Hostile Takeover

Y2K was supposed to be a big event. It turned out to be nothing to write home about.

“A computer flaw, the so-called "Millennium Bug," led to anxiety and the Y2K (Year 2000) scare. When complex computer programs were first written in the 1960s, engineers used a two-digit code for the year, leaving out the "19." As the year 2000 approached, many believed that the systems would not interpret the "00" correctly, therefore causing a major glitch in the system.”

How do we know it was supposed to be significant? Because experts told us that this software coding issue would lead to major issues with banks, utilities, pretty much anything digital.

Here are some of the more extreme predictions:

“1. Prediction: Prison doors will fling open, freeing violent criminals …

“2. Prediction: Planes will fall out of the sky …

“3. Prediction: 911 could cease operating …

“4. Prediction: People will be using toilet paper as currency …

“5. Prediction: GPS satellites could fail, leaving people stranded …

“6. Prediction: Elevators will stop working …

“7. Prediction: We’re  toast as a result of nuclear annhilation.”

Pretty much “human sacrifice, dogs and cats living together, mass hysteria.”

Some of the people making these predictions were credible: Ed Yardeni, Ed Yourdon, Gartner, etc.

There were three principle arguments.

First, it was alleged that testing before Y2K showed catastrophic effect.

Second, experts told us that much of the problem lay in so-called embedded systems. Think of a chip that is hard-coded with this logic inside a device. Short of swapping out the chip, you wouldn’t be able to fix the problem.

Third, people extrapolated geometric (and even exponential) failures from cascading problems spilling over from system to system.

In the end, there was no issue. There wasn’t any testing; people who wanted to sound the alarm just said there was. Embedded systems rely on elapsed time (e.g., 23,008 seconds have elapsed) without reference to a date. And systems don’t take as input anything passed to them without inspecting it. Systems will either reject bad data or tag it as problematic. They won’t just ingest them credulously.

So why were these ostensibly smart people so willing to say outlandish things?

Money and prestige explain much of it. People were getting great PR. Everyone loves a Cassandra. For a market strategist on Wall Street, you don’t have to be right, you just to have to be visible. You need to be in the center of the conversation. That drives meetings. Meetings drive commissions. For others, it might have been consulting fees.

Even if we could fix the problem, it was unlikely that everyone would get the work done in time for January 1, 2000. Many emerging markets didn’t get the work done before the end of the year and … nothing remarkable happened.

Nobody gets paid for saying, “everything will be all right” or “we’ll figure out a way to navigate this unscathed.”

Or, as the article puts it:

“In other words, Y2K and climate change are completely different but they’re treated as parallel cases because they’re both associated with apocalyptic predictions. Y2K was the ‘experts’ crying wolf. As a result, the ‘experts’ now have a credibility problem. They’re not the same experts but the damage, alas, has already been done.”

Steve Forbes couldn’t resist when something similar happened in the climate change movement:

“In June 2018, climate activist Greta Thunberg fired off an urgent tweet: “A top climate scientist is warning that climate change will wipe out all of humanity unless we stop using fossil fuels over the next five years.”

Imagine the psychological damage Thunberg’s claim inflicted on people who believed her. What it would be like to go through life with a ticking time bomb in the corner?

How should we think about predictions? Who is good at it? Who is bad at it? And what does this mean for bureaucracy?

Philip Tetlock is a psychologist who has researched decision-making over a long-term horizon in a study covering 284 experts making 28,000 predictions. He was motivated to research this after having seen political operators try to justify failing to foresee the end of the Soviet Union.

“The whole exercise struck Tetlock as what used to be called an ‘outcome-irrelevant learning structure.’ No feedback, no correction.”

It wasn’t just the end of Soviet empire.

“He observes the same thing going on with expert opinion about the Iraq War. Instead of saying, ‘I evidently had the wrong theory,’ the experts declare, ‘It almost went my way,’ or ‘It was the right mistake to make under the circumstances,’ or ‘I’ll be proved right later,’ or ‘The evilness of the enemy is still the main event here.’”

