Flashback – Consumer Protection Gone Crazy

Back in 2011 I explained how new legislation regarding credit cards led to the companies increasing fees and interest rates. More recently, about a year ago, I once again emphasized how well intentioned consumer protection laws often have unintended consequences. Here is that entry from August 23 of last year.

[Last time I wrote about a lawmaker introducing a bill to protect Americans from Internet addiction, a condition that has no formal definition or diagnosis. Whenever a problem or “epidemic” arises, someone in power decides that there is a government solution to change the conditions or behavior. (Even when the government was the source of the problem.)

People are not trusted to solve their own problems, often because they don't. In the end everyone loses some freedom because of the bad decisions of a few. It takes critical thinking to identify the root of the problem and personal responsibility to own the solution instead of passing it off to a higher power.

This dynamic was reinforced a few days ago when a package arrived from one of those catalogs that frequently appear in the mailbox. In the package was a gift pen, similar to those used by various companies as promotional items. It was an ordinary retractable ballpoint similar to those from a dentist’s office or a job fair but with one difference. It came in a plastic sleeve with the words, “WARNING: Cancer and Reproductive Harm” followed by a web address.

The address led to the California Proposition 65 page. “The California Office of Environmental Health Hazard Assessment is establishing this website to provide the public with information on chemicals, products and locations often associated with Proposition 65 warnings.  These warnings inform Californians about their exposures to chemicals that cause cancer, birth defects or other reproductive harm.” 

Notice that the above statement reads, “cause cancer” not “may cause cancer,” implying that they have studies to definitively prove a direct causal link. Since the list includes over 900 chemicals, that is a doubtful assertion. Looking at one random example: “The International Agency for Research on Cancer (IARC) lists coconut oil diethanolamine condensate (cocamide DEA) as an IARC Group 2B carcinogen, which identifies this chemical as possibly carcinogenic to humans."[Emphasis added] Apparently it only takes possibly to make the list. 

The full list includes a large number of arcane-sounding chemicals, e.g., Amikacin Sulfate and Zalcitabine, but it also includes alcoholic beverages, aspirin, tobacco smoke, nicotine and oral contraceptives.  

How helpful is this? Is tobacco smoke or nicotine a surprise? Why do Californians need the information and not everyone else? Coffee contains acrylamide, which is on the list, so last year a judge decided, "coffee sellers in the state should have to post cancer warnings.” But in “2016, the cancer agency of the World Health Organization moved coffee off its ‘possible carcinogen’ list.”

This isn’t science; it’s judges and lawmakers deciding what should or should not be on a list. It’s “The Boy Who Cried Wolf” gone crazy. People don’t have time to be careful about 900 chemicals and all the products they go into. I have no idea which part of the promotional pen I should worry about or how it might hurt me. Tanning beds and sunlight are not on the list only because they are not chemicals. The situation is so bad that my seven-year-old granddaughter upon returning from a vacation in San Diego commented about how silly it was seeing all the warning signs everywhere coffee was sold.

Not only is this not helpful, it adds cost. The extra warning labels and signs cost money. It is costly to reformulate products to avoid having to post warnings, or worse, to avoid the threat from lawyers, “some of whose businesses are built entirely on filing Proposition 65 lawsuits” on behalf of “straw man plaintiffs." The cost of these nuisance consequences comes back on all of us. (Economic understanding reminds us there is no magic money tree to make up the difference. It all gets passed along to the end consumer.)

Does the list ever shrink or become reasonable, or do we get to the point where everything needs a progressively more meaningless label? I’m sure many people thought this was a great idea back in 1986 not realizing that they may be creating a monster.]

Acting and Reacting

Is the world getting safer or more dangerous? Data about crime, wars and accidental deaths indicate that life this century is much safer than it was in the past. These events are very noticeable and easily measured. On the other hand, we often ignore or excuse less immediate dangers that arise as our interactions with the world become more complex.

As I have been describing behavioral examples of errors in the five key dimensions over the last 10 years, it becomes clearer that much of the human race is still attacking twenty-first century problems with cave-man level of skills. Just as the hunter-gatherers required immediate reactions to survive, when they heard a rustling in the bushes that may or may not be a snake or predator, humans retained those instincts, following a course of acting first and analyzing later. 

