Free to Choose Chapter 7: Who Protects the Consumer - Regulatory Agencies

Imagine you hire a bodyguard to protect you. A few years later, you realize the bodyguard is now working for the people you needed protection from – and you are still paying his salary. That, in short, is what happened with most of America’s consumer protection agencies. They were created to defend ordinary people. They ended up defending the industries they were supposed to regulate.

This is post 11 in my Free to Choose retelling series. This chapter is split into two parts.

The Explosion of Government Regulation

Friedman starts with a big-picture view. Before the late 1960s, the federal government had about thirty-two regulatory agencies. Most of them dealt with a single industry – railroads, banking, airlines – and had narrow, well-defined powers. Growth was slow.

Then something changed. In one decade, twenty-one new agencies were created. These were not limited to one industry. They covered everything: the environment, product safety, occupational safety, energy. The Federal Register, the document that records all government regulations, ballooned from about 17,000 pages in 1970 to over 36,000 pages by 1978. The number of government employees working in regulation tripled. Spending jumped from under $1 billion to roughly $5 billion.

And during this same decade, America’s economic growth slowed dramatically. Productivity, which had been rising over 3 percent a year, dropped to less than half that rate.

Friedman asks: is this a coincidence? He thinks not. The regulations imposed heavy costs on businesses. They prevented some products from being made. They forced companies to spend money on compliance instead of innovation. Conservative estimates put the total cost to industry and consumers at $100 billion a year – twenty times what the government itself spent on running the agencies.

Here is the irony. Ask yourself which products improved the most over the decades. Household appliances, televisions, computers, supermarkets – all produced by private enterprise with little government involvement. Now ask which products were the worst and improved the least. Postal service, public schools, railroad passenger transport – all run by government or heavily regulated industries. Yet the public had been persuaded that private business was the problem and government was the solution.

The Interstate Commerce Commission – A Case Study in Capture

The Interstate Commerce Commission, created in 1887, is the oldest and clearest example of what goes wrong.

After the Civil War, railroads expanded at an incredible pace. By 1890 there were over 1,000 separate railroads and more miles of track in the United States than in the rest of the world combined. Competition was fierce. Freight and passenger rates were among the lowest anywhere. Railroad owners hated it. They called it “cutthroat competition.”

They tried to fix the problem themselves – forming pools, agreeing on prices, dividing up the market. It never worked. Somebody always cheated. One member would secretly cut rates to steal business. Deals would collapse.

Competition was especially intense between big cities like New York and Chicago, where shippers could choose from many railroads. But on shorter routes, where only one railroad operated, that company had a monopoly and charged whatever it wanted. This created an odd situation: sometimes a short trip cost more than a long one. The short-haul customers were furious.

Farmers in the Midwest organized movements – the Grange, the Populists – demanding government control of the railroads. The cartoonists drew railroads as giant octopuses strangling the nation.

Here is the twist. Some smart railroad executives realized they could use this anger to their advantage. If the government regulated rates, it could enforce the price-fixing agreements that the railroads could not enforce on their own. The railroads joined the reformers. Together, they created the ICC.

Within a decade, the reformers had moved on to their next cause. The railroad men stayed. They staffed the ICC. They shaped its rules. The first commissioner, Thomas Cooley, had been a lawyer for the railroads for years. The Attorney General wrote to a railroad president just six years after the ICC was created: the commission “satisfies the popular clamor for government supervision of railroads, at the same time that supervision is almost entirely nominal.” He called it “a sort of barrier between the railroad corporations and the people.”

And how did the ICC solve the short-haul/long-haul pricing problem? Not by lowering the short-haul rates. It raised the long-haul rates. Everybody was happy – except the customer.

The ICC Spreads to Trucking and Airlines

In the 1920s, trucks emerged as competition for railroads. Trucking was unregulated and highly competitive. Anyone with enough money for a truck could start a business. It was close to what economists call “perfect competition.”

The railroads could not have that. They lobbied to bring trucking under ICC control. The Motor Carrier Act of 1935 gave the ICC power over interstate trucking. Out of 89,000 applications for operating permits, the ICC approved only about 27,000. After that, it rarely let new companies in. The number of licensed trucking firms dropped from over 25,000 in 1939 to about 14,600 by 1974 – even as the amount of freight shipped by truck increased twenty-seven-fold.

The permits themselves became valuable property. You could buy and sell them. Their total value reached $2 to $3 billion. This was not productive wealth. It was the price tag of a government-granted monopoly position. Studies showed that eliminating ICC regulation of trucking could cut shipping costs by up to 75 percent.

One Ohio trucking company, Dayton Air Freight, had a license for just one route – Dayton to Detroit. To serve other routes, it had to buy rights from other license holders, including one who did not own a single truck. It paid as much as $100,000 a year for the privilege. One of its customers said: “I don’t know why the ICC is sitting on its hands. The consumer is ultimately going to pay for all this.”

The same pattern played out with airlines. The Civil Aeronautics Board, established in 1938, took control of nineteen domestic airlines. Despite enormous growth in air travel and many applications, fewer airlines existed decades later. The one bright spot was that deregulation of air fares eventually happened – and it worked. Lower fares, higher airline earnings. But trucking and rail deregulation faced fierce opposition from the industries that benefited from the status quo.

