Regulating charity

Imagine that you encountered a hungry person and, rather than handing them money, instead decided to cook them a meal. While perhaps you don't consider this action anything heroic, at the very least it would seem to mark you as a responsible, caring citizen. In Houston, however, you would be viewed as a criminal:

Bobby and Amanda Herring spent more than a year providing food to homeless people in downtown Houston every day. They fed them, left behind no trash and doled out warm meals peacefully without a single crime being committed, Bobby Herring said.

That ended two weeks ago when the city shut down their "Feed a Friend" effort for lack of a permit. And city officials say the couple most likely will not be able to obtain one.

...Anyone serving food for public consumption, whether for the homeless or for sale, must have a permit, said Kathy Barton, a spokeswoman for the Health and Human Services Department. To get that permit, the food must be prepared in a certified kitchen with a certified food manager.

The regulations are all the more essential in the case of the homeless, Barton said, because "poor people are the most vulnerable to foodborne illness and also are the least likely to have access to health care."

Bobby Herring said those rules would preclude them from continuing to feed the 60 to 120 people they assisted nightly for more than a year. The food had been donated from area businesses and prepared in various kitchens by volunteers or by his wife.

This story nicely captures so much of what is wrong with regulatory state. It first assumes that people are stupid, evil or some combination thereof, in this example either on the part of the homeless for eating poisoned food or the preparers for making it. Second, it acts as a barrier to the provision a useful service or product, and may cause its provision to cease altogether. Third, it may even be counter-productive. Instead of having access to home-cooked meals, for example, the homeless may instead resort to other options such as dumpster-diving, which runs a much higher risk of contracting a food-borne illness than the meals they were previously receiving.

While these regulations were presumably put in place to protect the homeless either from themselves or others, it is rather apparent that what they really need protection from is such mush-brained paternalism.

But let's dig a little deeper into the issue and attempt to figure out what would be required if one wanted to serve the homeless in proper government-approved fashion. According to the city of Houston's website, to become a certified food manager one must take a two day course, pay $70 and pass an exam with a score of a score of at least 70 points.

Here are a couple of gems from the Food Service Manager's Certification manual (click to enlarge):

Potentially more onerous, however, is the certified kitchen requirement, which is apparently sufficiently burdensome that it has even prompted a business model based on avoiding the regulatory hassle. Although unable to determine the kitchen certification process after perusing the website, I  did notice the regulatory requirements for mobile food units, which are perhaps the next best thing. Now, in a system of limited government the process for setting up and operating such a business would look something like this:

• Buy truck
• Cook food
• Drive around and sell food
• Return home to roll around in piles of money and light cigars with $100 bills (kidding!)
• Pay taxes

Suffice to say this is not the system that exists in Houston. Among the paperwork one must file:

• A route list (Who cares?)
• Restroom availability letter (Whaaa?)
• Menu disclosure (Why? Also note the Spanish translation for item #5 lists tacos de fajita and menudo as food examples while the English version does not)

Each one of these requirement serves as at least some small barrier to someone starting a business. At best it is just one more hoop that one must jump through, while at worst it could be enough to halt the business altogether (and remember, the fewer resources someone has, the more of an obstacle each regulation becomes). Something to consider next time you are exposed to a rant about the alleged evils of deregulation.

Regulating toys and guns

In his latest column Nick Kristof poses the following question:

To protect the public, we regulate cars and toys, medicines and mutual funds. So, simply as a public health matter, shouldn’t we take steps to reduce the toll from our domestic arms industry?

But is Kristof's implied premise -- that regulation of these other areas has proven beneficial -- correct? Let's review our experience with regulation in these sectors:

Cars: The first instance of federal safety regulation of the auto industry occurred in 1940, when automobile design legislation was passed concerning sealed beam headlamps. After that nothing much occurred until the mid-1960s as pressure began to mount for more regulation (with Ralph Nader figuring prominently), culminating in the Highway Safety Act of 1970 which established the National Highway Traffic Safety Administration.

Did highway safety improve after such regulation was implemented? Yes. But as this chart reveals, safety had been improving long before such regulations were put in place:

Meanwhile, as this paper from a University of Nebraska economist notes:

In a column for Automotive News in May 2000, Murray Weidenbaum stated that safety and emission requirements added $2,500 [over $3,000 in 2009 dollars] to an average new automobile’s price. The higher price forcing motorists to drive their old cars longer before they replace them largely cancels out intended environmental and safety benefits, Weidenbaum observes (2000, p. 14).