Likewise the practice of not trusting or even attacking people from a different tribe or with a different belief system carries over today in many forms. “My god is better than your god” is not necessarily ancient grounds for confrontation. It happens in a modified form daily on social media.

These instant reactions and mini-superstitions come to us immediately, before we have a chance to engage our critical thinking. Thus critical thinking is often omitted from our decision process, used only to justify or rationalize actions after the fact.

Several recent books describe this psychological phenomenon in detail: Thinking, Fast and Slow by Daniel Kahneman; Nudge, by Thaler and Sunstein; and The Power of Habit by Charles Duhigg are among them. They tell how, as humans evolved, we developed mechanisms to be able to make quick decisions in times of panic or emergency. We react instantly, responding to emotional triggers often before we are aware of them. We are more comfortable following our established patterns of behavior. These programmed, intuitive reactions saved our ancestors, but they serve us poorly today.

That explains in part the need for COVID-19 bail out packages. According to Market Watch: “A shocking number of Americans are living paycheck to paycheck.” One survey says it’s at least half, another estimates 74%, as “one in four families making $150,000 a year or more are living paycheck-to-paycheck” and three in ten families having no emergency savings. No wonder it’s a crisis! The article says people are struggling.

This problem keeps coming up year after year, yet there is no change. 

Apparently what people need is something called financial literacy. An article in Ideas.TED from late last year asks: How financially literate are you?” and tells “3 things you should know about your money.” These three things are not close to rocket science: knowing how much money is coming in vs. how much you are spending; knowing your credit score and knowing how much credit card debt you have. Do we really need seminars and newsletters to teach people how to spend less than they earn to have a little left over at the end of the pay period or to read a credit card bill? These are third-grade skills.

Don’t blame it on credit cards or the eagerness of banks to lend customers more money than they can afford to borrow. These excuses are a cop-out. But this problem arose only in the last half-century or so. The world gets increasingly complex while we still try to cope using our cave-man instincts, act now and analyze later.

Critical thinking does not come naturally. It’s hard work and can sometimes be unpleasant. But it’s increasingly needed to keep up with the new products and services that technology throws at us at an ever-accelerating pace.

Critical Thinking and The Mail

Yesterday was my birthday, but I wasn’t born yesterday. Nor am I naïve enough to fall for all the advertising tricks that come my way. This must come as a disappointment to many companies. I got many examples in a single day last week when I picked up the snail mail.

First, let me repeat the assumption that a large percentage of the ads we see must be working to some extent. If consumers didn’t respond to the ads and buy the product, the company would either change their approach to advertising or go out of business. So let’s go to the mail.

The first envelope contains a typical auto insurance ad. It tells me I can save 15% or more on my insurance simply by switching to their company. (The number of discounts they can offer will make my head spin!) But didn’t I just receive a mailing the week before from another company telling me how much I would save with them? Theoretically, someone could keep switching back and forth between companies, saving with each switch, eventually paying almost nothing. That is certainly too good to be true. So this one gets recycled.

The next one is supposedly from my bank offering me a credit card with a 5.99% APR rate fixed for life. I don’t get too excited, because the fine print gives away some additional information. It’s not really from my bank; all my bank did was sell a mailing list with my name on it. The rate shown boldly at the top of the letter applies only to balance transfers during the first 3 months. After that it’s 15% to 24%. They are no doubt counting on the fact that people who already have a balance to transfer will also carry a balance with them and end up pay the higher rate (for life) – along with the possibility of some $37 late payment fees. This great deal follows the insurance offer into the recycling bin.

But wait – there’s more! This one according to the return address comes from “Your Local Office” in a city I am not familiar with. A gentleman working there is saving my free copy of the Medicare Guide. All I have to do is tear off the stub and mail it back telling my age, phone and email – so he can haunt me for the next year? No, thank you! (The actual name of the company is in the fine print at the bottom of the letter where I am informed that it is not affiliated with or endorsed by any government agency.) Out it goes.

Finally, the letter offering me wonderful, affordable health insurance joins the rest.

This is not the first time I have seen these or similar letters. So what could be the reason that these mailings continue? Someone must be responding. Perhaps it is the people who relieve stress by cow cuddling.

