On Toy Makers And The Financial Crisis

Why regulations keep failing.

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The Washington Examiner's Tim Carney has a column on the CPSIA regulations that require makers of children's products to submit to expensive chemical testing (see previous posts here and here.) But guess who doesn't have to submit?

Recently, the Consumer Product Safety Commission (CPSC) voted unanimously to grant Mattel an exemption from the CPSIA's third-party testing requirement. The law provided for such exemptions if a company can demonstrate it has its own testing facilities that meet a certain standard.

Mattel in 2007 and 2008 lobbied for this provision, and lobbied for the overall bill, prompting the usual cries of "wow, even industry is on board!" Of course, Mattel was already completing its own in-house testing operation as a reaction to the bad publicity and litigation resulting from a handful of recalls of its toys containing unsafe levels of lead.

So while little mom-and-pop toy makers have to pay thousands of dollars to test their products, Mattel is off the hook.

This might seem like a regrettable, but minor issue. How much harm can come from some extra costs imposed on a few select small businesses?

But I think there's more worth pointing out here. The Mattel case is an example of a pattern in regulation that has proven to have dire consequences for the economy as a whole.

Look at the financial regulations at the root of the housing bubble and ensuing financial crisis. The problem wasn't clear over-regulation or under-regulation. It was the type of regulation.

As economist Arnold Kling has argued, in the decade leading up to the financial crisis, bank regulators allowed financial institutions to lend at lower capital requirements if mortgage loans were pooled into securities (that's a very simple description of a complicated process, read more from Kling for the details).

What does this have to do with Mattel? The undue regulatory treatment of securitization was lobbied for by Wall Street, and indeed, was an advantage for the larger institutions, because small community banks generally don't engage in that kind of lending. That's the main reason why the smaller banks weren't as badly damaged when the housing bubble collapsed.

In both the case of CPSIA and the banks, the politically-connected exploited well-meaning regulations to their advantage. The fact that the same pattern can be at work in such disparate examples shows that Congress did not just make a mistake with the Mattel exemption.  It's a systemic problem.

What to do about it? Matthew Yglesias had some interesting thoughts recently on how to make government more responsive to the public good.