On Food Inspections

by Don Boudreaux on April 20, 2009

in Complexity & Emergence, FDA, Food and Drink, Regulation

Hat tip to Chris O'Leary for alerting me to this report in the New York Times.  It's a report on how food processors in California are paying for their own food inspections.  Because the chief cop-on-the-beat — Uncle Sam — does a poor job of inspection, food processors themselves are footing the bill for inspections.

Of course, the report has quotations from persons offering the predictable complaint — namely, that if food processors are footing the bill for inspection, then the inspections can't be as trustworthy as those done by government. 

Those who issue this complaint overlook several important facts; here are two.  First, the agency that these complainers insist is the only trustworthy inspector (that is, the federal government) has in fact done a poor job.  It's a stretch to say that Uncle Sam is the most trustworthy agency to perform food inspections in light of the reality that he has done this task in an untrustworthy manner.

(Extra credit for those who can pinpoint the flaws in the response that says "Well, Uncle Sam has performed poorly at this task only because its regulatory budgets have been gutted during the past several decades.")

Second, food processors have incentives to create a trustworthy inspection system.  Business for these food processors is better when consumers put more trust in the products offered by these food processors.

(Extra credit for those who can explain how branding and advertising play key roles in ensuring optimal levels of food safety.)

Update: Eric Crampton, over at Offsetting Behavior, tells a telling tale.

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{ 20 comments }

Healthy Markup April 20, 2009 at 6:57 am

As long as there's a free press we don't need government inspectors of food.

Gil April 20, 2009 at 7:10 am

Heck! Why not say "if you're not willing to grow your food or prepare your own meals then you can't complain about what you get from others"?

Eric Crampton April 20, 2009 at 7:30 am

And, of course, don't forget that the USDA has forbidden American slaughterhouses from testing their own product for BSE (Mad Cow Disease). Look up the Creekstone Farms case. They wanted to certify 100% BSE-Free, with 100% testing, to regain access to international markets when the BSE scare hit. Built their own lab, trained up their own personnel. And then USDA banned them from doing the testing. It's been in the courts for the last three years.

Remember: USDA food certification is there for protection…of the folks who don't want to have to try harder than the USDA minimum.

Michael Smith April 20, 2009 at 7:38 am

Regarding the excuse: "Well, Uncle Sam has performed poorly at this task only because its regulatory budgets have been gutted during the past several decades."

I'd love to see the evidence that the budget of any regulatory agency has been "gutted" during recent decades. According to the Office of Management and Budget, not a single one of the 30 major Federal government agencies is showing a decline in spending over the last 20 years; most are showing huge increases. See the document here: Link (See Table 5.2)

What’s more, why anyone thinks a government “inspector” is in a better position to insure quality than the producer/supplier of the food in question remains a mystery. Whatever work you do, ask yourself who knows more about what it takes to make sure you are producing acceptable quality work: you and your employer — or some government official who has never done your job?

And who has the most to lose if tainted product gets out: you, who may lose your job and your employer, who may lose his customer, lose his profits and face lawsuits — OR — a government “inspector” protected by a civil service system that makes it impossible to fire or replace him?

Michael Smith April 20, 2009 at 7:45 am

Remember: USDA food certification is there for protection…of the folks who don't want to have to try harder than the USDA minimum.

Exactly. Government-imposed standards generally become, not minimums which everyone exceeds, but maximums which it often doesn't pay to exceed.

vidyohs April 20, 2009 at 7:53 am

Eric Crampton above beat me to it. The Creekstone Farms case was covered very well in Reason magazine.

