Topic: Regulatory Studies

The CPSC’s Defective New Complaints Database

We are told constantly that government can play a beneficial role in the marketplace by taking steps to make sure consumers are more fully informed about the risks of the goods and services they use. But what happens when the government itself helps spread health and safety information that is false or misleading? That question came up recently in the controversy over New York City’s misleading nutrition-scare ad campaign, and it now comes up again in a controversy over a new database of complaints about consumer products sponsored by the federal Consumer Product Safety Commission (CPSC).

As part of the Consumer Product Safety Improvement Act of 2008 (CPSIA), Congress mandated that the CPSC create a “publicly available consumer product safety information database” compiling consumer complaints about the safety of products. Last week, by a 3-2 majority, the commission voted to adopt regulations that have dismayed many in the business community by ensuring that the database will needlessly include a wide range of secondhand, false, unfounded or tactical reports. The Washington Times editorializes:

…[Under the regulations as adopted last week] anybody who wants to trash a product, for whatever reason, can do so. The commission can leave a complaint on the database indefinitely without investigating its merits “even if a manufacturer has already provided evidence the claim is inaccurate,” as noted by Carter Wood of the National Association of Manufacturers’ “Shopfloor” blog….

Trial lawyers pushing class-action suits could gin up hundreds of anonymous complaints, then point the jurors to those complaints at the “official” CPSC website as [support for] their theories that a product in question caused vast harm. “The agency does not appear to be concerned about fairness and does not care that unfounded complaints could damage the reputation of a company,” said [Commissioner Nancy] Nord.

Commissioners Nord and Anne Northup introduced an alternative proposal (PDF) aimed at making the contents of the database more reliable and accurate but were outvoted by the Democratic commission majority led by Chairman Inez Tenenbaum. Nord: “under the majority’s approach, the database will not differentiate between complaints entered by lawyers, competitors, labor unions and advocacy groups who may have their own reasons to ‘salt’ the database, from those of actual consumers with firsthand experience with a product.” Commissioner Northup has published posts criticizing the regulations for their definitions of who can submit a report, who counts as a consumer, and who counts as a public safety entity.

For those interested in reading further, Rick Woldenberg, a leading private critic of the law who blogs at AmendTheCPSIA.com, has critically commented on the politics of the proposal here, here, here, here, and here. More coverage: ShopFloor with followups here and here, New York Times, Sean Wajert/Mass Tort Defense. I’ve been blogging for the past two years at my website Overlawyered about the wider problems with the CPSIA law, including its effects on books published before 1985, thrift stores, natural wooden toys, ballpoint pens, bicycles, plush animals, Irish dance costumes, rocks used in science class and many more. Most of these problems remain unresolved thanks to the inflexible wording of the law as well as, sometimes, the unsympathetic attitude of the commission majority. I’ve heard that bringing overdue investigative oversight to the ongoing CPSIA disaster is shaping up as a priority for many incoming lawmakers on the (newly Republican-led) House Energy and Commerce Committee, whose outgoing chair, California Democrat Henry Waxman, is closely identified with the law and its consumer-group backers.

Lame Ducks and Locavores On Food Safety

Last week the New York Times reported on the story of Estrella Family Creamery, an award-winning, very-small-scale producer of raw milk farmstead cheeses in Montesano, Wash. The family faces a Food and Drug Administration ban on its products because the food pathogen listeria has been found in its facilities; when it expressed defiance, the FDA proceeded to stage a raid to seize its entire cheese stock. It’s not easy to sort out how large a health risk may be involved (listeria, a widely disseminated form of bacteria, poses a real danger of food poisoning, but no actual illness has been traced to Estrella cheese). I was struck, in any event, by these paragraphs from the Times account:

“If the F.D.A. wanted to shut down the U.S. artisan cheese industry, all they’d have to do is do this environmental surveillance and the odds of finding a pathogen would be pretty great,” said Catherine W. Donnelly, co-director of the Vermont Institute for Artisan Cheese of the University of Vermont, referring to the listeria testing at cheese plants. “Is our role to shut these places down or help them?”

Kurt Beecher Dammeier, owner of Beecher’s Handmade Cheese, an artisan cheesemaker and retailer in Seattle, said the F.D.A. needed to work harder to understand artisans like Ms. Estrella. “The F.D.A. comes from an industrial, zero-defect, highly processed, repeatable perspective, and she comes from a more ancient time of creating with what she gets,” he said. “I’m not sure they can really even have a conversation.”

