DRI-172 for week of 1-18-15: Consumer Behavior, Risk and Government Regulation

An Access Advertising EconBrief: 

Consumer Behavior, Risk and Government Regulation

The Obama administration has drenched the U.S. economy in a torrent of regulation. It is a mixture of new rules formulated by new regulatory bodies (such as the Consumer Financial Protection Bureau), new rules levied by old, preexisting federal agencies (such as those slapped on bank lending by the Federal Reserve) and old rules newly imposed or enforced with new stringency (such as those emanating from the Department of Transportation and bedeviling the trucking industry).

Some people within the business community are pleased by them, but it is fair to say that most are not. But the President and his subordinates have been unyielding in his insistence that they are not merely desirable but necessary to the health, well-being, vitality and economic growth of America.

Are the people affected by the regulations bad? Do the regulations make them good, or merely constrain their bad behavior? What entitles the particular people designing and implementing the regulations to perform in this capacity – is it their superior motivations or their superior knowledge? That is, are they better people or merely smarter people than those they regulate? The answer can’t be democratic election, since regulators are not elected directly. We are certainly entitled to ask why a President could possibly suppose that some people can effectively regulate an economy of over 300 million people. If they are merely better people, how do we know that their regulatory machinations will succeed, however well-intentioned they are? If they are merely smarter people, how do we know their actions will be directed toward the common good (whatever in the world that might be) and not toward their own betterment, to the exclusion of all else? Apparently, the President must select regulators who are both better people and smarter people than their constituents. Yet government regulators are typically plucked from comparative anonymity rather than from the firmament of public visibility.

Of all American research organizations, the Cato Institute has the longest history of examining government regulation. Recent Cato publications help rebut the longstanding presumptions in favor of regulation.

The FDA Graciously Unchains the American Consumer

In “The Rise of the Empowered Consumer” (Regulation, Winter 2014-2015, pp.34-41, Cato Institute), author Lewis A. Grossman recounts the Food and Drug Administration’s (FDA) policy evolution beginning in the mid-1960s. He notes that “Jane, a [hypothetical] typical consumer in 1966… had relatively few choices” across a wide range of food-products like “milk, cheese, bread and jam” because FDA’s “identity standards allowed little variation.” In other words, the government determined what kinds of products producers were allowed to legally produce and sell to consumers. “Food labels contained barely any useful information. There were no “Nutrition Facts” panels. The labeling of many foods did not even include a statement of ingredients. Nutrient content descriptors were rare; indeed, the FDA prohibited any reference whatever to cholesterol. Claims regarding foods’ usefulness in preventing disease were also virtually absent from labels; the FDA considered any such statement to render the product an unapproved – and thus illegal – drug.”

Younger readers will find the quoted passage startling; they have probably assumed that ingredient and nutrient-content labels were forced on sellers over their strenuous objections by noble and altruistic government regulators.

Similar constraints bound Jane should she have felt curiosity about vitamins, minerals or health supplements. The types and composition of such products were severely limited and their claims and advertising were even more severely limited by the FDA. Over-the-counter medications were equally limited – few in number and puny in their effectiveness against such infirmities as “seasonal allergies… acid indigestion…yeast infection[s] or severe diarrhea.” Her primary alternative for treatment was a doctor’s visit to obtain a prescription, which included directions for use but no further enlightening information about the therapeutic agent. Not only was there no Internet, copies of the Physicians’ Desk Reference were unavailable in bookstores. Advertising of prescription medicines was strictly forbidden by the FDA outside of professional publications like the Journal of the American Medical Association.

Food substances and drugs required FDA approval. The approval process might as well have been conducted in Los Alamos under FBI guard as far as Jane was concerned. Even terminally ill patients were hardly ever allowed access to experimental drugs and treatments.

From today’s perspective, it appears that the position of consumers vis-à-vis the federal government in these markets was that of a citizen in a totalitarian state. The government controlled production and sale; it controlled the flow of information; it even controlled the life-and-death choices of the citizenry, albeit with benevolent intent. (But what dictatorship – even the most savage in history – has failed to reaffirm the benevolence of its intentions?) What led to this situation in a country often advertised as the freest on earth?

In the late 19th and early 20th centuries, various incidents of alleged consumer fraud and the publicity given them by various muckraking authors led Progressive administrations led by Theodore Roosevelt, William Howard Taft and Woodrow Wilson to launch federal-government consumer regulation. The FDA was the flagship creation of this movement, the outcome of what Grossman called a “war against quackery.”

Students of regulation observe this common denominator. Behind every regulatory agency there is a regulatory movement; behind every movement there is an “origin story;” behind every story there are incidents of abuse. And upon investigation, these abuses invariably prove either false or wildly exaggerated. But even had they been meticulously documented, they would still not substantiate the claims made for them and not justify the regulatory actions taken in response.

