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Toy lead-content regulations hurt small toy makers

On Christmas Day I saved this link from Overlawyered.com as a draft in WordPress, meaning to blag about it, but it took this post on the LRC blag to prompt me to finally write the post. Luckily, the Overlawyered.com post and links therein do all my work for me, so I don’t really have to write anything.

From Overlawyered.com:

The Consumer Product Safety Act of 2008, sponsored by Illinois Congressman Bobby Rush and quickly signed into law by President Bush, soon goes into effect. Sold as a measure to protect children from the perils of Chinese and other foreign-made toys which may contain lead paint, the law was written with good intentions. Unfortunately, good intentions sometimes produce bad consequences. While this law may never save a child, it will certainly have consequences for small businesses which produce toys, as well as other products intended primarily for children under 12.

As always, the devil is in the details, and Publius Endures has given the details careful scrutiny. Among other little details, this law may require toy manufacturers and importers to perform costly outside testing, at a cost of over $4000, on each lot of toys shipped. If the law is so interpreted by the people who draft its enabling regulations, that will simply put small manufacturers out of business, leaving the American toy market to giants such as Mattel or driving more of the business to overseas competitors who produce on a larger scale and can absorb the cost. The result, probably not intended at all by lawmakers, may be monopoly or oligopoly in the American toy market, accomplished through regulation rather than market forces.

Both of those links are to pieces by Mark Thompson—the shorter blag post at Publius Endures and the longer essay at Culture11.com. I’ll quote the longer, latter one:

At first glance, the Consumer Products Safety Improvement Act of 2008 appears harmless enough, having been created as a response to the 2007 recall of millions of imported toys imported by Mattel from China. In reality, the story behind the legislation—passed with no meaningful political opposition—is rife with warnings about how good intentions gone horribly wrong can combine with the fundamental perils of regulatory capture.

The problems arise in the actual details of the legislation, which are voluminous and, worse, vague. For starters, the legislation bans virtually all lead in all children’s products, defined as essentially anything that would be used by a child under the age of 12—clothes, school supplies, toys, etc. This is problematic because non-soluble forms of lead not only present no health risk, especially to children over 3, but also can form essential, operative elements of fundamental electronics products such as batteries or light bulbs. According to Rick Woldenberg, chairman of educational products manufacturer Learning Resources and a leading opponent of the law, this prohibition alone has already caused at least one manufacturer to discontinue production of light bulbs for elementary school microscopes.

But the ban on all forms of lead is far and away one of the least significant problems. The biggest problem, perhaps, is that the law implements a new third party testing requirement on every SKU number of every children’s product (including individual titles of children’s books), testing that can run anywhere from a few hundred dollars to tens of thousands of dollars, depending on the type of product. It is unclear how often this testing will be required; however, the wording of the legislation suggests that it could be as often as every outgoing shipment. What is clear, however, is that large imported shipments will only need to be tested upon their arrival in the U.S.

The new law also requires a new type of labeling on all children’s products, in which these products must be stamped with various information for tracking the product, including the date of production. While seemingly easy to comply with, this will actually require expensive retooling for manufacturing machines. The law further mandates that suppliers provide their distributors with certifications for each shipment of each product, a bureaucratic nightmare that many businesses will likely violate occasionally due to simple human error. Yet punishments for violations of the law are draconian—$100,000 minimum fines for each violation up to $15 million, plus possible criminal sanctions. In addition, it is still possible that the law will be implemented in such a way as to turn some pre-existing inventory into contraband when the law takes effect on February 10, 2009 (unless this changes, existing inventory would have to be discarded, immediately driving many businesses to close and/or default on loans).

Despite its intent, the law may actually harm safety, charging the CPSC with oversight of mountains of paperwork mere months after the agency was unable to prevent the importation of tens of millions of lead paint-infested toys. How the CPSC can abide by these additional responsibilities without moving resources away from legitimate safety investigations is difficult to conceive.

The effects of these new restrictions on small and medium-sized businesses are difficult to underestimate. An owner of Playstore Toys in Palo Alto, California, which specializes in wooden and organic toys, says that “Eighty to ninety percent of my suppliers are either preparing to close up shop or are considering it.” And Woldenberg, whose company is more properly classified as “medium-sized,” says that he conservatively estimates a minimum increase of 30% in the overhead for his company to manufacture an average product. In one instance, a testing company estimated that it would cost $24,000 in testing fees for one of Learning Resource’s chlidren’s telescopes to comply with the law—even though the product contains no parts that could conceivably be considered hazardous. Because this product only generates $32,000 in gross sales per year, it will need to be discontinued. Similar problems will exist for just about every niche children’s product, for which large production runs are impractical, such as educational materials for special needs children.

Meanwhile, however, massive multi-national corporations will be relatively well-suited to adjust to the new law. Their huge economies of scale mean they can afford to staff a few lawyers to oversee compliance with the law, and it is only a minimal change to their business models for them to mass produce and import their products in a way that minimizes testing fees. In sum, the net effects of this law are that the largest businesses will be relatively able to cope with the changes, while small and medium-sized businesses (and really, any domestic business) will be disproportionately affected.

