Yesterday on TechCrunch, Josh Constine posted an interesting essay about how some in the press were “Selling Digital Fear” on the privacy front. His specific target was The Wall Street Journal, which has been running an ongoing investigation of online privacy issues with a particular focus on online apps. Much of the reporting in their “What They Know” series has been valuable in that it has helped shine light on some data collection practices and privacy concerns that deserve more scrutiny. But as Constine notes, sometimes the articles in the WSJ series lack sufficient context, fail to discuss trade-offs, or do not identify any concrete harm or risk to users. In other words, some of it is just simple fear-mongering. Constine argues:

Reality has yet to stop media outlets from yelling about privacy, and because the WSJ writers were on assignment, they wrote the “Selling You On Facebook” hit piece despite thin findings. These kind of articles can make mainstream users so worried about the worst-case scenario of what could happen to their data, they don’t see the value they get in exchange for it. “Selling You On Facebook” does bring up the important topic of how apps can utilize personal data granted to them by their users, but it overstates the risks. Yes, the business models of Facebook and the apps on its platform depend on your personal information, but so do the services they provide. That means each user needs to decide what information to grant to who, and Facebook has spent years making the terms of this value exchange as clear as possible.

“While sensationalizing the dangers of online privacy sure drives page views and ad revenue,” Constine also noted, “it also impedes innovation and harms the business of honest software developers.” These trade-offs are important because, to the extent policymakers get more interested in pursing privacy regulations based on these fears, they could force higher prices or less innovation upon us with very little benefit in exchange.

Of course, the press generating hypothetical fears or greatly inflating dangers is nothing new. We have seen it happen many times in the past and it can be seen at work in many other fields today (online child safety is a good example). In my recent 80-page paper on “Technopanics, Threat Inflation, and the Danger of an Information Technology Precautionary Principle,” I discussed how and why the press and other players inflate threats and sell fear. Here’s a passage from my paper:

“The most obvious reason that doomsday fears get disproportionate public attention is that bad news is newsworthy, and frightening forecasts cause people to sit up and take notice,” Julian Simon astutely observed in 1996.[1] That is equally true today.[2] Many media outlets and sensationalist authors sometimes use fear-based rhetorical devices to gain influence or sell books. “Opportunists will take advantage of this fear for personal and institutional gain,” notes University of Colorado Law School professor Paul Ohm.[3] Fear mongering and prophecies of doom have always been with us, since they represent easy ways to attract attention and get heard. “Pessimism has always been big box office,” notes [Matt] Ridley.[4] This is even more true in the midst of the modern information age cacophony. Breaking through all the noise is hard when competition for our eyes and ears is so intense. It should not be surprising, therefore, that sensationalism and alarmism are used as media differentiation tactics. This is particularly true as it relates to kids and online safety.[5] “Unbalanced headlines and confusion have contributed to the climate of anxiety that surrounds public discourse on children’s use of new technology,” argues Professor Sonia Livingstone of the London School Economics. “Panic and fear often drown out evidence.”[6] Sadly, most of us are eager listeners and lap up bad news, even when it is overhyped, exaggerated, or misreported. [Michael] Shermer notes that psychologists have identified this phenomenon as “negativity bias,” or “the tendency to pay closer attention and give more weight to negative events, beliefs, and information than to positive.”[7] Negativity bias, which is closely related to the phenomenon of “pessimistic bias” …  is frequently on display in debates over online child safety, digital privacy, and cybersecurity.

That’s basically what FTC Chairman Jon Leibowitz told the Association of National Advertisers when he spoke to their “Advertising Law & Public Policy” conference last Thursday. As I noted last week, there’s intense pressure in Congress to pass a financial regulatory overhaul and, unfortunately, the version passed by the House in December—Rep. Barney Frank’s “Wall Street Reform and Consumer Protection Act of 2009” (H.R. 4173)—would also grant the Federal Trade Commission vast new powers for all its regulations, not just those relating to the non-bank financial institutions it currently regulates. In particular, HR 4173 would:

• Make it far easier (and not just faster) for the FTC to issue all kinds of new regulations on its own, without a specific Congressional mandate to do so and instead of relying on case-by-case enforcement to punish “unfair” or “deceptive” acts and practices;
• Reduce public input into those regulations;
• Impose heavy civil penalties on companies before notifying them that a practice might be “unfair” or “deceptive”;
• Prosecute those who merely provided “substantial assistance” to someone engaged in “unfair” or “deceptive” acts or practices; and
• Sue on its own authority, instead of through DOJ (as now).

