Who protects the consumer? Part Deux

Ralph Nader is a self-styled “consumer advocate” who back in the 1960s came to the attention of the public by publishing Unsafe at Any Speed, an attack on the Chevrolet Corvair. Unsafe at Any Speed was instrumental, unfortunately, in launching a massive expansion of government regulation of consumer goods, that is to say, of government bureaucrats telling adult free-born citizens which goods they shall or shall not be allowed to buy or sell.

Nader ran for president a couple of times, and we have a colleague who actually voted for him. One day at lunch our colleague was extolling his virtues, claiming that Nader had “done more for consumers than anybody.” We replied, “Really? More even than Thomas Edison?” We certainly thought our colleague’s assertion to be dubious, but we didn’t fully realize just how dubious until we recently re-read “Who Protects the Consumer?”, the seventh chapter of Free to Choose by Milton and Rose Friedman.

The Friedmans mention Nader at just a couple of different places in the chapter. The first involves the infamous Corvair. Our Dad actually owned a Corvair, purchased new in the early 1960s. Dad never encountered any safety issues, but in terms of mechanical reliability, the car was a lemon. In any event, the Friedmans on p.192 say the following.

Ralph Nader’s attack on the Corvair, the most dramatic single episode in the campaign to discredit the products of private industry, exemplifies not only the effectiveness of that campaign but also how misleading it has been. Some ten years after Nader castigated the Corvair as unsafe at any speed, one of the agencies that was set up in response to the subsequent public outcry finally got around to testing the Corvair that started the whole thing. They spent a year and a half comparing the performance of the Corvair with the performance of other comparable vehicles, and they concluded, “The 1960-63 Corvair compared favorably with the other contemporary vehicles used in the tests.”

The 1962 Chevy Corvair, an infamous subject of propaganda.

Nowadays Corvair fan clubs exist throughout the country. Corvairs have become collectors’ items. But to most people, even the well-informed, the Corvair is still “unsafe at any speed.”

Here “most people” includes our colleague, no doubt. But we do think it’s significant that the modern regime of consumer-product regulation was founded upon a case of pure malarkey. After all, if businesses were routinely harming consumers by carelessly selling harmful products, Nader and other advocates should have been able to motivate their agenda by finding a case of real negligence.

In reality, most of the harm to consumers is committed not by private business, but by government. For instance, we’ve heard self-styled consumer advocates on the radio going berserk over credit protection insurance sold by the credit card companies. The advocates might be right that the insurance does not provide full actuarial value but, after all, it costs only about $1 per month. Big deal, a $1 per month rip-off. Meanwhile, we ask ourselves, how much have we personally been harmed by, let’s say, Social Security? Not permitting us to save and invest our own money for retirement will end up costing us probably hundreds of thousands of dollars. Similarly, as Milton Friedman points out, consumer advocates curiously have little to say about tariffs and other trade restrictions, although they exact a substantial toll on consumers.

The Friedmans next mention Ralph Nader in connection with airline fares.

The case occurred in California, which is a large enough state to support several major airlines that fly solely within the state and as a result were not subject to CAB (Civil Aeronautics Board) control. Competition on the route between San Francisco and Los Angeles produced an intrastate fare that was much lower than the fare that the CAB permitted interstate lines to charge for the same trip.

The irony is that a complaint was filed before the CAB about the discrepancy in 1971 by Ralph Nader, self-proclaimed defender of the consumer….Nader could hardly have been under any illusions about how the airline case would be resolved. As any student of regulation would have predicted, the CAB ruling, later upheld by the Supreme Court, required intrastate companies to raise their fares to match those permitted by CAB.

So Nader’s complaint caused consumers to pay more, and it’s hard to believe that this result was inadvertent. Our colleague would have come closer to the truth if she had changed just one word–Nader has done more against consumers than anybody.

In the video (embedded below) accompanying the chapter, Milt takes us to Dayton(!), to recount the plight of Dayton Air Freight, a trucking company licensed by the Interstate Commerce Commission to truck freight between only Dayton and Detroit. At the time, the owners were struggling to get the ICC to license them for more routes. Fortunately, these licenses are no longer required, and the ICC has since been abolished, as has the CAB.

