Hunting with a BB Gun

“[The recent fungal meningitis outbreak] marks a lapse in the responsibility of government to protect against such a disaster.” – Editorial board, Washington Post, October 16, 2012

This statement (regarding an outbreak of fungal meningitis due to contamination at a New England compounding pharmacy) reflects a fundamentally paternalistic view of the world. It presumes government can and should be our protector against all the ills that might befall us in life. Click our seat belt, put on our helmet, limit our soda, license those who cut our hair, force us to buy insurance – it’s all for our own good, we’re just too ignorant to know better. The world is scary, understandably we want to be in control, but this is the real world and there simply cannot exist a magical entity that can protect us from all harm. We are adults and this desire for a paternalistic caretaker is a step backward into childhood and dependency and stands in stark contrast to stepping forward into adulthood and independence.

The danger in believing government can actually protect us is that we become complacent and assume there are no dangers lurking out there, how could there be, isn’t government in control? Why should I bother investigating this drug or this company, I mean, the FDA would never let anything dangerous through, right?  In this particular case the FDA actually did not have oversight control of the compounding pharmacy where contaminated injectable steroids (for back pain) were produced. The local state licensing boards had authority, however oversight was lax and even the regulations that were ignored were simply paperwork related and could not have prevented this disaster. But the average consumer doesn’t know all the ins and outs of government regulation; they just assume Big Brother is looking out for them. Is the answer then to give the FDA total control over everything then? Well only if you think the best answer to a failure of government is even more and bigger government. When it comes to a product as critical as drugs we obviously want someone double checking what it is we’re putting in our bodies. But I would feel a whole lot better knowing that if the entity doing the checking has an incentive not to fail because I can sue them too. The FDA (and state boards) have no such incentive; they are immune from all prosecution. Failure of the regulators has no consequences.

Government regulation is a government response to a government created problem. In this case the problem is corporate liability protection. Government creates by fiat entities that are mostly immune to liability for errors and misdeeds (LLCs, Corporation, LLPs, etc.). In order to reign in the moral hazard created by such government granted limited liability, government then decides it must regulate the beast it has created. Doing away with all liability protections and threatening owners with unlimited liability for harm (intentional or not) will be the incentive that will drive the creation of a private regulatory market wherein businesses owners insure themselves against loss and are then tightly regulated by their insurers who have an incentive to eliminate events that would result in paying damage claims. Insurers would hire FDA-like companies to closely monitor their insured and only those most effective at regulating and minimizing losses would survive (as they too could be sued for failure). Government simply stands as the backstop against any unscrupulous insurer that refused to pay valid claims (although such insurers would naturally go out of business quickly as that reputation spread).

Government regulation lulls citizens into a false sense of security. This is as dangerous as going on a lion hunt with a guide whose rifle actually turns out to be a BB gun.