Austin Contrarian

The FTC goes after blogger endorsements

The Federal Trade Commission intends to make bloggers who endorse a product disclose freebies they receive from the product's seller.  Seriously.

The existing regulations require those endorsing a product for an advertisement to disclose a connection with the product's seller "that might materially affect the weight or credibility of the endorsement."  Being paid to endorse a product, the FTC believes, is a fact that "might materially affect" the endorsement's weight or credibility -- unless the endorser is a celebrity, whom everyone assumes is being compensated.   

But since "might materially affect the weight or credibility" is a mushy standard that could mean anything, the FTC has to use examples to show what it means.  And it intends to add paid blogger endorsements to its little menagerie of examples (FTC report pp. 84-85 (pdf)):    

Example 7.  A college student who has earned a reputation as a video game expert maintains a personal weblog or “blog” where he posts entries about his gaming experiences. Readers of his blog frequently seek his opinions about video game hardware and software. As it has done in the past, the manufacturer of a newly released video game system sends the student a free copy of the system and asks him to write about it on his blog. He tests the new gaming system and writes a favorable review. The readers of his blog are unlikely to expect that he has received the video game system free of charge in exchange for his review of the product, and given the value of the video game system, this fact would likely materially affect the credibility they attach to his endorsement. Accordingly, the blogger should clearly and conspicuously disclose that he received the gaming system free of charge.

I don't know who tipped off the FTC attorneys to the blogosphere's existence, or what impelled him to do it, but he should be ashamed of himself.  Who was raising the hue and cry over blogger endorsements?  Who thought it was a good idea to sic an agency obsessed with balding treatments and miracle vitamins on the internet? 

Anyway, the damage is done.  The FTC attorneys have concluded that readers of these quirky and newfangled "weblogs" are entitled to the same protection from undisclosed endorsements that it guarantees TV viewers exposed to weight-loss and vitamin-supplement ads.

This is a silly regulation for many reasons.  First, the FTC can't effectively enforce its rules now for MSM advertisers.  There are just too many outlets (TV, newspapers, magazines, radio) and too many advertisers creatively gaming the rules.  The FTC can't even control specific industries.  It has been battling weight-loss and vitamin-supplement advertisers for decades.  Everyone operates at the laws' fringes; the FTC makes a rule, the weight-loss people figure out a loophole, and so on.  And so late night TV is filled with ads for all kinds of flaky weight-loss treatments.

Because the FTC struggles to regulate a few thousand MSM outlets, it has no chance of enforcing its rules among millions of blogs.  No chance at all.  Bloggers will be able to do what they want, confident in the anonymity provided by numbers.

And, second, even if the FTC could be a credible enforcer, why should it be?  I seriously doubt it will improve the reliability of blog product endorsements.  That ought to be the goal -- to improve the quality of the information floating around out there.  An undisclosed "material connection" perhaps sometimes reduces the value of the endorsement to readers. But lots of other things impair the value of endorsements.  The blogger might be an idiot, for example.  Or the blogger, while not an idiot, has bizarre, undisclosed fetishes which might make his experience just a mite atypical.  The blogger might not have done his homework on the product because he was lazy.  Or he endorsed the product because all the cool people were doing so.  In each case, the reader is likeliest to get the best information from the blogger who got the freebie.  

Third, the few, good bloggers who do provide useful information don't need regulations like this.  These are widely-read bloggers who have been around long enough to build up credibility with their readers.  Few would want to risk that credibility by failing to disclose something their readers would expect them to disclose.  And their readers might expect them to disclose a free book, meal or video game system.  Or they might simply assume the freebies and shrug.  For example, I assume Matt Yglesias and Tyler Cowen get free review copies of the books they review.  I don't believe that either will take the edge off a bad review merely because they got the book for free.  

Fourth, Google can fix any harm posed by a "tainted" endorsement in 200 milliseconds.  When deciding which video game system to buy, I can pull up my local bloggers' review,  but I can pull up a dozen others in just seconds, as well as discussion boards and professional product reviews.  There have been several widely-followed econ bloggers talking up the Kindle.  I suspect many of them got their Kindle gratis.  I don't know.  But when deciding whether to buy my kindle, I considered the possibility that their endorsements perhaps had an artificial glow.  But I also looked at the product review at Amazon (the 1* and 3* reviews are usually the most informative).  And I did other searches for blogs and  discussion boards devoted to the Kindle.  Acquiring information to counterbalance one compensated endorsement is virtually costless.  

