Death by Regulation

I had the opportunity to hear Competitive Enterprise Institute’s Greg Conko talk about the “precautionary principle” today. The precautionary principle was enshrined by the Rio Declaration on Development and Environment in 1992: “Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation.”

Conko pointed out several problems with precautionary principle. First, it assumes that “caution” is better than “action.” That is, it always assumes that risk-averse policies will produce better results on the whole. But this assumption is unwarranted. Every delay in new drug approvals for example can result in thousands of deaths from beneficial drugs, just as easily as it could stop bad drugs. Because drug companies already have an incentive to put only good drugs to market, however, in reality, it’s mainly good drugs that are being prevented from market-access.

As former-FDA Commissioner Alexander M. Schmidt said in 1974 after he retired, “In all of FDA’s history, I am unable to find a single instance where a congressional committee investigated the failure of FDA to approve a new drug. But, the times when hearings have been held to criticize our approval of new drugs have been so frequent that we aren’t able to count them. … The message to FDA staff could not be clearer.”

Another problem with the precautionary principle is that it’s biased against synthetic substances. For example, “carcinogens,” are often used to justify regulation, but as biochemist (and former-environmentalist) Bruce Ames has found, 99.9% of all carcinogens consumed by people come from natural products. These are substances that are “natural pesticides” that cause cancer when fed to rodents, but are perfectly fine for human consumption.

Conko also described how illogical this precautionary principle can become. In 2004, for example, Denmark banned vitamin-fortified cereals like Special K and Cornflakes because they couldn’t identify the long-term effects of mass consumption of these vitamins. Similarly, for twelve years, France banned the energy drink Red Bull for fear of the caffeine it contained, even though the caffeine level was actually lower than most coffee.

The principle (or really non-principle) is often applied politically. The EU, for example, banned U.S. and Canadian beef containing growth hormone, but permitted hormone treated pork. No surprise which industry the EU is internationally competitive. (The Dutch are the third highest exporter of pork in the world) Similarly, the EU’s restriction on genetically modified (GM) foods creates two classes. One for products made “from” GM foods and one for products made “with” GM foods. Beer is made “with” GM yeast while corn oil is made “from” GM corn. The “from” category is restricted while the “with” category is not. Guess which area the EU countries are more competitive in.

Conko also argued that the FDA approval process based on the precautionary principle results in less competitive market regulation. That is, consumers have fewer options with which to punish companies who introduce bad drugs because the regulatory burden is so great to squash small competitors. He pointed out that after the FDA’s current approval process was created in 1962, the number of generic drugs that were introduced fell to practically zero until 1984. In ’84, the law was changed to exempt generic drugs from the approval process, and immediately hundreds of new generics came to market.

Furthermore, according to Duke University and the Federal Trade Commission, average new drug development costs between $802 and $868 million. These costs are exaggerated considerably by the FDA approval process, however. AIDS medication, for example, has an expedited approval process, and the costs fall to $400 million per drug, making a strong case that the FDA results in much less competitive environment.

Nonetheless, most new drug testing is done, not with the FDA in mind, but motivated by the desire to avoid tort lawsuits. FDA approval takes two years at the most, which is not enough time to test the long-term effects of a drug. FDA just adds extra costs to the testing that companies would have to do anyway. Conko noted that tort laws already were driving improvements in car safety long before the National Highway and Traffic Safety Administration began to mandate them. Not only were they already implementing airbags and seatbelts, but when they were given the choice (initially) between seat belts and airbags, they actually were installing both even before they both were mandated. In this way, the free-market defends consumers’ safety and choices better than bureaucrats.