Category: Consumer Protection Law

Making Americans Less European

How do we explain the divergence between the US and so many other developed countries when it comes to social welfare issues? I looked at the issue last year, noting Spencer Overton’s conclusion that “Less than one percent of the U.S. population makes financial contributions over $200 to federal candidates, and . . . [o]f those who contribute over $200, approximately 85 percent have household incomes of $100,000 or more. . . .” Now Scott Ganz and Kevin Hassett propose that youth sports may actually be driving the difference:

A recent scholarly paper by economists Alberto Alesina and Edward Glaeser of Harvard University and Bruce Sacerdote of Dartmouth College found that countries tend to build large welfare states when citizens believe that success in life is largely determined by luck. . . . Americans are remarkably different from Europeans in this regard. If you ask Americans whether the economically disadvantaged are poor because they are lazy or unlucky, 60 percent say lazy. If you ask Europeans, only 26 percent finger laziness. Alesina and his colleagues argue that these attitudes shape society by shaping governmental and social institutions.

But why do these attitudes exist? A big part of the answer may be found in sports. A 1999 study by developmental psychologists Françoise D. Alsaker and August Flammer found American children spend more time participating in athletics than Europeans. In certain cases—America compared with France, for instance—the gap is quite substantial. A 1996 study by Michigan State University sports psychologist Martha E. Ewing and Vern D. Seefeldt, former director of the Institute for the Study of Youth Sports, found that 45 percent of all eligible American youths play in an agency-sponsored league, like Little League baseball or Pop Warner football. That is 22 million children each year who get an infusion of the American work ethos.

I am so glad that US children are spending more time on sports and less on trivialities like physics, foreign languages, or math. Otherwise they might subscribe to such troublingly European ideals as the difference principle, global warming, or the four freedoms.

Admittedly, I have to attribute my own distrust of cultural explanations to time spent at Oxford, where the dons cautioned against resorting to culture as an explanatory variable until you understood the politics, economics, and institutions it’s surrounded by. To begin thinking about why the US is such an outlier in social welfare policy, we might want to look at the work of international scholars (like Kieke Okma) who’ve done much to enhance our understanding of comparative health systems. We might also want to revisit the scorched earth politics of the 1990s.

How Inequality Drove the Subprime Mess

A few months ago I worried that many subprime borrowers were concerned parents terrified of losing a bidding war for places in good school districts. Today Robert H. Frank, with his usual perspicuity, explains that dynamic in a concise and convincing op-ed:

In a well-intentioned but ultimately misguided move to help more families enter the housing market, borrowing restrictions were relaxed during the [decades leading up to the subprime meltdown]. Down payment requirements fell steadily, and in recent years, many houses were bought with no money down. Adjustable-rate mortgages and balloon payments further boosted families’ ability to bid for housing.

The result was a painful dilemma for any family determined not to borrow beyond its means. No one would fault a middle-income family for aspiring to send its children to schools of at least average quality. (How could a family aspire to less?) But if a family stood by while others exploited more liberal credit terms, it would consign its children to below-average schools. Even financially conservative families might have reluctantly concluded that their best option was to borrow up.

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Financial Products Safety Commission

As we deal with the consequences of housing and consumption arms races, Elizabeth Warren’s article on “Making Financial Products Safer” is a must-read. Warren notes:

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance your home with a mortgage that has the same one-in-five chance of putting your family out on the street—and the mortgage won’t even carry a disclosure of that fact. Similarly, it’s impossible for the seller to change the price on a toaster once you have purchased it. But long after the credit-card slip has been signed, your credit-card company can triple the price of the credit you used to finance your purchase, even if you meet all the credit terms. Why are consumers safe when they purchase tangible products with cash, but left at the mercy of their creditors when they sign up for routine financial products like mortgages and credit cards?

Warren proposes that a new federal agency start regulating credit from a consumer safety perspective:

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Does the Case Affect CDA § 230 Immunity for JuicyCampus?