Aside: if you see experts talking this way about failed predictions they made in the past (that led to disastrous policy impacting masses of people negatively), then you know that they know they were wrong. It is just an ex post attempt at justifying their prior behavior. It is ego.

Mistakes were made.

Tetlock concluded that there was only one thing that distinguished good forecasters from bad ones.

“How you think matters more than what you think.”

What is a bureaucracy but a way of thinking? It is a way of ingesting and processing information to make decisions.

“It’s a matter of judgment style, first expressed by ancient Greek warrior poet Archiochus: ‘The fox knows many things; the hedgehog only one great thing.’ The idea was later expanded by essayist Isaiah Berlin. In Tetlock’s interpretation, Hedgehogs have one grand theory (Marxist, Libertarian, whatever) which they are happy to extend into many domains, relishing its parsimony, and expressing their views with great confidence. Foxes, on the other hand are skeptical about grand theories, diffident in their forecasts, and ready to adjust their ideas based on actual events.”

Considering what a hedgehog is not, we can say that a hedgehog is credulous, confident, and inflexible. Their way is the only way. They are absolutely certain. There will be dire consequences if you do not heed their warning. People will die, for example.

A bureaucracy is also credulous, confident, and inflexible. When you have a hammer, everything looks like a nail. That is the bureaucratic mentality.

Foxes tend to be much more successful, particularly with short-term forecasts that they can adjust or tweak from point-to-point, even as hedgehogs see their erroneous prognostications amplified with the passage of time. Not only are foxes’ predictions more accurate than those of their hedgehog brethren, but foxes are better at assessing the likelihood that their forecasts are correct.

The problem is that people have a cognitive bias, or so it would seem, to think the hedgehog more credible because of the certainty with which they express their views. A fox will present a nuanced, balanced case, highlighting the ways in which she could be wrong. The fox seeks information that will contradict and disprove her thesis so that she may adjust it; the hedgehog dismisses contradictory facts as being irrelevant outliers. Hedgehogs are charismatic. Celebrities praise the hedgehog for saving us from the terrible circumstances in which we find ourselves with their bold recommendations that flow from their boldly expressed knowledge. The fox takes incremental steps as she seeks feedback with which she can develop a rich picture, accumulating confidence from experience.

Bureaucracy is a Hedgehog. It is a system of thinking, ossified in its approach: the implementation of a set of rules for the delivery of a specific point of view. It is not interested in feedback or contradiction. It is a tool for the manifestation of expert opinion into action.

Here is NPR:

“There are many different interpretations of this parable, but psychologist Phil Tetlock sees it as a way of understanding two cognitive styles: Foxes have different strategies for different problems. They are comfortable with nuance; they can live with contradictions. Hedgehogs, on the other hand, focus on the big picture. They reduce every problem to one organizing principle. ‘The hedgehogs are more the big idea people, more decisive. In most MBA programs, they'd probably be viewed as better leadership material,’ Tetlock says.”

Et tu, Brute?

Foxes are capable of changing their strategy.

“Hedgehog approaches are fine in a stable environment but they can quickly break down when conditions are unstable. Hedgehogs struggle with complexity and change – they want reality to fit within their preconceived ideas. Foxes are more comfortable with uncertainty and change.” [emphasis added]

Cato has applied this model to regulatory policy. Regulatory policy depends often on cost-benefit analysis. We make predictions of the costs and the benefits and we have some sort of discounting mechanism to reduce this to a present value comparison that justifies a stance, one way or the other.

Who makes the predictions? Experts.

Are these short-term forecasts or long-term forecasts? They are more likely than not long-term forecasts.

Are these experts hedgehogs or foxes? They’re often hedgehogs who are pushing a particular view. They could be progressive activists who see everything through an interventionist lens or they could be people who have been captured by industry, preferring to stand back with more of a laissez-faire approach, deferring to hedgehogs on the other side of the table.

What, after all, is an expert? Do we not fall prey to the fallacy that an expert is someone who is better at making predictions?

