TCS Daily

Privacy Parts

By Robert Hahn - November 6, 2003 12:00 AM

Add telemarketing and spam to the dark side of the information technology revolution.  If you doubt that people are concerned, consider the rush to sign up for the FTC's do-not-call registry, which, if held to be constitutional, will force telemarketers to find some other way to interrupt dinner. As Billy Tauzin, chair of the House Commerce Committee, put it, "50 million Americans can't be wrong."


Designing methods to prevent unwanted commercial intrusions has become a booming cottage industry for software developers and policy wonks. The economist's favorites typically involve empowering consumers to block calls or email at the touch of a button or a few computer keystrokes -- to make it less costly to build walls that keep the intruders off your turf.


Specific fixes for deterring telemarketers include giving consumers easy ways to screen and/or block calls, or even to charge for incoming calls. The solutions for spam are similar: give consumers greater control by adding filtering software, or as Jon Rauch proposed in the pages of The National Journal, require mailers to pay a small fee for the right to clutter e-mailboxes.


Two basic issues merit attention in analyzing such solutions. The first is whether they would really make consumers better off. The second is whether the government should impose them. And the answers turn on the economics.


A fancy way to ask if a solution makes sense is whether the benefits of supplying the fix exceeds the costs. Unfortunately, we do not have a very good idea of what consumers are willing to pay to avoid hucksters pitching everything from diet pills to condos in Kauai.  Nor do we have a handle on the costs. But we do know enough to frame reasonable policy responses.


Take spam. We know that business already spends a lot to address the problem and that the cost to consumers is significant. According to Ferris Research, containing spam will cost business more than $10 billion dollars in 2003 in labor, hardware and software. And while the costs borne by individuals are anyone's guess, the burden imposed by anything that materially reduces the efficiency of e-mail communications for tens of millions of heavy users surely must be measured in the billions of dollars. 


That said, the means of asserting control over e-mail matter a lot. Smarter filters, which leave the baby but not the bathwater, seem to be evolving in the marketplace. So do other approaches, such as requiring a showing that a human is likely to have sent the email. It is less clear, though, whether the issue can be successfully addressed by technology that allows consumers to charge for access to their e-mailboxes.


It may simply be too expensive to charge, say, a penny for each email. Optimists point to the invention of "e-cash," which allows multiple transactions to be settled without the repeated use of checks or credit cards. But each transaction still costs money to perform. For example, PayPal now charges 30 cents for each transaction -- a figure far higher than one might charge for incoming spam. Moreover, the costs of the e-cash transaction do not take into account the costs of additional email traffic on the Internet, which could be considerable. On close examination, then, using transactions fees to contain spam fails on grounds of practicality. This may change, of course, as technology evolves.


That brings us to the other question-whether government should intervene to contain spam. The first step is to ask whether the market has failed. Some argue that the appearance of spam, by definition, is evidence of a failure to enforce property rights. And in a sense, they're right. But once we recognize that it's costly to enforce such rights -- and there is disagreement over who owns them -- the story becomes more complicated.


Intervention is warranted only if it can be shown that there is a problem worth solving and the government can actually improve on things. In all likelihood, a mixture of government and private sector solutions probably make sense, but with the private sector playing the dominant role. The government may want to back anti-spam rules with high penalties and significant enforcement effort. But that deterrence strategy is problematic, because it is difficult to find and successfully prosecute the culprits. The private sector is the logical place to look for creative solutions, which are likely to change along with technology.


What about telemarketing calls? Isn't "" a no-brainer -- at least from an economics perspective? Even here, one should be careful. Government intervention could reduce private incentives to find solutions that may be better. I might, for example, want to block certain kinds of calls -- say, offers of Viagra on the cheap -- but not solicitations for season tickets to the local opera company. Do-not-call does not easily accommodate such preferences.


And finally, there is the law of unintended consequences: Do-not-call could simply encourage telemarketers to place their calls from locations where it is harder to prosecute them for violations -- that's what has happened to online gambling.


Note, too, that the private market is not without resources to fight telemarketing. Consumers generally have the option to purchase caller ID or to not list their numbers. Electronics stores sell inexpensive devices that mislead telemarketing computers by signaling the line has been disconnected. And new options are appearing in the market all the time. Many phone services offer the ability to block specific numbers; some services even screen all incoming calls, and send a message warning off solicitations.


It is tempting to assume that if the do-not-call registry works well, the government should expand its horizons -- think junk mail. But there are less obtrusive and potentially more efficient alternatives -- for example, eliminating the postal system subsidy for third-class mail, or simply supplying information to consumers on how to get off mailing lists.


Privacy is complicated. Plainly, there are First Amendment issues. Less obviously, defining and enforcing privacy boundaries raises economic issues. Moreover, there is little reason to believe that one size will fit all -- that what works for, say, spam will work for telemarketing or the next technology designed to grab attention. Falstaff's line surely applies to Washington's war in defense of commercial privacy: discretion is the better part of valor.


Robert W. Hahn is executive director of the American Enterprise Institute-Brookings Joint Center, which studies regulatory policy.


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