Parting thoughts: Sometimes, government actually is the solution

The Inquirer published my final consumer column on Sunday (you can read it here). Now it's time to take leave from this blog, which I hope another writer will take over. Before I go, a few parting thoughts.

As I wrote Sunday, one thread seems to connect many of the problems I've focused on during nearly two decades covering consumer topics. It boils down to this: Markets offer the best possible consumer protection – but only when they work, which means there's enough competition and transparency to keep companies on their toes. Consumers are always better off if they understand the product or service offered and the price, and if they can threaten to walk away to a competitor. A key corollary: Markets work best when they're governed by well-designed rules.

Unfortunately, devils always lurk in the details. The Federal Communications Commission recently moved in the right direction by reclassifying broadband Internet service as "telecommunications" rather than as a lightly regulated "information service." But that came after a decade of moving the other way – a decade in which regulators placed too much faith in markets and some cable and phone companies took advantage of their position by interfering with or challenging widely accepted principles of an "open Internet" and "net neutrality."

What makes markets fail? The biggest problems stem from market power, when companies that face little or no competition feel free to take advantage of their position. Electric, gas and water utilities are closely regulated because we long ago accepted that they were "natural monopolies." Cable companies like Philly's own Comcast are a prime example of unregulated monopolies – or duopolies or oligopolies, depending on where a consumer lives. That's why Philadelphia's franchise-renewal negotations matter so much: As I wrote recently, they're a rare opportunity for city officials to exert leverage on behalf of consumers. But cable companies are hardly alone in facing too little market discipline. Airlines know that on many routes, passengers have little or no choice, and behave accordingly. If you have any doubts, look at what happened to Philadelphia-Pittsburgh fares when Southwest Airlines added and then discontinued service on that route.

Another key problem is what economists call "asymmetric information." In the ideal market, all participants know enough about the true cost and value of what's for sale that nobody can charge a premium simply by demanding it. But in the modern world, that level of so-called "perfect information" is virtually never available. Car prices are an example, which is why smart consumers seek out tools such as Consumer Reports' Car Buying Service or similar services from Edmunds. It's reasonable to seek the best bargain for a car, but you can't do it unless you know all the hidden financial arrangements between the automaker and the dealer. Even with Consumer Reports' or Edmunds' help, you never will.

The problem of asymmetric information is what drove President Obama's Labor Department to finally impose a clear fiduciary duty on retirement advisers – a duty to act in a client's best interests. Join me in the club if you'd never previously understood the difference between an "investment advisor," a professional who already has such an obligation, and a "financial adviser," a title sometimes used by insurance brokers and others outside the purview of the Securities and Exchange Commission. Financial advisers' conflicts – including incentives that can drive them to recommend higher-fee investments – cost U.S. investors a jaw-dropping $17 billion a year, according to a estimates by the president's Council of Economic Advisers.

One thing that has already changed for the better was a result, ironically, of the 2008 financial crisis, a disaster that finally convinced many policymakers – or at least many Democrats – that our bipartisan, decades-long infatuation with deregulation had carried us off a cliff.

Two years later, the Dodd-Frank financial reforms included establishment of the Consumer Financial Protection Bureau – a new approach to oversight and regulation of consumer-financial products that was the brainchild of Elizabeth Warren before she became a U.S. senator from Massachusetts. A legal scholar who studied bankruptcy and the financial struggles of the middle class, Warren argued that traps like balloon subprime mortgages were the equivalent of exploding toasters – something that any modern government should protect its citizens against, because the "market" solution – reputational damage ad after-the-fact lawsuits that may or may not succeed – is a poor substitute for rules against selling dangerous products in the first place. Thankfully for consumers, President Obama not only embraced the idea, but stuck with it when leading congressional Democrats seemed willing to trade it away to appease Wall Street.

I spoke with Warren recently for a column marking the 10th anniversary of 2005's ill-advised overhaul of federal bankruptcy laws and the fifth anniversary of Dodd-Frank – two laws that emerged under starkly different circumstances from the Washington sausage factory.