These are four reasons why the regulations will either be impotent or pointless.  But here's the FTC's fundamental mistake:  it doesn't understand that readers' expectations depend on the background rules.  Under the current system, I don't know whether a given blogger is being compensated for an endorsement unless she discloses a connection.  If she doesn't disclose a connection, then I have to treat her endorsement with a bit of skepticism (although thorough, thoughtful reviews are good at dispelling this skepticism), and will continue to do so until I've developed trust in her blogging.  In an unregulated blogosphere, my default stance is skepticism.

Under the FTC regulation, if a blogger has an ironclad obligation to disclose freebies, then I'll expect him to disclose that he got a free copy of the product, and discount his endorsement appropriately.  If he does not disclose a connection, I'll assume that he's not being compensated.  Of course, he could be cheating, and we know the FTC will not have the resources to police this kind of misrepresentation.  In this case, the regulation's only consequence will have been too disarm me, to make me a little more gullible.

In a world without a credible threat of enforcement, we're better off in the first scenario than the second.  The FTC's existing rules for television have arguably made consumers more gullible.  They vaguely understand that the government requires commercials to be accurate.  But "accurate" is judged on a sliding scale; commercials make a lot of claims that are unlikely to be true but which "must" be true because the government is letting them appear on TV.  In the worst case, the FTC regulations increase the risk of deceptive and misleading blogposts by giving readers false assurances that they are not being misled.

One might argue that my concerns are overblown and that these regulations will be  harmless at worst.  But this is wrong.  They will cause blog clutter if nothing else.   Tyler's book reviews will come (I presume) with an asterisk and fine print at the bottom.  Food critics will have to run disclaimers at the bottom disclosing which meals were free and which weren't.  Clutter is irritating. 

And it will be particularly irritating to those of us who won't need to clutter our blogs because no one is sending us free stuff to endorse.  

H/t This Life in Austin

Perry vetoes smart growth bill

Did anyone know that the Texas Legislature passed a "smart growth" bill?  I first heard about it when Perry vetoed it.

The legislation merely established a working group to study and recommend a smart-growth policy, so it would have had no immediate impact on growth patterns in Texas.  But it was charged with developing a "comprehensive smart growth plan for the state to prepare for the projected population growth in the state" and addressing things like the quality of community life, the design of municipalities, counties and regions, health issues and "the encouragement of community and stakeholder collaboration in development decisions."  

It's hard to get too worked up over legislation that merely would have established an advisory committee, but I think the veto was probably a wise decision.

As framed, the working group would have been charged with creating a statewide growth policy.  Bad, bad idea.  Most of our problems today stem from vesting TxDOT, a state agency, with unfettered control over major infrastructure projects.  It is TxDOT that decides whether to build this highway or that, to direct growth in this direction rather than that, and to toll or not toll.  (I admit TxDOT's policies on the latter match my preferences better than most of its others.)  And it is TxDOT that soaks up dollars that could be used to fund rail or other modes of transportation.

Infrastructure is destiny.  Choosing which and what kind of infrastructure to build is never a value-free choice.  And, today, the most important infrastructure projects reflect the values of a state agency rather than of the local communities most affected by them. Local communities should be able to shape their own environments.

We don't need a working group to give cities more powers.  Cities already have all the authority they need to regulate growth.  I think they mostly abuse it:  they impose minimum lot size requirements, rigid density limitations and strict separation of uses.  If a city can enact an ordinance like Austin's McMansion Ordinance, then it can do anything.

Counties lack some of these powers.  Counties can regulate platting and subdivisions, which allows them to dictate things like connectivity and minimum lot sizes, should they choose to do so.  But it's true they can't enact zoning.

Still, the problem for counties is not that they lack zoning, but that they can't regulate "commons" depleted by uncoordinated development.  Wells, for example.  Homeowners who lack connections to water utilities sink their own wells.  No individual homeowner has an incentive to ration his individual use; as a result, they cumulatively drain aquifers, especially in drought conditions.  Counties need the power to protect the aquifers for everyone.