That’s right, for only $300 for a 90-minute session, the latest health trend, according to this source, is “snuggling up with a 1,000 lb farm animal to help with your mental health.” One farm in New York “has a program offering the ‘Horse & Cow Experience’ where individuals can spend time connecting with the large barnyard animals.” When it comes to mental health, paying $300 to spend time snuggling with a cow seems more diagnostic than therapeutic!

I wasn’t born yesterday, but based on the mail I receive and the latest health trend, yesterday must have seen a figurative baby boom. If we get drawn in by these, how will we ever start using critical thinking to solve real problems?

A More Complex World Requires A Wiser Approach

A couple of years ago, CNN began an investigation based on a government mail fraud case against a Canadian company accused of processing payments for many rip-off artists from around the world with millions of victims in the US. “Many of the schemes are remarkably similar. They prey on the desperate, sick and elderly -- sending out letters that trick people into thinking they've won the lottery or found a psychic adviser who will turn their lives around.” Every year the scammers stole millions and laundered it through that company.

As follow up and as research for a book on the subject, they wanted to meet and interview a famous French psychic whose name is at the bottom of letters that appeared to be handwritten and personally signed. Addressed to the elderly, sick and lonely, "the letters promised that Maria Duval would use her powers as a world-renowned psychic to help solve their problems. They could recover from ailments, avoid terrible misfortune, win the lottery.” They only needed to send her money first. “At least 1.4 million Americans fell for the scam.”

To be convincing, the “letters contained personal details, like a recipient’s name, age or hometown” but this information is easily obtained on line. They bought mailing lists of people who would likely fall for such a scam. These people would then send in about $40 for each letter giving them guidance from the psychic along with lucky numbers and magic charms. The total collected in this one operation is estimated at over $200 million.

This continued for more than 20 years, but was only the tip of the iceberg. When they got an interview with the psychic, they found that she sold the rights to her name for a fraction of the proceeds. The psychic letter ploy along with other similar scams had become big business with professional copywriters and marketers scattered around the world and linked together by the Canadian payment processors.

It’s true that not enough Americans understand that psychic powers don’t exist. Those that can’t distinguish coincidence from the universe sending messages (or some such nonsense) are easily taken in. It’s true that some Americans don’t understand that you can never win a lottery that you haven’t bought a ticket for. But that’s not the main point.

There is a broader issue here. More sophisticated Americans, who scoff at the victims of these scams, follow fads and trends, are taken in by advertising for products of dubious value and respond with fear to manufactured crises. 

Their lack of critical thinking is evident and somewhat frightening. On one hand, they argue that climate change is real, based on the testimony of so many scientists. On the other, they will reject scientific consensus on many other subjects like the safety of genetic engineering, glyphosate (brand name Roundup) and irradiation of food. They will buy into the concept that locally grown and organic produce is always superior. They put their families on a gluten-free diet when there is no medical reason to do so. They believe there is something magical about sea salt. They put their faith in all sorts of untested dietary supplements. Experts warning against these actions are considered corporate shills or just mistaken. They buy products based on nothing more than endorsements from friends, strangers or celebrity spokespersons. They flock to purveyors of “secrets” that drug companies, doctors, credit card companies, Wall Street and the government “don’t want you to know.”

All this goes on as the world gets more complex every day. Incredibly fast communications bring real and false offers and threats. Advanced robots, AI and autonomous vehicles lurk in the near future, while hackers try to steal our identities and influence votes. Are Americans ready for the future? Behavior shows that today far too many are struggling, victims of scams and their own poor decisions.

My Credit Card Pays Better Interest than My Bank!

Here is an odd realization.  My credit card actually gives me a better interest rate than my bank.

“How can that be?” the crowd will scream.  Everyone is always complaining about high interest rates on credit cards.  They currently average around 16.1% and some are much higher!  Not only that, but if you make a minimum payment or even a partial payment, the interest applies not only to what is left after the payment, but to the entire amount you owed them before the payment.  It takes many years to pay off a credit card if you pay just the minimum, even if you never use it again.  Typical advice from financial advisors and planners is to pay off your highest interest debt first, and that is invariably credit card debt.