What lends some urgency to these continuing debates is that that the Senate is expected to vote as early as this week on a bill that will conscript thousands of food producers, processors and “facilities” – including many that produce or import relatively low-risk foods for specialty, local or ethnic clienteles – into a best-industrial-practices safety model with extensive recordkeeping requirements and other regulatory burdens. The bill cleared a Senate cloture vote the other day 74-25 and is scheduled for floor consideration Monday.

Much of the bill’s press coverage – as with a USA Today editorial which followed ridiculously slanted coverage in that paper – appears blithely unaware of the apprehension the bill has raised among small farmers and organic/”locavore” advocates. Some of those fears played out in a battle over an amendment offered by Sen. Jon Tester (D-Mont.) to lessen regulatory burdens on smaller local producers, and strongly backed by (e.g.) foodie guru Michael Pollan. Most big “consumer” groups, however, including Consumers Union and the Center for Science in the Public Interest, lined up against the small farmers and facilities, as did (following their lead) the New York Times, whose editorial managed to denounce the Tester amendment without actually saying what it did, lest its readers (who of course include many foodie/locavore believers) be confused. Moreover, many big agribusiness sectors have actively opposed the Tester amendment as well, on the view that any regulatory regime they have to live with, Uncle Perry with his parsnip patch should have to live with too, even if it means he won’t manage to stay in business while they will. Despite that line-up, Senate leaders have now reportedly accepted a watered-down version of the Tester amendment, which does not by any means exempt small producers from federal regulatory control – they will face plenty of it – but at least nods toward the principle of “tiering” burdens. (Earlier here, here, here, here, etc.)

The wider question is whether the bill as a whole, with its massive ramp-up of federal regulation to displace both voluntary market choices and state-level regulation, is a good idea. As I observed to TownHall’s Jillian Bandes, despite the panic atmosphere generated over the issue in recent years, the best evidence is that the incidence of food poisoning continues to fall, not rise; one reason for the greater press coverage of the issue is that science has gotten better at identifying and tracing the sorts of outbreaks that were happening all along. To some who promote a more intensive regulatory state, the resulting “crisis” presents a welcome opportunity, even though, on these advocates’ own terms, the existing array of laws provides ample means by which federal agencies can crack down on food actually shown to pose a hazard.

When the new Congress convenes in January, it will bring to Washington dozens of new lawmakers with more skeptical views about regulation, who may listen with favor to colleagues like Sen. Tom Coburn (R-Okla.), who has argued against the pending FSMA as an unjustified power grab. Could that be why Sen. Harry Reid (D-Nev.) is determined to force through the bill during the lame duck session? In this case – as with the very bad Paycheck Fairness Act, which Republicans managed to stop earlier this month, and the even more appalling “Public Safety Employer-Employee Cooperation Act” to force unionization on local public safety workers – it’s almost as if the point of the post-election session is to push controversial measures that would encounter more resistance if held over to the next Congress. Is this really a proper use of the lame duck?

Happy National Entrepreneurs’ Day?

President Obama has proclaimed today to be National Entrepreneurs’ Day. The president who has brought us regime uncertainty, more regulations, more government intrusion into the economy, more debt, and is proposing to raise taxes on productive businesses and individuals wants to celebrate entrepreneurship?

I was alerted to National Entrepreneurs’ Day via an email (not online) from the Department of Commerce’s Economic Development Administration. The EDA email makes it clear that the administration wishes to celebrate political entrepreneurship, not market entrepreneurship.

In his book, The Myth of the Robber Barons, historian Burton Folsom explains the difference:

A key point about the steamship industry is that the government played an active role right from the start in both America and England. Right away this separates two groups of entrepreneurs — those who sought subsidies and those who didn’t. Those who tried to succeed in steamboating primarily through federal aid, pools, vote buying, or stock speculation we will classify as political entrepreneurs. Those who tried to succeed in steamboating primarily by creating and marketing a superior product at a low cost we will classify as market entrepreneurs. No entrepreneur fits perfectly into one category or the other, but most fall generally into one category or the other. The political entrepreneur often fits the classic Robber Baron mold; they stifled productivity (through monopolies and pools), corrupted business and politics, and dulled America’s competitive edge. Market entrepreneurs, by contrast, often made decisive and unpredictable contributions to American economic development.

