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The Obama Administration is advocating a privacy bill.  One provision will limit the use of data to the purpose for which it was collected unless a consumer gives permission for additional uses; another will give consumers increased rights to access information about themselves.

Both of these provisions may actually reduce safety of data online.  One additional purpose for which data can be used is to verify identity in cases where there is some doubt.  Many of us have had the experience of having a merchant call a credit card company and ask a series of questions to verify our identity.  This bill would apparently make that process more difficult.  This would lead either to increased inconvenience or increased risk.  This provision is enforced in Europe and there is some evidence that identity theft is more common there.

There is also a danger of allowing increased access to information.  A thief who obtains some information about a consumer may be able to use this to spoof   the system and obtain access to much more information, which will facilitate more harmful forms of theft.

The more fundamental issue is that there is no cost benefit analysis showing that any regulation is justified, as I showed in my previous post on this issue.

Filed under: privacy

As I mentioned in my previous post, there is a strong effort to regulate the use of information on the web in the name of “privacy.” The basic tradeoff that drives the web is that firms use information for advertising and other purposes,and in return consumers get lots of things free.  Google alone offers about 40 free services, including the original  search engine, gmail, maps, and the increasingly popular android operating system for mobile devices. Facebook is another set of free services. There are hundreds of others, all ultimately funded by advertising and the use of information.  Any effort to regulate information is going to change the terms at which these services are offered.

To justify regulation, two conditions must be met.  First there must be some market failure.  Second, there must be at least an expectation that the benefits of the proposed regulation will outweigh the costs.  In a market economy, we generally put the burden of proof on those proposing regulation, since the default assumption is that markets provide net benefits.  Proponents of regulating the use of information on the internet have met neither of these burdens.

One main justification for regulation is that people do not want to be tracked. I discussed this issue in my previous post.  Let me just add that, while people express a desire not to be tracked, in practice they seem quite willing to trade information for other services.  The other issue is identity theft — the possibility that information will be misused for illegitimate purposes.  Tom Lenard and I have written extensively about this issue. The bottom line, however, is that consumers are not liable for much if any of the costs of identity theft, and since firms must bear these costs there is no obvious market failure.

With respect to the second issue, there has been virtually no effort to undertake any cost benefit analysis of the proposed regulations.  However, if there were such an analysis, it is unlikely that regulations would be cost justified since the benefits of the free stuff are huge and the costs are small at best.  While it is conceivable that some tweaking would pass a cost-benefit test, it is very unlikely that any regulation which could get through the political process and then be administered by an agency such as the FTC would in fact pass this test.  Moreover, the proposed regulations, such as a “do not track” list or shifting from opt out to opt in are well beyond “tweaking” and might fundamentally change the terms of the tradeoff.

The bottom line is this:  Privacy advocates act as if privacy is free.  But increased privacy means reduced use of information, and no one has shown that altering the terms of this tradeoff would be beneficial to consumers.

Filed under: cost-benefit analysis, privacy Tagged: cost-benefit analysis, privacy

First I would like to thank Geoff Manne for inviting me to join this blog.  I know most of my fellow bloggers and it is a group I am proud to be associated with.

For my first few posts I am going to write about privacy.  This is a hot topic.  Senators McCain and Kerry are floating a privacy bill, and the FTC is also looking at privacy. I have written a lot about privacy (mostly with Tom Lenard of the Technology Policy Institute, where I am a senior fellow).

The issue of the day is “tracking.”  There are several proposals for “do not track” legislation and polls show that consumers do not want to be tracked.

The entire fear of being tracked is based on an illusion.  It is a deep illusion, and difficult or impossible to eliminate, but still an illusion.   People are uncomfortable with the idea that someone knows what they are doing.  (It is “creepy.”)  But in fact no person knows what you are doing, even if you are being tracked. Only a machine knows.

As humans, we have difficulty understanding that something can be “known” but nonetheless not known by anyone.   We do not understand that we can be “tracked” but that no one is tracking us.  That is, data on our searches may exist on a server somewhere so that the server “knows” it, but no human knows it.  We don’t intuitively grasp this concept because it it entirely alien to our evolved intelligence.