But there is no reason to believe that a working group composed of state officials charged with implementing a statewide smart growth plan would have paid particular attention to county problems.  Much better to pass legislation tailored to counties rather than an open-ended mandate for statewide regulation.

Update and clarification on the music ordinance

I think I got the basic analysis of the outdoor music venue ordinance right.  But a couple of issues deserve more discussion.

First, I pointed out that unless a property is zoned for cocktail lounge, a restaurant will have to apply to rezone the property to switch its classification to a cocktail lounge. Cocktail lounges are allowed (conditionally) in CS-1 districts, which are rare, but they are also allowed in the CBD and DMU districts. These include both downtown and most of Barton Springs (including Shady Grove). I didn't mention the CBD or DMU districts before.   Shady Grove will not have to seek a rezoning because it is zoned DMU.  Restaurants along South Lamar, South Congress and other streets not within these three districts will need to seek rezonings.

But, second, the cocktail lounge reclassification will itself be more onerous than I indicated.   The Chronicle (h/t M1EK), on April 24 and again today, points out the cocktail lounges are conditional uses in CS-1, DMU and CBD districts. This is a big deal, since restaurants will now have to go through the conditional-use permitting process, including a trip to the Planning Commission. Furthermore, I believe they will have to submit site plans and comply with all code requirements enacted since they obtained their initial use permits, including parking, compatibility, setbacks, etc.   This may be an insurmountable hurdle for venues that have been around for 20 or 30 years.  Rather than being a minor, administrative matter, a reclassification will be time-consuming, expensive and fraught with uncertainty.

Finally, as I pointed out, it is not at all clear that these restaurants even meet the definition of a cocktail lounge.  The sale of alcohol for on-premises consumption is an accessory use for a restaurant.  It is a principal use for cocktail lounges.  Can city staff reclassify alcohol sales from accessory to principal use without any change in the mix of food and alcohol sales?

When I posed this question to Jeff Jack on the ANC listserve, he replied, "I suspect that what we will see is, at least in this case, is the interpretation by staff allowing food sales, no matter how much of a percentage of the total sales, to be an accessory use to a cocktail lounge. this only makes since selling more food at a bar is a good thing from the perspective of limiting alcohol abuse and it's related problems for which the code distinction was created."

City staff may be pressured to adopt this interpretation.  If it does not, then restaurants will have an incentive to push alcohol sales and curb food sales -- which would certainly be an unintended and harmful consequence of the new ordinances.  I don't know have far staff can go with this, since it has to worry about the consistency of its treatment of "accessory use" with other uses.  In other words, if it treats food sales as an accessory use even though they comprise 80% of gross revenue, it might have to liberalize its definition of accessory use for other, unrelated uses.

As I said before, this last issue is a murky one.  We won't really know the answer until staff tells us. 

Local option

The Chronicle reports that state senators (mostly Republicans) are throwing obstacles in front of Senator John Carona's "local option" bill.  This bill would allow counties to choose from a menu of fees and taxes to fund transportation projects as they see fit.  Options would include imposing a local gas tax or raising vehicle registration or driver's license renewal fees.  "No taxes or fees" would be on the menu, too -- and any increase would require voter approval.

This is a measure long overdue.  Cities and counties need to regain control of their local infrastructure.  Cities and counties know their needs better than TxDOT.  Cities and counties certainly know their preferences better than TxDOT.  We need to devolve more control to the locals, and "control" requires money.  This bill doesn't go far enough, in fact; counties and cities not only need the right to raise new money, they need to get back some of the money they now send TxDOT. 

State Republicans are raising a ruckus, though:

Sen. Dan Patrick, R-Houston, called it a "disaster" that, with so many exemptions added, puts the whole new tax burden on "my two favorite people, the police officer married to the school teacher."

