REGULATING THE MARKET TO PROTECT THE CONSUMER

One of the most dramatic developments of the postwar period was the passage of major pieces of legislation designed to protect the consumer from dangerous or otherwise unsatisfactory goods and services. Consumer protection is by no means unique to the postwar period. As early as 1838, Congress created the Steamboat Inspection Service to check the safety of steamboats, but the rate of passage of consumer protection legislation accelerated in the liberal phase of the postwar era.

Many pieces of consumer protection legislation were the result of highly visible public tragedies. The Steamboat Inspection Service was created after a series of explosions killed many passengers and crew. The Food, Drug, and Cosmetic Act of 1938 followed the famous Elixir Sulfanilamide tragedy. The form in which this drug was sold proved to be toxic and left more than 100 dead, many of them children. But the producer was held, under existing law, to be guilty of no more than mislabeling his product. The Flammable Fabrics Act (1953) is another example. This act followed in the wake of a number of tragic accidents involving children. The industry, it should be noted, did not resist this legislation. By being able to show that their fabrics met federal safety standards, at least some manufacturers hoped to increase demand and provide a basis for defense in lawsuits. The Kefauver-Harris amendments to the Food, Drug, and Cosmetic Act (1962) followed in the wake of the thalidomide tragedy. In Europe this drug produced severe birth defects when given to pregnant women. Similar outcomes were largely avoided in the United States, mainly because of the resolute behavior of one public official, Dr. Frances Kelsey of the Food and Drug Administration, who resisted enormous pressure to license the drug. It was believed that without additional legal safeguards, future situations might emerge in which the absence of such an extraordinary individual would produce a tragedy.

Tragic events, however, are not the whole story. The passage of consumer protection legislation was also related to swings in public opinion between liberal and conservative views. Notice in Table 27.1 that eight major pieces of consumer-protection legislation

TABLE 27.1 MAJOR CONSUMER SAFETY LAWS OF THE UNITED STATES, 1900-2010

Source: Asch 1988, passim; New York Times and online news sources.

Were passed between 1965 and 1972, including the Fair Packaging and Labeling Act, the National Traffic and Motor Vehicle Safety Act, and the Consumer Product Safety Act. This burst of legislative activity was related not so much to individual tragedies as to a general lack of faith in the market. Later, however, the liberal faith in government’s ability to improve on the outcome of market forces was placed on the defensive. Presidential candidate Ronald Reagan cited the Occupational Safety and Health Administration’s (1970) penchant for issuing regulations costly to business as a prime example of the costs of excessive regulation. No major pieces of consumer legislation were passed during the administrations of Ronald Reagan or George H. W. Bush. During the first administration of Bill Clinton, a massive overhaul of the health care system was planned, but despite the administration’s backing, the overhaul failed to achieve the level of public support needed to overcome opposition. After the financial crisis of 2008, however, there was renewed support for government regulation of the economy, and the administration of Barack Obama was able to pass legislation that increased the involvement of the federal government in the health sector and the financial sector.

Weighing the costs and benefits of regulatory legislation is a difficult task, and economists are far from agreement on individual regulations, let alone the whole trend. The benefits of regulation are relatively easy to see: Consumers may be protected from consuming a dangerous food, using a dangerous drug, or driving a dangerous car. Regulation also has costs, however: It may raise prices by requiring expensive additions to a product or by requiring a firm to amass evidence that its product is safe. Regulation may also have the effect of limiting competition by preventing price competition or stifling innovation by raising the costs of introducing new products. It has been contended, for example, that regulation of the drug industry has limited the number of new drugs being brought to market (Asch 1988, Chapter 7).