Consumer Perspectives for the New Year: The Need for Full Disclosure of Relevant Information about Products
Discussion of stimulus packages, bailouts and related macroeconomic policy options to create jobs and to get the economy going again has pushed into the background equally important debates over the role of government in individual market segments ranging through those for financial products, housing, energy, telecommunications and others.
To Regulate or Not to Regulate?
Assorted pundits, partisans and policy wonks argue that getting the economy back on track requires increasing government control, guidance, restrictions, or outright replacement of market processes in places and ways that have previously been left to the discretion of consumers and business managers. Re-regulation to offset years of de-regulation is the mantra. (Merriam-Webster defines regulate as “…to govern or direct according to rule or to bring under the control of law or constituted authority”). Fair-minded advocates know it is not that simple, but the impression persists that willy-nilly substitution of government processes for market processes, of public decision making for private decision making, can improve economic performance and, in particular, assure citizens that we will not again be faced with the avalanche of macroeconomic crises we have recently witnessed. Truth? Maybe, maybe not!
It’s everywhere! We only need to compare performance with expectations or with what we think ought to be, or have been. Market failure, like beauty, is very much in the eye of the beholder. Markets fail when they do not match our varying expectations or aspirations. Thus, perceptions of market failure are the result of impressions drawn from market imperfections. Some of course are quite serious, but others are less so. Market failure should be judged on a continuum ranging from perfection to abject failure.
It’s everywhere, too! Private decision makers frequently err in large and small ways, but so too do lawmakers and those responsible for carrying out the law. Indeed, some of the most vociferous critics of market performance are equally critical of the performance of government in the same time period. Regulation by the Federal Communications Commission is widely regarded as a failure by advocates, many of whom urge expansion of FCC authority and powers. Government emergency preparedness has been the subject of great criticism, as have programs related to energy, environment, housing and others. Indeed, as reflected in a variety of opinion polls, the Congress itself has drawn the ire, and disdain, of large numbers of citizens.
Mixed Economy—What Proportions?
Ours, like all others in the world, is a mixed economy: mixed in the sense that important economic decisions impacting the use of resources are made by economic agents in both the public and private sectors. The world of nations offers all sorts of combinations – some like ours relying mainly on markets and others relying mainly on “command and control” emanating from central governments. The form and relative importance of each locus of economic decision making is changing constantly as new laws and rules emerge to combine with new market forms. Much current discussion resembles an ideological “blame game.” It is fashionable for conservatives to laud the performance of markets and place the blame for failure at the door of government and, equally so, for those on the left to blame markets and private decision makers. However, as one well-known scholar put it, the optimum very likely contains both government and markets. The goal of policymakers and lawmakers is to find: “…the best possible mix of inevitably imperfect regulation and inevitably imperfect competition.” [A. Kahn, The Economics of Regulation: Principles and Institutions, Vol. I, Introduction at xxxvii; Volume II at 114 (1970; 1988 edition).]
The challenge of policymakers is to identify and where possible quantify, if only crudely and in objective ways, the costs and benefits of different mixes of reliance on markets and government regulation. In this task, simple solutions and rhetoric from ideologues on either end of the political spectrum deserve little weight.
Role of Government?
Governments play many roles in a mixed, predominantly market economy like ours.
- Defining rights and obligations of different private agents (enforcing contracts and property rights, etc.)
- Providing goods and services that would likely not be adequately (in amounts or quantities) provided by markets alone (national defense, parks, etc.)
- Shaping the bounds of acceptable conduct by agents and principals in the market place by constraining certain activities – antitrust laws, consumer protection laws, etc.
- Promoting certain kinds of market conduct by providing positive and negative incentives (utility regulation, targeted tax and expenditure programs, etc.)
In effect, government laws and rules define the bounds of acceptable and desired behavior within which private decision makers make choices about use of privately-owned economic resources as either suppliers or demanders.
Role of Markets?
Markets have long been recognized as “places” where information about societies wants and needs are aggregated (demand), then reconciled with aggregated information about how best to meet those needs (supply). Markets reflect the well-known “wisdom of crowds” – a wisdom that simply cannot be replicated by government officials, no matter how representative, well intentioned or armed with super computers.
The Challenge: Maximize Consumer Welfare!
Policy makers, law makers and enforcers must harmonize, balance, blend, and generally optimize elements of government and private sector conduct in ways that maximize consumer welfare. Economic performance is not the sole domain of either the public or private sectors, of politicians and bureaucrats vs. labor and management. Economic performance is the resultant of the joint operation of market forces in the context of incentives and constraints reflected in laws, rules and regulations established by government. Like the two blades of a pair of scissors responsible for cutting the cloth, government and markets are jointly accountable for economic outcomes.
Where Do We Go from Here?
- Respect for the limits of government as a means of addressing market failure;
- Careful analysis of the costs and benefits of government actions addressing market failure, including special attention to potential unwanted, unanticipated consequences of well-intended government actions;
- Consideration of two kinds of errors—a) too much reliance on markets, and b) too much faith in the ability of government as a palliative;
- Finding a balance that reflects awareness and respect for the strengths and limits of each form of institution; and
- Humility on both ends of the political spectrum driven by recognition that the answer to the question, “To Regulate or Not to Regulate” is an empirical one and not a political one.
The Need for Accurate Information about Outcomes of Choice
One regulatory initiative that has not been widely discussed, but which would have significant payoffs and might well find support across the political spectrum involves full and fair disclosure of information about the terms of sale and characteristics of goods and services offered for sale in the market place. Advocates on all sides tend to agree that consumers can make rational choices if, and only if, they are as fully informed about the economic effects of their decisions on individual welfare. Even a cursory survey of market performance turns up numerous instances in which consumers are mislead, deceived, inadequately informed or otherwise deprived of information necessary for consumer choice to lead to maximization of their wellbeing and achievement of efficiencies associated with reliance on markets. Surveys make clear, for example, that most consumers buy printers and other durable goods that require complementary goods (like ink) that add to lifetime costs without full knowledge of such costs. Consumers are poorly informed about the cost of personal credit on credit cards and about the limits on coverage for insurance claims. Indeed, explanations of the causes of the current “financial” meltdown increasingly focus on lack of information by buyers of a variety of financial and real assets. Full disclosure of relevant consumer product information is a sine qua non of the effectiveness of markets. Who can be against that?