Introduction

The modern consumer protection movement is most often associated with the 1960s, when concerns about product safety, misleading advertising and fraud angered an increasingly skeptical public. Those concerns first made headlines. Then they were forged into public policy, which resulted in new government programs.

But long before the rebellious '60s, government acted in ways that benefited consumers.

From the earliest days of the Republic, political leaders recognized the fundamental role of government in free market economies: Civil and criminal laws define personal property, unfair business practices, market abuses and fraud. The government facilitates economic growth by investing in public infrastructure and by allocating public resources. The courts provide a venue for resolving disputes.

On the other hand, as the modern market began to emerge, so did the mantra of caveat emptor, or buyer beware. The Latin phrase implied that while producers and consumers benefit from a government-defined market, the specifics of individual transactions were a private, not public concern.

Consumerism, as it is known, today began to emerge at the close of the 19th century -- and with it a new role for government. Mechanization pushed people off of self-sufficient farms and pulled people toward the factories and markets of a new urban America.

The first of three waves of modern consumerism rose as the national distribution of brand-named goods and newspaper advertising transformed the relationship between producer, merchant and buyer.⁽¹⁾

Upton Sinclair's 1906 book The Jungle exposed the horrors of a Chicago meat plant and generated a public outcry about food safety. The federal government responded by creating the Federal Trade Commission and the Food and Drug Administration.

Inspired by these events and the Progressive political movement, states, including California, also saw a growing role for themselves. The California Legislature had passed the Medical Practices Act in 1876 to counter the injurious potential of being treated by an incompetent or unscrupulous physician. By the close of the century, the State had expanded its regulatory net to other professions whose occupations were closely linked to public safety -- dentists and nurses, accountants and lawyers, architects and engineers.

At the same time, political concerns rose about the economic hegemony of monopolies and trusts. While the federal government created anti-trust laws, states expanded rate-setting and route regulation over franchised monopolies -- railroads, ferries, trucking, and as they matured, public utilities including water, power and telephone.

The second wave of modern consumerism came in the late 1920s and 1930s -- as mass-produced goods, and in particular electric appliances, flooded a market that was reshaped by radio advertisements. Stuart Chase and Frederick J. Schlink's 1927 book Your Money's Worth distilled public concerns about new product safety and reliability. Consumers Union was founded and Congress passed numerous laws that resulted in minimum standards for products and advertising.

The third and most recent wave of consumerism began in the early 1960s as global markets, an explosion of new products, the expansion of credit and the maturation of television created new concerns about product safety, lending practices and advertising claims.

In 1962, in a speech to Congress, President John F. Kennedy outlined four basic consumer rights: a right to safety, a right to be informed, a right to choose among a variety of products and services at competitive prices, and a right to a fair hearing by government during the formation of public policy, or in other words, a right to be heard.

Ralph Nader's 1965 book Unsafe at Any Speed helped to define a public agenda that resulted in the creation of the National Highway Traffic Safety Administration and the Consumer Product Safety Commission.

And so it was in California, where consumer concerns rapidly evolved from protest placards to line-items in public budgets. The policy was outlined in the Consumer Affairs Act of 1970, which created the Department of Consumer Affairs out of its predecessor, the Department of Professional and Vocational Standards. The department was given a mission far broader than the regulation of specific licensed businesses. Civil servants and political appointees were given the job of educating consumers on all relevant issues, advocating on behalf of consumers in all relevant public forums, and increasing regulatory and enforcement efforts against bad actors in all corners of the marketplace.

More recently, the federal and state governments have deregulated markets in which economic analyses have showed that vigorous competition could be expected to put a constant downward pressure on prices and encourage increasing consumer choice and quality of goods and services. Those policies reflect assessments that demonstrated how over-regulation can increase prices, limit choice and discourage innovation -- indicating that the government's role requires a sophisticated balancing.⁽²⁾

These concepts have been articulated by economists and policy analysts. They were placed in statute by overwhelming bipartisan support. And they remain an essential benchmark for assessing government's efforts in the area of consumer protection. As stated in California's Consumer Affairs Act of 1970:

It is the intent of the Legislature and the purpose of this chapter to promote and protect the interests of the people as consumers. The Legislature finds that vigorous representation and protection of consumer interests are essential to the fair and efficient functioning of a free enterprise market economy. The Legislature declares that government advances the interests of consumers by facilitating the proper functioning of the free enterprise market economy through [a] educating and informing the consumer to insure rational consumer choice in the marketplace; [b] protecting the consumer from the sale of goods and services through the use of deceptive methods, acts, or practices which are inimical to the general welfare of consumers; [c] fostering competition; and [d] promoting effective representation of consumers' interests in all branches and levels of government.⁽³⁾

The Legislature went on to define the consumer's interest in a way that despite its construction seems to be without limits:

"Interests of consumers" is limited to the cost, quality, purity, safety, durability, performance, effectiveness, dependability, availability and adequacy of choice of goods and services offered or furnished to consumers and adequacy and accuracy of information relating to consumer goods, services, money, or credit (including labeling, packaging and advertising of contents, qualities and terms of sale).⁽⁴⁾

This intent language is notable both for its breadth and its restraint. While the Legislature saw consumer protection as broadly defined and paramount, it also saw the State's role first and foremost as a "facilitator" of market efficiency rather than an intervenor in the marketplace.

Achieving ambitious public policy goals, however, is a greater challenge than setting those goals. Policy makers and program managers have worked persistently to develop effective organizational structures, guiding statutes and regulations, management and leadership techniques that would provide the mandated protections to a growing and diverse population of consumers in a rapidly evolving marketplace.