Thus, an argument can be made that regulations have actually been counterproductive by raising the cost of cars and keeping people in less safe vehicles than would otherwise be the case. Does this augur in favor of regulation? Suffice to say that is less than clear.

Toys: In the statist mindset if there is one product that deserves to be regulated it is toys. After all, if government won't look after the children who will (other than, ahem, the parents)? In reality, however, toy regulation is best understood as a means for big business to crack down on its competitors as Tim Carney explains:

Under the Consumer Product Safety Improvement Act (CPSIA), every manufacturer of children's products whether a toy truck, a pacifier, a picture book, or a kid-sized stool must submit their products to independent tests for lead and other chemicals before selling them. Well, all manufacturers except for Mattel, the largest toymaker in America.

Recently, the Consumer Product Safety Commission (CPSC) voted unanimously to grant Mattel an exemption from the CPSIA's third-party testing requirement. The law provided for such exemptions if a company can demonstrate it has its own testing facilities that meet a certain standard.

Mattel in 2007 and 2008 lobbied for this provision, and lobbied for the overall bill, prompting the usual cries of "wow, even industry is on board!" Of course, Mattel was already completing its own in-house testing operation as a reaction to the bad publicity and litigation resulting from a handful of recalls of its toys containing unsafe levels of lead.

In light of the company's poor practices, the market and the courts forced Mattel to ramp up testing of its products. Then Mattel lobbied to force the same burdens on every competitor, even the man hand-carving toddler-sized chairs in his backyard workshop.

...Remember, Mattel lobbied for this bill, and the Toy Industry Association said "we were early proponents of adopting mandatory laws to require toy testing." Hasbro, the second-biggest toy-maker behind Mattel, hired lobbyists for the first time in its history in order to back the CPSIA.

The regulation--even without the exemption for Mattel--imposes crushing burdens on smaller manufacturers and moderate burdens on the biggest manufacturers. If you have to test a sample from each "product line," but your "product line" is about 50 hand-sewn baby dolls, you might just close up shop. For Mattel, it's just a new expense.

More on the CPSIA's impact on small toy makers here, here and here. Is this really a model worth following?

Medicine: The downside of federal regulation of medicine is quite obvious, as John Stossel points out:

[Bruce] Tower has prostate cancer. He wanted to take a drug that showed promise against his cancer, but the Food and Drug Administration would not allow it. One bureaucrat told him the government was protecting him from dangerous side effects. Tower's outraged response was: "Side effects — who cares? Every treatment I've had I've suffered from side effects. If I'm terminal, it should be my option to endure any side effects."

Of course it should be his option. Why, in our "free" country, do Americans meekly stand aside and let the state limit our choices, even when we are dying?

Dr. Alan Chow invented a retinal implant that helps some blind people see (optobionics.com). Demonstrating that took seven years and cost $50 million dollars of FDA-approved tests. But now the FDA wants still more tests. That third stage will take another three years and cost $100 million. But Chow doesn't have $100 million. He can't raise the money from investors because the implant only helps some blind people. Potential investors fear there are too few customers to justify their $100 million risk.

So Stephen Lonegan, who has a degenerative eye disease that might be helped by the implant, can't have it. Instead, he will go blind. The bureaucrats say their restrictions are for his own safety. "There's nothing safe about going blind," he says. "I don't want to be made safe by the FDA. I want it to be up to me to go to Dr. Chow to make the decision myself."

In other words, federal regulation is keeping potentially helpful remedies out of the hands of people who most desperately need them. How does that serve the interest of anyone? Why is this a regulatory model worth embracing?

Mutual funds: This is a more difficult subject to comment upon, as mutual funds first appeared in the mid-1920s, suffered along with the rest of the stock market in the crash of 1929, and then was regulated shortly thereafter via the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940. Thus, comparing mutual funds before and after regulation is difficult. However, it's worth noting that finance is arguably the most regulated sector of the US economy and yet has still been plagued with problems, helping to precipitate the most recent recession.

Why Kristof believes that our experience with regulation in these areas should lead us to embrace the increased regulation of firearms is far from clear.

The deregulation delusion

According to the received wisdom in many Washington policy circles, most notably those inside the White House, last year's financial crisis arose from either insufficient regulation or even alleged deregulation. The problem with that narrative, however, is that it's awfully difficult to square with the facts. As Ryan Young writes:

In a December 3 article in Politico ("J-O-Bs should come before GDP"), Rep. Phil Hare argues that "reckless deregulation" is one of the causes of the current economic crisis. That isn't actually true. This year's edition of the Competitive Enterprise Institute's Ten Thousand Commandments report found that 3,830 new regulations came into effect in 2008 alone.

