Food safety made the news in 2012 when salmonella outbreaks linked to tainted cantaloupes and mangos sickened nearly 400 Americans and caused three deaths. Usually, blame for such outbreaks is placed on menacing, profit-driven corporations. Too-lax food safety laws and underfunded, understaffed government food inspection agencies let them get away with murder. However, as a member of the U.S. meat industry, I want to suggest two other culprits: the United States’ system of command-and-control food regulation and the public’s trusting embrace of it.

In fairness, the command-and-control viewpoint isn’t illogical. The American food supply is one of the safest in the world. We have access to an abundance of food (3,700 kilocalories per day) at very low prices, and food poisoning is exceedingly rare (a 0.0035 percent incidence rate, according to Centers for Disease Control data). A strict regulatory environment, it would seem, is the recipe for creating food we can trust, and a stricter one could only be an improvement.

But I submit that the current system fails to tap creative, market-based incentives to further improve food safety. As a result, we are settling for mediocrity—focusing on meeting government-established minimum safety levels. While this theory is not empirically defensible (no alternative U.S. food safety system is allowed to exist), if we consider the history of U.S. food regulation and its economic incentives, we’ll find reasons to think that we can do better.

Background | Food safety in the United States is regulated by no fewer than 15 federal agencies and thousands of separate procedures at all levels of government. At the broadest level, food safety is the responsibility of two federal agencies, the U.S. Department of Agriculture (which oversees meat and poultry) and the Food and Drug Administration (which monitors packaged food and produce, as well as medications). The FDA owns the majority of regulatory oversight—covering roughly 85 percent of the U.S. food supply—at a cost of nearly $1 billion a year. The USDA (specifically the Food Safety Inspection Service) has a far more limited role, charging $1.2 billion to monitor the national meat supply.

Federal food safety oversight has existed for a very long time. Its apotheosis was Congress’s passage of the Pure Food and Drug Act and Federal Meat Inspection Act in 1906, but the very first laws granting federal food inspection power were passed in 1891. Food safety, in living memory, has never been managed by anything other than a bureaucracy.

And that bureaucracy has expanded greatly in the intervening decades, right up to today. The FDA has announced sweeping implementation of new policies within the somewhat moldered Food Safety Modernization Act that was passed two years ago. The largest overhaul of food safety regulations in almost a century, the act proposes to tighten an allegedly too-lenient food inspection system. In addition to gaining a $1.4 billion appropriation and 5,000 new employees, the FDA hopes to mandate a series of structural business alterations—more than 50 regulations in all—that will “establish risk-based standards” to improve public health. How can one argue against that?

Consolidation | Well, one argument is that the new rules will likely continue the consolidation of the food industry, economically trample smaller food providers that can be the source of innovation, and promote regulatory capture—industry gaining control of the government agencies that supposedly oversee it. After all, this has happened before.

Around the turn of the 20th century, when the nation’s first federal food laws and regulations began to appear, small meat packers were overjoyed (and lobbied heavily for their adoption) because they believed that federal oversight would break the back of the National Packing Company, the “Beef Trust” formed by giant meat packers Swift, Armour, and Morris. The small packers’ sentiments were understandable; in the mid-1860s, the Chicago packing houses handled 29 percent of all cattle marketed, but by 1883, following the advent of refrigeration, that share had increased to 40 percent. For small packinghouses, previously enjoying the lion’s share of processing, the trend was ominous. The temptation to counter structural economic changes with structural regulatory ones proved impossible to resist.

After a successful campaign by small packers to generate federal oversight (the Meat Inspection Act of 1891, as well as the Sherman Antitrust Act of 1890), they nonetheless continued to lose market share. The industry, originally characterized as “competitive with ease of entry” and consisting of “relatively large numbers of firms in each community,” increasingly became dominated by conglomerates. By 1904, the “big four” Chicago packers had gained roughly 50 percent market share. Not only had the desired rules failed to re-democratize the meat industry, the “Beef Combines” actually got bigger.

Not surprisingly, J. Ogden Armour, the great meatpacking industrialist, was quick to pronounce support for additional government safety regulations; after all, they always seemed to improve his bottom line. He expressed great pleasure at the passing of mandatory meat inspection requirements for domestic processors, telling the New York Times in 1906: “Nobody in the country will give the law heartier support than we will. As we have said from the first, we always have believed in stringent meat inspection.” The “stringent inspection” labels gave his company a convenient marketing front in the era of Upton Sinclair’s The Jungle, while simultaneously erecting significant barriers to entry by upstart competition.

In a strange echo of the past, a January 2013 New York Times article observed that “the food industry cautiously applauded” the latest FDA proposals. The article quotes a Grocery Manufacturers Association statement that “Consumers expect industry and government to work together to provide Americans and consumers around the world with the safest possible products.” Armour couldn’t have said it better himself.

Consolidation continues today. In 1970 the top five beef companies controlled about a quarter of overall market share. Today, the top four command over 80 percent—despite all of the hype about “locavore” dining. The reasons for this consolidation are manifold, including consumer price consciousness, economies of scale, and complicated horizontal integration across the industry. But lest it go unnoticed, regulatory accretion over this period has also increased. Those costs weigh on all meat packers, of course, but they often are fixed costs, which means they weigh more heavily on smaller producers. Reams of paperwork, expensive tests, constantly updated procedures, and risk create barriers-to-entry that heavily burden small processors and discourage would-be entrants. As a result, small meat packers in the United States are disappearing as quickly as small family farms; according to a USDA assessment, the number of cattle slaughter plants declined by over 42 percent from 1996 to 2003 “as plant size increased and smaller plants closed.”

