Can Regulators Reform?

Social Regulation: Strategies for Reform, edited by Eugene Bardach and Robert A. Kagan, San Francisco: Institute for Contemporary Studies, 1982, 420 pp., $19.95, $8.95 paper

Revolt Against Regulation: The Rise and Pause of the Consumer Movement, by Michael Pertschuk, Berkeley and Los Angeles: University of California Press, 1982, 192 pp., $12.95

Social Regulation is a collection of essays by specialists in regulation presenting strategies for reforming food and drug, occupational safety, and pollution regulation. The quality and interest of the essays vary greatly, but those by William Havender, Michael Levin, Thomas Grumbly, and Michael O'Hare best succeed in making their case.

Havender, a research biochemist, discusses the problems involved in regulating foods and drugs. After giving a lucid introduction to research on health hazards, he explains how perverse incentives guide the Food and Drug Administration (FDA). The result is that the agency holds drugs off the market even when their dangerous side effects are minimal or nonexistent and even when they could substitute for riskier drugs currently on the market. For instance, he tells of the FDA keeping low-dose contraceptives off the market until 1974, although it was known in the 1960s that high-dose pills were causing harmful side effects and women in Communist China had been taking the low-dose versions without adverse consequences since the late '60s.

Havender's essay is full of insights and interesting but little-known facts. He points out that the Environmental Protection Agency (EPA) released its commissioned study of chromosome defects among residents of houses near the Love Canal in Buffalo, New York, without having compared their frequency of chromosome defects with that of a matched control group. Only after President Carter decided to evacuate 700 families to temporary quarters did an EPA panel review the study. The panel concluded that there was no indication of excessive chromosome abnormalities.

But Social Regulation contains more than essays about the harm done by government regulation. There are two essays about successful reductions in regulation. The first is "Getting There: Implementing the 'Bubble' Policy," by Michael Levin. It is a fascinating account of how the EPA allowed firms to meet pollution standards by "trading" pollution reductions from one source for equivalent pollution increases from other sources.

Under the bubble policy, each plant is treated as if under a bubble: all that matters is the total amount of pollution, not its source within a plant. This approach allows firms to reduce pollution where it is most feasible to reduce and not to do so when reductions would be very costly. Since plant managers can determine their own capacities to reduce pollution better than do centralized regulators, the same amount of pollution reduction occurs as with command-and-control regulation, but at a lower cost.

Although the principle seems obvious, implementing it was not easy. Levin, who is chief of the Regulatory Reform Staff in the EPA, draws some conclusions from the episode. Since some of his conclusions are relevant for those who seek political change in general, they are worth repeating. First, he says, reform should start as a supplement, not a replacement. This will avoid threatening vested interests. Although the reform should start small, it should be structured to create an internal dynamic that will broaden once it starts being used. Second, it must be "gotten out on the street" to be used and must be structured to produce quick real-world success stories. Third, it must build a constituency within and outside an agency.

The other success story about regulatory reduction is Thomas Grumbly's "Self-Regulation: Private Vice and Public Virtue Revisited." It tells how the Department of Agriculture, under President Carter, shifted federal meat and poultry inspection away from government and toward self-inspection by firms. (One can just imagine the cries of foul play were the Reagan administration to try such a reform!) The lessons Grumbly draws from this successfully executed reduction in government regulation are similar to Levin's.

Michael O'Hare's essay, "Information Strategies as Regulatory Surrogates," points out the many possibilities for replacing heavy-handed regulation with simple requirements that producers provide information for consumers. Unlike traditional regulation, which forecloses consumer options, information requirements allow consumers to make their own choices.

O'Hare cautions, however, that even information requirements can be burdensome to consumers as well as to producers. He tells of a bank that inserted in its electronic funds transfer disclosure statement a sentence offering $10 to anyone who wrote the words "Regulation E" on a postcard and sent it in. Not one of 115,000 recipients of this offer responded! In this case, an information requirement had the perverse effect of discouraging consumers from reading the bank statement and causing them to be possibly less informed than if there had been no requirement.

While the other essays were somewhat informative, I would not recommend the book as a whole. Those interested in the nitty-gritty of how regulations can be altered could well use this book. Otherwise, I recommend borrowing it from a library and reading the four essays discussed above.

Revolt Against Regulation, by a member of the Federal Trade Commission (FTC) who was its chairman under President Carter, begins the way one would expect. In the first chapter, "On the Side of the Angels," Michael Pertschuk recalls the glory days of the 1960s "consumer" movement. In his mind, "consumer legislation" is good, and a politician's effectiveness is measured by the amount of such lawmaking he sponsors. He doesn't question whether consumer legislation helps or hurts consumers. Fairly soon, though, some cracks appear in the liberal foundation. For instance, Pertschuk admits that the cost of much consumer regulation falls on consumers in the form of higher prices.

Pertschuk goes on in the next few chapters to tell of the business revolt against regulation in the mid- to late '70s and of his efforts as FTC chairman to save as much power as possible from the axe of congressional oversight. All pretty much par for the course. But then he turns on a dime. In the final chapter he discusses some of the lessons the regulators have learned from economists. "We boasted then, 'There is a law that makes cars safer!' We know now…there is no such thing as a free lunch. And laws don't make anything."

Even then, he says, "The economists earned my grudging respect,…for their dogged insistence that we think through (emphasis his) the reality of what we believed we were achieving with our intervention in the marketplace." Pertschuk confesses that economists helped teach him "respect, if not reverence, for the marketplace—or, more precisely, for the power of market incentives, of self-interest. They have taught us how much more likely we are to gain our objectives by channeling the flow of such incentives than by vain efforts to block their passage."

In case you think this is just window-dressing, and that his views on particular regulations haven't changed, listen to his comments on a federal automobile regulatory agency to set minimum quality performance standards for automobiles. When Caspar Weinberger, FTC chairman under Richard Nixon, first proposed such an agency, Pertschuk, then a congressional staffer, loved it. But now, in commenting on Weinberger's original report, Pertschuk writes: "A fundamental problem with that report was that nowhere in its pages does one find so much as a discussion of the costs of providing such protection, or of the tradeoffs between such costs and benefits to consumers."

The quote speaks for itself. I recommend Pertschuk's last chapter to those who doubt that reasonable people will change their minds in response to evidence.

David Henderson is a staff economist for the President's Council of Economic Advisers.