Indeed, the ICC found no defenders even among the consumer advocates in the panel discussion at the end of the video. In fact, Kathleen O’Reilly of the Consumer Federation of America argued for “elimination” of the ICC and other agencies that “have the major purpose of economically propping up a certain industry.” She then attempted to draw a distinction between those agencies and the “watchdog” agencies that she favors. But what prevents her watchdog agencies from also being captured by whatever industry they regulate? After all, when the ICC was created in the late 1800s, it too was intended to serve as a consumer watchdog.

Back when we lived in Washington, DC, we knew a guy who worked for the Consumer Product Safety Commission, regulating children’s toys. As part of his job, the taxpayers paid for this guy to attend the big toy convention in New York, where toy makers introduced their newest products. While in New York, representatives of the toy companies would wine and dine him at fancy restaurants. Do you believe the toy companies picked up the tab for this guy solely for the pleasure of his company? Or do you think maybe they did so to buy his favor? And if so, how do you suppose they got the idea that his favor might be for sale? The regulator gets treated to a lobster thermidor, and as a result, some kid shoots his eye out with a dangerous toy.

Well maybe, but not likely. Because fortunately, what protects the consumer is not government bureaucracy. What protects the consumer is competition among sellers.

Who protects the consumer? (Bumped)

The modern administrative and regulatory state–massive and intrusive–has its origins in the Progressive Era. And during that period, no book provided more political and ideological momentum for regulatory intervention than Upton Sinclair’s The Jungle (1906), a lurid account of alleged unsanitary conditions in the meatpacking industry. Sinclair’s account was fictionalized, and to some degree sensationalized, but it nonetheless provided the impetus for passage of the Meat Inspection Act, as well as the Pure Food and Drug Act. The modern regulatory state was off and running.

Nowadays, many people, perhaps even most economists, have come to believe that the administrative and regulatory state has grown too burdensome and intrusive. But hardly anyone questions the particular regulations requiring federal meat inspections. In fact, meat inspection is considered so essential that Congress acted specifically to exempt meat inspection from the recent budget cuts mandated by sequestration. After all, nobody wants to eat tainted meat!

Indeed, given the seemingly obvious need for the government to inspect meat, anyone who expressed doubt about that necessity would be widely ridiculed as an anti-government crackpot. Here at Yet, Freedom!, our position on federal meat inspection is: Meat inspection? What meat inspection? A recent report reveals that federal inspectors aren’t even doing their jobs.

The Food Safety and Inspection Service’s (FSIS) enforcement policies do not deter swine slaughter plants from becoming repeat violators of the Federal Meat Inspection Act (FMIA). As a result, plants have repeatedly violated the same regulations with little or no consequence. We found that in 8 of the 30 plants we visited, inspectors did not always examine the internal organs of carcasses in accordance with FSIS inspection requirements, or did not take enforcement actions against plants that violated food safety regulations. As a result, there is reduced assurance of FSIS inspectors effectively identifying pork that should not enter the food supply…

Finally, we found that FSIS inspectors did not take appropriate enforcement actions at 8 of the 30 swine slaughter plants we visited for violations of the Humane Method of Slaughter Act (HMSA). We reviewed 158 humane handling noncompliance records (violations) issued to the 30 plants and found 10 instances of egregious violations where inspectors did not issue suspensions. As a result, the plants did not improve their slaughter practices, and FSIS could not ensure humane handling of swine.

Sounds like there’s little evidence that federal meat inspection makes much of a difference. And so here we have government failing even at its foundational regulatory task, the very first and highest-priority task assumed by the regulatory state over 100 years ago. If after all this time, government can’t manage to usefully perform meat inspections, what reason is there to believe that government can effectively carry out any of its other regulatory tasks? If government regulators can’t keep feces off a pig carcass, how can they usefully regulate markets for complex financial derivatives, or navigate the chinoiseries of 50 different state markets for health insurance? Of course they can’t, which is why the fact that the banking industry was the most regulated sector of the entire economy did not prevent the great financial crisis of 2008.