This high interest seems like a scheme for banks to make more money, but it is partially due to the need to cover the risk they face when lending money, which a credit card is.  Some of those people will default on their debt and never pay them back.  The default rate on credit cards is up this year, but usually hovers around 3%.  That’s 3% of people who walk away from their debt leaving the banks holding the bag.  They charge the high-risk people more because they are more likely to default, but they charge everyone else more (except for those low, teaser introductory offers to get you hooked) to make sure they have collected enough to cover their losses.  As I’ve written elsewhere, businesses and governments really have only one source of money:  our wallets.  We all end up paying the price for bailing out the deadbeats.

Given all that information, what I’m saying about getting interest from the credit card company doesn’t seem to make sense.

But I’m not talking about the interest consumers have to pay.  I’m talking about the interest the credit cards pay us in the form of those cash back bonuses.  Discover pays 1% on all purchases (with some 5% quarterly specials) and a Capital One card advertises 1%,  2% on groceries and 3% on dining.  So here is the catch; when I pay off my credit card in full every month I get a cash bonus for every dollar I have spent and I pay them no interest.

When I look at a typical bank savings account I find an interest rate of 0.1% at Chase, for example, (or 0.4% for a Premier Account with monthly fees and/or monthly limits unless the balance is over $15,000).  So for practical purposes, the Discover credit card pays me 10 times as much for the money I spend each month as the bank would pay me if I let them keep my money for a year (assuming I did not have to pay any extra fees).

I know it’s not a pure comparison, money spent is clearly not the same as money saved, but the contrast is still interesting.  The credit cards don't pay me interest for lending them my money.  They pay me to borrow their money hoping I will end up paying them more in interest in return - but I don't!  It’s a curious result from some creative critical thinking.

Perspective of Constant Updates

Why do we hear about political polls almost daily for 6 months or more before the election?  Here is just one sample from a few weeks ago on CBS News: “Where Clinton and Trump stand with 90 days left.”  I just saw the headline and didn’t read the article, because it makes absolutely no difference where they stand 90 days before or even one day before the election.  It only makes a difference where they stand the day after the election.  This is not news.  It’s more like laziness, something they can sit in the office and collect off a feed from somewhere else.

This has been the trend in news for the last few decades.  They breathlessly report results of a poll, sometimes a poll they themselves have taken, about who is slipping or who is gaining.  That information may be useful to the candidates' campaigns, but not to voters who still have, in this case, 90 days to make up their minds.  It is generally a waste of our time; but if they can make it seem like news, they can draw in the viewers and advertisers to help pay their anchors millions of dollars (to read poll results and later in the broadcast complain about overpaid CEOs).

These same organizations will try to keep us up on election night watching them kill time by checking off states, showing partial returns and reviewing voter turnout, until they can make a final determination.  It’s unbelievable how many people fall for this, people who know deep down inside that the results will be the same in the morning and nothing is gained by staying up to hear those results six hours earlier.  The world is not going to changing in those 6 hours.  The new president will not take office for another two months, two months in which the media will be filled with stories about what might happen or who might be appointed to the cabinet, and gobs more speculation by insiders,  experts and even their fellow news reporters.

But we never learn.  The media has us trained to sit on the edge of our seats, soaking in these meaningless polling data and speculations.  We can’t wait to see what happens and need some expert to provide guesses to relieve the suspense.  Likewise, they compete for our attention with breaking news, of some disaster or incident from across the ocean or the other side of the country that can’t wait until a scheduled program – because it will affect our lives how? 

See how we are conditioned.  Ring the news bell and we salivate for the latest!

On a related note, why do I need a mobile app to check my bank balance on my phone from anywhere?  If I go out shopping, I will use my credit card that needs to be paid only once a month.  I will have plenty of time to come home and check my bank balance on my computer if I really need to.  Shopping with a list also reduces the chance of coming up embarrassingly short.  Yet the bank thinks they are doing me a big favor giving me the ability to check my balance on the fly.  Perhaps they think I will be going to lunch from the office unable to decide between joining my rich friends at the Ritz or my cheap friends at McDonalds.  I have to check my balance first.  Perhaps they are just trying to encourage me to live closer to the edge financially, knowing I can get away with it because I have my bank balance at my finger tips.