Over 30,000 total new rules passed during the Bush years. Hardly any were repealed. Businesses currently dole out the equivalent of Canada's entire 2006 GDP - about $1.2 trillion - just to comply with federal regulations.

Where is the deregulation?

263,989 people make their living working for federal regulatory agencies, according to research from the Mercatus Center. That's an all-time high. 12,190 of them regulate financial markets from Washington. More are based in New York and other financial centers. None of these figures include state and local rules and regulators. Those cost extra.

To what Young points out I would also add this:

Indeed, finance is one of the most regulated sectors in the private sector (along with health care -- any coincidence both suffer from so many problems?). So what has all of these rules, regulators and money spent on enforcement provided us? Clearly not financial stability. In fact, it appears misguided regulation actually contributed to the 2008 financial crisis.

Witness today's New York Times article on the role of credit rating agencies:

Without question, the credit rating system is one of the capitalism’s strangest hybrids: profit-making companies that perform what is essentially a regulatory role. The companies serve the public, which expect them to stamp their imprimatur on safe securities and safe securities alone. But they also serve their shareholders, who profit whenever that imprimatur shows up on a security, safe or not.

To make matters more complicated, rating agencies are deeply entrenched in millions of transactions. Statutes and rules require that mutual fund and money managers of almost every stripe buy only those bonds that have been given high grades by a Nationally Recognized Statistical Rating Organization, as the agencies are officially known.

Credit rating agencies were at the heart of the financial crisis, assigning solid ratings to various investments which later turned out to be highly risky and near worthless. As this Bloomberg story from April says:

They helped banks create $3.2 trillion of subprime mortgage securities. Typically, the firms awarded triple-A ratings to 75 percent of those debt packages.

“Ratings agencies just abjectly failed in serving the interests of investors,” SEC Commissioner Kathleen Casey says.

Perhaps the solution was to have a government agency determine whether the rating agencies were capable of performing their assigned task. According to the logic of many who believe in an activist government, this was a perfect opportunity for regulators to step in and protect consumers from low quality rating agencies. Except, this is exactly what was happening:

Originally, NRSRO recognition was granted by the SEC through a "No Action Letter" sent by the SEC staff. Under this approach, if a CRA (or investment bank or broker-dealer) were interested in using the ratings from a particular CRA for regulatory purposes, the SEC staff would research the market to determine whether ratings from that particular CRA are widely used and considered "reliable and credible." If the SEC staff determined that this was the case, it would send a letter to the CRA indicating that if a regulated entity were to rely on the CRA's ratings, the SEC staff would not recommend enforcement action against that entity.

Think about that: the government mandated that many financial organizations rely upon the grades given by the credit rating agencies and then even signed off on which CRAs were respectable. The CRAs then assigned excellent ratings to scores of financial products which were actually junk. Who in their right mind can believe the real problem here was insufficient regulation?

Like much of the conventional wisdom in DC, the idea that deregulation is to blame for the ills of the financial sector is rooted in myth. Upon closer examination we find a familiar story of regulation, market distortions and a resulting mess. Real reform of this sector, like health care, will consist of freeing the market rather than imposing further burdens upon it.

No good regulation

From a 1997 Reason interview with Nobel prize winning economist Ronald Coase:

Reason: Can you give us an example of what you consider to be a good regulation and then an example of what you consider to be a not-so-good regulation?

Coase: This is a very interesting question because one can't give an answer to it. When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies--perhaps all the studies--suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been. I was not willing to accept the view that all regulation was bound to produce these results.

Therefore, what was my explanation for the results we had? I argued that the most probable explanation was that the government now operates on such a massive scale that it had reached the stage of what economists call negative marginal returns. Anything additional it does, it messes up. But that doesn't mean that if we reduce the size of government considerably, we wouldn't find then that there were some activities it did well. Until we reduce the size of government, we won't know what they are.

Reason: What's an example of bad regulation?

Coase: I can't remember one that's good. Regulation of transport, regulation of agriculture-- agriculture is a, zoning is z. You know, you go from a to z, they are all bad. There were so many studies, and the result was quite universal: The effects were bad.

You can a short biography of Coase here. He is probably most well known for the Coase theorem.