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Political Ignorance and the Case Against Paternalistic Regulation:

My colleague Josh Wright and co-blogger Todd Zywicki have an important essay criticizing the Obama Administration's proposed new Consumer Financial Protection Agency (CFPA). The premise behind the CFPA is that consumers' choices need to be limited by government regulators because otherwise consumers are likely to make mistakes caused by their own cognitive errors.

Josh and Todd outline several serious problems with the CFPA proposal and the economic theory underlying it. Here are two others based on my own work on political ignorance.

I. Voters are More Ignorant and Irrational than Consumers.

First, the CFPA and other paternalistic policies will have to be adopted through the democratic process. But voters tend to be rationally ignorant about politics, and commit serious cognitive errors in analyzing the little information about politics they do know. Political ignorance and irrationality is likely to be far more severe than the cognitive mistakes consumers make. Voters intuitively realize that there is very little chance that their votes will actually influence the outcome of an election. As a result, they have precious little incentive to either acquire political information or to work to overcome their biases in evaluating what they do learn. By contrast, consumer decisions are individually decisive. If I decide to get a credit card or take out a mortgage, I can actually implement that decision without getting the agreement of over 50% of a large electorate. Good incentives certainly don't lead consumers to avoid ignorance and cognitive bias entirely. But they do cause consumers to be less ignorant and irrational than voters. Even people who follow politics closely devote far more time and effort to, say, choosing the right car or TV, than they do to deciding who to vote for president. For that reason, political decisions about paternalistic regulation are likely to be far more influenced by ignorance and cognitive bias than the consumer decisions paternalists seek to "correct."

II. Political Ignorance Increases the Risk of Regulatory "Capture."

Second, political ignorance opens the door to interest group "capture" of the CFPA or other agencies that will implement paternalistic regulations. Such regulations will necessarily be complex and difficult to understand. Rationally ignorant voters are unlikely to follow them closely enough to be able to tell the difference between effective regulations and harmful ones. As a result, it will be easy for interest groups and government officials to enact regulations that benefit politically influential businesses as the expense of the public under the guise of consumer protection. We have seen this pattern time and again with other regulatory agencies, such as those engaged in railroad, airline, public utility, and trucking regulation.There is no reason to believe that the new paternalistic regulatory agencies will be any different. Indeed, agencies implement paternalistic financial regulations are likely to be even more vulnerable to capture because of the complexity of the financial system (which makes political monitoring by ignorant voters even more difficult), and the presence of numerous powerful interest groups who have an incentive to do the capturing. Banks, credit card companies, real estate developers, and many others will no doubt lobby hard to capture the CFPA once it gets established.

Some advocates of paternalistic regulation, such as Cass Sunstein, recognize the dangers of ignorance and interest group power. They argue that these problems can be mitigated by delegating the regulation to experts insulated from political pressure. This solution creates serious dangers of its own, which I outlined in a post written two years ago. Moreover, any proposal to establish such an "independent" agency must itself first navigate a political process heavily influenced by ignorance and interest group lobbying. It's highly unlikely that it would get through Congress unscathed.

Expert advice is often useful in making difficult consumer decisions. On balance, however, it is better to trust experts chosen by consumers in a competitive market than to delegate coercive power to government-appointed experts who have neither the knowledge nor the incentives needed to genuinely improve consumer welfare.

Related Posts (on one page):

  1. More Wright and Zywicki on the Consumer Financial Protection Agency:
  2. Political Ignorance and the Case Against Paternalistic Regulation:
PersonFromPorlock:
The real objection, though, has to be that it's unseemly for a government which answers to the People to treat them as incompetents. Not that this has stopped anyone yet.
9.19.2009 8:21pm
martinned (mail) (www):
Good idea! Let's abolish the FDA!
9.19.2009 8:27pm
Ilya Somin:
Good idea! Let's abolish the FDA!

I agree. Research by San Peltzman and other economists shows that the FDA causes a lot more harm than good.
9.19.2009 8:32pm
Fub:
Second, political ignorance opens the door to interest group "capture" of the CFPA or other agencies that will implement paternalistic regulations. Such regulations will necessarily be complex and difficult to understand. Rationally ignorant voters are unlikely to follow them closely enough to be able to tell the difference between effective regulations and harmful ones.
One common rule I've heard all my life: Any descriptive words in the title of a government agency, will tell you what the agency actually doesn't do, but what the government wants you to believe it does.

So, for example, Consumer Product Safety Commission, means that the commission has nothing to do with actual product safety, but instead makes and enforces, or lobbies Congress to make, absurd "safety" regulations to exterminate small businesses, increase prices for poor people, etc.

Applying this rule, any proposed Consumer Financial Protection Agency (CFPA) will be guaranteed to make and enforce regulations to ensure that ordinary people find it difficult to make financial transactions or obtain loans, and to ensure that loan sharks and con artists flourish.

It's so simple that even a hypothetical "rationally ignorant voter" can understand it.
9.19.2009 8:39pm
yankee (mail):

First, the CFPA and other paternalistic policies will have to be adopted through the democratic process. But voters tend to be rationally ignorant about politics, and commit serious cognitive errors in analyzing the little information about politics they do know. Political ignorance and irrationality is likely to be far more severe than the cognitive mistakes consumers make. Voters intuitively realize that there is very little chance that their votes will actually influence the outcome of an election. As a result, they have precious little incentive to either acquire political information or to work to overcome their biases in evaluating what they do learn. By contrast, consumer decisions are individually decisive. If I decide to get a credit card or take out a mortgage, I can actually implement that decision without getting the agreement of over 50% of a large electorate. Good incentives certainly don't lead consumers to avoid ignorance and cognitive bias entirely. But they do cause consumers to be less ignorant and irrational than voters. Even people who follow politics closely devote far more time and effort to, say, choosing the right car or TV, than they do to deciding who to vote for president. For that reason, political decisions about paternalistic regulation are likely to be far more influenced by ignorance and cognitive bias than the consumer decisions paternalists seek to "correct."