Roommates2.jpgThe U.S. Court of Appeals for the Ninth Circuit (en banc) has just issued a very interesting opinion interpreting a federal law providing immunity from liability for online speech — the Communications Decency Act (CDA), 47 U.S.C. § 230. The case is Fair Housing Council v., LLC, 2008 WL 879293 (9th Cir. April 3, 2008) (en banc).

The CDA § 230 states: “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” Most courts have interpreted § 230 to immunize the operators of websites or blogs against distributor liability for comments posted by others.

I have been critical about the way that this statute has been interpreted:

Unfortunately, courts are interpreting Section 230 so broadly as to provide too much immunity, eliminating the incentive to foster a balance between speech and privacy. The way courts are using Section 230 exalts free speech to the detriment of privacy and reputation. As a result, a host of websites have arisen that encourage others to post gossip and rumors as well as to engage in online shaming. These websites thrive under Section 230’s broad immunity.

juicycampus3.jpgWebsites such as JuicyCampus, which encourage and facilitate gossip and rumors about college students, exploit § 230 immunity.

The case suggests a limit to § 230 immunity that some might believe creates a way to hold sites like responsible for the gossip and rumors they solicit. In the end, I don’t believe that will save the day and penetrate § 230’s armor for sites like JuicyCampus. allows users to post listings for roommates. When a user creates a listing, requests particular information from users, requesting preferences for gender, sexual orientation, and kids. Much of this information is solicited via drop down menus which list the various choices. Users can also put additional comments in a section that allows for an open-ended narrative. Two Fair Housing Councils in California sued Roommates contending that the site violated the Fair Housing Act (FHA), 42 U.S.C. § 3601 and state housing discrimination statutes. The FHA prohibits any “statement . . . with respect to the sale or rental of a dwelling that indicates . . . an intention to make [a] preferenc,e limitation, or discrimination” based on certain categories (such as gender or sexual orientation). California law has a related restriction. contended that it was immune under the CDA § 230. It claimed that it just provided options for its users and is not the “information content provider.” But the Ninth Circuit concluded that § 230 immunity didn’t apply. According to the statute, an “information content provider” is one who is “responsible, in whole or in part, for the creation or development of” the content. Writing for the court, Chief Judge Kozinski noted:

The FHA makes it unlawful to ask certain discriminatory questions for a very good reason: Unlawful questions solicit (a.k.a. “develop”) unlawful answers. Not only does Roommate ask these questions, Roommate makes answering the discriminatory questions a condition of doing business. This is no different from a real estate broker in real life saying, “Tell me whether you’re Jewish or you can find yourself another broker.” When a business enterprise extracts such information from potential customers as a condition of accepting them as clients, it is no stretch to say that the enterprise is responsible, at least in part, for developing that information.

The court also held that was not immune for its search system, which allowed users to search according to discriminatory criteria:

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The Neuroimaging of Persuasion: Selling Babies

800px-Baby_playsaucer.jpgI’ve argued (here, here, & here) that there is a gap between how jurists generally imagine that consumers behave (and should be protected) and the technological tools available to clever marketers. The slogan I’ve come up with is total persuasion: “a society in which most speech that you hear is designed to persuade you to consume.”

Today’s W$J offers an interesting article along this line. According to researchers at Oxford, we’re hard-wired to respond to baby faces in positive ways:

Using a technique called magneto-encephalography that measures brain signals, the Oxford researchers found that a baby’s face can seize our attention in milliseconds, activating an unusual mental organ called the fusiform gyrus that responds to human faces. Moreover, these distinctive infant features, unlike the mature features of an adult, trigger a sense of reward and good feeling in a seventh of a second. Picture Bambi’s saucer-size eyes or those of Mickey Mouse.

And from later in the article:

Through brain-scanning experiments, researchers have located the neurochemical essence of our face expertise in a strip of temporal-lobe tissue about two inches long and three-quarters of an inch wide. Studying this face recognition area in macaque monkeys, neurobiologist Doris Tsao at the University of Bremen, Germany, reported in Science that the tissue consisted almost entirely of neurons that responded just to faces.

