the experimentation of the marketplace that products and services can emerge to satisfy the infinite wants and desires of consumers. And if regulatory actions make obtaining certain financial products more costly, the underlying demand for that product does not magically disappear. One way or another, consumers will continue to truck, barter, and exchange.
In thinking about the proper scope of regulatory policy, it is important to recognize and evaluate not only the intended benefits of a particular policy but also the potential unintended consequences. In a famous essay by the economist Frederic Bastiat titled “What is Seen and What is Not Seen,” Bastiat wrote that “there is only one difference between a bad economist and a good: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” 19 The effects of consumer financial regulations have both intended and unintended consequences, and the Bureau must attempt to analyze both types before intervening in the marketplace.
And there are additional political economy concerns that need to be properly analyzed by the Bureau. Regulatory actions, by their nature, prescribe or prohibit certain economic behavior and consequently benefit some while burdening others. 20 It is perhaps of utmost importance then to delineate the precise market failure the intervention is seeking to solve and at the same time be mindful not to allow some industries to gain at the expense of others. The concept I am describing is called regulatory capture. 21
Regulatory capture can take many forms. Entrenched industry can benefit from new and onerous regulations that make it difficult for new business to form and enter the market. Alternatively, industry with access to political power benefit when regulators make substitutes for their products more expensive. Such activity reduces competition and raises prices for consumers by creating inconsistent rules that artificially segment the consumer loan market. 22 Our goal is to represent all consumer voices and improve aggregate consumer welfare.
Putting aside the discredited economic theories it relies on, command-and-control regulation also undermines individual liberty. Whereas a presumption in favor of consumer choice inherently lifts up the individual and enhances individual liberty, command-and-control regulations diminish it. And while it is true that when regulators conduct their analyses it is difficult to calculate a precise value for liberty, it is nonetheless imperative for regulators to take liberty into account. 23
As John Stuart Mill observed, “If a person possesses any tolerable amount of common sense and experience, his own mode of laying out his existence is the best, not because it is the best in itself, but because it is his own mode” and later adds that “[h]e who chooses his plan for himself employs all his faculties. He must use observation to see, reasoning and judgement to foresee, activity to gather materials for decision, discrimination to decide, and when he has decided, firmness and self-control to hold to his deliberate decision.” 24 Indeed, this sentiment was echoed by Amartya Sen when he noted that decisional autonomy and being free from interference from others were crucial components to freedom. 25
But command-and-control style regulation does not value “the process aspect of freedom” or the dignity of individual autonomy. When faced with a consumer who happens to have a preference that is contrary to that of the regulator, the command-and-control diktats usurp the rights of the consumer and force her to comport with the regulator’s preferences. As Judge Ginsburg and Professor Wright put it:
“Limiting the range of decisions to be made by individuals or burdening those who would make an officially disfavored choice…tends to infantilize the public. Effective decision making is acquired through trial and error, that is by making a decision and either getting verbal feedback about or directly observing the success or failure of one’s decision as a means of reaching one’s goal…[t]he more palpable the consequences of one’s decisions, the more indelible the imprint of experience.” 26
There is little doubt that most ordinary Americans would regard such officious behavior as antithetical to good governance. Our vision respects the basic fabric that makes the United States truly exceptional. Where we treat everyone as equals and allow the individual to shape their destiny. As Hayek put it, “Liberty not only means that the individual has both the opportunity and the burden of choice; it also means that he must bear the consequences of his actions and will receive praise or blame for them. Liberty and responsibility are inseparable.” 27 Dignity for the individual means respecting her choices. And it is precisely through the independence to make those choices that liberty is taken seriously.
A substantial portion of my remarks today have been aimed at attempting to convince you that markets and consumer choice have been impressive tools for improving the lives of ordinary Americans. Let me give you just a few examples of this progress. Back in 2013, an economist looked at a Sears catalog from 1975 and compared the work-time cost of those products to similar items in 2013. What he found is remarkable. 28 To purchase a manual treadmill in 1975, the typical non-supervisory American worker needed to work 18.5 hours; in 2013, she only needed to work 6.5 hours. To purchase a 19 inch television, that same worker in 1975 had to work 60.6 hours; in 2013 she only needed to work 6.6 hours. And to purchase a washer/dryer combo, the worker had to put in 67 Hours; today she only has to put in 29.9 hours.
After going through a few other examples, the economist concluded that in order to buy the bundle of items the economist identified, an ordinary American worker in 2013 works “a mere one-third of the work time that was required by his or her counterpart in 1975”. And the examples do not capture the technological innovations that the newer products have.
But for some reason there is a long history of skepticism regarding the utility of consumer credit. A major concern among critics is the belief consumers routinely choose products that they cannot afford or lead them to live beyond their means. But this belief is belied by the facts. Empirical evidence demonstrates that consumers are rational and the market process improves consumers’ lives. 29
And contrary to common mythology, consumer credit—the process of lending money to consumers—increases opportunity and wealth in the economy. A consumer borrows money today and spends more in the present, with the intent on paying back the loan in the future. Put differently, rather than save over a period of time and forgo the benefits of a particular product, consumer credit changes the timing of the purchase. Yet government regulators often ignore the basic purpose behind consumer use of credit. They can fail to recognize that market transactions are a positive-sum game. And they can also ignore the economic reality undergirding the pricing and types of services offered by businesses.
The Bureau’s approach must reinforce the basic institutions that support these outcomes. But that means the Bureau has to engage in light-touch, consumer-first regulatory policy. Not heavy-handed, outdated regulation that is ill-equipped to deal with the technological demands of the 21st century. The lessons of the past must guide us into the future.
I have tried to explain our principles so you can understand how we will be guided by a presumption in favor of consumer choice as we execute the Bureau’s important mission. My hope is that you understand that we intend to develop policies that are consistent with these principles. And I ask for your help: if you ever believe that we are violating our principles, call us out on it. Let us know how we can better achieve them. We’ll greet that as legitimate and helpful engagement. I am very hopeful that we can work together to help improve the lives of consumers. Our door will always be open to important groups like Consumer Action. Thank you.