“In a 2005 report to Congress on the costs and benefits of regulations, the Office of Management and Budget summarized some of this literature. It reported that of 47 analyses studied, 11 were roughly accurate, 22 overestimated the cost-benefit ratio, and 14 underestimated it. This is not a great record in terms of accuracy, but at least does not show an overt bias toward over- or underestimation. Like many approaches to prediction, however, the record of cost-benefit analysis is far from stellar.”

Are the economists behind this cost-benefit analysis hedgehogs?

“Economists, in particular, are treated with the reverence the ancient Greeks gave the Oracle of Delphi. But unlike the notoriously vague pronouncements that once issued from Delphi, economists’ predictions are concrete and precise. Their accuracy can be checked. And anyone who does that will quickly conclude that economists make lousy soothsayers.”

Whether it is the economist making the predictions or the bureaucracy in which he works that evinces hedgehog traits is a distinction without a difference.

Another way of looking at this is to consider the data-driven approach to forecasting. Very complex forecasting may turn out to be more accurate if it requires data-driven analysis reconciling verified, well-sourced inputs with the conclusions it asserts. How rare is this?

Cato then turns its attention to public choice.

“Anthony Downs, in his classic 1967 book Inside Bureaucracy, characterized agency personnel in one of five categories: climbers, conservers, advocates, zealots, and statesmen. Of these five types, only statesmen can be seen as possible foxes. The rest, to lesser or greater degrees, reflect varieties of hedgehogs …

“Other studies tend to confirm that agency decisionmakers are, on the whole, best characterized as hedgehogs, although the studies reach that conclusion for different reasons. As James Q. Wilson persuasively argued, agency personnel tend to be dedicated to their missions; that is few people go to work at the U.S. Environmental Protection Agency who don’t believe in the cause of environmentalism to the exclusion of other policy concerns.” [emphasis added]

Our piece, Who Watches the Watchers, talked about the way in which individuals can hijack institutional capital for their own purposes or squander it through incompetence, in much the same light.

“A corollary implication here is that individuals who would use institutions to advance their own interests and causes are more likely to target the most influential entities, the ones with the greatest amount of institutional capital. Why do you rob banks? Because that’s where the money is.”

A good, if not ironic, case study of a hostile takeover of an administrative agency’s institutional capital may be the story of Lina Khan, Chairperson of the U.S. Federal Trade Commission.

Who is Lina Khan? By all accounts, she is a brilliant woman. She is the Chair of the Federal Trade Commission. Her rise has been meteoric, having made her name known for an influential article in the Yale Law Journal on Amazon and antitrust. She wrote the piece as a student. She is a leading voice of the so-called New Brandeis movement.

“The New Brandeis or neo-Brandeis movement is an antitrust academic and political movement in the United States which argues that excessively centralized private power is dangerous for economical, political and social reasons. Initially called hipster antitrust by its detractors, as also referred to as the "Columbia school" or "Neo-Progressive antitrust," the movement advocates that United States antitrust law return to a broader concern with private power and its negative effects on market competition, income inequality, consumer rights, unemployment, and wage growth.

“The movement draws inspiration from the anti-monopolist work of Louis Brandeis, an early 20th century United States Supreme Court Justice who called high economic concentration “the Curse of Bigness” and believed monopolies were inherently harmful to the welfare of workers and business innovation.”

Her advocacy against large, concentrated commercial power and her youth have combined to make her a darling of the policy elite, with flattering profiles appearing in global publications.

“Khan, like many in her cohort, believes otherwise. ‘If markets are leading us in directions that we, as a democratic society, decide are not compatible with our vision of liberty or democracy, it is incumbent upon government to do something.’”

As we shall see, there are those who interpret her view as being not too far removed from the Vietnam War sentiment, "It became necessary to destroy the town to save it."

There are two sides to every story. Here is the Interim Staff Report of the Committee on the Judiciary, US House of Representatives, February 22, 2024 entitled, “Abuse of Power, Waste of Resources, and Fear: What Internal Documents and Testimony from Career Employees Show about the FTC under Chair Lina Khan.” Republicans felt manipulated by the President’s appointment of Khan as Chair shortly after they approved her nomination to be a member of the FTC since he had not indicated his intention to do so when nominating her. This, coupled with her aggressive litigation to block deals (and the ensuing broader chilling effect on mergers and acquisitions), inflamed them to investigate reports of dysfunction at the agency.

