Category Archives: Regulation

Obamacare Kills the Family Farm

Obamacare is poised to put the family farm out of business. Although not directly applicable to the food industry, it has spawned sibling legislation whose ends are aligned with the Obamacare mandate of lowering health care costs for the nation – by any means necessary. Toward that end the “Food Safety and Modernization Act” was passed in 2011 which has now spawned a new round of FDA rulemaking known as proposed rule “Current Good Manufacturing Practice and Hazard Analysis and Risk-Based Preventive Controls for Human Food.” The primary stated goal of this proposed rule (according to the FDA) is to “reduc(e) the public health burden of foodborne illness associated with contaminated produce.”  A worthwhile goal, I’ll grant that. However setting aside for now the question of constitutionality of a federal agency laying down rules to govern activity that is wholly intrastate in nature, there are a number of problems with both the implementation, results and costs associated with this end goal.

Some of the more absurd components of this proposed rule include (a) WEEKLY testing of water “before it touches the surface of any fruit”, (b) where manure has been spread one must wait 9 MONTHS before harvesting, and (c) the maintenance of DAILY clipboards of records of every event that takes places on the farm related to food production. As with any regulation there is a cost involved. Irrespective of the industry it is always the large entity that has the advantage relative to its smaller competitors in terms of bearing the additional costs of new regulation. Therefore it should come as no surprise that this proposed rule would have the effect of putting many small farmers out of business (there are exemptions for “small” farmers, however these merely delay the timeframe of implementation). But don’t take my word for it, you can read the comments of such farmers themselves at the FDA’s comment site.

Now at this point the progressive may be protesting, “But, but, this rule will save lives and if some small farms must be sacrificed to achieve that goal then as long as the greater good is being served this is an unfortunate side-effect.” Although seeing as how most progressive types are proponents of buying locally grown produce (itself not a bad concept) I imagine their heads will explode when they realize this “greater good” will have the net effect of putting so many small farmers out of business it will all but kill the “buy local produce” industry.

Even by FDA’s own best estimates this rule would potentially reduce the incidence of food borne illness by 2-5% (i.e. save no more than 67 lives per year or about $14 million per life). And while I would gladly spend $14 million to save the life of a loved one, I don’t have $14 million nor do I (or anyone) have the right to use government to fleece my neighbors pockets for that $14 million on the off chance it might save a life I care deeply about.

The emotional response of “we can’t put a value on a human life” runs afoul of the economic law of diminishing returns. Whenever a brand new type of regulation was introduced (pollution, car safety, etc) we witnessed massive improvements – because nothing existed before that (not that such regulation was necessary however, seeing as how these types of regulations were merely a response to prior government induced market distortions). As a hypothetical example, seeing that $1 billion in regulatory costs reduces deaths from 1 million to 1 thousand legislators naturally will assume even tighter regulations costing another $1 billion will do the trick – but it doesn’t work like that. Those new regulations reduce deaths to only 900, another billion to 850 and so on. The low hanging fruit was picked with the initial round of regulation; the minuscule amount of fruit at the top takes exponentially more effort to pick.

Ok, fine, you may say, a human life should not have a dollar value attached – we should spend and spend to stop all deaths. Although publicly we may profess such sentiments, our actions speak very differently. If our safety were paramount to the exclusion of all monetary and non-monetary costs then we would either choose to drive at 1 mph at all times or spend hundreds of thousands of dollars to drive a military grade armored tank. But we don’t do that because safety is a luxury and we can only afford luxuries to the extent we have produced above more than the bare essentials. This, by the way, is why human conditions were so much less safe years ago and are so in third world countries today – not due to any lack of government oversight but rather due to lower productivity, which puts luxuries (such as safety) out of reach. So although we are bound by our productive capacity when determining how much we personally want to spend on safety, government knows no such bounds. Whether it might cost $100 billion or $100 trillion to potentially save one life is of no concern to those that bear none of the costs.

Where’s the beef? Sorry, it’s been banned.