Fraud was illegal throughout the 19th and 20th century and earlier. Competitive markets punish producers who fail to satisfy consumers by putting the producers out of business. Limiting the choices of producers and consumers harms consumers without providing compensating benefits. The only justification for FDA regulation of the type provided for the first half of the 20th century was that government regulators were omniscient, noble and efficient while consumers were dumbbells. That is putting it baldly but it is hardly an overstatement. After all, consider the situation that exists today.

Plentiful varieties of products exist for consumers to pick from. They exist because consumers want them to exist, not because the FDA decreed their existence. Over-the-counter medications are plentiful and effective. The FDA tries to regulate their uses, as it does for prescription medications, but thankfully doctors can choose from a plethora of “off-label” uses. Nutrient and ingredient labels inform the consumer’s quest to self-medicate such widespread ailments as Type II diabetes, which spread to near-epidemic status but is now being controlled thanks to rejection of the diet that the government promoted for decades and embrace of a diet that the government condemned as unsafe. Doctors and pharmacists discuss medications and supplements with patients and provide information about ingredients, side effects and drug interactions. And patients are finally rising in rebellion against the tyranny of FDA drug approval and the pretense of compassion exhibited by the agency’s “compassionate use” drug-approval policy for patients facing life-threatening diseases.

Grossman contrasts the totalitarian policies of yesteryear with the comparative freedom of today in polite academic language. “The FDA treated Jane’s… cohort…as passive, trusting and ignorant consumers. By comparison, [today’s consumer] has unmediated [Grossman means free] access to many more products and to much more information about those products. Moreover, modern consumers have acquired significant influence over the regulation of food and drugs and have generally exercised that influence in ways calculated to maximize their choice.”

Similarly, he explains the transition away from totalitarianism to today’s freedom in hedged terms. To be sure, the FDA gave up much of its power over producers and consumers kicking and screaming; consumers had to take all the things listed above rather than receive them as the gifts of a generous FDA. Nevertheless, Grossman insists that consumers’ distrust of the word “corporation” is so profound that they believe that the FDA exerts some sort of countervailing authority to ensure “the basic safety of products and the accuracy and completeness of labeling and advertising.” This concerning an agency that fought labeling and advertising tooth and claw! As to safety, Grossman makes the further caveat that consumers “prefer that government allow consumers to make their own decisions regarding what to put in their bodies…except in cases in which risk very clearly outweighs benefit” [emphasis added]. That implies that consumers believe that the FDA has some special competence to assess risks and benefits to individuals, which completely contradicts the principle that individuals should be free to make their own choices.

Since Grossman clearly treats consumer safety and risk as a special case of some sort, it is worth investigating this issue at special length. We do so below.

Government Regulation of Cigarette Smoking

For many years, individual cigarette smokers sued cigarette companies under the product-liability laws. They claimed that cigarettes “gave them cancer,” that the cigarette companies knew it and that consumers didn’t and that the companies were liable to selling dangerous products to the public.

The consumers got nowhere.

To this day, an urban legend persists that this run of legal success was owed to deep financial pockets and fancy legal footwork. That is nonsense. As the leading economic expert on risk (and the longtime cigarette controversy), W. Kip Viscusi, concluded in Smoke-Filled Rooms: A Postmortem on the Tobacco Deal, “the basic fact is that when cases reached the jury, the jurors consistently concluded that the risks of cigarettes were well-known and voluntarily incurred.”

In the early 1990s, all this changed. States sued the tobacco companies for medical costs incurred by government due to cigarette smoking. The suits never reached trial. The tobacco companies settled with four states; a Master Settlement Agreement applied to remaining states. The aggregate settlement amount was $243 billion, which in the days before the Great Recession, the Obama administration and the Bernanke Federal Reserve was a lot of money. (To be sure, a chunk of this money was gobbled up by legal fees; the usual product-liability portion is one-third of the settlement, but gag orders have hampered complete release of information on lawyers’ fees in these cases.)

However, the states were not satisfied with this product-liability bonanza. They increased existing excise taxes on cigarettes. In “Cigarette Taxes and Smoking,” Regulation (Winter 2014-2015, pp. 42-46, Cato Institute), authors Kevin Callison and Robert Kaestner ascribe these tax increases to “the hypothesis… that higher cigarette taxes save a substantial number of lives and reduce health-care costs by reducing smoking, [which] is central to the argument in support of regulatory control of cigarettes through higher cigarette taxes.”

Callison and Kaestner cite research from anti-smoking organizations and comments to the FDA that purport to find price elasticities of demand for cigarettes of between -0.3 and -0.7 percent, with the lower figure applying to adults and the higher to adolescents. (The words “lower” and “higher” refer to the absolute, not algebraic, value of the elasticities.) Price elasticity of demand is defined as the percentage change in quantity demanded associated with a 1 percent change in price. Thus, a 1% increase in price would cause quantity demanded to fall by between 0.3% and 0.7% according to these estimates.

