Sunday, October 10, 2010

CPSIA - What Are We Trying Achieve?

787 days have passed since ANY Democrat in Congress did ANYTHING to help us on the CPSIA. There are only 23 days left until Election Day.

Sean Oberle published a lengthy contemplation of the issue raised in my last post on the relationship between compliance and safety as objectives for regulators and for industry. Mr. Oberle's essay speaks for itself, so I will not attempt to summarize it. He concludes with the following message: "Therein lies the frustrating and frightening aspect of product safety. Those of you tasked with ensuring product safety – industry rep, consumerist, and regulator alike – are trying to quantify ambiguity amid a chaos of demands … all of them in flux … I don't envy you."

Sean, boy are you right!

I think it's worth discussing a few issues on compliance versus safety since Mr. Oberle devoted so much ink (or electrons) to the topic.

1. The law defines what the CPSC can and cannot do. It's a shame no one told them . . . .

First and foremost, the CPSC exists because of the CPSA and its activities are governed by the CPSA. Recall authority is governed by Section 15 which limits the agency's recall authority to "substantial product hazards", namely a product that ". . . creates a substantial risk of injury to the public". [Section 12 gives the agency additional powers to seek a court order for "imminent hazards".] In other words, the CPSC does not have the legislative authority to tilt at windmills - it cannot demand recalls for anything unless it presents a "substantial risk of injury to the public".

Consider recalling 12 million glasses that the CPSC acknowledges in writing are SAFE. Substantial risk of injury?

Consider recalling more than seven million trikes sold over 14 years that caused six children to cut themselves. Children who were under three years of age and should have been under the care of attentive adults. Substantial risk of injury?

Consider recalling more than 400,000 Sarge cars because the little yellow dot on the wheel hubcap violated the lead-in-paint ban, and those dots were produced from two cans of paint. Substantial risk of injury?

One must distinguish between legerdemain and reality, between policy and what the law intended. It is a little focused-upon responsibility of the agency to exercise this judgment. Is it even possible for everything that happens to be a "substantial" risk? We know of cases where a single broken toy without an injury provoked an official investigation at the agency. Fair? Is this an activity that the CPSA authorizes? It is . . . if you are running the agency and you say it is. Arguably, the recall of the 480,000 Mattel Wheelies on September 30 was just such a case. Consumers apparently reported two broken cars with wheels that fell off, and no injuries were reported or implied. Substantial risk of injury? I question that.

2. The notion that we need all this supervision flies in the face of injury statistics. But it sure makes the CPSC look irreplaceable, doesn't it?

I have already published and discussed ad nauseum the historical injury statistics from lead based on CPSC recall notices - ONE DEATH and THREE UNVERIFIED INJURIES over 11 years (1999-2010). If we were facing such a dire public health crisis, why weren't kids dropping like flies from lead poisoning over such a long time period of "lax regulation"? If the harm was so widespread and so devastating, why aren't any of these actual victims known? Names, addresses, photos, case histories?

A friend replied to me recently reasoning that there is no safe level of lead. Okay, I concede that lead can be dangerous but it is absolutely true that lead in present throughout our environment and in the air, food and water that we consume every minute of every day. So since we take in lead from several sources all the time, we know we are building up lead and this leads to several questions. If lead is so harmful at all levels, why aren't we ALL showing the effect of our cumulative build-up of lead? How can you demonstrate that children's products contribute meaningfully to the asserted "problem"? How can you prove that "fixing" children's products will meaningfully change lead blood levels? And if you could prove those things (which cannot be done), how can you measure the return on investment of our multi-billion dollar annual investment? Remember, we can only spend those dollars one time - so is flushing them down the toilet on test reports REALLY our best use of scarce and irreplaceable dollars? How would you measure that?

But the more that the CPSC enforces the law against "bad" corporations, the more they scam the public into thinking they needed the help all along. They talk about recall statistics but never put them in the context of injury statistics. The proponents never compare lead injury statistics to other injury statistics like swimming pools.

[Is a child injured by lead "worse" that a child killed in a pool? It better be - because we are spending billions to prophylactically eliminate the possibility of purported lead injuries while leaving swimming pools open to continue a continuing skein of killings of more than one child each day. That's okay according to our Democrat-run Congress. Tell that to the family of drowning victim - they can take comfort in knowing that their child didn't have lead poisoning thanks to the relentless and remorseless enforcement of the CPSIA . . . .]

So as the regulators abuse and confuse the definition of hazard, they create an atmosphere of dependence. Oh thank you Mother Government for saving me! What would I do without you?!

3. Mr. Oberle reminds us that "Lack of incidents may not mean a product is safe." And just because you're paranoid doesn't mean they AREN'T out to get you.

Mr. Oberle does not take an offensive stance on this topic, btw. He is right, you can sometimes catch something dangerous before it creates harm. Presumably a quicker recognition of the hazard in Magnetix might have prevented injuries. Responsible companies need to always keep a lookout for insights that reveal latent hazards.

