Consumerism is in vogue. Not the idea that we should be urged and educated to be careful in our purchase and use of the myriad products offered to us. Not that we should swallow advertising with a grain of salt. Not that we should take advantage of Consumer Reports and Consumers ' Research et al. to evaluate competing products and select those most appropriate to our individual needs and budgets.
Consumerism could mean all those wise things, but it doesn't. Instead, it has been co-opted by people unified around one rallying cry: government must protect consumers. Deceptively packaged, this version of consumerism is promoted by hucksters who have little philosophic appreciation or analytic comprehension of the role of the individual in the operation and the viability of an individualistic society. The assumption has been widely made, confidently even if implicitly, that government regulation of consumer products not only can enhance consumer welfare but surely will do so.
Confronted with this assumption, consumers should rise to the occasion. Instead of passively accepting such claims, we should examine the historical experience, which suggests that putting government in charge of protecting the consumer is much like putting Dracula in charge of the blood bank. If so, as consumers we are faced today with this problem: how best to protect ourselves from the consumer protection advocates.
All of us are interested in product quality, product safety, and getting what we bargain for. If we could have greater safety or higher quality without paying for them, no one would object to having them. But such things do not come free, even if the costs are commonly ignored or underestimated by consumer advocates. Many of the things proposed in the name of consumerism are actually "goods" in themselves. They carry a price, and they will continue to do so no matter how the economy is organized—privately or governmentally.
Granted, the government can subsidize safety requirements, but this spells higher taxes. What is the difference between paying for something through a price increase in the market and paying for it through a tax increase? There is one major difference: under the tax system, someone other than the specific consumer of a specific product can be forced to make at least part of the payment.
Once it is recognized that improvements in product safety and quality come only at a cost, the problem of whether or not a product should be made safer or its quality enhanced is no longer simple, because not all consumers want the same amount of safety, given the price—just as not all consumers want the same number of record albums by the "Sex Pistols," given their prices.
Nutrition experts in the Food and Drug Administration (FDA) may know the relationship between an individual's caloric and vitamin intake and his health and length of life; the National Highway Transportation Safety Administration (NHTSA) may know that the presence of headrests will reduce the severity of injury in the event of an accident; and the Consumer Product Safety Commission (CPSC) may know in how many seconds a given material can be consumed in flames. What they do not know, however, is a person's preferences, which include willingness to assume risk.
Consumers are often willing to forgo some degree of safety, in deference to other things, because of the cost. Indeed, they are willing to forgo good health and years of life in order that they may have other things now. People smoke cigarettes even though they know that smoking is harmful. Poor people buy relatively cheap, even if less reliable, appliances and machines because, by doing so, they can have more of other things.
The government can require people to ride in safer cars and planes; it can try to ensure that every can of beans and every electric appliance the consumer buys is harmless. But what are the costs of these accomplishments? Is it inevitable that the improvements will be sufficient to warrant the attendant sacrifices?
The imposition of controls and standards appears on the surface to be a rather easy, direct solution to complex problems. All we need to do is establish regulations that are in the public interest, set up a regulatory body, and hand over to its members the power to regulate in the public interest. But this popular impression of controls is deceptively naive. For one thing, people disagree. Many car buyers disagree violently with Ralph Nader over whether or not the VW Beetle should be allowed on the road. Some sports enthusiasts disagree with Mr. Nader on whether or not they should be allowed to choose to eat at ballgames hot dogs and beer that Mr. Nader declares to be "unhealthful."
In short, it is not clear much of the time what exactly is in the "public interest"; and where there is disagreement, the rules and regulations will reflect the wishes of one faction at the expense of another. The regulations will nonetheless be made by the members of a regulatory agency who will have their own preferences, biases, and prejudices and who may have no firmer grasp on the public's interest than does anyone else.