The problem with these estimates is that they were based on research done decades ago, when smoking rates were much higher. The authors estimate that today’s smokers are mostly the young and the poorly educated. Their price elasticities are very, very low. Higher cigarette taxes have only a miniscule effect on consumption of cigarettes. They do not reduce smoking to any significant extent. Thus, they do not save on health-care costs.

They serve only to fatten the coffers of state governments. Cigarette taxes today play the role played by the infamous tax on salt levied by French kings before the French Revolution. When the tax goes up, the effective price paid by the consumer goes up. When consumption falls by a much smaller percentage than the price increase, tax revenues rise. Both the cigarette-tax increase of today and the salt-tax increases of the 17th and 18th century were big revenue-raisers.

In the 1990s, tobacco companies were excoriated as devils. Today, though, several of the lawyers who sued the tobacco companies are either in jail for fraud, under criminal accusation or dead under questionable circumstances. And the state governments who “regulate” the tobacco companies by taxing them are now revealed as merely in it for the money. They have no interest in discouraging smoking, since it would cut into their profits if smoking were to fall too much. State governments want smoking to remain price-inelastic so that they can continue to raise more revenue by raising taxes on cigarettes.

 

Can Good Intentions Really Be All That Bad? The Cost of Federal-Government Regulation

The old saying “You can’t blame me for trying” suggests that there is no harm in trying to make things better. The economic principle of opportunity cost reminds us that the use of resources for one purpose – in this case, the various ostensibly benevolent and beneficent purposes of regulation – denies the benefits of using them for something else. So how costly is that?

In “A Slow-Motion Collapse” (Regulation, Winter 2014-2015, pp. 12-15, Cato Institute), author Pierre Lemieux cites several studies that attempted to quantify the costs of government regulation. The most comprehensive of these was by academic economists John Dawson and John Seater, who used variations in the annual Code of Federal Regulations as their index for regulatory change. In 1949, the CFR had 19,335 pages; in 2005, this total has risen to 134,261 pages, a seven-fold increase in six-plus decades. (Remember, this includes federal regulation only, excluding state and local government regulation, which might triple that total.)

Naturally, proponents of regulation blandly assert that the growth of real income (also roughly seven-fold over the same period) requires larger government, hence more regulation, to keep pace. This nebulous generalization collapses upon close scrutiny. Freedom and free markets naturally result in more complex forms of goods, services and social interactions, but if regulatory constraints “keep pace” this will restrain the very benefits that freedom creates. The very purpose of freedom itself will be vitiated. We are back at square one, asking the question: What gives regulation the right and the competence to make that sort of decision?

Dawson and Seater developed an econometric model to estimate the size of the bite taken by regulation from economic growth. Their estimate was that it has reduced economic growth on average by about 2 percentage points per year. This is a huge reduction. If we were to apply it to the 2011 GDP, it would work as follows: Starting in 1949, had all subsequent regulation not happened, 2011 GDP would have been 39 trillion dollars higher, or about 54 trillion. As Lemieux put it: “The average American (man, woman and child) would now have about $125,000 more per year to spend, which amounts to more than three times [current] GDP per capita. If this is not an economic collapse, what is?”

Lemieux points out that, while this estimate may strain the credulity of some, it also may actually incorporate the effects of state and local regulation, even though the model itself did not include them in its index. That is because it is reasonable to expect a statistical correlation between the three forms of regulation. When federal regulation rises, it often does so in ways that require corresponding matching or complementary state and local actions. Thus, those forms of regulation are hidden in the model to some considerable degree.

Lemieux also points to Europe, where regulation is even more onerous than in the U.S. – and growth has been even more constipated. We can take this reasoning even further by bringing in the recent example of less-developed countries. The Asian Tigers experienced rapid growth when they espoused market-oriented economics; could their relative lack of regulation supplement this economic-development success story? India and mainland China turned their economies around when they turned away from socialism and Communism, respectively; regulation still hamstrings India while China is dichotomized into a relatively autonomous small-scale competitive sector and a heavily regulated and planned government controlled big-business economy. Signs point to a recent Chinese growth dip tied to the bursting of a bubble created by easy money and credit granted to the regulated sector.

The price tag for regulation is eye-popping. It is long past time to ask ourselves why we are stuck with this lemon.

Government Regulation as Wish-Fulfillment

For millennia, children have cultivated the dream fantasies of magical figures that make their wishes come true. These apparently satisfy a deep-seated longing for security and fulfillment. Freud referred to this need as “wish fulfillment.” Although Freudian psychology has long ago been discredited, the term retains its usefulness.

