A Slaughterhouse Catch-22 for Food Regulations

One of my favorite readers left a great comment about food regulations on my Interview With FDA Commissioner David Kessler post. Here's the portion that struck me as particularly provocative:

I have no patience with the "nanny state" objection. All the governmental regulations that have been put in place to protect citizens are there in response to citizen demand. The government doesn't do a single.blessed.thing that citizens haven't asked for.

If someone is smart and responsible and capable of figuring out, e.g., how to read a food label and why it's desirable to wear a seat belt, well yippee for them. The regulations don't impinge on their rights at all.

Double true. With extra truth sauce.

However, if we're going to be intellectually honest here, we owe it to ourselves to at least try to think up the contra-case: an instance where food regulation goes too far, becomes a clearly bad thing and does impinge on peoples' rights. Fortunately, we have one. Actually two.

One is happening right now. It's the new slaughterhouse regulations recently enacted by the US Department of Agriculture, in response to a spate of high-profile e. coli outbreaks that shook the meat industry over the past few years. This article in The Atlantic addresses the subject better than I ever could, but suffice it to say that our government's new meat processing regulations have become so complex, so onerous and so expensive that only the largest mega-regional slaughterhouses can afford to meet them.

So what happens next? Well, for starters, the small-scale meat processing industry is now likely to die off or get consolidated away.

Which leaves us with a problem. Let's say you're a local, small-scale rancher or beef farmer, and you want to send your ethically grown cattle to a small, local, ethically-managed abattoir. Unfortunately--and in an ironic example of unintended consequences--you can't. You'll soon have to send your cattle hundreds of miles away to the same gigantic industrial slaughterhouse everybody else is stuck using, because your small-scale abattoir became unprofitable under the new regulatory framework.

Here's the thing: As regulations increase, the economics of a given industry inevitably change. Big players can handle the incremental costs of new regulations--but the little guy can't always. If regulations become too costly, the big guys become the only players left. Sadly, our government, while trying to protect us, may have inadvertantly regulated away an entire segment of the meat industry, leaving behind an entrenched and far less competitive oligopoly of a few huge market players.

Bonus question: what do you think happens to meat prices as the slaughterhouse industry consolidates? Will farmers get paid more per head of cattle? Will consumers end up paying less for meat? It only takes vestigial critical thinking skills to figure out the answer to both questions is no.

Another irony. Talk to the ethical meat consumers you know. Ask them if they're in favor of more government regulation of our food supply. After they say yes, explain this scenario of the slaughterhouse industry, and see what happens to their once decisively-held opinions. Careful what you wish for.

And if you think the snowball stops there, think again. Consider any onerously regulated industry with a small number of large players. What's the primary barrier to entry for new competitors in such an industry? The primary barrier to entry is, sadly, the ability to meet onerous regulations. The secondary barrier is the ability to exercise political power by lobbying political leaders to impact future regulations in your favor.

You'd think being successful in the meat processing industry meant being good at processing meat. Not for long.

Okay, admittedly, this is just one example. But it's an exceptionally clear and depressing example of how increasing regulations can destroy competition, hurt suppliers and consumers, and worst of all, force perfectly ethical market participants right out of an industry. The question is, where exactly is that point where regulations become too onerous? How do we know when we've crossed it?

I don't know the answer. But I suspect it tends to happen to already-regulated industries that happen to be deeply out of favor with the public. Think about it: Our politicians can easily generate maximum electoral capital by regulating, punishing, assailing, railing, grandstanding and moralizing against these out-of-favor industries, all the while appearing as if they care about their voters. And in a few years, when the industry consolidates down to a few powerful mega-players, you can quietly start collecting political contributions in exchange for softening future regs. This to me is one of the darkest aspects of nanny state politics.

There's one more point I'd like to make: We consumers often think big, greedy companies are anti-regulation. This is far less true than you'd think.

And since I'm trafficking in so much irony today, let me share possibly the most ironic regulatory event of the last one hundred years: The cigarette industry, which is essentially a duopoly here in the USA, actually wanted the FDA to extend its authority and regulate tobacco products. Why? Because the FDA was likely to pass onerous regs that--if strict enough--would prevent another major cigarette company from ever being created in the USA. Bam! You've earned yourself permanent protection from new competition.

Why am I talking about this? Am I trying to say I hate all government regulations, I love contaminated meat, and I think we should return to an Upton Sinclair-esque era with no rules?

Don't be silly. My point is far more limited: regulations don't always protect people. Sometimes they actually hurt consumers, prevent competition, and annihilate small businesses. And all that does is make life easier for the large, politically-connected businesses that remain--and the politicians who represent them. What I want CK readers to understand is that there's no black and white here: you cannot assume that more government regulation is always a good thing. Again, be careful what you wish for.


For Further Reading (investment and industry analysis geeks only):
Competitive Strategy by Michael Porter
Innovation and Enrepreneurship by Peter Drucker
Wikipedia on Porter's Five Forces
Prophet of Innovation by Thomas K. McCraw (a great biography of economist Joseph Schumpeter)


Related Posts:
The Problem with Government Food Safety Regulation
How to Give Away Your Power By Being a Biased Consumer
Survivor Bias: Why "Big Food" Isn't Quite As Evil As You Think It Is
Let Them Eat Cake! Thoughts About Wealth, Power and the Food Industry
Understanding the Consumer Products Industry


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