This looks like a case where actual evidence would be more useful than this sort of a priori argument.
9.19.2009 8:53pm
MCM (mail):
This looks like a case where actual evidence would be more useful than this sort of a priori argument.


That was my reaction as well. The assumption that consumers are more rational and less ignorant than voters strikes me as tenuous at best. The nature of most advertising, and its effectiveness, suggests to me that consumers are just as ignorant and irrational as voters.
9.19.2009 9:01pm
Perseus (mail):
Research by San Peltzman and other economists shows that the FDA causes a lot more harm than good.

Typo: I believe it's Sam Peltzman.
9.19.2009 9:20pm
D.O.:
— Good idea! Let's abolish the FDA!

— I agree. Research by San Peltzman and other economists shows that the FDA causes a lot more harm than good.

Why economists? I thought that FDA is (watching) after our health, not our pockets.
9.19.2009 9:42pm
Mac (mail):
You want evidence? May I suggest you look at the new lead rules put out to "protect" children from lead? Not only is this seriously harming the thrift stores whose profits benefit any number of charities, but we now have the specter of Federal Agents roving garage sales and inflicting a $100,000.00 fine on hapless citizens for selling used products that have been banned. Ignorance of the law, I understand, is no excuse. So, if we are smart enough to plow through the Consumer Product Recall list for lead before we have a garage sale, why are we not smart enough to plow through same before we buy the product?

They are even considering banning the wire spiral in wire notebooks because, if ingested, it may cause a tiny amount of harm from the lead content. I would think that a child would have a lot more problems from eating the wire, but I am just an ignorant consumer and not smart like Nancy Pelosi.

This same law has caused great harm to other industries who use a small amount of lead in bicycle tire ports for inflation and other very minor uses in 4x4;s etc. (I can't think of the name of the tire thingamajig.) All children's books printed before 1985 must be destroyed as they contain a very small amount of lead which may pose a hazard if the child eats the book. Not a great hazard, mind you. The idea of destroying books is anathema to me. I am an admitted bibliophile, but beyond that, it is ridiculous. I have never heard of any child consuming an entire book and it the harm it would cause is miniscule, at best, at least from the lead. I can't speak to what the paper would do to the digestive system, but would think it might be unpleasant. However, I have had dogs who consumed entire books with no obvious ill effects, so who knows?

Given my experience with city building inspectors, with my home and many of my friends and neighbors, I would have vastly preferred to have been told to hire my own inspector as would others I know, as the false sense of security given by the codes and inspectors led to major builder defects that were not caught until 6 to 10 years later. The city inspectors will take no responsibility, legal or otherwise for their extremely poor performance.

Wasn't it oft cited by Madoff's victims that they thought the SEC was watching him and would not have let him rip them off? That did a lot of good. They would have been a lot more cautious if they thought they were on their own, as they were, in the end as things turned out.

I think all of the above, and there are many more examples, are "evidence" of this being a terrible idea.
9.19.2009 9:50pm
John Carney (mail) (www):
Well done. I've been making a similar argument over at Clusterstock.com for a few months now.

From one recent post:


The claim that a world of animal spirits justifies government regulation rests on the tacit assumption that animal spirits stop at the government's doorstep. But this assumption is unjustified. There is no reason to expect that the kind of biases, errors, enthusiasms, fears or mythological thinking that Shiller and Akerlof think characterize markets do not also characterize governments. To the contrary, animal spirits are likely to be even more of a problem for government since there is less room for a correction. Markets fail when they become too far removed from reality; governments tend to fail upward, with each failure providing a justification for broader government powers. Markets have built in checks that government regulation does not.

What really seems to have gone wrong in Shiller and Akerlof's analysis is a failure to appreciate the strength of there own discovery of irrational behavior. Or, to put it differently, they've applied a double standard that applies behavoiral economics to market actors but imagines a rational and benevolent regulator. There view of regulation is just a mirror image of the shallow view they say classical economics takes on markets.
9.19.2009 9:52pm
Off Kilter (mail):
As a physician, I have to agree with Ilya on the FDA. Peltzman's work, which is now decades old, hasn't been refuted.

DO asks why. It's because regulations come with costs as well as benefits. Patients die if unsafe drugs are released. But they also die if safe and effective drugs are delayed in reaching market because of regulations, or made so expensive by regulations that companies don't bother to produce them. Peltzman pointed out that the costs of the FDA (I believe more precisely the added "efficiency" requirements) outweigh the benefits.

Of course, to say that drugs wouldn't be centrally, politically, and bureaucratically regulated is not to say they wouldn't be regulated at all. Safety can be regulated through market mechanisms, like Underwriter's Laboratory, to the degree desired by consumers. The key point is that drug companies face costs both by turning out unsafe drugs and by delaying safe drugs, whereas FDA bureaucrats are never personally held liable for deaths they cause by delaying drugs, so they tend to be biased toward eliminating one bad outcome without realizing there's any tradeoff in causing another bad outcome (type 1 vs type 2 errors).

