Saturday, June 14, 2008

The EU is Watching Out for You

Paul Krugman sees deregulatory ideology run amok as the culprit in food safety crises that have tomatoes being pulled off the shelves and Koreans protesting importation of US beef. He writes:
[H]ard-core opponents of regulation were once part of the political fringe, but with the rise of modern movement conservatism they moved into the corridors of power. They never had enough votes to abolish the F.D.A. or eliminate meat inspections, but they could and did set about making the agencies charged with ensuring food safety ineffective.

They did this in part by simply denying these agencies enough resources to do the job. For example, the work of the F.D.A. has become vastly more complex over time thanks to the combination of scientific advances and globalization. Yet the agency has a substantially smaller work force now than it did in 1994, the year Republicans took over Congress.

Perhaps even more important, however, was the systematic appointment of foxes to guard henhouses.

Thus, when mad cow disease was detected in the U.S. in 2003, the Department of Agriculture was headed by Ann M. Veneman, a former food-industry lobbyist. And the department’s response to the crisis — which amounted to consistently downplaying the threat and rejecting calls for more extensive testing — seemed driven by the industry’s agenda.

The primary market failure at work here is one of imperfect information - it is prohibitively costly for consumers to obtain detailed information about how every available food ingredient was produced (and, really, would you want to?) in order to make a judgment about the associated risks. In such cases, basic microeconomics tells us that the free market outcome is not optimal and government intervention - possibly through regulation (which is only effective if credibly enforced) - can be welfare-improving. That is, the "free market" view does not represent sound economics.

The same logic applies to the chemicals in everyday products. In the absence of effective government intervention, consumers may be taking greater than optimal levels of risk (i.e. we are taking chances we wouldn't if we had complete knowledge of what's in all that stuff we buy). The uncertainty could also have the effect of deterring consumers from buying products that are indeed perfectly safe (this is why credible regulation is good for producers).

While Washington may be asleep at the switch, the Brussels isn't, and one pleasant side-effect of globalization is that tougher EU regulation may benefit US consumers, or so suggests this fascinating Washington Post story:

Europe this month rolled out new restrictions on makers of chemicals linked to cancer and other health problems, changes that are forcing U.S. industries to find new ways to produce a wide range of everyday products.

The new laws in the European Union require companies to demonstrate that a chemical is safe before it enters commerce -- the opposite of policies in the United States, where regulators must prove that a chemical is harmful before it can be restricted or removed from the market...

Adamantly opposed by the U.S. chemical industry and the Bush administration, the E.U. laws will be phased in over the next decade. It is difficult to know exactly how the changes will affect products sold in the United States. But American manufacturers are already searching for safer alternatives to chemicals used to make thousands of consumer goods, from bike helmets to shower curtains.

The European Union's tough stance on chemical regulation is the latest area in which the Europeans are reshaping business practices with demands that American companies either comply or lose access to a market of 27 countries and nearly 500 million people.

From its crackdown on antitrust practices in the computer industry to its rigorous protection of consumer privacy, the European Union has adopted a regulatory philosophy that emphasizes the consumer. Its approach to managing chemical risks, which started with a trickle of individual bans and has swelled into a wave, is part of a European focus on caution when it comes to health and the environment.

Regulation in the US is weaker than you might think:

The EPA has banned only five chemicals since 1976. The hurdles are so high for the agency that it has been unable to ban asbestos, which is widely acknowledged as a likely carcinogen and is barred in more than 30 countries. Instead, the EPA relies on industry to voluntarily cease production of suspect chemicals.

"If you ask people whether they think the drain cleaner they use in their homes has been tested for safety, they think, 'Of course, the government would have never allowed a product on the market without knowing it's safe,' " said Richard Denison, senior scientist at the Environmental Defense Fund. "When you tell them that's not the case, they can't believe it."

Eep. Because the EU is a large market, it may make sense for producers to conform to their stronger regulations and therefore the same products sold here will live up to European standards. The bad news is that logic only applies insofar as the products are the same, which will depend on the marginal costs associated with producing up to EU standards (the fixed costs of developing products that can be sold there will likely worth bearing for multinationals) relative to the economies of scale gained from producing the same product for both markets.

There would be more incentive for producers to conform to European regulations if US consumers start to look for the CE mark which is used to label products that meet European standards.

Now, if only we could find a way to get the EU involved with our domestic food supply... (that is, Americans would feel much more confident eating Brussels sprouts if they are Brussels-certified).

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