In my most recent paper (with Michael Hammock, coming out in Competition Policy International) we cite two books by Clifford Nass ( C. Nass & C. Yen, The Man Who Lied to His Laptop: What Machines Teach Us About Human Relationships (2010), and B. Reeves & C. Nass, The Media Equation: How People Treat Computers, Television, and New Media Like Real People and Places (1996, 2002).)  Nass and his coauthors show that people automatically treat intelligent machines like other people.  For example, if asked to fill out a questionnaire about the quality of a computer, they rate the machine higher if they are filling out the form on the computer being rated than if it on another computer — they don’t want to hurt the computer’s feelings.  Privacy is like that — people can’t adapt to the notion that a machine knows something. They assume (probably unconsciously) that if somethingis known then a person knows it, and this is why they do not like being tracked.

One final point about tracking.  Even if you are tracked, the purpose is to find out what you want and sell it to you.  Selling people things they want is the essence of the market economy, and if tracking does a better job of this, then it is helping the market function better, and also helping consumers get products that are a better fit.  Why should this make anyone mad?

Filed under: advertising, consumer protection, privacy, regulation, truth on the market Tagged: “do not track”, privacy, tracking

I will be discussing the titular topic at a Federalist Society panel (sponsored by the NY City Lawyers Chapter) along with Richard Epstein (NYU Law) and Jonathan Baker (Chief Economist, FCC) Tuesday night at the Cornell Club.  Registration details are available at the link above.  Here is the event description:

The Federal Trade Commission is more active than ever in its assertion of authority in the virtual world. The FTC’s role is generally understood to include competition analysis, consumer protection, and policy advocacy. How are each of these functions best accomplished by the FTC in the virtual world? Are there special attributes of the internet and e-commerce that require the FTC to modify its traditional regulatory approach? Will the FTC’s planned “Do Not Track” policy be an overall good, or a market inhibiter? Our experts will examine these and other questions.

I’m very much looking forward to it.

Chris Hoofnagle writing at the TAP blog about Facebook’s comprehensive privacy options (“To opt out of full disclosure of most information, it is necessary to click through more than 50 privacy buttons, which then require choosing among a total of more than 170 options.”) claims that…

Read the full piece here. 

Last June, Christine Varney, then a lawyer in private practice, now President Obama’s nominee to be the next Assistant Attorney General for Antitrust, warned that Google, not Microsoft, is the monopolist of the future.  “For me, Microsoft is so last century. They are not the problem,” Varney said at a June 19 panel discussion sponsored by the American Antitrust Institute. The U.S. economy will “continually see a problem — potentially with Google” because it already “has acquired a monopoly in Internet online advertising.”  Concerns of this nature ultimately led Tom Barnett, the last Assistant Attorney General for Antitrust, to threaten a Sherman Act monopolization lawsuit if Google went through with plans to buy Yahoo.  Google, on the other hand, contends that the concerns are completely misplaced.  “The nature of the Internet is just a fundamentally different world from the sale of packaged software or the bundling of software with OEMs (original equipment manufacturers),” according to Kent Walker, Google’s General Counsel.  “The standard line we have is that competition is just one click away.”

Panelists:

• Mr. Scott Cleland, President, Precursor LLC and Chairman, NetCompetition.org
• Ms. Susan Creighton, Partner, Wilson Sonsini Goodrich & Rosati, PC
• Prof. Geoffrey Manne, Founder and Executive Director, International Center for Law & Economics and Lecturer in Law, Lewis & Clark Law School
• Mr. Rick Rule, Partner, Cadwalader, Wickersham & Taft LLP
• Moderator: Mr. Montgomery N. Kosma, Vice President of Legal Services Outsourcing, CPA Global

Full audio is embedded below.

Well, you probably know my answer to that one.

I was interested to read Fred von Lohmann’s short take on the privacy aspects of the Google Books Settlement, available here.

Read the full piece here.

In the comments to this post, Peter Swire (Ohio State) points to some recent comments (see also here and  here) he submitted to the Federal Trade Commission on how to incorporate privacy into conventional antitrust analysis.  The privacy and antitrust link appears to be something that will receive quite a bit of attention in the coming months and years.  The basic argument in favor of incorporating privacy into antitrust analysis under appropriate circumstances is not too controversial…

Read the full piece here. 

Randy Picker (HT: Randy) has posted an interesting new paper to SSRN entitled “Competition and Privacy in Web 2.0 and the Cloud“.   It is an insightful look at the how privacy rules imposed on Web intermediaries might raise competition concerns.  Consider, for example, the relationship between privacy rules and vertical integration that Picker highlights as a potential unintended consequence of privacy rules…

Read the full piece here.