On the more general question...

Ilya: we don't typically vote for the people running these regulatory bureaus, so I'm not sure why voter ignorance is an issue here.
9.19.2009 9:53pm
Andrew J. Lazarus (mail):
The libertarians have never forgiven the FDA for rejecting Thalidomide.
9.19.2009 10:29pm
ChrisTS (mail):
Off Kilter:

(Great Handle). I am not sure I understand your argument.

You compare the possible loss of life/harm of having unsafe medicines on the market with the possible loss of life/harm of delaying safe medicines to market. Is there some evidence that show the latter outweighs the former? I realize this would require some amount of counterfactual estimating, but we could look to pre-FDA history for some help.

Further, you then note the costs of having the FDA. I do not understand how those kinds of costs are to be factored into the analyis of lives/harms.
9.19.2009 11:06pm
ChrisTS (mail):
Off Kilter, again:

You also suggest that 'the market' will provide for consumer safety. This surprises me, particularly in light of the practice of encouraging off-label use and many cases of apparent willingness to 'see if we can get away with it' marketing (e.g., Vioxx and the Ford Pinto).

I do not want to be excessively cynical, but I think we have rather good evidence that even relatively decent folks will produce and sell dreadful products if it helps them keep their jobs or increase their earnings.

I do not think the FDA and other consumer protection agencies work perfectly, but I do like having someone involved whose interest is in something other than selling me something, especially in the case of medicines.
9.19.2009 11:12pm
Fub:
Andrew J. Lazarus wrote at 9.19.2009 10:29pm:
The libertarians have never forgiven the FDA for rejecting Thalidomide.
And for good reason: the categorical prohibition of thalidomide for any and all use was totally irrational.

It's only dangerous effect was its teratogenicity, caused by its angiogenisis inhibition properties. It caused birth defects.

To any rational person that means it should not be used by pregnant women. To the FDA, it meant that it should never be used by anyone, for any purpose.

Now, after over 50 years of struggle against the total ban, it has been found to be effective against various cancers, some forms of arthritis, leprosy and various ulcerative diseases.

The same property that caused the birth defects, angiogenisis inhibition, is the reason for its usefulness in treating those diseases.

All that was required to prevent birth defects was a prohibition against prescription to women who were pregnant or likely to become pregnant during the course of drug administration.

Instead, countless patients have suffered and died because the FDA mandated a general prohibition, and refused to reconsider the general prohibition for decades despite new evidence of its effectiveness against those diseases.
9.19.2009 11:23pm
Mac (mail):

The libertarians have never forgiven the FDA for rejecting Thalidomide.



I no longer have a source for this, but my understanding is that the ban on Thalidomide had nothing to do with FDA brilliance. Rather, they dithered so long in making a decision that, as they were poised to approve it, the birth defect problem became apparent in Europe and they then reversed course and banned it instead of approving it as they were going to do. Thalidomide is not a good example to use for the necessity of the FDA.

Not to mention the extraordinary costs they add to prescription drugs. On the one hand, Obama is ranting against the high cost of drugs and the evil pharmaceutical companies without admitting or addressing the high and often unnecessary costs imposed on the drug companies by the FDA. I heard the other night that they won't approve a new drug if there is a similar one on the market. What do you think that does to the costs of drugs? This is a perfect example of the government preventing competition that would drive down the costs of drugs while they are blasting the drug companies for the high cost of drugs. Great regulation there.
9.19.2009 11:35pm
Mac (mail):
You can go here for a small example of the damaging consequences of regulation.
9.19.2009 11:59pm
Allan (mail):
Who chooses the experts when government does not? The people with lots of aggregate amounts of money. That is, those in business.

If I buy a $10 basketball, and 100,000 others do, we are not going to be able to get an expert. But the company that sells $1,000,000 in basketballs sure can... And the company will sue me if I voice my opinion that the basketballs suck.

Libertarians seem to dislike government, but they offer no real world alternatives, just theories.
9.20.2009 12:01am
Allan Walstad (mail):
I first learned to think economically about these issues from Thomas Sowell's Knowledge and Decisions, nearly 30 years old by now but just change some of the names and multiply the numbers by 10 or 100 and it still applies. Interesting how "Yankee" fails to appreciate the significance of simply working through the consequences of incentives facing voters and consumers.

As I've pointed out elsewhere, Adam Smith had it pretty well figured our in the Wealth of Nations. His view of the merchant class was that they were out to profit by hook or by crook. He saw that the free market would constrain them far better than government, precisely because they could get control of the power levers of government sufficiently to use it for their benefit at the expense of the consumers.

Bottom line is that in a free market, I, individually, can take my business elsewhere. But I, individually, don't have a free choice of what government to deal with.
9.20.2009 12:09am
Bruce Hayden (mail):
What I always find interesting in this sort of thread is that there seem to be two types of people here, those who don't trust the government, but trust the market, and those that don't trust business, but trust government.

I presume that Conspirators Ilya and Todd are of the former camp, as am I, but Yankee and MCM are in the later.

As I lawyer (at times), I would suggest that the best of all worlds is to get the government out of the way, until someone screws up, and then let the legal system levy retribution if the companies screw up. That is in my view much more effective long term than having agencies in charge, which invariably have all the wrong incentives in their decision making, but also are subject to agency capture.

But that is why I am conservative/libertarian, instead of liberal/progressive. We come here with two really different world views, and I doubt if we ever will find that much common ground.
9.20.2009 12:11am
Mike McDougal:

I thought that FDA is (watching) after our health, not our pockets.