The Natural History of Government Intervention

Friedman describes what he calls the “natural history” of government intervention. It follows a predictable pattern, and the ICC illustrates every step.

First, a real or imagined problem creates public outrage. Reformers and industry insiders form an unlikely coalition. Their goals are incompatible – consumers want low prices, producers want high prices – but everyone hides behind fine-sounding words like “the public interest” and “fair competition.”

Congress passes a law. The preamble talks about protecting the people. The body of the law gives officials power to “do something.”

The reformers celebrate and move on to their next cause. The industry insiders stay. They work the system full-time. They staff the agency. They shape the rules. Gradually, the agency serves the industry instead of the public.

Success creates new problems, which require more regulation, which creates more bureaucracy. Eventually, even the original industry insiders lose control to the growing bureaucracy. The final result is the exact opposite of what the reformers wanted. But by now so many people depend on the system that nobody can dismantle it.

Instead, a new agency is created to fix the problems of the old one – and the cycle starts again. Amtrak was created largely because the ICC would not let railroads adjust to changing markets. Its real purpose was to let railroads drop unprofitable passenger routes. Now Amtrak both cuts service and subsidizes what remains.

The FDA – Good Intentions, Deadly Consequences

The Food and Drug Administration has a different origin but follows the same trajectory.

It started with Upton Sinclair’s novel The Jungle in 1906, which exposed the horrifying conditions in Chicago’s meatpacking houses. Sinclair wanted to create sympathy for workers. Instead, he made people sick thinking about their food. As he said: “I aimed at the public’s heart and by accident hit it in the stomach.”

Like the railroads, the meat packers saw an opportunity. They had already learned that poisoning customers was bad for business. But European countries were blocking American meat imports, claiming it was diseased. Government inspection would certify the meat as safe and open those markets – at taxpayer expense. The meat packers eagerly supported the new law.

The 1906 act was modest – mostly food inspection and patent medicine labeling. For decades, the FDA had little effect on the drug industry. Then came two tragedies.

In 1937, a chemist tried to make the new drug sulfanilamide available in liquid form. The solvent he used was deadly. One hundred and seven patients died, and the chemist killed himself. The result was the 1938 Food, Drug, and Cosmetic Act, which required all new drugs to be approved for safety before they could be sold.

Then came thalidomide. In the early 1960s, this drug caused terrible birth defects in Europe. The FDA had kept it off the American market, though small amounts had been given to doctors for experimental use. The public outcry led to the 1962 Kefauver amendments, which changed everything. Now drugs had to be proven not just safe but effective. And there was no time limit on how long the FDA could take to decide.

The Drug Lag – Lives Lost in the Name of Caution

The consequences were dramatic. The number of new drugs introduced each year dropped by more than 50 percent after 1962. The time to bring a drug to market quadrupled. The cost exploded – from about half a million dollars and twenty-five months in the early 1960s to $54 million and eight years by 1978. That is a hundred-fold increase in cost, compared to a mere doubling of prices in general.

Drug companies could no longer afford to develop treatments for rare diseases. The United States, once the world leader in new drug development, fell behind. And because the FDA often refused to accept evidence from other countries, Americans could not even benefit from breakthroughs happening abroad.

Dr. William Wardell studied this “drug lag” carefully. He found that far more drugs were available in Britain than in the United States, and those available in both countries reached Britain first. Some of these were not minor improvements. Beta blockers, which could prevent death after heart attacks, were available in Britain but not in America. Wardell estimated they could have been saving ten thousand American lives a year. For an entire decade after the 1962 amendments, not a single new drug for hypertension was approved in the United States, while several were approved in Britain.

FDA advisory committees sometimes said things like: “There are not enough patients with a disease of this severity to warrant marketing this drug.” Wardell’s response was devastating: that is fine if your goal is to minimize drug side effects for the whole population. But if you happen to be one of those “not enough patients,” and your disease is severe or rare, “then that’s just tough luck for you.”

Friedman explains why this happens with a simple thought experiment. Imagine you are an FDA official deciding whether to approve a new drug. You can make two mistakes. Mistake one: approve a drug that turns out to be harmful. Your name will be on every front page. Your career is over. Mistake two: reject a drug that could have saved thousands of lives. Who will know? The drug company will complain, but they will be dismissed as greedy. The patients who might have been saved are not around to protest. Their families will never know that a bureaucrat’s caution killed their loved ones.

The incentives push every FDA official toward extreme caution – toward blocking drugs rather than approving them. It is not about bad people. It is about a system where saying “no” is always safer for your career than saying “yes.”

Key Takeaway

The pattern repeats across every agency Friedman examines. The ICC was created to protect consumers from railroad monopolies – it ended up protecting railroads from competition. The FDA was created to protect patients from dangerous drugs – it ended up blocking lifesaving medicines and costing thousands of lives through delay. In each case, a real problem led to a government agency, the reformers moved on, and the regulated industry took control. Friedman calls this “regulatory capture,” and the evidence suggests it is not a bug in the system. It is how the system works. The people with the most at stake – the industries being regulated – will always invest more time and effort in shaping the rules than the general public, which has a thousand other things to worry about. Good intentions are not enough. The question is whether the cure is worse than the disease.

Book: Free to Choose by Milton and Rose Friedman | ISBN: 978-0-15-633460-0

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