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Affluent Christian Investor | September 22, 2017

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Mandated Disclosure Laws — Another Policy Failure That Politicians Can’t Resist

Phtoto: More Than You Wanted to Know: The Failure of Mandated Disclosure cover

Phtoto: More Than You Wanted to Know: The Failure of Mandated Disclosure cover

Having information is good, right? Information helps people make good decisions, so it’s obvious that laws mandating disclosure of information must be a benefit to the public.

That’s the logic behind many laws and regulations anyway. And like the logic behind many laws, it’s mistaken. So say professors Omri Ben-Shahar (University of Chicago) and Carl Schneider (University of Michigan) in their recent book More Than You Wanted to Know: The Failure of Mandated Disclosure, published in April by Princeton.

Think about those tedious documents you so often have to sign before you can get something you want – they are the subject of this book. And while such documents are as boring as anything can be, the book is engaging, witty, and above all powerfully argued.

The villains of the book are the Disclosurites. Disclosurites is the term that the authors have coined for those who are responsible for putting us in the “kudzu-like” grip of information mandates. The Disclosurites are the contemporary policy wonks and politicians who insist that Americans must be given voluminous amounts of information prior to making decisions so that those decisions will be “fully informed.”

Mandated disclosure is not merely a failure because it seldom helps anyone make a better choice, but it can even be counterproductive. With so much information cascading down on them, consumers, patients, and others may miss the information that would actually matter to them.

Nevertheless, for politicians across the ideological spectrum, mandated disclosure is an easy way to appear to be engaged in solving society’s problems. Republicans can claim that more information helps markets work better and Democrats can claim that disclosures help protect “the little guy.” Therefore the mandates keep accumulating.

Disclosure mandates usually have their genesis in what the authors call a “trouble story” that attracts attention and makes politicians want to do something. Consider one of the many cases discussed in the book, that of Jeanne Clery, a college student who was raped and murdered in her dorm room at Lehigh University in 1986.

Once that tragedy came to the attention of Congress, the politicians decided that part of the solution to campus violence was mandatory disclosure of crime statistics, now embodied in a statute. Ben-Shahar and Schneider explain, “Lawmakers treated the trouble story as a problem not of campus safety, but as an information problem to be solved by disclosure. A small federal agency publishes a large handbook – 200 pages of instructions on safety reporting.  Compliance may costs schools something – a typical disclosure is over 10,000 words and requires managing much information, but costs the government trivially.”

The required Clery Act disclosures, the authors conclude, divert resources away from important campus needs (safety and otherwise) but have hardly any impact on either the targeted decision-makers or the incidence of campus crime. (I discussed the impact of the Clery Act in this piece.)

That story exemplifies the general truth about mandatory disclosure: it entails vastly more cost than benefit.

Why is disclosure almost always a failure? The authors argue that, at root, it is because non-specialists cannot make complicated and unfamiliar decisions that call for a specialist’s knowledge. Requiring that, e.g., prospective mortgage borrowers go through a stack of papers that are supposed to help them avoid making a bad choice in home financing is unlikely to do any good. Nor is requiring that a person who is contemplating a medical procedure read and sign a lengthy document informing him about all the pros and cons apt to help him make the best decision.

Even if individuals understand the language put in front of them — which is rarely the case — mastering the pertinent concepts and sensibly applying them to the decision at hand is beyond the capacities and time constraints of nearly all of us. When people have to make important decisions, the authors observe, what they need is good advice, not a pile of words and data that usually make them go into the “Whatever” mode.

The Disclosurites have come to realize that their solution often does little or no good, but believe that the way to make all their information more digestible is yet another mandate, namely that disclosures be written in simple language.

Thus, Congress passed the Plain Writing Act of 2010 and the Dodd-Frank Act insists that disclosures must give financial consumers “timely and understandable information.” Unfortunately, that approach cannot improve matters, the authors argue. “At base, simplifying fails because the complex isn’t simple and can’t be made so. Simpler words mean more words and longer (hence harder) documents,” they write. Putting disclosures into easier words does nothing to make difficult ideas any more comprehensible.

Another simplification gambit is to reduce the disclosure to a “score” – for example the restaurant sanitation grades one often sees prominently posted. Disclosurites have touted this as proof of the success of their endeavors, crediting such scores with a decline in food-related hospitalizations.

The authors, however, point to research done in New York and San Diego finding no discernible health benefits from the restaurant grades. Digging further into this, Ben-Shahar and Schneider discovered that there really is no way of accurately encapsulating all of the factors that go into food safety into a single score. Moreover, inspectors are not machines and score very divergently.  So, while the scores seem to be objective and useful to diners in deciding where to eat, in fact they are neither.

As with regulation in general, disclosure mandates have been subject to a ratchet effect. Lawmakers keep adding new ones and finding more material to require in old ones, but almost never is a disclosure pared down, much less eliminated.

Faced with the criticism that their pet policy does little good, disclosurites often retreat into the defense that giving people more information can’t do any harm. To that argument, the authors respond that overloading Americans with information can indeed be detrimental. “Mandates,” they write, “can do harm, harm that is disproportionately borne by exactly the people who most need protection. This harm is unintended and unnoticed, but harm it is – and in several forms: mandates can undercut other regulation, deter lawmakers from adopting better regulation, impair decisions, injure markets, exacerbate inequality, and in some important cases, cripple valuable enterprises.” They back that indictment up.

People, especially less sophisticated ones, are apt to think that because some transaction is accompanied by a lot of official disclosures, it must be all right. The information that might raise doubts gets overshadowed or buried in all those pages and pages. For instance, sharp and ethically dubious practices by lenders that at least arguably should be dealt with through direct regulation have received judicial approval simply because all of mandatory disclosures were made to the consumer.

The harm can sometimes go the other way, when disclosure laws are used as a sword by customers to inflict damage on sellers who failed to comply perfectly with every aspect of a disclosure law. Lawyers have come up with a term for this: the disclosure defense game.

In sum, mandated disclosure has lots of hidden costs.

After thoroughly exploring the failure of mandated disclosure to achieve any detectable improvement in the decisions Americans make and demonstrating its serious unintended side effects, Ben-Shahar and Schneider arrive at the point where the reader expects them to say what they would replace it with.

Their answer is commendably precise: nothing. Asking what to replace mandated disclosure with, they write, “implies that [it] was doing something that needs to be replaced. Our argument has been that it accomplishes so little that eliminating it would deny few people anything.”

Ben-Shahar and Schneider observe that we are surrounded by unbelievable amounts of information, often free, that people can and do utilize in making decisions.  Often they rely on trusted friends, consultants and information aggregators (who do not need the stuff of disclosure mandates to perform their services) when they have big decisions to make. Disclosure mandates waste a lot of time and paper but are almost entirely irrelevant to people’s decision processes.

More Than You Wanted to Know is an important book that makes an enormous contribution to the literature on the inefficiency of regulation.

Article originally published on Forbes.com.

 

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