So are we therefore doomed to forever be exposed to tainted meat? Not inevitably, because what protects the consumer is primarily not government regulation, but competition. Remember when the New York city government fell several years behind schedule in performing restaurant inspections? Did that mean that NYC restaurants became noticeably less safe? Should people have avoided NYC eateries? No, because NYC has some 16,000 different eateries in competition, which insures good customer service, including safe food.

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Six Lies about U.S. Schools (Bumped)

At thefederalist.com, Joy Pullmann puts together a good list of “Six Lies Most People Believe about U.S. Schools.” We have to agree in particular with lie number 1 on the list:  “America’s rich, suburban schools are high quality.”

The Global Report Card has recently layered specific, nationwide figures upon broader comparisons that have long demonstrated our mediocrity. Its authors give Beverly Hills as one example. It represents most affluent suburban districts, which Americans typically think contain great schools. But they don’t. “If Beverly Hills were relocated to Canada, it would be at the 46th percentile in math achievement, a below-average district. If the city were in Singapore, the average student in Beverly Hills would only be at the 34th percentile…” The schools everyone thinks are so great are only so because we compare them to our truly awful urban districts, rather than to actual peers.

Unfortunately, our own personal experience concurs with this assertion. We are constantly coming across students who attended allegedly good high schools but who nonetheless demonstrate a poor grasp of proper high school material. In one recent case, a student, while sitting in our office, related to us that his parents moved to the suburbs precisely so that he would not need to attend the awful Chicago city schools. But only moments later, this same student, while going over some economics problems, revealed a distinct lack of proficiency with middle school (not high school–middle school) level math.

Further evidence that suburban schools are deficient is the fact that, as reported previously on this site, the proportion of high-school seniors who test proficient in U.S. history is only 12%. For the figure to be this low there must be an awful lot of above-average students at above-average schools who are not learning what they’re supposed to.

Apparently, parents are either not willing or not able to judge their children’s schools on the basis of academic substance. It seems that parents judge the school “good” so long as the child seems reasonably happy, and the child doesn’t get pregnant, or victimized by crime, or fall in with the stoner crowd. Talk about defining success down.

We could say a lot more, but it’s usually better to let Milton Friedman do the talking. Here is Friedman’s classic video, “What’s Wrong with our Schools?”

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Should the rich give back? (Revised)

In recent years, we have heard much rhetoric aimed at demonizing “the 1%” of richest Americans, who are supposedly guilty of somehow victimizing “the 99%.” We even saw a bumper sticker recently that proclaimed “I am the 99%” as if that were something to be proud of. Even more appalling, we have heard from students that some of this rhetoric has even found its way into classrooms at UD. And three years ago we all had to endure an election campaign during which we were told repeatedly that the rich were not “paying their fair share.”

Is that right? Do the richest 1% owe something to the other 99%? Should the rich have to “give back?”

Logically, the rich should only have to give back if they have taken something. But is that how Bill Gates and Steve Jobs got rich? By taking? No, clearly not. They got rich by innovating and producing products that people wanted and that greatly improved people’s lives. The fact is that virtually all progress in our economy and in our society comes from a tiny minority of talented, hard-working, and successful entrepreneurs, scientists, and engineers. The rest of the population reaps the benefit of the improvements brought about by this tiny minority. On this point, Harry Binswanger, writing recently in Forbes, quotes the famous novelist Ayn Rand:

When you work in a modern factory, you are paid, not only for your labor, but for all the productive genius which has made that factory possible: for the work of the industrialist who built it, for the work of the investor who saved the money to risk on the untried and the new, for the work of the engineer who designed the machines of which you are pushing the levers, for the work of the inventor who created the product which you spend your time on making . . .

Or as someone once aptly put it, no poor person can give you a job.

Similarly, in their classic treatise Free to Choose, Milton and Rose Friedman note that

economic and social progress do not depend on the attributes or behavior of the masses. In every country, a tiny minority sets the pace, determines the course of events. In the countries that have developed most rapidly and successfully, a minority of enterprising and risk-taking individuals have forged ahead, created opportunities for imitators to follow, have enabled the majority to increase their productivity.

