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.

Senior Citizens Won’t Admit that Medicare is Welfare

Perhaps the biggest obstacle to reforming our unsustainable welfare state is that most of the welfare recipients refuse to acknowledge that they are, in fact, welfare recipients. They feel that, one way or another, they’re entitled to the benefits. For instance, as we discussed with our students, retirees in the past have often collected Social Security payments amounting to many times their lifetime contributions. In particular, folks who retired back in the 1950s collected on average more than 10 times what they paid in. Yet almost all of these people, if you asked them, would deny being beneficiaries of government largess.

In an excellent piece at washingtonpost.com, Catherine Rampell reports that seniors are also unwilling to recognize the massive government subsidy implicit in the Medicare program.

[R]espondents were asked whether they personally receive a government subsidy to help them pay for health insurance. The overwhelming majority — 85 percent — said no. The age group most likely to say this? Again, those over age 65, 93 percent of whom insisted they do not receive any such subsidies.

This is astounding, given that the lion’s share of people in this cohort receive Medicare. Despite all the mockery that oblivious cries of “Keep your government hands off my Medicare!” generated several years ago, older Americans still don’t seem to understand that Medicare is not only the government’s largest health-care program but also one that involves transferring lots of money away from everyone else and toward them — i.e., a subsidy.

Folks are apparently kidding themselves that they’re getting no more than what they paid for. But that’s not even close to being true.

[A] single male who earned an average wage, was employed every year from age 22 to 64 and turned 65 this year would have paid about $70,000 into the Medicare system, in inflation-adjusted terms. Sounds like a lot, right? But bear in mind that he should expect to receive about $197,000 in Medicare benefits. A two-earner couple of the same age, both of whom also worked every year since age 22 at the average wage, would have paid in $141,000 to get some $427,000 in benefits.

So basically a ratio of about three to one.

As Rampell points out, however, it’s not just seniors who have their health insurance subsidized. Health insurance subsidies are received by the vast majority of Americans.

There are the 9 million leeches who receive subsidies through the Obamacare exchanges, yes, and the nearly70 million moochers who use Medicaid or the Children’s Health Insurance Program, or CHIP, benefits. But the largest group of Americans who benefit from government health-care subsidies — without often acknowledging it — are those who receive employer-sponsored insurance.

Like me, about 158 million Americans receive insurance through employers. The exclusion from workers’ taxable income of employer-sponsored health insurance costs the federal government about $250 billion each year. Why? Your employer gets to deduct the costs of compensation provided to you in exchange for your services, whether it’s salary, bonuses, health-care costs or even a BMW. But while the value of that salary, bonus and Beemer are all taxable to you, the tax code explicitly lets you ignore the value of those health-care benefits when calculating how much you owe Uncle Sam in payroll and income taxes.

So what’s the problem with people getting all these government subsidies to pay for health care? After all, people need health care, and it’s very, very expensive. Three problems:

1. The unsustainable growth of the programs threatens to bankrupt the government, which could lead to default and a major financial crisis.

2. The subsidies breed government dependency and undermine the character traits of accountability and individual responsibility necessary to the maintenance of a free republic.

3. A large part of the reason for why health care has gotten so expensive is the subsidies themselves. The subsidies increase the demand for health care which drives up prices.

Like an alcoholic, the first step toward a cure would be for Americans to admit they have a problem.

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The Greatest Retirement Crisis In American History

This article in Forbes suggests that very few baby-boomers are likely to experience the glorious retirements depicted in Viagra commercials. It looks instead like a steady diet of ramen and sugar water:

Our national demographics, coupled with indisputable glaringly insufficient retirement savings and human physiology, suggest that a catastrophic outcome for at least a significant percentage of our elderly population is inevitable. With the average 401(k) balance for 65 year olds estimated at $25,000 by independent experts – $100,000 if you believe the retirement planning industry – the decades many elders will spend in forced or elected “retirement” will be grim.