Mike Farmer April 20, 2009 at 7:56 am

A company's brand is it's promise of excellence. If a company invests millions to start a business, then takes short cuts and offers an inferior product, consumers associate poor quality with the brand and they buy elsewhere — so the business has a financial incentive to provide a quality product, because, conversely, the association of quality with the brand creates profits if the company can price their product competitively. The combination of price and quality is the key, but consumers will not buy poor quality at any price in enough quanity for the company to be profitable , especially in the food industry, so companies have a natural incentive to institute quality assurance measures. If companies rely on government inspectors who are dependent on budgets to do a good job, then companies are at risk when budgets are cut. In a competitive market of inspections, the excuse of not having enough money to do a good job inspecting would not fly.

indiana jim April 20, 2009 at 7:57 am

If in real estate its: location, location, location; then in meat and produce markets it would have to be: reputation, reputation, reputation. Repeat sales are essential to business succeess; this should be obvious to even the most zealous Big Government proponent.

indiana jim April 20, 2009 at 7:57 am

If in real estate its: location, location, location; then in meat and produce markets it would have to be: reputation, reputation, reputation. Repeat sales are essential to business succeess; this should be obvious to even the most zealous Big Government proponent.

Jason O April 20, 2009 at 8:20 am

(Extra credit for those who can pinpoint the flaws in the response that says "Well, Uncle Sam has performed poorly at this task only because its regulatory budgets have been gutted during the past several decades.")

The Post hoc fallacy is the error with the above conclusion.

(Extra credit for those who can explain how branding and advertising play key roles in ensuring optimal levels of food safety.)

Branding and advertising markets drive optimal levels of food safety by creating informed consumers who then take their preferences to the shopping aisles. Competitors may capitalize on any food safety violations in advertising and damage brand reputation. Then customers shall modify preferences away from the company with unacceptable behavior. This is my quick answer.

JoshK April 20, 2009 at 8:49 am

In the world of kosher food, there is a process of inspection and certification and it's entirely private.

muirgeo April 20, 2009 at 9:42 am

What a Triple AAA idea… lets get Moody's , Fitch and Standard & Poor on the job… that should work. They'll recognize crap on lettuce when they see it.

Eddie April 20, 2009 at 9:57 am

I run a small commercial fishing company in Central America that exports to the US. Our facility is approved by the FDA. There is a mountain of paperwork from the host country so they can show the FDA that our product is good. However, no one ever even looks at our product. Likewise, when we have inspections in Miami when product is received, the inspector often knows little about fresh fish. The closest FDA lab for inspecting seafood is Atlanta, even though most product comes in in South Florida.

Finally, last year we redesigned our product handling processes to minimize the time the product is not iced and achieved over a 30% drop. No credit from our inspector, but the inspector will point out that we don't have door leading to the ice machines (someone could put contaminant in the ice machine), or other minor problems. This year we are investing big in new, state-of-the-art chemicals for disinfecting; which are much more effective and environmentally safe than chlorine. I imagine we'll get no credit for that either.

All said, we are fortunate because the inspectors in both countries are frequently good people, sympathetic to small business. Similar to what I saw consulting for big business: good people making the most of bad processes and incentives; trying to do the right thing.

wintercow20 April 20, 2009 at 1:37 pm

"What a Triple AAA idea… lets get Moody's , Fitch and Standard & Poor on the job… that should work. They'll recognize crap on lettuce when they see it."

I apologize for responding to the start of a food fight.

Staying on point to Don's post, it is clear that Moody's, Fitch and S&P are not freely competitive rating firms with reputations at stake when they are rating an issue. They are government granted monopolies/ oligopoly … plus enjoy a rule that requires that virtually all new security issues MUST be rated by one of these recognized firms. So your point is a straw man. Along those lines, I know S&P well … and it is just not credible to believe that you can consistently run 40% operating margins without someone taking a swipe at it.

Second, and the point I think is more important. Suppose we grant you that the Fitch, S&P, Moody's disaster was a market failure. What you have done is show us one datum among billions of transactions that happen around the world where supposed "private" and spontaneous regulation failed. The big problem with this is that relying on a single FDA to inspect the doodoo on lettuce substantially increases the risk of mistakes. We are leaving ALL food inspection to a single company, who stands to receive MORE funding when they make mistakes? Even if you have a favorable disposition toward government, wouldn't you prefer to have the government subsidize and oversee hundreds of competing food rating agencies rather than sanctioning a single one?