The subtext here is that the Republicans believe that Chair Khan has hijacked the FTC’s considerable institutional capital to promote a progressive, partisan agenda, instead of fulfilling her administrative mandate in implementing U.S. antitrust legislation. The case they present is one-sided, so make of it what you will.

If they are correct (and I will leave that to you to decide), this behavior would be consistent with what we argued in Who Watches the Watchers:

“A corollary implication here is that individuals who would use institutions to advance their own interests and causes are more likely to target the most influential entities, the ones with the greatest amount of institutional capital. Why do you rob banks? Because that’s where the money is.”

The FTC is one of the most powerful agencies in the United States. This isn’t the local SPCA. This is an organization that can bring some of the most powerful companies to their knees. The temptation to direct that power is overwhelming. What the House Judiciary report suggests is a pattern of narcissism (to which we alluded in describing The Narcissistic Rage of the Bureaucracy).

The report claims to understand her motivation:

“Chair Khan has been open in how she believes markets are political—a view that justifies using the FTC’s power to control the market economy.54 She seems to have no concern with politicizing enforcement of the law as a prosecutor or adjudicator because she believes that ‘all decisions are political insofar as government agencies are bringing them.’”

The agency staffers, the permanent civil servants who persist between administrations and who ensure the machine works, were excited for her arrival, sympathetic to her intent to break new ground. They noted their own edginess in litigation before her arrival, but they appear to have developed concerns about efficacy early on in her tenure.

“Another group of managers expressed staff’s willingness and desire to bring novel and aggressive cases, but expressed concern that Chair Khan was preventing staff from being successful. The managers communicated to the Chair that they are ‘excited about [the Chair’s] vision to expand antitrust enforcement’ and explained to the Chair that some of the FTC’s past work ‘has pushed the envelope in bringing complaints that hew less to standard theories and instead add to the body of merger behavior that violates’ the antitrust statutes. The managers even pointed the Chair to ‘novel theories’ in “recent complaints[.]”

Part of this was allegedly due to Khan’s centralization and consolidation of power in the office of the Chair.

“To achieve her progressive ambitions at the FTC, Khan sought to centralize power in the office of the Chair. In doing so, she refused to delegate effectively and never acknowledged the high opportunity costs that came from pursuing progressive policies lacking economic foundation.”

The operative word employed in the House Judiciary text here was “micromanagement.”

“Chair Khan’s refusal to delegate to even her own handpicked leadership team—the Bureau Directors—had a negative impact on the ability to conduct even the most basic functions in an investigation.”

She may have taken unusual steps that had the effect of undermining the staff and confusing the process.

“Instead of operating efficiently, the Chair’s office attempted to micromanage investigations. For example, the Chair’s office inserted itself into conversations between FTC staff and targets of investigations regarding discovery negotiations.”

The FTC is no different than anyone else. They have limited resources (even though the budget had increased 30% under the Biden administration watch). Staff understood the need to pick their battles. The Chair did not appear to accept this.

“Some managers pleaded with leadership because staff could not address actual anticompetitive conduct because of Chair Khan’s inaction. For example, one manager wrote to the FTC’s Chief of Staff that ‘it sometimes feels like we are running down marginal theories (given the facts of a specific case) when more problematic deals may go unreviewed.’”

There were charges of basic mismanagement.

“Chair Khan would also leave matters open for investigation even when staff had no viable theories of harm. As one manager wrote, senior leadership needs to ‘[c]lose matters when we are done’ because ‘leaving matters open repeatedly, without a demonstrable antitrust question to investigate, demonstrates a lack of trust in staff’s judgment and results in staff’s distrust of senior leadership and discourages creative thinking and initiative.’ Similarly, a manager noted that staff had ‘too many matters open and no ability to triage.’”

The report suggests that there was little follow-through, with an inability to prioritize.