The social desirability of expanded consumer protection can be assessed largely in terms of the use which government has made of its historic regulatory powers. And it is often apparent that the general well-being of the consumer has been exploited by special interest groups who seek to improve their own economic positions behind the veil of government regulation. For example:
• We have legislated that car buyers purchase two headrests and six sets of seat belts—but how many people use them? Twenty-five percent of the driving public, perhaps? Do idle seat belts do any good for anyone, aside from the producers of the belts and those who paternalistically insist that everyone buy them?
In the fall of 1977, then-Secretary of Transportation Brock Adams came out in support of mandatory installation of air bags in new automobiles. More recently, air bags have been the pet project of NHTSA Secretary Joan Claybrook. The devices have been available for years, and most people have chosen not to buy them. But these regulators assume that they are duty-bound to force their purchase, perhaps supposing that people who may have voted for President Carter are not sufficiently intelligent to make the "right" decision on whether or not they should have air bags in their cars.
These consumer protectors are apparently oblivious to the social consequences of the forced use of such safety devices. We know from unhappy experience that the number of accidents and deaths on highways is highly correlated to reckless driving. We know also that the amount of reckless driving is related to the cost that drivers will bear in the event of an accident. Since air bags reduce some costs of personal injury to the driver, we may expect that mandatory air bags will lead to increased reckless driving and to increased accident rates. And, in fact, many automobile safety regulations have had the expected perverse effect: they have increased the number of accidents.
There are seemingly plausible theoretical arguments in support of requiring inspections of automobile headlights, brakes, etc. Such regulations, however, have had no detectable effect on the level of automobile accidents. What the regulations have accomplished is to hand to service stations and garages the monopoly power to force consumers to have more extensive, even if doubtfully effective, inspections and repairs than they would otherwise choose. (A study by Mark Crain estimates that state inspection systems have increased automobile repair bills by 12 to 40 percent, depending on the state and inspection system used. On average, repair bills have risen $90 per year per car because of inspection systems.)
• Proposals for reinstituting price controls, similar to the ones in effect during the Nixon administration, are repeatedly heard. Controls are, of course, advocated in the name of protecting consumers from being "ripped off" by high prices. But such controls would again be ineffective—and for good reason: the task of efficiently controlling the prices of virtually everything consumers buy is simply too complex for any real-world government. And, ironically, the prices of those things which government has controlled directly or indirectly—including utilities, insurance rates, taxi cab fares, plane and train ticket prices, and postal rates—have been very high on the list of price increases over the years. With that record and with the steady rise in taxes, asking the government to control prices is rather like asking Hell's Angels to keep order at a rock concert.
• We have legislated that banks cannot pay interest on checking accounts. But what do we find? Banks in times of tight money try to attract deposits by giving away anything from pots and pans to green stamps and shotguns. One bank, in its effort to attract customers, "sold" money at a 20 percent discount. There is nothing reprehensible about trying to attract deposits, but these are inefficient means of paying interest.
There are limitations, too, on what lenders can charge, largely to protect the poor. But the most certain way to ensure that the poor are unable to obtain consumer credit is to control the interest rate on consumer loans. It may be lamentable that they are charged "high" rates of interest, but the poor reveal by their borrowing they prefer loans at high (marketclearing) rates to no credit at low (shortage-inducing) rates.
• The price of natural gas has been kept down by regulatory bodies in the interest of "equity." As a result, people scramble to use what they can obtain, and we face a seemingly perennial energy crisis, gas cutoffs, and distortions in the allocation of resources. In the process, we have effectively given OPEC a subsidy on each barrel of oil they sell to us.
• We have tried to legislate very high medical standards, and we have many superbly trained doctors. But we also have many people who, because of consequently high prices, go without professional medical care and in some cases turn to quacks or to home remedies that may be unsafe, ineffective, or inappropriate.
In every state in the union, there is a plethora of rules and regulations governing entrance into a variety of trades, like barbering, and professions, like law. The regulations were proferred as ways of protecting consumers from "unethical" and "poorly qualified" operators. Their effect has been to restrict the supply of people in the regulated areas and to increase the prices that consumers have had to pay. To add insult to injury, as some consumers have learned, state licenses do little to distinguish the competent from the incompetent operators. After bearing the costs of restricted competition, they still must search out the quality of service they want.
