A Safety Market?
by John Goodman
Issue 105 - April 9, 2008

Think about the last time you ate out. Did you get mad cow disease? E. coli? Cholera? Some other form of food poisoning? No? Well, why not? The spate of unsafe toys, tainted drugs and unhealthy food stuffs appearing over the past 12 months - especially imports from China - prompts one to ask: Why do unsafe products get to the market and what is the best way to control them?

New York Times columnist Paul Krugman blames Milton Friedman. Friedman? Yes, Friedman. In a piece that was way over the top even for Krugman, the columnist claimed that Friedman's belief in the power of markets rather than regulation is the cause of unsafe food.

But there is no lack of government regulatory power over food or products, in the U.S. or elsewhere. China in particular executed its top food and drug safety regulator for taking bribes. One can only wonder how much more government power Krugman would like to see exercised.

If the only thing standing between you and E. coli were the local public health inspector, you would have been dead long ago. Ditto for the other safety regulators. What keeps you alive is the desire of private enterprises to have you return as a loyal customer.

Businesses operating on narrow profit margins in highly competitive markets cannot afford a safety scare. That could bankrupt them. As a result, the private sector often goes way beyond what government requires and often does a better job.

For example, GlobalGap, a private enforcer of food standards in Europe, came into existence because European food retailers couldn't count on the European Union's 27 governments to do an adequate job. GlobalGap has 81,000 farms in 76 countries as members. It requires the registration of all pesticides used, the monitoring of pesticide residue and the tracking of all produce from field to ship to shelf. Wal-Mart and McDonald's are two users of its services (see WSJ)

Interestingly, developing country governments - including Brazil and Egypt - are trying to shut down these private "regulatory" activities, claiming they are an unfair trade practice.

In David Henderson's The Concise Encyclopedia of Economics Kip Viscusi notes that the Occupational Health and Safety Administration (OSHA) imposes $149 million in employer fines each year and economists estimate that workplace injuries have been reduced a meager 2 to 4 percent as a result. By contrast, the $245 billion employers pay in extra wages to induce employees to accept riskier jobs is 1,600 times more effective. Market incentives to create safer workplaces completely dwarf regulatory incentives.

What is the lesson for health care? We need a market for safety. Instead of a top-down, command and control approach (the Chinese way), we need a market in which safety is part of the package providers offer in competition with each other (the Milton Friedman way).

John Goodman is President of the National Center for Policy Analysis