“In addition to pursuing cases without a viable theory of harm, Chair Khan forced FTC staff to pursue marginal theories of harm within particular matters. This mismanagement caused staff to inform senior leadership about the obvious fact that the ‘greater the number of potential theories, the less time staff has to focus on the most likely provable theory.’ Another manager explained to senior leaders that ‘in our preliminary investigations, staff currently is tasked with addressing every conceivable theory of harm[.]’”

The report speculates as to the Chair’s motivation.

“Career FTC staff members expressed concern that Chair Khan may not actually want the FTC to succeed in its enforcement and purposefully put staff in a position to lose cases. FTC managers expressed staff’s willingness and desire to bring novel and aggressive cases, but expressed concern that Chair Khan was preventing staff from being successful, Additionally, managers warned against leadership directing staff to bring cases unsupported by facts. FTC staff routinely requested that Chair Khan clarify her priorities for the agency, but she routinely refused to communicate with managers.”

Why would she want to lose? In order to force legislative change, we are told.

“Plainly stated, one manager wrote to another manager that ‘I’m not sure being successful (or doing things well) is a shared goal, as the chair wants to show that we can’t meet our mission mandate without legislative change.’”

This merited focusing, we are told, on the big, high-profile cases.

“One manager aired frustration regarding vague directions that did not provide staff with the guidance necessary to succeed. The staff member wrote that the “Chair talks about wanting to do the ‘big cases’ or the cases ‘that move markets.’ But those platitudes do not provide actual direction, leading the staff member to ask ‘[W]hat, exactly, does that mean?’”

This focus on making headlines with an incidental interest in winning cases would have a long-lasting impact on the antitrust landscape if legislative change didn’t follow, according to some.

“Another manager pleaded with the Bureau of Competition Front Office to understand the importance of winning cases in litigation. The longtime manager explained that ‘[l]itigation is the most important thing we do[.]’As the manager explained, ‘[N]ot only does [litigation] create the precedent we’ll depend on later, but our entire staffing model is built on the presumption that a significant percentage of merging parties will abandon their merger in the face of a complaint.’ The manager explained that ‘i]f the private bar senses that our litigation teams are weak or understaffed, they will litigate much more frequently, severely compounding our staffing crunch.’ The consequences, as this merger shop manager explained, is that over time merging parties can become emboldened to attempt more transactions and bring the FTC to court if the FTC attempts to block a merger.”

As the report goes on, it hints at the external orientation of the Chair, quoting an email from a manager to the Chair’s Chief of Staff:

“I also continue to get a sense that outside influences . . . have an undue impact on our priorities, investigation management, and enforcement decisions. While public perception of the Commission’s performance is vital to institutional legitimacy and I recognize the need to explain to the public what we’re doing (or more accurately, what we’ve done), we should never make an enforcement-related decision for the sake of PR.”

Some staff felt contempt from the Chair for their experience or their attachment to precedent, perhaps.

“According to career FTC managers, Chair Khan refused to treat career FTC employees as experienced litigators capable of fulfilling her agenda. One manager wrote that it was unclear whether the ‘Chair views the staff as the tool to implement her agenda’ even though ‘staff conducts investigations with expertise and thoroughness, and they are talented, tenacious litigators[.]’”

The collapse in morale came out in the 2023 Federal Employee Viewpoint Survey.

“Honesty and Integrity: In 2020, the last year under the Trump Administration, 87% of FTC employees agreed that senior leaders maintain high standards of honesty and integrity.252 Under Chair Khan’s leadership, that figure fell to 53% in 2021, declined further to 49% in 2022, and barely rebounded to 58% in 2023 …

“Respect for Senior Leaders: In 2020, 83% of surveyed FTC employees agreed that they have a high level of respect for the FTC’s senior leaders.254 Again, under Chair Khan’s leadership, that figure plummeted to 49% in 2021, 44% in 2022, and 53% in 2023. …

“Motivation and Commitment: In 2020, 80% of FTC employees agreed that senior leaders generate high levels of motivation and commitment in the workforce.256 Under Chair Khan’s leadership, that figure dropped to 42% in 2021, fell to 36% in 2022, and only rose slightly to 46% in 2023 …

“When compared to other agencies, the results are even more alarming. In each category listed above, the FTC dropped from highest-rated to lowest or second-lowest of the ranked agencies.”