When we grow into adulthood, we do not shed our childish longings; they merely change form. In the 20th century, motion pictures became the dominant art form in the Western world because they served as fairy tales for adults by providing alternative versions of reality that were preferable to daily life.

When asked by pollsters to list or confirm the functions regulation should perform, citizens repeatedly compose “wish lists” that are either platitudes or, alternatively, duplicate the functions actually approximated by competitive markets. It seems even more significant that researchers and policymakers do exactly the same thing. Returning to Lewis Grossman’s evaluation of the public’s view of FDA: “Americans’ distrust of major institutions has led them to the following position: On the one hand, they believe the FDA has an important role to play in ensuring the basic safety of products and the accuracy and completeness of labeling and advertising. On the other hand, they generally do not want the FDA to inhibit the transmission of truthful information from manufacturers to consumers, and – except in cases in which risk very clearly outweighs benefit – they prefer that the government allow consumers to make their own decisions regarding what to put in their own bodies.”

This is a masterpiece of self-contradiction. Just exactly what is an “important role to play,” anyway? Allowing an agency that previously denied the right to label and advertise to play any role is playing with fire; it means that genuine consumer advocates have to fight a constant battle with the government to hold onto the territory they have won. If consumers really don’t want the FDA to “inhibit the transmission of truthful information from manufacturers to consumers,” they should abolish the FDA, because free markets do the job consumers want done by definitionand the laws alreadyprohibit fraud and deception.

The real whopper in Grossman’s summary is the caveat about risk and benefit. Government agencies in general and the FDA in particular have traditionally shunned cost/benefit and risk/benefit analysis like the plague; when they have attempted it they have done it badly. Just exactly who is going to decide when risk “very clearly” outweighs benefit in a regulatory context, then? Grossman, a professional policy analyst who should know better, is treating the FDA exactly as the general public does. He is assuming that a government agency is a wish-fulfillment entity that will do exactly what he wants done – or, in this case, what he claims the public wants done – rather than what it actually does.

Every member of the general public would scornfully deny that he or she believes in a man called Santa Claus who lives at the North Pole and flies around the world on Christmas Eve distributing presents to children. But for an apparent majority of the public, government in general and regulation in particular plays a similar role because people ascribe quasi-magical powers to them to fulfill psychological needs. For these people, it might be more apropos to view government as “Mommy” or “Daddy” because of the strength and dependent nature of the relationship.

Can Government Control Consumer Risk? The Emerging Scientific Answer: No 

The comments of Grossman, assorted researchers and countless other commentators and onlookers over the years imply that government regulation is supposed to act as a sort of stern, but benevolent parent, protecting us from our worst impulses by regulating the risks we take. This is reflected not only in cigarette taxes but also in the draconian warnings on the cigarette packages and in numerous other measures taken by regulators. Mandatory seat belt laws, adopted by state legislatures in 49 states since the mid-1980s at the urging of the federal government, promised the near-elimination of automobile fatalities. Government bureaucracies like Occupational Safety and Health Administration have covered the workplace with a raft of safety regulations. The Consumer Product Safety Commission presides with an eagle eye over the safety of the products that fill our market baskets.

In 1975, University of Chicago economist Sam Peltzman published a landmark study in the Journal of Political Economy. In it, Peltzman revealed that the various devices and measures mandated by government and introduced by the big auto companies in the 1960s had not actually produced statistically significant improvements in safety, as measured by auto fatalities and injuries. In particular, use of the new three-point seat belts seemed to show a slight improvement in driver fatalities that was more than offset by a rise in fatalities to others – pedestrians, cyclists and possibly occupants of victim vehicles. Over the years, subsequent research confirmed Peltzman’s results so repeatedly that former Chairman of the Council of Economic Advisors’ N. Gregory Mankiw dubbed this the “Peltzman Effect.”

A similar kind of result emerged throughout the social sciences. Innovations in safety continually failed to produce the kind of safety results that experts anticipated and predicted, often failing to provide any improved safety performance at all. It seems that people respond to improved safety by taking more risk, thwarting the expectations of the experts. Needless to say, this same logic applies also to rules passed by government to force people to behave more safely. People simply thwart the rules by finding ways to take risk outside the rules. When forced to wear seat belts, for example, they drive less carefully. Instead of endangering only themselves by going beltless, now they endanger others, too.

Today, this principle is well-established in scientific circles. It is called risk compensation. The idea that people strike to maintain, or “purchase,” a particular level of risk and hold it constant in the face of outside efforts to change it is called risk homeostasis.

These concepts make the entire project of government regulation of consumer risk absurd and counterproductive. Previously it was merely wrong in principle, an abuse of human freedom. Now it is also wrong in practice because it cannot possibly work.

