Monday, April 6, 2009

CPSIA - Rules and Incentives

I want you to consider the idea that the CPSIA is not actually the new rules of the safety game, but is instead simply a bundle of economic incentives. The rules imposed by the CPSIA are clearly intended to modify behavior, generally with the threat of terrible punishment as a cost of (any) non-compliance. Thus, the rules act as incentives and allocation mechanisms. We all respond to incentives - in other words, we seek the option that gives us the best return on investment at any given time. The impact of the CPSIA will be to change how we make our decisions going forward.

Here's a quick question for you - remember back when it was possible to make capital gains? Which did you prefer, capital gains or ordinary income? Capital gains, of course, because they carry a lower Federal tax rate. Do you think that lower tax rate was an accident? No. The Federal government established the lower rate to encourage investment, and added a time element to make sure that investments were held in place for at least a year. Capital gains tax rates are economic incentives. The new CPSIA rules will affect behavior as much as any other economic incentive, like tax rates.



















[Courtesy of http://www.despair.com/, a favorite site of mine!]

The CPSIA features a number of rules that affect cost and risk ("risk" is another word for "cost"). Do you think your business will change because of sharply rising costs? What is the impact of uncontrollable costs which can arise suddenly and without warning? Rational business people will organize away from such costs because random events (costs) are usually overvalued by conservative people (most people). Business people will respond to randomness by taking chips off the table. Economic incentives at work.

I worry about what our business will look like when and if all the ridiculous rules (and risks) in the CPSIA are allowed to mature and be implemented. Frankly, it's more horrible than I can imagine or care to. The new law will almost certainly make most of our products unprofitable at current sales volumes. How will we deal with that? A restructuring of our business to survive will be necessary. This is quite unfortunate since we have a sterling record of attention to detail and safety achievement. Those items don't deserve to die. No never mind, a rule's a rule. I don't know what form the reorganization would take, but one obvious reorganization is to cut down sharply on the product offerings (and cut overhead sharply) and reorient the business around high volume products only. This would be a total betrayal of our customers and our market, and I am not sure I have it in me. I have no good Plan "B" at this point which is why I am fighting the law. This option won't be available to all small businesses. Below a certain threshold, the only option will be consolidation - or closing down. [Starting a new business won't be easy, either, for the same reasons.]

Even if this economic incentive wasn't bad enough, there is the prospect of a snarling CPSC to deal with. Since folks like Commissioner Moore openly scorn us for not "anticipating" for years that this law would be passed precisely as it was written, I have been actively working with my crystal ball and Ouije board. Rick the Seer foresees an ugly, retooled CPSC out to protect the American people to death (an ironic turn of phrase, I know). After all, if the new leaders appointed by the Democrats actually think that books, pens, sweaters and ATVs might be dangerous sources of lead, actually endangering lives (this ignorant attitude is entirely foreseeable), then the agency can be expected to be merciless in patrolling the markets. With this terrible vision in mind, how should I prepare? Fear of a lean, mean, enforcing machine CPSC is an economic incentive. Businesses will change as a result.

Many people will exit once this vision becomes reality, and some might leave in anticipation. Those that remain would have to get their act together. What might that mean? Again, all roads to lead to Rome - smaller product lines with higher volumes. Only a simple business model can be run predictably inside the lines at all times. In a fault-intolerant environment, especially one supervised by people that cannot distinguish between risky behavior and meaningless infractions, the only way to preserve wealth (and jobs) is to never make a mistake. This can only be done with a simplified business model. Again, goodbye specialty markets. Not sure I can do this. It's a maddening prospect.

Another economic incentive is joy in your work. Yes, you know what I mean. We are not put on this Earth to work, and many of us feel we have choices as to how we spend our time. We can do anything to make a living. I, for one, take great satisfaction from making the world a little better place by developing and supplying great educational materials. I want to spend my time on making our organizations great contributors to society. I do not want to live a Dickensian existence pushing mounds of paper back and forth in satisfaction of Congressional Democrats' notion of how to properly protect children. I would find that kind of business environment suffocating and unrewarding. Some economic incentives are not measurable in dollars. It's a basic principle of Micro Economics that people make economic choices to maximize happiness, and naturally only one element of happiness is your bank account. The CPSIA creates very negative incentives in the happiness column for me. If I felt differently about the safety impact of the law, I might feel differently, but I don't - the law will have no positive effect on safety and may in fact result in worse safety for children. When the law ultimately makes our business so unpleasant to operate that all the joy leaves it, we will leave it, too. We don't have to do this.

Finally, the CPSIA creates an economic incentive with its blinding complexity. The predictable inability to handle complex chores accurately leads to elevated costs from the risk of unpredictable failure. Most business people insist on predictability. Financial obligations only make sense if you are confident you will be able to meet them. The CPSIA is so complex it can't be learned and can't be taught - and the prospect of failure raises the likelihood of expensive problems under the new law. Businesses will respond to this feature of the law. It's an irresistible economic incentive - to exit.

The non-business people who know everything in Congress are busily ruining our economy with their rulemaking. As awful as the CPSIA is, we are not the only victims these days. For instance, Congress is currently engaged in destroying once and for all whatever remains of our financial services industry. Read all about Chris Dodd's "master stroke" on executive compensation: http://money.cnn.com/2009/03/06/magazines/fortune/colvin_bonus.fortune/index.htm. Here's a good one: the Federal government under TARP rules may get to decide where TARP fund recipients can eat lunch. Yes, it's in the law. The good news is that those new Burger King sliders are supposedly very tasty!

Where will this stop? Will the American people let these people ruin our country, right under our noses? We can only hope that the political backlash begins soon. Write your Congressman today and DEMAND that they support HR 1815 and Amend the CPSIA.

6 comments:

thedomesticdiva said...

Rick...

Great post! Exactly my sentiments. My success is not just in my bank account. CPSIA takes my time away from what I love to do: design children's clothing. It makes me spend my time on redundant paperwork and interpretation of the CPSIA.

challengeandfun said...

Lest we think the government is focused solely on ruining only the children's products industry, they are working to reform the FDA and the agriculture industry. Better stock up on specialty & organic foods produced at small farms.

Rob

Esther said...

It's all about power and control. Every aspect of our lives is being invaded by "well intentioned" legislation meant to be applied for our own good. Food Safety, Consumer Product Safety, Financial Product Safety all have the intent to be good things, but created by those seeking power and control these laws will destroy freedom. The Founding Fathers denounced this kind of government when they declared their independence from King George. Will we once again say, "When in the course of Human Events..." it becomes necessary to declare our independence from such tyranny?

Mary Beth said...

Incomprehensible! As one small town politico from wealthy California wine country said to me over dinner: "The manufacturers will just have to suck up..."

David said...

I agree, CPSIA needs clarification. Too many small business owners are impacted and will likely go out of business. I thought the idea was to stimulate our economy by allowing small businesses to thrive, not strangle us.

Valerie Jacobsen said...

We've come a long, long way from "Give me liberty or give me death" to "Give me the illusion of absolute safety, and I won't ask for freedom."

Is that a one-way street?