Consumer protection

Consumer rights and consumer protection | William Potter / Shutterstock

From the Progressive Era to the 1980s, except for a brief hiatus in the 1920s, the United States continually advanced consumer protections, setting rigorous standards in drug approval, food safety, chemical use, banking, and financial services. Although often claimed to be “un-American” in today’s political discourse, this protective approach was not foreign to American governance or capitalism. In fact, as David Vogel shows, for much of the twentieth century, the US frequently led the world in identifying and mitigating health, safety, and environmental risks through stringent and precautionary standards.

American consumers in the twenty-first century might well ask: What happened? The short answer is that the consumer protection framework has shifted from regulatory oversight to providing information to consumers, thus transferring a significant portion of the responsibility from the state to the consumers themselves.

A fresh look at how this historic change occurred will show why information and awareness isn’t enough: regulation by the state has a crucial role to play if American consumers are ever to be properly protected. 

The early twentieth century was a pivotal period for the advancement of consumer rights in the US, marked by significant legislative achievements. Initiatives such as the establishment of the Food and Drug Administration, the Pure Food and Drug Act, and the Meat Inspection Act in 1906, and antitrust laws like the Clayton Antitrust Act and the Federal Trade Commission Act in 1914, underscored this era’s commitment to consumer protection. As Lisabeth Cohen observes, these legislative efforts received broad support from a consumer base that was increasingly aware of—and willing to leverage—its influence in the market. 

The New Deal ushered in another major expansion of consumer protection efforts. The Great Depression had galvanized Americans to seek greater protections from the state; the first and second New Deals expanded the federal government’s protective role for the public, in alignment, as Mary Furner notes, with “the public interest rhetoric that leading progressive economists had been shaping since the 1880s.” The establishment of consumer divisions within New Deal agencies in 1933 and 1934 were a part and parcel of this. “[The] problems of consumers,” FDR declared, were now “thoroughly and unequivocally accepted as the direct responsibility of government.” The enactment of the Federal Food, Drug, and Cosmetic Act in 1938, along with the Wheeler-Lea Act in the same year—designed to eliminate unfair competition and false advertising—were significant milestones in this regard.

Consumer protection rose to greater prominence in the marketplace during the 1960s and 1970s. In 1962, President Kennedy unveiled his Consumer Bill of Rights, a critical moment Anne Fleming characterizes as a plea for the federal government—”by nature the highest spokesman for all the people,” as Kennedy put it—to champion consumer rights rather than leaving the responsibility mostly to the states. This led to the federal government ramping up its efforts, resulting in a notable surge in consumer protection laws. Presidents Johnson and Nixon continued this trend, contributing to the enactment of several key pieces of legislation, including the Water Quality Act of 1965, the National Traffic and Motor Vehicle Safety Act of 1966, the Fair Packaging and Labeling Act of 1966, the Truth in Lending Act of 1968, the Consumer Product Safety Act of 1970, the establishment of the Consumer Product Safety Commission in 1972, and the Equal Credit Opportunity Act of 1974.

The development of the Uniform Commercial Code (UCC) also unfolded against this backdrop. It represented a crucial advancement in safeguarding the interests of those with limited means in the marketplace. During this time, Congressional hearings highlighted widespread fraud and deception present in consumer loans and credit sales, predominantly affecting those with modest incomes, subjecting them to higher cash prices and finance charges for goods and services, unlike middle-class consumers, who presumably had access to vendors offering more favorable prices and terms. The UCC emerged as a strategy to combat such unjust transactions. Following its adoption by state legislatures in the early 1960s, the UCC prompted courts to adopt a more vigilant stance against predatory and abusive practices targeting consumers, particularly in cases where a significant power imbalance existed due to consumers’ lack of information or choice. While maintaining the principle of freedom of contract, the UCC introduced “the doctrine of unconscionability,” recognizing the limits to contract freedom for fairness’s sake, especially in cases marked by disparity in bargaining power in the marketplace. As Fleming notes, the doctrine of unconscionability thus emerged as a new legal approach, termed “the law of the poor.” 

In short, despite the limitations of existing consumer protection laws in combating various predatory practices and injustices in the marketplace—and there were many—the 1960s and 1970s solidified the notion that consumer protection was a governmental responsibility that needed to be addressed with direct and significant regulation. 

Beginning in the early 1980s, however, the government’s stance on consumer protection evolved apace with a broader shift towards neoliberal policy-making. The idea of curtailing marketplace transactions for the sake of consumer protection was now viewed as a limitation on consumer choice, inadvertently driving up prices due to elevated regulatory costs. Instead, consumer protection started to be seen as a responsibility that individuals, deemed rational and capable, were expected to shoulder themselves, assuming they were provided adequate information about the terms of exchange. 

The ensuing decades saw a proliferation of disclosure regulations designed to equip individuals and families with the knowledge required to effectively navigate markets and sidestep potential risks. As Justice Stephen Breyer explains in his book Regulation and Its Reform, disclosure aligns with an anti-statist ideology and the idea of free markets: “It does not regulate production processes, output, price, or allocation of products. Nor does it restrict individual choice as much as the other classical forms of regulation.” Essentially, it issues a caveat emptor: buyer beware.