The argument is also laid out clearly in the brief video below, produced by the Atlas Network. The video highlights the essential point that profits are moral, so long as they arise through voluntary exchange. Profits become morally dubious when they involve involuntary exchange, which usually involves government creating for someone a special privilege.

All the aforementioned suggests that the 99% owe a lot to the 1%. Harry Binswanger, in fact, runs with this idea and, in the spirit of Jonathan Swift, makes a modest proposal–that the 99% should give back to the 1%!

Anyone who earns a million dollars or more should be exempt from all income taxes. Yes, it’s too little. And the real issue is not financial, but moral. So to augment the tax-exemption, in an annual public ceremony, the year’s top earner should be awarded the Congressional Medal of Honor.

Imagine the effect on our culture, particularly on the young, if the kind of fame and adulation bathing Lady Gaga attached to the more notable achievements of say, Warren Buffett. Or if the moral praise showered on Mother Teresa went to someone like Lloyd Blankfein, who, in guiding Goldman Sachs toward billions in profits, has done infinitely more for mankind. (Since profit is the market value of the product minus the market value of factors used, profit represents the value created.)

We’re not sure that the rich should literally enjoy a zero marginal tax rate, but we do agree that a society that celebrates business success is healthier, and morally superior, to a society that denigrates it. A society that denigrates and demonizes the successful, will not end well. This point was made vividly by the great science-fiction writer Robert Heinlein.

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as “bad luck.”

Are young people today learning to celebrate success, or to resent it? Do they respect rich people for their success, or do they feel instead that the rich owe them something? Adam Carolla, in the following epic rant, suggests that resentment of achievement is on the rise. If he’s right, it does not bode well for the future.

Language Warning: Not appropriate for children. Also, for Campus Crybullies: Trigger Warning.

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Redistribute GPAs? (Revised)

In chapter three of The Road to Freedom, Arthur Brooks points out that many of his students at Syracuse University believed that the government should redistribute wealth from rich to poor. Brooks proposed to the students the following idea. He would “take a quarter of the points earned by the top half of the class and pass them on to the students in the lower half of the class.” Despite their support for wealth redistribution, the students “were in unanimous agreement that this was a stupid idea.” Of course, but what’s the difference between grade-point redistribution and wealth distribution? If redistributing GPAs is wrong, doesn’t it follow that redistributing wealth is also wrong?

Turns out that Brooks is not alone in making this analogy, and many students have taken the opportunity to post amusing Youtube videos in which their fellow students struggle to explain why they support redistribution of wealth but not GPAs.

 

The GPA analogy must have hit a nerve, because “progressive” students got out their video cameras to make responses. Check out this reply by the young tax experts at something called TYT (The Young Turks) University.

 

To the best we can discern, the young people in this video make two main points.

First, the top 1% of rich people are not paying their fair share of taxes, as evinced by the fact that Mitt Romney paid only 13% of his income, while middle-class people typically have to pay a higher rate.

We agree that rich people should pay more in taxes than should middle-class or poor people. But the U.S. tax code is already very progressive. The top 1% of earners account for more than one-third of the income-tax revenue, and the top 10% account for more than one-half.

Furthermore, the 13% figure is grossly misleading. As the Young Turks themselves acknowledge, Romney’s tax rate was relatively low because the vast majority of his income was derived from investments, which are taxed at 15%, lower than the rate on “ordinary” income. What the Young Turks probably don’t realize is that there was a time, years ago, in this country when investment income was in fact taxed at a rate similar to that on ordinary income. That policy didn’t work out very well because the tax deterred investment and didn’t do much to generate revenue. As a result, something like a bipartisan consensus formed to tax investment income–dividends and capital gains–at a lower rate.

Nevertheless, it is not true that investors like Romney are taxed at only 15%, and that is because taxing investment income amounts to double taxation. The money that investors use to purchase securities comes from after-tax income. The money that Romney invested was already taxed–as ordinary income–at the time that he first earned it. If he had immediately blown the money he earned on hookers and booze, he would have owed no further tax. That’s because current consumption is taxed only once. But since Romney invested the money instead of spending it, he’s taxed again. Future consumption is taxed more than once, which creates a distortion and an inefficiency. It follows that the efficient tax rate on investment income is (approximately) ZERO, which happens to be the actual rate in Japan. The Young Turks think 15% is too low, but in fact the rate should be near zero!