There is a powerful and inverse correlation between strength of regulation and competition in the food industry. As the rules become increasingly onerous, the tendency toward centralization grows.

So what? | It can be argued that the loss of small packers (and, by extension, the small-scale farms and cattle operations that supply them) is a regrettable but necessary cost of improving the safety of the nation’s food supply. However, I believe that consolidation (generated by intense regulatory pressures) actually leads to less safe food.

Food is so vital and prevalent, and mishandling of it so potentially devastating, that the subject of food-borne illness falls into that treacherous low-probability/high-consequence psychological category where reason is waylaid by emotion. As a result, we are wary of any proposal to ease or alter the regulation of food, believing such change can only lead to catastrophic results. It is far better, we are tempted to believe, to make food safety the responsibility of government inspectors and rulemaking bureaucracies. But the evidence for this belief is surprisingly weak and we should wonder what could be gained from competition between food providers who would have to earn the public’s trust.

There are, after all, plenty of consumer goods that have the capacity to seriously inconvenience or kill us, yet their safety is left largely to market mechanisms backed by civil liability. A computer virus can affect worker productivity every bit as much as a stomach virus, and yet we find computer companies producing remarkably “clean” products each and every day without submitting to government-approved protocols or mandated inspection regimes like we find in the food sector.

Well over a million companies worldwide currently operate under industrial quality improvement doctrines such as ISO 9000 or Six Sigma. Those tools and standards, spontaneous and non-governmental, are an effective way for companies to implement the one overarching rule of business: don’t hurt customers. Though it flies in the face of conventional wisdom, businesses actually “behave” because they want to remain competitive, not because they feel a duty to follow rules. Continual process improvement, enhanced product reliability, and superior safety are what make companies competitive; their striving toward perfection gains loyalty and, ultimately, market share. It is fascinating to note, for instance, that the Six Sigma standards of quality control require a 99.99966 percent error-free rate (3.4 defects per million). As good as our food system is, it doesn’t come close to that rate of excellence.

Someone might reasonably object that nothing currently prevents food providers from competing on food safety. Government regulations enforce a minimum safety level, after all, not a maximum. To look at a different industry, Volvo has built its reputation and market share on the notion that its cars are especially safe. But the food industry suffers from a version of moral hazard that makes it difficult for individual producers to compete on safety. Because the industry is so highly regulated, final responsibility for safety is perceived to rest with the regulator rather than the business owner. Compared to computer companies, whose market shares are wholly dependent on their reputation for quality, food companies can rest on the crutch of government-sponsored certification because consumers seem to assume that certified companies are all equally safe. Government’s emphasis on oversight effectively erases the advantages of differentiation, creating “pooled” commodity products in which it is difficult to compete on a basis of safety or quality. Hence, government food safety regulation both creates a high barrier to entry and low returns for existing producers who try to differentiate themselves on safety.

Testing my theory | Imagine for a moment what the food world would look like if food safety were a competitive advantage in a relatively unregulated sector. The Volvo of the food world, vying for an “ultra-safe” reputation, would find a profitable niche. Small companies could demonstrate (through third-party quality assurance, a sophisticated testing regime, or something completely unthought-of as yet) that its product was measurably safer than its competitors.

Arguably, this is already happening to a small degree, as growing public concern over “industrial” food has opened a window for small, local food companies to develop customer loyalty through claims of superior safety. But like the debate over western public lands and hunting (i.e., private landowners find themselves unable to charge significant rents for private land access because so much “free” access exists nearby), these attempts are swamped by a giant state-manipulated production system. The competitors in this space are registering a slight murmur of consumer dissatisfaction rather than the persistent drumming roar that I believe a competitive market would unleash.

If we could get the incentives right, corporate self-interest would be instantly harnessed for the greater public good. If food safety were a serious competitive advantage, companies would engage in a continuous striving for the next-higher grade, or a “seal of approval,” or a “four-diamond” rating. Instead, under the current regime producers aspire only to an “Inspected—Passed” stamp; companies have little reason to strive to be the best they can be.

As the new FDA rules go into effect, the time is ripe to try an experiment. I suggest that we establish a pilot program in which small food companies can select to be regulated under the current regime or opt for a “Not Government Regulated” label coupled with their own private regime. The latter firms would have to earn customers’ trust, and customers would determine which firms do things well. This system would tap the latent power of markets to manage food safety instead of relying on the blunt instrument wielded by administrators.

Contrary to popular myth, markets are very good at giving us what we want. I posit that food safety in a relatively unregulated sector would soon surpass the regulated sector as innovation and competition were unleashed—but only if given the chance.

Regulations are good for imposing minimums, but not for creating excellence. Since our food safety “problem” is clearly in the vanishing margins, excellence is called for. This will only be attained when incentives exist to urge our producers (and consumers) to peak performance.

Readings

  • “The Rise of the Chicago Packers and the Origin of Meat Inspection and Antitrust,” by Gary D. Libecap. Economic Inquiry, Vol. 30, No. 2 (April 1992).