I summarized my concerns about this bill in this short interview with PFF’s new communications director, Mike Wendy, last week: [display_podcast]

Leibowitz has lobbied hard to have his agency put on steroids (as former FTC Chairman Jim Miller put it), asking for all these things, as well as more funding, at the first Senate hearing on Hr 4173 back in February. (Conveniently, he was the only witness!) He repeated his calls for these powers on Thursday but tried to allay fears about how they’d be used. As Communications Daily reports:

The FTC would use expanded authority only where consumers suffer “significant harm,” bad behavior is common in the industry, standards would improve practices and the expected burdens are “reasonable,” Leibowitz said. “We’d be really stupid if we try to solve every problem in American society with a rule,” he said, so the commission will use any new authority “very judiciously….”  Where business practices and consumer expectations are “evolving,” self-regulation is working and First Amendment issues are involved, the FTC would hold back, he said… [including] behavioral advertising and marketing to children. It would show “enormously bad judgment to pursue those matters, Leibowitz said. “We do believe in self-regulation.”

I’m glad to hear Commission Leibowitz say all this but… well, I fear these soothing promises of regulatory restraint will ultimately prove hollow, if not under this FTC Chairman, then under his successors (just as I am not comforted by FCC Chairman Julius Genachowski’s similar promises not to regulate the Internet, no matter how sincere he may be). Strangely, Leibowitz promises the FTC will regulate only when “bad behavior is common in the industry”—and yet HR 4173 would eliminate the requirement of the FTC’s current Magnuson-Moss rulemaking procedures that a regulated practice must be “prevalent.” (The Direct Marketing Association’s Linda Wooley discussed this critical issue in detail in her testimony.) This illustrates a broader point: the whole point of restraining our regulatory agencies by statute is that we all know better than to trust a regulator when he says, “Oh, don’t worry, we’re not really going to use all that power—and if we do, we’ll be sure to use it carefully!”

The FTC May Need New Focused Mandates, But Not More Broad Powers

Leibowitz singled out “negative-option marketing (where marketers presume consumers want a certain product and charge them for it unless they opt-out) as an example of the kinds of scams the FTC would use its new powers to punish. Perhaps he’s right that the FTC may not be able to adequately address such unfair and deceptive practices today. But it does not follow that this requires increasing the FTC’s powers across the board. Sen. Kay Bailey Hutchison hit the nail on the head in her remarks at last week’s Senate Commerce Committee hearing on HR 4173:

In evaluating whether, and how, to change the scope and extent of FTC regulatory authority, I believe we must first ask whether there is a particular exigency, or area of consumer harm, that is so pervasive that the FTC’s existing enforcement capabilities and rulemaking processes are not sufficient to address the issue.  Second, if there is such an exigency, is the proposed legislative change broadly applied, resulting in greater regulatory burdens across a wide range of industries, or is it appropriately narrow to provide the FTC greater ability to develop rules and carry out enforcement actions directly relevant to that exigency.  Third, we need to consider whether the FTC has sufficient personnel in key areas of its responsibility to carry out its enforcement and consumer protection mandates.

In written testimony, FTC Commissioner William Kovacic supported retaining Moss-Magnuson’s additional procedural safeguards because:

While many other agencies do have the authority to issue rules following notice and comment procedures [under the Administrative Procedure Act (APA)], the Commission’s rulemaking is unique due to the range of subject matter (unfair or deceptive acts or practices) and sectors (reaching broadly across the economy, except for specific carve-outs). Except where Congress has given the FTC a more focused mandate to address particular problems, beyond the FTC Act’s broad prohibition of unfair or deceptive acts or practices, I believe that it is prudent to retain procedures beyond those encompassed in the APA.

Congress has already enacted several such statutes, such as COPPA, telemarketing, the CAN-SPAM Act and mortgages, and if the FTC could identify particular problems that require a new mandate to issue rules under the APA. Yet, as Linda Wooley noted in her testimony, when Commissioner Leibowitz was asked at last month’s hearing to enumerate areas in which APA rulemaking authority would be helpful, he could only respond that, “…we’d really want to […] think for a while if we got this authority about what we wanted to do and what we wouldn’t want to do…”

William Allen Rogers's 1904 cartoon recreates an episode in Gulliver's Travels, with T.R. as Gulliver

In other words, Leibowitz wants Congress to write his agency a blank check to do whatever it deems necessary in the future. Specifically, the FTC would get to decide which issues were appropriate for preemptive regulation, as well as achieving much the same effect of aggressive regulation through litigation designed to intimidate—imitating Teddy Roosevelt’s approach to foreign policy: “Speak softly and carry a big stick!“

We’ve been down this road before. In the 1970s, the FTC so thoroughly abused its uniquely vast jurisdiction by issuing rules to, among other things, ban advertising to children, that it was dubbed the “National Nanny” by the Washington Post—hardly a Thatcherite bastion. This experience led Congress in 1980 to impose the procedural safeguards that would be repealed by HR 4173. Congress was so angry it actually briefly shut down the agency to make it clear that it had not dubbed the agency a regulatory knight errant, free to tilt its steely lance at imagined windmills of “unfairness” or “deception.”