I don’t know.  I suspect they are just trying to compete for my business with all the other banks that will let me check my bank balance on my phone at any time from anywhere for some unfathomable reason.  Meanwhile they are paying a bunch of programmers to come up with nifty apps instead of using that money to pay me a just little more interest on the money I do have in the bank.  That would be an excellent way to compete.

This is about having perspective.  Slow down and get a grip on reality.  Don’t be lured in by the hype and simulated excitement.

Admit it.  Ninety-nine percent of breaking news is not that urgent or important.  A tornado warning in your county is breaking news; a plane crash in Egypt is not.  The only other time it might be important enough to interrupt my day is if my bank suddenly went out of business.  Then I could pull out my phone and find out immediately if I had any money left at all!

More Discipline Evidence

I was not surprised, more discouraged, to see this headline on CBS:  “Nearly a third of Americans have no emergency savings.”  Five months ago a similar survey from Bankrate.com reported that about 63 percent would be unable to deal with a $500 car repair or a $1,000 emergency room bill.  Surely this doesn’t mean one-third of Americans don’t have emergencies.  Rather it’s more evidence that Americans have a problem with discipline in their spending habits.

The CBS piece points out that the number who have enough stashed away for at least six months has risen from 22% to 28% in the last year, but it’s still not good news for the non-savers or for the rest of us who may be affected if they begin defaulting on bills. 

Of course a natural reaction when someone is accused of weak discipline is to find an excuse.  (Weak discipline often goes hand in hand with weak responsibility.)  Here CBS comes to the rescue with “11 Tricks Retailers Use to Get More of Your Money.” 

These tricks can be condensed into a few categories.  Some have to do with offering prepared foods:  precut or prewashed or heat-and-serve.  It would be cheaper to do the washing and cutting and preparation at home, but buying prepared foods should be the result of a conscious decision to trade your money for free time rather than an automatic decision.  Another category covers bargain displays, soothing music and confusing store layouts to delay shoppers, getting them to spend more time (and money) in the store.  Finally, constant sales and promotions try to make almost everything look like a bargain, even when a product rarely sells for the full price.  Most of these tricks can be defeated by the age-old advice of shopping with a list and sticking to it.  (I’m surprised the writer left out the common trick of pushing an extended warrantee to get you to buy breakdown insurance on a brand new item.)

I wrote last time about how going after false advertising and other fraudulent activities keeps the FTC very busy.  They can hardly be expected to protect us from these little “tricks” too.  Americans need to take some responsibility.

Finally, some people attempt to control their spending by eliminating credit cards.  This strategy has some significant hidden implications and costs.  Not using a credit card (responsibly) affects your credit score, which in turn can make it more difficult to buy a house, a car or other big-ticket item.  Lower credit scores increase the cost of insurance and travel and may reflect poorly on you when applying for a job.  In addition, credit card companies become your ally when you face cases of fraud or have a dispute with a seller.  You also benefit from any cash-back program, have a complete record of spending and don’t have to carry a large amount of cash, especially for emergencies.  When used properly, credit cards have many benefits.

Even though the trend is in the right direction, a large proportion of Americans still have inadequate savings.  It’s futile to blame it on retailers’ tricks or to try to fool yourself by cutting up credit cards.  The right answer, the real solution, is to know it’s up to you, and only discipline will do.  It is hard to imagine that a large percentage of those without savings and living from paycheck to paycheck can’t find at least one small sacrifice or habitual extra outlay to cut as a source for a small savings plan.  It may seem to hurt at first, but it’s a lot healthier than living with the constant stress of dreading the arrival of the next unexpected bill or emergency.

Credit Card Fraud

Since November when 40 million Target customers had their credit card information compromised, the focus has turned to the fact that the US leads the world in credit card fraud due in part to the use of “decades-old” technology.  The new technology, used in most of the rest of the world, features smart cards, debit and credit cards with an encoded computer chip in place of the magnetic strip on the back.  The chip changes the encryption with each use, making it significantly more difficult for criminals to steal information.  This CBS Evening News story gives all the details, but gives some pretty meaningless numbers as well.

The meaningless numbers come near the end.  The reporter says that smart cards are only effective in stores and may cause criminals to shift their attention to online transactions.  Supposedly, it happened in England when, after issuing smart cards, on-line fraud increased from 23% to 65%.  What seems like a large increase may or may not be.