Dropping the Façade: the Reality of Government Regulation

If the results of government regulation do not comport with its stated purposes, what are its actual purposes? Are the politicians, bureaucrats and employees who comprise the legislative and executive branches and the regulatory establishment really unconscious of the effects of regulation? No, for the most part the beneficiaries of regulation are all too cynically aware of the façade that covers it.

Politicians support regulation to court votes from the government-dependent segment of the voting public and to avoid being pilloried as killers and haters or – worst of all – a “tool of the big corporations.” Bureaucrats tacitly do the bidding of politicians in their role as administrators. In return, politicians do the bidding of bureaucrats by increasing their budgets and staffs. Employees vote for politicians who support regulation; in return, politicians vote to increase budgets. Employees follow the orders of bureaucrats; in return, bureaucrats hire bigger staffs that earn them bigger salaries.

This self-reinforcing and self-supporting network constitutes the metastatic cancer of big government. The purpose of regulation is not to benefit the public. It is to milk the public for the benefit of politicians, bureaucrats and government employees. Regulation drains resources away from and hamstrings the productive private economy.

Even now, as we speak, this process – aided, abetted and drastically accelerated by rapid money creation – is bringing down the economies of the Western world around our ears by simultaneously wreaking havoc on the monetary order with easy money, burdening the financial sector with debt and eviscerating the real economy with regulations that steadily erode its productive potential.

DRI-301 for week of 4-13-14: Hey, Hey, FDA – How Many People Did You Kill Today?

An Access Advertising EconBrief:

Hey, Hey, FDA – How Many People Did You Kill Today?

The Interstate Commerce Commission may have been the first federal-government regulatory agency, but the Food and Drug Administration (FDA) is the eminence grise of regulation. For over a century, it has cast its shadow over America’s supply of food and medicines. Today its decisions directly affect goods comprising about one-quarter of all consumer expenditures. No other regulator so typifies the popular conception of regulation as the stern, all-seeing, all-knowing guardian of public welfare. No other government body better exemplifies the hideous reality of regulation as the substitution of totalitarian rule for individual choice.

A Very Short History of the FDA

Milestones in FDA history are marked by tragedy. With each tragedy came an increase in federal-government regulation. Each increase brought us closer to the FDA as it exists today.

In 1902, two separate incidents of poisoning due to adulterated vaccines caused a total of 22 deaths. (Interestingly enough, government officials were the guilty parties.) These led to the Biologics Control Act, which mandated government control of the interstate sale of serums, toxins and viruses. In 1906, the Pure Food and Drug Act made it a crime to transport “adulterated” food or drugs across state lines. In 1914, the Harrison Narcotics Act forbade possession and sale of various narcotic drugs by non-physicians.

In 1937, the pharmaceutical company S.K. Massengill sold a preparation called “Elixir Sulfanilamide.” The company’s chief chemist mixed sulfanilamide with raspberry-flavored diethylene glycol, apparently without being aware of the toxic effects of the latter upon humans and animals. The company failed to conduct the usual animal tests before marketing the preparation. Deaths due to kidney failure resulted, with the ultimate toll rising as high as 107. (The chemist eventually committed suicide prior to standing trial for negligent homicide.)

A famous letter to President Roosevelt from the mother of a juvenile victim was published and provided the impetus for the Food, Drug, and Cosmetics Act of 1938. This act conferred upon the FDA the power and duty to gauge the efficacy of new drugs. Although subsequent legislative enactments further enhanced the agency’s powers, this was the watershed marking the emergence of the modern FDA.

In what follows, we will concentrate our analysis on the FDA’s regulation of drugs, a topic that is more than sufficient to engage our full attention.

The Dichotomy Between Safety and Efficacy

The unfolding history of the FDA reflects a dichotomy between two desirable attributes of every drug. (Slightly modified, the dichotomy applies to food as well.) These attributes are safety and efficacy. We want our medicines to be free of risk to our health. But we also want them to perform the therapeutic tasks for which they were created.

Early on, the FDA’s main task was to regulate drug safety. But in 1962, amendments to the Food and Drug Act gave the agency the power to gauge a new drug’s efficacy. For the last half-century, the FDA has insisted that medicines must be both safe and effective in order to be legally marketed. Having grown up under the aegis of big government in general and FDA in particular, Americans today take this insistence for granted. Yet in recent decades, discontent with this mantra has rumbled across the land.

Economists, who are taught remorseless logic at their professor’s knee, were the first to challenge the conventional thinking. Their first volley was aimed at FDA regulation of efficacy. Why not allow the free, competitive marketplace to determine whether a medicine works or not? After all, that is exactly what we do with almost all goods and services.

The reflexive response to this viewpoint is: We don’t dare do that, because we have to know whether a medicine works before we take it. Otherwise, we die or suffer horrible ill effects. That is why we test all medicines to make sure they are safe and effective before we allow them on the market.