Consumer-related policy questions cannot be asked and answered with any finality. A healthy economy by definition involves a constant evolution of goods and services, producers and consumers. An equally healthy government provides for constant assessment of how and how well it is providing consumer protection.

Conducting that assessment is complicated by the reality that no one agency or even level of government is responsible for all consumer protection activities. In recent years a number of public agencies have recognized that consumer protection is among their reasons for existing. Some have even established units dedicated to consumer protection.

Still, in California the nexus for all of these issues is the Department of Consumer Affairs, which statutorily holds the broad mandate for ensuring protection of all California consumers. By law it is required to stand on behalf of consumers -- in the marketplace and on the soapbox, in public forums such as the Legislature and the courts, and in private meetings among public and private sector leaders.

In this report, the Little Hoover Commission examined four mainstays of the State's consumer protection function:

1. Consumer Education. Common sense and academic research have long shown that educated consumers make smarter choices, discerning quality and price, rewarding efficient and innovative suppliers with their business, and resolving disputes on their own behalf. The State's premier statute places education high, and consumer advocates and business interests often agree that is the best course of action.

2. Consumer Advocacy. The need for government-sponsored consumer advocacy has been defined by economists in theory and demonstrated in public venues. In general, consumers often do not organize themselves collectively when the individual costs of participating in public forums are high and the individual benefits are low. Few people take a day off work to testify at a regulatory hearing over a utility rate increase that will mean small change to them. Advocacy is often lacking even when the aggregated costs to consumers are high.

3. Organizational Structure. The organizational structure of the Department of Consumer Affairs is an issue that predates the department itself, and has never been adequately resolved. The department is the product of an evolution of policies shaped by political and economic interests -- a debate historically controlled by the regulated industries. Changes as a result have been incremental rather than holistic. This structure is important because it shapes how, and how well consumer protection is accomplished -- particularly in the area of professional regulation, where ineffective consumer protection can result in limited choices and higher prices.

4. Interagency Cooperation. The interdepartmental structure also is important because many governmental agencies are involved and consumer protection can never be placed into one entity. In fact many agencies have expanded their consumer protection functions since the Department of Consumer Affairs was created.

Previous Commission Studies

The Little Hoover Commission has twice before reviewed the state agency charged entirely with consumer protection:

• An Examination of the Department of Professional and Vocational Standards. In 1967, the Commission issued a report on the Department of Professional and Vocational Standards (later renamed the Department of Consumer Affairs). The report recommended converting the licensing boards to advisory groups, centralizing investigative and legal resources and using license fees to reimburse the General Fund rather than directly finance individual regulatory boards.



• Comments and Recommendations Regarding Professional and Business Licensing. In January of 1979, the Commission, at the request of the Secretary of the State and Consumer Services Agency, evaluated the conclusions of a regulatory task force the Department of Consumer Affairs had established to scrutinize the performance of the professional and vocational boards. The Little Hoover Commission concluded that some of the task force's most stinging criticisms were unsubstantiated. However, considerable evidence remained to show the boards were not putting consumer interests first.

In addition to those reviews, a number of more contemporary reports by the Little Hoover Commission have involved state programs with an important consumer protection element. Among the most recent:

• When Consumers Have Choices: The State's Role in Competitive Utility Markets. Consumer protection in changing utility markets is the fundamental issue addressed in the Commission's 1996 report. In addition to the overriding concerns about providing effective regulation to produce the lowest consumer prices, the Commission dealt specifically with the role of consumer advocacy in the public venues in which utility regulation issues were debated and defined. The Commission recommended that an office of consumer advocacy be established in the Attorney General's office to deal with utility issues.



• Long-Term Care: Providing Compassion Without Confusion. In more select and less visible "markets," such as the delivery of long-term care for the elderly and infirmed, the public wants -- and federal, state and local agencies are called on to encourage and ensure -- low-cost, high-caliber care. A central element in the Commission's 1996 report concerned better enforcement of regulations governing long-term care providers.

And finally, the department's board-based structure puts it in the spotlight in larger reviews of government structure, and in particular assessments of the State's reliance on boards and commissions to perform a wide range of functions. The Little Hoover Commission has contributed to that debate, as well:

• Boards and Commissions: California's Hidden Government. In 1989, the Little Hoover Commission released a report on boards and commissions. In this report, the Commission recommended developing "sunrise" criteria for evaluating the best way of addressing new public concerns that may warrant public action, but not necessarily a new organization. It recommended a sunsetting process by which agencies would have to prove their worth.

Methodology

During this review, the Commission organized a series of meetings with those who play a role in public consumer protection efforts -- local prosecutors, legislators and their staff, business interests and consumer advocates. A list of round table participants is contained in Appendix A. The directors and managers of other state agencies with consumer-related functions also were interviewed, along with some of the executive officers of professional boards within the department. A list of those interviewed is contained in Appendix B.

The Commission empaneled an advisory committee that met twice to further flesh out the issues and the challenges facing the department and the State's efforts to fulfill the interests of the department. A list of Advisory Committee members is contained in Appendix C.

And the Commission conducted a public hearing in November 1997 to explore how the State fulfills its consumer protection mandates. A list of witnesses is contained in Appendix D.

With the assistance of consumer advocates and the cooperation of numerous public officials, the Commission has completed this report. It begins with a transmittal letter, an Executive Summary and this Introduction. A Background is followed by four chapters, on Consumer Education, Consumer Advocacy, Organizational Structure and Interagency Cooperation, which are followed by a Conclusion, Appendices and Endnotes.