This past week the FDA proposed an outright ban on artificial trans fats in prepared foods.  Trans fats occur naturally and artificial ones have been used for decades in foods. As a foodstuff they are safe insofar as they don’t make you sick upon ingestion and have known physiological benefits in proper amounts (and known harms if consumed to excess, which is the case with all food components). The FDA is not banning some new dangerous unknown substance. They are banning something that has, in large part, already been voluntarily reduced in the past few years to the point that average US consumption of trans fats is now half of what the American Heart Association recommends as being safe. So if it’s already hardly used, where’s the harm in a ban you might say? Setting aside the ethics of the ban, the direct type of harm that can be envisioned would be a situation wherein the use of trans fat solves a problem for which there is no good substitute. Furthermore any substitutes might very well themselves be more harmful than the trans fat. That’s called “unintended consequences” and occurs with every single government mandate ever issued.

Some examples where trans fats are used include cake frosting, microwave popcorn, frozen pizzas and various fried foods. These are mere treats, things eaten a handful of times in a month if even that (how many cakes have you eaten in the last month?). But given the government’s penchant for quixotic battles against virtually riskless activities (trillions of dollars spent fighting terrorism even though jaywalking kills more people each year than terrorism) it should come as no surprise that Uncle Sam would relish the role of micromanaging the minutiae of our lives (“exactly how many calories are in the candy bar sir?”).

Lifelong dependency of the citizen ensures eternal power for the state.

 

There is nothing wrong with the FDA educating the public about the healthiness or lack thereof of certain kinds of foods (although forcing the public to pay for such education through taxation rests on ethically dubious ground). However, the outright banning of this or that substance crosses a line. The metric upon which prohibitions have been based (such as drug prohibition, however ill conceived) is one of “imminent harm”, i.e. if someone is about to jump off a bridge we can plainly see their free will is immediately deleterious to their own well being therefore one could argue intervention is justified. However, the bar has been moved from “imminent” to “eventually possible” i.e. should we tear the bridge down so as to make it impossible for anyone to ever jump off it? Should we now ban every conceivably risky activity?  If so, that’s going to be a mighty long list! Nearly every action in our daily lives carriers some level of inherent risk.

The FDA’s justification for this ban is a mere estimate (i.e. best guess) that it will result in 20,000 fewer heart attacks and 7,000 fewer deaths each year. The rationale is of course the “Greater Good” argument. This ban will naturally lead to lower health care costs for the nation. Why stop there? Perhaps the FDA could implement other policies that have the net effect of lowering health care costs. Perhaps they could ban foods that naturally contain trans or saturated fats (all meat, cheese and dairy). Next they could ban all foods that are not considered to be “healthy” (according to the whim of whoever happens to be in power at the FDA). These directives would surely save more lives, so how can one object? Eventually the government could require all citizens join a gym and exercise each day… because this would lead to fewer deaths each year… so how can one object? Oh, and what of those that refuse to do their quota of exercise? Well, we’ll just levy a fine, err, I mean tax on those that refuse the directive of the collective.

This trans fat ban is just the first step in sacrificing the individual on the altar of the collective state. If you agree to take what the collective offers (free or subsidized health insurance), then you must submit to having your life directed by that same collective. Children accept the care of their parents and thus are obligated to follow their rules. Likewise government demands we follow their rules because they view us as but children. Lifelong dependency of the citizen ensures eternal power for the state.

In the dark

As a small business owner I have had the unique misfortune of being exposed to a wide array of state-imposed roadblocks. Whereas the individual may only be disturbed by the occasional run in with their tax bill or prohibition against engaging in activities frowned upon by our wise overlords, a business is daily confronted by a multitude of meddlesome intrusions (and I am not speaking of regulation of efficacy or safety, such standards would still exist in an insurance driven, rather than regulation driven, free market framework).

