by Gregory Conko
November 14, 2005

Keeping American Business Competitive in a World of Global Regulation

Presentation by Gregory Conko

Director of Food Safety Policy

Competitive Enterprise Institute

To the Apple Processor's Association

November 15, 2005

Washington, DC

The Competitive Enterprise Institute is a non-profit research and advocacy organization that focuses on a broad range of regulatory issues, ranging from environmental and public health policy, to antitrust and technology policy. 

We are what is sometimes referred to as a market liberal organization, which means that we’re dedicated to advancing free enterprise and limited government because we think that individuals are best helped not by government intervention, but by making their own choices in a free marketplace.  Much of what we do is to look at the impacts US and international regulations have on freedom, choice, and prosperity.

So, when Paul Weller asked me if I would be able to come and talk to you about keeping American business competitive, I knew I would have one message you’d be interested in hearing.  After all, few Americans really understand as much as the apple industry does how big a threat is posed by arbitrary and capricious regulation. 

It was only as recently as 1989 that the CBS program 60 Minutes and the environmental group Natural Resources Defense Council teamed up to launch the Alar-Daminozide scare.  Noted toxicologist Meryl Streep appeared before Congress and made the case for regulation by doing little more than asking, “What are we doing to our children?”  Alar was featured in stories in major and minor newspapers across the country and in cover stories in Time and Newsweek, not to mention more credible publications like Redbook and Ladies Home Journal.

In the face of this media blitz, members of Congress did what they usually do – ran to the nearest microphone to denounce Alar. 

Despite its own findings that Alar was safe when used as directed, the Environmental Protection Agency chose to go along and get along, rather than set the record straight.  Instead of correcting the factual inaccuracies, the agency “urged” apple growers to stop using Alar and announced it planned to ban the product.  Under pressure from both EPA and the apple industry, Uniroyal “voluntarily” withdrew Alar from the market, and sixteen years ago yesterday – by unlucky coincidence: November 14, 1989 – EPA published its notice in the Federal Register announcing the withdrawal of Alar’s approval.

The rest is history.  Much of America panicked.  One mother called the Nebraska state police to catch her child’s school bus and confiscate the killer apple in her lunchbox.  Another parent called the International Apple Institute to learn whether it was even “safe” to pour apple juice down the drain.  Apple growers and processors lost an estimated $375 million dollars, with some forced into bankruptcy.

Even if Alar was in some way harmful, the effects of regulatory over-reaction surely were not cost-free.  Banning Alar reduced the public’s exposure to it, but also led to other unintended consequences.  In the place of Alar, growers had to substitute less effective strategies for ensuring that ripe fruit could be harvested.  Less uniform harvesting schedules meant new ergonomic risks for apple pickers, increased stress levels in the orchards for both pickers and growers.  And in the end, workers and the public were exposed to different chemicals.

More troubling still is how the activists defend their fraud.  NRDC lawyer Janet Hathaway said that “Allowing the EPA to condone continued use of a chemical whenever the benefits outweigh the risks is absolutely anathema to the environmental community.”  Imagine that: even when the benefits outweigh the risks. 

Rarely do we get such an honest statement from the fans of more regulation.  But that kind of thinking is a big part of the reason why regulation is in many cases so out of control.

And the problem is that Alar is not a unique example.  All too often, environmental and public health regulatory policies are the product of some interest group’s over-reaction to a minor or non-existent risk.  As we have seen, bad science – or even a poor understanding of good science – can cause consumers, policymakers, and businesses to mis-allocate attention and resources away from where they are needed most and to waste resources on things of little importance. 

In its 2003 annual report to Congress, the OMB's Office of Information and Regulatory Affairs examined the various regulatory agencies’ own cost-benefit estimates of their major regulations – that is, those that are estimated to cost $100 million dollars or more annually. 

OIRA did not double check the analyses, even though the regulatory agencies have an incentive to over-estimate the benefits and under-estimate the costs – it just took them at face value.  Nevertheless, the report concluded that 52 to 72 percent of all benefits from the 107 major rules studied come from just four EPA regulations, all arising from the Clean Air Act.  That suggests that less than 4 percent of regulations produce up to 72 percent of the benefits.

Unfortunately, the public and the news media tend to have unrealistic expectations about what regulation can deliver, and neither our government nor the activist groups who want more of it are inclined to tell them the truth – that some risks must be borne in order to minimize bigger and more pressing hazards. 