But a little thought will reveal the falsity of this reaction. The vast majority of all medicines are not administered to forestall death or even dire illness, although a few are. And for almost all of mankind’s time here on earth, the only way to tell whether a substance or plan of treatment was effective was for a human being to take or adopt it. Even today, only a small minority of all existing drugs underwent rigorous testing by the FDA prior to introduction. We know about the amazing therapeutic properties and relative safety of aspirin, for example, because it was used for centuries before 20th-century tests refined our knowledge of its properties and effects.

Maybe the most important argument against allowing the FDA to determine efficacy is that this is often a subjective matter. The FDA tends to rely on the criterion of “statistical significance,” based on the result of clinical trials involving large numbers of patients. But scientists are increasingly coming to recognize the degree to which both diseases and medicines are unique to individuals. This is true of cancer, for example. It is really a large number of diseases rather than one single disease, and the effects of different therapies vary widely among individuals. A drug can fail the FDA’s test of efficacy yet still be effective for individuals; a drug’s clinical trials can display “statistically significant” results while still failing substantial numbers of patients. That is why the empirical case for leaving the decision to individual patients and their doctors is so strong.

Most economists who have studies the issue agree that the FDA shouldn’t regulate efficacy. On this point, the public tends to be sympathetic once their attention has been gained and their critical faculties engaged. But the issue of safety is where the general public tends to get impatient with the arguments of economists. Just because we can’t test all goods doesn’t mean we shouldn’t test as many as we can, does it? After all, as everybody knows, you can’t be too careful

As every economist knows, you can be too careful. Testing drugs for efficacy takes time. Today, the tests required by the FDA take years, often well over a decade, to complete. (The average drug undergoes over 60 clinical trials involving thousands of test-consumers.) Suppose that the drug eventually passes the test and is allowed onto the marketplace. The implication of this is that for all those years, people who could have been helped by the drug… weren’t. And suppose that this happens to be one of those unusual cases of life and death – the very sort of case for which we supposedly need FDA regulation to prevent unnecessary deaths. Lo and behold, it turns out that FDA regulation causes unnecessary deaths rather than preventing them. The name given to the inordinate time span needed for drugs to pass FDA muster was “drug lag.”

All economists would acknowledge a role for certification in the marketplace. That is, there are many contexts in which we want to know that product-related representations made by sellers are accurate. There is no basis for assuming that this function can be performed only by government and every reason for expecting private businesses to perform it better and cheaper. The existence of organizations like Underwriters’ Laboratories and Consumer Reports underlines this.

It is important to reserve this certification to the private sector because only consumer demand can answer the vital question of how many resources to allocate to the certification process. When government attempts to answer this question, it does so politically, using criteria that are important to bureaucrats and politicians but irrelevant to the public at large. We probably don’t need to devote much time and attention to certifying dental floss or facial tissues. The way to make sure that money isn’t wasted on trivial matters but is spent purposefully where wanted is by allowing full play to free markets, where only those costs of certification that consumers are willing to pay will be incorporated into production, distribution and marketing.

Even economists disagree about how much emphasis to give safety, though. For years, this was the FDA’s central mission. In 1974, economist Sam Peltzman of the University of Chicago set out to measure how effective the 1962 laws had been at improving safety – and at what cost. Peltzman found that prior to 1962 an average of 49 new drugs were introduced each year. In the ten years following passage of the amendments, this average total of new drugs introduced fell to 16. This is bad in two ways. First, it is obvious that a drug that never appears on the market cannot benefit consumers. Second, some drugs are introduced to compete with existing drugs rather than to create an entirely new kind of product. Since an artificial reduction in the number of competitors cannot help but reduce competition in the marketplace, this made it more difficult for the drug marketplace to do its job of determining which drugs work best for which consumers. That is a very important finding because the FDA’s limited resources prevent the agency from testing most existing drugs; it must rely on competitive markets to do the job of weeding out ineffective products. So not only do consumers lose out from not having the benefits of a drug available, they also lose out on the beneficial competitive effects the lost drug would have had on other drugs.

Soon the ranks of skeptical economists were swelled by protesting private citizens. Contrary to the impression created by news media and commentators, the citizens were mostly protesting against drug lag rather than against the introduction of new drugs. That is, they were consumers who objected to the FDA withholding beneficial, or potentially beneficial, products from them. This protest movement reached a crescendo during the height of the AIDS crisis in 1988. A gaggle of AIDS activists gathered outside FDA headquarters in the Washington, D.C. suburbs and chanted “No more deaths!” They were not excoriating the agency for allowing an unsafe AIDS drug or treatment on the market, thereby causing AIDS patients to due prematurely. No, they were protesting the unconscionable delay, caused by drug lag, in bringing new AIDS therapies to market. Clearly, their attitude was: “We’re doomed without much better medicines than now exist and we’re willing to risk death in order to shorten the time necessary to discover and deploy those medicines.”