For example, my company manufacturers chemical products used to maintain aquariums (i.e. to keep fish, plants and corals alive and healthy). A good portion of our products is classified by various state agriculture agencies as either feeds or fertilizers (because they help living organisms grow). Such products are subject to the same agriculture rules and regulations intended for the products aiding in the production of food or large animal husbandry. These rules not only specify a set of taxes (fees) you must pay just for the mere privilege of selling such products within a particular state (50 States, 50 different fees per every product, every year) they also specify the manner in which you may artistically design labeling, the verbiage you’re permitted to use and the manner in which you can market said products. If an ingredient is not on a particular state’s “approved” list then that means you can’t say anything about it on the label – even if it confers a competitive advantage. Therefore the product must get “dumbed down” to meet the most obtuse standards, as printing 50 variations of the same label is not economically viable (for smaller businesses). In some states a lone bureaucrat can unilaterally block the sale of a product to an entire state if they perceive said product does not provide value to the consumer – all on their own personal whim and without any appeal recourse. By way of example I actually had such a bureaucrat in Wisconsin tell me that aquatic plants in Wisconsin don’t need iron to grow (therefore justifying the blocking of sale of our iron supplement). Curious. I know legislatures can enact laws, but I didn’t know they could repeal laws of nature as well.

Now, and here’s the rub for those of you that might think even these onerous regulations ensure efficacy – no state agency actually cares whether a product does what it says. That’s right. All they care about is collecting their fee and that your description of your product conform to their narrow definition of a “proper” feed or fertilizer. Innovation and change? Sorry, not permitted. This is an unfortunate legacy of the fascist depression era agriculture policies that continue to interfere in commerce to this day. All these bureaucrats care about is what you SAY is in the product – and that you pay your fees every year. Of course before you can SAY anything about your own product you must humbly bow down before your overlords and request as meekly as possible that if they have the time could they perhaps deign to review your label so as to ensure it meets their standards for banality and mediocrity, thus ensuring its admission into the Great State of <insert state name here>.

So, if you have ever pondered why so many competing products all say and do the exact same thing, it’s more than likely because of regulations. When government sets the standards, nobody is permitted to step outside of the 3×5 card of approved product parameters. Everyone is forced sell to the same level of mediocrity stipulated by ignorant bureaucrats. Unless, of course, you are a mega huge business that helped to enact these regulations, in which case you can easily afford the hundreds of thousands of dollars to get your ingredient approved or the millions of dollars to buy political favor if you can’t. Unfortunately small time competitors can’t afford such hurdles even if their product is better. Regulation imposes costs only on those businesses that can already afford it. It ensures the consumer remains in the dark about what they’re missing from smaller competitors who are marginalized by lowest common denominator minded regulation. I know, because I make the innovative products you’re not permitted to know exist.

Calculating The Social Cost of Horse Manure

Imagine the following: It is the year 1700 and growth in the American colonies is threatening an economic and environmental catastrophe. Human and equine populations are expanding rapidly in tandem. The horse is integral to the economic engine that drives all economic output. But there is an unaccounted cost: manure. The horses are fed fuel (hay), do work, and out comes waste (manure). Harvard scientists have extrapolated that based on current trends there will be so many horses that manure will cover the colonies to a depth of three feet by the year 2000! Something must be done! There is clearly an unaccounted cost to all this manure lying about. The only solution to stem the tide: a manure tax.

Hopefully this seems a bit silly – it was meant to be. However our betters (those in government) are in engaging in similar sophistry. They make pie in the sky predictions cloaked in an aura of mathematical certainty concerning the “social costs of carbon” up through the year 2300. To wit: to little media fanfare the White House Working Group recently released an update to its estimates of the Social Cost of Carbon. Why is this notable?  The revised figures were up to two times larger than the previous “estimates” made by the same office only 3 years ago. Is the problem of climate changing getting worse? Hardly. The White House has merely “updated” its numbers in a climate cost-analysis model that has enough variables in it to send an algebra student screaming into the night.