On the other hand, injury statistics are a useful tool. If, as is the case for lead, the assertion is that the hazard is widespread and present over a lengthy period of time, injury statistics become QUITE relevant. So, if lead was such a terrible problem in children's products (putting lead-in-paint aside, long ago banned), injury statistics over many years would reveal a latent problem. Think of the breadth of the definition of "Children's Products" and think of the years of recall data available for study. We are looking at TRILLIONS of interactions with children every year in the United States alone. Where are all the lead victims? We cannot say that we don't know the scale of this problem. We have apparently been running an "experiment" on the U.S. public for decades in the period the zealots label as "lax regulations" or "lax enforcement". If lead-in-substrate were so dangerous, wouldn't you expect to see SOME evidence of it?

If we must imagine the scale of the danger, can we spend imaginary dollars to deal with it?

4. The compliance hawks want to frame this as a financial question - how much is your safety worth? I think that's the wrong question - I think the question is "how long do you want to have a job?"

I have already reported that our compliance group is currently up to six people from a historical one or two, and of course, our products are no safer today than in the past. They were always safe and still are, but it costs us a lot more to operate. That's not good for you or for me.

So how do we pay for all this new bureaucracy? We have not raised prices, that's impossible these days. We are lucky to have customers and cannot spit in their faces with a price increase. Think of your business - it won't fly.

We also need to hit profitability targets because we need to remain financable. We do not get money from "money fairies" - we have to deal with a bank, just like you. Our bank prefers to see that we make money. I know that doesn't seem very civic-minded but I can't fault them for their POV. In any event, I think it's elementary that a business needs to make a profit to have the model sustain itself. Therefore, we cannot commit ourselves to ever-eroding profitability. When our costs rise, we cut elsewhere . . . just like you do.

Needless to say, we have skinnied up a lot since 2007. We have a much-reduced headcount and operate far more efficiently. This is how everyone behaved during the financial crisis and the jobs have not returned, in part because the economy remains sluggish. With our rising overhead relating to pointless regulations, what can we do? We must recover the money from activities that are focused on raising revenues. In effect, we are discontinuing activities that create growth to fund activities that are pure costs.

What's the math behind this? Consider how we recover a dollar of bureaucratic cost from productive activities. If you are already operating efficiently and cannot wring out big productivity gains (as may be the case post-financial crisis cost reductions), then how do you pay for an additional dollar of overhead cost? When you eliminate a "productive" dollar of cost to pay for an unproductive dollar of cost (e.g., you trade a dollar of marketing promotion for a dollar of test costs), it's not an even trade. No, because your dollar of productive cost creates gross margin whereas your overhead produces no profit whatsoever. Your productive dollar of cost produces gross profit which defrays your operating costs and produces marginal net profit on top of that. Wiping out the dollar of productive cost also wipes out the contribution to operating costs, so effectively, only the associated marginal net profit can defray the unproductive cost. Since profit percentages are generally low for most of us, the ratio of productive cost dollars needed to be sacrificed to cover unproductive costs is probably on the order of 2:1 or 3:1. Hire another QC person and fire the equivalent of two people elsewhere. In our case, we do it by attrition. We just shrink away.

As if this weren't bad enough, it's also a recipe for disaster or business death in a worst case. The continued erosion of productive spending to finance unproductive spending has a dramatic impact on growth. Revenue flattens out or stays in a downward trend. It's no surprise - you are starving your company of investment dollars as you spend at constant levels. You have simply shifted your spending from productive uses favoring growth to unproductive uses that will not create growth. Presumably, those of you with children have discussed the merits of eating fruits and vegetables versus eating potato chips. It's no different for a business and how it consumes dollars. We will never grow up to be big and strong if Mother Government restricts our financial diet this way.

Sean's right. I don't envy you . . . or me. This makes me very pessimistic about the future.

I hope you are mad as hell and won't take it anymore. In 23 days, you will get to vote. DO IT!


Happymom4 aka Hope Anne said...

Soon, the only option to having decent and safe toys will be for us as parents to use our own good judgement and MAKE OUR OWN . . . out of dangerous sticks and stones and things like that . . .

Wacky Hermit said...

If I can find the time to collect my thoughts (and I probably can't) I'll do a blog post on this.

But until then, I'm doing the best thing I can do: raising four economically literate children. My 12 year old can tell you immediately what's wrong with our nation's current approach to deficit spending, and my 10 year old knows that printing money to get out of public debt causes inflation. The 4 year old cleans sinks for quarters, and the 6 year old is learning how to save his money. And I'm working on starting a charter high school, where I will push for strong Math and Econ components to the curriculum. If we're going to raise the next generation of leaders, we damn well better make sure they know what the hell they're doing and understand the concept of risk.

Hopefully, in about 40 years at least one of them will be in government fixing all this mess. I don't hold out much hope for the current crop of powerful people or those waiting in the wings to take power next.

Ben said...

