Slaughterhouses, Restaurants, and Agency Capture

Among the justifications given for state intervention in the economy is ensuring the safety of consumer goods - everything from cars to food to drugs. The US Department of Agriculture (USDA) is an organization whose tasks include, among other things, ensuring the safety of meat, poultry, and egg products.

As a result, it has monopoly control over the sale of kits that test for Mad Cow disease. Creekstone Farms is a small slaughterhouse in Kansas that wanted to quell customers' fears about Mad Cow disease by testing all of its beef for the contagion, rather than merely the random, sporadic testing the USDA mandates. The USDA refused to sell enough kits to Creekstone to test every cow.

Why? According to USDA, the reason was because such an act would undermine its official position that random testing is adequate. However, GWU Law Professor Jonathan Turley writes that the real reason is due to a phenomenon called "agency capture", a term describing a regulatory agency becoming a tool of those it seeks to regulate. The USDA is simply trying to appease the big slaughterhouses which compete with Creekstone in the marketplace. If Creekstone were to go ahead and set a higher standard, the larger companies would have to follow suit and test all of their cows unless they wanted to lose market share. The meatpacking industry was dead set against full testing and worked to ensure it would not have to compete with Creekstone. Thus, working on behalf of the big slaughterhouses, the USDA is preventing Creekstone from satsifying the public's desire for better testing.

More generally, a monopoly certifier of safety is preventing the free market from advancing safety standards.

Although I am a bit late to respond, Julian Sanchez and Radley Balko recently had a back-and-forth on this very subject. Julian was turned off by the discovery that some of the restaurants he had eaten at were found to have rodents on premises, and argued that there is an ex ante justification for government provision of restaurant certification. Radley countered by arguing that private companies, such as Underwriter Laboratories and Consumer Reports, could provide this service. Julian responded with cautious support for private certification while leaving the option for government certification open (I think).

On net, I tend to think that Radley's right to suggest a private cert system would be more efficient and flexible than the government inspection model. But that's a variable function of the specific informational and transaction costs of the two alternatives. These are cases where the libertarian's attitude, I think, should be reformist but not condemnatory in quite the same way, analogous to the case where we think the police department would do better to outsource its forensics department, or that legislators are issuing an inefficient number of emissions vouchers each year. If the transaction costs of the private solution fell out differently, prior inspection wouldn't be intrinsically objectionable, so the error involved in going that route is of a different order than the kind involved in the first category.

I'm not sure who determines whether or not transactions costs are too high; certainly not those who are willing to pay them. However, there is another economic argument that is missing from the discussion, I believe.

Private certifiers such as Consumer Reports are directly beholden to consumer preferences. If consumers are not happy with Consumer Reports, or believe they are favoring certain vendors unfairly, or believe their standards are subpar, consumers can choose not to exchange their money for Consumer Reports's services, and Consumer Reports's bottom line will be affected. They have an incentive to please the public. Thus, Consumer Reports serves as a direct link between the vendor's success in the marketplace and the safety choices of consumers. Michelin knows it has to meet Consumer Reports' standards for the very reason that many people trust Consumer Reports enough to pay for their certification services. Consumers having the ability to spend their dollars on their own choice of certifiers keeps vendors in check.

A monopoly certifier does not receive its operational funds from consumers freely. It does not have a direct incentive to please the public. At most, it may face consequences years down the road through election outcomes, and even then bureaucratic inertia protects its job security. If it favors certain vendors unfairly, the public cannot respond immediately by refusing to interact with it. Taxation still provides funds for its continued operations. Because the monopoly certifier's solvency is not affected by consumer choices, the direct link between the vendor's success in the marketplace and the choices of consumers is no longer there.

Vendors no longer have an incentive to please the public, but rather only need to please the monopoly certifier. They can satisfy the monopoly certifier by creating safe products, but they can also do so through payoffs, political favors, nepotism, and bribes. As a result, the monopoly certifier becomes beholden to special interests, because there is no market incentive against it. No longer is there a true link between consumers and vendors.

Anytime a monopoly is created, and by that I mean a monopoly backed by the use of government force, mutual incentives arise for the most powerful to use that monopoly as a pawn for their goals, and for that monopoly to be willingly used in this fashion. The fiasco with the USDA and Creekstone Farms is a great illustration. The mission of the USDA is to regulate slaughterhouses; yet, the large slaughterhouses are using the USDA to ward off competition from the likes of Creekstone.

Similarly, FDA standards are so stringent and drug approval is so inefficient that only giant pharmaceuticals can afford to take the financial risks involved in bringing a drug to market. As a result, smaller biotech companies have a difficult time competing with the firmly entrenched giants on the drug market. For over a century, anti-trust legislation has been intended to thwart the power of large firms; yet, paradoxically, it has been a weapon for large firms to target more efficient competitors, creating state-enforced monpolies where none existed before. International organizations such as the WTO are created to 'ensure free trade' and protect the public from protectionist policies. Yet, in practice, they result in privileged trade status for politically-connected corporations.

Is there any doubt that a monopoly certifier of restaurant cleanliness would eventually have its interests become aligned with politically savvy restaurants it is supposed to regulate, at the expense of competitors and the public?

Philosophical considerations can inform our initial conjectures about various roles of government. However, economic incentives also have to be considered to evaluate the merits of intervention.

The relevant question is not whether private certifiers can emerge to ensure safety in the marketplace. That question has already been answered in the affirmative. A more important question is-- can a public monopoly ensure safety in the marketplace without being corrupted by the perverse incentives of monopoly structures? The answer is a resounding no.

Share this

This article made me think

This article made me think of Atlas Shrugged. The gov't Science Institute was opposed to Rearden Metal because the development of the metal by a private organization undermined the Institute's justification for existance.

Not quite the same, but an interesting parallel anyway.

Nice summary. When I tried

Nice summary. When I tried to write about this, I got a little too worked up, I think.

Please make sure that that

Please make sure that that bastion of economic insights, Kevin Drum, reads this.

Why do they try to preempt

Why do they try to preempt anything and everything from happening? Everyone knows the shortest path from a to b is consumer to producer, and every level between that obfuscates and slows down the transfer of valuable information. Can the goofs who work for gov'ts not see that?

Excellent article, Jonathan!

Excellent article, Jonathan!