Tuesday, March 31, 2009

CPSIA And The Black Market

If you've never heard the term before, a "black market" is an outlaw stream of commerce. It's called "black" because it takes place "in the dark" outside the law. Another term for it is "under the table".

You get a black market whenever people get shut out of the above-board market for various reasons. Some of those reasons can include price controls, onerous requirements to start a business, high taxes, and over-regulation of products. When the hurdles to sell are low, few will bother squeezing under them; but set them too high, and few will bother jumping over them. Prices on the black market can be lower or higher than on the above-board market, depending on what's going on there. When the hurdle is expensive over-regulation, black market goods will be cheaper.

Economists from the 18th century beginning of the discipline have noticed people's natural tendency to "truck, barter, and exchange" in order to obtain goods they cannot produce themselves, or goods that someone else can produce better. This is a human instinct that has proved insuppressible. Government can only hope to channel it by laying down restrictions on its flow. But it is as incompressible as water, and like water if you try to force it through too narrow a channel, it will overflow and cut its own channel. So government officials and self-styled consumer advocates can argue all they want about how "right" a statute like CPSIA is, but it's important to realize that it will not stop people from trading in children's goods because it will not remove their need to do so. Even the most conscientious and moral person would trade on the black market before they'd let their children go without clothing.

The problem with a black market is that like water let loose, it seeks the lowest level. A complete lack of regulation means the black market lacks the advantages that regulation can give. Regulation isn't a bad thing necessarily; a little regulation can make a market more efficient than it would be in pure laissez-faire mode. For example, we have regulations that require truth in advertising. Truth in advertising regulations make the playing field level for all players in the market. On a black market, these regulations become mere social conventions, and over time as new people enter the business they will inevitably fade, necessitating the buyer to do his own research. As there are usually more buyers than sellers, and buyers are worse equipped than sellers to discover truths about the goods they buy, this creates inefficiencies. But worse than that, it creates a culture of cheating the customer because that's where the incentives are. Right now, the business culture is one of willing compliance with truth-in-advertising laws. That is NOT something you want to be changing. No regulation scheme can be fully enforced; it must have the cooperation of the businesses and the business culture in order to self-police the market. When the regulatory regime runs contrary to the market culture, it is foolish to presume it will have no influence.

By increasing the height of the hurdles one has to jump to sell a legitimate product, Congress is encouraging more and more of them not to bother, and the few that are left have every reason to become less ethical. One of the reasons we have so many home crafters selling children's products in the first place is that it's a sort of "gray market"-- a semi-regulated market-- where it's easy to start a business. Putting more pressure on a market like that will turn it into a black market in a heartbeat. Moreover, the crafters' gray market shares in the dominant business culture of honesty. Make them outlaws and watch how fast that disappears-- and how quickly they are joined by the previously reputable legal businesses with which they compete.

At first, little would change. But after a while, we'd start to get reports of disreputable people entering the market. Perhaps someone would import toys illegally that were hazardous, or someone might use imported fabric that was coated with a toxic chemical to make clothes. The government would find it difficult to crack down on them because they don't have business licenses, merchant accounts, etc. Shut them down? Confiscate their merchandise? Next week they'll be in business on a different street selling something else. Government would respond with warnings about buying that cheap black-market trash, but warnings never extend anyone's budget enough to make them able to buy more expensive, regulated goods. Honest men and women would cut corners to compete with them. And thus would all consumer regulation on children's products come to naught.

CPSIA by itself may not be enough to create a nightmare scenario like that, but it's a definite and strong push in that direction. Moreover, because CPSIA will fail to eliminate the risk of contaminated goods, it will inevitably be followed by more and stricter legislation in the same vein, which does have that potential. I don't know about you, but I really don't want to have to buy my kids' jeans out of the back of a truck in a parking lot at twilight, or get their toys from a secret toy dealer. Anyone who is truly concerned about children's safety should be horrified by the thought that children's goods will be sold on the black market. And yet that is precisely what CPSIA is doing.