These shocking employee survey responses are consistent with allegations of scapegoating, as noted by a manager:

“Scapegoating the career staff for the FTC’s ‘underenforcement’ of the antitrust laws is not just counterproductive, it’s factually incorrect. The Bureau of Competition brought and won more litigation cases over the past decade than any time in its history. The FEVS survey results almost certainly reflect staff’s view that we’re continuing to be blamed for the agency’s past shortcomings.”

Khan’s leadership team seemed to think that they were the victims, lamenting the lack of sympathy for how they were treated.

“Chair Khan’s senior leaders at times appeared not only uninterested in addressing the problems, but also attempted to claim that staff were unreasonable and that the leaders were the victims. One member of Chair’s Khan’s leadership team wrote that ‘[s]ome of our staff may be feeling distrustful or vulnerable or otherwise aggrieved[.]’ But instead of addressing the problem, this senior leader complained about ‘feeling hurt and frustrated that this staff member isn’t giving me (as the sender of the guidance email) any benefit of the doubt . . . which I thought I had earned by now. But I guess that’s where we are these days, so I’ll get over it.’ This senior leader simply stated: ‘Hopefully this is an outlier.’”

Another possible red flag was the way in which the Agency cut off staff from personal and professional opportunities.

“One action that highlights the unnecessary targeting of FTC staff under Chair Khan was her moratorium on FTC staff accepting speaking engagements. Documents provided to the Committee explained why the moratorium against public speaking was so harmful to the FTC’s mission. One career manager wrote to senior leaders that ‘public speaking is an important way for the agency to advance its competition mission by educating consumers, companies, and other important stakeholders about the antitrust laws and their application and enforcement.’”

Some managers appeared to feel as if they needed to walk on eggshells around the Chair and her immediate coterie.

“Internal FTC documents show that FTC staff, and even some senior leaders on the Chair’s own team, feared interacting with Chair Khan. In preparing for a meeting with Chair Khan in April 2022, one manager wrote: I keep hearing that we can’t say things or recommend outcomes because it will upset you. It adds to an impression I’ve heard too often that you’re being kept in a bubble and don’t know what’s going on at the agency. That impression benefits no one. Neither does the increasing impression that the people who communicate with you most are afraid to tell you anything you don’t want to hear. If we can’t talk about things we disagree about we cannot have the debate that is essential to thorough investigation and prosecuting creative, groundbreaking cases.”

Who could blame them when senior managers behave as alleged here?

“[The Director of the Bureau of Competition] continued, raising her voice and stating that ‘this is not all about your feelings’ and that I had been ‘a hassle,’ ‘irritating,’ and ‘throwing up flags all over the place.’ She continued to raise her voice at me for much of the remainder of the call.”

Add it all together and you have allegedly a Chair with a strong view of what policy should be (even if that’s not what the statute or the precedent says), who centralizes power and decision-making, micromanages and scapegoats staff, and who pursues all manner of litigation unsuccessfully, even when there is no provable harm, diluting the agency’s attention even as she hounds the agency’s staff into resigning.

Beware of Greeks bearing gifts.

Even if you don’t believe that Khan is what the House Judiciary staffers claim she is, it’s not difficult to believe that the fact pattern exists in some bureaucracies. You may recognize aspects of this story in your own experience.

Bureaucracies are Hedgehogs. They are not organizations with the dynamic capacity to make decisions based on changing fact patterns. They cannot manage complexity. They exist to project power. Therefore, we must be vigilant that the people we appoint to lead these agencies do not substitute their own policy views to exploit the bureaucracy’s implementation apparatus. This is especially true of the largest and most powerful agencies. Bureaucracy is vulnerable to narcissistic takeover.

Either the House Judiciary report is an accurate representation of what is happening at the FTC or it is a tendentious, partisan attack on a woman of precocious judgment. Whatever you believe, this report is a cautionary tale because it is at least possible.