Not that I prefer any of those options.

BoscoH April 20, 2009 at 2:31 pm

What a Triple AAA idea… lets get Moody's , Fitch and Standard & Poor on the job… that should work. They'll recognize crap on lettuce when they see it.

I don't imagine that, for example, Six Sigma processes are used anywhere in the food industry.

Eric Crampton April 20, 2009 at 4:57 pm

BoscoH: Have you ever heard of HAACP? It's like six sigma, except it makes sense.

Food QA Pro April 21, 2009 at 2:48 pm

The food industry has been "self regulating" for quite some time (at least 20 years). Most (all?) food manufacturing facilities pay for some 3rd party audit at least once per year. These are done regardless of whether you are governed by FDA or USDA and regardless of how often you are inspected by the government.
These are done for several reasons:
1 – they are driven by the big players in the businesses. If you are a finished goods manufacturer, you can't do business with Costco, Wal-Mart, Kroger, Ralphs all require that you complete a 3rd party audit in order to sell to them. If you are an ingredient supplier all the big name manufacturer's (Heinz, Kraft, Nestle) require that you have a 3rd party audit (and in some cases they require their own audit) in order to sell to them.
2 – The requirements in these audits are more detailed, more thorough, and stricter than an FDA or USDA audit.
3 – The auditors for these 3rd party companies are generally more competant than the government auditors. They are better educated, they come from within the industry (its not uncommon for someone with 20 years of experience in food manufacturing to move into an auditing role). Government inspectors that I have worked with have not had any significant production environment experience. The 3rd party auditors tend to know where the dead bodies are stored better than the government auditors.
4 – efficiency. If you are a plant that sells to all the major grocers, they all want some type of assurance that you are meeting THEIR standards. In order to assure them of this, the plant can either host 10 "customer audits" per year or they can host 1 3rd party audit per year (assuming that the grocers all accept the same audit). It saves $ for the grocers who don't have to employ an army of auditors to cover every single manufacturing facility that supplies to them (imagine how many different vendors have products in a a grocery store). Ultimately, it helps keep the cost of goods down for consumers while still providing a reliable audit of the producers.

Everyone in the food industry understands that their brand will be severely damaged, if not totally destroyed, by a recall or other food safety issue. They pay these 3rd party audit companies to provide an assurance that there are not issues.

Regarding the comparison to Moody's et. al. There are nearly a dozen big name audit companies operating in the U.S. Some are more specialized (AIB is still the standard in the baking world and Siliker or Cook & Thurber are the best choice for a meat/poultry plant). But there is significant competition for the business and it is a totally open market. AIB's audit business will be hurt by their association with the Peanut recall. If I started an auditing company tomorrow I could try and get business. I'd have a hard time because of the reputations and standing business that the current auditors have, but the government wouldn't be telling me that I wasn't allowed to do an audit.

There will always be bad people doing bad things and we those people need to be punished, but the FDA isn't any more likely to catch them before they harm the public than a good 3rd party audit.

muirgeo April 22, 2009 at 9:18 am

Remember the recent Peanut paste contamination that KILLED 9 people and made 22,000 sick? They were given a SUPERIOR rating by a private inspector unqualified to be doing the job he was paid to do.

Veritas April 22, 2009 at 1:18 pm

Remember the recent Peanut paste contamination that KILLED 9 people and made 22,000 sick? They were given a SUPERIOR rating by a private inspector unqualified to be doing the job he was paid to do.

Posted by: muirgeo | Apr 22, 2009 9:18:03 AM

And they will pay the price with their reputation.

FDA/Gov't inspectors suffer no such fate.

Are you really a fully functioning human?

John April 23, 2009 at 9:59 am

Are you really a fully functioning human?

Posted by: Veritas | Apr 22, 2009 1:18:27 PM

Trolls are not human.

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