There’s a cognitive problem here.  Lots of things to which we’re totally accustomed have considerable risk associated with them.  And in many cases, they’re far more dangerous than the new products or practices that could replace them.  By over-estimating the riskiness of new things or things with which we’re just not very familiar, and under-estimating the riskiness of old things we know, we can actually trap ourselves – and society – in a world that is unnecessarily dangerous.

Oddly, though, society’s innate preference for the old over the new tends to produce lots of new and improved ways to regulate.  And that never seems to disturb those who fear change.

Of course, change and innovation are a way of life for agriculture and the food sector, and have been as long as there has been a “food industry.”  A sector that makes it possible for Americans to eat nearly one-billion meals every day could not exist without innovation and experience dealing with major uncertainties.

As a result, U.S. agriculture provides an unequaled variety of safe, healthful, and convenient food that costs consumers a steadily declining share of national income.  The farm and food sector adds more than a trillion dollars to the economy every year and is competitive worldwide because its productivity continues to grow – up an average of 3 percent annually since 1990.  As healthy as this pace of change has been in the past, it promises to be even greater in the future in response to new markets and new technologies.

That’s the good news. 

But, in the past few decades, agriculture and food processing have been given increasingly difficult new rules to live by.  And those rules are constantly evolving, with new ones added every year.

The regulatory pressures facing the agriculture sector are real and increasing, and are growing at a time when knowledge of production agriculture among the general public – and perhaps more importantly among the media, legislators, and regulators – is generally on the decline.  As the number of people with direct knowledge of farming and food production continues to fall, regulatory control becomes more and more subject to the whims of popular opinion and emotion rather than the true benefits and costs to society. 

Even as a skeptic of centralized policy-setting, I will acknowledge that there are important instances where environmental and food safety regulations are reasonable and warranted.  However, it is important that credible scientific information be used to identify the actual problem areas, that sound economics is used to calculate the true benefits and costs of regulatory controls, and that above all, government pay a decent respect for the rights of people to engage in voluntary business activities with one another.  Sadly, regulation in the United States and around the world is increasingly being divorced from these three principles.

And the dollar cost of this regulation is astounding.  Americans spend over $850 billion every year in order to comply with federal regulations.  That’s about $8,000 per year for the average family of four.  And that’s on top of the $19,000 share each household contributes (directly and indirectly) to federal tax revenues.

While all citizens and businesses of course do share in these costs, the distribution of this burden is quite uneven.  As you probably know from first hand experience, in the business sector, those hit hardest are small and medium sized firms.  According to the Small Business Administration, businesses employing fewer than 20 employees face an annual regulatory burden of $6,975 per employee – nearly 60 percent higher than that facing a firm with more than 500 employees.

What’s more, these cost estimates largely address only the direct expense of regulatory compliance, such as reporting requirements and new equipment purchases.  But these rules can also lead to increased prices, lower product quality, and other intangible costs like loss of business freedom. 

Most importantly, from a global competitiveness and economic growth standpoint, regulations can reduce innovation by inhibiting new ideas, constraining product development, restricting production process design, or encumbering marketing strategies.

The National Association of Manufacturers estimates that US manufacturers face a 22 percent overall cost disadvantage relative to their primary foreign competitors.  And, though I’m not aware of good estimates in the food and agriculture sector, it’s not difficult to imagine that the burden is probably higher still. 

Now, all of that can’t be attributed just to regulation.  The cost disadvantage also comes from such things as higher corporate taxes; frivolous law suits; and a higher cost for labor that includes payroll taxes and health care costs.  But the excessive and often unreasonable regulatory burden borne by American business is among the most important drags on the profitability of American firms and our competitiveness in the global marketplace.

Certainly, government regulations are designed to influence business behavior in favor of the public interest and to improve such things as environmental protection, health and worker safety, national security, individual privacy, and commercial competition.  However, just because a group of legislators and regulators mean well does not guarantee that the regulations they produce will have substantive benefits.  Even when they do, those contributions to the public good must be balanced against especially unnecessarily burdensome regulations that increase business costs, reduce productivity, and hinder job creation.

Streamlining and rationalizing regulation – by which I mean ensuring that regulations actually make some scientific and economic sense – is an essential component in ensuring the continuing competitiveness of American business, especially in the food and agriculture sector.

Unfortunately, as the Alar example shows all too well, we face an up-hill battle.  Various special interest groups – once considered “fringe” organizations and easily ignored – are becoming increasingly influential in determining how food is produced and sold in North America, Europe, and the Pacific Rim. 