• Since 1962 the government has required drug manufacturers to prove to the satisfaction of the FDA that new drugs are safe and effective for their intended use. The purpose has been to save lives, to avoid the tragic Thalidomide problem. But the new regulation has increased the gestation period for the development of new drugs from two to as much as eight years, resulting in an average of four years—twice what it was prior to 1962.
The new law has saved lives that would have been lost by the introduction of unsafe drugs, but it has resulted also in the loss of lives that would have been saved if certain new drugs had been made available years earlier. Over the past several years, studies have found that FDA safety and efficacy requirements are resulting in more lost lives than saved lives. As drug-law researcher Sam Peltzman notes:
…any attempt to minimize risk in the area [of drug development] has costs which (according to the history of drug development) far exceed the benefits: those who will suffer death and disease while a potential drug therapy is evaluated will suffer no less than the victims of a drug disaster, but their number is likely to be much larger than the number of victims of the disaster…The unequal emphasis placed on the benefits and costs of risk taking may be explained, if not excused, by the contrast between the anonymity of the beneficiaries and the visibility of the victims.
• In 1976 the FDA ruled that producers of cold, cough, allergy, and antihistamine products could no longer claim that their products "loosen congestion so you can cough it up or get it off your chest," or "promote free breathing," or "free secretions along the lower respiratory tract." Instead, manufacturers could claim only that, for example, their product increases "expectorant action to loosen phlegm (sputum) and bronchial secretion" and "relieves irritated membranes in the respiratory passage-way by preventing dryness through increased mucous flow." We must wonder if even the more sophisticated among us have, because of these new labels, any better idea of what the products do.
• According to a recent study done by George Sternlieb at Rutgers University, almost 20 percent of new-home costs—an average of $12,000 per house—is attributable to overregulation of home building. Fred Case of UCLA's Graduate School of Management estimates that when the costs of governmental regulations and review procedures are added together, it may account for as much as 40 percent of the price of new homes. It is understandable that Congress has considered establishing a Consumer Protection Agency whose principal task would be to protect the consumer from all the other protective agencies in Washington! Given the history of consumer protection via government, however, we may all rest easier that this proposal was defeated.
• In 1965 the owner of a midwestern trucking firm, who found that the railroads invariably protested any proposed rate reduction that he submitted to the Interstate Commerce Commission (ICC), offered to transport yak fat from Omaha to Chicago for 45 cents per hundred pounds (freight rates regulated by the ICC vary with the products being transported). As expected, the railroads protested to the ICC: the "new" rates were obviously predatory. The ICC suspended the trucking firm's proposed yak fat rates and formed committees to study the yak fat rate structure. Only after serious deliberation did the ICC discover that yak fat had not only never been produced in the country but had never even been sold in the country! One may suspect that the regulators do not always know what they are doing.
Indeed, the evidence suggests that we should question the actual purpose of regulatory bodies like the ICC, which often give the public the impression that they have the interest of consumers at heart. George Stigler, after years of investigating the record of those regulatory agencies which control prices in specific industries, has concluded that for a long time we have deluded ourselves into believing regulation is thrust upon industries by the Congress and state legislatures, whereas in fact it may be more accurate to say that industries deliberately procure regulation in the interest of reducing competition, dividing the market, and setting prices. And the supposedly protected consumer must wonder, Just how do we regulate the regulators?
THIS IS PROTECTION? If protecting the consumer were the true interest of our government, most of its new policies and policy proposals would never get past first base. One of the favorite ploys of government, for example, is to impose tariffs on foreign goods being imported into the country. Indeed, the tariff code of the United States is now thicker than the Los Angeles telephone directory. When tariffs are imposed, who is being protected? The consumer? Hardly. Tariffs, of course, simply increase the cost of consumer purchases.
