A Viable Alternative to Federal Regulatory Agencies

by JordanBrown (click for original)

It seems that many people are frustrated with one or more aspects of the Federal Government, yet are unwilling to reduce its size or scope in any significant way. Perhaps the most common argument against reducing (or eliminating) the State goes something like this: “I don’t like being taxed so heavily, but I think it’s important that we regulate X, and reducing taxes or the authority of the State will just allow the crooks in X industry/corporation/group/ to commit more fraud.” In short, many people are afraid--understandably so--of a dirty environment, heavy-metal laden vegetables, and corrupt elections, and believe that only the Federal Government has the funds and authority to handle those issues.

But valuing uncontaminated food does not, in any way, mean that the FDA is the best organization to keep tainted products off the grocery store shelves. In fact, it would seem that the exact opposite is true. The Government Accountability Office has a long list of federal agencies and programs that are at high risk for waste, corruption, and inefficiency. On the most recent high-risk list are such items as ‘FDA Oversight of Medical Products’ and ‘EPA’s Processes for Assessing and Controlling Toxic Chemicals.’ These are not problems with small, relatively insignificant programs, nor are the failing grades issued by a libertarian organization critical of the State. This is a government agency, admitting to gross failure of other government agencies.

Here’s the text that further explains the failure of the EPA to regulate toxic chemicals:

"EPA’s ability to protect public health and the environment depends on credible and timely assessments of the risks posed by toxic chemicals. Its Integrated Risk Information System, which contains assessments of more than 500 toxic chemicals, is at serious risk of becoming obsolete because EPA has been unable to keep its existing assessments current or to complete assessments of important chemicals of concern. Overall, EPA has finished only nine assessments in the past three years; at the end of 2007, most of the 70 ongoing assessments had been underway for more than five years. EPA urgently needs to streamline and increase the transparency of this assessment process."

Also on the list—30 items long--are Medicare, Medicaid, Department of Defense Supply Chain Management, Oversight of Food Safety, and Effective Mechanisms for Sharing Terrorism-Related Information to Protect the Homeland. Only three of the items are new additions to the 2009 list, and many have been on the list for ten or more years!

These failing agencies come at a high price. The EPA’s 2008 budget was $7.2 billion; the FDA’s was $2.4 billion. But budgets are just the most obvious cost—the inefficiencies themselves likely cost much more. For example, it costs pharmaceutical companies, on average, $800 million to get a new drug approved by the FDA, and many of those drugs fail to receive approval. This expensive process, along with the excessive wait times, drastically increases the price of the drugs that do reach the market, and often keeps experimental treatments out of the hands of willing, terminal patients.

Some will argue that an inefficient FDA or EPA is better than nothing at all, but agencies like the FDA also create a false sense of security; their stamp of approval often means individuals don’t feel that they need to conduct any independent research regarding the quality of food or pharmaceuticals, even when GAO reports and salmonella outbreaks would seem to indicate otherwise.

An example of a viable alternative to the federal alphabet soup is the Underwriters Laboratory. The UL is an independent organization that tests more than 3 million products against a list of more than 1,001 standards of safety:

The UL Mark does not carry any legal weight beyond that of any other trademark. In this sense, it is different from the CE Marking or the FCC Part 15 requirements for electronic devices, which are required by law. In practice, however, it may be extremely difficult to sell certain types of products without a UL Mark. Large distributors may be unwilling to carry a product without UL certification, and the use of non-certified equipment may invalidate insurance coverage. It is common practice in many fields to specify UL Listed equipment or UL Recognized materials. Local jurisdictional authorities, such as building, electrical and fire inspectors, may be reluctant to accept a product for installation in a building unless it carries a recognized third-party compliance mark such as the UL Mark.

Failure to receive a UL Mark is far worse than any fine or legal slap on the wrist that government regulatory agencies hand out, because it tells consumers and wholesalers that a product isn’t safe. There is no way to get around that, or pass (non-existent) fines on to the consumer. The only solution for the manufacturer is to improve its product, or sell only to those individuals willing to take the risk that the product will catch on fire, emit toxic gases, etc.

Similarly, economic incentives keep approval organizations like the UL honest and efficient. If a private organization analogous to the UL managed food safety as poorly as the FDA, it would go out of business. One outbreak of salmonella would deal a serious blow to the organization. A second failure--due to negligence, malfeasance or bribery—would ensure that the organization would be replaced by one more trustworthy. Those harmed by the organization's failure to identify the tainted food would have grounds for a lawsuit, and at least the possibility of recompense.

In contrast, failing government agencies continue to receive federal funding, regardless of how many years they have been on the GAO’s high-risk list, because they are part of the State—a monopoly--and therefore face no economic repercussions. There is no real accountability or oversight because the regulatory agency employees get paid regardless of performance or whether they provide a service that people would even be willing to pay for in the free market.

As Barry Donegan pointed out in a recent article, agencies like the SEC are often full of industry professionals who are unwilling to truly regulate others in their field. Once again, an independent organization that had published requirements for those individuals wishing to become recognized as certified professionals in a certain field would serve the needs of consumers far better than a federal agency. A financial services consumer would have the option of patronizing a fund manager who couldn’t meet the requirements needed to become a member of the fund managers association, but he or she would face the potential economic consequences of that decision.

It’s important to recognize that some federal regulatory agencies do provide useful services, they just do so poorly and at the taxpayers’ expense. A more efficient and just system would utilize market incentives to ensure honesty and quality, while passing on the cost of regulation to those consumers who value certified products and services enough to pay a little extra.

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