You seem to think that economists cannot competently study the success (or not) of the FDA. Why do you think that?
9.20.2009 12:12am
Mike McDougal:

Who chooses the experts when government does not?

Ratings and evaluation companies like Consumer Reports, Car and Driver, and Underwriter Laboratories.
9.20.2009 12:19am
Obvious (mail):
If the FDA announces it has just released a drug projected to save 5000 lives/year, and it studied the drug (without making demanding any changes in it) for the last 10 years, it follows that over the prior decade 50,000 lives were lost.
9.20.2009 12:23am
Obvious (mail):
If the FDA announces it has just released a drug projected to save 5000 lives/year, and it studied the drug (without demanding any changes in it) for the last 10 years, it follows that over the prior decade 50,000 lives were lost due to FDA regulations.
9.20.2009 12:24am
ChrisTS (mail):
Bruce Hayden:

What I always find interesting in this sort of thread is that there seem to be two types of people here, those who don't trust the government, but trust the market, and those that don't trust business, but trust government. ..

As I lawyer (at times), I would suggest that the best of all worlds is to get the government out of the way, until someone screws up, and then let the legal system levy retribution if the companies screw up.


I understand your position. But, I do worry more about the 'capture the horse out of the barn' approach than the 'keep the horse in the barn' approach.

I do not fully trust either 'the government' or 'the market.' I see them, at least in our nation, as two powerful forces. I do not want either to have complete hegemony [as many of my colleagues would say].

With respect to medicine and medical devices, I do want the government to keep a preventative eye on the market; the human costs strike me as too great for us to wait until after either significant numbers of people or law-savvy people have taken death and harm to the courts.
9.20.2009 12:46am
Off Kilter (mail):
Chris: "the human costs strike me as too great for us to wait until after either significant numbers of people or law-savvy people have taken death and harm to the courts"

It's an empirical question, Chris. Read Peltzman's paper.
9.20.2009 12:50am
Grover Gardner (mail):

I no longer have a source for this, but my understanding is that the ban on Thalidomide had nothing to do with FDA brilliance.


Well, the woman who insisted on blocking it was hired by the FDA. Apparently there was a lot of pressure from the drug company and FDA supervisors to release the drug, but she stood her ground and they did listen to her. Her persistence led to immediate reforms. At the time, the FDA did not supervise drug trials, and follow-ups by the drug companies themselves were rare. In fact, thalidomide was "tested" by issuing it to 20,000 patients, including 207 pregnant women, resulting in 17 cases of deformed children.

The lesson here would seem to point toward more regulatory oversight, not less.

And thalidomide is now approved for certain treatments, here and in other countries, but it is associated with other side effects, like high blood pressure and nerve disorders. It's not a panacea cure that's being "cruelly" withheld from the market. It's a very potent and dangerous drug, and only long study has enabled scientists to understand its potentials and drawbacks. In fact, in Brazil, where leprosy is rampant, the drug has been used since 1965 but was often issued to pregnant women without their being informed of the side effects, resulting in predictable birth defects.


As I lawyer (at times), I would suggest that the best of all worlds is to get the government out of the way, until someone screws up, and then let the legal system levy retribution if the companies screw up.


What about the people who are injured or die in the meantime? What does "retribution" mean to them at that point?
9.20.2009 12:51am
Andrew J. Lazarus (mail):
It is correct that thalidomide was not rapidly approved and its teratogenic properties became evident in the meantime. However, it was not bureaucratic delay. A recently-hired woman doctor (of whom there were few back then) in the FDA, Dr. Francis Kelsey, who thought it was inadequately tested, refused to approve it. The rest is history. I suggest, Mac, that you owe her an apology.
It's only dangerous effect was its teratogenicity, caused by its angiogenisis inhibition properties. It caused birth defects. To any rational person that means it should not be used by pregnant women.
Well, yes, except that is the purpose for which it was going to be sold—to cure morning sickness. I agree that this doesn't mean research on potential uses for persons other than pregnant women shouldn't have continued, but I'm afraid that as one of those instances where libertarian theory collides with history, this irrational use happens to be what a major pharmaceutical company had in mind.

Why is it that, for example, Consumer Reports has always called for more government regulation? Perhaps their institutional memory reaches back to the pre-FDA days, where quack remedies and false advertising were common. Did you know that pre-FDA case law prohibited competitors from suing over rivals' false advertising claims? (And anyone who thinks that Car & Driver gives unbiased advice deserves what he gets.)
9.20.2009 12:57am
Andrew J. Lazarus (mail):
It is correct that thalidomide was not rapidly approved and its teratogenic properties became evident in the meantime. However, it was not bureaucratic delay. A recently-hired woman doctor (of whom there were few back then) in the FDA, Dr. Francis Kelsey, who thought it was inadequately tested, refused to approve it. The rest is history. I suggest, Mac, that you owe her an apology.
It's only dangerous effect was its teratogenicity, caused by its angiogenisis inhibition properties. It caused birth defects. To any rational person that means it should not be used by pregnant women.
Well, yes, except that is the purpose for which it was going to be sold—to cure morning sickness. I agree that this doesn't mean research on potential uses for persons other than pregnant women shouldn't have continued, but I'm afraid that as one of those instances where libertarian theory collides with history, this irrational use happens to be what a major pharmaceutical company had in mind.