Another standard government policy is to support the prices of certain commodities, usually by requiring that they be sold at prices higher than they would otherwise fetch in the marketplace, and sometimes by acting as a purchaser of last resort so as to keep the price high. Milk, that mainstay of the American table, has been price-supported by the government for years. Why? Leaving aside the substantial political contributions of the dairy associations, the rationale has been that this is the way to get more milk onto the grocery store shelves.
Higher prices can indeed be expected to increase the amount of milk supplied; we can equally confidently expect people to reduce the amount demanded. The resulting surplus means increased government inventories of surplus dairy products and probably some milk destroyed. The cost of this scheme to consumers and taxpayers exceeds $1 billion annually.
The government is also often engaged in protecting consumers from one thing and in the process subjecting them to another. A case in point is the FDA's proposed ban on saccharin, proposed because experiments show that if, over a short period, a rat consumes the equivalent of 800 bottles of diet soda, it has a chance of getting cancer. (A comedian has an alternative hypothesis: "Do you know what a rat does when he consumes 800 bottles of soda pop? He explodes.")
When the FDA backed off its initial hardline position, instead requiring diet soda makers to provide a warning label on their product, people's willingness to make trade-offs was expressed quite clearly. Many people prefer to take the small chance of getting cancer in order to lead what they (not FDA officials) think will be a better life with less weight. That tradeoff, of course, would not be open to them if the FDA had its protective way.
Another case in point is the government's requirement that children's sleepwear be fire-resistant. This resulted in the debacle of children sleeping in pajamas treated with what turned out to be cancer-causing chemicals. The government richly deserved the outrage that followed revelation of this case. The consumer should be able to ask: "If I am willing to take the precaution of keeping matches from my children and to pay for smoke alarms and a house that has a low probability of catching fire, why can I not have my children sleep in plain, simple cotton and not all of those chemicals?"
THE COSTS ADD UP The cost of paternalistic protection of consumers from the perils of daily existence is by no means trivial. Murray Weidenbaum and Robert DeFina have conservatively estimated that the cost of federal consumer protection measures on the books in 1976 was a minimum of $6.6 billion, $1.5 billion of which was administrative costs incurred by the federal government and $5.1 billion of which was compliance cost incurred by firms. Many costs related to consumer protection measures could not be evaluated, and many other consumer protection costs are the result of state and local regulations.
The actual social cost of consumer protection is likely to be far greater than any direct estimate of administrative and compliance costs. Consumer protection measures shift the responsibility for consumer decisions from individuals, who have direct knowledge of what does and does not contribute to their individual welfare, to the government agencies, which are poorly prepared to judge how consumers are best able to protect themselves. These agencies must resort to development of broad rules that apply to a range of cases and are imperfectly adaptable to individual circumstances. The harm from improper use of consumer products is, therefore, likely to increase.
Consumer protection laws and regulations also mean that government is given greater authority to "manage" the economy. As economist George Stigler has warned: "The State—the machinery and power of the State—is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the State can and does selectively help or hurt a vast number of industries." People can be expected to compete for access to that power to use the State to further their own private interests or to secure protection by obtaining favorable government regulations that block out competitors. A part of the hidden cost of consumer protection is in the resources used by firms attempting to acquire political (as opposed to market) advantage.
Government has flagrantly abused its regulatory powers in the past. Is there any reason to expect a change in its future behavior? If we give government ever more power to regulate consumer purchases, we must ultimately return to the question of how to regulate the regulators. Indeed, how do we prevent the government from abusing the power it already has? Such questions are vital but not new. They have been asked by many, including James Madison over 200 years ago:
But what is government, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external or internal controls on government would be necessary. In framing a government, which is to be administered by men, the great difficulty lies in this: You must first enable the government to control the governed; and in the next place, oblige it to control itself.
Richard B. McKenzie is a professor of economics at Clemson University. This article is adapted from a publication of the International Institute for Economic Research (1100 Glendon Ave., Los Angeles, CA 90024).
This article originally appeared in print under the headline "Caution: Consumer Protection May Be Hazardous to Your Health".