A sad irony is that this law, if no “fix” is made, will have effects that few of its advocates would have likely found desirable. For example, the testing requirements will encourage more mass production and less product diversification, making it particularly unprofitable for even a small business to cater to a niche market such as special needs children. Should these requirements be placed on a “per shipment” basis, manufacturers will be encouraged to produce more products overseas or, if the option is available to them, to sell their products almost exclusively to “big box” stores capable of ordering massive quantities of a product at once. [emphasis added]
[...]
After the import scandals of 2007, the understandable anger of Democrats—and many Republicans—at toy giants like Mattel and Hasbro made some form of restrictive legislation inevitable (although the multi-industry scope was perhaps not inevitable). Not surprisingly, lobbying disclosure reports indicate that Mattel and Hasbro massively increased their lobbying budgets in the months after the scandal broke, with Mattel’s lobbying expenditures (to be distinguished from campaign contributions) increasing from $60,000 in the first half of 2007 to $480,000 in the second half. This pace continued through at least the first three quarters of 2008.

Much more surprising, at least at first glance, is the position these companies took with respect to this legislation. For instance, in hearing testimony on November 6, 2007, Kathrin Belliveau of Hasbro and Joseph McGuire of the big-business dominated National Association of Manufacturers testified before Congress that they supported this legislation, with only minor modifications requested. Importantly, both testified that they supported the testing requirements that will likely be particularly devastating to small and medium-sized businesses and domestic manufacturers.

While one should be careful about assigning intent in these situations, there are at least two possible explanations for these efforts. The conspiratorial theory is that big business actively sought to use the law to destroy their smaller competitors. The more benign (and, I think, likely) theory is that these groups simply needed to appear supportive of the legislation for PR purposes; knowing that their economies of scale would allow them to weather the effects of almost any outcome, they had no incentive to push for changes that would have a much more significant effect on smaller business.
[...]
Regardless of which explanation is accurate, the conclusion is the same: regulation will only rarely impose destructive effects on “big business,” but it will often impose dramatic costs on smaller competitors. In this manner—and especially in an era when “deregulation” is a four-letter word—free market conservatives and libertarians would do well, at least politically, to adopt an attitude that is fundamentally anti-corporate, portraying regulation as essentially a boon for big business and a path to monopoly—or at least market oligarchy. This, of course, is effectively the position recently advanced by Prof. Roderick Long in a much-discussed Cato Unbound essay.

As Mark Thompsons notes, the large toy manufacturers didn’t necessarily support the legislation because it would hinder their smaller competitors more than it would them, though I have a hard time believing they were completely unaware of this near-certainty. What is important is that the system functioned once again to benefit the rich and powerful and screw the little guy. State interventions into the economy always result in waste and counterproductive regulatory/bureaucratic compliance, and almost always result in consolidation of power and wealth. As many libertarians argue (correctly, I think) and as seems to be the case here, State safety regulations often retard improvements in health and safety by forcing companies to waste money and encouraging companies to adhere only to the letter of the law and not to practices that would benefit them and their customers over other companies and their customers. I wish Statists would appreciate the fact that inestimable sums of wealth and jobs have been destroyed or precluded by thousands upon thousands of well-intentioned regulations like this.

Thompson was somewhat optimistic that the worst effects of this legislation would be amended to reduce the harm to smaller companies, but I fear that the regulations will stay and that they will go on benefiting large companies and hurting small ones, either to a large extent or a smaller extent. The solution to problems like this is allowing the free market of judgment and punishment (profit and loss) to work and allowing a fair, tort-based legal system to flourish, in which large companies fear devastating lawsuits more than federal regulations (which end up helping them in the long run!).

Overlawyered has followed up with three more posts and I’m sure we’ll be hearing more about it as the February 10 enforcement date approaches and passes.

UPDATE: I forgot to add this link to a column by Timothy Carney for the DC Examiner. (I wonder if he’s related to John Carney of my previous blag post.) Worthwhile excerpt:

Is this disproportionate impact on the smaller businesses an “unintended consequence,” as many now say? When you look at the lobbying records, it doesn’t look so.

Mattel—whose leaded toys kicked off this whole scare—beefed up its lobbying effort when the legislation appeared. The company’s lobbying budget, which had been steady at $120,000 per year from 2002 through 2006 ballooned to $540,000 in 2007 and $650,000 in 2008—a 442% increase from two years earlier.

In late August 2007, Mattel, the largest toymaker in the world, hired a new lobbying firm, Johnson, Madigan, Peck, Boland & Stewart, to lobby on the bill. One of their lobbyists on this issue was Sheila Murphy, recently the legislative director for Sen. Amy Klobuchar, a Democratic member of the Commerce Committee’s Consumer Affairs subcommittee. Klobuchar became a cosponsor of the bill in late September 2007.

Hasbro, the world’s No. 2 toymaker, had never had a Washington lobbyist, according to federal lobbying filings, before October 2007, when the company hired the Duberstein Group, headed by Ken Dubertstein, the former White House Chief of Staff under Ronald Reagan. Since then, Hasbro has spent $500,000 on lobbying.

But these industry giants weren’t resisting regulation—they were embracing it. Carter Keithley, president of the Toy Industry Association—of whom Mattel is the biggest member—told this columnist “we were early proponents of adopting mandatory laws to require toy testing.”

The regulations give the big toymakers a federal stamp of approval, and they make it harder for upstarts to challenge the big guys—or even survive. Without the regulation, parents might put more trust in a local, independent toymaker they know. After the regulation goes into effect, that toymaker is out of work.

Regulation proponents usually say anti-regulation types are shills for big business. Washington’s toy story makes that claim look even more like make-believe.

Posted in Power elite, Socialism