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!