There are a couple of points worth making here.  The first is that Patrick's "police officer married to the school teacher" probably lives in the 'burbs, and suburbanites suffer especially hard from dilapidated infrastructure.  Perhaps the police officer and school teacher prefer better roads (or a rail option) to slightly higher fees and taxes.  There are always trade offs.  Under the local option, they'd at least get to vote in a local election.  Patrick and company apparently think the policeman and school teacher are better off when the decision is made for them by suddenly paternalistic Republican senators sitting a couple hundred miles away. 

That leads to the second point.  The "local option" bill is not a tax hike.  It gives county voters discretion to tax themselves if they'd like better infrastructure.  Voters in some counties might prefer creaky infrastructure to higher gas taxes or vehicle registration fees.  Others might prefer more roads, or better roads, or more money for transit.  The point is that counties could sort themselves according to their own preferences.  And gain more say over their urban form rather than having it dictated to them by the bureaucratic TxDOT.

Perhaps that's the senators' real objection.  They fear that if urban areas get even a limited choice over their own infrastructure, they might make choices that the Legislature doesn't like.  The Lege doesn't like the "local" in "local option."

Flip flop

A couple of weeks ago, I suggested that cities give developers incentives to build dense, connected, local street networks rather than simply mandate them.  After thinking a bit harder about it, though, I'm not sure that's the best solution.

Cities should refuse to maintain subdivision streets that do not provide a minimal level of connectivity for other city residents (as Virginia will now do).  But should a city or state go one step further and mandate connectivity?  Should it pay developers to provide connectivity?  Or should it do nothing, other than leave the maintenance costs on subdivisions with functionally private streets?

Using incentive payments is sound in theory.  Connectivity provides a spillover benefit to residents outside the subdivision because it lowers congestion on major arteries, gives them more alternatives for getting around, and solves a collective action problem.  If bans on mixed-use development were also relaxed, connectivity could also shorten net trip length.  (Connectivity alone won't do the trick.)  The disconnected, cul-de-sac pattern is less expensive than a dense street grid.  But if a city offered developers incentives equal to the value of connectivity to the city, then developers would build dense, connected grids when it made economic sense to do so. 

There are a couple of practical problems with this, though.  One is that no city could afford to do it, at least not for enough subdivisions to make a difference.  The second is that it would be hard for the city to figure out what to pay.  A city could pay for all subdivision streets.  But see objection no. 1 (and cities shouldn't be subsidizing subdivision streets anyway).  A city, in theory, should pay only for the extra street length needed to get up to a minimal level of connectivity.  But that depends on what the developer would have built in the first place, and the city wouldn't be able to determine that. 

That leaves regulation (mandating connectivity) or doing nothing.

Simply mandating connectivity eliminates the drain on the city fisc.  It is more feasible, politically, than simply dumping money on developers, as Virginia has demonstrated.  Regulation is a tricky thing, though.  The cost-benefit analysis does not change merely because the city is no longer paying its share.  And, again, connectivity can be very expensive.    

Perhaps the best solution is a hybrid approach.  Cities could mandate a certain minimal level of connectivity but let developers buy their way out of it.  That might provide enough of a nudge to solve the collective action problem without mandating street designs that cost more than they are worth.   

Baffled

By this:

Suppose the federal government gave you and your neighbor $500 each to buy a new bike, but what you really wanted was a $250 shopping spree for running gear instead. So you offered to sell your $500 federal check to your neighbor for $250 in cash so everyone’s dreams could be realized.

That is essentially what several cities in Los Angeles County planned to do with federal stimulus money, until the local transportation authority, its face slightly reddened, pulled the plug on the plans. A spokeswoman in Washington for the House Committee on Transportation and Infrastructure said Wednesday that the swaps would be illegal.

“We have already put governors, transit agencies and large metropolitan planning associations on notice that we intend to aggressively oversee that the funding is utilized as Congress intended,” the spokeswoman, Mary A. Kerr, said by e-mail.

Under the federal stimulus package intended to improve the nation’s infrastructure, the Los Angeles County Metropolitan Transit Authority was set to dole out roughly $215 million in sums of at least $500,000 each to the county’s 88 cities to get their projects moving.

Many cities on the list, however, did not have qualifying projects because they are too small or cannot move as quickly as the stimulus law stipulated. So the transit agency encouraged the cities to do with the stimulus money what they often do with other money — swap it with other cities at a discounted rate.