To understand how the tissue develops, Yoichi Sugita at Japan’s Neuroscience Research Institute raised infant monkeys for two years without ever showing them a face. Lab workers wore hoods. When faces were finally revealed to them, the monkeys could readily tell them apart, Dr. Sugita reported in January in the Proceedings of the National Academy of Sciences.

“It is mind-blowing,” Dr. Kanwisher said. “If you had to bet, you would bet it is innate.”

What can/should the law do about these findings, which, after all, confirm common intuitions. See Steven Jay Gould’s A Biological Homage to Mickey Mouse, in The Panda’s Thumb.


Lipson on The BS That Didn’t Bark: Why Didn’t (Doesn’t) Bear Stearns Go Into Bankruptcy

lipson.JPGMy colleague, Jonathan Lipson, is an incredibly astute observer of bankruptcy law and practice. I was talking with him the other day about Bear’s bailout, and he offered some characteristically interesting thoughts. I invited him to share them in written form with our audience, and will be posting his comments in two parts today and tomorrow.

What’s so bad about bankruptcy?

Today’s New York Times reports that both shareholders and lock-up acquiror JP Morgan-Chase have threatened to put the financial firm into bankruptcy if the other doesn’t blink.

But, if bankruptcy is the only thing both sides agree on, why doesn’t the board authorize a chapter 11 filing?

Two classes of arguments have been made against a BS bankruptcy, one about market disruption, the other about value maximization. The cost, delay and uncertainty of bankruptcy could bring the whole system down, the theory goes. In any case, it would wipe out shareholders’ entire interest.

These are, of course, possible outcomes. But they’re not as likely as people think. In any case, the important question is not whether bankruptcy would do this, but whether ex ante we think bankruptcy would be worse than the current deal.

There is some reason to think bankruptcy might actually be better. If so, then something else may explain why BS, JPM and the Fed would rather spend the next couple of years in Delaware Chancery Court than the U.S. Bankruptcy Court for the Southern District of New York.

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Facebook Banishment and Due Process

facebook3.jpgRecently, I was talking with David Lat, author of the blog Above the Law, and he was complaining about being banished from Facebook. David was an active user of Facebook, and he suddenly and inexplicably found himself banned from the site. Facebook didn’t supply him with any reason.

I found the issue quite intriguing, and David said I could blog about it. In particular, what makes this issue of interest to me is how it applies more generally to Web 2.0 applications. With Web 2.0, people invest a lot of time creating profiles, uploading information, and so on. And they start to depend upon these applications in their lives.

lat-david-2.jpgDavid also said he has a lot of important information on his Facebook profile. He uses it as a way to communicate with people, and he uses it to help him gather information for use in his blogging. So being kicked off Facebook is a big deal to David. It can impact his job. It can also impact his friendships and professional relationships. For example, David told me he received emails from several friends who wondered where he had gone. They thought David might be ignoring them or might no longer be their “friend” on Facebook.

As more of our lives become dependent on Web 2.0 technologies, should we have some sort of rights or consumer protection? Is Facebook the digital equivalent to the company town?

David checked Facebook’s website, which has a FAQ about disabled accounts. Facebook states:

Your account was disabled because you violated Facebook’s Terms of Use, to which you agreed when you first registered for an account on the site. Accounts can either be disabled for repeat offenses or for one, particularly egregious violation.

Facebook does not allow users to register with fake names, to impersonate any person or entity, or to falsely state or otherwise misrepresent themselves or their affiliations.

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Persuasion in the Virtual Shopping Mall

AC89-0437-20_a.jpegI just came across an interesting paper, Empirical analysis of consumer reaction to the virtual reality shopping mall , 24 Comp. Hum. Beh. 88, by Kun Chang Lee and Namho Chung. Here’s the abstract:

The Internet shopping mall has received wide attention from researchers and practitioners due to the fact that it is one of the most killing applications customers can find on the Internet. Though numerous studies have been performed on various issues of the Internet shopping mall, some research issues relating to the user interface of VR (virtual reality) shopping malls still await further empirical investigation. The objective of this study is to investigate whether the user interface of the VR shopping mall positively affects customer satisfaction in comparison with the ordinary shopping mall. For this purpose, we developed a prototype of the VR shopping mall for which the user interface consists of both 3D graphics and an avatar, using it as an experimental medium. 102 valid questionnaires were gathered from active student users of the ordinary shopping mall, and two research hypotheses were then tested to prove whether the three explanatory variables such as convenience, enjoyment, quality assurance improve in the VR shopping mall, and whether customer satisfaction is also significantly enhanced in the VR shopping mall in comparison with the ordinary shopping mall. Additionally, we conducted the PLS (partial least square) analysis to test whether the customer satisfaction is explained significantly by the three explanatory variables or not.