Future consumption, however, is not just double taxed, it is triple taxed. That’s because, before the corporations get around to paying Romney his dividends, they must first pay the corporate income tax. At 35%, the U.S. has one of the highest corporate income tax rates of any country in the world. The tax accountants, however, usually find enough deductions so that corporations pay on average about 25%. Still, that means that Romney’s dividends were already taxed at 25% before being payed out to him, and then taxed another 15% when he received them. The combined effect of these taxes is 36.25%, and again, this falls on top of the taxes Romney already paid during the year in which he first saved the money.

Maybe the Young Turks should learn something about our tax system before they upload their thoughts about it to youtube.

The second major point the Turks try to make is that competition in the marketplace, unlike competition for school grades, is fundamentally unfair. Indeed, the female Turk argues that “the 1%” are “mostly bankers” who got rich by “cheating” or otherwise doing unspecified things “that society frowns upon,” and so they do not “deserve” the money that they have. The male Turk then uses bribery as a metaphor to describe how the rich got rich. In short, the whole system, according to the Turks, is rigged.

But can this be true? Did Henry Ford get rich by bribery, or by revolutionizing the auto industry? Did Bill Gates get rich by bribery, or by revolutionizing the computer industry? Was Steve Jobs a crooked banker? Look, nobody said life was fair, and we can always dig up examples of people trying to gain unfair advantage by engaging in various shenanigans. The fact remains, however, that our largely (for now) market-oriented system does, for the most part, reward hard work and ingenuity.

We do find it disturbing that young people in particular should argue that the system is rigged and opportunity a mirage. Young people, with the chance before them to shape their entire adult lives, should be optimistically planning and pursuing their dreams, not whining about how the deck is hopelessly stacked against them. For this failure, some of the blame must be assigned to the schools.

Furthermore, even if we accept the Young Turk argument that people are cheating, how does this justify redistribution? For instance, to pursue their own metaphor, suppose that some people were obtaining high grades by resorting to bribery. In that case, would the obvious solution be to redistribute grades by giving extra marks to those who have not earned them, and in the process perhaps also taking marks away from those who did earn them? Or would the proper response be to, you know, put a stop to the bribery?

And which is the economic system that facilitates getting ahead through ‘bribery’ of one sort or another? That would be a socialistic system, where government officials have the power to determine who gets what, where, when, and how. If the Young Turks really want to abolish the role of ‘bribery,’ they should advocate for free markets.

The really interesting thing, however, is that the Turks felt compelled to argue that the rich did not earn their wealth legitimately. Inadvertently, they have effectively conceded the point that wealth earned legitimately should not be redistributed! Since different people have widely varying willingness and abilities to legitimately create wealth, it follows that wide disparities of wealth can exist without justifying distribution, just as wide disparities exist in GPAs. That was indeed the exact point that the GPA analogy was intended to make. As the kids say, “Game over.”

We cannot conclude this post, however, without noting Female Turk’s really jaw-dropping argument that the way the rich “give people opportunities” is by “paying taxes.” Oh, is that where opportunity comes from? Only through government? Gosh, all these years we thought that rich people gave opportunities by starting and expanding businesses and thereby creating jobs, and by developing new products and services that improve our standard of living.

Female Turk–another proud product of modern America’s schools.

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Videos: “I, Pencil” and “I, Smartphone” (Revised)

We recently posted video of Milton Friedman discussing Leonard Read’s famous essay, I, Pencil. A good video adaptation of the essay, embedded below, was made by the Competitive Enterprise Institute.

See also below the video I, Smartphone, a brilliant take-off on I, Pencil. The video runs through a lengthy list of just some of the many diverse and far-flung countries–on several different continents–that are involved in producing various inputs and components of the phone. Just this hint at how many countries and inputs are involved in the process makes clear how utterly impractical is Donald Trump’s recent proposal to force Apple to produce its phones in the U.S. The idea really is completely absurd.