The political clout wielded by the AIDS movement was sufficient to budge the FDA off dead center. It pioneered an approval concept called “fast track,” by which a new drug or therapy could make it to market within two years once a threshold level of efficacy against AIDS was reached. It also introduced a program of access to experimental medicines called “compassionate use,” designed to allow the terminally or critically ill to take greater risks than ordinary health-care consumers.

Hey, Hey, FDA – How Many People Did You Kill Today?

Not unwilling to face the consequences of their own logic and research, economists realized that the FDA was killing people. It occurred to them to wonder how many people the FDA was killing every year. Because economists love to count but do it imperfectly, their estimates varied widely.

William Wardell (a pharmacologist using econometric methods) complained that nitrazepam, a relatively safe used as a sedative and tranquilizer, was held off the U.S. market by the FDA for five years after it was available in Great Britain. He estimated that over 3,700 Americans died from use of less safe substitute drugs during that interval. Wardell also estimated in the late 1970s that 10,000 lives could be saved yearly by FDA approval of beta blocker drugs for regulating blood pressure. Yet such drugs as propranalol, practahol and others were kept off the U.S. market years after they had been approved in Europe. The Independent Institute’s “FDA Review” project estimated that tens of thousands of lives were lost by these actions.

D. H. Gieringer compared the human toll in mortality and morbidity of FDA approval delays compared to those in Europe. During 1970-1993, FDA approval times lagged those in the U.K., France, Spain and Germany for the same drugs. Differences in data collection complicated direct comparisons, but the differences were nonetheless stark. He found that the FDA’s policy may have avoided as many as 5-10,000 casualties (deaths and injuries combined) per decade, but at a fearful cost – the FDA policies caused between 21,000 and 120,000 deaths per decade. (Notice the “casualties vs. deaths” comparison, necessitated by international differences in data-collection procedures.)

The difference in drug-approval policies suggests another point of comparison. Perhaps the foreign countries, with their looser regimes, suffered disasters like our Elixir Sulfanilamide tragedy? Or perhaps they showed a clear pattern of higher deaths or morbidity? No, no such pattern of inferiority was present. Drug recalls were roughly the same, except for a somewhat higher rate in Great Britain, where the economist who studied the case remarked that the benefits enjoyed from the earlier availability of approved drugs undoubtedly outweighed the costs of withdrawals.

The Competitive Enterprise Institute found thousands of deaths caused by FDA delays in approval of drugs such as interleukin-2, taxotere, vasoseal, ancrod, glucophage, navelbine, lamictal, ethyol, photofrin, rilutek, citicodine, panorex, femara, prostar, omnicath and transform. Overall, the Independent Institute concludes that “the number [107] of victims of the Elixir Sulfanilamide tragedy and of all other drug tragedies prior to 1962 is very small compared to the death toll of the post-1962 FDA.”

The FDA has been especially hard on the victims of so-called “orphan diseases;” that is, diseases of which there are comparatively few sufferers. The paucity of potential buyers makes drug companies loathe to spend large sums of money on drug development for these diseases, but the costs of FDA compliance are just as large in the absolute sense (thus, much larger in relative terms) for “orphan drugs” as for drugs used to treat big-ticket diseases like AIDS, heart disease or cancer. The 1983 Orphan Drug Act loosened FDA requirements for such drugs. Of course, this is a tacit admission of just how high a barrier to market entry FDA compliance really is.

Fans of big government might conjecture that FDA policy keeps more “bad” (adulterated or just plain ineffective) drugs off the market than alternative regimes. Perhaps the roster of drugs delayed or deep-sixed by the FDA is populated disproportionately with marginal or less-effective drugs. No, economists have investigated – and rejected – these possibilities as well.

Overall, 35 economists who have studied the record of the FDA have favored some program of liberalization or reform, according to the Independent Institute’s FDA Review project. Programs range from outright abolition of the agency to much more moderate reform, such as speeding up introduction of new drugs to market. Only 3 economists have opposed liberalization.

During the height of the Vietnam War, young left-wing anti-war protestors repeatedly chanted “Hey, hey, LBJ – how many kids did you kill today?” Their intent was to transform President Johnson in public imagination from a wartime commander-in-chief to a deliberate murderer of children. Neither the President nor any other civilian head of state has ever denied the existence of collateral civilian casualties in wartime. Rather, the rationale has been that these deaths are regrettable but unavoidable concomitants of achieving war aims. But the FDA’s studied avoidance of its economist critics has no justification. The fundamental economic definition of cost is the highest-valued alternative foregone. The real cost of FDA approval delays is not measured in dollars but in the death and suffering caused by not having drugs available. That is a conscious choice made by the FDA for which its Commissioners are morally responsible.