The Dodd Bill: A Welcome Alternative to HR 4173

HR 4173 was sent to the Senate in December, and in January, the bill was referred to the Senate Banking Committee, chaired by Sen. Chris Dodd. The Senate Commerce Committee, which held the two hearings discussed above, has jurisdiction only over the bill’s implications for non-financial regulation. So the two committees will have to work out some kind of compromise before the Senate can pass a bill—which will probably have to be reconciled with what the House passed. That procedural posture is important because it means the Senate has the opportunity to do what the House did not: Pause and consider whether financial overhaul really requires reinventing the FTC as the “National Nanny” it was well on its way to becoming back in the 1970s—and, in particular, what such a radical change to the FTC’s powers would mean for the Internet and other media regulated by the agency.

The good news is that Sen. Dodd’s draft 1336-page legislation seems to do precisely what Sen. Hutchinson and others have suggested: Change the FTC’s authority only with regards to a particular problem—in this case, financial regulation. (Dodd’s bill differs in a number of other respects from HR 4173). In a nutshell, Dodd’s bill would transfer the FTC’s consumer financial protection functions to the newly created Bureau of Consumer Protection at the Federal Reserve, but the FTC could also punish violations of the bill’s financial protections on its own under Section 5 of the FTC act.  Further, the Fed’s BCP would have to consult with the Federal Trade Commission before imposing any regulations. The FTC could impose civil penalties, but only for “knowing violations” of the CFPA Act—i.e., only for financial offenses. In an important recognition of the dangers of unbridled agency discretion, the Dodd bill also imports the FTC’s existing definition of “unfairness” as requiring that an act or practice be “likely to cause substantial injury to consumers, which is not reasonably avoidable by consumers” and which is “not outweighed by countervailing benefits to consumers or to competition.”

The bad news is that Dodd’s bill is unlikely to be the final word on the FTC’s authority, as Sen. Rockefeller’s Commerce Committee may insist on some or all of the provisions of HR 4173 that expand the FTC’s powers across the board among a flurry of other amendments. Still, whatever its other shortcomings or advantages, Dodd’s bill offers a path forward for financial overhaul that does not require remaking the FTC—and thus transforming regulation of the Internet, other media, advertising, cyber-security and privacy—among many other things. And for that, the Dodd bill deserves careful consideration as an alternative to just giving the FTC all the power it could ever want, and then just hoping the agency doesn’t abuse it—which is essentially what Chairman Leibowitz, much like the FCC’s Chairman Genachowski, is suggesting we do.

Holman Jenkins has a stinging editorial in today’s Wall Street Journal entitled, “Neutering the ‘Net,” which borrows a term that my friend Randy May coined long ago to describe what net neutrality regulation will ultimately accomplish. What I like best about the Jenkins essay was the way he exposed Free Press for their hypocrisy over metering as a possible alternative approach to network management, something I documented in this piece and this piece about their new-found love of Internet price controls.  Here’s how Jenkins puts it in his essay today:

The mask really slipped earlier this year when Time Warner Cable began experimenting with usage-based pricing to protect the average broadband customers from the 20% of users who create 80% of the traffic. A lobby called Free Press, the most extreme of the pro-net neutrality interests, went ballistic, calling metered pricing a “price-gouging scheme” and backing a bill in Congress to ban it. Never mind that Free Press had previously argued just the opposite, saying usage-based pricing was a fairer way to deal with congestion than, say, by selectively slowing down file-sharing sites that gobble up disproportionate broadband capacity. Never mind, too, the irony that the net-neut campaign against the selective slowing of non-urgent traffic has left only differential pricing as a way to bring a modicum of efficiency to network usage.

Indeed.  Of course, we should expect nothing less from the neo-Marxist media reformistas as the UnFree Press.

Apologies for the non-technology post, but since the only topics of conversation these days are Wall Street, credit default swaps, and Putin’s flights over Alaska, I thought I’d post my review of Dave Smick’s new book The World is Curved: Hidden Dangers to the Global Economy…the Mortgage Crisis Was Only the Beginning.

                                                                                                            <div style="100%"><a href="http://www.scribd.com/doc/6320801/Not-So-Flat-After-All-Forbescom-092908-by-Bret-Swanson">"Not So Flat After All" - Forbes.com - 09.29.08 - by Bret Swanson</a> - <a href="http://www.scribd.com/upload">Upload a Document to Scribd</a></div>