Research by economists at New York Fed has shown how the bankruptcy law actually helped fuel the financial collapse. Consumers who were unable to write off unsecured debt – even credit-card debt that had mushroomed thanks to penalty interest rates as high as 35 percent or more – were more likely to default on mortgages, a phenomenon that contributed to hundreds of thousands of additional foreclosures. At the same time, Warren says, the overhaul "encouraged lenders to take on even riskier and riskier loans, and encouraged people to take on more and more debt, even when it was clear on its face that the debt would not be repayable."

A decade after the bill passed, with plenty of active and tacit support from many Wall Street-friendly Democrats, I asked Warren about proponents' repeated claim back then that personal bankruptcies had climbed because bankruptcy had "lost its stigma" rather than for reasons such as growing consumer debt and stagnating middle-class incomes.

Writing about consumers' problems with debt, I've almost never encountered any who were less than mortified by even the prospect of bankruptcy. On the other hand, there seems to be abundant evidence that corporate bankrupts no longer feel much, if any, shame – an observation bolstered by Donald Trump's dismissal of questions about his business bankruptcies during the first Republican presidential debate. Warren sees the same contrast.

"Unlike Donald Trump," she told me, "when families go into bankruptcy the humiliation runs deep. But when a business executive makes the decision, he shrugs and says, 'Hey, it's just business.' No shame at all."

To be sure, bankruptcy is one of the toughest areas for government to regulate – a balancing act because of all the competing interests at stake. We've come a long way since the era of debtors' prisons, but some poor people still wind up in jail essentially because of unpaid debts while wealthier people can pay their way out. A well-designed bankruptcy system needs to allow both individuals and corporations the ability to get back onto their feet after a financial reverse, while weighing that against collateral harm and the need to discourage senseless risk-taking.

When it comes to regulating Wall Street, Dodd-Frank was also a balancing act. Warren and others contend the law didn't go far enough to ward off the kinds of risks taken by huge financial firms that believe they have an implicit guarantee because they're "too big to fail." Short of breaking up the biggest banks, Warren argues persuasively for rebuilding the Glass-Steagall Act's wall between commercial and investment banking, repealed in 1999.

But she sees the CFPB's performance as something to cheer.

"The CFPB is the bright spot on the landscape – it's government that works for people," she told me. In their first four years, agency employees have "handled more than 650,000 complaints. They've forced big financial institutions to return more than $10 billion directly to families they cheated. That's government that works for people."

Even more important than being a "cop on the beat," in one of Warren's favorite phrases, is that the CFPB is helping the market itself function better, with rules promoting simplicity and transparency in a sector know for its tricks and traps. "People can see what something costs in advance, so they can comparison shop more easily," she says. "And they don't have to worry as much that hiding back in the fine print is something that will jump out and bring them down financially."

It's a conservative canard that those who reject anti-government dogma always want higher taxes, more intervention, or rules for the sake of rules. I can't speak for anyone else, but I want taxes sufficient to pay for services commensurate with my country's wealth, including a graduated income tax that asks higher rates as incomes rise; I want investment in education, research and infrastructure that will pay dividends far into the future; and I want market intervention where it's necessary and helpful. Because markets often fall well short of the ideal, it's essential to have a cop on the beat to protect consumers from wrongdoers and careless harm. But we also need regulators and antitrust officials who work to identify and address market failures with the fearlessness of Teddy Roosevelt-style trust-busters.

In hindsight, it doesn't surprise me that since writing my first "Consumer Watch" column in 2001, I've gotten far more complaints about sectors where markets have failed to produce robust and transparent competition, and far fewer about sectors such as retailing, where it's easy for disgruntled consumers to see what they're getting and vote with their feet if it makes them unhappy.

My thanks to all the people – from ordinary consumers to advocates to academics and government officials – who have helped me better understand consumer issues over the years. My column and blog wouldn't have been the same without you.