Why is it that, for example, Consumer Reports has always called for more government regulation? Perhaps their institutional memory reaches back to the pre-FDA days, where quack remedies and false advertising were common. Did you know that pre-FDA case law prohibited competitors from suing over rivals' false advertising claims? (And anyone who thinks that Car & Driver gives unbiased advice deserves what he gets.)
9.20.2009 1:12am
Grover Gardner (mail):

If the FDA announces it has just released a drug projected to save 5000 lives/year, and it studied the drug (without making demanding any changes in it) for the last 10 years, it follows that over the prior decade 50,000 lives were lost.


Much better to release untested drugs and just see how many people die before we find out there's a problem.

Honestly, what sort of inanity is this? Of course delaying a drug might mean suffering and lost lives. So might premature release, as has been seen in numerous instances. Lotronex, Redux, Raxar, Posicor, Baycol, Duract and Rezulin were all approved in the late 90's, at a time when the FDA was under intense pressure to speed up the release process. All were quickly withdrawn after serious side effects and possible deaths were associated with them.

Certainly there is frustration among people with life-threatening or terminal illnesses like cancer when they see potential treatments withheld. But in many cases there are questions of either extreme toxicity or inefficacy that must be vetted.
9.20.2009 1:40am
Kirk Lazarus:
Each individual should exercise the level of caution they feel is appropriate to them when deciding which drugs to take, and should bear the responsibility (barring tortious behavior on the part of the manufacturer etc) when things go wrong. If you think new drugs are likely to be inadequately tested and unsafe, then you can choose to only take drugs that have been on the market for 10 years, or 20 years, or whatever else makes you feel comfortable.
9.20.2009 2:37am
D.O.:
@Mike McDougal: I think economists can study a lot of things outside the sphere of economics, but each time it is reasonable to ask why. Economics is ostensibly the study of allocation of scarce resources between alternative uses. I do not see how the safety regulation fits in there unless you think that "safety" is a resource (could be, I just don't see how). And what is the alternative? It seems hard to study the alternative empirically given that for the last 50 or more years there were no countries with drug development without a governmental approving system. Maybe Peltzman's paper answers all those questions. I do not say no, just wondering.
9.20.2009 3:39am
Grover Gardner (mail):

Each individual should exercise the level of caution they feel is appropriate to them when deciding which drugs to take, and should bear the responsibility (barring tortious behavior on the part of the manufacturer etc) when things go wrong. If you think new drugs are likely to be inadequately tested and unsafe, then you can choose to only take drugs that have been on the market for 10 years, or 20 years, or whatever else makes you feel comfortable.


Thanks. Next time I'm rushed to the hospital with a kidney infection and a 104 degree fever, I'll remember to insist that I only be given safe drugs. And if they give me something that kills me, I'll know I have no one to blame but myself.

Seriously, without a regulatory body overseeing the testing of new drugs, how do I know which drugs have been tested and found safe, and which haven't? Without a regulatory body collecting data on drug safety, how do I know which ten-year-old drugs are safe? How would I ever know that any drug was safe and effective? Anecdotal evidence? Through the grapevine? Checking WebMD?

I mean, in your world, there wouldn't be any new drugs because no one would take, nor any doctor prescribe, anything until they had heard, somehow, for sure, that no one had died from taking it.
9.20.2009 4:32am
Grover Gardner (mail):
Look. Kirk, everyone should be as knowledgeable about their health as possible. I myself come from a medically savvy family. When I was diagnosed with a stomach condition, I read up on the condition and the various drugs used to treat it. When one drug exhibited unpleasant side effects I asked the doctor if we could try an alternative. But this was not a life-threatening condition. I had the luxury to explore my options. Many people don't have that knowledge or confidence. They depend on someone else to heal them, and that someone has to have adequate information about the drugs they are prescribing.

On the other hand, if it turned out that one of those drugs shut down my liver, I hardly feel in a position to be responsible for that! Someone more knowledgeable than me has to determine if that drug is safe for me or not.
9.20.2009 4:47am
Ricardo (mail):
Ratings and evaluation companies like Consumer Reports, Car and Driver, and Underwriter Laboratories.

You forgot to mention Standard &Poors and Moody's and the careful job they did of assessing the risks of senior tranche subprime mortgage-backed securities.

The key isn't whether a given expert is from the private sector or the government. It is what incentives the expert has to give an unbiased opinion. In finance, anyway, the private ratings agencies have horrid incentive structures as the fees the collect for rating a security are paid by the issuer. If you don't get the incentives right, "expert" opinions will be worse than useless.
9.20.2009 5:14am
Kirk Lazarus:
It might be in almost everyone's interests to delegate much of their medical decision making to someone else (such as a physician), but that should be their choice to make, not one that's forced on them. The market would find mechanisms to ration the quality of medical services superior to those employed by the State. Note that I use the word "ration" advisedly: under a free market low cost medical services would be free to develop. Under regulation, the medical regulator (like most regulators) is captured by the industry it regulates. The licensed physicians' unions and the manufacturers of drugs and medical devices may make occasional ritual protests, but in reality they benefit from a system that shuts out competition.
9.20.2009 6:37am
martinned (mail) (www):

I think economists can study a lot of things outside the sphere of economics, but each time it is reasonable to ask why.

