Sen. Elizabeth Warren was a passionate advocate of a controversial academic theory known by its enthusiasts as “behavioral economics” during her time as a Harvard law professor.
Today, Warren's theory is the rationale behind the Consumer Financial Protection Bureau's sweeping consumer credit card data-mining surveillance program that has alarmed civil liberties experts, financial industry officials and members of Congress.
The goal of the CFPB data-mining is to track 80 percent of the nearly 1 billion consumer cards that are currently in circulation. The program also aims to monitor 95 percent of all mortgages.
Why is an agency created only a few years ago as a component of the Federal Reserve invading the financial privacy of millions of Americans? The answer is found in Warren's academic advocacy.
Behavioral economics requires mega-helpings of data -- called “evidence-based research” -- on which to base the government's financial regulatory policies.
Warren, a Massachusetts Democrat, aggressively lobbied President Obama, other federal policymakers and the mainstream media to embrace behavioral economics. Key to that effort was a law review article, “Making Credit Safer: The Case for Regulation,” which she co-wrote with New York University law professor Oren Bar-Gill.
In “Making Credit Safer” and countless magazine articles, newspaper interviews and op-eds, and public speeches, Warren issued a rallying cry for behavioral economics and formation of a new federal agency that ultimately became the CFPB.
“Behavioral evidence reinforces a vision of poorly informed consumers,” she wrote. “Effective regulation requires both authority and motivation. Yet none of the many regulators in the consumer credit field satisfies these basic requirements.”
In a Harvard Magazine article, Warren described her vision of what the CFPB would do, comparing it to the Consumer Product Safety Commission:
"So why not create a Financial Product Safety Commission charged with responsibility to establish guidelines for consumer disclosure, collect and report data about the uses of different financial products, review new products for safety, and require modification of dangerous products before they can be marketed to the public? The agency could review mortgages, credit cards, car loans, and so on."
In Warren's reckoning, just about any consumer choice would be considered fair game for government data-mining.
Columbia University law professor Ronald Mann, a frequent visiting scholar at the Federal Reserve, said Warren left a distinct behavioral economic imprint on the CFPB.
“Elizabeth Warren has been writing some things using insights from behavioral economics,” Mann said. “Obviously her thinking was important in the forming of the agency and the way it was set up."
Behavioral economists emphasize that consumers frequently make mistakes, and companies offering financial products and services take advantage of those mistakes. Government intervention is required to protect consumers.
Richard Epstein, currently at NYU Law School, disagreed that government must intervene because “perfect rationality” is not always exercised by consumers: “You can’t have an economic model of rationality that people never make mistakes,” he said. “That’s crazy.”
Todd Zywicki, a professor of law at George Mason University’s School of Law who closely follows behavioral economics, called it a pseudo-science that provides a “veneer” of respectability to justify CFPB’s regulations.
“What behavioral economics is, is really a new system of trying to dress up sort of old style, ‘government knows best’ paternalism in the garb of economics,” Zywicki said. “And it’s a way to make it look like it’s more like economic science rather than just Big Brother paternalistic government. It gives them that veneer of evidence-based decision making.”
Federal Trade Commissioner Joshua Wright observed last year in the Yale Law Review that numerous behavioral economists were appointed to prominent positions in the Obama administration following passage of the Dodd-Frank Act that established the CFPB.
“What is most important about Dodd-Frank and consumer protection,” Wright wrote, “is that it represents the arrival of behavioral law and economics as the intellectual centerpiece of the current administration’s approach.”
Cass Sunstein is the most prominent behavioral economist in the Obama administration. Obama appointed him to run the White House Office of Information and Regulatory Affairs in 2009, a position he left last year.
Sunstein and economist Richard Thaler co-authored “Nudge: Improving Decisions about Health, Wealth and Happiness” in 2008. Invoking behavioral economic principles, the two men said government could “help” ordinary people make better choices.
At CFPB, Sendhil Mullainathan was among the most prominent behavioral economists. He was appointed as the agency’s first research director and managed the early stages of the data-monitoring program. He is now at Harvard.
On Sept. 12, lawmakers at a House Financial Services Committee hearing complained that Mullainathan received a $5 million contract from CFPB to retain Ideas42, his behavioral economic organization, after he left the agency.
All seven members of CFPB’s Academic Research Council are also behavioral economists. The ARC includes David Laibson, who works with Mullainathan at Harvard and whose data were used by Warren and Bar-Gill for their piece. Also on the ARC is Sunstein's co-author Thaler.
Warren is adept at credit card snooping. She and Bar-Gill reviewed a great deal of proprietary credit card data for their law review article, including their first sample of “128,000 credit card accounts followed monthly over a 36-month period.”
Warren said they followed an additional dataset of 14,798 credit cards over a two-year period.
Warren was expected to be appointed by Obama as CFPB's first director, but congressional opposition to her candidacy was so deep and intense that Obama instead chose Richard Cordray, a former Ohio attorney general.
CFPB has been aggressive in its data mining effort. The bureau has awarded $18.5 million in contracts to Argus, Experian and Deloitte Consulting to obtain 10 years' worth of private financial information on five million American consumers, according to internal CFPB documents obtained by the nonprofit watchdog group Judicial Watch under the Freedom of Information Act.
CFPB also stated in documents describing its strategic development plan that it is running “proprietary loan-level datasets covering substantially all of the credit card marketplace.”
Cordray told the Sept. 12 House Financial Services Committee hearing that CFPB was ordering 110 banks to hand over its credit card data as part of its “market monitoring” activities.
NYU's Epstein described the scale of data collection by CFPB as “frightening,” saying, “I’m scared because my view is this is the sort of thing which, if it’s done by the CIA for terrorist activity, we scream.”
But "when these characters (at CFPB) do it, all the sudden it’s benevolent,” Epstein said.
Mann said no university would attempt consumer surveillance of the magnitude being practiced by CFPB due to privacy considerations.
“I suspect that in a university context, it would be very difficult to get an institutional review board to collect that kind of data because of the intrusion on individuals.”
But CFPB is doing it because it doesn't worry about such issues, he said: “They’re the government, though. They don’t have to live by those constraints.”
Zywicki said CFPB is operating a data-mining program out of sheer arrogance.
“They don’t need this much data for regulation,” he said. “They’re asking for it because they can. They want it. And they can make people produce it for them.”
Warren and Cordray declined to be interviewed for this story.