Not surprisingly, products in the VR malls were seen as better, and customers enjoyed shopping more. As the authors point out later in the paper, “VR is a medium capable of yielding immersion,” which should increase customers’ ability to evaluate brand quality, and thus increase sales. Indeed, the effect becomes more robust the more time you spend at the VR mall! Lee and Chung claim that their approach has “immediate managerial applications”: to me, it gives a sense of why and how we’d move toward an omni-persuasive consumer experience.

The Home Finance Arms Race

A growing consensus seems to be emerging that we can borrow and spend our way out of the current subprime mess. The “stimulus package,” the Fed’s interest rate cuts, and new moves to increase the limit on “jumbo loans” all seem based on this assumption. Given that the U.S. is already racked with debt, I can’t quite see the logic here. Moreover, as Harold Meyerson noted recently in Congressional testimony, there’s a much simpler explanation for the current housing woes:

The subprime mortgage crisis is fundamentally a crisis of the rising cost of housing while the income of many Americans has flat-lined. As home-building executive Michael Hill pointed out in a Washington Post op-ed column just this Monday, “forty years ago, the median national price of a house was about twice the median household income. In some parts of the country, this ratio was closer to 1 to 1. Twenty years ago, the median home price was about three times income. In the past 10 years, it jumped to four times income.” And in most thriving metropolitan areas, Hill adds, the ratio is far higher than that.

Conclusion: If median income in America had continued to increase as it did in the years from 1947 to 1973, when it doubled, we would not be facing the mortgage-market meltdown we are experiencing today. So, too, with credit cards, where default rates are also increasing sharply, reflecting the growing desperation of Americans struggling to pay their bills, and further destabilizing many of our already shaky financial institutions.

If economic policies focus solely on allowing the middle class to borrow more, they may well be setting us up for yet another arms race of housing finance that we can ill afford. Consider, for instance, the effects of inequality in New York City, a bellwether for trends likely to affect more of America:

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Are Debtors’ Prisons Next?

Ah, the perils of unintended consequences. The federal government in the 1990s made direct deposit a default method of paying Social Security and some other benefits. Now “Social Security recipients could now more easily pledge their future checks as collateral for small short-term loans.” And the “payday loan” industry has found a lucrative new niche–“volume has climbed to about $48 billion a year from about $13.8 billion in 1999.”

Responding to the manifest failures of under-regulated consumer finance markets, many are now claiming that predatory borrowing was a bigger problem than predatory lending. I wonder if they’d find predatory “Ms. [Jennifer] Rumph, whose medical problems include severe asthma and two hip replacements,” and who appears to support herself and her children with disability benefits:

After Ms. Rumph fell behind on her payments, Miracle Finance sued her in small-claims court in Abbeville, Ala. Although federal law says creditors can’t seize Social Security, disability and veteran’s benefits to pay a debt, enforcement of the law is scant, and many Social Security recipients are unaware of their legal rights. Lenders and their debt collectors routinely sue Social Security recipients who fall behind in their payments, and threaten them with criminal prosecution, senior advocates say.

Debtors must go to court to prove their case. Ms. Rumph says she didn’t know any of this and was afraid to go to court. Miracle Finance won a $1,500 default judgment in July, and four days later sought a court order requiring Ms. Rumph to appear in person to detail her income and assets.

I suppose some analogue to the “fugitive disentitlement” doctrine might leave hard-liners unmoved by Ms. Rumph’s plight. Nevertheless, the payday borrowing boom in general should lead to reconsideration of exactly what the purportedly narrowing “consumption gap” between rich and poor is actually based on.