As Obama administration achievements, the EDA touts increased Small Business Administration subsidies and a smorgasbord of industrial planning contained in last year’s stimulus package:

The American Recovery and Reinvestment Act served as the cornerstone for this new foundation by pumping $100 billion into the economy to help us tackle some of the grand challenges of the 21st century in diverse fields from healthcare IT and health research, to clean energy, to smart grids, and high speed trains. Recovery Act investments are creating a virtuous cycle of investment, innovation, and job creation that have so far led to the creation of 3 million new jobs.

Wrong. The stimulus has fueled an unvirtuous cycle of political entrepreneurship in which business interests chase federal hand-outs for endeavors sanctioned by inside-the-Beltway planners. Political entrepreneurs have less incentive to innovate and are naturally reluctant to criticize the government because they don’t want to bite the hand that’s feeding them. As Chris Edwards puts it, they become “tools of the state.”

If the administration were really interested in promoting entrepreneurship, it would repudiate the anti-market policies it has pursued thus far. That’s obviously not going to happen, so it’s going to be up to congressional Republicans to repudiate their own history of supporting federal subsidies. In other words, the GOP’s re-found fondness for limited government rhetoric is going to have to actually be matched by action.

A Successful IPO Does Not a Justifiable Bailout Make

There seems to be a lot of confusion about the meaning of GM’s IPO today.  A common narrative in today’s media is that GM’s return to the stock market affirms the wisdom of the auto bailout.  Some tougher customers in the media insist on a higher threshold being met—that taxpayers get back the entirety of their $50 billion investment in GM—before declaring “mission accomplished.” And then there are the rabid partisans who—in their seething animosity toward the Obama administration—reach conclusions devoid of logic and rich only in conspiratorial-mindedness.  For example, yesterday I was contacted by a media outlet vetting this conclusion: “The IPO is evidence of the failure of the bailout because taxpayers were excluded from buying shares at the IPO price and, therefore, denied the opportunity to get their money back.”  Huh?

All of those analyses are wrong.  Let me dispense with the last one first, as it simply betrays a gross misunderstanding of how taxpayers are on the hook.  By divesting of GM (i.e., selling its shares), the government is beginning to make the taxpayer whole.  But just as there were no checks written directly from taxpayers to GM, there will be no checks written to taxpayers, as the Treasury liquidates the public’s share of GM.  Whether main street Americans could participate in the IPO has nothing to do with making the taxpayer whole.  And, by the way, IPOs typically limit sales of shares at the initial price to a chosen few.  So let’s just shelve the canned indignation on this claim.  It’s a distraction.

Here’s the real issue.  Today’s IPO is nothing more than testament to the fact that the government threw GM a lifeline, enabling the company to expunge most of its debts and firm up its balance sheet on terms more favorable than a normal bankruptcy process would have yielded.  That enabled GM to partake of the cyclically growing U.S. auto market in 2010 and turn a profit through the first three quarters.  So what?  Did anyone really think that a chosen company so coddled and insulated from market realities couldn’t turn a short-run profit?  Yes, even GM, under those favorable conditions should have been expected to turn a profit this year.

But at what cost?  That answer—even the question—seems to be elusive in the public discussion of the IPO.  The cost was not only $50 billion—the amount diverted to GM in the first place.  Nor was it that $50 billion minus the proceeds raised in today’s IPO (and minus the proceeds raised later when the government divests entirely of GM – it will still hold 33% of GM after today).  In other words, making taxpayers whole does not absolve the Bush and Obama administration’s for the auto intervention.  Recouping the $50 billion only gets us partially out of the hole.  (And I’m not even sure who “us” includes because the costs are so far reaching.)

Yes, GM is making sales and accounting for market share, but only at the expense of the other automakers.  Had GM been forced to severely atrophy or liquidate, the other automakers would have had greater revenues, more market share, and probably higher profits).  They would have been able to attract GM’s best engineers and line workers.  They would have more money to invest in R&D and to lead the industry into the future.  Instead, by keeping GM in the mix, some of those industry resources remain misallocated in a company that the evolutionary market process would have made smaller or extinct. 

The auto industry wasn’t rescued with the GM bailout.  GM was “rescued.”  By rescuing GM, the government overrode market forces, and there are significant costs to assign for that.  Witness the stagnant economy with 9.6 percent unemployment.  Is it not plausible that businesses are sitting on their cash and not investing or hiring because of the fear inspired by the government interventions starting with the bank and auto bailouts?  It’s more than plausible.  The regime uncertainty that persists to this day was spawned by the GM bailout and other interventions.