These swaps sounded innocuous enough:

Irwindale, which has roughly 1,500 residents, agreed to sell its $500,000 allocation to the city of Westlake Village — 9,000 residents — for $310,000 in cash, which would go into Irwindale’s general fund.

“We have a general fund deficit this year,” said Robert Griego, the city manager of Irwindale, which got offers from a half-dozen cities for its money. “So we probably would have used it to avoid people getting laid off.”
Torrance, a city in southern Los Angeles County, moved to snap up transportation dollars to spruce up major arteries, and planned to buy a $500,000 share from Bradbury, another small city, for about $315,000.

“We thought it was kosher,” said Eric Tsao, the finance director of Torrance. “We could have leveraged more for our projects, and the other cities would have had some money to do what they would like. You can’t do much with $500,000 in infrastructure anyway.”

But when the exchanges were brought to light on Monday by The Pasadena Star-News, the transit agency quickly intervened. It sent letters to cities clarifying that the only swapping allowed would be federal money for equal amounts of state transportation money.

I understand why the federal government wants its transportation dollars spent on transportation projects.  But unless the Times left out part of the story, the cities purchasing the "transportation dollars" intended to use the dollars for transportation projects.  If they hadn't, they presumably wouldn't have been able to buy the transportation dollars at such steep discounts.

The feds' intervention was not necessary to protect the stimulus.  Stimulus dollars do not have to be spent as efficiently as private investments, but that does not mean they have to be spent as inefficiently as possible.  For example, paying 100 guys $10 an hour to dig holes in a desert might be stimulative but it wouldn't provide as much stimulus as paying 50 bus drivers $20 per hours to keep the buses running.  The  bus drivers provide a social benefit, which leverages the stimulus dollars; the hole diggers do not.

The cities' swaps obviously made everyone better off.  The cities that sold the dollars got cash to offset budget deficits and cuts in city services and employment.  The cities that bought the dollars got more transportation than the sellers would have gotten for much more money.  The feds, almost by definition, got more stimulus and more transportation.  Thus, I'm baffled.

Thanks for protecting us from crappy massages

Gov. Perry just signed a bill requiring new massage therapists to get 500 hours of training rather than 300.  Crappy massages, you see, are a direr threat than diesel fumes.  But I'm not being fair.  The need for more training was obvious.  Texas and that backwater Delaware were the only states to require less than 500 hundred hours of training (except for the 12 states that don't require any, that is.)  It was only a matter of time until we experienced a spate of bad massages.   

The massage therapists the Statesman interviewed thought this was a wonderful idea. Big surprise. Who doesn't appreciate a good income-maintenance program?

Protecting us from interior-design related injuries

Interior designers want to make it a crime to decorate places of "public accommodation" without a license.  In other words, they'd like the Legislature to help them cartelize the interior design industry in Texas.   

The interior designers, of course, don't see this as an income-maintenance program.  They're just worried about safety.  "[L]icensed interior designers are trained in health, safety and welfare, are qualified to draw and develop specifications (electrical or plumbing fixtures or ceiling modifications, for example) and to create non-load-bearing elements of buildings, whereas non-licensed decorators are not."  Makes a lot of sense.  Because someone somewhere may want his plumbing redesigned, I have to hire a licensed professional to pick out a wall color.   That's like making me hire a certified arborist to mow my yard. 

Professions that petition the Legislature to protect the "public" usually have better cover than this.  Typically, there's been a gory accident, triggering predictable calls for tighter standards.   What the decorators really need is a good newspaper headline, something like "Family wiped out in grisly interior-design related accident; state's lack of certification program called into question."

But let's suppose for just a minute that it really is safer to hire a licensed interior designer than an unlicensed one.  Will this legislation promote safety?  No.  Just the opposite.  The proposed legislation applies only to the design of businesses and other public places.  It will force out cheap, unlicensed designers, raising fees for licensed interior designers who design for public spaces.  The higher fees will induce licensed interior designers to substitute out of residential design into commercial design.  Meanwhile, unlicensed decorators will be herded into residential design.  Homeowners, as a result, will be more likely to end up using unlicensed designers.  Since they're presumably less sophisticated than businesses -- and thus less able to screen designers without the state's assistance -- they're more likely to end up with unqualified designers.  And we can expect more interior-design related injuries at home.