Disclosures were certainly not a novel idea. Rooted in American common law, they have been a longstanding element of US policy, championed by figures like Louis D. Brandeis and further highlighted by Franklin D. Roosevelt, who emphasized the necessity of transparency in financial transactions to protect against fraud. But in earlier legislation like the Securities Acts of 1933 and 1934 or the Truth in Lending Act of 1968, disclosures were intended to complement rather than replace government regulation. It was not until the 1980s that disclosures were considered an alternative to direct, substantive regulation, “as part of a trend to inform and educate rather than regulate,” as Paula J. Dalley puts it. The rising prominence of disclosures in financial markets has been so pronounced that legal scholar Lauren Willis argues that today, The dominant model of regulation in the United States for consumer credit, insurance, and investment products is disclosure and unfettered choice.”

Parallel to the rise of disclosures, the emphasis on consumer literacy increased. As Willis observes, “Policymakers have embraced consumer education as a necessary corollary to the disclosure model of regulation.” With respect to finance, the vision promoted was of “educated consumers managing their own credit, insurance, and retirement planning matters by confidently navigating the bountiful unrestricted marketplace,” as Willis explains. The 1999 Clinton-Gore Plan for Financial Privacy and Consumer Financial Protection in the twenty-first century is a case in point. The plan largely focused on “expanding the consumer’s right to know,” repeatedly declaring support for legislation requiring clear disclosure of various aspects of financial transactions, and emphasized the importance of financial literacy. The need to take action against abuses concerning high-interest loans, including subprime loans, was mentioned only briefly.

By this time, the participation of American consumers in financial markets was at an all-time high. Gross household debt had jumped from 15 percent of GDP in 1946 to nearly 100 percent by the 2000s; in the same period, mortgage debt grew from a third to over 70 percent of GDP. Stock market involvement surged from less than 5 percent of the population owning stocks in 1952 to almost 60 percent. To be sure, stock ownership through active individual investment is concentrated in the hands of those with high income. However, one does not need to be an active investor to participate in the stock markets or broadly in the financial system. Retirement, one of the most important aspects of socio-economic security, is financialized in the United States—whether one seeks to participate in financial markets or not. In the early 1990s, about 60 percent of full-time workers in the US still had defined-benefit plans, such as pensions. The move in the intervening years toward defined-contribution plans like 401(k)s meant that by 2008, only one third did. And, despite the advisement of the Clinton-Gore Plan, participation in the financial market in no way meant that a consumer was financially literate, alert to risk, and ready for what came next: the US financial crisis from 2008 to 2010, which resulted in 300 failed banks, 8.5 million lost jobs, 10 million foreclosed homes, and nearly 22.5 percent of Americans with negative net worth. 

The collapse highlighted the limitations of the neoliberal model’s reliance on disclosures: the model does not account for informational asymmetries (in which vital information may be available to one party, and not the other), or the fact that when information is distorted it cannot lead to sound decisions—and might in fact increase risk rather than help mitigate it. There are also challenges tied to organization and implementation. In the mortgage sector, for instance, disclosures do not occur until “after the application fee is paid,” which makes it challenging for “borrowers on a limited budget” to abandon their current application and consider other options, as Willis points out. 

Clearly, consumer literacy is no panacea. Even if individuals had the literacy, there are other psychological or behavioral factors that affect the way they are able to relate to information. As Moss articulates, there are “a large number of systematic biases that adversely affect the way most of us perceive and interpret risk,” ranging from “misapplications of simple heuristics” to “optimistic bias and illusions of control.” There is no guarantee that market actors will avoid risk, even if they are literate enough to understand what constitutes it. 

When the product or the market process in question is complex, which is the case with most everything exchanged in financial markets, there is also no guarantee that individuals will be able to assess and understand the full extent of the risk they are taking, even if they have access to information. Elizabeth Warren points to a “disclosure hoax”: the idea that disclosure can be an effective consumer protection tool in financial markets: “Mortgage-loan documents, payday-loan papers, car-loan, and credit card terms—all these and other lending products have become long and jargon-filled, often proving entirely incomprehensible to those with law degrees—much less to those whose specialty is not reading legal documents.” 

In the wake of the 2008 crisis, the Consumer Financial Protection Bureau (CFPB) was created, after much political infighting, to ensure consumers are subject to fair, transparent transactions in relation to loans and other financial products. While this was a significant step in enhancing consumer protection, particularly within the financial marketplace, CFPB itself has been criticized for relying too much on the disclosure model. Moreover, as Johnson and Kwak presciently noted in their 2011 book: “Any regulatory agency is only as effective as the people who staff it, and there is always the possibility that a future, pro-finance president will appoint a head of the CFPB who is opposed to consumer protection.” Under Trump’s leadership, CFPB weakened, and its law enforcement activity has dropped significantly. 

Promoting awareness is not enough. The deregulations of the second half of the twentieth century and disastrous subsequent crash show very clearly that substantial regulation is necessary to ensure consumers are protected.