August 24, 2011

Shouldn’t government protect consumers?

By Shouldn’t government protect consumers?

Author: Timothy Sandefur

I was on the Armstrong & Getty Show this morning (click here to listen) to talk about government regulations for protecting consumers. As an advocate of economic liberty and limited government, I’m often asked why I would oppose common-sense safety regulations that are meant to prevent food poisoning and the like. Shouldn’t the government protect consumers? Milton Friedman devoted a brilliant episode of his classic Free To Choose to that question, which you can watch below, but I’ll try to give a briefer answer here.

There seems to be nothing wrong with government imposing basic safety requirements for food service and so forth—government has a proper role to play in protecting us against fraud, for example. But that isn’t really the question we should be asking, and the choice is not a choice between government regulation and no regulation. The free market provides a different type of regulation than government does. And the real question is, why should we think that government regulations protect the consumer better than private or free-market alternatives? To answer that question requies us to consider a couple points.

? First, incentives. Government is not subject to the same incentives as private industry: a private business only gets paid if it satisfies its customers, but bureaucrats get paid whether they do a good job or not, out of taxes.  When Enron defrauded people, its directors went to jail and it went out of business. But nobody at the SEC, or any of the other bureaucracies that are supposed to protect us from things like Enron, lost their jobs or went to jail. When restaurants serve contaminated food, they lose customers, or get sued. But government usually cannot be sued—it’s immune—and it can’t lose customers, because you have to pay them whether you want to or not. Courts have held for many years that restaurants owe you a legal obligation to provide first aid if you choke or something, but the Supreme Court has repeatedly held that the government owes you no obligation to protect your personal safety, even if it promises to do so. So why should we think government is more trustworthy?

Sometimes you hear people say that regulation is kept in check by the democratic process—“if you don’t like the laws, vote the bums out!” But in fact, virtually all regulations are written, enforced, and judged, by unelected administrative agencies. The overwhelming majority of the laws governing your life are not written by elected officials, but by hired bureaucrats (who can’t even be fired in many cases, because they’re members of government unions). And it is extremely difficult or impossible to sue these agencies. Elected officials have little real control over them. So while you can refuse to dine or shop at a restaurant or store that does a bad job, you have no realistic control over the people who write and enforce regulations. They are profoundly un-democratic.

? Second, consider lobbying. Government doesn’t just lack the incentives that private industry experiences—it’s subject to different kinds of incentives. Government regulation doesn’t respond to market forces—to supply and demand—it responds to political pressures. That means it often imposes senseless regulations in the name of “public safety” that aren’t really supported by evidence, like the hands-free cell-phone laws, or ridiculous laws prohibiting McDonald’s from giving out toys in Happy Meals. Or, worse, government responds to lobbyists who use the law to prohibit their own competition. Economic protectionism frequently masquerades as public safety regulation.    

Probably the most vivid recent example involves hot-dog carts, taco trucks, or other mobile food carts. In many cities, including Sacramento, ordinances prohibit mobile vendors, not to protect the public from food poisoning, but to protect other businesses from having to compete with them. In El Paso, Atlanta, and many other cities, it’s illegal to operate a hot dog stand within a certain proximity of a restaurant. Does this protect the consumer? Does it prevent food poisoning? Of course not. It exists merely to protect established businesses against competition.

That point bears emphasizing: government regulations are subject to all sorts of abuse and manipulation. People can use it for NIMBY purposes. If you give government the power to prevent “harm,” you have to be very careful how you define “harm,” because just about anything you do can be labeled a “harm” by someone who doesn’t want you to do it.

? Furthermore, keep in mind that the costs of government regulation are very hard to assess. A lot of the time, government imposes unjustifiable restrictions; in the worst case, it “protects” us by depriving us of access to crucial life-saving or pain-reducing medications. The FDA kills people every day by refusing to approve much-needed treatments, because bureaucracies have a strong incentives to over-regulate and take as few risks as possible. Or they withdraw things from the market unjustifiably, like Vioxx or Fen-phen or Thalidomide.  Again, bureaucrats get paid regardless of whether they serve consumer needs. And because a lot of regulations stifle new inventions before they’re made, or prevent new treatments from being developed, we never really know what they actually cost us. When people complain about the “Nanny State” depriving us of free choice, it’s not just a matter of the right to eat a hamburger or drink a shake; it’s about the government being too cautious and depriving us of opportunity and critical innovations because they impose a relatively minor risk. I think the consumer should be free to choose whether to take a risk or not.

? Finally, private alternatives tend to be more effective than government anyway. Most people do not actually rely on government to protect them, and wisely so. They tend instead to rely on their own judgment and on alternatives provided by private actors in the free market—recommendations from their doctors, word of mouth from their friends, ratings on Amazon.com or in Consumer Reports or the Good Housekeeping Seal; there are all sorts of private regulatory institutions. I have certainly never asked to see a government health report at a restaurant. I just trust my friends, or I take a risk and try a new place myself, and if I like it, I tell others, who rely on my recommendations. And I know that if I don’t like a restaurant or a store, I’ll stop shopping there, and tell my friends to stay away. I don’t have that kind of power, or that freedom of choice, when the government takes charge.

The bottom line is that government does exist to protect us against people who would hurt us. But it doesn’t have, and cannot have, the kind of information that the free market provides, by assembling a vast amount of dispersed knowledge and allowing each of us the freedom to choose. Private businesses respond to consumer preferences. Government does not. It’s subject to a whole different suite of incentives and limitations that should make us very skeptical. And its powers are easily perverted to harming consumers and benefitting the politically influential at the expense of entrepreneurs and the general public.

Here is Milton Friedman, explaining the issue more clearly:

For more information, check out these articles at the Concise Encyclopedia of Economics:

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