The Skewed Incentives Faced By the FDA

The overwhelming question induced by these estimates is: Why? Why should the FDA always err on the side of killing people through excessive caution? Consider the comments of former FDA commissioner Alexander Schmidt: “The times when [Congressional] hearings have been held to criticize our approval of new drugs have been so frequent that we aren’t able to count them… The message to FDA staff could not be clearer. Whenever a controversy over a new drug is resolved by its approval, the agency and the individuals involved likely will be investigated… The Congressional pressure for our negative action on new drug applications is, therefore, intense.”

Congress is in session roughly 40% of every year. It exerts budgetary control over the FDA. So when legislators speak – or even clear their throats – the agency listens. In contrast, the influence of protesting citizens lasts only as long as media cameras are pointed in their direction. The AIDS lobby is a special case because the political power wielded by homosexuals gave them unusual consumer clout. Ordinarily consumers are fragmented and well-nigh impossible to organize effectively. That is why the incentives facing FDA are so heavily skewed against consumers and in favor of bureaucratic inertia.

Risk vs. Benefit

It is worth asking how the FDA has been able to justify suppressing the development of new drugs. The answer to that question lies in its one-sided, unbalanced approach to risk. We face risk at every moment of our lives. Most human actions involve an element of risk. Getting out of bed entails the risk of falling. Driving to work risks injury or death from vehicular accident. Dining out runs the risk of acquiring food-borne illness. Every recreational and athletic pastime carries risks that may even include death.

Even the most familiar medicines pose risk to the patient. Dosage is the most obvious, since there is virtually always an optimal dosage range. Underdosing will lose the therapeutic benefit, while overdosing will harm the patient or even kill him. Tolerance is another problem; allergic reaction and individual variation prevent advance prediction of how everybody will respond to a particular medication.

We have lived with risk from birth and normally take it for granted. That causes us to overrate many risks of which we are consciously aware. The FDA has profited from this asymmetry. It has seized upon our extreme emotional aversion to serious diseases like cancer to develop policies that enhance its power over us, thereby increasing its security at our expense.

In 1958, Congress passed the Delaney Amendment, which banned any substance that caused cancer in humans or even in a single animal, regardless of the dose received by the test subject. This amounted to an engraved invitation to ban anything against which somebody had a grievance. In 1986, a panel of scientists estimated the cancer risk of a particular dye at approximately 1 in 19 billion human exposures. When the Ralph Nader-founded organization Public Citizen sued to prevent the FDA from reclassifying the dye as safe for certain commercial uses, the agency caved in to the pressure. Scholars such as the late Aaron Wildavsky and W. Kip Viscusi have characterized the implicit theory underlying this attitude as the “zero-risk” approach to public policy.

Once again, it was the AIDS crisis that forced the public to confront the absurdity of zero-risk. Homosexuals were dying like flies. Movies like Philadelphiahelped to transform them from pariahs to objects of public sympathy. Suddenly it no longer made sense for the FDA to deny them the use of AZT and similar drugs merely because it was highly toxic and might kill them. Whose life was it, anyway – theirs or the government’s? How dare the FDA tell them that they weren’t competent to fight for their own lives, in consultation with their personal physicians?

And if homosexuals were given the right to control their struggle for life, why shouldn’t the rest of us also have it?

Whose Life Is It, Anyway?

The supposed safety conferred by the FDA is a mirage. Instead, it is a killer agency. To the degree that U.S. markets for food and drugs are in fact safe, this is due to competition, not the FDA.

We have yet to broach the most problematic aspect of FDA regulation. Daniel Henninger, a journalist who has long specialized in the FDA and drug regulation, puts it in this way: “Normally, political decisions about regulatory practice are made among a small community of specialists. Today, the intense interest in curing, or at least ameliorating, diseases such as cancer, AIDS, heart disease, arthritis and Alzheimer’s means that the outcome of the debate over the drug lag is likely to reflect the values of an unprecedentedly large community of public interests.”

Why should the ability of any one individual to decide whether and how to treat himself medically be controlled by “a small community of specialists?” Why should health-care consumers have to organize politically in order to enjoy the rights given them at birth and guaranteed by the Constitution? What if an individual is so unfortunate as not to suffer from a high-profile disease like cancer, AIDS, heart disease, et al? Do his “values” then lie outside the mythical “community of public interests” Henninger cites?

Does my life belong to me or to the federal government?

The correct answers to these questions are “it shouldn’t,” “they shouldn’t,” “it shouldn’t matter,” “no, because there is no community of public interests” and “to me,” respectively. But the existence of the FDA means that the correct answers are not the answers in fact. And the only remedy for that is to end, not mend, the FDA.