Market Myth No. 3: Regulation of business is wasteful, unproductive and usually unnecessary

1.  How Barbie was poisoned in China

In the summer of 2007, millions of toys produced for Mattel by Chinese firms were recalled because they were toxic for the children who would play with them.  Some were a danger because manufacturers had cut corners by using lead paint and others because of tiny magnets that could be fatal to toddlers if swallowed.  In China’s “anything goes” version of capitalism, nobody checks to see that products are safe or that firms are following the rules.  But after years of pro-market propaganda, our own Consumer Product Safety Commission is too weak and poorly funded to stem the tide of dangerous products.

Of course, the Market Fundamentalists insist that consumers could solve the problem simply by being more vigilant.  Do they expect that people will buy test kits and scrape a little paint off every toy to see if it contains lead?  Perhaps they would advise that we import millions of these test kits from China.  But what if these lead paint-testing kits are themselves defective?

It is obviously far more efficient to rely on government regulators to protect us from dangers like this.  A well-funded Consumer Product Safety Commission would have the most up-to-date testing equipment and would do spot checks of imported products to make sure that they meet our standards for keeping people healthy.  Sure, this would impose some burden on firms like Mattel, but the ultimate outcome of healthier children and greater consumer confidence is what is best for our society and our economy.[i]

2.  How a failure of regulation in the sub-prime market threatens both homeowners and our whole economy. 

The recent sub-prime mortgage crisis is a clear consequence of the aggressive marketing of predatory lending products to consumers who lack the time and skills to protect themselves.  Salespeople for the mortgage lenders persuade naïve borrowers to sign on to loans that take away their financial security and ultimately their homes.  The fine print in these deals can drive the interest rate on the mortgage through the roof after a brief introductory period at a more attractive rate.  And the sneakiest deals include huge penalties on the borrowers if they try to get out of the loan before its expiration. 

The fallout has affected not only poorer communities, but also the stability of our entire economy.  As more and more people are unable to keep up the payments on their mortgages, gigantic financial institutions around the world find themselves holding pieces of paper—based on sub-prime mortgage debt—that could be worth far less than they paid.  The consequence has been an increasing reluctance of these institutions to engage in new lending and the entire U.S. housing market is now slowing at an alarming pace.  Average home prices for the entire U.S. are expected to fall this year, the first decline since 1968. 

Segments of the mortgage lending “community” insist that consumers should solve for themselves the problems forced on them by morally challenged firms. They think that substantive efforts to protect consumers are “un-American” and “insulting”.  But by what logic can one expect consumers, many of whom have limited time and financial knowledge, to be able to spot lending practices that have been designed by firms precisely to take advantage of the unwary?

The best solution to the problem of predatory lending is regulation.  North Carolina was the first state to actively combat these abuses with an aggressive piece of legislation enacted in 1999.  Since then, the incidence of predatory lending has decreased while the credit supply to disadvantaged communities has been maintained. States such as Ohio and Michigan that took no significant regulatory action have found themselves at the front of the sub-prime foreclosure rankings, with all the accompanying social ills.  The next step in clear: the US needs comprehensive national legislation to protect all Americans from abusive mortgage lending.  This will protect the poorest households while also protecting our financial institutions from their own excesses.  [ii]

3.  How much the delay in raising fuel efficiency standards for automobiles has cost our nation.  

In the 1970s, federal legislation to improve the fuel economy of cars led to big gains in energy efficiency.  But then the Market Fundamentalists came to power with their claims that regulation is always counter productive.  They created a political climate in Washington that made it impossible to pass new legislation that would set new energy efficiency targets for the auto companies.  Shockingly, the energy efficiency of our consumer vehicles is worse in 2007 than it was in 1987.   Market Fundamentalist ideas, in brief, have cost us twenty years of time when we could have been acting to diminish our economy’s dependence on foreign oil imports.  The price of that failure has been huge.  That is twenty years in which we have done little to meet the threat of global climate change.  Rapidly melting glaciers and rising sea levels are one disastrous consequence of inaction; the Iraq War is another.

Yet even now, the current administration remains largely indifferent to the scientific viewpoint that we can and must increase the energy efficiency of our vehicles. And again, they roll out the familiar argument that the alternative to coercive regulation is for the market to work out the solutions.  But this is yet another instance where consumer efforts alone do not work.  When many other drivers are behind the wheel of huge, gas guzzling SUV’s, purchasing a tiny, fuel-efficient hybrid is a risky choice. Everyone knows that in a collision, it is the passengers in the smaller vehicle who suffer greater injuries.  The only way out of this vicious cycle is through regulations that make the drivers of bigger, more dangerous, and inefficient vehicles pay more for the costs that they are imposing on everyone else.

Twenty years of leadership failure on this issue cost us dearly in environmental degradation, climate change, and the growing violence in Iraq and the larger Middle East. Higher fuel economy requirements for all vehicles, with no loopholes, are necessary to protect us from the terrible consequences of what even George W. Bush has called “our oil addiction.”  Contrary to the Market Fundamentalist claims, regulations can be productive, efficient, and indispensable.[iii]

    -- Chris Knight

[i]     Pasztor, Andy and Casey, Nicholas. “Congress Probes Mattel Safety Reporting.” The Wall Street Journal Online.  Sept. 7     2007  (accessed  Sept. 7 2007). http://online.wsj.com/article/SB118913466159420392.html

[ii]   Christie, Les. “Home-price forecast: First ever decline.” CNNMoney.com.  May 8, 2007. (accessed  Oct. 4, 2007). http://money.cnn.com/2007/05/08/real_estate/home_prices_to_dip/index.htm.

Prah, Pamela M.  “Ohio tries to fend off foreclosures on home loans.” Stateline.org. April 23,  2007. (accessed  September 9,     2007). http://www.stateline.org/live/details/story?contentId=201186.

Quercia, R.G., Stegman, M.A., and Davis, W.R. 2003. “The Impact of North Carolina’s Anti-Predatory Lending Law: A
Descriptive Assessment.” UNC Chapel Hill.  June 25, 2003. (accessed Sept.11,  2007).  http://www.planning.unc.edu/pdf/CC_NC_Anti_Predatory_Law_Impact.pdf.

Quercia, R.G., Stegman, M.A., and Davis, W.R. 2005. “The Impact of Predatory Loan Terms on Subprime Foreclosures: The         Special Case of Prepayment Penalties and Balloon Payments”. UNC Chapel Hill.       http://www.ccc.unc.edu/documents/foreclosurepaper.pdf.

Reckard, Scott E. “CEO calls for broker reform.” LA Times.  Aug. 22, 2007. (Accessed  Sept. 20, 2007).
http://www.latimes.com/business/la-fi-loans22aug22,1,790951.story?coll=la-headlines-business.

[iii]   Clean Vehicles. Sept.18, 2007. Union of Concerned Scientists. (Accessed Oct. 4, 2007).
http://www.ucsusa.org/clean_vehicles. 

US Environmental Protection Agency,  “Light Duty Automotive Technology and Fuel Economy Trends: 1975-2007 – Executive
Summary.”  Sept. 26, 2007. (Accessed Oct. 4, 2007). http://www.epa.gov/otaq/cert/mpg/fetrends/420s07001.htm#3.

President Bush Delivers State of the Union Address. Jan. 23, 2007. (Accessed Sept. 20, 2007)     http://whitehouse.gov/news/releases/2007/01/20070123-2.html.

Tolland, Bill. “Faceoff looming on mileage standards.” Pittsburgh Post-Gazette.  Sept 9, 2007. (Accessed  Sept. 9, 2007)
http://www.post-gazette.com/pg/07252/815604-185.stm.