These “equations” are nothing so scientifically resolute as E=mc2. No, rather they are a mathematical house of cards that can be manipulated to yield any desired value. For example, one of the key variables is something known as the “discount rate”, that is, the interest rate one would need to invest a dollar today in order to earn some amount in the future. So, if we invest $1 today that grows to $40 in one hundred years and we assume by then there will be $40 in economic losses due to one pound of carbon, then we say the cost of one pound of carbon today is $1. This is the “social cost of carbon”. The goal then is to spend $1 today to clean up one pound of carbon, thus averting $40 in damage in one hundred years. We would not spend $2 to clean it up because it would be more profitable to earn $80 and incur the $40 cost. If the social cost of carbon is low, then it is difficult to justify expensive remediation efforts, whereas if it is high then imposition of costs on the populace is that much easier to rationalize.

All we can do is pile assumptions on top of estimates of cherry picked data.

Of course the rub is how does one actually figure out the cost of environmental “damage” in 100, 200 or 300 years? All we can do is pile assumptions on top of estimates of cherry picked data. For example, loss of tourism dollars at ski slopes is counted as a cost, however the shifting of those dollars to newly more temperate regions is not counted as an offsetting benefit.

Even if we assume the science is ironclad and the calculations of the costs are solid, there is still the problem of the discount rate. It is the logarithmic volume control on the stereo of climate economics. Small changes have dramatic effects. For example, a discount rate of 2.5% yields a cost of $98/ton but 5% yields only $27/ton. Curiously the WHWG ignored the government’s own Office of Management and Budget (OMB) directive to also include a value of 7% in the analysis. It is estimated that at a 7% discount rate the Social Costs of Carbon would likely have been nearly $0 or even negative (meaning that CO2 actually confers a net benefit, not cost). It is also telling that the White House Working Group also ignored the OMB directive to only integrate domestic costs into their models, not global costs, an apparent “oversight” which further tends to push the Social Costs of Carbon estimates upward. This is what is known as “stacking the deck” in your favor.

So, back to our horse manure tale. What would the outcome have been had such a tax been implemented 300 years ago? Money would have drained from the economy, thereby lowering people’s standard of living while simultaneously retarding capital growth. This lack of capital would have had a deleterious effect on future generations’ economic output. Just as people in the year 1700 never could have conceived of the technological marvels that would make their hypothetical fear moot, so should we not be so conceited as to believe future humans will not make similar discoveries that will render our fears of climate catastrophe about as realistic as drowning in a sea of manure.

Perverse Incentives Promote Disasters

In the wake of any industrial accident there follows a predictable chorus of pundits lamenting “market failure” in order to justify further interference of the state into every facet of business function. On the surface this might sound plausible, surely we need Big Brother looking over our employer’s shoulder to make sure everything is safe, right? The only problem with this narrative is that the pundits tend to conveniently omit the crucial fact that such disasters happened on the watch of government. There is no place in the world immune to at least some level of government oversight related to safety. Even in Bangladesh where there has been a recent spate of factory fires and building collapses they at least had building codes even if they weren’t followed. And there in lies the rub. The people entrust their government with the task of ensuring their safety (a dubious decision at best) but when that same government fails to adequately carry out that mandate and such failure is the proximate cause of some disaster oddly blame is 100% shouldered by the regulated entity rather than the regulator. If you had a jail in your community that routinely had prisoners escaping and killing people it seems like at some point the people running the prison should share in the culpability.

So whether it is financial misdeeds on Wallstreet, a factory explosion in West Texas, or a building collapse in Bangladesh, we see the same failure of the state regulators to do their job. But the regulators are just employees, they can’t be held personally liable. And their employer is the state, and the state can’t be held liable. So where does that leave us? No one is responsible. What is the solution? Rub some bacon on it – err I mean throw some more money at it.

