On what basis does government justify intrusions into voluntary, noncoercive economic transactions between free people? Usually the rationale is “protecting consumers.” This is a broad power, but it dwindles in comparison to the prerogative implied by something known as the “granny clause.”

Protecting consumers usually involves ensuring that laymen are not harmed by the fraud or incompetence of professionals, who have — or are supposed to have — much greater knowledge than their customers about the services they provide. Licensure requirements for builders, physicians, barbers and many other trades are common applications of this rationale.

Another typical form of consumer protection involves regulating monopolies in various markets, such as electric power, telecommunications or cable television. Of course, many of these so-called “natural” monopolies are really more the result of government’s active participation than the cause of it, but the regulation of monopolies at least has longstanding legal precedent and some limit to its scope.

Now one of Michigan’s leading regulatory officials, an appointee of the governor, has offered up in press reports and in speeches yet another rationale for government interference. Referring to the deregulated electricity market that is now being phased in, he has invoked the “granny clause,” a phrase he heard during his service in the attorney general’s office.

His example of the clause involved his own mother, whom he described as suffering from dementia and very poor short-term memory. He noted that she could sign a contract that he might decide, some months later, was not “the right contract” for her. Without the “granny clause,” it would be too late to free her from this choice, but under the “granny clause,” state government would protect her by pre-emptively setting the terms of everybody’s electricity contracts in ways that would eliminate customer choice in the first place.

Now, protecting the welfare of those who are not competent to manage their own affairs is a legitimate concern of any compassionate society. We already have many statutes and legal procedures that address this issue. Among these procedures is the ability of someone who knows that he or she is weakening to grant durable power of attorney to a trusted acquaintance. Court‑appointed guardianships are a related institution. Another example is a provision in the state’s consumer protection act granting buyers a brief right of rescission after signing certain complicated contracts.

But the granny clause goes much further. It effectively makes government the self-appointed guardian for all citizens, who are treated like incompetent wards of the state. Government gains the power to insert itself into every market, control every price and set the terms of every contract, with the implicit assumption that one of the parties may be demented. All citizens are treated as if they are unable to manage their own affairs.

The context of this example of the granny clause was the electric power market, a sector that has been regulated by government for most of the last century. But the assumptions underlying the granny clause can in fact apply to any economic transaction, including buying a new television, hiring a plumber or choosing an Internet service provider. By implication, if a single disabled consumer somewhere might make a “bad” purchase, the government would step in and limit everyone’s choices.

Note that the state regulator who described the clause didn’t cite anyone who actually had been harmed. The mere possibility of such an outcome was all that was needed to warrant state involvement.

The granny clause is not merely theoretical. A relative of the clause has already entered Michigan’s statute book in at least one place: Michigan Public Act 660 of 2002 imposes on certain lenders a duty to ascertain whether a statement “may be reasonably comprehended by the segment of the public to which” it is directed. This means lenders must assume — and limit their offerings to consumers on the assumption — that some people are unable to understand the plain duties required of a borrower.

The potential for abuse in the granny clause is obvious, especially in light of the temptation government officials would have to exercise it aggressively in order to demonstrate their concern for “consumer safety” (and often enough, to satisfy an influential interest group that benefits from the regulation). In contrast, the loss of consumer freedom and opportunity caused by their action would be much less visible.

The granny clause should be rejected by citizens and their representatives. It moves society ever further from the system of limited government envisioned by our founders, in which all voluntary, noncoercive acts are allowed, except for a handful of carefully defined exceptions that benefit everyone. It moves us ever closer to a system in which everything is prohibited, except for those carefully defined exceptions granted by our guardians in Lansing and Washington, D.C.

#####

Jack McHugh is a legislative policy analyst at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.