Think about it using hypothetical numbers.  If there were 1000 cases of fraud in Year 1 and 1000 cases in Year 2, then on-line fraud did jump from 230 to 650 (23% to 65% of 1000).  On the other hand, it is reasonable to assume that the total cases decreased.  Since there were 770 cases of fraud not on line (1000 - 230) and most of those went away due to the better technology, there might have been only 300 total cases both on line and at stores.  In that case in Year 2 there would have been 65% of 300 cases on line or 195, which is a decrease from the original 230 cases.  So there might have been no discernible shift of attention by criminals at all!  If this had been one of those standardized test questions, the answer would have been “e.  Not enough information given.”  But it wasn’t a test question; it was a serious news story, one using incomplete data to imply a still-lurking danger.

Another example comes from Reuters about seatbelts saving children’s lives.  The news is good, 43% fewer children killed on the highways due to increased seatbelt usage over the last 10 years.  With one in three deaths occurring when children are not buckled up the CDC urged parents to “make sure their children use appropriate-sized car seats, booster seats and seat belts on every trip."  The study points out that deaths of improperly secured children differed by race, “nearly half (45 percent for blacks and 46 percent for Hispanics) versus a quarter (26 percent) for white kids."  Is this really necessary?  Are they implying that minority parents are less careful?  I don’t think so.  But the added information not only distracts from the primary message, it also falls into the same “not enough information” category of the credit card fraud example – 45% of how many vs. 26% of how many?

Cases of meaningless or incomplete numbers are not unusual in the news business.  They obviously don’t think it through.  They are counting on us to join them in not thinking it through and to automatically trust their assumptions and come to similar conclusions or, in more sinister instances, to mindlessly accept a false or misleading impression.  It’s critical thinking; not paying attention leads us to go along with rather than analyze and question many false conclusions.

Earn Tons of Cash in Your Spare Time!

Headlines like this one on the radio, TV or Internet should raise eyebrows and cause your defenses to go up.  It sounds too good to be true, so it probably is.  They make it sound like you can sit back with your feet up and watch the money roll in.  What I always wonder is:  If it’s that easy, why are they trying to sell CDs or starter kits instead of doing it themselves?  If they know all the secrets to making money in the stock market or in real estate, why are they giving those secrets away?  If I knew how to make money on my computer at home, why wouldn’t I pay a bunch of people to sit at computers in a big building and keep most of that money myself?  Maybe it’s easier (and less risky) to sell books, CDs and kits than it is to actually make the money.  Maybe if it sounds too good to be true, there’s a hidden catch.

Making easy money is not the only promise that lures unsuspecting citizens.  Another magic answer many people are desperate for is how to lose weight easily.  In the Federal Trade Commission’s recently released report, Consumer Fraud in the United States, 2011, fraudulent weight-loss products are cited as the number one issue.  An estimated 5.1 million Americans over the age of 18 bought and used such products including nonprescription drugs, dietary supplements, skin patches, creams, wraps, and earrings that were found to deliver little or no benefit while promising easy, substantial weight loss or weight loss without diet or exercise.  It was too good to be true!

Other areas for fraud included prize promotions, buyers' clubs, work-at-home programs, credit repair, debt relief, credit card insurance, business opportunities, mortgage relief, advance-fee loans, pyramid schemes, government job offers, counterfeit checks, and grants (see page 22 of the report).  In some of these area there are legitimate organizations offering services.  The best way to avoid possible fraud is to understand that the valid ones don’t sound too good to be true; they require effort.

The source that led me to this report suggests measures to combat fraud including:  a task force of regulators, consumer advocates, and legislators to promote new laws and regulations; more accountability for media outlets and communication channels that "profit from the frauds responsible for the losses suffered by victims" and more government regulatory power.  Do we really need (or want) more laws, penalties and advocates to protect us from too-good-to-be-true schemes?  As long as we keep looking for the easy answers and abdicate responsibility by claiming to be victims, that becomes the commonly proposed solution.  The real answers are changes in behavior, which require the discipline to get in physical and financial shape and the responsibility to own our problems instead of claiming to be victims.