Economic imperialism is a wonderful thing. In fact, it's what I do for a living at the moment. The question isn't so much "why", but rather "how". Economics can apply a unique and relatively objective perspective to many problems, but it can't be treated as the end-all of rational decision making.
9.20.2009 8:07am
martinned (mail) (www):

It might be in almost everyone's interests to delegate much of their medical decision making to someone else (such as a physician), but that should be their choice to make, not one that's forced on them. The market would find mechanisms to ration the quality of medical services superior to those employed by the State. Note that I use the word "ration" advisedly: under a free market low cost medical services would be free to develop. Under regulation, the medical regulator (like most regulators) is captured by the industry it regulates. The licensed physicians' unions and the manufacturers of drugs and medical devices may make occasional ritual protests, but in reality they benefit from a system that shuts out competition.

Take this comment, for example. It has more (hidden) assumptions than I can count on my fingers and toes, including, but not limited to, the assumption that all regulators are captured, or at least that there is no way to stop them from being captured, that utility maximisation implies greed in people generally, and in medical doctors in particular, and that rational decision making is a sensible frame of reference in a market so plagued with information asymmetry as the health market.

(À propos this last one: Note that one of the useful assumptions in the original post is that people may be ignorant, but that they are more ignorant as voters than as consumers. That has the useful property of avoiding the need to talk about how rational consumers are in some absolute sense. The down side is that it requires the incorporation of some economic theory of democratic decision making to model the incentives from voter to politician to agency, so that it may be compared with the incentives as they run from consumer to supplier.)

Each of these assumptions, or even all of them together, may be justified, but we would be remiss if we let them pass without careful consideration.
9.20.2009 8:14am
Cornet of Horse:
martinned,

"that utility maximisation implies greed in people generally, and in medical doctors in particular"

The problem is that in a system vulnerable to regulatory capture, the non-greedy are put at a disadvantage to the greedy with little recourse. It doesn't require that all doctors be greedy, indeed most are not (but many are still vulnerable to narrow narratives that frame their self-interest in terms of some sort of solidarity against malign outside influence, as we see rampant among unions in general), just that the greedy ones can gain an advantage by capturing power artificially concentrated by means nominally democratic but functionally obscure to accountability.
9.20.2009 9:23am
einhverfr (mail) (www):
I think there are two questions here:

1) Are additional consumer protection measures required and
2) If they are, what form should they take.

There are a couple things to consider. First, one cannot protect customers from themselves. However, where banks and customers collide, I think it is necessary that fairness prevail.

The most important protection that could/should be in place would be a limit on how quickly a credit line could be reduced and whether a bank should be able to reduce a credit line faster and convert any over-balance amount into an installment-based loan. The old practice of "well, we reduced your credit limit by $1500 and so now you are $1000 over limit" is a recipe for disaster.

If I could make a reform I would say that credit reduction policies would need to be convertable into installment-based loans with terms that each bank could provide for separately, with terms provided for in the inicial credit card terms.

Loan contracts themselves should not be entirely subject to one-sided renegotiation without protections for the other side.
9.20.2009 11:38am
martinned (mail) (www):

Loan contracts themselves should not be entirely subject to one-sided renegotiation without protections for the other side.

Marxist!
9.20.2009 11:45am
Allan Walstad (mail):
D.O.:

Economics is ostensibly the study of allocation of scarce resources between alternative uses. I do not see how the safety regulation fits in there unless you think that "safety" is a resource...

Ah, yes--the definition of economics. It has undergone quite some evolution and I doubt there is a universally accepted one, although I don't see a lot of attention given to the question these days. But it's important. Israel Kirzner, in his 1976 book The Economic Point of View, comes to what I think is the most sensible understanding, that economics is the discipline that spins out the consequences of the fact that individuals make choices in the pursuit of their goals and purposes. Of course, allocating scarce means among alternative uses is a substantial part of the picture, but subsumed within the broader definition. Given assumptions about people's goals and purposes, the knowledge and technology available to them, and the institutional constraints and incentives within which they act, we can at least hope to reason our way to some conclusions about what will happen.

So yes, safety regulation fits in. A drug might be dangerous in itself, but it might save my life or even just make my life more enjoyable while it lasts. So choices must be made. What consequences follow from a system in which choices are imposed coercively, versus leaving people free to make their own choices?

More generally, what are the incentives, and the likely responses to those incentives, and the consequences thereof, in a society in which individuals are free to transact non-coercively on the basis of freely-transferrable property rights? What about in a system in which decisions are made politically, or where the people assigned to make decisions are chosen politically? Economics, properly viewed, sheds light on such questions.

Martinned:

Economic imperialism is a wonderful thing.

There's nothing "imperialistic" about being open to the insights available from economics. It would be imperialistic to deny that there is any other source of insight into human affairs. As far as I can tell, nobody does that.
9.20.2009 11:58am
Abdul Abulbul Amir (mail):




If the FDA announces it has just released a drug projected to save 5000 lives/year, and it studied the drug (without making demanding any changes in it) for the last 10 years, it follows that over the prior decade 50,000 lives were lost.





Much better to release untested drugs and just see how many people die before we find out there's a problem.




The FDA requires two levels of testing. The first is for safety. The second is for effectiveness. Prohibiting the sale of a drug after successful safety testing has nothing to do with keeping people from people being killed by that drug.

BTW, the effectiveness testing takes by far the most time and resources.
9.20.2009 12:23pm
SuperSkeptic:
Libertarians seem to dislike government, but they offer no real world alternatives, just theories.

. . .

As I lawyer (at times), I would suggest that the best of all worlds is to get the government out of the way, until someone screws up, and then let the legal system levy retribution if the companies screw up. That is in my view much more effective long term than having agencies in charge, which invariably have all the wrong incentives in their decision making, but also are subject to agency capture.