If regulators fail, then they just get more money and scribble down yet more regulations based on their clairvoyant 20/20 hindsight; more words on paper that will be ignored by more regulators in the future. The perverse incentive of this system should be obvious and yet it continues. The perverse incentive is that (a) failure is rewarded with (b) more resources; therefore failure is what is incentivized. Now that is not to say that all the regulators individually are these evil monsters failing on purpose in hopes of one day obtaining a raise. But what it does mean is that the system itself cannot cure itself. A market system is self-regulating in that failing firms (assuming they are not bailed out by the government) disappear into the graveyard of failed businesses. In a market based regulatory system failure means you lose all your money and go out of business. Success means you make money and you stay in business. Competition among the successful firms drives further improvements. There is no competition in the monopolistic government run regulatory system; Soviet style stagnation reigns supreme. A successful private regulator (e.g. Underwriter’s Laboratories, Consumer Reports, etc) prevents harm and is rewarded for successfully doing so. Government can’t go “out of business” and so the same old failing system stays in place, at least until we vote in illusory “change” only to discover nothing has changed at all.

Better regulation through competition

Monopolies are bad. The supposed truth of that axiom is nearly universally accepted. Government demonstrates its adherence to this precept through such devices as anti-trust legislation. Curiously though, government itself is the biggest monopolist like entity. I say “monopolist like” because even the so-called monopolies of Standard Oil or AT&T could not force people to purchase their goods via legally imposed violent coercion. Government is monopoly at the barrel of a gun. So, if the truism that monopolies are bad is generally accepted, why is the public so willing to blithely accept the monopolist enterprises the government imposes on us? For some reason the public holds those in government to be members of a class of altruistic super humans that think only upon the betterment of society and never upon themselves, that they are selfless servants of their fellow man (angels?). To quote John Stossel, “Give me a break!” Those in government are humans, just like us, with the same weaknesses, foibles and strengths (witness the recent GSA convention debacle). They are not magically transformed upon taking an oath of office or employment within the government. To persist in such a belief is as delusional as believing in the Tooth Fairy or Santa Claus.

the public holds those in government to be members of a class of altruistic super humans that think only upon the betterment of society and never upon themselves

If all humans are the same, whether they are employed in “public” monopolies or private firms why do private firms consistently deliver better, more effective, more efficient and less expensive results? Competition. When private firms compete the ones that deliver what the customer wants survive, and the ones that can’t deliver do not. So when there are calls for less regulation or elimination of the FDA or EPA do not confuse that with a desire for actually no checks on safety and efficacy. Rather it is a call for a free and open market based regulation. In order to have such a free regulatory system, entities like the FDA and EPA must be stripped of their legal government backed authority so that all may engage in fair competition. The reason there are currently no other “FDA” like entities is that there is no incentive to start such a business. Why do so if your customers must use your competition? Without legal stricture, firms addressing the role the FDA plays in the market (insurance risk mitigation) would arise (just as Underwriters Laboratory did for electronics).

For example, if a company wants to produce drugs it may do so without any insurance or oversight. Those drugs would be quite inexpensive. Purchasers of those drugs would be trading an increased risk of deleterious effects for a lower price. The company is trading its competitive advantage of low price for the increased risk that it will be put out of business by the first lawsuit from an injured customer. So virtually all such firms would purchase insurance. Insurance companies, thus having an incentive to not pay out claims, would require their insured to be inspected (regulated) by any of a number of private drug regulators. Those drug regulators would likewise be legally liable, so they too (unlike the current FDA which has no accountability) would be highly motivated to do a good job. Those private regulators that are effective would grow due to their good reputation; those that do a poor job would disappear due to their poor reputation (and lawsuits). The FDA does a poor job but there is no mechanism to drive it out of business… they get more money when they do a bad job. Drug makers and insurers would preferentially use the regulators that approve and examine drugs quickly and effectively. So rather than waiting 10 years for a lifesaving drug we might only need to wait 1-2 years. Not only does this save lives but it dramatically lowers cost. The FDA is likely responsible for more deaths by the drugs it has kept off the market for too long then the bad drugs it let slip through. That is the unseen harm of government mandated legalized monopolies.

The market will never be perfect because it is composed of imperfect humans, but competition allows society to shed those imperfections, not some utopian concept of the selfless government servant who can do no wrong.