What about the weakening of the rule of law?  Doesn’t the diversion of TARP funds by the Bush administration, in circumvention of congress’s wishes and in contravention of the language of the law, represent a cost?  How about the property right of preferred bondholders who were forced to take pennies on their investment dollars under the Obama bankruptcy plan?  Any costs there?  What about U.S. moral authority to dissuade other goverments from meddling in their markets or indulging industrial policy?  That may be costly to U.S. enterprises.  And with the government still holding a third of GM, its hard to swallow the idea that public interest will be the driver of policies affecting the auto industry.  And that suggests even more costs.

But don’t mistake this blog post for an anti-IPO rant.  I’m in favor of the IPO.  It couldn’t have happened sooner.  But I suspect the investment bankers, the administration, and the other members of GM’s Board of Directors reckoned that, with the hype over the new Chevy Volt and the recent newsleak of GM’s $43 billion in unorthodox tax deferrments on the balance sheet, now was the perfect time to go public.

When The Government Is The False Advertiser

I had an op-ed in the Washington Times yesterday on government’s growing participation in public-health scare campaigns demonizing everyday foods that are fattening, salty, or thought to be bad for us in other ways. In particular, I singled out Mayor Michael Bloomberg’s New York City Department of Health, which has followed up one scientifically dubious ad campaign on sweetened soft drinks (“What can we get away with?” asked one official) with an even worse – in fact, grossly misleading and manipulative – attack on salt in processed foods:

It shows a can of soup bursting at the seams with table salt, whole mounds and piles of it. The city’s underlying point is not 100 percent off-base - healthful in most other ways, conventional canned soup is a relatively salty food - but the actual amount of salt in a can is more like 1 teaspoon, not the third of a cup or more depicted in the city’s ridiculously exaggerated photo. Not to put too fine a point on it, but the Bloomberg soup ad is built on a visual lie.

What would happen if a private advertiser tried to get away with imagery as misleading as this? Well, in 1970, in a case still taught in business schools, Campbell’s got caught manipulating the soup pictures in its ads; its photographers had put marbles at the bottom of the bowl so that the pleasing vegetables would be more visible on top. The Federal Trade Commission filed a deceptive-advertising complaint to make the company stop.

The FTC’s authority would not extend so far as to ordering New York City to cease its misrepresentations, and for various reasons (including the principle that states and localities ought largely to retain independence from federal dictation) we should be glad it doesn’t. But couldn’t we at least ask that the federal taxpayer not be made to subsidize the false advertising?

Last month, the federal Centers for Disease Control - headed by Bloomberg’s own [former health commissioner Dr. Thomas] Frieden - announced a $412,000 grant to assist the city in its anti-salt efforts.

The full piece is here. Incidentally, via the American Council on Science and Health comes word of a new Harvard study finding that Americans’ intake of salt is almost exactly the same as it was 50 years ago; it also seems that international studies find that people in other countries tend to pursue and attain very similar levels of salt intake. If accurate, that would cast doubt on two key themes of public health alarmism, namely that America is experiencing some sort of epidemic of exposure to salty processed foods, and that such an epidemic underlies rising hypertension rates (which, as the article explains, may owe more to obesity than to salt intake). I could not resist a chuckle at the name of the press outlet reporting the results of the new study: Bloomberg Business Week.

The GM ‘Turnaround’ in Bastiat’s View

GM’s long-rumored initial public stock offering will take place Thursday and self-anointed savior of the U.S. auto industry, Steven Rattner, is pretty bullish about the prospect of investors turning out in droves. 

I’ve been saying for a while that I thought the government’s exposure [euphemism for taxpayer losses] in the auto bailout was in the $10-billion to $20-billion range.

But since investor interest has pushed the initial price up from the $26-to-$29 per share range to the $32-$33 range, Rattner now believes:

[T]his exposure is in the single-digit billion range, and arguably potentially better.

I won’t argue with Rattner’s numbers.  After all, they affirm one of my many criticisms of the bailout: that taxpayers would never recoup the value of their “investment.”  My bigger problem is with Rattner’s cavalier disregard for the other enduring—and arguably more significant—costs of the auto bailouts.

Rattner is like the foil in Frederic Bastiat’s excellent, but not-famous-enough, 1850 parable, That Which is Seen and That Which is Unseen.    Rattner touts what is seen, namely that GM and Chrysler still exist.  And they exist because of his and his colleagues’ commitment to a plan to ensure their survival, along with the hundreds of thousands (if not millions, as some “estimates” had it) of jobs that were imperiled had those companies vanished.  (For starters, I very much question even what is seen here. I am skeptical of the counterfactual that GM and Chrysler would have disappeared and that there would have been significantly more job loss in the industry than there actually was during the recession and restructuring.  But I’ll grant his view of what is seen because, frankly, the specifics are irrelevant in the final analysis).