Notable and quotable

In A Nation of Takers (p. 57), Nicholas Eberstadt, our guest speaker this week, writes about the appalling number of Americans turning away from self-reliance by gaming the system of disability insurance.

In the two years between January 2010 and December 2011, for example, the U.S. economy generated 1.73 million nonfarm jobs–but added almost half as many (790,000) workers to the roll of federal disability payments. Nor can this perverse pattern be discounted as a short-term phenomenon peculiar to the nature of the recovery from the crash of 2008. Over the fifteen years between December 1996 and December 2011, America gained 8.8 million nonfarm private-sector jobs–and 4.1 million workers on disability payment. In the decade between December 2001 and December 2011, nongovernment nonfarm employment rose by fewer than 1 million jobs (828,000), while the ranks of the working-disabled swelled by over 3 million…

Distinguished guest speaker: Nicholas Eberstadt

For the benefit of those of our readers in the Dayton area, we are pleased to announced that on Tuesday, March 12, we will be hosting a guest lecture by Nicholas Eberstadt of the American Enterprise Institute.

Dr. Eberstadt has put out an important new book, A Nation of Takers, about how the entitlement epidemic is bankrupting the U.S. government and weakening the character of the American public.

The talk is open to the public and takes place from 3:00 – 4:00 in Miriam Hall, Room 102, on the campus of the University of Dayton.

Join us on March 12 for a very enlightening discussion of a topic of the utmost importance to the future of our nation.

It can’t happen here

Start by imagining, if you will, a country that is one of the richest countries in the world, whose most popular politician of all time was a self-proclaimed “social democrat,” elected on a platform of “social justice.” Indeed, the current government’s priority is to provide “low-income housing, infrastructure and transfers to poor families with children,” and the public sector is relatively large. The government pursues its progressive agenda fairly unencumbered by retrograde social forces such as Tea Partiers or gun-toting rednecks.

In this almost ideal progressive setting, what could go wrong? Ladies and gentlemen, we give you Argentina, once one of the most prosperous and advanced countries in the world, now brought to its knees by 60 years of socialism. The country’s income per capita is now only 37 percent of the U.S. level, and in recent years, the country has seen hunger and food riots. And notably, the government is now systematically cheating people out of their pensions.

The pension saga is particularly instructive, and we may start the story in 2001-02, when the government’s massive spending causes a severe economic crisis and inflation. The government defaults on its debt, and as a result, markets will lend to the government only at rates higher than the government can afford. The government, in fact, has issued no new debt for the past five years. Desperate for cash, the government seizes people’s personal, privately managed, pension funds. This would be analogous to the U.S. government seizing people’s 401(k)s. In any event, the confiscation enables the Argentine government to turn the pensions into a “slush fund” used to pay for typical giveaways and boondoggles, and also lets the government off the hook for paying off the government bonds held by the pension funds.

The people who have lost their funds are given an unfunded promise that in retirement they’ll be taken care of by the government–similar to the unfunded Social Security system in the United States. Except that inflation is still raging, perhaps as high as 25% annually, and the government does not want to have to give pensioners such a large cost-of-living adjustment. The Supreme Court rules, however, that the pensions must indeed be indexed to inflation.

To avoid making the full indexed payments, the government proceeds to falsify the inflation figures, reporting inflation of only about 9%. And when economists dispute the phony inflation figures, the government goes full-fascist and tries to intimidate them by levying fines and filing trumped-up criminal charges.

Argentines now speculate that the government is hoping to delay long enough so that enough retirees die off before it has to pay them.

“It’s their sick little game,” says Juan Alberto Suárez, a 79 year-old whose lawsuit has not yet been resolved eight years after it was filed. “They want us to die before they have to give us what’s ours.”

Behold where leads the agenda of “social justice,” very nearly the antithesis of ordinary, plain old,…you know… justice.

But don’t worry! This is Argentina, not the USA. Nothing like that could ever happen here.