Frankly, I'm surpised that the interior designer profession would ignore such an obvious threat to safety.  Our homeowners surely deserve just as much protection in the home as they receive at work.

A dumb, dumb tax loophole

Wednesday's Statesman had a piece on a property-tax break for "ecolabs."  A property owner who opens up his property to ecological research is entitled to reduced property taxes.  Not surprisingly, this has sparked intense interest in bugs and grass among a number of property owners (including Michael Dell).  The tax appraisers are more skeptical:

The issue has led to an unlikely contest, with academics and some landowners squaring off against tax appraisers.

Ecolab exemptions, like those for farming, ranching or wildlife management, can reduce the appraisal value of a property as much as 90 percent. The land is valued as if it were dedicated to agricultural use.

. . .

But county appraisers, suspicious of the arrangements, have begun rejecting ecolabs.

The Travis Central Appraisal District has overturned all ecolab exemptions it granted last year. And within the past year, the Hays Central Appraisal District has rejected eight ecolab applications, and the Bexar Appraisal District has rejected one.

The appraisers say the ecolabs have little oversight and cost counties and school districts thousands of dollars in missed revenue, and they question the merits of the research projects.

The appraisers are being diplomatic.  This is an idiotic loophole.  Not because ecological research is not valuable.  It is.  It is certainly something that our universities should do.  This is just a stupid way to fund it.

The ecologists complain that they need access to private land.  There's no question that they do.  But people get access to private land all the time.  They rent it.

That's effectively what's happening here.  The state is renting land for ecological research, paying rent in the amount of the tax breaks.  (Actually, that's not quite right:  The state is obtaining access to the land but compelling counties and cities to pay the rent.)

This is a dumb, dumb way to pay rent, and not just because city and county governments are being forced to pick up the tab.  This is a dumb way to pay rent because the people who obtain the benefit from the property, and are therefore in a position to judge the value of the property, don't pick up the tab.  This means that the amount of rent doesn't necessarily have any bearing on the value of access to the property.  For example, one property owner's assessed value has been cut by $2.8 million.  He's effectively getting $60,000+ in rent per year for letting researchers perform ecological research on his property.  Is it worth it?  I don't know.  No one knows, because the researchers' institutions don't have to foot the bill.  If we gave the institutions an extra $60,000 to spend on ecological research, they might spend it all for access to a single piece of property.  But then they might not.  They might decide that $60,000 could be used better to fund a bunch of other projects. 

Even if the researchers were determined to get access to a specific property, they might be able to get it for a lot less than $60,000.  The typical property owner probably wouldn't give access for free.  But if he's got 40 undeveloped acres just sitting there, earning no economic return at all, he might consider even a few thousand dollars a windfall.  This loophole virtually guarantees that we'll overpay for ecological research.

Access to the property might not be worth the price for another reason.  The research itself might not be worth very much.  All research is not created equal.  Universities, departments, and even individual researchers have to prioritize all the time.  They do this in part based on a cost-benefit analysis.  I don't mean they calculate the fiscal benefits of the research -- there frequently is none -- but they balance the potential advance of knowledge against the cost of procuring that advance. 

When universities or academic departments or grant-issuing government agencies foot the bill, they have an incentive to monitor the research project, to make sure it is worth the resources it will consume.  This is a good system because they have the expertise to decide what's valuable and what's not.  Under the tax-break system, though, the university or academic department or grant-issuing government agency doesn't have to worry about the cost of property access.  Trivial research -- that is, research that no sensible academic would spend ten bucks on -- can be used to lop thousands of dollars off the tax rolls.  (Also, there's the possibility of collusion between property owner and researcher.)

This system forces the burden of monitoring the quality of the research on . . . the tax appraiser.  The tax appraiser must determine whether the project is a justifiable ecological research project or just a tax dodge.  I doubt many tax appraisers anticipated that they would need a research degree in ecology when they signed up for the job. 

Rep. Patrick Rose has introduced a bill to tighten the ecolab tax break.  Do us a favor, Representative.  Don't tighten.  Chop.