Video: Created Equal (Bumped)

Here is the video corresponding to chapter 5 of Free to Choose, covering the topic of fairness and equality. Don’t miss in particular the concluding roundtable discussion in which the great Thomas Sowell lays the smackdown on Socialist Frances Fox Piven.

Money quote, from Milt: “In this world, the greatest source of inequality has been special privileges granted by government.”

For more on fairness and the profit motive, see the short clip below from Milton Friedman’s 1979 guest appearance on Donahue. Phil Donahue, who started his career in Dayton, gets schooled.

 

 

The Lesson of the Pencil (Bumped)

In the first chapter of Free to Choose, as well as in the accompanying video, Milton Friedman briefly discusses Leonard Read’s famous essay, I, Pencil. Friedman elaborates at greater length in the video below.

As Friedman says, no one in the world knows how to make a pencil, at least not entirely from scratch. To make a pencil from scratch would require knowing how to mine the ore to produce the steel to make the saw that cuts the tree that provides the wood, and so on and so on. No only does no single person possess this knowledge, but we daresay there is probably no collection of even 1,000 people who could together provide the required knowledge.

Once we think about it, we realize that even the humble pencil is a very complex thing. But is that the whole lesson of the pencil? Is the lesson merely that a seemingly simple thing can involve great complexity? What is it about the production of the pencil that is so remarkable?

It is that the price system can coordinate the diverse and voluntary activities of all of the many people involved in the production process without orders being given or a plan being imposed by a single, overarching authority. Indeed, no system of command and control, such as employed by the military for example, could successfully coordinate all the activities required to make a pencil. On D-Day in 1944, Allied forces managed–barely–to execute the most complex military plan in history, but Allied high command could never have managed to produce from scratch a simple pencil without the help of markets and prices.

Video: The Tyranny of Control (Bumped)

Here is the video corresponding to chapter 2 of Free to Choose.* The “high-tech” consumer goods displayed around the 23-minute mark are not too impressive by today’s standards, but remember that the film was produced over 30 years ago. The Japanese weaving machinery, however, still seems impressive even after all these years, and the contrast with the trade-protected and primitive hand-loom industry in India is astonishing. The example of the Indian weaving industry demonstrates vividly that trade protection stifles innovation and in the long run creates an industry that is weaker, not stronger.

Another vivid example is provided by the protected Indian auto industry, as shown in the second video embedded below, an excerpt from The Commanding Heights, a PBS documentary from 2002. Some of the remarkable take-away facts about India:

  • Trade-protected Hindustan motors was founded the same year as unprotected Toyota. Fifty years later, Toyota produced 5 million cars per year; Hindustan motors, 18 thousand, and to an antiquated design that never changes.
  • 12-24 months, and 50 visits to the capital city, required to obtain a permit to import a single $1500 computer.
  • A 15-year waiting list to buy a car.

*Bonus points if you can identify the classical piece that plays at about 24:05. And in case you think the question absurdly recondite, note that 50 years ago, before the baby boomers destroyed the culture, many students would have known it.

Economic freedom: Hong Kong vs. India (Bumped)

In the first chapter and episode of Free to Choose, Milton Friedman spotlighted Hong Kong as a prime example of a relatively free economy. In the second chapter and episode, Friedman discussed the baleful effects of economic planning and control in India. In the video below, John Stossel makes the contrast between Hong Kong and India explicit and direct. Whereas Friedman focused primarily on the freedom to engage in international trade, Stossel asks the simple but very revealing question: How easy is it to start a business?

This ABC special dates from 1999, and includes a cameo appearance by an 87-year-old Friedman. The show runs over 40 minutes, but the best and most relevant portion is Part One, which consists of just the first 16 and a half minutes.

This show makes the case for economic freedom more powerfully than almost anything else we have seen. Indeed, Part One is perhaps the greatest 16 1/2 minutes in the history of television. Or at least the most truth-packed. And the rest of the show is pretty great too, in particular the point near the end when Stossel tells the Calcutta politician to his face that his policies are “stupid.”

Update: Another highlight was when Stossel explained the difference between freedom and democracy. India has more democracy than Hong Kong, but Hong Kong has more freedom.