Issues ranging from pesticides, biodiversity, and bioengineered crops, to worker safety and obesity are dominating the public agenda and impacting how and where you can sell your products. 

Now, some of these developments will occasionally work in your favor.  Undue attention to our country’s so-called “obesity crises” – combined with the threat of regulation and litigation – convinced McDonald’s to change its Happy Meal menus to include an estimated 54 million pounds of fresh apple slices in 2005 alone. 

That said, I think you’ll agree that Americans generally, and your industry in particular, would be much better off on balance if our government pursued a more rational regulatory agenda.

And pursuing smarter regulation should not be just a domestic issue.  Opening export markets and removing trade barriers, for example, are among the most important changes needed for improving American competitiveness in the food and agricultural sector.  Free trade provides U.S. producers with new markets and an expanded consumer base. 

The current Bush Administration – as the Clinton and Bush 41 Administrations before it – has made a significant effort to open foreign markets to U.S. manufactured goods and the service industry.  But, for a variety of reasons, agriculture has been a harder nut to crack. 

Even when some aspects of agricultural trade have been included in trade agreements, the liberalization has often been largely offset by new burdens that minimize the overall net positive effect.  Take, for example NAFTA.  Mexico raised its quota limit for fresh U.S. apples, but the negotiated minimum-price arrangement meant much less trade to Mexico than your industry otherwise should have expected.

Unfortunately, eliminating barriers to agricultural trade has long been the dieting and exercise of the global trade agenda: everyone talks about it, but no one likes to actually do it.

Agriculture wasn’t even on the global trade agenda until the Uruguay Round of GATT negotiations began in the 1980s.  One of the two primary goals of the Uruguay Round was, of course, to bring agriculture into the global trade framework that previously was focused almost exclusively on manufactured goods. 

The problem with the Uruguay Round Agreement on Agriculture was that it primarily attacked tariffs and quotas, but did little to root out two much bigger barriers to agricultural trade: subsidies and regulations.

Subsidies have figured quite prominently in this Doha Round of GATT negotiations that will culminate in next month’s World Trade Organization ministerial meeting in Hong Kong.  But perhaps the more important issue – and certainly an underappreciated one – is the problem of countries using trumped up health and environmental concerns as a pretext for protectionism.  The Uruguay Round’s Agreement on Sanitary and Phytosanitary Measures was meant to keep this from happening, but the SPS agreement has had a less than stellar record of protecting free agricultural trade. 

We see daily reminders of the ways in which food exports are burdened by silly and senseless regulation that appeals to no one but domestic industry and ideological activists.  Europe bans American beef and milk; Australia restricts fresh and frozen salmon; and Japan wants to ban almost everything, but it’s settled for needlessly strict testing and fumigation requirements for fruits and vegetables. 

And that’s not even to mention my own area of expertise, bioengineered crops.  I could fill an entire day speaking on that subject.  But it’s worth noting that, within the past few years, several famine-stricken African and Asian countries have rejected U.S. grain shipments containing bioengineered corn and soybeans because Greenpeace activists convinced their governments that American farmers were trying to poison them. 

In some of these cases, the WTO has been able to broker a peace agreement, or is working on one.  But the resolution has typically been one of compromise and not of principle.

Other truly bizarre examples abound.  In 2001, for example, Norway prohibited the sale of Kellogg’s Corn Flakes fortified with vitamins because all those vitamins might be a health hazard when eaten in uncontrollable amounts.  In 2003, Denmark banned the sale of Ocean Spray Cranberry Drink for the same reason. 

But while reforming regulation over-seas is difficult, to say the least, members of the U.S. Congress – and occasionally members of the executive branch – have been leading a small but growing movement for regulatory reform here at home, and with some important results. 

Statutes like the Small Business Regulatory Enforcement and Fairness Act (SBREFA) and various executive orders have put modest dents in the steady metastasis of US regulation.  More importantly, they have begun to lay the groundwork for more substantial regulatory reform in the future. 

The systematic and thorough review of regulatory proposals that these efforts have spawned is likely to result in a more modest scale of regulation.  And that should be good news to consumers, taxpayers, and businesses that care about health, safety, and the environment, as well as jobs, inflation, and American competitiveness.

Our challenge is to modernize the federal government’s regulation of economic activity to make optimum use of the vast resources that are now devoted to meeting the many requirements imposed by regulations, and to overtly recognize that a blinkered pursuit of environmental protection, or worker and consumer safety, is more likely to produce a more dangerous world, not a safer one.