Inspector General's Findings Undermine CFTC Research on Position Limits, Says Streetwise Professor
Commentary by Bob Zwirb
In a blog post titled "You Can't Handle the Truth! Censoring Politically Inconvenient Research at the CFTC," University of Houston Finance Professor Craig Pirrong commented on the CFTC Inspector General's finding that the Chief Economist of the Commission had "prohibited relevant but potentially controversial research" on position limits. He also discussed Chair Massad's testimony before a Senate panel regarding this finding, in which he explained that the Commission "must set priorities" when conducting economic research.
Noting that priorities at regulatory agencies "are inherently political," Professor Pirrong considered what this development says about the CFTC's commitment to carrying out its statutory obligation to conduct a cost-benefit analysis of the regulation, and whether the agency can claim credibly that any rule it eventually adopts will "offer sufficient benefit to make them necessary, or to exceed their cost, if its own Chief Economist claims that his office has neither the data nor the expertise to perform valid research on the effects of limits." Noting that the only reason to have economists at a regulatory agency is to provide critical evaluations of pending or existing rules and regulations, Professor Pirrong concluded that it "is beyond absurd" to preclude economists from policy-relevant research on rules that the agency is considering.
Commentary
Unfortunately, these disturbing revelations are consistent with the subordinate role that economists and economic analysis have played at the CFTC during the Dodd-Frank era. Earlier in the rulemaking process, it was the Commission's Inspector General who revealed that the cost/benefit analyses accompanying the first set of Dodd-Frank rules had been written by lawyers rather than economists, as one might have expected. That finding coincided with allegations that the Commission was taking "a vague and minimalist approach" to fulfilling this statutory obligation (and choosing methods of informal rulemaking to avoid it altogether). See House Agricultural Committee, Lawmakers Request Review of CFTC's Cost-Benefit Analysis (March 14, 2011).
These revelations also are consistent with the CFTC's official position in litigation involving previous iterations of the position limit rulemaking – in which it had told the court that the agency was not obligated to analyze the empirical economic evidence on speculation and the effectiveness of position limits because Congress mandated that it issue such rules. They also are consistent with the way in which the Commission has handled empirical research, when addressing this issue couldn't be avoided. For example, at a public meeting in November 2013, the CFTC relied on a staff member from its economic division, who did not have an advanced degree in economics, to present the findings of approximately 130 empirical studies. But perhaps the most disturbing revelation is the characterization of the policymaking process at the CFTC by one of its own economists as one in which "a decision is made and then analysis is done in a fashion designed to support the decision." Unfortunately, that approach to the process is all too common at regulatory agencies where lawyers predominate and economists are treated like stepchildren.
Ultimately, such marginalization of economists and economic analysis in the rulemaking process is self-defeating when the agency must defend its findings in court. As Judge Frank H. Easterbrook once emphasized, an agency must first "act like an expert if it wants the judiciary to treat it as one." Elliott v. CFTC, 202 F.3d. 926, 942 (7th Cir. 2000) (Easterbrook J., dissenting).