Rick, something I've been wondering about. You regularly see large corporations challenge the FCC in court and the FCC is frequently overrulled.

Why don't we see a similar type of action from the large multinationals who are regulated by the CPSC?

My feeling is it's because of the negative publicity such a legal action would create. The press could vilify them as putting safety on the line where as telecom issues are more abstract for the average man to get worked up over during a court challenge? Do you agree with that assessment?

Rick Woldenberg, Chairman - Learning Resources Inc. said...

Ben, IMHO, there are many reasons why big companies are standing pat. First, it's not economically advantageous to them. They are not really at risk. For instance, Mattel announced that the recall of 11 million toys on September 30 would result in a charge of one measly penny per share. What would horrify any of us is trivial incident to them. Why bother with the expense and risk of litigation?

There are other popular excuses for inaction, such as:

a. Someone else will do it for them.

b. It will take care of itself.

c. It's worse for our enemies or competitors.

d. It's death to our brand (bad publicity).

e. It's politically unwise.

f. It will cause the regulators to clamp down on us to "get even". [Some people might fear this a lot.]


I can only judge by behavior that the children's product industry won't be saved by a big company. They got what they wanted, an exception for internal labs. Otherwise, this is just an annoyance, a rounding error. It's just us small guys that think death is at the door.

Because it is . . . .

halojones-fan said...

I don't see comments at Product Safety, so I'll post 'em here.

"[I]sn’t taking refuge in the fact that a product was compliant when made (though wouldn’t be now) putting compliance first and safety second?"

I think that what we're getting at, here, is that the things the CPSIA requires don't actually improve safety. The product was indeed compliant when made, but that's because "safety" and "compliance" were the same thing.

I'm not sure what point Oberle is trying to make, really; is he saying that changes in safety standards shouldn't be retroactively applied? I'm assuming that he doesn't actually mean to argue against the notion of product recalls!

Or maybe he's arguing that older toys should be grandfathered into compliance? Hey, it worked for aspirin! (Aspirin is severly toxic to your liver, and would never be approved for use by the modern FDA. Heck, it would probably be illegal to even sell!)

"Lack of incidents may not mean a product is safe. It might just mean that incidents have not occurred yet."

Yes, just like lack of a criminal history doesn't mean that an inner-city black youth isn't a criminal. It just means he hasn't been caught at it yet.

Do we really want to encourage this kind of rationalization for overzealous regulation? This is a literal do-anything-I-want clause. "It might have been a hazard. We can't define how it could possibly have been a hazard to any person in any way at all, but there might have been something we don't know about, so we're perfectly within our authority to declare it hazardous." Oberle really doesn't see the dangers of this kind of thinking?

"That doesn’t mean they are safe any more than the fact that the vast majority of drunk drivers will never harm anyone means their actions are safe. No, I'm not suggesting that toy makers are like drunk drivers..."

Actually...yes, sir, that's exactly what you're suggesting. Maybe you need to pick a different analogy next time--or, better yet, don't use analogy at all if you feel like you need to apologize for it afterward.

halojones-fan said...

"But what about a tricycle with a protruding toy key placed where children’s crotches are likely to strike in the very likely possibility that they’ll fall forward during play?"

And yet...somehow there were six MILLION of these toys sold, and six of them caused notable injury to the user. We're talking about a literal one-on-a-million occurrence. As in the "incidents haven't occurred YET" thing, this is ex post facto justification; "there must have been a good reason because the CPSC doesn't do things without a good reason".

"[I]t has become bemusing to see some people assigning blame to the CPSIA and the new, “overzealous” CPSC for such recalls, as if the decades-old duties of foreseeability and correcting risks were suddenly dropped anew into companies’ laps in August 2008."

Ah-heh. It was, in fact, "dropped anew into companies' laps", in the sense that the verification and compliance process was well-understood by producers both small and large. And suddenly here's the CPSIA with its arbitrarily-tightened standards and its insistence on ill-defined "testing", and the CPSC's newly bloody-minded attitude towards compliance.

"What was going on was a feeling – often angry or anxious – that more could and should be done to ensure safe products."

Well...there's been a lot of "feelings" lately, many of them "angry or anxious", but nobody with influence in the government is proposing that all Arabs or Muslims be locked up deported. Why should we do things on the basis of angry or anxious feelings? Won't that lead to a poorly-reasoned decision made with emotional reasoning rather than rational reasoning?

"What is more tragic, a child who chokes to death on a small part from an untested toy or a child who dies of a poorly-treated disease because mommy lost a job – and her accompanying medical insurance – due to regulation-caused layoffs?"

Oh, give me a damn break. The issue isn't untested toys. The issue is the "fluctiating ambiguity" that you describe.

I guess you would be okay with a snap decision made in response to emotional reasoning, given that you're willing to pull this "think about the children" bullshit. Indeed, I can't help but wonder what your organization is actually for, given that you're apparently so willing to buy into the Divine Right Of The CPSC.