For what is seen, Rattner admirably admits of a cost.  And that cost is not insignificant.  It is anywhere from $65 billion to $82 billion (the range of the cost of the bailout) minus what is being paid back and what investors are willing to pay for GM shares—in the “single-digit billion range,” as Rattner says.  But Rattner is willing to stand by that trade-off, claiming his efforts and the billions in “government exposure” were a small price to pay for saving the U.S. auto industry, as it were.  It’s merely a difference in philosophy or compassion that animates bailout critics, according to this position.

No.  Not so fast.  All along (quite contemptuously in this op-ed, which I criticized here) Rattner has been unwilling to acknowledge the costs that are unseen.  Those unseen costs include:

  • the added uncertainty that pervades the private sector and assigns higher risks and thus higher costs to investing and hiring (whom might government favor or punish next?);
  • the diversion of resources from productive to political purposes in the business community (instead of buying that machinery to churn out better or more lawn mower engines, better to hire lobbyists to keep Washington apprised of how important we are or how this or that policy might be beneficial to the national employment picture!);
  • excessive risk-taking and other uneconomic behavior that falls under the rubric of moral hazard from entities that might consider themselves too-big-to-fail (perhaps, even, the New GM!);
  • growing aversion to—and rising cost of—corporate debt (don’t forget what happened to Chrysler’s “preferred” bondholders in the bankruptcy process!);
  • the sales and market share that should have gone to Ford or Honda or VW as part of the evolutionary market process;
  • the fruitful R&D expenditures of those more disciplined companies;
  • the expansion of job opportunities at those companies and their suppliers;
  • productivity gains passed on to workers in the form of higher wages or to consumers as lower prices;
  • the diminution of the credibility needed to discourage foreign governments from meddling in markets, often to the detriment of U.S. enterprises.

 The list goes on.

 Yet, Rattner, seemingly oblivious to the fact that the economy remains stuck in the mire, speaks triumphantly of the successful auto bailout.  But nobody ever doubted that taxpayer resources in the hands of policymakers willing to push the bounds of legality could “rescue” GM from a fate it deserved.  The concern was that policymakers would do just that, leaving behind wreckage to our institutions not immediately discernible.  But anemic economic activity, 9.6 percent unemployment, and a private sector unwilling to invest is pretty darn discernible at this point.

Rattner should take off the tails, put down the champagne flute, and acknowledge what was originally unseen.

Lame-Duck Menace: The Paycheck Fairness Act

At Compensation Cafe, Stephanie Thomas explores some of the “nonsensical implications” of a misnamed bill that’s a high Obama administration priority in the lame duck session:

Let’s assume that John and Jane have identical characteristics (education, work experience, etc.) except for gender. ABC Company makes offers of employment to John and Jane on the same day, for the same position, for the same starting salary: $45,000. Jane accepts the offer, but John negotiates the salary, and ends up with $50,000. Under the current equal pay laws, there’s no problem; John is earning more because he negotiated and Jane did not. Makes sense, right? Under the Paycheck Fairness Act, ABC Company would be guilty of gender discrimination.

Here’s another example. Assume that Sam and Sally have the same education, work experience, etc., and are both hired by WidgetCo on the same day. WidgetCo sets Sam and Sally’s starting salary at $2,500 more than they were making at their previous job. Sam was earning $37,500 at his previous job, and Sally was earning $36,000; their starting salaries at WidgetCo are $40,000 and $38,500. Seems reasonable, doesn’t it? Under the Paycheck Fairness Act, WidgetCo would be guilty of gender discrimination.

One final example. Assume that Brad and Bridget both work for Alpha Inc., have the same job title, same level of responsibility, etc., and they are both earning $100,000 per year. Brad asks for a 5% raise, but Bridget doesn’t ask for a raise. Brad gets the raise and ends up earning more than Bridget. Again, no problems here, right? Wrong - under the Paycheck Fairness Act, Alpha Inc. would be guilty of gender discrimination.

“Making matters worse, under the new law, damage awards would be uncapped, and class-action procedures loosened. Bring on the trial lawyers,” notes a Chicago Tribune editorial. For more on this very bad bill, check out the papers and presentations from a panel last week put on by our friends at the Hudson Institute. Earlier here and, at Overlawyered, here, here, etc.