Lawyers out there: What is wrong with Torts as a market check?
9.20.2009 1:02pm
Jestak (mail):
I agree. Research by San Peltzman and other economists shows that the FDA causes a lot more harm than good.

Ah, yes, Sam Peltzman. Whenever libertarians need to justify their opposition to regulation, they reach for Peltzman's papers on the FDA and auto safety, even though they are now 35 or so years old and hardly state of the art.

In the case of his FDA paper, Peltzman claims to have proven that drug regulation, by slowing down the rate of approval of new drugs, costs more lives than it saves. Therefore, he concludes, drug regulation should be abolished and we should have a pure free market in pharmaceuticals.

The problem is that, while Peltzman does do some regressions and provides some charts in his paper, regressions and charts don't make a single paper the last word on a subject. Otherwise, the "last word" on every major empirical issue in economics would be written several times a year. In Peltzman's case, his 1973 paper makes some assumptions which bias his cost-benefit analysis of drug regulation. His biases have the effect of inflating his cost estimates for drug regulation.

First, Peltzman begins his paper by observing a decline in the rate of new drug development in the US in the 1950s and '60s. He thinks he's found a "tipping point" in 1962, notes that 1962 was the year of passage for the Kefauver-Harris
Act (expanding the FDA's authority), and essentially concludes "Eureka! The Kefauver-Harris Act is the cause of slower drug development!" He fails, however, to take several points into account: 1) New drug development begins to slow down in the mid-1950s, well before the passage of Kefauver-Harris, 2) As Philip Hilts, historian of the FDA, notes, the K-H Act would not have begun to significantly affect the development of drugs until the mid-1960s at least (any serious student of government policy knows that there is always a lag time between passage of a law and implementation of policy). Finally, 3) even though Europe did not make any policy changes during this period, there was a significant decline in new drug development in Europe at this time as well. So, a reasonable conclusion would be that the Kefauver-Harris Act coincided with a decline in drug development, without being a major cause of the decline. To attribute the decline in drug development to Kefauver-Harris, therefore, would be to seriously overestimate the cost of drug regulation.

As a result, we can't use Peltzman's findings as a basis for public policy. His numbers aren't reliable.
9.20.2009 1:20pm
yankee (mail):
That was my reaction as well. The assumption that consumers are more rational and less ignorant than voters strikes me as tenuous at best. The nature of most advertising, and its effectiveness, suggests to me that consumers are just as ignorant and irrational as voters.

And election advertising is the same way. But this assumption that consumers are less "ignorant and irrational" than voters is wholly without empirical foundation. There's mountains of evidence that voters are ignorant and commit cognitive errors, but there's also mountains of evidence that people are subject to irrational cognitive errors. As for "ignorance," empirical evidence would be much more worthwhile than claims that because consumers face better incentives than voters, they must be better-informed. Possible counter-effects:

1) Consumers face multitudes of consumption decisions, so they have little ability to become informed about any given purchase.

2) Information about government and politics may be easier to come by than relevant information about products, because much product information, although important, is "hidden." In the absence of government regulations, it would be all but impossible to know e.g. what the nutritional content of a given processed food product is, because manufacturers do not voluntarily release that information. Same goes for the amount of lead in kids' toys. By contrast, government and politics are front-page news every day.

I don't mean to claim that consumers are more ignorant than voters; I don't know. I just think abstract reasoning about incentives is not an adequate substitute for empirical evidence.
9.20.2009 1:49pm
Mac (mail):

I don't mean to claim that consumers are more ignorant than voters; I don't know. I just think abstract reasoning about incentives is not an adequate substitute for empirical evidence.



yankee,

Well, I agree and disagree. I think you are correct about there being no substitute for empirical evidence. However, the FDA process is far too long, bureaucratic and subject to politics. It is full of irrelevant procedures. Perhaps, the question should be how to get a bureaucratic organization to operate efficiently and effectively in the least amount of time. I don't think an answer to that question has ever be found. However, the FDA saves lives and it costs lives. It could be better, but there is no incentive for it to do so.

It is interesting that consumers overwhelmingly reacted negatively to the Government's plan to have the FDA regulate vitamins and minerals and herbs. I understand that the major chains test the products they sell for accuracy in the ingredients, both in product and amount. However, the smaller ones don't. There have been cases of rat poison found in Ginseng from Korea and prescription drugs such as the one that helps men have sex, (the actual name is blacklisted from this forum, I discovered, but it begins with a V) found in other products to give a few examples of egregious misrepresentation. However, consumers most adamantly don't want regulation. Not for efficacy or anything else. Interesting, no?




1

) New drug development begins to slow down in the mid-1950s, well before the passage of Kefauver-Harris.


Jestak,

Would this be before or after they discovered the vaccine for polio, without any Government help or funding, by the way?

I am curious as to your source for this information, please.
9.20.2009 5:40pm
David M. Nieporent (www):
That was my reaction as well. The assumption that consumers are more rational and less ignorant than voters strikes me as tenuous at best. The nature of most advertising, and its effectiveness, suggests to me that consumers are just as ignorant and irrational as voters.
The difference is incentives. It's rational for voters to be ignorant, because their decisions have virtually no impact on them. The same is not true of consumers.
9.20.2009 6:10pm
Benjamin Davis (mail):
Refighting real old battled. Go read Upton Sinclair's the Jungle folks. Capture through contract vs. capture in a democratic system - there is an intermediary in the second that may temper the rapacious results of capture through contract.
Best,
Ben
9.20.2009 6:12pm
Cornet of Horse:
Ben,

But we now have more experience with the democratic alternative than Sinclair did, and it is unclear that it is sufficiently attentive to minority rights to allow a majority to (ostensibly) give its imprimatur to trampling them. I say ostensibly, since due to the ignorance Somin highlights, that majority is in fact often aware of nothing of the sort.

To capture by contract(s) may well take a lot more work than to do so by political connection. Herding cats comes to mind, given the changes in the marketplace(s), particularly that for information, since Sinclair's time.
9.20.2009 6:32pm
Jestak (mail):
Jestak,

Would this be before or after they discovered the vaccine for polio, without any Government help or funding, by the way?

I am curious as to your source for this information, please.


Salk's polio vaccine was first tested in 1952; the Sabin vaccine was about 2 years behind that.

The data in Peltzman's own paper show a slowdown in drug development starting in the mid-1950s; Philip Hilts also notes this in his history of the FDA. The 1940s and 1950s were an especially fruitful time for pharmaceutical research (besides the Salk and Sabin vaccines, many major antibiotics were first developed in this period). Peltzman made the mistake of assuming that he could use that period as a baseline to estimate "normal" rates of drug development.
9.20.2009 6:42pm
Grover Gardner (mail):

Prohibiting the sale of a drug after successful safety testing has nothing to do with keeping people from people being killed by that drug.

BTW, the effectiveness testing takes by far the most time and resources.


Let's say someone with a rapidly metastasizing form of cancer takes a drug that is safe but ineffective, instead of pursuing a proven course of treatment. The result can be just as lethal.
9.20.2009 8:17pm
Grover Gardner (mail):

Would this be before or after they discovered the vaccine for polio, without any Government help or funding, by the way?


The safest, most efficient and most effective form of polio vaccine, the Sabin oral vaccine, was chosen and distributed worldwide as the result of studies conducted by the NIH.
9.20.2009 8:27pm
steverino:
Recall, if you will, the guy in the ponytail who stood up at a Bill Clinton campaign event and expressly stated that the relationship between government and the people was that of a parent to a child. As I remember it, he said "theoretically you are the father and we are the children," before going onto ask Bill what, if he were elected to the office of the nation's Daddy, was he going to do for the kids.

As far as I'm concerned the one thing the big-government paternalistic types can be forgiven is believing that their constituents can't run their own lives. What else could they possibly believe, given that they're elected into office by people who demand they be taken care of.

Add to that the fact that they are elected into office to solve the people's problems, make them worse, the only people who really benefit financially being the elected politicians, and their constituents still keep voting for them time and again, and it's no wonder they have contempt for the people.

Not fixing the problem equals a job for life.

The only change I would suggest to Mr. Solmin's piece is that I would change the wording from "Political Ignorance Increases the Risk of Regulatory 'Capture'" to "Political Ignorance Increases the Opportunity for Regulatory 'Extortion.'" I honestly wonder why people believe that those making the pay-offs are in the drivers seat when it comes to pay-to-play. Just ask those regulated by Barney Frank or Chris Dodd if these guys ever stay bought. It's the executives who get perp-walked into a Congressional hearing room. Never the guys demanding the pay-off. They get to sit in judgement.

I'm sure a significant portion is spontaneous advantage seeking, as nobody hates capitalism like a capitalist. But I believe the real money starts flowing in when draconian regulations are proposed. Usually for that very purpose.

Nice little business you have here. It'd be a real shame if anything happened to it.
9.20.2009 8:56pm
wm13:
You forgot to mention Standard &Poors and Moody's and the careful job they did of assessing the risks of senior tranche subprime mortgage-backed securities.

But you forgot to mention Fannie Mae and Freddie Mac and the careful job they did of assessing the risks of Fannie and Freddie mortgage-backed securities. I really don't see this meme as particularly persuasive in either direction.
9.20.2009 9:29pm
Off Kilter (mail):
Probably the most recent detailed history of the FDA is the chapter devoted to it in Ronald Hamowy's Government and Public Health in America (2007). The chapter, more than 100 pages long and with about a thousand footnotes, strongly supports the suggestions by Ilya of regulatory capture and perverse bureaucratic incentives.
9.21.2009 1:08am
Joe The Plumber (mail):
And the company will sue me if I voice my opinion that the basketballs suck.

Laugh out loud funny.

but they offer no real world alternatives, just theories.

You mean like the "theory" that consumer products can't be at all criticized (I guess you never read a blackberry storm review)?
9.21.2009 10:49am
Joe The Plumber (mail):
Much better to release untested drugs and just see how many people die before we find out there's a problem.

I think you need more straw for that, man...
9.21.2009 10:54am
Adam J:
David M. Nieporent - "The difference is incentives. It's rational for voters to be ignorant, because their decisions have virtually no impact on them. The same is not true of consumers." Are you sure about this? It can take an enormous amount of time to become a informed consumer, and it often seems far more efficient to rely on an expert's advice. Of course, the problem is that these experts (both government and private ones) can have perverse incentives to provide bad information.
9.21.2009 10:57am
Andrew J. Lazarus (mail):
and with about a thousand footnotes
That was Ann Coulter's defense, wasn't it?
9.21.2009 12:19pm
Fat Man (mail):
Are Voters Ignorant and Irrational?

If you think voters are ignorant and irrational, I have sad news -- Congressmen are even more ignorant and irrational.
9.22.2009 12:05am
Mac (mail):
Fat Man,

You win the thread!
9.22.2009 8:05pm

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